Guernsey: Protected Cell Companies In Guernsey

Last Updated: 17 October 2011
Article by Barney Lee and Helen Crossley

Guernsey was the first jurisdiction to introduce a Protected Cell Company ("PCC") in 1997 and has been regularly using cell companies and refining the concept since then. During the last 10 years, PCC's have been introduced in numerous jurisdictions throughout the offshore world and are widely used for insurance and investment fund purposes.

What is a PCC?

A PCC is a limited liability company and has a board of directors. A PCC may create one or more cells, the assets and liabilities of which are segregated from the assets of the PCC itself (the "core") and from the assets and liabilities of other cells. Reference to the 'core' is to the non-cellular assets of a PCC. A cell is established by a board resolution. A PCC may, in respect of its cells, create and issue cell shares, the proceeds of which will form part of the 'cellular assets' attributable to that cell.

Usually cell shareholders will have voting and other rights which are restricted to matters relating to the cell. For example, cell shareholders are unlikely to be able to vote on resolutions in respect of the PCC which do not affect cell shareholders or in respect of matters relating to other cells.

In normal companies, the assets of the company are available to all creditors to satisfy debts. The key advantage of a PCC is that a distinction is made between the core assets and the assets attributed to each cell (called "cellular assets"). As such, when a cell incurs liabilities in respect of the business it carries out, those liabilities will only be attributed to the assets of that cell. Creditors of a cell are not able to have recourse against the assets attributable to other cells or to the core assets and thus the assets of another cell or the core are referred to as "protected assets". This enables a number of portfolios to be established in the same company but with fewer risks attaching to contagion of claims between asset classes or lines of business.

A number of cases involving PCC's have been determined without the concept of a PCC structure having been challenged. In fact, a recent case upheld the integrity of a PCC structure and the segregation of assets and liabilities.

A cell, or the core, is also able to enter into a recourse arrangement with another cell which enables, for example, one cell to secure borrowings against the assets of another cell. Importantly, with a recourse agreement, the creditors of one cell can have recourse to the assets of another cell or to the assets of the core, depending on whom the recourse agreement is with.

It should be noted that the cells are not separate legal entities and cannot transact as such. In all cases it will be the PCC acting for and on behalf of the cell that enters into a transaction. Importantly, if it is not clear in respect of which cell a certain transaction is being entered into, the officer entering into the transaction on behalf of the PCC could be personally liable.

Criminal Penalties

Where a PCC is liable to any criminal penalty due to the act or default of a cell or an officer acting in relation to a cell, then the penalty may only be met from the cellular assets attributable to that cell. It is not clear what an "act" or "default" of a cell means in this context since a cell has no separate legal personality. Similarly, where a PCC is liable to any criminal penalty due to an act or default of the core or any officer of the core, then the penalty may only be met from core assets.

Fraud

In the case of loss or damage which is suffered by a particular cell and which is caused by fraud perpetrated by or upon the core or another cell, the loss or damage is the liability solely of the company's core assets or that other cell's assets, as the case may be.

Disputes

If there is a dispute as to whether any right is in respect of a particular cell, whether any creditor is a creditor in respect of a particular cell or whether any liability is attributable to a particular cell or the amount to which any liability is limited, the PCC may refer the matter in dispute to the court which will make a declaration on the matter.

Precautions when Managing a PCC

There are two very important precautions which must be taken when managing a PCC. Firstly, there are a number of sections of the Law designed to ensure that third parties dealing with a PCC are put on notice of that fact. These include requiring references be made to the PCC structure in the name, memorandum of incorporation, cell name and also notification to any party it transacts with. Thus the board must ensure that it identifies to a counterparty that it is acting on behalf of a PCC and it must identify the cell in respect of which the PCC is transacting. The language usually used is "X" PCC Limited acting for and on behalf of "Y" cell.

Secondly, the directors of a PCC have an obligation to:

  • Keep separate and separately identifiable the assets of the core from the assets of each of the cells; and
  • keep separate and separately identifiable the assets of each cell from the assets of each other cell. In practice, this means maintaining separate accounts for each cell in which the assets attributable to each cell are clearly identifiable.

Consolidated accounts of a PCC are often of little relevance to cell shareholders as investors in different cells have no financial interest in the assets or performance of other cells.

