- the Bermuda Captive Conference

Segregated Accounts Companies
Segregated Account Companies
• Jan Woloniecki, Head of Litigation, Attride-Stirling &
• Dennis Silvia, President, Cedar Consulting, LLC
Everything you always wanted to know
about the Segregated Accounts Companies Act 2000
(“ SAC Act”) but were too afraid to ask ...
•In the beginning ...
•Quiz Time
•The Pre-History of the SAC Act
III A TEST CASE: Gottex v. New Stream
In the beginning ...
“In the beginning the Universe was created. This has
made a lot of people very angry and has generally
been regarded as a bad move.” DOUGLAS ADAMS
Quiz Time
What is the single
most important
invention of Victorian
Britain which created
the modern
globalised economy
Is it (a) ...t (a) ...
The steam engine?
Or (b) ...
The transatlantic telegraph cable?
Or (c) ...
The sewerage system?
Or (d) ...
None of the above
Answer: (d)
The limited liability company
Mr. Goldbury
You merely file a Winding-Up Petition,
and start another company at once!
Though a Rothschild you may be
in your own capacity as a Company
you’ve come to utter sorrow - But the
Liquidators say - Never mind - you
needn’t pay’, So you start another
company tomorrow!
King of Utopia
Well, at first sight it strikes us as
dishonest, but if it’s good enough for
virtuous England - The first commercial
country in the world it’s good enough for
W.S. GILBERT, “Utopia, Limited,
or the Flowers of Progress” (1893)
2 Fundamental Principles of
Corporate Law
A company is a separate legal person
from its shareholders (even if the shares
are 100% owned by a single person) =
separate legal personality
The extent of a shareholder’s liability is
the amount of the share capital he has
contributed (or, if the shares have not been
fully paid up, agreed to contribute) =
limited liability
Salomon v. A. Salomon & Co Ltd
[1897] A.C. 22
... one of the most important inventions
of the Twentieth Century
The segregated accounts company
The Pre-History of the SAC Act
/ “nonassessable” mutual companies
North Star Hospital Mutual 64 F.
3d 422 (8th Cir., 1995)
N.F.L. Insurance 874 F. Supp.
606 (S.D.N.Y., 1995)
“Rent-a-captive” structures
employing preference shares
“Protected cell” structures set up by
Private Act
You could write a book about
captive insurance, reinsurance and
SAC companies ...
See: O’Neill & Woloniecki, “The Law of Reinsurance in England and
Bermuda” (3rd ed., 2010), pp. 1008-22
The Nature of the Beast
“The [SAC] Act creates a unique offshore legal construct under which: (a)
account owners, if they are characterised as shareholders, are issued shares
of a designated class; and (b) the segregated accounts company conducts
business on behalf of investors by reference to the relevant class of shares
through transactions linked to segregated accounts or cells ...”
Kawaley J., Gottex [4]
3 Core Concepts
No separate legal personality
The segregated accounts of a SAC Act
company do not have separate legal
personality: SAC Act, s. 17(1).
Nonetheless, the company may enter
into contracts in respect of a particular
segregated account and sue in the
name of that account: SAC Act, s. 18(7).
2. Assets and liabilities in Segregated Accounts
There must be: “... a separate and distinct account
(comprising or including entries recording data, assets, rights,
contribution, liabilities and obligations linked to such account)
of a segregated accounts company pertaining to an identified
or identifiable pool of assets and liabilities of such segregated
accounts company pertaining to an identified or identifiable
pool of assets and liabilities of such segregated accounts
company which are segregated or distinguished from other
assets and liabilities of the segregated accounts company for
the purposes of this Act.” SAC Act, s. 2(1)
Meaning of “asset linked to any account”
In Gottex Kawaley J. rejected the
suggestion that “asset” should be
given a narrow, common law,
definition, “as inconsistent with the
manifest policy of the Act.” [134]
“An asset is linked to a segregated
account if it is not just identified as
‘belonging to’ a segregated account
but also as ‘pertaining to’ it.” [134]
“The Loan Notes constituted assets
linked to the Plaintiffs’ segregated
accounts which were required to be
kept as a separate fund in
accordance with the requirement of
SACA.” [145]
3. Statutory Firewall
SAC Act, s. 17(2) sets up a statutory firewall, providing
that any liability “linked” to a segregated account shall
be a liability of that account, and not of any other
account. Any asset “linked” to a segregated account
must held in in a “separate fund” and, “shall not be
available or used to meet liabilities to, and shall be
absolutely and for all purposes protected from, the
general shareholders and from creditors of the company
who are not creditors with claims linked to segregated
A TEST CASE: Gottex v. New Stream
BNY AIS Nominees & Gottex ABL (Cayman Ltd) v.
