Segregated accounts companies: worth a look
The Segregated Accounts Companies Act 2000 (SAC Act) makes it possible for a company incorporated in Bermuda to register as a segregated accounts company (SAC).
A segregated account contains assets and liabilities that are legally separated from (i) the assets and liabilities of the company’s general account and (ii) such company’s other segregated accounts.
Registering as an SAC allows the assets of one account to be protected from the liabilities of other accounts. The statutory divisions between accounts do not create separate bodies corporate, but rather achieve within a single company what could otherwise be achieved by incorporating subsidiaries or by using complex contractual or trust structures.
As a result, the accounts will be self-dependent, whereby only the assets of a particular account may be applied to the liabilities of that account. Importantly, a segregated account does not have a separate legal personality; it cannot sue and be sued in its own name.
SACs are commonly structured so that the voting share is held by a person or entity that has the responsibility for the day to day running of the company and the account owners usually hold securities linked to a particular segregated account.
The SAC Act provides that an asset, right, contribution, liability or obligation that belongs or pertains to a segregated account of an SAC must be ‘linked’ to that segregated account by one of the following methods:
• An instrument in writing (which includes a governing instrument or contract).
• An entry or other notation made in respect of a transaction in the records of an SAC.
• An unwritten but conclusive indication.
SACs are commonly used for a variety of insurance purposes, including rent-a-captives, life and annuity companies, transformer vehicles, as well as financial guarantee, securitisation and derivatives structures and special purpose vehicles. They are also frequently used in the mutual and hedge fund industries. Recently, there has been interest in using SACs for segregating intellectual property and for use in the film industry.
Sometimes, it is necessary or desirable for segregated accounts within an SAC to contract with each other or the general account. For example, it may be convenient for the general account to provide, and charge for, centralised administrative services to one or more segregated accounts or for a segregated account to invest in another segregated account within the same SAC. Investors in SACs can also change their investment strategy by ‘exchanging’ securities linked to one segregated account for securities linked to another account without capital gains implications.
Specific provisions have been included in the SAC Act to avoid any problematic legal issues in connection with internal transactions. This has been accomplished without compromising the paramount notion that a segregated account does not have separate legal personality.
The SAC Act also introduces provisions to protect creditors in the event that preferential or other improper transactions are entered into between accounts and, within limits, protects management (on a consensual basis) from exposure to liability consequent upon inevitable conflicts of interest that will arise in internal transactions.
The Bermuda courts have considered the SAC structure and upheld the statutory segregation of accounts established by the SAC Act. Bermuda courts have also confirmed the following:
• When dealing with segregated account companies that it is imperative, in order to preserve the fundamental segregation concept, that the governing instrument is clear and complete, that the byelaws are carefully drafted and that Bermuda legal advice is sought both at the creation of the segregated account company and in the event of a complex and substantial restructuring.
• Segregated account companies are typically designed to ensure that third party creditors cannot attack the assets in the segregated account that are intended to be available exclusively to meet the claims of creditors who have entered into transactions linked to that specific account. The courts confirmed that only the general assets are available to meet general claims.
• The winding-up regime applicable to Bermuda companies in general also applies to segregated account companies. The Bermuda court further confirmed that the statutory provisions provided under the SAC Act will also apply providing that each segregated account must be wound up on an individual basis.
• A liquidator must deal with the assets and liabilities of each segregated account in accordance with the SAC Act and in the absence of contractual terms to the contrary, not apply the assets of one segregated account to the liabilities of another segregated account or the general account. The court held that it was clear on the evidence presented before the court that there was nothing to support piercing the ‘iron curtain’ that applies to the segregation of accounts.
It should be noted that there is a risk that the SAC Act may not be upheld or recognised in jurisdictions other than Bermuda where the SAC may operate or have assets, particularly if that jurisdiction does not have corresponding segregated account legislation.
Overall, SACs present a unique opportunity to operate ‘mini companies’ within one company thereby avoiding the burdens associated with incorporating various companies while maintaining the benefits of varying investments and ring-fencing assets and liabilities.
Lawyer Sarita Ebbin is an associate in the Corporate department at Appleby. A copy of Ms Ebbin’s column can be obtained on the Appleby website at www.applebyglobal.com. This column should not be used as a substitute for professional legal advice. Before proceeding with any matters discussed here, persons are advised to consult with a lawyer.
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