In September 2002 the British Virgin Islands government introduced amendments to the Insurance Act 1994 to create a regime for the registration and regulation of segregated portfolio companies (SPCs) (known in some other jurisdictions as protected cell companies). The Insurance (Amendment) Act 2002 (the Amendment Act) was introduced following a perceived demand from the international insurance market and is designed primarily to facilitate so called rent-a-captive operations, aimed to assist companies that are too small to form a captive insurance company of their own. (The Amendment Act and the Insurance Act 1994, are collectively referred to in this briefing simply as the Act).
The Act establishes a system of voluntary application for an existing or proposed insurance company to be licensed by the Financial Services Commission (FSC) in the British Virgin Islands as an SPC. However, no SPC can be created without the prior approval of the FSC. An SPC must include in its name the letters SPC or the words Segregated Portfolio Company.
Essentially, an SPC may create one or more segregated portfolio in order to ring-fence the assets and liabilities of one portfolio from the assets and liabilities of another portfolio, while remaining one legal entity. This eliminates the need and the associated expense for incorporating separate companies to hold separate assets or having to use trust or contractual structures.
The Act provides for the division of an SPC's assets into segregated portfolio assets and general assets. The general assets are those assets that are not applied to any particular segregated portfolio. The directors have a duty to establish and maintain procedures to keep segregated portfolio assets separate and separately identifiable from general assets.
An SPC may create different classes or series of shares relating to the same portfolio, the proceeds of the issue of which are included in the segregated portfolio assets of the relevant segregated portfolio. The proceeds of the issue of shares, other than segregated portfolio shares, must be included in the company's general assets. Segregated portfolio dividends are paid on segregated portfolio shares by reference only to the accounts of the segregated portfolio in respect of which such shares are issued.
The Act provides that any contract or agreement that is to be binding only on a particular segregated portfolio must be specifically executed by the SPC for and on behalf of that segregated portfolio. Failure to do so will generally result in the directors incurring personal liability for the liabilities of the SPC and the segregated portfolio under that agreement, although unless the directors were fraudulent, reckless, negligent or acted in bad faith, the directors will have a right of indemnity against the assets of the portfolio in question. If the contract or agreement was not entered into on behalf of a specific portfolio, the directors can be indemnified from the general assets of the company.
Segregated portfolio assets are only available to meet liabilities to the creditors of the SPC who are creditors in respect of that specific segregated portfolio. Such assets are absolutely protected from the creditors of other portfolios. A creditor of a segregated portfolio will have recourse, first, to the assets of that segregated portfolio and, secondly, the company's general assets, to the extent that the segregated portfolio's assets are insufficient to satisfy the liability.
An application for registration as an SPC must be accompanied by an adequate business plan for the proposed SPC and for each proposed segregated portfolio of that SPC. As with any insurance company, the applicant must demonstrate that it has or has available to it the knowledge and expertise necessary for the proper management of segregated portfolios.