Knowledge

This briefing provides a summary of the main provisions of Guernsey law relating to protected and incorporated cell companies.

Guernsey was the first jurisdiction in the world to introduce legislation permitting the formation of cell companies through the Protected Cell Companies Ordinance, 1997. The concept of the Incorporated Cell Company ("ICC") was introduced in Guernsey through the Incorporated Cell Companies Ordinance in 2006. Both of those Ordinances were consolidated into the Companies (Guernsey) Law, 2008, as amended (the "Companies Law").

A Guernsey Protected Cell Company ("PCC") is a single legal entity made up of a "core" and any number of protected "cells". The assets and liabilities attributable to the core and each cell are subject to statutory segregation, limiting the rights of a creditor to the assets of a particular cell or the core.

An ICC comprises the ICC itself and any number of incorporated cells. Unlike cells in a PCC, each incorporated cell of an ICC is a separately registered legal entity (as is the ICC itself). The ICC is based on the same principles as the PCC: segregation of assets and the limited recourse of creditors to the assets of a particular incorporated cell.

Both types of cell company offer statutory segregation of assets and liabilities between cells, protecting the assets attributed to a particular cell from the liabilities of another cell, and the cell company as a whole from the liabilities of a particular cell.

In addition, PCCs in particular can offer cost advantages over a non-cellular company with multiple subsidiaries, as a single board, single company secretary and a single administrator are required.

ICCs can provide these cost advantages to a lesser degree while enjoying enhanced segregation of assets and liabilities, along with the flexibility for incorporated cells of the same ICC to have different governance structures and to contract with each other. As each incorporated cell is a separate legal entity, it may be a more familiar structure in jurisdictions that do not have their own cellular companies.

When originally introduced, PCCs and ICCs were only available to licensed insurance companies and collective investment schemes and, not surprisingly, these remain the two most popular uses for cell companies.  Currently a closed-ended or open-ended collective investment scheme, a licensed insurer or any other company whose affairs are administered by a licensed person in Guernsey may be established as a cell company. However, a cell company may not be a licensed insurance manager or intermediary, a bank, a licensed fiduciary or a person licensed to conduct controlled investment business under the Protection of Investors (Bailiwick of Guernsey) Law, 2020.

Protected Cell Companies

A PCC is a single legal entity. It is one company with one board of directors, one memorandum and articles of incorporation and one company number.

A PCC comprises a "core" and any number of protected "cells". Those cells can be created simply by a resolution of the board of directors of the PCC, unless the PCC is regulated, in which case other requirements might apply.

The Companies Law does not dictate how the share capital of a PCC must be structured. Commonly, however, ordinary voting (or management) shares are issued in respect of the core and non-voting redeemable shares are issued in respect of each of the cells. The core shares will often carry voting rights at general meetings (including the right to appoint and remove directors) and the cell shares enjoy the economic benefits of participation in the PCC.

Shares issued in respect of each cell and the core constitute a separate class of shares. Accordingly, although the cell shares may not have voting rights at general meetings, they do have class rights which must be observed and can only be varied with the consent of the holders of that class of shares.

The key factor which differentiates a PCC from a traditional (non-cellular) company is the segregation of its assets. A PCC is able to limit its liability in respect of a particular contract to the assets of a particular cell or its core, rather than exposing all of the assets of the PCC to such liabilities, as would be the case with a non-cellular company. Accordingly, if the PCC is unable to satisfy the liabilities it owes to a creditor of a particular cell out of the assets of that particular cell, the creditor is not entitled to have recourse to the assets of other cells or the core. This crucial statutory protection afforded to the PCC and its creditors and shareholders under the Companies Law prevents losses in one cell of a PCC from affecting the solvency of, and the profits in, the other cells of the PCC and the PCC itself.

Notwithstanding this protection, the law is sufficiently flexible as to allow a PCC to implement an arrangement whereby one cell may be given rights in respect of the assets of, or obligations in respects of the liabilities of, another cell or the core (or vice versa) by way of a recourse agreement, should that be commercially desirable and/or appropriate. A recourse agreement requires the approval of the holders of shares of the relevant cell or the core by way of special class resolution. In addition, the directors of the PCC must make a declaration that no creditor would be prejudiced by the recourse agreement.

