BERMUDA SEGREGATED ACCOUNTS COMPANIES Conyers Dill & Pearman Barristers & Attorneys Clarendon House 2 Church Street PO Box HM 666 Hamilton HM 11 Bermuda email: bermuda@ Website: www. Bermuda British Virgin Islands Cayman Islands Dubai Hong Kong London Mauritius Moscow São Paulo Singapore
F O R E W O R D This Memorandum has been prepared for the assistance of anyone who is considering establishing a segregated accounts company in Bermuda. It deals in broad terms with the requirements of Bermuda law. It is not intended to be exhaustive but merely to provide general information to our clients and their professional advisers. We recommend that our clients seek legal advice in Bermuda on their specific proposals before taking any steps to implement them. This Memorandum has been prepared on the basis of the law and practice as at the date referred to below. Conyers Dill & Pearman Hamilton, Bermuda July 2009
TABLE OF CONTENTS 1. INTRODUCTION 2. RATIONALE FOR ESTABLISHING A SEGREGATED ACCOUNTS COMPANY 2.1 Segregation of Assets and Liabilities 2.2 Flexibility 2.3 Cost 3. SETTING UP A SEGREGATED ACCOUNTS COMPANY 3.1 Incorporation 3.2 Registration 4. TIMESCALE FOR INCORPORATION AND REGISTRATION 5. THE GOVERNING INSTRUMENT 6. ONGOING REQUIREMENTS 6.1 Segregated Account Representative 6.2 Ongoing Segregation of Accounts 6.3 Issue of Shares 6.4 Record Keeping 6.5 Financial Statements 6.6 Dividends 6.7 Register of Account Owners 7. SEGREGATED ACCOUNTS COMPANIES AND OTHER JURISDICTIONS 8. TAXATION
1. INTRODUCTION A segregated accounts company ( SAC ) is a company which is permitted to create segregated accounts in order to segregate the assets and liabilities attributable to a particular class or series of shares of the SAC from the assets and liabilities attributable to each other class or series of shares of the SAC, and from the SAC s general assets and liabilities. In Bermuda, the concept of a segregated accounts company has been around for more than 15 years, but until recently only in the form of companies incorporated by private Act. With the enactment of the Segregated Accounts Companies Act 2000 (the SAC Act ), there is now a system of registration so that SACs may be created speedily and with the flexibility necessary to respond to the needs of international business. A company incorporated under the Companies Act 1981 (the Companies Act ) can be registered as a SAC, thus avoiding the lengthy and expensive private Act process 1. 2. RATIONALE FOR ESTABLISHING A SEGREGATED ACCOUNTS COMPANY 2.1 Segregation of Assets and Liabilities A SAC is permitted to create segregated accounts. Any asset or liability linked to a particular segregated account is deemed to be separate from the assets or liabilities of other accounts and from the company at large. Such assets or liabilities are held exclusively for the benefit or burden of the account owners of that account and any counterparty to a transaction linked to that account. SACs can thereby contract with a creditor or shareholder so that assets injected by that person are held by the SAC in respect of a particular segregated account are insulated from any claims of the creditors of other segregated accounts and of the general creditors of the company. A segregated account is not a separate legal entity but a record or a collection of records detailing transactions relating or linked to each other. The SAC Act therefore enables a statutory segregation of accounts within a single company that could otherwise only be achieved by incorporating subsidiaries or by private act. Within the investment funds industry the ability to use a SAC is particularly beneficial for fund managers wishing to establish master-feeder fund structures, structures providing for multiple classes of shares or any structure where the statutory segregation of assets is desired. SACs are also useful in the insurance industry, being a sensible vehicle for rent-a-captives, being captive insurance companies established and licensed by a sponsor who then rents the capital, the insurance licence and the company s capacity to operate to various participants. Insurance companies also find SACs useful for legally separating reserves among different insurance products, particularly long-term business such as life and disability programs. Companies incorporated to hold significant assets (for example, aircraft or ships) may also find it beneficial to have each asset attributed to a separate account. Other types of companies may also benefit from the segregated accounts structure and specific advice should be sought to determine whether on the facts of each case a SAC is the best available option. 2.2 Flexibility A SAC can be tailor-made to best serve the interests of the individual account owners and the company at large. In particular, SACs can be designed to streamline and simplify administration 1 Promoters of a Bermuda company may still petition the Bermuda Legislature for a private Act where the company is desirous of obtaining special provisions for the constitution and structure of the company not otherwise available under current legislation. SACs created by private Act are beyond the scope of this memorandum. 1 of 7
for investment funds, insurance companies, asset-holding companies and companies carrying on separate and distinct business ventures. 2.3 Cost The annual government fees for Bermuda companies are set on a sliding scale calculated on the basis of the company s assessable (or in the case of an investment fund, authorised) capital. Annual government fees for exempted companies presently range from $1,995 to $31,120 per company. One of the primary benefits of a SAC is that it is not necessary to incorporate more than one company; one company with minimal assessable capital can be created, administering any number of segregated accounts. The fee to establish a SAC is $250, plus $280 per annum for segregated account subject to a maximum of $1,120 per annum. By way of example, a SAC with minimal share capital and 10 segregated accounts will attract an annual government fee of $3,365. Ten separate companies with minimum share capital would attract $19,950 in government fees each year. Even leaving aside the considerable savings in legal incorporations fees and annual secretarial fees, which are usually payable per company, the cost benefit is considerable. 