With the increasing use of segregated account companies in Bermuda, it is becoming clear that not only is the structure useful for its ability to ?ring fence? assets but it is also an efficient corporate method when bringing products to market.

In Bermuda the concept of segregated accounts was developed in 1991 when Bermuda enacted the first private legislation to allow for the segregation of assets and liabilities.

The Segregated Account Companies Act 2000 and more recently the Segregated Accounts Companies Amendment Act 2002 (the ?SAC Act?) has laid the legislative framework for the innovative use of segregated account companies.

The major concept behind the segregated account is the legal separation of assets and liabilities of accounts established by the company from the other assets and liabilities of the company the concept of limited liability taken to a micro-level.

For example, a company using a segregated account structure will have a general account that will hold the general assets and liabilities of the company and then one or more segregated accounts that will hold the assets and liabilities attributable to that account only.

The statutory division protects the assets of one account from any potential claims by creditors of other accounts.

The offshore mutual and hedge fund industries have responded to the flexibility that the segregated account structure provides for fund managers of multi-class funds, including ?master-feeder?, umbrella or mutual fund structures.

A typical example would see segregated accounts established, each offering separate classes of shares. The shares specifically offered by a segregated account would represent a portfolio that would invest the proceeds of subscriptions according to the terms of the offering document for that particular class.

In practical terms this would mean that each segregated account might have one class of shares representing a portfolio. The differentiation between the portfolios therefore occurs, as each cell would typically have varying investment strategies and risk factors ranging anywhere from U.S. small caps to Russian securities.

Separate investors would enter into distinct contractual arrangements with the individual cells and invest in one or more portfolios.

The SAC Act has introduced specific creditor protection provisions in the event preferential or other improper transactions are entered into between accounts. In addition, within limits, there is protection for management (on a consensual basis) from exposure to liability where conflicts of interest arise in the context of inter-cell transactions.

Express provisions also exist for the resolution of disputes arising in relation to such transactions either by reference to court or arbitration.

This segregated cell structure has yet to be tested in the courts. The question of the right of come-back is more an issue of the underlying contractual security provisions than the structure itself.

That is because the entering into of any potential debt obligation will have at its contractual core the identification of the particular asset base from which a creditor?s claim can be made and for which typically a charge would be granted.

A secured creditor therefore will have recourse only against the specific asset pool held by the segregated account to which that debt obligation relates.

The use of the segregated account structure also has applications outside of the collective investment scheme area. In relation to insurers, a segregated accounts insurance company is typically a variation of a ?rent a captive?.

Companies owning real estate, ships, aircraft or other assets conventionally organise themselves using a corporate structure, the simplest of which entails a holding company owning a separate company for each asset, for example, an aircraft or ship.

Trust applications could include employee benefit schemes.

Unlike the general approach of other offshore jurisdictions, Bermuda?s legislation provides details on the practical aspects of segregated accounts and concrete statutory provisions.

For many business models and arrangements it is the comprehensive statutory framework, coupled with the underlying contractual base that will provide a level of comfort in respect of the segregation of assets.

Business so far has responded positively to the segregated account structure as providing an effective, flexible and cost effective method of implementing commercial activity with growth in the future expected.

@EDITRULE:

Attorney is a member of the Corporate and Commercial Practice Group at Appleby Spurling Hunter. Copies of Mr. Montarsolo?s columns can be obtained on the Appleby Spurling Hunter web site 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.