This memorandum has been prepared for the assistance of our clients in connection with the provisions relevant to protected cell and incorporated cell companies under the Companies (Guernsey) Law, 2008 (the "Companies Law"). It is intended to provide only a summary of the main legal and general principles and it is not intended to be comprehensive in scope. It is strongly recommended that you seek specific legal advice on such matters and we would be pleased to assist in this respect. A series of briefings on other specific aspects of Guernsey companies has been produced by Ogier and is available on our website www.ogier.com. Transitional provisions have also been made (a separate briefing addresses the operation of these).
The memorandum has been prepared on the basis of the law and practice in Guernsey as at 1 July 2008.
The Companies Law came into full force on 1 July 2008 and contains provisions in relation to protected cell companies ("PCCs"), protected cells ("PCells"), incorporated cell companies ("ICCs") and incorporated cells ("ICells").
Protected Cell Companies And Protected Cells
Under the Companies Law, a PCC is a single legal person with a single board of directors comprising a core of non-cellular assets and one or more distinct cells holding assets independently of each other and the non-cellular core. The key feature of a PCC is that each PCell carries on business independently of other cells and this provides ring-fencing of assets. Such ring-fencing has been judicially considered before the Guernsey courts but has not, at the time of writing, been before the courts in any other jurisdiction. It is a requirement of the Companies Law that the directors of a PCC inform any person with whom it transacts both that it is a PCC and that they identify the PCell with which that person is transacting, unless the transaction is not a transaction in respect of a particular PCell.
What Is The Difference Between PCCs And ICCs?
An ICC adopts a fundamentally different approach to cells from a PCC. It incorporates them as separate legal entities, dependent upon the cell company, whose common board members control the cell company and each ICell.
The principal difference therefore is that an ICell of an ICC is treated as a separate company whereas a PCell is not a body corporate and has no separate legal identity.
What Are They And When Are They Used?
A cell company is a company which has the ability to create one or more cells within the company which have separate and distinct assets and liabilities. These cells will be used to carry out separate and distinct businesses. Each cell will have its own members. Historically, the concept of a cell company was developed for use in relation to umbrella investment funds and to assist in the management of investment pools supporting separate lines of insurance business. However, now cell companies have a wider range of applications in financial services businesses and structured finance activities. In particular, ICCs are utilised in relation to multi-series asset backed securities issues, commercial paper conduits, medium term note programmes and in relation to structured equity products.
Incorporation Of PCCs
In addition to the usual incorporation steps, for a company to be incorporated as a PCC it needs the consent of the Guernsey Financial Services Commission ("GFSC"). Further the name of the PCC must include the expression "Protected Cell Company", "PCC" or an expression approved by the GFSC.
The articles will usually give power to the directors of the PCC to create cells at their discretion. A PCell cannot be wound up separately from a winding up of the PCC as a whole. However, provisions can be included in the articles for redemption of all outstanding shares, for example on the passing of a special resolution by the holders of the shares in that PCell or on a non-compulsory basis.
Shares In PCCs And PCells
A PCell may (if so provided by the relevant resolution) issue shares with or without a par value, purchase its own shares, give financial assistance and hold its shares as treasury shares.
A PCell may not own shares in its own PCC or another PCell of the same PCC.
Position Of Creditors Of PCCs And PCells
The position of creditors depends upon whether the liability is attributable to a particular PCell or to the PCC's non-cellular assets.
This is because the assets of a PCC are either cellular or non-cellular and the directors of a PCC have a duty to keep cellular assets separate and to separately identify core assets.
Under the Companies Law, the assets of a particular PCell or of the PCC itself cannot be used to satisfy a debt of another cell or the core (as applicable).
A creditor may only make a claim against the assets of the particular PCell and, if the assets of the cell are insufficient, he may then pursue the non-cell assets (i.e. the other cells of the PCC are insulated from the creditor).
However, where the PCC and a third party enter into a "recourse agreement", then the otherwise protected assets of the PCells may be subject to a liability owed to the third party. This is subject to the prior approval of the members of the particular PCell or the core providing the additional security under the "recourse agreement".
Incorporated Cell Companies And Incorporated Cells
Under the Companies Law, an ICC consists of a cell company with separate ICells, each incorporated pursuant to the Companies Law. However, each ICell is itself a corporate entity with separate legal personality in addition to and totally separate from the ICC company core. However, an ICell may not itself be an ICC or a PCC.
An ICell is a company but is not a subsidiary of its ICC solely by virtue of the fact that it is an ICell of that company.
Incorporation Of ICCs And ICells
A company cannot become an ICC nor can an ICC be registered unless the GFSC has granted its consent.
An ICC may, by special resolution, resolve to incorporate one or more ICells and shall specify the terms of memorandum and articles of the cell. However, the consent of HM Procureur is not required for the registration of an ICell.
The name of the ICC must include the expression "Incorporated Cell Company", "ICC" or an expression approved by the GFSC and the name of the cell must include the expression "Incorporated Cell", "IC" or an expression approved by the GFSC.
Shares In ICCs And ICells
An ICell may (if so provided by the relevant resolution) issue shares with or without a par value, be established as a company limited by guarantee, purchase its own shares, give financial assistance and hold its shares as treasury shares.
An ICell may not own shares in its own ICC but, unless there is something to the contrary in the memorandum or articles, an ICell may own shares in any other ICell of the same ICC.
Under the Companies Law, an ICell of an ICC is not a subsidiary of the ICC. This allows an ICell to invest in any other cell of the ICC subject to its articles of association, although an ICell may not invest in the ICC itself (s. 474).
Position Of Creditors Of ICCs And ICells
The position of creditors depends upon whether the liability is attributable to a particular ICell or to the ICC itself.
This is because the directors must keep the assets and liabilities of the ICC separately from the assets and liabilities of its ICells and similarly keep separate the assets and liabilities of each ICell, although they may provide for the assets of all the cells to be collectively invested or managed provided that they remain separately identifiable.
A creditor may only make a claim against the assets of the particular ICell and, if the assets of the cell are insufficient, he is unable in the absence of another agreement permitting this to pursue the assets of the ICC or the other ICells (i.e. There is no concept of a recourse agreement in relation to ICCs).
Power To Enter Into Transactions
An ICC will generally have no power to enter into transactions on behalf of any ICell and when either the ICC or an ICell is entering into a transaction the directors must ensure that there is a statement as to whether it is the ICC, or one of the cells and, if so, which cell.
PCCs and ICCs are exciting entities, which provide an important new flexible and convenient product for professionals involved in structured finance and funds products. In particular, they provide:
- strong ring-fencing of cellular assets and liabilities.
- significant cost savings in terms of statutory and administrative fees:
- greater certainty as to the treatment of each cell pursuant to the Companies Law and established corporate law principles: and
- cells with the ability to invest in other cells of the same company.
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.