Dec 2024
Cayman Islands law permits the registration of segregated portfolio companies (“SPC”). An SPC is a single company which segregates its assets and liabilities amongst various “portfolios”. Benefits in adopting the SPC structure include cost savings, ease of establishment of the segregated portfolios and flexibility of rules for distributing profits by way of dividends.i
An exempted company may apply to register as an SPC at the time of incorporation with the Registrar of Companies. Upon registration, a notice is filed with the Registrar of Companies setting out the names of each segregated portfolio which has been created. An SPC must include the words “Segregated Portfolio Company” or the letters ‘SPC’ in its name. The board of directors of the SPC creates segregated portfolios by resolution. Each segregated portfolio must be separately designated and have the words include “Segregated Portfolio” or the letters “SP”, or “S.P.” in its name. The assets of an SPC are allocated by the directors either as “segregated portfolio assets”, being assets held on behalf of a segregated portfolio which may be used to pay the liabilities of that particular segregated portfolio, or as “general assets”, being assets of the SPC which are not segregated portfolio assets and so are available to meet claims of all creditors. The SPC may pay a dividend, distribution or redemption proceed in respect of the shares attributed to one segregated portfolio, irrespective as to whether a dividend, distribution or redemption proceed would be permitted in respect of any other segregated portfolio.
SPCs are a popular type of entity for Cayman investment funds, particularly where one or more portfolios are used to pursue different investment strategies. Whilst the constitutional documents of an SPC bind the board of directors and members, they do not bind third parties. However, the segregation of the assets and liabilities of a segregated portfolio within the SPC is enshrined in statute and so the SPC may rely on that statutory segregation in its dealings with third parties without having to implement additional measures such as contractual limited recourse.
Accordingly, a creditor of a particular segregated portfolio only has recourse to that segregated portfolio’s assets (and if the relevant portfolio’s assets are insufficient, subject to any prohibition in the SPC’s articles, to the general assets of the SPC) but not to the assets of the SPC held in any other segregated portfolio. These rules expressly override the insolvency distribution provisions otherwise to be found in the Companies Act.
An additional SPC-specific insolvency regime is set out in the Companies Act and provides that SPC receivership orders must be made by the Court for the purposes of the orderly closing down of the business of, or attributable to, a particular segregated portfolio. The Court will not make a receivership order where the SPC is in winding-up and any receivership order ceases to have effect upon the commencement of the winding-up of an SPC but without prejudice to the prior acts of the receiver. A receivership order may be applied for by the SPC, its directors, any creditor to the SPC in respect of the relevant segregated portfolio, any holder of segregated portfolio shares in respect of the segregated portfolio or the Cayman Islands Monetary Authority.
The Companies Act provides that upon the discharge of a receivership order in respect of a segregated portfolio the Court may direct that creditors’ claims against the SPC in respect of that segregated portfolio shall be deemed extinguished. In 2012, the Cayman Court of Appeal determined that there was no jurisdiction to wind-up a segregated portfolio on the just and equitable ground, only the SPC as a whole. In addition, the Cayman Court of Appeal has held that it may make a receivership order in respect of a segregated portfolio on the grounds of the insolvency alone. In this, and subsequent cases which have come before the Cayman Courts show that, since 2012, the Court has upheld the segregation principles in accordance with the statutory SPC structure of the Companies Act.