New Stream Capital Fund Ltd [2010] Bda L.R. 34
Summary of Facts
The Legal Issues
Some judicial pearls of
Illegality of the Plan
“Just and Equitable” to
Appoint a Receiver
Hon. Mr. Justice Kawaley
Factual Overview
Pieter Brueghel the Elder (1568)
Legal Issues
The Plaintiffs argued:
The Plan was illegal and void because it violated the SAC
Act requirement to maintain segregated accounts, and
could not be effective without their consent.
In all the circumstances, it was just and equitable for the
Court to appoint a receiver over the class C and F accounts
under SAC Act, s. 19.
The Defendant argued that the directors of the Bermuda
Fund had power under its bye-laws to give effect to the Plan
without the consent of all classes of shareholders.
Some judicial pearls of wisdom
“In liquidity and solvency crises, it becomes more
commercially significant than ever for those
managing segregated account companies to
deliver on SACA’s primary promise: that the
fortunes of account owners will stand or fall with
the fortunes of their segregated account and
account owners will not unwittingly have their
potential recoveries subjected to the vagaries of
risks which they have not elected to assume ...
account owners are entitled to expect that subject
to satisfying the claims of creditors of the account,
they are beneficially interested in all of the assets
in the account. The legal connection between the
account owner and the assets of the segregated
account is therefore ... far closer than the nexus
between a shareholder and the assets of an
ordinary company.”
Kawaley J., Gottex [148] – [149]
The Illegality of the Plan
“In my judgment, the liquidity and
solvency crisis which the Defendant was
confronted in 2008 and 2009, and
attempted to deal with through the Plan,
did not engage the unfettered discretion
purportedly conferred by Article 12(1) ... I
find that the modification of the NSI loan
arrangements with Classes C and I
contravened the Defendant’s
constitutional and statutory segregation
obligations and fell beyond the scope of
the Defendant’s lawful investment
management powers.”
Kawaley J., Gottex [161], [167]
“Just and equitable” to appoint a Receiver
the case of a company defending
a minority shareholder’s petition, the
directors’ opposition to the petition is
legitimized by their representation of
the majority shareholder
constituency. In the present case, the
Defendant has no such constituency
and is, in effect, seeking to serve as
a self-appointed guardian of the
Plaintiffs’ commercial rights,
proclaiming Robespierre-like: ‘Je suis
le peuple moi-meme!’”
Kawaley J., Gottex [191]
Developments post-trial
Receivers were appointed over all
segregated accounts on the application
of the directors of the Bermuda Fund
The Receivers applied to be appointed
as Joint Provisional Liquidators,
following the arrest in of the Managers’
Head of Investor Relations for running
a marijuana farm ...
The Bermuda Fund is now in liquidation
+ various New Stream entities are in
Chapter 7 bankruptcy in the
Lessons to be learnt from the Gottex case
Investors / account owners:
Appoint competent captive
Captive Managers:
Retain competent
lawyers ...
“In hindsight it does seem astonishing that
such a complex and substantial
restructuring involving a Bermudian
company should have taken place without
the Defendant obtaining formal Bermuda
law advice ... it is difficult to avoid the
suspicion that rather than ignoring the far
from straightforward Bermuda law
position, a ‘don’t ask don’t tell’ policy was
Kawaley J., Gottex [46]
Commercial advantages of SAC Act companies
The End