sales corporation (FSC) transactions, a Bermuda lawyer said at a major FSC conference in New York yesterday.

Mr. David Cooke, a lawyer at Mello, Hollis, Jones & Martin, said that while the preference was initially the result of Bermuda's sophisticated legal infrastructure, it is now increasingly the result of efforts in Bermuda to further protect the lender in FSC transactions against the bankruptcy of the equity investor.

The conference, setting out the achievements and challenges for FSC leasing in the 1990s, is the FSC/DISC Tax Association's third of its kind.

Mr. Cooke, speaking on the second day of the two-day conference, said there were four structures presently in Bermuda which are generating the most interest among lenders: The standard FSC, which is incorporated under the Companies Act of 1981; The FSC incorporated by a private act of Parliament; The FSC combined with a Bermuda purpose trust; and The FSC combined with a limited partnership.

In a standard FSC, shares are held by a subsidiary or a trust established by the equity investor. Though there is a risk of the company being placed into compulsory liquidation or going in voluntary liquidation, there is the ability to tailor the constituting documents of the FSC to avoid the company being wound up.

Mr. Cooke said present lender concerns generally centre around the possible bankruptcy of the equity investor. He said there is the risk that a trustee in the bankruptcy of the equity investor might have access to the FSC and its assets, or that the FSC and its assets will be taxed.

"The mere fact that the FSC is incorporated and operating outside the jurisdiction of the US bankruptcy courts provides a certain degree of comfort in respect of these risks,'' he said. "Furthermore, it is well-established law that the Bermuda courts will not enforce the taxation laws of another country.'' Mr. Cooke said that while the majority of companies are incorporated by registration under the 1981 Companies Act, it is relatively common for Bermuda's Parliament to sanction an incorporation where special provisions are required.

He said company incorporations by private acts of parliament require consultation with the Attorney General's Chambers and the Ministry of Finance, approval by a joint select committee of Parliament, distribution of the Bill to Parliamentarians, publication of the Bill, and approval of both houses of Parliament.

The principal drawbacks in this procedure are the cost and the time involved, Mr. Cooke said adding that it could weeks, possibly months before the process is complete. But, he said, the advantage is the ability to tailor the company to the specific needs of the parties involved in setting up the FSC to provide further protection to lenders.

All of the FSC private acts which were passed in July last year contained a six-month time limit within which the company's memorandum of association was to be filed. But none of the companies was incorporated and the acts have now lapsed. "If this mechanism is to be used in the future, it will be necessary to obtain the passage of a further Act of Parliament,'' he said.

FSCs that are combined with Bermuda purpose trusts require that an appointed trustee holds the company assets in trust for the specific purposes set out in the trust deed. The equity investor divests itself completely of interest in any assets settled into the trust.

Mr. Cooke said that while purpose trusts are a relatively new concept for Bermuda, they provide further insulation of the FSC and its assets should the equity investor go bankrupt.

"For example, the Bermuda purpose trust could be established for the limited purposes of borrowing, servicing the loan, and holding the shares of the FSC,'' he said.

The use of exempted limited partnerships has been of particular interest to lenders in FSC transactions, Mr. Cooke said.

"Structurally, the partnership appears above the FSC as the sole beneficial owner of that company,'' he said. "That partnership is formed of the limited partner, which is generally a wholly owned subsidiary of the equity investor, and the general partner, which is generally a wholly owned subsidiary of an investment bank.'' The limited partner and the general partner contribute a percentage of the cost of the FSC equipment, while the partnership then borrows the remaining cost from the lender.