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.


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