Traditional investment fund structures such as umbrella or multi-class funds, whether established as companies or unit trusts, have always suffered from the risk of "contagion" between the different share classes or sub-funds. The risk is that losses attributable to one class or sub-fund may reduce or even extinguish the assets attributable to another. Gibraltar's Protected Cell Companies Act 2001 provides a unique solution to this problem.
Gibraltar is one of the several domiciles that provides for protected cell companies (PCC). It is interesting that while the PCC was initially developed for the captive insurance industry it has now also become a popular method of structuring hedge funds, property funds and private equity funds.
Since November 2001 Gibraltar enables companies to be incorporated as a PCC or existing companies, if they provide so in their constitutional documents, to convert into a PCC.
PCC / Experienced Investor Fund
A PCC is a special type of company that may create one or more cells for the purpose of segregating and protecting cellular assets. It is similar to a multi-class company but the distinguishing features of a PCC are:
- each share class is referred to as a cell with its own distinct name or designation;
- the PCC has a core cell ("non-cellular assets") and one or more non core cells ("cellular assets"); the "non-cellular assets" of a PCC comprise the assets of the company which are not "cellular assets";
- there is a legal segregation of assets attributable to each non core cell. Hence cellular assets attributable to a cell of a PCC shall only be available to the creditors of the PCC who are creditors in respect of that cell and shall be protected from the creditors of the PCC who are not creditors in respect of that cell;
- the name of a PCC shall include the expression "Protected Cell" or "PCC".
Gibraltar's premier vehicle for launching alternative investment funds is the Experienced Investor Fund (EIF). The competitive regime, which was developed in August 2005, enhanced Gibraltar's attraction as a domicile for alternative investment funds and a good number of hedge funds, private equity funds and property funds have already gone down that route. EIFs may be established as a PCC (other possibilities are, e.g., a "normal" investment company or a unit trust). Alternatively, an existing EIF, established as a "normal" investment company, may be converted in a simple process within a few weeks into a PCC!
The legal segregation of assets and liabilities is often described as "ring fencing" and is the main attraction of a PCC. It enables the assets and liabilities of particular cells to be segregated from other assets and liabilities of the company, thereby ensuring that there is no "cross-liability" between different protected cells. However, the creation by a PCC of a cell does not create, in respect of that cell, a legal person separate from the company as single cells do not constitute separate entities themselves (only the company is a single legal person).
Given this ring fencing, a PCC structure is very useful if a fund manager wishes to offer various investment portfolios where each has its own investment strategy and risk profile. That is even more attractive where investors are not common for each portfolio.
Protection of cell assets
The protection granted to each single cell's assets against claims, liabilities and losses attributable to other cells and/or to the non-cellular assets, is enforced by a number of procedural and balancing legal measures. Subject to the PCC Act there shall be implied (except in so far as the same is expressly excluded in writing) in every transaction entered into by a PCC that no party shall seek to make or attempt to use any cellular assets attributable to any cell of the company to satisfy a liability not attributable to that cell. If any party succeeds by any means whatsoever in using any cellular assets attributable to any cell of the company to satisfy a liability not attributable to that cell, that party shall be liable to the company to pay a sum equal to the value of the benefit thereby obtained by him. It is also provided that if any party succeeds in seizing or levying execution against any cellular assets attributable to any cell of the PCC to satisfy a liability not attributable to that cell, that party shall hold those assets or their proceeds on trust for the PCC.
The directors of the PCC may establish cells and must establish a cell for each class of share in issue ("cell shares") and each cell constitutes a cell for the purposes of the PCC Act and the directors must maintain all the assets, income, earnings, liabilities, expenses and costs of each cell segregated and separate from all other assets, income, earnings, liabilities, expenses and costs of the company and of each other cell.
Any consideration received on, or proceeds from, the allotment and issue of a class of shares must be applied to the cell established for that class of shares, and the assets and liabilities and income and expenditure attributable to that cell must be applied only to that cell and on a redemption of any share of a particular class the assets of the cell established for that class must be reduced by the amount of the redemption price.
For each cell the company must keep separate books in which all transactions relating to that cell are recorded.
Any asset derived from any other asset or assets (whether cash or otherwise) attributable to a cell must be applied in the books of the company to the same cell as the asset or assets from which it was derived and any increase or diminution in the value of an asset attributable to a cell must be applied to that cell.
