Malaysia: Explore Asia's Only Protected Cell Companies

Last Updated: 11 December 2017
Article by Labuan IBFC Inc.

"PCCs are a flexible structure offering cost-efficient centralised management while allowing for
diversity in mandate, risk coverage and efficient management"

The protected cell company (PCC) was borne as alternative risk management tool in 1997, designed primarily to cater for the needs of self-insuring organisations, especially the captive insurance industry. Apart from the captive insurance industry, PCCs are also now a popular structure in the fund management industry, as part of a larger diverse asset allocation investment strategy.

The core concept underpinning the PCC structure is that it acts as a single and separate entity which in turn has the ability to create multiple cells and provides these segregated cells the ability to take on differentiated assets and liabilities per cell, while allowing each cell to operate independently and providing segregation of these assets and liabilities.

One unique feature of the PCC is that it is a single entity with only one board of the directors, regardless of the number of cells it creates. However, the ownership of the cells and the underlying assets, on the other hand, can be held by different individuals or owners.

Today, there are more than 40 domiciles globally offering some variant of the PCC structure, including Labuan IBFC– the only jurisdiction in Asia to offer both conventional and Shariah-compliant PCCs.

The Labuan PCC

The Labuan PCC was introduced in Labuan International Business and Financial Centre in 2010 in line with the enactment of the amended legislation, Labuan Companies Act 1990 (LCA 1990). Fundamentally, LCA 1990 deals with the establishment, structure and operations of a Labuan PCC while its business activities are governed under the Labuan Financial Services and Securities Act 2010 and Labuan Islamic Financial Services and Securities Act 2010 – for Shariah-compliant PCCs.

A Labuan PCC is essentially a limited liability company that has the ability to form cells. It can be incorporated as a Labuan company or converted from an existing Labuan company. A Labuan PCC is allowed to undertake captive insurance or mutual funds activities (including captive takaful and Islamic mutual funds).

The following paragraphs provide examples of how the PCC's unique character can be best utilised:

Insurance

A Labuan PCC may be used for a range of insurance purposes. These include setting up a PCC captive, life and annuity companies and derivatives structures, this is where the ability of create multiple cells under one PCC core whilst providing segregation of assets and liabilities is key. Life insurance companies, for example, can legally separate the assets of life and individual policyholders. Association insurers, on the other hand, whose members share a common business interest can access insurance arrangements by offering competitive premiums whilst offering legal protection on the assets of the individual members by placing them in various cells.

Moreover, organisations that have presence in various geographical locations can create cells, each offering a particular insurance exposure unique to that area in order to accommodate the differing risk management needs of those areas.

Funds

Building a customised collective investment fund such as a mutual fund from scratch can be a daunting task for new investment advisers. More often than not, the issues of credibility and the lack of expertise from potential customers are always called into question. To avoid these pitfalls, many new investment managers are opting to "white-label" their collective investment fund products that are already offered by established service providers. In this instance, the Labuan PCC structure may be used by an established service provider to offer a collective investment fund product to new investment advisers. It is also possible in turn for the new investment advisers to create cells or multiple cells to cater their multiple business strategies.

In addition to offering a reputable collective investment fund product to their potential customers, the new investment advisers have access to the expertise, assistance from the investment managers, and proper corporate governance.

Cost-efficiency and straightforward process for group companies

Setting up a cell under a Labuan PCC core provides the ability for the cells to operate in an analogous manner. This is essentially similar to a group company consisting of the parent and its subsidiaries that addresses the problem of "cross-class liability" and the segregation of assets in a cost-effective and straightforward manner. In a way, the PCC is able to reduce friction and the complications of setting up a separate subsidiary company. Additionally, the setting up of further cells or "companies" is much simpler with the framework of the core already in place.

In certain circumstances, a Labuan PCC may be a convenient and effective structure for joint venture arrangements when a particular party wishes to retain its ownership of an asset or income stream within the joint venture structure.

Small or middle market companies can also take advantage of setting up a cell as the administration cost tied to a cell is likely to be more affordable than with a traditional standard entity.

Segregation mechanism for businesses with multiple projects

A Labuan PCC also works well as a segregation tool for organisations with multiple businesses undergoing corporate rehabilitation and reorganisation. For example, in the event of winding-up a business, the segregation of asset and liability can be efficiently performed through a Labuan PCC.

Traditionally, businesses holding multiple assets such as ships, aircrafts and property, are structured within a group with the separate subsidiary company holding its respective underlying assets. The Labuan PCC, however, can provide a more efficient and economically viable benefit with a segregated portfolio where each asset is owned separately, whilst having the management of these assets centralized at the core.

An example that illustrates this well is when property developers use a Labuan PCC to set up cells for each of their development projects. This method provides a ring-fencing mechanism for each cell i.e. each development project will carry out its separate and distinct business from the other cells and more importantly, this can be easily dissolved without interfering in the use of the other cells, this comes in handy especially when a development project has been completed and ownership is transferred. And throughout this time there centralised management being executed at the core for all the various cells or companies, which offers cost efficiency.

Shariah-compliant structures

Labuan IBFC is the only jurisdiction in the region, if not the world, to provide shariah-compliant PCCs, providing an option for organisations that either prefers or are mandated to be shariah-compliant in their activities. For instance, companies that are interested to set up a takaful captive or plan to enter into Islamic mutual funds can consider structuring this this option, especially those entities historically based in the Middle East, with plans to penetrate into the growing reinsurance or investment fund markets in Asia.

Substance at the core!

In this age of tax transparency via information exchange it has become essential that companies recognise the importance of substance creation in their domicile of choice. In a PCC structure the required substance would be created at the core of the PCC, as it executes it offers centralised management and control for all the cells beneath it.

And with a Labuan PCC this substance is able to be provided cost efficiently on Labuan island, conveniently situated within Asia's trading day, well supported by the 50 over banks and more than 200 insurance licensees in Labuan IBFC.

Moving forward: Labuan IBFC as Asia's PCC Centre

Labuan IBFC is among the few jurisdictions that offer PCC globally. It is the first to do so in the Asian region and aims to evolve to become the PCC Centre for Asia. Towards this aim, the Labuan PCC offering is expected to be fine-tuned in 2018 order to ensure that PCCs in Labuan remain relevant and robust.

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.

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