In a series of recent judgements, the Cayman Islands Grand Court has celebrated the 25th anniversary of the introduction of the segregated portfolio company (“SPC”) regime in the Companies Act by confirming the strict separation of assets and liabilities between segregated portfolio (“SP”) as the defining feature of SPCs in the circumstances where an SP and/or the SPC itself were in distress.
In a judgment of the Grand Court on 10 November 2022 regarding an SPC which was in official liquidation, Justice Parker highlighted the importance of the segregation principle:1
“The statutory position is clear. The Company is a segregated portfolio company (“SPC”), which means that it contains one or more (and in this case, 12) separately identifiable SPs. The SPC’s key feature is that the assets and liabilities of each SP are separate and ‘ring-fenced’ from every other SP within the SPC and from the assets and liabilities of the SPC itself (s. 216(1) of the Act).
As a result, a creditor of one SP does not have recourse to the assets of another SP. Similarly, any assets held by the SPC itself (and not held by an SP) are general assets of the Company (s. 222 of the Act).”
This judgment followed Justice Kawaley’s decision on 6 July 2022 relating to an application to appoint receivers to certain SPs of an SPC. In the reasons for his decision to appoint receivers to certain SPs, Kawaley J commented on the unique legal structure of SPCs:2
“Although these portfolios do not possess full legal personality, if the business conducted through the vehicle is no longer viable, it can be wound-up by analogy with a liquidation through the receivership regime prescribed by Part XIV of the Companies Act (2022 Revision) (the “Act”). Other segregated portfolios will be unaffected by this failure and can carry along their merry way, assuming that the SPC itself continues to be viable.”
These recent decisions confirm that even in circumstances where an SP or the SPC finds itself in distress, the Cayman Islands courts will respect the segregation principle (where the necessary procedures in relation to establishing and maintaining segregation have been followed by the SPC).
The Grand Court’s decisions highlight that, after 25 years, the Cayman Islands SPC regime can hold itself out as “battle-tested” and has shown itself to be a reliable and effective regime, even in circumstances of distress. Conyers has extensive experience in establishing and advising SPCs and also assisting the full range of stakeholders when difficulties arise, with particular experience in advising members and directors of SPCs in relation to distressed and contentious scenarios.
Refresher on the Segregation Principle
Part XIV of the Companies Act which sets out the provisions in relation to SPCs came into force in 1998 in response to strong demand, particularly from the insurance sector of the international financial community. The main purpose of the legislation is to provide a means for different groups to protect their interests when carrying on business with different risks through a single legal entity.
Where assets have been allocated to a particular SP of the SPC, those assets are held as a separate fund which is not part of the general assets of the SPC itself. Only persons who have entered into transactions with the SP, or who otherwise have become creditors of the SP concerned, will have recourse to that SP’s assets. Any asset which attaches to a particular SP is not available to meet the general liabilities of the SPC or any of any other SPs. All assets held by an SPC not allocated to individual SPs are regarded as general assets.
The directors of an SPC are under a duty to establish and maintain procedures to:
- segregate, and keep segregated, portfolio assets separate and separately identifiable from general assets of the SPC;
- segregate, and keep segregated, portfolio assets of each segregated portfolio separate and separately identifiable from segregated portfolio assets of any other segregated portfolio; and
- ensure that assets and liabilities are not transferred between segregated portfolios or the SPC’s general assets otherwise than at full value.
1In the matter of Performance Insurance Company SPC (in Official Liquidation) (unreported, FSD 70 of 2021 (RPJ)).
2In the matter of Green Asia Restructure Fund SPC (unreported, FSD 112 of 2022 (IKJ)).