Guernsey pioneered the concept of the cellular company and has been instrumental in establishing these innovative vehicles as internationally recognised corporate entities. The protected cell company was first developed in Guernsey in 1997. A number of other jurisdictions have since adopted similar legislation. However, a survey conducted by Reactions Magazine in June 2006 saw Guernsey voted the best domicile in Europe for PCC legislation, highly commended for its tailored legislation, and commended for its cost efficiency. Also in 2006, Guernsey introduced legislation creating a similar, but different, vehicle known as the incorporated cell company. Both protected and incorporated cell companies have proved very popular with promoters of investment funds established in Guernsey for a number of reasons.
Protected Cell Companies ("PCCs")
A PCC is a single legal entity, but the company is made up of a core and a number of ring-fenced protected cells. It is a way of creating different portfolios of assets within one company. Designed primarily for use in the captive insurance industry, the potential benefits to the investment fund sector of such vehicles were also recognised from the outset.
Traditional "umbrella funds" have been popular in Guernsey and elsewhere for many years, but practitioners had always recognised the potential risk of "contagion" between sub-funds. For example, where an umbrella fund, established as an ordinary company, has a sub-fund which is highly geared and adverse market movements have resulted in the sub-fund's liabilities being greater than its assets, it is possible for creditors to look to the assets of other sub-funds (which might have a conservative investment and borrowing strategy) to cover their loss. This potential risk is removed by the PCC structure because, in the absence of a recourse agreement, in the event of insolvency of a cell the assets of one cell will not be available to creditors of other cells. Recourse to the core can be made only in the event of a prior recourse agreement. This statutory protection provides fund promoters with the benefit of a corporate vehicle whilst affording the same protection from contagion as an umbrella unit trust.
PCCs have both core capital (in the case of an investment fund, usually the shares held by the management company) and cellular capital, which is the capital invested in individual cells (via the issue of shares to investors).
Investment funds established as PCCs have a number of benefits:
- Avoidance of contagion risk (see above)
- Lower cost of establishing new cells (as opposed to setting up a new fund as a separate corporate vehicle)
- Faster regulatory consent for new cells (usually five working days)
- Integrated marketing of a variety of investment strategies in one corporate entity
- Cost savings in the areas of corporate governance and company administration (for example, common board of directors and company secretary and only one set of articles)
- Taxable in Guernsey as a single legal entity
- Each cell can have different investment advisors or managers
Guernsey is host to a large number of PCCs established as investment funds. As at 31 December 2009 there were 98 open ended and 37 closed ended PCC investment funds established in Guernsey: some 15% of all funds established in the jurisdiction. This represents a significant number of underlying fund cells. Statistics are not available on the number of cells established under PCC funds but, of the 208 open ended umbrella or cellular funds in Guernsey, there were 1,836 underlying classes/cells at the end of June 2009.
PCCs can be approved by the Guernsey Financial Services Commission for use as authorised or registered investment funds.
It should be noted that if one cell of a PCC is authorised as a particular class of fund (for example as an authorised Class B open-ended fund) then the other cells all have to be of the same class of authorisation.
Further details on these types of funds and the differences between them are given in our Red Guide: Obtaining Approval for an Investment Fund in Guernsey.
The following schematic is an example of what a PCC structure for an authorised open-ended Guernsey fund might look like:
Incorporated Cell Companies ("ICCs")
An ICC has cells like a PCC, but in the case of an ICC each cell is a separately incorporated, distinct legal entity. The ICC and its cells all have the same directors and same registered office but the legislation specifically states that incorporated cells are not subsidiaries of the ICC. Unlike a PCC, a cell of an ICC may have a different memorandum and articles of incorporation to another cell in the same ICC. The ICC submits a combined annual return and only the ICC is required to create separate accounts.
This structure allows incorporated cells to exploit their status as independent legal entities, with the ability to contract amongst themselves.
The advantages of an ICC are:
- Cells may enter into legal contractual obligations with one another (such as providing guarantees or loans or acting as feeder funds based in different currencies)
- Cells have a separate legal identity and can therefore contract with third parties in their own right
- Reduced costs of audit fees and account preparation, annual return fees and administration of separate boards and shareholder registers
- ICCs are more straightforward to audit which makes incorporated cells easier for commercial rating agencies to assess where a fund is seeking a credit rating
- Groups of companies can amalgamate into an ICC by producing a "transfer agreement" approved by the directors of the non-cellular company, and those of the ICC, by a special resolution of both companies and the lodging of certain information with the Guernsey company registrar. A conversion of a group of companies into an ICC will result in significant
cost savings – for example there would only be the need for a single set of accounts, annual return and share register. Each fund will continue to be a separate legal entity. This could be attractive to a group of funds managed by the same manager wishing to contract freely with each other but also wanting the cost benefits of a cellular company.
- ICCs can also act as "nurseries" for new funds which might start out as cells of an ICC but, when certain economies of scale have been realised, be converted into separate non-cellular funds in their own right.
How AO Hall Can Help
AO Hall is a law firm with experience in structuring and launching a wide range of funds, including PCCs and ICCs. Along with the Island's other leading fund practitioners, AO Hall is a member of the Guernsey Investment Funds Association. We advise on all matters associated with investment funds and their establishment in Guernsey. In addition, the Firm is experienced in listing funds on the CISX, the London Stock Exchange Official List and AIM.
The Guernsey Financial Services Commission ("GFSC") requires all Guernsey established funds to appoint a local administrator. Through our local contacts, AO Hall can recommend local fund administration companies. Because AO Hall does not operate an associated fund administration business, it can provide objective and independent advice on the selection of fund administrators. We can also recommend sponsors for funds listing on the CISX and a trustee/custodian where required.
In addition, AO Hall's specialists have particular expertise and experience in preparing fund documentation to ensure compliance with regulatory requirements. We will assist fund promoters in submitting application documents to the GFSC and will liaise with the GFSC and local administrators throughout the approval process. AO Hall has an established working relationship with the GFSC and its staff. This professional service forms part of the overall fund advisory services AO Hall offers to new and existing fund promoters.
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.