Variable Capital Companies, an excellent addition to the Mauritius Financial Centre Offering

The introduction of the Variable Capital Companies Act 2022 (“Act”) in April 2022 heralded a new era for investment structuring opportunities in the jurisdiction. The Variable Capital Company (“VCC”) aims to deliver on the increasing demands for innovation in the fund structuring space and will undoubtedly be of interest to Funds and international investors looking for cost-effective and flexible structuring opportunities. VCCs have already been a great success story in Singapore.

Most importantly the Act provides the legislative framework ensuring compliance with the requirements of anti-money laundering/combating the financing of terrorism (“AML” /”CFT”) by including VCCs under the definition of “financial institutions”.

The VCC can operate as a standalone entity, or a larger structure can be created whereby the VCC sets up special-purpose vehicles (“SPVs) or sub funds. The structure is particularly flexible in that allows different sub funds which could be closed-end, open ended Collective Investment Schemes (“CIS”) and Special Purpose Vehicles or any combination thereof. The VCC structure facilitates the segregation and ring-fencing of assets and liabilities of each sub entity. The creation of each sub entity requires incorporated and where applicable, authorisation from the Financial Services commission (“FSC”), but there is no restriction of the number of sub-entities that can be created within the VCC structure.

The VCC provides greater efficiency by streamlining management and operations so to reduce costs of operating the VCC, its SPVs and sub funds can share Fund Managers, C.I.S. Administrators, Custodian, boards of directors and service providers in a similar vein as the Protected Cell Company structure.

VCCs are an ideal vehicle for fund managers and multi-family offices as they provide distinct personality (where elected) and greater flexibility.

From a legal perspective all the entities including the VCC, SPVs and sub funds can elect to have separate legal personality and be structured as companies. As such, the VCC may sue or be sued in respect of a sub fund or SPV and this will only be ring fenced to that specific sub fund or SPV.
A single Global Business License will be required by the VCC irrespective of whether its sub funds or SPVs have separate legal personality.

Please note obtaining separate legal personality requires that the entity is incorporated as a company under the Companies Act and it must include the following word in its name: “Inc VCC sub fund” or “Inc VCC special-purpose vehicle”. Importantly the assets of each entity whether a sub fund or SPV should be ring fenced to prevent financial contagion so the assets of one sub fund or SPV may not be used to pay the liabilities of another.

All companies should apply for authorisation with the financial services commission FSC to operate as a VCC fund. The FSC is also the body which would approve the operation of a sub fund as a CIS or a closed ended fund. All VCCs must use the words “ Variable Capital Company” or “VCC” after its name. The VCC is incorporated under the companies act and existing immersion company can convert to a VCC.

One of the main features of the VCC is that it may issue shares of varying amounts in its sub funds and SPVS.

There are solvency test requirements under the Companies Act 2001 which do not apply to VCCs. The board of directors of the VCC must determine its solvency prior to the distribution of dividends. The VCC may pay dividends in respect of shares of a sub fund or an SPV in respect of the assets of the specific sub fund or SPV. The VCC may pay dividends out of its capital.

Redemption or buyback powers are often required in funds and the VCCs may redeem or buyback of shares of any sub fund or SPV but these provisions should be detailed in its constitution. In addition, a VCC may seek an authorisation from the Registrar to reduce the share capital or that of its SPVs and sub funds.

Where the sub funds and SPV have elected to have separate legal personality, they should present separate financial statements. Alternatively, the VCC can provide one set of accounts.

Voluntary wind up is possible for sub funds and VCCs and should be approved by the authority to confirm the latter is satisfied that the interests of the participants in the sub fund or SPV are properly protected.

The court may order a winding up of any sub fund or SPV following an order receipt from the FSCA, a creditor of the sub fund/SPV, a C.I.S. Manager of the VCC, any sub fund’s Board or any sub fund.

The taxation of a VCC, its sub funds and SPVs will generally be treated as a single entity for tax purposes unless an election has been made to present financial statements for the entities individually.

The Protected Cell Company (“PCC”) structure shares some similarities with the VCC although, it is submitted, it is a very much more expensive structure so it’s worth comparing the two in detail. The flexible nature of the VCC makes it a far superior vehicle to the PCC as described in detail below.

The permissible activities of PCC are wide ranging including asset holding, structured finance, collective investment schemes, closed ended funds, insurance, pensions schemes and real estate development while the primary objective of the VCC is to operate as a fund. Importantly while the VCC allows the sub funds and SPVs to elect for separate legal personality and be incorporated as companies this is not possible with the PCC cells. However, the PCC and VCC are similar in that a PCC may declare and pay dividends in respect of the cell by reference to the cell’s assets and a VCC may declare and pay dividends by reference to the sub fund/ SPV by reference to the assets and liabilities attributable to that particular sub fund/ SPV.

In a PCC one can only have one board of directors while in the VCC, where separate legal personality has been elected, the boards and directors of sub funds and SPVs can be different to those of the VCC.

While a VCC sub fund can apply for different licenses as described above, the PCC can only apply for one kind of license for the whole structure.

A VCC can appoint a different C.I.S. Manager, C.I.S. Administrator, Custodian and other service providers for each sub fund or SPV, while a PCC may only have one C.I.S. Manager, C.I.S. administrator, Custodian etc.

With the PCC, legal proceedings can be taken against a specific cell without affecting the assets or liabilities of other cells however creditors could have recourse to the assets of the core cell if the assets of the cells are insufficient. Fortunately in the case of a VCC any order or judgement of the court can be restricted to the specific SPV or sub fund so long as they have elected separate legal personality.

In conclusion, the VCC allows for the creation of sub funds and SPVs and the segregation and ring fencing of assets and liabilities. The VCC offers separate legal personality and greater flexibility and may issue shares of varying amounts. The VCC may well be a more cost-effective structure than the PCC. The VCC Is an excellent addition to the Mauritius International Financial Centre offering and its flexible nature makes it a superior vehicle for fund managers, multi family offices and investors.