In line with its commitment to provide flexible and innovative legal structures for cross border trading and investment activity, the British Virgin Islands ("BVI") has recently expanded the use of its segregated portfolio company regime. A segregated portfolio company ("SPC") may create individual segregated portfolios in order to segregate the assets and liabilities of one segregated portfolio from those of the other segregated portfolios, and from the company's general assets.
Previously, the advantages of the jurisdiction's SPC regime were only available to insurance companies and regulated funds, however the enactment of the BVI Business Companies (Amendment) Act, 2018 and the Segregated Portfolio Companies (BVI Business Company) Regulations, 2018 (the "Regulations") have significantly expanded the potential uses of this type of entity. The Regulations permit a company to be incorporated as an SPC or to re-register as an SPC subject to submission of the requisite documentation to the BVI Financial Services Commission.
While the segregation of assets and liabilities between various separate 'pools' can be achieved by the adoption of a group company structure comprising a number of different companies, and it has always been possible to segregate assets and liabilities within a company on a contractual basis, there may be benefits to using the SPC structure as an alternative. The principal benefit of using a SPC as opposed to alternative methods of establishing segregation of assets and liabilities, such as contractual limited recourse wording, is that the ring-fencing is embedded in statute rather than contract and so has the benefit of statutory recognition in the BVI. In addition, whereas contractual ring-fencing would only bind the parties to the relevant contract, the statutory regime will also bind non-consensual third parties thereby significantly extending the ring-fencing concept and protection. Finally, there may also be cost and administrative advantages to using a single SPC (as opposed to a group structure); for example, in the context of a fund, the use of an SPC allows an asset manager to establish one entity with a single bank account (with separate sub-accounts for each segregated portfolio) and to potentially be subject to only one on-boarding process with its service providers such as its administrator, prime broker, custodian etc. enabling it to be in a position to quickly roll out new sub-funds with different investment strategies to different investors without delay.
As of 1 October 2018, a BVI Business Company (provided it is not engaging in certain specified regulated business such as banking) is permitted to apply for registration as a SPC under the revised legislation. Specifically, the following are envisaged as potential uses for SPC vehicles:
(a) operating as investment funds (whether open-ended or closed ended);
(b) holding assets for high net worth persons, including institutional investors;
(c) operating multiple businesses or types of business, including setting up new business ventures, that require segregation from the business of the SPC;
(d) engaging in property development and management, including the acquisition of, trading in, leasing of, or otherwise generally dealing in, real estate, ships, aircraft, and other property that the company considers will be more efficient and cost-effective to be managed or otherwise dealt with through a segregated portfolio;
(e) engaging in bankruptcy remote vehicles in structured finance and capital markets transactions; and
(f) performing such other duties, responsibilities and investments as are not inconsistent with any restriction or prohibition under the BVI Business Companies Act or the Regulations.
The statute states that segregated portfolio assets must only be used to meet liabilities due to the creditors of a particular segregated portfolio, and are not available or to be used to meet the claims of creditors of another separate segregated portfolio. A liability in respect of or attributable to a particular segregated portfolio entitles a creditor of that segregated portfolio to have recourse only to the segregated portfolio assets attributable to such segregated portfolio, and not to the assets of other segregated portfolios. It should be noted that the liabilities of a particular segregated portfolio may be met by the general assets of the SPC to the extent that:
(a) the assets attributable to the segregated portfolio are insufficient to satisfy the liability; and
(b) the SPC's general assets exceed any minimum capital amounts lawfully required by the BVI's Financial Services Commission.
Where a liability of an SPC arises or is imposed other than from a matter in respect of a particular segregated portfolio, that liability may only be met from the SPC's general assets. The statute expressly provides that on the liquidation of an SPC, the liquidator must deal with the SPC's assets in accordance with the requirements set out above regarding the segregation of segregated portfolio assets, and in discharging the claims of creditors of the SPC, the liquidator must apply the SPC's assets to those entitled to have recourse thereto in accordance with the rules applicable to SPCs as described above. The provisions of the Law (and of the Insolvency Act of the BVI) which apply to the liquidation of BVI companies generally are deemed to be modified as necessary to give effect to the SPC rules, and in the event of any conflict between such general provisions and the SPC rules, the latter shall prevail.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.