The concept of the cell company was introduced to Jersey in the form of the protected cell company (the "PCC"), and the incorporated cell company (the "ICC"), in February 2006, by way of an amendment to the Companies (Jersey) Law 1991 (the "Companies Law")1.
Both PCCs and ICCs can create cells but the cells created by them have a very different legal status:
- PCC: A protected cell of a PCC is not a separate legal entity (although it is treated as if it were for many purposes of the Companies Law) and transacts business through the PCC.
- ICC: An incorporated cell of an ICC is an entirely separate legal entity which may transact and enter into agreements with third parties in its own name.
The cell company is an attractive and much used vehicle in the captive insurance, investment and structured finance markets. Examples of financial structures where a cell company can provide a convenient and cost-effective vehicle include:
- multi-series securitisation programmes involving a series of debt issues by a single issuer backed by separate classes of assets;
- umbrella investment funds, where each cell can constitute a separate sub-fund with separate investment strategies and asset classes;
- in the captive insurance industry, where a cell company can act as a captive insurer to cover the risks of several unrelated sponsoring entities without exposing the capital associated with any one such entity to liability in connection with another; and
- as vehicles for family trust companies.
A cell company may segregate assets and liabilities between its different cells, with the key resulting advantage that in an insolvency situation the recourse of any creditors will be limited to the specific cell that they transacted with. As such, a single cell can become insolvent leaving the remaining cells (and cell company) unaffected and therefore able to operate as normal.
The memorandum of the cell company must specify whether it is to be a PCC or an ICC. The following paragraphs highlight some of the key features of PCCs and ICCs:
Separate legal personality
- PCC: A PCC is a single legal entity within which there may be established numerous protected cells. Although each protected cell must be separately identified, with a separate memorandum and articles of association and its own shareholders and directors, it will not be a separate legal entity from the PCC itself.
- ICC: Each cell of an ICC is a company and therefore a separate legal entity.
- PCC: The name of a PCC must end with the letters "PCC" or the words "protected cell company", and the name of each cell with "PC" or "protected cell".
- ICC: The name of an ICC must end with "ICC" or "incorporated cell company", and the name of each incorporated cell with "IC" or "incorporated cell".
Segregation of assets and liabilities
- PCC: The assets and liabilities of a PCC are divided between those which are cellular and those which are non-cellular. Cellular assets and liabilities are those which are attributable to particular cells. Non-cellular assets and liabilities are those belonging to, or owed by, a PCC in its own right and not attributable to any of its cells.
The directors of a PCC must exercise their powers and discharge their duties so as to ensure that:
- the cellular assets of the company are kept separate and are separately identifiable from the non-cellular assets of the company; and
- the cellular assets attributable to each cell of the company are kept separate and are separately identifiable from the cellular assets attributable to other cells of the company.
Where a PCC enters into a transaction in respect of a particular cell or incurs a liability arising from an activity or assets of a particular cell, a claim by any person in connection with the transaction or liability only extends to the cellular assets of the cell. That said, the Companies Law enables cells, by making suitable provision within their articles of association, to permit the assets of one cell to be made available to settle the liabilities of another cell. Where doubt exists, a protected cell company may apply to the court for a determination of whether a liability of the company is to be met out of non-cellular assets, the cellular assets of a specific cell, or a combination of those assets.
- ICC: As each cell of an ICC is a company, and each cell contracts in its own name (as would any normal company), assets and liabilities are clearly established within each incorporated cell.
Recourse of creditors
PCC: The recourse available to a creditor of a PCC is limited as follows:
- to non-cellular assets, if he has entered into a transaction with the PCC in its own right; and
- to the cellular assets of the cell in respect of which he has transacted, if he has entered into a transaction attributable to a particular protected cell.
The Companies Law contains detailed provisions to ensure that, although protected cells are not themselves distinct legal entities, creditor recourse is limited to the assets of each cell. There are provisions preventing a cellular creditor seizing, attaching or otherwise levying execution against any assets of a PCC, whether in Jersey or elsewhere, which are not assets of the particular cell in respect of which he has transacted. Any benefit wrongfully obtained by the creditor must be repaid and any assets wrongfully seized or attached by him are, as a matter of Jersey law, automatically held on constructive trust for the relevant company, or cell, to which they are attributable and must be kept separate and identifiable by him.