3. SETTING UP A SEGREGATED ACCOUNTS COMPANY Any new company seeking to operate segregated accounts must be incorporated under the Companies Act and registered under the SAC Act. While these are two separate and distinct processes, they can be performed simultaneously so that the date of incorporation can be the same as the date of registration. It is also possible for a company already incorporated in Bermuda subject to certain conditions to become a SAC by way of registration under the SAC Act. 3.1 Incorporation Bermuda law distinguishes between local companies (those which are owned predominantly by Bermudians) and exempted companies (those which are owned predominantly by non- Bermudians). Generally, exempted companies may only carry on business from Bermuda in connection with transactions and activities which are external to Bermuda. The vast majority of all companies incorporated in Bermuda are exempted companies. The focus of this part is on the incorporation of an exempted company and its registration as a SAC. The Bermuda Monetary Authority (the BMA ) must approve the incorporation of all Bermuda exempted companies. The identity of the ultimate beneficial owners of the company must always be disclosed and, in general, all ultimate beneficial owners holding 5% or more of the shares of the proposed company must sign a personal declaration attesting to his or her good standing and provide verification documents. Full particulars of the incorporation process, together with a description of the constitutional documents, local requirements and the ongoing regulation of a Bermuda exempted company can be found in our publication entitled Bermuda Exempted Companies, copies of which are available on our website or on request. 3.2 Registration In order to be registered as a SAC, a company is required to file a statutory notice (the Form 1 ) with the Registrar of Companies (the Registrar ). The Form 1 must describe the nature of the business as well as contain a statement that the company is able to comply with the accounting procedures set out in the SAC Act. When making such statement, it is usually sufficient for the 2 of 7
company s directors or other applicants to confirm that the company s accountant or administrator has been directed to account for segregated accounts in the manner set out in SAC Act. Where the company has conducted business prior to its application to register as a SAC, a copy of the Form 1 must be sent to all persons (currently doing business with the company) who will become account owners and to the company s known creditors at least contemporaneously with the filing of the Form 1 with the Registrar. Further, the company must include with the Form 1 for filing with the Registrar, evidence that seventy five percent in number of the account owners and the creditors have consented in writing to the registration of the company as a SAC and a statutory declaration (the Statutory Declaration ) setting out a true and accurate statement or description of the following: (i) (ii) (iii) (iv) the assets and liabilities of the company as at a date within three months before the date of the Form 1; any transaction or event which, as at the date of the Form 1, has occurred or is expected to occur between the date of making the statement of assets and liabilities and the date of registration of the company as a SAC which, if it occurred before the date of that statement, would have caused material changes to the assets and liabilities disclosed therein; the number of segregated accounts to be operated and the assets and liabilities proposed to be assigned to each of those segregated accounts; and a statement that: on registration as a SAC, the company and each segregated account will be solvent and (aa) no known creditor of the company will be prejudiced, (bb) the known creditors of the company have consented in writing to the company s registration, or (cc) adequate notice has been given to all known creditors of the company and no creditor has objected to the registration (otherwise than on frivolous or vexatious grounds); no creditor of the company will be prejudiced; or the creditors of the company have consented in writing to the company proceeding to register as a SAC. The process used by the company to determine that the known creditors will not be prejudiced, or to obtain their consent to registration, must be described and verified by its directors as part of the Statutory Declaration. The company is also required to notify the Registrar of any material changes to the information set out in the Statutory Declaration between the date of the notice filed and the date of registration. It should be noted that the application and documents which are submitted to the Registrar and the BMA do not form part of the public record of the company. The SAC will, however, be included in the Register of Segregated Account Companies which is maintained by the Registrar and is available to public inspection. 3 of 7
4. TIMESCALE FOR INCORPORATION AND REGISTRATION A company can usually be incorporated within 3 to 5 full business days of submission to the BMA of the completed application together with all of the supporting information on the ultimate beneficial owners and any required personal declarations. In order for contemporaneous registration under the SAC Act, all documentation must be completed in full and correct. 5. THE GOVERNING INSTRUMENT The SAC s governing instrument is the document by which the relationship between the account owners and the company are governed. The governing instrument will generally set out the requirements for becoming an account owner, the methods by which the accounts will be managed, the mechanics for the payment of dividends, and the distribution of assets upon a winding up of the company. 6. ONGOING REQUIREMENTS 6.1 Segregated Account Representative In addition to the ongoing requirements imposed by the Companies Act on all Bermuda exempted companies (as detailed in our publication entitled Continuing Requirements of the Companies Act of Bermuda ), a SAC is required to appoint a segregated account representative ( SAR ) approved by the Minister of Finance. The purpose of the SAR is to act as an internal watchdog, with the statutory duty to make a written report to the Registrar within thirty days after (a) the SAR reaching the view that there is a reasonable likelihood of a segregated account or the general account of the SAC becoming insolvent, or (b) it coming to the SAR s knowledge or his or her having reason to believe that certain failures to comply with the SAC Act have occurred or that the SAC has become involved in any criminal proceedings in Bermuda or elsewhere. 