Introduction
Cell companies
Difference between ICCs and PCCs
Introduction of ICCs to Jersey
Creation of cell companies
Special resolutions
Board control
Accounting requirements
Transfer of cells
Conversion of non-cell companies
Directors' obligations
Protection and isolation of assets and liabilities
Protection of cellular assets from creditors' claims
Insolvency
Comment
Legislation permitting the incorporation of cell companies has been in force in Jersey since February 2006. Additional changes to the Companies (Jersey) Law 1991 brought into force in 2008 increased the flexibility of the cell company regime by, for example, removing the requirement for a cell company and each of its cells to have the same directors. Taking account of the changes to the law, this update offers a guide to:
- when cell companies can be used;
- the benefits of using a cell company; and
- issues to be considered when incorporating and using a cell company.
Specific advice should be sought to ensure that any cell company complies with the law and is appropriate for the particular transaction.
Two types of cell company are available under Jersey law:
- the incorporated cell company (ICC); and
- the protected cell company (PCC).
| ICCs | PCCs |
| An innovative concept in structuring introduced first in Jersey | Similar to protected cell structures or segregated portfolio companies elsewhere |
| Cell is a separate legal entity | Cell is required to be treated as though a separate legal entity |
| Liability limited by structure (separate legal personality) | Liability limited by procedural rules - provisions preventing cellular creditors from claiming non-cellular assets provide enhanced protection |
| Can convert to PCC or to general company | Can convert to ICC or to general company |
| Cell has power to contract because of separate legal personality | Special provisions allow the cell to contract |
| Cell is separate legal entity. Claims limited as a substantive matter of law to assets of that cell | Directors obliged to separate properly cellular assets and to notify and record when contracting for cell |
A cell company is a company that has the ability to create one or more cells with assets and liabilities that are distinct from those of other cells and the cell company itself. These cells can be used to carry out separate and distinct businesses. Each cell has a separate memorandum and articles, and its own members. Members of the cell company will not necessarily be members of a cell. A cell company may be a public or private company, a par value or no par value company or a guarantee company, and can be a limited or unlimited company. Provision can be made for cells to be dissolved or wound up under certain circumstances.
One feature of the Jersey legislation is that neither an incorporated cell of an ICC nor a protected cell of a PCC is a subsidiary of the relevant cell company solely as a result of the cellular dependency. A cell may invest in any other cell of the company, subject to its articles of association, although a cell may not invest in the cell company itself.
Historically, the concept of a cell company was developed for use in relation to umbrella investment funds and to assist in the management of investment pools supporting separate lines of insurance business. However, Jersey cell companies have been used for a wider range of applications in financial services businesses and structured finance activities.
Difference between ICCs and PCCs
An ICC adopts a fundamentally different approach to cells. The ICC incorporates each cell as a separate legal entity without the cell company needing to have any shareholder relationship with the relevant cell. Therefore, the principal difference is that an incorporated cell of an ICC is treated as a separate company, whereas a protected cell of a PCC is not a body corporate and has no separate legal identity.
Introduction of ICCs to Jersey
The concept of the incorporated cell was developed in response to concerns regarding the effectiveness of the ring-fencing and liability segregation provisions in relation to the traditional protected cell structures established in other jurisdictions. Concerns have been raised that protected cell structures established outside Jersey do not provide adequate asset protection where there is a risk of involuntary cross-default across cells. This can arise as a result of a disparity in risk profile between cells or ultimate performance of the business being conducted by the different cells. A second major concern with traditional protected cell structures is that provisions that direct the segregation of the asset pools attributable to the different cells, and provide for the appropriation of those specific pools to satisfy the cellular liabilities, may not be recognised by foreign courts. This is because these rules may be viewed as procedural only (rather than substantive), and as such, a foreign court may be less inclined to enforce them as a matter of private international law.
A further concern affecting PCCs incorporated outside Jersey is the ability of a creditor or shareholder of a single cell, in effect, to have all other cells of the PCC placed into an administrative moratorium or 'Chapter 11' type proceeding, which would be likely to defeat the expectations of investors or counterparties regarding timely payment or performance of obligations. This feature has also previously rendered non-Jersey PCCs unacceptable to rating agencies for rated transactions.
However, the ICC creates each cell as a separately incorporated Jersey company. Incorporation is a substantive provision of law that is expected to be recognised by foreign courts in the same way as that of the limited liability of a traditional standalone company.
A cell company is created in the same way as any other Jersey company, but its memorandum must state that it is an ICC or a PCC. The company name must include the applicable identifying words or initials - that is, 'incorporated cell company' (or ICC) or 'protected cell company' (or PCC). For a cell company to create a cell, a special resolution is required that must assign a distinctive name to the cell distinguishing it from other cells and include the appropriate words or initials - that is, 'incorporated cell' (or IC) or 'protected cell' (or PC).
The cell company then files the special resolution and the cell is created when the registrar of companies issues a certificate of incorporation (for an incorporated cell) or a certificate of recognition (for a protected cell). Each cell must have the same secretary and registered office as the constitutive cell company.
The special resolution must adopt a memorandum and articles in relation to the cell, and may provide for the dissolution or winding up of the cell in various circumstances such as bankruptcy, resignation of members, the expiry of a fixed period of time or for other specified reasons.