A PCC is a single legal entity and, accordingly, each individual cell is not itself a separate legal entity. In consequence, the cells of a PCC cannot, other than by way of a recourse agreement, contract with each other and a cell cannot contract with the core of the same PCC. These issues can be resolved by interposing a company (for example, a subsidiary of the PCC in question) to contract with both cells or the cell and the core to achieve the same economic outcome. Of course, cells of two different PCCs can contract with each other.

Incorporated Cell Companies

The ICC is based on the same principles as the PCC: segregation of assets and limited recourse of creditors to those assets in respect of liabilities owed by the ICC. An ICC comprises the ICC itself and any number of incorporated cells.

Unlike cells in a PCC, each incorporated cell of an ICC is a separately registered legal entity (as is the ICC itself). Each incorporated cell has its own board of directors, its own memorandum and articles of incorporation and its own company number. The Companies Law permits the composition of the board of directors of each incorporated cell to be different from the board of the ICC, provided that at least one of the directors of the incorporated cell is also a director of the ICC.

The rationale behind the creation of the ICC was to provide additional protection to creditors. Since each incorporated cell is a separately registered legal entity the segregation of assets within the ICC is strengthened. The fact that each incorporated cell is a separate legal entity also provides greater flexibility in relation to the ability to convert, migrate and amalgamate incorporated cells.

As each incorporated cell is a separate legal entity capable of contracting on its own behalf and with its own company number, incorporated cells may be more familiar to counterparties and authorities in jurisdictions that don't offer cell companies. ICCs may, therefore, be an advantageous structuring option for international businesses entering into cross-border transactions in multiple jurisdictions.

Like a PCC, the consent of the Guernsey Financial Services Commission is required for the formation of, and/or the conversion of a non-cellular company into, an ICC. The formation of an incorporated cell requires a special resolution of the shareholders of the ICC of which that incorporated cell will form part. In addition, the incorporated cell must be registered at the Guernsey Registry and certain document filing requirements will apply.

When a contract is made with an ICC it may be made with the ICC itself or with the relevant incorporated cell. Unlike a PCC, contracts can be made directly with the incorporated cell itself. The ICC has no power to bind any of its incorporated cells. It is possible for the ICC to own shares in one of its incorporated cells, but an incorporated cell is prohibited by the Companies Law from owning shares in the ICC.

As a consequence of each incorporated cell being a separately registered legal entity, incorporated cells can contract with each other. In consequence, there is no equivalent of the recourse agreement in respect of ICCs.

Conversions

There are a range of conversions possible with PCCs and ICCs. The process to effect a conversion is the same regardless of the particular transaction being considered: the consent of the Guernsey Financial Services Commission is always required as well as a special resolution of the shareholders of the entity which wishes to convert.

The conversions which are possible are:

• a non-cellular company may convert into a PCC;
• a non-cellular company may convert into an ICC;
• a PCC may convert into an ICC;
• an incorporated cell may convert into a non-cellular company;
• an incorporated cell may transfer from one incorporated cell company to another;
• a non-cellular company may convert into an incorporated cell and transfer to an ICC;
• a PCC may convert into a non-cellular company;
• incorporated cells of an ICC may be subsumed into their ICC and subsequently converted to a non-cellular company; and
• a protected cell of a PCC may convert into a standalone non-cellular company.

Notably, an ICC cannot convert directly into a PCC and a non-cellular company cannot convert directly into a cell of a PCC.

Since incorporated cells are separately registered legal entities, they are able to take advantage of Guernsey's migration and amalgamation legislation giving them the freedom to become registered in other jurisdictions and to amalgamate with other entities within and beyond Guernsey. This would not be possible with cells of a PCC because they are not separately registered legal entities.

Common uses for PCCs and ICCs

PCCs are often used, and indeed were originally introduced, to enable Guernsey licensed insurance managers to offer cells to third parties as rent-a-captives. In those circumstances, the core of the PCC is owned by and capitalised by the local insurance manager. The cell can be offered to a client to write an insurance contract for that client's benefit. Shares in the cell are issued to that client in order that the client has an economic interest in the cell and can benefit from any profits accruing from the business written. The cell will often reinsure its liabilities into the reinsurance market.

