Introduction
Legal framework
Types of protected cell company and permitted activities
Incorporation
Consent of the DFSA
Shares and shareholders
Separation of assets
Prohibition of dealings between cells
Creditors' rights
Disclosure requirements
Comment
A protected cell company is one of the legal forms of company that may be incorporated in the Dubai International Financial Centre (DIFC). As a corporate vehicle, DIFC protected cell companies share similarities with segregated portfolio companies or protected cell companies available in other financial jurisdictions.
In essence, a protected cell company is a single company consisting of a core and a number of cells, which are legally ring-fenced from each other. Each cell has assets and liabilities attributed to it and its assets cannot be used to meet the liabilities of any other cell. A protected cell company also has core, non-cellular assets that can be used to meet any liabilities that cannot be attributed to a single cell.(1)
Protected cell companies are governed by the DIFC Companies Law (2/2009) and Chapter 12 of the DIFC Companies Regulations. Protected cell companies differ from the other types of corporate entity that can be set up in the DIFC as they are subject to a certain degree of authorisation and regulation by the Dubai Financial Services Authority (DFSA). As such, certain rules of the DFSA Rulebook also apply to protected cell companies.
Types of protected cell company and permitted activities
A protected cell company may be open ended or closed ended. An open-ended protected cell company has a variable share capital and its articles of association must allow its shareholders to have their shares redeemed by the fund manager (as defined in the Collective Investment Law 2010) upon request at a price based on the net asset value of the property of the relevant cell and in the manner provided in the collective investment rules module of the DFSA Rulebook. An open-ended protected cell company may be established only as a fund entity (as defined in the Collective Investments Law 2010). The protected cell company structure is particularly relevant to umbrella funds, as the segregated cell structure allows the establishment of sub-funds as separate cells of the main fund.
Any other type of protected cell company is defined as closed ended. A closed-ended protected cell company may only carry on activities related to insurance business (as defined in the Regulatory Law 2004) as either a non-captive or a captive insurer.
To incorporate a protected cell company in the DIFC, the applicant must first obtain the DFSA's consent for incorporation of the company. Once the DFSA's consent has been secured, the applicant may submit an application for registration to the registrar of companies, together with supporting documents and fees payable.
Given the nature of their permitted activities, protected cell companies cannot be incorporated without the prior consent of the DFSA. Moreover, following their incorporation, protected cell companies are subject to supervision of the DFSA. Any change in a protected cell company's articles must be approved by the DFSA in writing. Any failure by the protected cell company to comply with the DFSA's rules or licensing conditions, the Companies Law or the Protected Cell Company Regulations may result in the DFSA giving directions to the company or even revoking its consent.
A protected cell company may create and issue cell shares and related cell share certificates in respect of each cell. The cell share capital is comprised of the cellular assets attributable to the cell for which the cell shares were issued. Cellular dividends are calculated in respect of the profits and losses of each specific cell and cannot be paid out of another cell or non-cellular profits and losses.
A register of shareholders and an index of the names of the shareholders must be kept by the company.
The assets of a protected cell company are either cellular or non-cellular. The cellular assets are those attributable to the cells of the company (ie, proceeds of cell share capital and reserves, including retained earnings, capital reserves and share premiums). The other assets of a protected cell company are non-cellular or core assets.
The directors must keep the cellular assets attributable to each cell distinct and separately identifiable from non-cellular assets and cellular assets attributable to other cells. If any director breaches his or her duty to keep assets separate he or she is personally liable for any loss or damage incurred as a result of such breach (although he or she has a right of indemnity against the non-cellular assets of the company, unless he or she was fraudulent, reckless or negligent or acted in bad faith).
Prohibition of dealings between cells
Any transfer of cellular assets attributable to one cell to another cell, or an amalgamation or consolidation of a cell with (or into) one or more other cells of the protected cell company, is prohibited unless it has been approved by court order. When considering whether to make an order, the court will take into account factors such as whether the creditors (without recourse to the assets of the relevant cells) have consented to the transaction and whether the company's and the relevant cells' shareholders have been prejudiced by the transaction. The court will also consider the DFSA's representations.
One of the protected cell company's main features is that liability arising out of a particular cell can be satisfied only by using the assets of that particular cell and a creditor cannot resort to the assets of any other cell of the protected cell company. Similarly, for liability not attributable to a particular cell, only non-cellular assets may be used to satisfy such liability.
A protected cell company must, when transacting with a person, give such person clear information on:
- the type of company;
- the particular cell involved in the transaction; and
- the rules of liability in relation to cells of a protected cell company.
Failure to provide such information may result in the directors incurring personal liability to that person in respect of the transaction subject to the court's decision. Personal liability incurred by the directors in this case cannot be avoided by contract.
Since the number of closed-ended and open-ended protected cell companies established in the DIFC is currently very low, the success and feasibility of DIFC protected cell companies in fund structures remains to be determined.
For further information on this topic please contact Hasan Rizvi, Adela Solomon or Leila Drissi at Taylor Wessing (Middle East) LLP by telephone (+9714 309 1000), fax (+9714 358 7732) or email ([email protected], [email protected] or [email protected]).
Endnotes
(1) See DIFC Reinsurance Captives Guide.