Cell companies in Jersey
06 May 2014
This briefing provides a summary of the main provisions of Jersey law relating to protected and incorporated cell companies.
The concept of the cell company was introduced into Jersey by way of an amendment to the Companies (Jersey) Law 1991 (the "Companies Law") which introduced both the protected cell company (the "PCC"), and the incorporated cell company (the "ICC"), in February 2006.
The main advantage of cell companies is that they allow for the segregation of assets and liabilities between different cells, with the resulting advantage that in an insolvency situation the recourse of any creditors will be limited to the specific cell with which they transacted. As such, a single cell can become insolvent leaving the remaining cells (and cell company) unaffected and therefore able to operate as normal. This is explored further below.
The following paragraphs highlight some of the key features of PCCs and ICCs:
Separate legal personality
A PCC is a single legal entity within which numerous protected cells can be established. Although each protected cell must be separately identified, with a separate memorandum and articles of association and its own shareholders and directors, it is not a separate legal entity from the PCC itself and must transact business through the PCC.
In contrast, each cell of an ICC is a separate company and thus a separate legal entity which may transact and enter into agreements with third parties in its own name.
Segregation of assets and liabilities
The assets and liabilities of a PCC are divided between those which are cellular and those which are non-cellular. Cellular assets and liabilities are those which are attributable to particular protected cells. Non-cellular assets and liabilities are those belonging to, or owned by, the PCC in its own right and not attributable to any one of its protected cells.
The directors of a PCC must exercise their powers and discharge their duties so as to ensure that:
- the cellular assets of the PCC are kept separate and are separately identifiable from the non-cellular assets of the PCC; and
- the cellular assets attributable to each protected cell of the PCC are kept separate and are separately identifiable from the cellular assets attributable to other protected cells of the PCC.
Where a PCC enters into a transaction in respect of a particular protected cell, or incurs a liability arising from an activity or assets of a particular protected cell, a claim by any person in connection with the transaction, or liability, only extends to the cellular assets of that protected cell. However, the Companies Law enables protected cells, by making suitable provision within their articles of association, to permit the assets of one protected cell to be made available to settle the liabilities of another protected cell where this is desired. Where doubt exists, a PCC may apply to the court for a determination as to whether a liability of the PCC is to be met out of non-cellular assets, the cellular assets of a specific protected cell, or a combination of those assets.
In the case of an ICC, since each incorporated cell of an ICC is a company, and each incorporated cell contracts in its own name (as would any ordinary company), assets and liabilities are clearly confined within each incorporated cell.
Recourse of creditors
The recourse available to a creditor of a PCC is limited as follows:
- to non-cellular assets, if he has entered into a transaction with the PCC in its own right; or
- to the cellular assets of the protected cell with which he has transacted, if he has entered into a transaction attributable to a particular protected cell.
The Companies Law contains detailed provisions to ensure that, although protected cells are not themselves distinct legal entities, creditor recourse is limited to the assets of each protected cell. There are provisions preventing a cellular creditor seizing, attaching or otherwise levying execution against any of the assets of a PCC, whether in Jersey or elsewhere, which are not assets of the particular protected cell in respect of which he has transacted. Any benefit wrongfully obtained by the creditor must be repaid and any assets wrongfully seized or attached by him are, as a matter of Jersey law, automatically held on constructive trust for the relevant PCC, or protected cell, to which they are attributable and must be kept separate and identifiable by him.
Although creditors of a protected cell generally have recourse only to the assets of the protected cell in respect of which they have transacted, the directors are given some flexibility in this regard by the Companies Law, which provides that:
- subject to appropriate provision being made in the articles of the PCC, and to the directors making a statement of solvency regarding the financial position of the PCC itself, a PCC may meet any liability attributable to a particular protected cell out of the non-cellular assets; and
- subject to appropriate provision being made in the articles of a "paying" protected cell, and to the directors making a statement of solvency regarding the financial position of that protected cell, a PCC may meet any liability, whether attributable to a particular cell or not, out of the cellular assets of any other protected cell.
