INTRODUCTION

A cell company is a corporate vehicle that is permitted to segregate its assets and liabilities between different cells of itself, for different purposes, with the result that a creditor's recourse against the cell company is limited to whichever cell was transacted with. Where a cell becomes insolvent, the remaining cells of the structure are not affected and continue to operate as normal.

Cell companies are available in many jurisdictions, both onshore and offshore (for example, segregated account companies in Bermuda and protected cell companies in Guernsey). With effect from 1 February 2006, the Companies (Jersey) Law 1991 (the "Companies Law"), as amended by the Companies (Amendment No. 8) (Jersey) Law 2005 (the "Amendment Law"), permits the establishment of cell companies in Jersey.

The major issue affecting cell companies has always been the recognition of their validity by other, mainly onshore, legal systems, which do not generally permit such concepts. Jersey's solution has been to create the Incorporated Cell Company (the "ICC"), as well as the Protected Cell Company (the "PCC").

Jersey cell companies do not have their permitted activities limited by statute as many cell companies in other jurisdictions do. The Jersey Financial Services Commission (the "JFSC") will instead monitor the uses of cell companies and issue guidance as to their preferred use if such is thought necessary.

The benefits of a Jersey cell company are not only limited to new structures. It will be possible, with the JFSC's permission, for a foreign body corporate to change its status to a Jersey cell company as part of the process of redomiciliation to Jersey.

WHAT IS A JERSEY CELL COMPANY?

A cell company may take any form that a conventional company may take pursuant to the Companies Law. It may, therefore, be a public or private company, a par value or no par value company or a guarantee company and it may be a limited liability or unlimited liability company.

A cell company is a company which, once established, has the ability to create cells separate from itself, each of which may hold separate assets (and liabilities), therefore enabling the assets (and liabilities) of each cell to be isolated from the assets (and liabilities) of the cell company itself and of any other cells.

The Amendment Law provides for two forms of Jersey cell company:

  1. the protected cell company; and

  2. the incorporated cell company.

Protected Cell Companies

The cells of a PCC, although treated as companies for the purposes of the Companies Law, are not bodies corporate and do not, therefore, have separate legal identities from their parent cell company. However, the cell of a PCC is able to transact with its parent cell company or another cell of its parent cell company as if it were a body corporate and had its own separate legal identity and capacity.

The name of a PCC must end with the words "Protected Cell Company" or with the abbreviation "PCC". A PCC must also assign a distinctive name to each of its cells, which distinguishes the cell from other cells of the PCC and which ends with the words "Protected Cell" or the abbreviation "PC".

Incorporated Cell Companies

The cells of an ICC are companies for the purposes of the Companies Law and, as such, have their own legal identities and capacity separate from their parent cell company.

The name of an ICC must end with the words "Incorporated Cell Company" or with the abbreviation "ICC". An ICC must also assign a distinctive name to each of its cells, which distinguishes the cell from other cells of the ICC and which ends with the words "Incorporated Cell" or the abbreviation "IC".

CREATION

Cell Companies

A cell company is created by application to the registrar of companies (the "Registrar"). The memorandum of the cell company must detail whether it is to be a PCC or an ICC. A cell company will still require, depending upon the activities to be undertaken by the cell company, all of the usual and necessary regulatory consents.

Once established, a cell company may create cells, which must have the same directors, secretary and registered office as itself. A cell is not, however, deemed to be a subsidiary of its cell company.

Cells

Cells are created by way of special resolution, which must assign the cell a name and set out the terms of that cell's memorandum and articles. The articles of a cell are deemed to provide that a cell may not own shares in its cell company and, unless the contrary is included in the articles, that a cell may own shares in any other cell of its cell company.

The special resolution may also provide for when the cell may be wound up and dissolved, and may further provide that the cell may issue par value or no par value shares or have a guarantee members or members. It should be noted that a special resolution might also provide for the creation of more than one cell.

The special resolution is filed with the Registrar, and a cell is created when the Registrar issues a certificate of incorporation (in the case of an ICC) or a certificate of recognition (in the case of a PCC). Once created, the articles of a cell may be amended either as provided for in the articles or, if there is no such provision, by way of special resolution of the cell and its cell company.

ADMINISTRATIVE ISSUES

The duties imposed upon directors of traditional companies by the Companies Law will, naturally, also be imposed upon directors of cell companies and cells. The directors of a PCC also have the following additional duties:

  1. they must discharge their duties to ensure that:

  2. (a) the cellular assets of the PCC itself are kept separate and are separately identifiable from the non-cellular assets of the individual protected cells; and

    (b) the cellular assets attributable to each individual protected cell are kept separate and are separately identifiable from the cellularassets attributable to other individual protected cells of the PCC;

  1. they must ensure, when the PCC enters into an agreement in respect of a particular protected cell of the PCC, that:

(a)the other party to the transaction knows or ought reasonably to know that the PCC is acting in respect of a particular protected cell; and

(a)the minutes of any meeting of directors held with regard to the agreement clearly record the fact that the PCC was entering into the agreement in respect of that particular protected cell and that the obligation mentioned in (2)(a) above has been complied with.

