The Grand Court of the Cayman Islands recently handed down an opinion that is welcome news for protected cell captives. The case is significant because it adds to a small but growing body of case law affirming the segregation of cell captive assets and liabilities, which is the foundational concept for these facilities.
The case, In the Matter of Performance Insurance Company SPC, FSD No. 70 of 2021 (unreported), involved a Cayman segregated portfolio company (SPC), Performance Insurance Company SPC (Performance). Under Cayman law, an SPC may form protected cells known as segregated portfolios (SPs). SPs have no legal identity separate from the SPC, but the assets and liabilities of each SP are segregated by law from the assets and liabilities of the SPC and every other SP. Thus, a creditor or claimant of any one SP has no recourse against the assets of any other SP. Similarly, a creditor or claimant of the SPC has no recourse against the assets of any SP and vice versa.
Performance had been placed in liquidation as the result of alleged fraud involving some, but not all, of its SPs. The two liquidators appointed to handle the liquidation proposed to allocate the fees and expenses of the liquidation, which were substantial, among all of the SPs, including those that were not involved in the fraud and were still solvent. The shareholders of two of the solvent SPs—Bottini Insurance SP (Bottini SP) and SSS Insurance SP (SSS SP)—took issue with this plan, arguing that it was contrary to Cayman law because the law prohibited recourse against the assets of their SPs to satisfy the general liabilities or expenses of the SPC, including the general expenses of the liquidation. They further argued that there was a conflict between their interests as shareholders of solvent SPs, which was simply to leave the SPC by novating their business elsewhere, and the interest of the liquidators, which was to administer the liquidation of Performance and its insolvent SPs for the benefit of the parties who had suffered losses due to the apparent fraud. Because of this conflict, the shareholders argued the court should appoint an independent liquidator to oversee the liquidation of their portfolios.
The court agreed with these arguments and appointed a third, independent liquidator whose sole authority would be to oversee the liquidation of Bottini SP and SSS SP. Under the terms of the court’s order, the fees and expenses of the liquidators overseeing the liquidation of Performance and its insolvent SPs would not be allocated to Bottini SP or SSS SP. Instead, Bottini SP and SSS SP would be solely responsible for the fees and expenses of the independent liquidator appointed to oversee their liquidation.
The court’s decision in the Performance case is important because it affirms the segregation of cell and general assets and liabilities within protected cell captives, thus preserving the integrity of this structure. Also important is the court’s recognition that the interests of the shareholders of the two SPs who brought the action could be considered separately and apart from the interests of the SPC as a whole, notwithstanding the fact that the SPs have no separate legal identity from the SPC. Although not expressly stated in the law, this conclusion, which flowed from the statutory segregation of assets and liabilities within the SPC and prior court opinions concerning conflicts of interest arising in insolvency proceedings, allowed the shareholders to reach a result that not only protected the assets of their cells from the liquidators’ immediate plan but permitted the appointment of an independent liquidator who would act solely in their interests and the interests of other parties with a direct stake in their cells.
The Performance ruling is a welcome addition to existing case law affirming the segregation of assets and liabilities within protected cell captives and appears to be the first court opinion directly addressing this issue, as opposed to merely commenting affirmatively on the principle of segregation in the course of addressing other issues. The case is most directly relevant to cell captive participants and other stakeholders in the Cayman Islands but also is a boon generally to cell participants and the captive industry everywhere for its support of the fundamental concept underlying protected cell captive structures.
MMM attorneys are highly experienced in the formation, licensing, and regulation of captive insurers. If you have any questions about this legal update, please contact the authors or any member of our Insurance & Reinsurance Team.