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.
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.
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.
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.
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.
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.
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.
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.