Inviolability of the Bermuda segregated accounts company structure upheld

Fiona Bada

August 31, 2023

The recent decision of the Supreme Court of Bermuda in the case of Re Northstar Financial Services (Bermuda) Ltd and Omnia Ltd [2023] SC (Bda) 57 Civ (the “Northstar Case”) upheld the integrity and legal recognition of the Bermuda segregated accounts company (SAC) and the linkage provisions which are fundamental to the segregated structure.

The Bermuda SAC is a modern corporate legislative innovation which permits a SAC, as a separate legal entity, to create one or more segregated accounts such that the assets and liabilities of each segregated account are separate from the assets and liabilities of each other segregated account and the general assets and liabilities of the company which are typically held in what is known as the general account.

One of the main advantages of the SAC is the relative ease with which it enables a company to ring fence certain of its assets without the need to resort to, or incur the expense and complication of, incorporating and possibly licensing a separate company to hold the assets or having to resort to trust or contractual structures. The ring fencing of assets and liabilities provided by the Segregated Accounts Companies Act, 2000 (the “Act”) means assets linked to a particular segregated account may only be used to discharge liabilities which are linked to that segregated account, therefore where the liability of a SAC to a person arises from a transaction relating to a particular segregated account, that person shall, in respect of that liability, be entitled to have recourse only to the assets linked to the particular segregated account and not the assets of any other account.

The Northstar Case was brought before Chief Justice Hargun on an application made by the joint provisional liquidators of two insolvent companies: Northstar Financial Services (Bermuda) Ltd (in liquidation) (Northstar) and Omnia Ltd (in liquidation) (together, the “Companies”). The Companies operated (or purported to operate) segregated accounts in respect of policies of insurance and other investment products provided to them, initially pursuant to the terms of various private acts and then, in the case of Northstar, subsequently under the Act.

The Companies had, individually, issued either variable investment plans (“Variable Plans”) and fixed investment plans (“Fixed Plans”). Variable Plans entitled policyholders to invest in a range of different mutual fund assets with the return being variable or reliant on the performance of the underlying mutual fund investment. Fixed Plans did not offer policyholders a choice of underlying investments. Instead, policyholders provided funds to a company and the company had the discretion to determine where said funds were invested with the intention that the return on these proceeds would be used to pay the policyholders the guaranteed return over a set period.

The Chief Justice reaffirmed that the linkage of assets and liabilities to a particular account is a fundamental feature of the SAC. He determined that the definition of ‘linkage’ should be broadly interpreted amounting to the ability to identify in a company's accounts or accounting records, an assets or liability with a given segregated account either by writing or some other conclusive indication, as opposed to the physical segregation of funds, for example, by the maintenance of separate bank accounts.

Further, he confirmed that in order to satisfy the description of an asset or liability being linked to an account, it is not necessary for it to be demonstrably derived from the original investment. As segregation merely requires that the segregated assets can be identified, a separate and distinct account evidenced by entries recording data, assets, rights, contributions, liabilities, and obligations linked to such an account is sufficient and accounting entries may establish the necessary nexus between the item and the accounts.

This position held true even in circumstances where no underlying asset was purchased with the sums invested as the Companies’ books recorded the funds committed both as an asset and a liability of the relevant segregated account. Conversely, by extension, the court found that if the underlying investments were not linked or subsequently ceased to be linked, this fact did not, without more, indicate the absence of a segregated account or result in a segregated account ceasing to exist. As such, the court found that policyholders with segregated accounts did not have a claim against the general account assets of the Companies or any other segregated account.

On the facts, the Chief Justice found that each of the Companies established segregated accounts in respect of the policies for which they represented they would create segregated accounts from the moment the policies were entered into and the funds committed. The Variable Plans showed sufficient connection in each of the Companies’ records between the underlying investments and the particular policies in respect of which these investments have been made for those investments to be categorised as segregated assets, however the necessary recordkeeping for purposes of effective segregation was not present in relation to investments that were made pursuant to the Fixed Plans.

The commingling of funds is therefore no longer fatal to the creation of a segregated account if the relevant contractual materials should evince an intention to create a segregated account, the particular assets are of a kind that may be segregated and are connected in the company's records to the particular policy. The court determined that the appropriate to be taken whenever possible is to strive to uphold segregation not just because it represents the will of the contracting parties, but also because it is the central feature of the legislation and, in the Northstar Case, the private acts under which the Companies carried on business.


Fiona Bada is counsel in the Corporate & Commercial department of Cox Hallett Wilkinson Limited

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