Although creditors of a protected cell generally have recourse only to the assets of the cell in respect of which they have transacted, the directors are given some flexibility in this regard by the Companies Law, which provides that:
- subject to appropriate provision being made in the articles of the PCC and to the directors making a statement of solvency regarding the financial position of the company itself, a PCC may meet any liability attributable to a particular protected cell out of non-cellular assets; and
- subject to appropriate provision being made in the cellular articles of a "paying" protected cell, and to the directors making a statement of solvency regarding the financial position of that protected cell, a PCC may meet any liability, whether attributable to a particular cell or not, out of the cellular assets of any other protected cell.
- ICC: The position of creditors of an incorporated cell is the same as for an ordinary company. Therefore, no creditor of an incorporated cell would naturally have recourse, as a matter of law, to go against the ICC or another cell within the structure.
- PCC: A PCC, as a single legal entity, will generally submit a single tax return to the Jersey tax authorities.
- ICC: An ICC, with each cell being a separate company at law, will be treated for the purposes of the relevant legislation as a separate entity with its own tax treatment.
On the formation of a PCC or an ICC, the cell company will have its own memorandum and articles of association. Once incorporated, the cell company may by special resolution resolve to apply to the Registrar of Companies to create a cell, assigning a name and adopting a memorandum and articles of association of the new cell. Each cell is formed on the date stated in the certificate of recognition or incorporation (as appropriate) issued by the Registrar of Companies.
Shareholders of a cell will not acquire an interest through the PCC or ICC as they would do in other jurisdictions, but acquire shares directly in the cell. The rights and the terms and conditions attaching to such cell shares are set out in the articles of association of the cell and not the articles of the cell company. There is no requirement or need for the cell company to take shares in a newly created cell and the Companies Law confirms that a cell is not, simply by virtue of being a cell, a subsidiary of a cell company.
Directors, secretary and registered office
Each cell has its own board of directors, which may consist of different persons. The directors of a PCC have two specific additional duties to those otherwise imposed at law:
- they must ensure that the cellular assets of each cell are kept separate and identifiable from both non-cellular assets and the cellular assets of other cells; and
- they must ensure that when the company enters into an agreement with another party in respect of a protected cell, (a) that party knows, or ought reasonably to know, that the cell company is acting in respect of its cell, and (b) that the minutes of any meeting of directors held with regard to the agreement clearly record both that fact and that the obligation in (a) has been, or will be, complied with.
A director who fails to comply with these duties is guilty of an offence, punishable by a fine. Such a director may also incur civil liability.
It is essential to ensure that in any contract entered into by the PCC in respect of the cell, the contract makes clear that fact and specifically puts the third party on notice of the basis on which the parties are entering into the contract.
Each cell must have the same company secretary and registered office as the cell company. Whilst a PCC must maintain the register of directors and secretary in respect of its cells, each incorporated cell of an ICC will keep its own register but must inform the ICC of any change of director within fourteen days.
Accounts and annual returns
The cell company is responsible for including details of each cell in its annual return. However, each cell is responsible for preparing its own accounts.
Greater legal certainty
Each cell has its own memorandum and articles of association and shareholders invest directly in shares in the cells, rather than through the core cell company, as is the case with protected cell vehicles in other offshore jurisdictions. The Companies Law also clarifies that creditors transacting with a particular cell of a PCC only have the right of recourse against the assets of that cell and, again unlike certain other offshore jurisdictions, do not have any rights against the non-cellular assets of the core company. The ICC is perhaps considered even more robust as a structure due to the incorporated status of each cell.
The membership of a Jersey cell company is divided between its non-cell members and its cell members. The Companies Law makes it clear that cell members are not, by virtue of that fact, members either of the cell company itself or of any other cell; and similarly non-cell members are not, by virtue of that fact, to be treated as members of a cell. This, coupled with the basic rule that (for most purposes) a protected cell is treated as a separate company, gives clarity. Thus, for voting purposes, it is clear that a cell member of a Jersey cell company may not, in that capacity, vote at a general meeting of the cell company, and vice versa.
Reduced complexity and administrative cost savings
A cell company is particularly suitable for repeat transactions in collective investment funds and securitisation programmes. Once the basic structure has been given regulatory consent (where necessary), it is generally possible to add a new cell to the existing framework swiftly and with much reduced regulatory scrutiny. The administrative benefits can be considerable.
Protected cells may invest in other protected cells within the same cell structure. Cells within the same structure may have different features and share capital. An ordinary company may convert into a cell company and a cell of a PCC may be incorporated. Similarly, an incorporated cell may be incorporated as a company independent of its ICC. Cells may also be transferred between cell companies.
A separate and different legal regime applies to cell companies established and operating under Guernsey law (see our Briefing "Cell Companies in Guernsey").