SAC race

The development of public legislation relating to segregated accounts companies is proving beneficial to the insurance market in Bermuda. Neil Horner reports

In August 2000, Bermuda enacted the Segregated Accounts Companies Act 2000 (the SAC Act). The public legislation established a registration system for a segregated accounts company or SAC (the Bermudian equivalent of a protected cell company when the assets of one cell are statutorily insulated from the liabilities of another cell or from the SAC’s general account) to operate segregated accounts. The legislature introduced various amendments in 2002, thereby signalling its determination to keep Bermuda at the forefront of responsible but facilitative development in this area.

The new legislation can be used in both the insurance and non-insurance context. This article briefly considers some of the primary uses of the legislation (although primarily in the insurance context) and summarises some of the key features of the Bermuda public legislation.

Prior to the enactment of the SAC Act, Bermuda had permitted separate account companies to be established by way of a Private Act of the Bermuda Parliament (Private Act). Well over 100 such companies had been incorporated prior to the introduction of the SAC Act. In fact, Bermuda had pioneered the separate account (or protected cell concept) that was subsequently introduced in other offshore jurisdictions. Indeed, although the terminology differs between jurisdictions, the concept has become an established part of the offshore legal world and has been introduced in certain US states (Vermont and Hawaii, for example).

It should be noted that, so far as the author is aware, there is no case law in Bermuda or any other offshore jurisdiction with segregated account or protected cell legislation ruling on the legal efficacy or enforceability of the segregated account concept. To that extent, there must remain some residual uncertainty as to the efficacy of the concept, although it is certainly the expectation of the offshore legal community that it will withstand the full rigour of judicial analysis when it is finally litigated.

Uses of the legislation
The new legislation may be utilised for a variety of insurance purposes. It is particularly attractive in the ‘rent-a-captive’ context.
A rent-a-captive is a structure in which a sponsor (typically an insurance captive manager) will set up a captive insurance company and ‘rent’ the core capital, licence and capacity of the captive to programme participants. The structure is particularly attractive to smaller companies in which the cost of establishing a captive would otherwise be prohibitive. In a segregated account rent-a-captive, the effect of the public legislation is to segregate legally each participant’s programme from the programmes of other participants to fireproof each participant from the claims of creditors of other participants.

The new legislation may also be utilised in the context of so-called ‘transformer companies’ which, for example, transform insurance risk into capital markets products (such as swaps and derivatives).
Bermuda insurance legislation has already recognised the convergence of the insurance and capital markets, specifically by providing in its insurance legislation that the capital markets component of such transactions shall statutorily be deemed not to constitute the carrying on of insurance business. A single company may wish to enter into separate transactions with different parties, and the SAC legislation is very attractive in this context.

In the context of mutual funds, the legislation is particularly attractive for umbrella or multi-class funds, which would provide each share class with the same benefit of limited liability that would be obtained if separate corporate bodies were used for each class of investor.

Key features of the SAC Act
A segregated account is an account containing assets and liabilities that are legally segregated from the assets and liabilities of the company’s ordinary account, known as its ‘general’ account, and from the other segregated accounts.

Although a segregated account is not a separate legal person, the legislation confers some of the attributes of separate corporate personality on a segregated account. These attributes are to be exercised by the SAC itself on behalf of the segregated account. So, the SAC Act provides that the SAC may sue and be sued in respect of a particular segregated account and expressly permits the property of a segregated account to be subject to order of the court as if it were a separate legal person. The SAC itself is a separate legal entity from its shareholders and as such is imbued with the normal attributes of a company.

The legislation contains detailed firewall provisions to the effect that the assets of one segregated account are (unless the affected parties expressly agree otherwise in writing) only available to meet the liabilities of that particular segregated account and not the liabilities of any other segregated account or of the general account.

The legislation contains specific provision recognising the validity of inter-cell transactions between the general account and individual segregated accounts and between segregated accounts inter se. This was introduced in the raft of amendments introduced in 2002 and is a particularly helpful clarification – for example, it may be convenient for the general account to provide central administrative services to one or more segregated accounts and presumably charge the accounts on some predetermined basis for the provision of such services.

The legislation permits persons to enter and exit a SAC either contractually or by becoming a shareholder of shares issued by the SAC and linked to a particular segregated account. The latter route confers certain additional statutory rights by virtue of the participant having shareholder rights. Again, the amendment (permitting contractual participation) was introduced in 2002.

The new legislation permits dividends to be paid and liquidations to be effected on a specific segregated account basis without reference to the general account or other segregated accounts within the SAC.

In relation to the matters that may be set out in the governing instrument of a SAC, the legislation is facilitative, permitting the parties to craft provisions that are suitable to their needs, and so to derive the maximum benefit of segregation, it is important to specify in the governing instrument the assets and liabilities which are linked to a particular segregated account.

It is likely that use of the public legislation in Bermuda will continue to increase as the registration system offers a cost-effective and swift route to achieving the benefits of a statutory firewall protecting the segregation of assets and liabilities between cells. The legislation is flexible but responsible and it is likely that it will continue to be refined in the light of ongoing experience – for example, to further facilitate the process of existing Private Act companies registering under the SAC Act beyond the existing provisions. However, the offshore legal community awaits a judicial determination of the segregated account or protected cell legislation with great interest. There will remain a certain element of doubt until such time, although it is anticipated that the concept will be judicially endorsed.

Neil Horner is senior corporate counsel at Attride-Stirling & Woloniecki