Country report: Segregated portfolio companies in the British Virgin Islands

By Heidi de Vries and Richard May, Walkers Global

One of the most significant features of the recently-enacted BVI Business Companies Act, 2004 (as amended) (the ‘BVIBC Act’) is that it is now possible to register companies limited by shares as segregated portfolio companies in the British Virgin Islands.

The British Virgin Islands is now one of several offshore jurisdictions that provides for a statutory segregated portfolio company (‘SPC’), which brings the benefit of statutory segregation of assets and liabilities within a single corporate entity.

Presently, the segregated portfolio provisions of the BVIBC Act only apply to:

Companies that are or will be recognised as professional or private funds or registered as public funds under the Mutual Funds Act, 1996 (as amended) of the British Virgin Islands;
Companies that are or will be licensed as insurers under the Insurance Act, 1994, of the British Virgin Islands.

The BVIBC Act does, however, provide that the segregated portfolio company structure may be extended to other forms of company of such class or description as may be prescribed by regulation. At present, there are no such regulations prescribed.

What is an SPC ?

An SPC is a single corporate legal entity that benefits from the statutory segregation of assets and liabilities between segregated portfolios established within the same company. The assets and liabilities of each segregated portfolio within one legal entity are legally separate and there is no joint liability between segregated portfolios. In the context of a mutual fund, this means SPCs can establish segregated portfolios to separate the assets relating to classes of shares with different investment criteria, thus protecting shareholders from the potential of cross liability arising from the adverse investment performance of other classes of shares. In the context of licensed insurance companies, this allows one entity to cater for a number of insureds without the risk of cross liability.

The benefits of operating segregated portfolios are not restricted to new companies first incorporated as SPCs and it is possible for existing BVI Business Companies that are either mutual funds or licensed insurance entities to apply to be re-registered as SPCs upon application to the Registrar of Corporate Affairs and the Financial Services Commission.

What are the key features of an SPC?

The key features of an SPC are:

No separate legal personality. The SPC is a single legal entity within which may be established from various segregated portfolios. Although each segregated portfolio must be separately identified it will not be a separate legal entity from the company;
Name includes ‘SPC’ at length or in abbreviated form. An SPC must include the letters ‘SPC’ or the words ‘Segregated Portfolio Company’ in its name;
Segregation of assets and liabilities. The assets and liabilities of each segregated portfolio are legally separate from those of the other segregated portfolios and general assets of the company. To achieve that segregation, the SPC must identify the relevant segregated portfolio(s) and make clear that business is being transacted in the name of, or by, or for the account of the particular named segregated portfolio(s). The capacity in
which the SPC contracts and the name(s) of the relevant segregated portfolio(s) must be set out in writing in the relevant transaction documentation;
Directors’ duties and liabilities. In addition, the directors have a duty to establish and maintain the segregation of each segregated portfolio’s assets from those of other segregated portfolios and also the general assets of the SPC;
Recourse of creditors to the applicable segregated portfolio and general assets. Creditors of a segregated portfolio have recourse to the assets of the segregated portfolio and to any general assets of the company (being assets not comprised within any segregated portfolio) to the extent that the segregated portfolio assets attributable to such a portfolio
are insufficient.

When dealing with an SPC a third party should clearly establish which segregated portfolio of the SPC it is dealing with (and therefore which of the relevant segregated assets it has recourse against).

What are the advantages of an SPC?

The advantages of an SPC over traditional methods of creating contractual legal divisions between asset pools (such as setting up subsidiary special purpose vehicles and putting in place contractual limited recourse provisions with third parties) include greater legal certainty, reduced complexity and administrative cost savings. The SPC is also now an internationally-recognised vehicle for both mutual funds and insurance companies – thereby providing greater shareholder comfort.

The concept of segregation of assets and liabilities within one legal entity

Under the BVIBC Act the assets and liabilities of each segregated portfolio within a segregated portfolio company are legally separate from those of the other segregated portfolios. Creditors of one segregated portfolio only have recourse to the assets of that specific segregated portfolio and to any general assets of the company (being the assets not comprised in any segregated portfolios) to the extent that the segregated portfolio assets attributable to such a segregated portfolio are insufficient. The segregated portfolios of the company all reside within the one legal entity. It is important to note, however, that the statutory segregation of assets and liabilities have not yet been tested by the courts of the British Virgin Islands.

The introduction of the SPC structure into British Virgin Islands law has continued to improve the BVI’s position as a jurisdiction of choice for both mutual funds and captive insurance companies and the number of SPC vehicles incorporated in the BVI each quarter is on the rise.

Notes

The content of this article is intended to provide a general guide to the subject matter of SPCs and is not intended to be legal advice. Specialist legal advice should be sought by clients wishing to establish SPCs.