In order to ensure that the integrity of the structure is maintained, the two steps mentioned above are vital. For example, if a party transacts with a PCC but not in respect of any particular cell, then in pursuing the company in respect of the liabilities arising, there is no clear attribution of either the asset or the liability. By way of contrast, if it is clear in all cases in respect of which cell the PCC is transacting and if the accounts show the asset being attributed to that cell, there can be no question that any creditor should have recourse other than to the assets of the relevant cell.

Implied Terms and Conditions

To reinforce the cellular nature of liabilities, there is implied (unless expressly excluded in writing) in every transaction entered into by a PCC the following terms:

  • That no party shall seek to make liable any protected assets;
  • that if any party succeeds in making liable any protected assets, that party must pay to the company a sum equal to the value of the benefit obtained; and
  • that if any party succeeds in seizing, attaching or levying execution against any protected assets, that party must hold those assets or their proceeds on trust for the company and must keep those assets or proceeds separate and identifiable as such trust property.

However, the implied terms are subject to any recourse agreement.

Express Terms

To reinforce the implied terms, ordinarily express non-recourse wording is included into any contractual arrangement.

Recovery of Assets for Breach of Implied Terms

If any asset or sum is recovered by the PCC it must, after deducting or paying any costs of recovery, be applied so as to compensate the cell affected or the core, as the case may be. All sums recovered on account of property held on trust as a result of an implied term, will be credited against any concurrent liability against any protected assets.

If the protected assets have been improperly taken in execution of a liability and cannot be restored to the cell affected or the core, as the case may be, the PCC must appoint an independent expert to certify the value of the assets lost. The PCC must then transfer or pay from the cellular assets or core assets to which the liability was attributable, assets or sums sufficient to restore to the cell affected or the core, the value of the assets lost. This obviously depends on there being sufficient assets available to do this.

Extra-Territorial Effect

In respect of the liability of cellular and core assets, the key aspects of the segregation of assets and liabilities are expressed to have extra-territorial application.

In insolvency proceedings in two jurisdictions, this raises issues of conflicts of law and whether another jurisdiction would accept the extra-territorial effect. The usual approach in the case of double insolvency is to treat the insolvency proceedings in the place of incorporation as the principal insolvency and to treat the additional insolvency proceedings as being ancillary. This would suggest that in any double insolvency affecting a PCC, the protected cell structure would be respected i.e. the place of incorporation will ultimately determine the attribution of assets and liabilities.

However, where either significant assets of a cell are held in a jurisdiction other than Guernsey or liabilities are incurred under foreign laws, a foreign legal opinion should be obtained on whether a foreign court would accept the cellular integrity of the PCC in that jurisdiction.

Some Advantages of Using a PCC

There are a number of advantages of using a PCC, some of which have been mentioned above. PCC's are less expensive to administer than would be the case in a company with multiple subsidiaries. A single board, a single company secretary and a single administrator are required. Naturally the accounting is slightly more complicated in that assets and liabilities need to be separate and separately identifiable and attributed to the appropriate cell (although no more complicated than for a multi-class structure); however, the costs savings should be measurable.

As the cells of a PCC do not require registration with the Guernsey Registrar of Companies, they can be formed quickly by Board resolution. There are a number of PCC's established in Guernsey with several hundred cells each holding different assets. Although this is an extreme example of the use of PCC's, even in such complicated structures they facilitate cost benefits. A PCC is also treated as a single legal entity for taxation purposes which can have tax benefits.

PCC's also provide flexibility and protection if the core or a single cell of the PCC becomes insolvent. If a particular cell were to find itself in financial difficulty, a receiver could be appointed to that cell without affecting the other cells or the core. This should be contrasted with a multi-class company where, if losses were suffered in respect of one class of shares such that the assets in respect of those shares were less than the liabilities, the creditors might have access to the assets of the whole company.

If a PCC enters into liquidation, the liquidator is required to recognize the rights of each individual cell and to protect the assets of each cell from the creditors of other cells.

The PCC structure also allows investors to be segregated according to risk. So, investors with a high risk profile can invest into a cell which invests in riskier assets without the danger of any losses arising from those riskier investments spreading to investors who have a low risk profile.

In certain circumstances a PCC may outgrow its purpose. For example, a single cell of a PCC might achieve such success in its business that it needs additional freedoms not available as a cell of a PCC (for example, the ability to transact in its own right). In such cases, there are a number of options available under Guernsey Law, whereby the cell can be converted into a stand alone company.

