Worldwide: Protected Cell Companies: Untangling The Cellular Knot

Last Updated: 26 June 2015
Article by Nigel Feetham

Guernsey was the first jurisdiction to introduce Protected Cell Companies. It did so in 1997 and other 'offshore' jurisdictions followed soon after, including Cayman, Bermuda, Gibraltar and Malta. In more recent years a segregated company regime has been implemented in many states of the United States, in the United Kingdom, Dublin and Luxembourg. Segregated business transactions therefore now take place across many jurisdictions around the world.

Protected Cell Company legislation was enacted primarily to encourage growth of the captive insurance industry, by bringing captive promoters together under a single corporate entity but enabling the segregation of assets between them for satisfying third party claims and limiting their liability accordingly. The clear statutory intention is therefore that the assets attributable to a particular 'cell' (a legal fiction) are not available to meet the claims of creditors of other cells. The limitation serves a similar purpose to the maritime laws that have existed for well over one hundred years in many nations around the world that limited the liability of ship-owners (both in contract and in tort) and also to the corporate fiction that limits the liability of shareholders in a not dissimilar way.

The question "would a foreign court respect PCC legislation" spurred the writing of the book "Protected Cell Companies: a Guide to their Implementation and Use" (Spiramus Press, 2010, 2nd Edition, Nigel Feetham and Grant Jones). This short article will examine that question, albeit it can hardly do justice to the detailed analysis presented in the book itself.

There are possibly three ways in which a PCC could be called into question in foreign court proceedings. First, if local legislation required local courts to ignore PCC legislation on the issue of liability. Second, if PCC legislation was deemed contrary to local public policy. Third, if PCC legislation was classified as procedural, rather than substantive. Let us take each in turn for the sake of argument.

The first is the easiest to dismiss. I am not aware of any statute anywhere in the world that purports to declare that a local court should not give effect to foreign PCC legislation. This is hardly surprising since such outright rejection of a foreign law would hardly sit well with the principle of comity of nations.

The second can also be given short shrift. Far from offending any notion of public policy (or principle of justice), PCC legislation underpins the fundamental principle of modern commerce that owners of capital should be able to deploy that capital in commercial enterprise and limit their liability to such capital and no more. All legal systems around the world recognise this as part of their substantive law in one way or another. Indeed, many countries have other laws which are almost indistinguishable from the Protected Cell Company regime in what they are intended to achieve. It is therefore difficult to imagine how PCC legislation could be considered contrary to public policy or justice by a foreign court if its own local laws contained or recognised something similar. This is the case even in insolvency and it is an analysis developed in detail in the PCC book.

Lastly, absent any local rules to the contrary, and applying well established private international law principles recognised in most (if not all) civil and common law countries, it is not easy to conceive why a court would decline to give effect to foreign 'substantive law'. To do otherwise would not only be an affront to principles of comity but also undermine international commerce. Most countries around the world establish under their conflict-of-laws rules the distinction between the application of foreign substantive law (where the rule is that foreign laws containing substantive rights should be applied) and procedural law (where local rules of procedure are applied). Since all PCC legislation is undoubtedly intended to be substantive in nature, it is difficult to see why a foreign court should not recognise PCC legislation as such. An examination of jurisprudence in this area suggests that when courts have classified foreign laws that were arguably substantive in nature as procedural instead, they appear to have done so more on the basis of an overriding principle of policy than on the application of cogent legal argument. That said, courts have generally tended to view foreign limitation of liability laws as a matter of substance (not procedure), and therefore on this basis alone should treat PCC legislation in the same way.

Ultimately, however, the argument that I think would prevail is this: if investors pursuing a bona fide commercial activity have sought the benefit of the capital protection laws afforded by PCC legislation (in much the same way they would have done had they decided to conduct their business through an ordinary limited company or limited partnership, or as ship-owners seeking the benefit of maritime limitation of liability laws have done for well over a century), why should they (and the body of creditors who have dealt with the PCC expecting that their rights will be determined in accordance with PCC laws) be deprived of such protection by the court? Viewed in this way, PCC legislation is, in effect, a capital and creditor protection rule like any other. For a foreign court to hold otherwise would be to undermine the very principles on which international trade has developed since at least the eighteenth century, namely, the dual principle of limited liability for those that put capital at risk and also acceptance that in a global economy countries must recognise each others commercial laws.   

Surprisingly, there have been less than a handful of reported court cases on the subject of cell companies anywhere in the world and until recently none where a court has considered in detail the legal status of a protected cell company. That recent case is the decision of the Montana Federal Court in Pac Re 5-AT v. AmTrust N.A., Inc., No. CV-14-131-BLG-CSO, 2015 U.S. Dist. LEXIS 65541 (D. MT, May 13, 2015). For years the industry has been concerned that a court might view the cellular structure as a complex Gordian knot and use its judicial sword to cut through it without proper legal consideration of the situation presented. Whilst the Montana case did not concern a cross border situation in the manner I have highlighted in this article, it is still gratifying to see that the judge (unlike Alexander the Great) patiently and intelligently untangled the knot by hand, in accord with long-standing insurance industry practice whilst leaving the cellular structure intact. This augurs well for the future of the Protected Cell Company.

This decision can nevertheless be contrasted with the US Fifth Circuit Court of Appeal's opinion in a case not involving a Protected Cell Company but another segregated business form, the Series LLC: Glenn E. Alphonse, Jr. v. Arch Bay Holdings, L.L.C.; Specialized Loan Servicing, L.L.C. (filed 11 December 2013).  It is not necessary to restate the facts of that case or the court's legal analysis or lack thereof; suffices to say that the court appeared to have difficulty in finding an appropriate legal classification for a Delaware Series LLC. The Fifth Circuit opinion states that "...Series 2010B is a Series LLC, and Series LLCs only exist to represent the interest of the parent LLC, which in this case is Arch Bay." The court's description of Arch Bay Holdings, LLC as the "parent" of "Series 2010B" is, of course, legally wrong since the legal relationship of an LLC and a series is not that of a parent and subsidiary. Disappointingly, it remanded back to the US District Court the question of the 'series' separate legal status. Therefore instead of grasping the opportunity to provide a much needed judicial precedent in the area of segregated business forms generally, it dodged a question which on the face of it was relatively straight-forward.

I would welcome any comments from readers on this article or any matter raised in it.


For further information, please contact Nigel Feetham at nigel.feetham@hassans.gi

Nigel Feetham is a partner at Hassans (a Gibraltar law firm) and Visiting Professor at Nottingham Law School, Nottingham Trent University. Nigel is also the author and co-author of a number of books.


The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Nigel Feetham
Similar Articles
Relevancy Powered by MondaqAI
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions