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Cayman Segregated Portfolio Company - Formation

The segregated portfolio company (SPC), was first introduced in the Cayman Islands in 1998 by an amendment to the Companies Act (Revised) (Companies Act). The concept of an SPC is that a company, which remains a single legal entity, may create segregated portfolios (Portfolios) such that the assets and liabilities of each Portfolio are legally separate from the assets and liabilities of any other Portfolio and from the SPC's general assets and liabilities. In other words, there is no cross contamination from one Portfolio to any others.



Potential uses of an SPC


Investment funds

Cayman SPC's are a popular vehicle for use by investment funds, particularly in the context of multi-class funds in which one or more portfolios uses, as part of its investment strategy, leverage, short sales and other tools that potentially create substantial liabilities to third parties. Multi-class funds have historically sought to prevent liabilities spilling over from one class to another by creating trading subsidiaries through which the assets of the class (akin to a segregated portfolio in an SPC) engaging in such a strategy would be invested. However, there are various risks associated with this approach, (for example, a court might deem the trading subsidiary to be a mere agent of the multi-class fund and thus prejudice the containment of liabilities at the trading-subsidiary level), and the creation of trading subsidiaries results in a high cost of rolling out additional portfolios. The relatively low cost of rolling out new portfolios and the statutory segregation between portfolios may make an SPC a preferable structure.


Captive insurers

The SPC was first used in the Cayman Islands by captive insurers, and it continues to be a popular structure as it allows an insurer to add additional participants in a reinsurance programme without risk of cross liability.


It is a significant benefit to participants in a 'rent-a-captive' programme whereby those wishing to organise their own insurance or reinsurance can become shareholders in a Portfolio of an existing SPC, managed by an experienced insurance manager. There are savings in time and cost in creating a new Portfolio as opposed to creating a new company or limiting recourse contractually. The participants in a captive programme contribute premiums to the Portfolio through which their business is placed and are entitled to distributions solely from that Portfolio. On completion of a particular programme, the relevant Portfolio is wound up and the shares issued by that Portfolio held by the participant are redeemed and cancelled.


Structured-finance and Securitization vehicles

Cayman exempted companies are widely used as bankruptcy-remote vehicles in structured-finance and capital-markets transactions. The SPC structure allows a single company to act as multi-issuer structured-finance vehicle, and the legal structure of an SPC is recognised by the leading rating agencies as meeting the legal criteria required of a bankruptcy-remote special-purpose company.


Segregation of Assets & Liabilities


As regards each Portfolio's assets:

  • those assets are only available and may only be used to meet liabilities to the creditors and shareholders of the SPC who are, respectively, creditors in respect of that Portfolio or holders of shares attributable to that Portfolio and are entitled to recourse to those assets for that purpose; and

  • those assets are not available and may not be used to meet liabilities to creditors of the SPC who are not creditors in respect of that Portfolio or liabilities to shareholders of the SPC who are not holders of shares attributable to that Portfolio.

As regards each Portfolio's liabilities (being liabilities in respect of or attributable to that Portfolio):

  • each such liability extends only to, and the person in respect of that liability is entitled to have recourse only to:

  • firstly, that Portfolio's assets; and

  • secondly, unless the SPC's articles specifically prohibit, the SPC's general assets to the extent that Portfolio's assets are insufficient to meet the liability (and to extent that the SPC's general assets exceed any minimum capital amount lawfully required by a regulatory body in the Cayman Islands).

  • each such liability does not extend to, and the person in respect of that liability is not entitled to have recourse to, any other Portfolio's assets.

Features of a SPC

The SPC’s memorandum and articles of association need to take note of, and the SPC needs to give effect to, the following key structural features that characterise an SPC:


Name

A segregated portfolio company must include the letters 'SPC' or the words 'Segregated Portfolio Company' in its name.


Designation of portfolios

An SPC may create one or more Portfolios in order to segregate the assets and liabilities held by the SPC on behalf of one Portfolio from the assets and liabilities held on behalf of any other Portfolio and from the SPC’s general assets and liabilities. One or more classes or series of shares may be designated to each Portfolio, and the proceeds of issue of any shares so designated must be included in the assets of the relevant Portfolio. Each Portfolio is required to be separately identified and to include in its identification the words 'Segregated Portfolio' or 'SP' or 'S.P.'.


Distributions and redemptions

Principles relating to the payment of dividends or other distributions, and the payment of the redemption or repurchase price of shares, are applied to each Portfolio in isolation, so that an SPC may pay a dividend or other distribution in respect of Portfolio shares of any class or series regardless of whether a dividend or distribution would be permitted to be paid in respect of any other Portfolio. Payments in respect of dividends, distributions and redemptions of shares may only be paid out of the assets of the Portfolio in respect of which the relevant shares were issued.


Segregation of assets

The assets of an SPC are either general assets or Portfolio assets. The general assets of an SPC comprise those assets of the SPC that are not assets of any Portfolio. The assets of a Portfolio comprise the share capital and reserves attributable to the Portfolio and all other assets attributable to the Portfolio.


To give effect to the segregation principle described above, it is the duty of the directors to establish and to maintain the segregation of the following:


(i) of the general assets from Portfolio assets, and

(ii) of the assets of each Portfolio from those of any other Portfolio and from the general assets.


There are two elements of the segregation principle as regards the assets of a Portfolio:

  • The positive element is that such assets may be used to meet liabilities to the creditors and shareholders of the SPC who are, respectively, creditors in respect of that Portfolio or holders of shares attributable to that Portfolio, but for no other purpose.

  • The negative element is that such assets must not be used to meet liabilities to creditors of the SPC who are not creditors in respect of that Portfolio or liabilities to shareholders of the SPC who are not holders of shares attributable to that Portfolio.

Segregation of liabilities

To recap on the segregation principle as regards the liabilities of an SPC in respect of, or attributable to, a particular Portfolio, it similarly has two elements:

  • The positive element is that the person in respect of each such liability of that Portfolio may have recourse to (but only to):

  • firstly, that Portfolio's assets; and

  • secondly, unless the SPC's articles specifically prohibit, the SPC's general assets to the extent that Portfolio's assets are insufficient to meet the liability (and to extent that the SPC's general assets exceed any minimum capital amount lawfully required by a regulatory body in the Cayman Islands).

The negative element is that the person in respect of each such liability is not entitled to have recourse to any other Portfolio's assets.


One should note that it is possible for the SPC's articles to provide that there will be no overspill of a liability from an insolvent Portfolio to the SPC’s general assets.


General assets and liabilities

Income and other property and rights of an SPC not attributable to any Portfolio must be applied to, and are comprised in, the company’s general assets. Liabilities of an SPC not attributable to any of its Portfolios may only be discharged from the company’s general assets.


Bell Rock - setting up your SPC

We routnely set up Cayman SPC's for a wide range of purposes. Most commonly, we set up SPC's for Cayman investment funds where managers see the economies of scale in having one legal entity but multiple Portfolio's with different investors and different strategies. Essentially, a range of funds. We provide a complete solution from including initial advice, structuring, regulatory registration if applicable and recommendations on the appointment of service providers, as required. We also provide ongoing support in the form of governance services, compliance and corporate services. For further information on setting up a Cayman SPC, please feel free to contact us: info@bellrockgroup.com




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