The first directors of a cell are appointed by the cell company. However, although cells and the cell company may have the same directors, there is no requirement that a cell share the same board, as the cell company and directors of a cell can be removed and replaced in the manner provided for in the cell's articles of association.
A director of a cell does not, by virtue only of being a cell director, have any duties or liabilities in respect of the cell company or any other cell, and is not entitled to obtain any information in respect of the cell company or any other cell.
The directors of a cell are responsible for preparing accounts in respect of that cell, in accordance with the law.
A cell company is required to keep a separate record of members for each cell and to submit an annual return for each cell.
Subject to compliance with the specific requirements of the law, cells of ICCs can be transferred to PCCs and vice versa. However, all cells of an ICC must be incorporated cells and all cells of a PCC must be protected cells. Therefore, on transfer, the cell must adopt the form applicable to the cell company to which it is transferred.
Conversion of non-cell companies
The law provides facilitating provisions that allow a non-cell company to be converted to a cell of a cell company or to a cell company.
In addition, a body incorporated outside Jersey can, with the approval of the Jersey Financial Services Commission, re-domicile itself as a Jersey company and then change its status to a Jersey ICC or a PCC by following the conversion process set out in the law.
Directors of cell companies and cells have the same duties and responsibilities as directors of non-cell companies. In addition, directors of a PCC must ensure that:
- cellular assets and liabilities are kept separate and are separately identifiable from the non-cellular assets and liabilities of the company; and
- the cellular assets and liabilities attributable to each cell of the company are kept separate and are separately identifiable from the cellular assets and liabilities attributable to other cells of the company.
Failure to comply with such duties is an offence. While there is no directly applicable personal liability upon directors in these circumstances, the general provisions of the law to protect against fraudulent or wrongful trading could be brought into play in appropriate cases, potentially making directors in default personally liable for the cell's liabilities.
Protection and isolation of assets and liabilities
The assets and liabilities of a cell of an ICC are protected and isolated because the incorporated cell is, under law, a separately incorporated company. However, for PCCs (which are not separate legal entities), the position is different and various provisions have been included to provide protection for the assets and isolation of the liabilities of a protected cell.
In summary, the law differentiates between:
- cellular transactions and liabilities, which are transactions in relation to or liabilities incurred in respect of the activity or assets of a particular cell of the PCC; and
- non-cellular transactions liabilities, which relate to the PCC in its own right.
Claims in relation to cellular transactions and liabilities extend only to cellular assets. Claims in relation to non-cellular transactions and liabilities extend only to non-cellular assets.
A PCC may not meet cellular liabilities from non-cellular assets or another cell's cellular assets, or non-cellular liabilities from cellular assets, except where prescribed requirements have been met. In particular, the PCC or the relevant protected company must be permitted to do so under its articles, and the directors must make a statement that, having made full enquiry into the affairs and prospects of the PCC (or the particular protected company), they have formed the opinion that:
- immediately after meeting the liability, the PCC (or the protected company) will be able to discharge its liabilities as they fall due; and
- taking into account the future intentions of the directors with respect to the PCC (or the protected company) and the amount and character of the financial resources in their opinion available to the PCC (or the protected company), it will be able to continue to carry on business and be able to discharge its liabilities as they fall due for one year following the date on which the liability is to be met.
Protection of assets from creditors' claims
Specific provisions protect cellular assets from creditors' claims. In particular, creditors with claims arising from cellular transactions are entitled to claim only against the cellular assets of that cell - if their claim does not arise from a cellular transaction, they will not be entitled to claim against cellular assets.
The law provides specifically that creditors whose claim arises from a non-cellular transaction have no right to make claims against cellular assets In addition, creditors whose claims arise from a cellular transaction of a particular cell cannot claim against non-cellular assets or the cellular assets of another cell. Other provisions make a creditor that succeeds in obtaining cellular or non-cellular assets to which it is not entitled liable to repay to the cell or PCC, as applicable, an amount equal to the benefit improperly obtained. Where a creditor successfully sells, realises or obtains title to cellular or non-cellular assets to which it is not entitled, the creditor must hold those assets or the proceeds on trust and they must be separated and identifiable as trust property.
In the event of the insolvency of a cell, this will not (in the absence of any special provisions in the articles of association subjecting the non-cellular assets to the liabilities of an insolvent cell) lead to the insolvency of the cell company, whether an ICC or a PCC. This results, in the case of an ICC, from the separate incorporation of each incorporated company and, in the case of a PCC, from the express provisions of the law restricting creditor claims to the relevant cellular assets and denying access to non-cellular assets. This is likely to reduce administrative inconvenience and cost arising for cells not otherwise affected by the insolvency of another cell of the cell company.
The Jersey legislation provides a solution to the underlying problems that exist for cell companies in many other jurisdictions. The ICC, in particular, introduces a truly innovative corporate structure that combines robust ring-fencing provisions with a degree of flexibility and convenience not presently available in other jurisdictions.
For further information on this topic please contact Niamh Lalor at Ogier by telephone (+44 1534 504 000), fax (+44 1534 504 444) or email ([email protected]).