Public Records of the Beneficial Ownership of the PCC and Resident Agents

Generally, the beneficial owners of shares in a PCC are not a matter of public record.

Where a PCC is required to have a resident agent (namely, if it is utilised for a purpose other than as an open-ended or closed-ended collective investment scheme, listed on a recognised stock exchange, a supervised company, or a States of Guernsey trading company) the registered agent is required to hold details of beneficial ownership of the shares.

These details are not a matter of public record although the resident agent may be required to release the information pursuant to a court order or regulatory request.

Annual Validation Procedure

A PCC must adhere to the annual validation procedure which requires a filing to be made with the Company Registry once a year before 31 January together with a declaration of compliance signed by a director. The details required to be set-out in the annual validation are:

  • The address of the registered office;
  • particulars of the directors;
  • the particulars of a resident agent (where required);
  • the categories of its principle business activities;
  • whether the PCC is exempt from audit;
  • confirmation that the PCC's register of members is up to date as at 31 December in the previous year;
  • that the information contained in the validation was current as at 31 December in the previous year; and
  • the number of issued shares and the aggregate value of those shares.

Transfer of Cellular Assets

It is not possible to transfer a cell (which has no legal personality) but it is possible, in certain cases, to transfer cellular assets. Generally the consent of the court is required for the transfer of the cellular assets attributable to any cell of a PCC (a "cell transfer order"). It should be noted that it is not possible to transfer the core assets of a PCC. However, a cell transfer order is not required to invest, and change investment of, cellular assets or otherwise to make payments or transfers from cellular assets in the ordinary course of the PCC's business.

No transfer of the cellular assets attributable to a cell of a PCC may be made except under the authority of and in accordance with the terms and conditions of a cell transfer order.

The court must not make a cell transfer order unless it is satisfied that the creditors of the PCC entitled to have recourse to the cellular assets attributable to that cell consent to the transfer or that those creditors would not be unfairly prejudiced by the transfer and the court must hear any representations of the GFSC.

It will clearly be easier to facilitate the granting of a cell transfer order if the creditors' consent is obtained. The court may attach conditions to any cell transfer order, particularly with regard to discharging claims of creditors.

A cell transfer order is not required for a PCC to lawfully make payments or transfers from the cellular assets attributable to any cell of the Company to a person entitled to have recourse to cellular assets.

It is possible to list the shares of a cell or cells of a PCC on a stock exchange in accordance with the rules of the particular exchange. In respect of shares in the cell listed on the Channel Islands Stock Exchange, the shares would have to be freely transferable.

Property Ownership

A PCC holding an asset, including property, would do so in the same way as any limited liability company. For example, in respect of UK property, the PCC would be noted on the title deeds and registered at the Land Registry (if registered land) as the legal owner of the property for and on behalf of the relevant cell of the PCC.

The Land Registry accepts the confirmation from the solicitor registering the property on the register that the structure is capable of owning property.

Ownership of a Company

In relation to how shares held in a company by a cell of the PCC would be registered, the same principle applies as with property ownership addressed above. The PCC would be registered on the share register as the legal owner holding the shares for and on behalf of the cell of the PCC.

Utilisation of a Purpose or Hybrid Trust to Hold Ownership of the PCC

One option, which may suit a client for tax or confidentiality reasons, could be to utilise the innovations contained within the Trusts (Guernsey) Law 2007 (the "Trust Law") to establish a purpose trust to hold the shares of the core or cells of the PCC.

The Trust Law permits pure purpose trusts or hybrid purpose trusts that combine persons and purposes as objects. The trust, which is intended ultimately to benefit individual beneficiaries, can subject the interests of those beneficiaries to the overriding purposes of the trust, which can be to hold the shares in the PCC.

For even greater confidentiality, the trust could begin as a pure purpose trust, with the ability to add beneficiaries later. Discretionary trusts have been used in the past for a similar objective, but have now fallen out of favour and the purpose trust is considered to be more resilient against attack. Purpose trusts offer flexibility to permit a significant degree of settler control, as well as remoteness for those who may ultimately benefit from the structure.

Note

This is a short note on some of the general characteristics of a PCC and some of the advantages of such a structure. If you require more specific information, please do not hesitate to contact us. Legal advice should be taken in respect of your specific structure or any specific queries you might have.

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
 
In association with
Mondaq Advice Centre (MACs)
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
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.