Both PCCs and ICCs are commonly used as umbrella investment funds, with each cell being used as an investment vehicle for different asset classes. The reduced costs of cellular companies can make it more economically viable for individual cells with lower investor capital to have access to the advantages of collective investment scheme status than would be the case if they were standalone entities. Each cell may have different investors, adopt different investment policies and restrictions and appoint different investment managers or advisers, while the PCC as a whole or the ICC is registered or authorised as a single collective investment scheme.

An insurance company structured as a PCC would usually issue at least £100,000 in core shares in order to meet the minimum capital requirement imposed on Guernsey licensed insurers under the Insurance Business (Bailiwick of Guernsey) Law, 2002 (the "Insurance Law"). Capitalising the core in this way saves having to individually capitalise each cell.

Conversely, collective investment schemes structured as PCCs tend to have a very small issued share capital in their core, often comprising only two management shares of £1 each. Cell shares are issued to investors, meaning that each cell may have an issued share capital of several million pounds.

A PCC is also often used in insurance transformer transactions whereby the cell of a PCC writes a derivative contract such as a credit default swap and the liability of the cell under that derivative contract is insured by an insurance company. The transformer provides the insurance company with exposure to a more varied form of investment product (the derivative) but through its traditional business method, the writing of an insurance policy.

ICCs are more popular for longevity transactions whereby an incorporated cell insures the liabilities of a pension fund and then reinsures that liability with a third party reinsurer. The separate legal personality of incorporated cells – and their consequent ability to migrate and amalgamate under the Companies Law – makes them more attractive than PCCs for this purpose.

While these are the most common purposes to which cellular companies are put, in fact, almost any company whose affairs are administered by a licensed person in Guernsey may be established as a cell company. The exception to this rule is that a cell company may not be a licensed insurance manager or intermediary, a bank, a licensed fiduciary or a person licensed to conduct controlled investment business under the Protection of Investors (Bailiwick of Guernsey) Law, 2020.

Insolvency

The general insolvency provisions under the Companies Law apply equally to PCCs and ICCs. A PCC can be wound up in the same way as a non-cellular Guernsey company. However, on the winding up of a PCC the liquidator must observe the special nature of the PCC. Since each cell of the PCC is not a separate company it cannot be independently wound up. Consequently, there are two other insolvency procedures applicable to cells of a PCC:

• Administration: administration is available to non-cellular companies, PCCs, cells of PCCs, ICCs and incorporated cells. This process is only available if the company or cell is insolvent and the court considers that the making of an administration order may achieve the survival of the company or cell or the more advantageous realisation of its assets.
• Receivership: receivership is only available in respect of cells of a PCC. This process is only available where the assets of a cell are likely to be insufficient to discharge the claims of creditors of the cell and the making of a receivership order by the court will result in the more orderly winding up of the business of the cell and the distribution of its assets to those entitled to have recourse thereto.

Notably, both of these processes are only available where the body in question is, or is likely to become, insolvent.  A solvent entity cannot avail itself of these processes. It is for this reason that most cells of a PCC issue redeemable shares so that, upon the conclusion of the business written by the cell, a solvent cell can be wound up through the redemption or repurchase of the issued redeemable shares.

Unlike a cell of a PCC, an incorporated cell can be wound up just like a non-cellular Guernsey company. 

If a cell of a PCC is unable to pay its debts, technically the PCC as a whole is unable to pay its debts and a creditor of that cell could apply to wind up the entire PCC because the PCC is a single legal entity. However, on any application to the Guernsey court to wind up a PCC on the basis that one of its cells is unable to pay its debts the Guernsey court would refuse to order the winding up of the PCC as a whole in recognition of the nature of a PCC.

Nonetheless, it is common for contractual documentation relating to PCCs to provide that in the event that the assets of a particular cell become exhausted any rights of the creditors against that cell are extinguished and any right of that creditor to petition for the winding up of the PCC is excluded.