6.2 Ongoing Segregation of Accounts Assets linked to a particular segregated account are held by the company as a separate fund. Such assets are not available to meet the company s general liabilities, and cannot (unless otherwise agreed) be made available to satisfy the liabilities linked to other accounts. Each segregated account is able to grant security interests over its assets, and these security interests can be made to rank ahead of the interests of the owner of the account. It is possible for segregated accounts within one SAC to contract with each other, subject to some restrictions designed to protect creditors from improper transactions made between different accounts. In addition, one segregated account can hold an interest in another account within the same SAC. Transfers from one account to the general account, however, are only permitted in certain circumstances and with the consent of the account owners and counterparties. Such transfers can be voided upon application to the court by any person adversely impacted by the transfer. 6.3 Issue of Shares Shares whose assets and liabilities are linked to a particular segregated account must be recorded in the records of the company as being linked to that segregated account. 4 of 7
6.4 Record Keeping A SAC must comply with the requirements of the Companies Act as it pertains to the keeping of records and accounts. In addition, a SAC must keep proper records of each account. Account owners do not have the right to inspect the records of other accounts, but they do have access to the names and holdings of all other account owners. 6.5 Financial Statements The financial statements of a company must be made available to its shareholders at least once in each year. This requirement can be waived in certain circumstances. 6.6 Dividends The provisions of the Companies Act pertaining to dividends and other declarations to not apply to companies registered under the SAC Act. The SAC Act provides a code for the declaration of dividends and distributions, which takes into account the solvency of the segregated account in question, rather than the solvency of the company itself. 6.7 Register of Account Owners The register of account owners is not open to the public. In the case of a SAC which is a mutual fund, the register of account owners is not open to inspection by any person without the consent of the company, provided that an account owner is entitled to receive a copy of the information in the register pertaining to his interest in the company. 7. SEGREGATED ACCOUNTS COMPANIES AND OTHER JURISDICTIONS The SAC is becoming a popular and effective vehicle not just in Bermuda but in other jurisdictions as well. However, these types of entities have not been considered yet by the courts of Bermuda or any other jurisdiction 2. As such, it is possible that in some jurisdictions a SAC may be an unfamiliar structure and its dealings may be construed in a manner which is contrary to the intent of the legislation. More specifically, courts in other jurisdictions may not be prepared to accept that creditors in respect of a particular segregated account are prevented from gaining recourse to the assets of other segregated accounts, or that general creditors of the SAC as a whole do not have recourse to those assets specifically designated as segregated account assets. Similarly, if a liability (for example a fine or tax) is imposed by an authority of another jurisdiction, it is not known how the courts of Bermuda (or indeed other jurisdictions) might impose or distribute that liability as among the general account of the SAC and the various segregated accounts. That said, segregated accounts (or cell structures ) are not unique to Bermuda. Variations on segregated cell legislation exist in an increasing number of jurisdictions, including in several US states. As the concept becomes commonplace, so too should investor comfort with the effectiveness of such structures. 2 A recent U.S. receivership case involving a Cayman segregated portfolio company touched briefly on the nature of a segregated portfolio company but not in any substantive way. 5 of 7
8. TAXATION There is no Bermuda income or profits tax, withholding tax, capital gains tax, capital transfer tax, estate duty or inheritance tax payable by a Bermuda exempted company or its shareholders, other than by shareholders who are ordinarily resident in Bermuda. A Bermuda exempted company may apply for, and is likely to receive, from the Minister of Finance (under the Exempted Undertakings Tax Protection Act 1966) an assurance that if the Bermuda legislature adopts any legislation imposing tax computed on profits or income, or computed on any capital assets, gain or appreciation, or any tax in the nature of estate duty or inheritance tax, then such taxes shall not apply to the company until at least March 2016. No stamp duty is payable in respect of any instrument executed by a Bermuda exempted company or in respect of an instrument relating to an interest in a Bermuda exempted company. Stamp duty may, however, be payable in respect of transactions involving Bermuda property. 6 of 7
This publication is not intended to be a substitute for legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide a brief overview and give general information. About Conyers Dill & Pearman Conyers Dill & Pearman advises on the laws of Cayman Islands, British Virgin Islands, Bermuda and Mauritius. The Firm specialises in company and commercial law, commercial litigation and private client matters. Conyers provides responsive, timely and thorough offshore law advice from 11 locations including offices in Europe, Asia, the Middle East and South America. Founded in 1928, Conyers comprises over 550 staff including more than 150 lawyers. Affiliated companies (Codan) provide a range of trust, corporate secretarial, accounting and management services. www. 7 of 7