Benefits of Segregated Portfolio Companies for Investment Purposes
Once registered under the Cayman Islands Companies Act (As Revised), a segregated portfolio company (“SPC”) can operate segregated portfolios (“SPs”) with the benefit of statutory segregation of assets and liabilities between portfolios. The principal advantage of an SPC over a standard exempted company is to protect the assets of one portfolio from the liabilities of other portfolios.
The benefits of SPCs
- The SPC corporate structure is frequently used for multi-class hedge funds, umbrella funds and master-feeder structures owing to the various benefits of the SPC structure.
SPC provides ability to set up a statutory “ring-fence” to protect against cross liability issues relating to the assets and liabilities of the various SPs within a SPC. - The annual Government fees for an SP is 50% less than the annual Government fees for an exempted company.
- The SPC is a Cayman corporate structure, like a standard exempted company, where there are no residency restrictions on Directors or Shareholders.
- There are no exchange control restrictions.
- There are no Cayman taxes on the SPC or its shareholders, among other benefits.
- As shown in figure 1 below, the SPC structure is used increasingly as an investment platform on which investors can use different SPs to hold varying asset classes (e.g. real estate, intellectual property, stocks and shares, and distressed assets) and have their investments managed separately from other investments held by other SPs on the same SPC platform.
What are the features of a Segregated Portfolio Company?
- Under Cayman Companies Act, an SPC is an exempted company which has been registered as a segregated portfolio company. It has full capacity to undertake any object or purpose subject to any restrictions imposed on the SPC in its Memorandum of Association (“Memorandum”). The Memorandum of an SPC usually gives the SPC full capacity to pursue very broad objects. For example, the Memorandum of an SPC typically has a clause such as this (emphasis added):
“The objects for which the Company is established are unrestricted and the Company shall have full power and authority to carry out any object not prohibited by the Companies Act…or any other law of the Cayman Islands.” - Cayman Companies Act permits an SPC to create one or more SPs in order to segregate the assets and liabilities of the SPC held within one SP from the assets and liabilities of the SPC held within another SP of the SPC.
- The general assets and general liabilities of the SPC (i.e. assets and liabilities which cannot be properly attributed to a particular SP) are held within a separate general account rather than in any of the SP accounts.
- The Companies Act requires an SPC to make a distinction between “segregated portfolio assets” (which are assets of the SPC that have been designated or allocated for the account of a particular SP of an SPC) and general assets (which are assets of the SPC that have not been designated or allocated for the account of any particular SP of the SPC). Each SP should have, as appropriate, its own bank account, brokerage account, and other accounts to hold its assets to avoid co-mingling with the assets of other SPs.
- How are SP assets comprised? – The assets of an SP comprise (a) assets representing the share capital and reserves (“reserves” include profits, retained earnings, capital reserves and share premiums) attributable to the SP; and (b) all other assets attributable to or held within the SP (e.g. bonds, stocks, real estate, IP). Shares of the SPC are permitted to be issued in respect of a particular SP, the proceeds from the issue of such shares are included in the assets of that SP and the shares may carry the right to distributions from that SP. The proceeds of the issue of shares which are not segregated portfolio shares shall be included in the SPC’s general assets.
- The Companies Act also requires an SPC to make a distinction between “segregated portfolio liabilities” (which are liabilities of the SPC that have been designated or allocated for the account of a particular SP of the SPC) and general liabilities (which are liabilities of the SPC that have not been designated or allocated for the account of any particular SP of the SPC).
- It is the duty of the Directors of the SPC to establish and maintain (or cause to be established and maintained) procedures:
- to segregate, and keep segregated, portfolio assets separate and separately identifiable from general assets;
- to segregate, and keep segregated, portfolio assets of each SP separate and separately identifiable from segregated portfolio assets of any other SP; and
- to ensure that assets and liabilities are not transferred between SPs or between an SP and the general assets otherwise than at full value.
Accordingly, a creditor will only have recourse to assets from SPs with which it has contracted and creditors will have no recourse to the assets of other SPs of the SPC which are protected under the Companies Act. This statutory protection afforded under the Companies Act to the assets of each SP is one of the key feature and benefit of the SPC structure.
xiv. Transfers to General Assets to meet expenses – Sometimes the Articles of Association of the SPC empowers the Directors of the SPC to transfer segregated portfolio assets to the general assets of the SPC (and, if more than one SP is in existence, pro rata in proportion to the net asset value of each SP or in such other proportion as the Directors determine) in order to discharge the following liabilities: government registration fees, annual return fees, professional fees, service provider fees, taxes, fines and penalties and any other liabilities or a recurring nature necessarily incurred in maintaining the continued existence and good standing of the SPC.
(xv) Segregation of Liabilities and rights of third parties – The liabilities to a person arising from a matter imposed on, or attributable to, a particular SP, only entitle that person to have recourse to that particular SP in the first instance and then to the general assets of the SPC, unless the Articles of Association of the SPC prohibits payments from the general assets of the SPC, in which case there is no recourse to the general assets.
This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely pro-vide a brief overview and general guidance only. For more specific advice on the Cayman Islands segregated portfolio companies, please refer to your usual Loeb Smith contact or:
Gary Smith
Partner Loeb Smith Attorneys
Cayman IslandsTransactions of Investment Companies With Portfolio and Subadvisory Affiliates
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