Guernsey has recently introduced changes to the Protected Cell Companies Ordinance, 1997 (the "Law") to allow for the incorporation of any company as a protected cell company ("PCC"), save for certain Guernsey regulated businesses, provided that the administration of the PCC is undertaken by a Guernsey licensed financial services business with a principal place of business in Guernsey. The change is effective from 13 September 2005.
It is expected that the use of PCCs will prove to be as attractive and popular as has been the case in the context of collective investment schemes and captive insurance companies.
When the Law was introduced in 1997, its use was limited to open-ended investment companies and insurance companies. As a result of demand within the investment fund sector, the Law was subsequently amended to permit closed ended investment funds to be established as PCCs. As at 14 September 2005, 66 PCCs with 236 cells had been formed for various insurance purposes and 94 PCCs with 592 sub-fund cells had been formed for investment fund purposes. Several jurisdictions have subsequently followed the Guernsey model.
The attraction for investment funds adopting a PCC structure is the avoidance of any cross class contagion in the event of a class or portfolio within an umbrella fund becoming insolvent and the creditors attempting to enforce judgment against assets within other classes. The Law effectively achieves what has always been possible in the case of umbrella unit trusts, where the assets within each sub-trust are ring-fenced, each fund being created by a separate trust for each class.
Use of the PCC has also been exploited in the context of insurance companies. Whilst the Law was originally adopted for use by rent-a-captives, its use has expanded. Cells have recently been used for transformers and a wide range of other ART solutions. There have also been a number of CAT bond issues and the securitisation of life business within individual cells of a PCC.
The key feature of a PCC is that although it remains a single legal entity, it has separate and distinct "cells". The assets and liabilities of one cell are segregated and protected from those of the other cells. They are also separate and distinct from a PCC’s non-cellular assets.
The Law expressly provides that the assets of one cell are only available to those creditors of the company who are creditors in respect of that cell. It also expressly states that the assets of one cell are protected from the creditors of the company who are not creditors in respect of that cell and who accordingly are not entitled to have recourse to the assets of that cell. As a result, rather than achieving the ring-fencing of assets contractually, as is usual in the case of a multi-class issuer of debt or equity, a PCC enables assets to be ring-fenced within the company’s individual cells pursuant to a statutory framework.
A PCC is required to inform any person with whom it transacts that it is a PCC and must identify or specify the cell in respect of which such person is transacting.
Where the liability of a PCC to a person arises from a transaction effected in respect of one cell, the Law expressly provides that the transacting party is entitled to have recourse firstly only to the assets of that cell and thereafter only to the PCC’s non-cellular assets. The transacting party is not entitled to have recourse to assets attributed to any other cell. Additionally the Law provides that where the liability of a PCC to a person arises otherwise that from a transaction in respect of one particular cell, that person is entitled to have recourse only to the PCC’s non-cellular assets.
This note is intended to provide general information only and should not be regarded as constituting legal advice, which should always be sought in particular cases. Please contact any of the partners if you have any specific questions in relation to the Law.
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Probably the most significant change from previous practice in Guernsey law under the Companies (Guernsey) Law 2008, which came into effect on the 1 July 2008, was the consignment to history of the concept of capital maintenance, which was discarded in favour of a solvency model as the basis of a company’s ability to pay distributions and dividends.
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