1. Segregated Accounts Companies

2. Segregated Account Companies Speakers: Jan Woloniecki, Head of Litigation, Attride-Stirling & Woloniecki Dennis Silvia, President, Cedar Consulting, LLC

3. Everything you always wanted to know about the Segregated Accounts Companies Act 2000 (“ SAC Act”) but were too afraid to ask... I HISTORICAL PERSPECTIVE In the beginning... Quiz Time The Pre-History of the SAC Act II OVERVIEW OF THE SAC ACT III A TEST CASE: Gottex v. New Stream IV CONCLUSION

4. 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.” D OUGLAS A DAMS

5. Quiz Time What is the single most important invention of Victorian Britain which created the modern globalised economy ?

6. Is it (a)... t (a)... The steam engine?

7. Or (b)... The transatlantic telegraph cable?

8. Or (c)... The sewerage system?

9. Or (d)... None of the above

10. Answer: (d) The limited liability company

11. 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 us. W.S. GILBERT, “Utopia, Limited, or the Flowers of Progress” (1893)

12. 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

13. ... one of the most important inventions of the Twentieth Century The segregated accounts company

14. The Pre-History of the SAC Act “ Non-contributing” / “non- assessable” 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

15. OVERVIEW OF THE SAC 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” (3 rd ed., 2010), pp. 1008-22

16. 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]

17. 3 Core Concepts 1.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).

18. 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)

19. 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]

20. 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 accounts.”

21. 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 wisdom  Illegality of the Plan  “Just and Equitable” to Appoint a Receiver Hon. Mr. Justice Kawaley

22. Factual Overview Pieter Brueghel the Elder (1568)

25. 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.

26. 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]

27. 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]

28. “Just and equitable” to appoint a Receiver “ In 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]

29. 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

30. CONCLUSION Lessons to be learnt from the Gottex case  Investors / account owners: Appoint competent captive managers  Captive Managers: Retain competent Bermuda lawyers...

31. “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 adopted.” Kawaley J., Gottex [46]

32. Commercial advantages of SAC Act companies  Cost  Efficiency  Flexibility

33. The End