Northstar Financial and Omnia: An Important Decision Regarding Segregated Accounts in Liquidation Context

Northstar Financial and Omnia: An Important Decision Regarding Segregated Accounts in Liquidation Context

On 28 July 2023, judgment was handed down judgment in an application by the joint provisional liquidators (“JPLs”) of Northstar Financial Services (Bermuda) Ltd. and Omnia Ltd.  (together the“Companies”) to resolve questions regarding the operation of segregated accounts.

The use of segregated accounts in Bermuda is widespread. For example, within the insurance industry segregated accounts are used to protect investments by creating a ‘firewall’ for assets and liabilities within a segregated account but without the need for more onerous trust structures. Individuals and companies with segregated accounts can benefit from tax reductions, costs savings and increased flexibility.

The Companies hold hundreds of millions of investors’ money pending the outcome of the judgment. The decision also had potentially enormous broader consequences for Bermuda’s insurance and investment businesses, because if the Court found that policyholders had not obtained segregated accounts it could call into question the entirety of the segregated accounts regime. It is also one of the first cases in which the Court has been called on to examine the detail of the creation of a segregated account.

Northstar Financial Services (Bermuda) Ltd. was incorporated in Bermuda on 18 February 1998 and underwent various name changes and amalgamations before being registered as a segregated accounts company under the Segregated Accounts Companies Act 2000 (the “SAC Act”). Omnia Ltd. was incorporated in Bermuda on 15 May 2000 and was never incorporated under the SAC Act but purported to establish segregated accounts under two Private Acts: The Sage Life (Bermuda) Ltd. Act 1999 and the Omnia (Bermuda) Ltd. (Segregated Accounts) Consolidation and Amendment Act 2004 (the “Private Acts”).,

In 2017 and 2018 the Companies were sold to a Bermuda holding company owned by Greg Lindberg. Mr Lindberg converted many of the Companies’ assets into highly illiquid debt instruments owed by companies which he controlled and which meant it lacked the ability to meet policy redemption requests.  In 2019, the United States Department of Justice indicted Lindberg on federal wire fraud and bribery charges. He was convicted in 2020 and was sentenced to seven years in federal prison. In 2020, the JPLs were appointed over the Companies by the Bermuda Court.

As part of the liquidation process, in 2021 the JPLs applied to the Court, asking it to determine whether the Company had successfully created segregated accounts when it sold a variety of life insurance and investment products to policyholders and to determine the rights of segregated accounts holders to claim against the general assets of the Companies. Policyholders were divided into 3 separate classes and representatives appointed:

• Variable policyholders who purchased units which were used as measurements of value linked to the performance of shares in mutual funds, with the value of their policy dependent on that performance;
• Fixed policyholders who purchased the right to receive a fixed rate of interest on their investment unrelated to the performance of any underlying assets; and
• General creditors, which included those with without variable or fixed policies.

Jennifer Haworth from MJM Limited and Edward Davies KC of Erskine Chambers were instructed on behalf of the Variable Class Representatives.

There were difficult arguments which included:

• Whether the requirements for the creation of a segregated account under the Private Acts and the SAC Act were the same. This had the important consequence of determining whether the Private Acts could had imposed a different regime;
• Whether sufficient record keeping had been established to enable the Court to identify a ‘linked asset’ to the policy, even where this represented only accounting entries;
• Whether the fact that variable policyholders only acquired the right to receive a return based on the performance of units, rather than the underlying assets precluded segregation; and
• Whether comingling of funds prevented segregation.

The Variable Class Representatives were entirely successful in their arguments. The Court held, among other things as follows:

• That there was no material inconsistency for the operation of the segregation regime between the Private Acts and the SAC Act;
• The main object of the SAC Act is to allow a company to ring-fence assets without the expense or complications of incorporating, and in certain cases licensing, a separate company to hold segregated assets, or having to resort to a trust or contractual structure;
• Linkage was sufficient to establish segregated accounts and that it is not necessary for the assets to be placed and maintained in a separate bank account. The primary consequence of linkage is that the assets of the segregated account are held exclusively for the benefit of the beneficial owners or counterparty and can only be applied to the liabilities of the segregated account;
• Co-mingling of funds does not preclude the operation of segregation; and
• Only the variable policies had effective record keeping in order to establish segregated accounts.

The Court’s ruling is not only crucial for the parties in this case but will have a substantial impact on companies seeking to register as a segregated account company, companies seeking to ensure they provide for effective segregation of accounts and the payment of policyholders and creditors in liquidations of segregated accounts companies.

The parties appeared recently before the Court for a hearing on consequential costs following the main hearing on segregation. The outcome on the issues of costs is expected in the early part of next year.