The Companies Law imposes certain duties upon companies in relation to maintaining register of members and the issue of share certificates. A cell company, whether an ICC or a PCC, must perform these duties on behalf of each of its cells.

In addition, although a cell of either an ICC or a PCC is not required to submit an annual return to the Registrar, a cell company must include, in its annual return, such information in respect of each cell as is required by the Companies Law in respect of a company together with, in respect of each of its individual cells, a copy of so much of its annual return as relates to each such cell.

A cell of either an ICC or a PCC is not required to keep accounting records, although the cell company itself must keep sufficient accounting records in relation to each of its individual cells to show and explain each cell's transactions and which must be able to disclose, with reasonable accuracy and at any time, the financial position of the individual cells and enable the individual cell's directors to ensure that any accounts prepared by the cell company in respect of an individual cell, comply with the Companies Law.

A cell of either an ICC or a PCC is not required to prepare regular accounts. The cell company must itself, however, prepare separate accounts for each of its individual cells which show a true and fair view of the profit or loss of each individual cell of the company and the state of each of its cell's affairs, taking into account only the assets and liabilities solely attributable to that cell at the end of the period to be determined in accordance with the Companies Law.

ADMINISTRATIVE BENEFITS

Whilst it may be possible to use "traditional" companies with numbers of subsidiaries to achieve a similar effect to that of a cell company, apart from not being able to achieve the segregation of assets and liabilities that a cell company structure is able to, such a route can be hugely burdensome in both the administrative time required and the operating costs.

Once the cell company is established, which will cost £200 (no more than the incorporation costs of a traditional company), the cost of creation of individual cells (ie the administrative and any regulatory costs) should be substantially less that the incorporation of new companies and subsidiaries.

Notwithstanding the duties imposed upon the directors of cell companies in respect of individual cells, the administrative cost of fulfilling those duties should generally be less than the cost of administering a number of subsidiaries.

LIABILITY OF AN ICC AND ITS CELLS

As an ICC and each of the cells of an ICC are companies for the purposes of the Companies Law and have their own separate legal identities and capacity, liabilities accrue to each as they would to a traditional company.

LIABILITY OF A PCC AND ITS CELLS

The Amendment Law provides that a PCC has no power to meet the liabilities of a cell from the assets of the PCC itself ("Non-Cellular Assets") or indeed to meet any liability of one of its cells from the assets of another of its cells ("Cellular Assets").

However, this provision is not absolute where a PCC's articles permit it so to do and the prescribed solvency test is satisfied. The provisions concerning assets wrongfully obtained by creditors described below would not apply in such circumstances.

Where a PCC enters into a transaction or incurs a liability in respect of one of its cells, any claim by a creditor will only extend to the Cellular Assets of that particular cell. Such a creditor has the right to seek, in Jersey or any other jurisdiction, to make those Cellular Assets available against all or part of the amount owing. However, if that creditor, in Jersey or another jurisdiction, succeeds in accessing the Non-Cellular Assets of the PCC itself or the Cellular Assets of another cell of the PCC ("Other Cell's Assets"), they will be required to pay to the PCC an amount equal to the benefit obtained by so succeeding (the "Benefit") and to hold the Non-Cellular Assets or Other Cell's Assets (or the proceeds of their sale) so obtained on trust for the PCC or the other cell. The Benefit (or the right to claim the Benefit, where applicable) and the Non- Cellular Assets or Other Cell's Assets, or their proceeds, would then be included in the Cellular Assets of that particular cell when returned.

Conversely, where a PCC enters into a transaction in its own right or incurs a liability in respect of its activities or assets, any claim by a creditor will only extend to Non-Cellular Assets. As above, such a creditor has the right to seek, in Jersey or any other jurisdiction, to make the Non-Cellular Assets available to all or part of the amount owing. However, if that creditor, in Jersey or another jurisdiction, succeeds in accessing any Cellular Assets, they will be required to pay to the PCC the Benefit obtained by so succeeding and to hold the Cellular Assets (or the proceeds of their sale) on trust for the cell or cells concerned.

As a consequence of cells of a PCC having no separate legal identity, whenever assets of a cell are returned, after being held on trust in either of the above-mentioned situations, they are returned to the PCC and not the cell in which the assets were held.

There may be occasions when the assets (or their proceeds) wrongfully obtained are not returned in full or at all. If this occurs, the PCC must engage an auditor to certify the loss suffered by the PCC. Once ascertained, an amount will be transferred from the Cellular Assets to the Non-Cellular Assets or vice-versa, depending upon whether a particular cell or the PCC itself caused the creditor to have a claim. Where an amount is to be transferred to the Cellular Assets to make good the loss suffered, it will be transferred to the individual cell whose assets were wrongfully sequestered.

When necessary, a PCC may apply to the Royal Court for the Royal Court to determine whether its liabilities are to be satisfied from its Non-Cellular Assets, Cellular Assets or a combination.