If there is any asset of the company that the directors do not consider readily attributable to a particular cell or cells the directors must allocate that asset to and among any one or more of the cells in a manner and on a basis that they in their absolute discretion deem fair and equitable and the directors have the power to, and may at any time and from time to time, vary the basis in respect of any asset not previously allocated to one or more cells.
Each cell is charged with the liabilities, expenses, costs, charges or reserves of the company (or the appropriate proportion of them) that are in the absolute discretion of the directors attributable to that cell and any liabilities, expenses, costs, charges or reserves of the company not attributable to any particular cell or cells are allocated and charged by the directors between one or more cells in a manner and on a basis that the directors in their absolute discretion deem fair and equitable and the directors have the power to, and may at any time and from time to time, vary the basis including where circumstances so permit the subsequent re-allocation of such liabilities, expenses, costs, charges and reserves.
Director's personal liability to inform persons that they are dealing with a PCC
In all transactions with third parties the directors shall inform such third party that the company is a PCC, and unless the transaction is not in respect of any particular cell identify or specify the cell in respect of which the third party is transacting.
If a PCC fails to inform a person that he is transacting with a PCC, and that person is otherwise unaware that, and has no reasonable grounds to believe that, he is transacting with a PCC or fails to identify or specify the cell in respect of which a person is transacting, and that person is otherwise unaware of, and has no reasonable basis of knowing, which cell he is transacting with then, in either such case the directors shall incur personal liability to that person in respect of the transaction, and the directors shall have a right of indemnity against the non-cellular assets of the company, unless they were fraudulent, reckless or negligent, or acted in bad faith.
Consent of Commissioner or Finance Centre Director
A company may not be incorporated as a PCC, and an existing company may not be converted into a PCC, except with the written consent of the Financial Services Commissioner.
A company which is a collective investment scheme authorised by the Financial Services Commissioner under the Financial Services Act 1989 shall be granted to be incorporated as a PCC. In contrast a company which is not required to be licensed or authorised under the Financial Services Act 1989 and 1998 may not be incorporated as or converted into a PCC, except in accordance with the terms and conditions of the written consent of the Finance Centre Director.
Ambitious international fund administration sector
Service providers in Gibraltar are keen to grow the industry, and with its moderate cost base, the domicile is proving to be a very attractive alternative to other more seasoned jurisdictions. Gibraltar hosts a range of fund administrators, from the global names to boutique providers. Its ambitious international fund administration sector, which is headed by the very experienced Capita Financial Administrators (Gibraltar) Ltd (part of Capita Group plc, a FTSE 100 company), serves a large number of small and medium-sized asset and alternative investment managers and has practical experience with redomiciliation of funds into Gibraltar as well as transforming EIFs into PCCs.
Redomiciliation into Gibraltar
Hedge funds with registered place of business in a relevant foreign state are able to move into Gibraltar by continuation of their legal form without liquidation and fresh registration in a relative simple procedure, if redomiciliation is provided for in the constitution documents and if permitted to do so by the foreign jurisdiction. In 2006 the first hedge funds have moved their registered office from the Caribbean into Gibraltar. For successful redomiciliation just a few formalities and the presentation of a few evidences are necessary. Redomiciliation into Gibraltar also enables hedge funds to convert into a PCC: In a first step, the hedge fund has to move its domicile by continuation of its legal form into Gibraltar and upon successful redomiciliation he can start converting into a PCC.
Strong solution to investment managers and sponsors of hedge funds
Without a doubt, Cayman Islands has become the world's most important hedge fund domicile but also Gibraltar provide the services, infrastructure and operational flexibility which the international investor demands, within the framework of clear and carefully enforced legal guidelines, that are in tune with the requirements of the modern hedge funds industry. It is the combination of Gibraltar's effective EIF regime and the ability of the EIF to be established as a PCC that provides a strong solution to investment managers and sponsors of hedge funds, private equity and real estate funds. That flexible and cost-effective structuring option enables one who sees a clear benefit in the segregation of assets and liabilities within one legal entity to set up a superior version of the traditional umbrella or multi-class funds. Where non PCC multi-class funds rely on a purely contractual arrangement between shareholders as set out in the articles of association, the PCC Act gives a statutory basis for the segregation of assets that binds third parties as well.
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.