Guernsey Protected Cell Companies

Introduction
Why Use a PCC?
What are the Main Features of a PCC?
Recognizing a PCC
What is the Position of Creditors and Third Parties?
What Happens on Insolvency of a Cell/the PCC?
Will a PCC be Recognized in a Foreign Jurisdiction?

Introduction

The Protected Cell Companies Ordinance 1997 ('the PCC Law') came into force in Guernsey on February 1 1997 and provides for a new type of company (a 'PCC') to be established.

The significance of the PCC Law is that it permits a PCC to have separate and distinct 'cells'. The assets and liabilities of a cell are segregated from those of other cells and those assets are not available to creditors of other cells generally.

By contrast, in non-PCCs the share capital may be structured so that certain classes of share capital represent rights to specific assets of the company or reflect the benefit or burdens of specific obligations incurred by the company. On an insolvency those assets are available to all creditors of the company.

The only companies which can currently be established as, or converted into, PCCs are:

• authorized collective investment schemes under The Protection of Investors (Bailiwick of Guernsey) Law, 1987; and
  
  
• registered insurers under The Insurance Business (Guernsey) Law, 1986 or those insurers which are exempt from registration.

Provision exists for further classes or descriptions of business to be added.

Why Use a PCC?

The PCC structure lends itself particularly well to multi-funds or umbrella funds and captive insurance companies.

Multi-Funds or Umbrella Funds

These are multiple investment portfolios with a single class of equity attributable to each investment portfolio.

The advantage of this structure is that it reduces administrative burdens and expenses but the disadvantage is the presence of inherent risk, there being only one vehicle to be attacked by creditors. Whilst there may be internal divisions and appropriate non-recourse wording in documents, as far as creditors are concerned, there is a single pot of assets against which to claim. There is therefore the risk of contagion. The risk will be significant in highly leveraged schemes or derivative trading programmes which are high risk activities, where a problem in one fund could adversely affect other funds.

A PCC offers a mechanism for each fund to be ring-fenced as a matter of law from creditors of other funds within a single corporate entity.

Captive Insurance Companies

This is where insurance facilities can be undertaken for companies which are otherwise unrelated but share common risk issues. The PCC structure enables capital and premium provided by each company to be devoted to the provision of that company with insurance services and not to be exposed to claims in respect of underwriting risks assumed by other companies, by allocating a cell to each company.

What are the Main Features of a PCC?

Single Legal Entity

Although a PCC may have created one or more cells, a PCC is a single legal entity and the creation by a PCC of a cell does not create in respect of that cell, a legal entity or person separate from the PCC itself. Each cell of a PCC must have its own distinct name or designation.

There are no registration requirements for a cell at HM Greffe (the local companies registry in Guernsey).

Creation of Cells and Cellular and Non-Cellular Assets

The PCC Law states that the assets of the PCC shall be either cellular assets or non-cellular assets.

The cellular assets of a PCC are the assets of the company attributable to the cells of the company. These comprise:

(a) assets represented by the proceeds of cell share capital and reserves attributable to that cell (reserves in this context include retained earnings, capital reserves and share premiums); and

(b) all other assets attributable to a cell.

The non-cellular assets of a PCC comprise the assets of the company which are not cellular assets.

Liabilities of a cell

Cellular assets attributable to a cell of a PCC are:

• only available to the creditors of the PCC who are creditors in respect of that cell;
  
  
• protected from the creditors of the PCC who are not creditors in respect of that cell and who therefore are not entitled to have recourse to the cellular assets attributable to that cell.

Recognizing a PCC

There are a number of provisions in the PCC Law designed to ensure that third parties dealing with a PCC are on notice of that fact.

Form

The name of a PCC must include the expression 'Protected Cell', 'PCC' or any other cognate expression approved in writing by the authorities.

The memorandum of association of a PCC must state that it is a protected cell company.

Unless and until a PCC has complied with these provisions it is deemed not to be a PCC.

Notification

A PCC must:

• inform any person with whom it transacts that it is a PCC; and
• for the purpose of the relevant transaction identify or specify the cell in respect of which that person is transacting.

In practice this will involve contractual documentation making it clear that the PCC is transacting in respect of a particular cell.

What is the Position of Creditors and Third Parties?

A person who has contracted with a PCC and whose contract is referable to a particular cell may only have recourse to that cell's assets and to the extent that there is a shortfall (unless he has agreed to the contrary) to the non-cellular assets of the PCC in respect of a liability arising out of that contract.

What Happens on Insolvency of a Cell/the PCC?

On a winding up, the liquidator of a PCC is bound to deal with the PCC's assets in accordance with the requirements of the PCC Law and in discharging any claims of creditors of a PCC may only apply the company's assets to those entitled to have recourse to them in accordance with the provisions of the PCC Law.

The PCC Law provides a mechanism to wind up an individual cell by the making of what is termed 'a receivership order'. Although the person appointed is expressed to be a 'receiver' his role is more akin to that of a liquidator. Hence the PCC should not be undermined on the insolvency of any cell.

Will a PCC be Recognized in a Foreign Jurisdiction?

It should be emphasised that a PCC is an entity established under Guernsey Law and the impact of foreign laws and judgments of foreign courts may be of significance as this is a novel concept. The question arises whether foreign courts will treat a cell's assets as insulated from the liabilities of other cells, in particular, if those assets are situated within the jurisdiction of the foreign court.

This article is not intended to be a comprehensive guide to the PCC Law. Advice should always be sought in a specific case. For advice, please contact the writer, Sean Cheong, at Collas Day on e-mail: [email protected], or alternatively write to Sean at

Collas Day is one of the largest firms of Guernsey advocates. Details of its areas of practice can be found on the firm's website at www.collasday.com


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