SUMMARY WINDING UP OF AN ICC AND ITS CELLS

As an ICC and each of the cells of an ICC are companies for the purposes of the Companies Law and have their own separate legal identities and capacity, each can be wound up in the normal manner.

SUMMARY WINDING UP OF A PCC

When a company commences a summary winding up, the Companies Law provides that its corporate state and capacity continue until it is dissolved (in so far as it is able to exercise its powers to realise and distribute its assets and discharge its liabilities).

The potential problems this could cause for PCCs, by virtue of individual cells of a PCC being treated as companies, are avoided by the Amendment Law providing that, where a PCC is being wound up, those provisions of the Companies Law will not apply to any cell of the PCC and that, in the winding up of a cell of a PCC, these provisions of the Companies Law will not apply either to the PCC or to any other cell of the PCC.

INCORPORATION OF A CELL INDEPENDENT OF A CELL COMPANY

A cell of a cell company is able to apply to the Registrar to be incorporated as a company, independent of the cell company, which created it. Such an application must be approved by a special resolution of all the members of the cell concerned or each class of members, where applicable.

The application must include all the information that would ordinarily be included with a company incorporation application.

Any member of that cell who feels that the application or its terms would unfairly prejudice their interests may, within 30 days of the application being made, apply to the Royal Court under Article 143 of the Companies Law.

ICC

If the cell of an ICC is successful in its application, it retains all property and rights held by it and remains subject to all the criminal and civil liabilities, contracts, debts, obligations and legal proceedings or actions, either by or against it, immediately before its independent incorporation.

PCC

If the cell of a PCC is successful in its application, it retains all property and rights held by the PCC in respect of it and remains subject to all the criminal and civil liabilities incurred by or contracts, debts, obligations and legal proceedings or actions, either by or against it, entered into on its behalf by the PCC, immediately before its independent incorporation. To minimise the impact of such an application by a cell of a PCC upon its existing activities at the time of independent incorporation, the Amendment Law provides that the independent incorporation will not amount, inter alia, to a breach of any prohibition of assignment or transfer of contractual rights or an event of default.

TRANSFER OF CELLS OF CELL COMPANIES

The Amendment Law provides that one cell company is able to transfer its cells to another cell company by entering into a written agreement (the "Transfer Agreement"). The Transfer Agreement must be approved by the directors of each of the cell companies and approved by a special resolution of the transferee cell company. Further, the Transfer Agreement must be:

(a)authorised by a special resolution of the transferor cell and sanctioned by the Royal Court as an arrangement pursuant to the Companies Law; OR

(b) consented to by all the members of the transferor cell and all the creditors (where applicable) of that cell; OR

(c) authorised by a special resolution of the transferor cell and sanctioned by the Royal Court, when the Royal Court is satisfied that the transfer will not materially, unfairly, prejudice a creditor, where the creditors of the transferor cell do not all agree to the transfer.

The transferee cell company must file the special resolution together with the supporting documentation and a prescribed declaration executed by each of the directors of the transferor cell company with the Registrar of Companies within 21 days of approval. The Registrar will then issue a new certificate of incorporation or recognition, as applicable, as well as recording that the cell is no longer a cell of the transferor cell company.

The provisions regarding the status of the cell of an ICC or PCC following its independent incorporation also apply where a Transfer Agreement is entered into, with the Amendment Law providing that entry into a Transfer Agreement will not amount to a breach of any prohibition of assignment or transfer of contractual rights or an event of default.

WHAT CAN CELL COMPANIES BE USED FOR

Whilst cell companies are traditionally, and continue to be, connected with the captive insurance market, they are also suited to investment fund structures, particularly those in the form of umbrella funds, with each sub fund having its own cell, enabling assets and liabilities of each sub fund to be easily segregated within a particular cell.

More recently, the cell company structure has been used in securitisation transactions, where the cell company acts as the SPV issuer of a variety of different asset-backed notes, with each pool of underlying assets being contained in their own cell.

Cell companies' uses are many and varied, with the added attractions of reducing inertia costs and assisting standardised business models, and include:

  1. "rent-a-captives" – insurance SPVs for re-insurance contracts and self-insuring;

  2. financial guarantee companies;

  3. intra-group financing vehicles;

  4. self-contracting (i.e. cell to cell within a single legal entity);

  5. true sale transaction structures for securitisations;

  6. investment or mutual funds, where each cell can hold a separate class of assets;

  7. property development companies, with individual properties held within separate cells;

  8. e-commerce ventures; and

  9. ship and aircraft fleet financing.

This list is, of course, not exhaustive, and we should be delighted to explore other possible uses.

This memorandum is intended to provide an outline of the legal regime governing cell companies in Jersey, and is not intended to be comprehensive in its scope. It is recommended that clients seek legal advice on any particular matters.

Jersey

Heather Bestwick, Partner

Cayman Islands

Wayne Panton, Partner

London

David Whittome, Partner

British Virgin Islands

Jack Boldarin, Partner

Hong Kong

Hugh O'Loughlin, Partner

Dubai

Rod Palmer, Partner

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.