In the case of an ICC, the position of creditors of an incorporated cell is the same as for an ordinary company. Therefore, no creditor of an incorporated cell would have recourse, as a matter of law, against the ICC or another cell within the structure – no more than one company might have any recourse against an entirely unrelated company.
On the formation of a PCC or an ICC, the cell company will have its own memorandum and articles of association. The memorandum of the cell company must specify whether the cell company is a PCC or an ICC. Once incorporated, the cell company may, by special resolution, resolve to apply to the Registrar of Companies to create a cell, assigning a name and adopting a memorandum and articles of association of the new cell. Each cell is formed on the date stated in the certificate of recognition or incorporation (as appropriate) issued by the Registrar of Companies.
Shareholders of a cell do not acquire an interest through the PCC or ICC (as they would do in other jurisdictions), but acquire shares directly in the cell. The rights and the terms and conditions attaching to such cell shares are set out in the articles of association of the cell and not the articles of the PCC or ICC. There is no requirement or need for the PCC or ICC to take shares in a newly created cell and the Companies Law confirms that a cell is not, simply by virtue of being a cell, a subsidiary of a cell company.
The shareholders of a PCC are thus divided between its "non-cell members" and its "cell members". The Companies Law makes it clear that cell members are not, by virtue of that fact, shareholders either of the PCC itself or of any other cell; and similarly "non-cell members" are not, by virtue of that fact, to be treated as shareholders of a protected cell. Thus, for voting purposes, it is clear that a cell member of a PCC may not, in that capacity, vote at a general meeting of the PCC, and vice versa.
Directors, secretary and registered office
Each ICC and PCC and each incorporated or protected cell has its own board of directors, which may consist of different persons. The directors of a PCC have two specific additional duties to those otherwise imposed by law:
- they must ensure that the cellular assets of each protected cell are kept separate and identifiable from both non-cellular assets and the cellular assets of other protected cells; and
- they must ensure that when the PCC enters into an agreement with another party in respect of a protected cell, (a) that party knows, or ought reasonably to know, that the PCC is acting in respect of its protected cell, and (b) that the minutes of any meeting of directors held with regard to the agreement clearly record both that fact and that the obligation in (a) has been, or will be, complied with.
A director who fails to comply with these duties is guilty of an offence, punishable by a fine. Such a director may also incur civil liability.
It is essential to ensure that, in any contract entered into by the PCC in respect of a protected cell, the contract makes clear that fact and specifically puts the third party on notice of the basis on which the parties are entering into the contract.
Each incorporated or protected cell must have the same company secretary and registered office as its ICC or PCC. Whilst a PCC must maintain the register of directors and secretary in respect of its protected cells, each incorporated cell of an ICC will keep its own register but must inform the ICC of any change of director within fourteen days.
Accounts and annual returns
An ICC or PCC is responsible for including details of each incorporated or protected cell in its annual return. However, each incorporated or protected cell is responsible for preparing its own accounts.
A PCC, as a single legal entity, will generally submit a single tax return to the Jersey tax authorities. The tax liabilities of the PCC and its protected cells will, however, be separate. In the case of ICCs, since the ICC and each incorporated cell is a separate company at law, it is treated for all purposes as a separate entity with its own tax treatment and the ICC and each incorporated cell must file its own tax return.
The cell company is an attractive and much used vehicle in the captive insurance, investment and structured finance markets. Examples of financial structures where a cell company can provide a convenient and cost-effective vehicle include:
- multi-series securitisation programmes involving a series of debt issues by a single issuer backed by separate classes of assets;
- umbrella investment funds, where each cell can constitute a separate sub-fund with separate investment strategies and asset classes;
- in the captive insurance industry, where a cell company can act as a captive insurer to cover the risks of several unrelated sponsoring entities without exposing the capital associated with any one such entity to liability in connection with another; and
- as vehicles for family trust companies.
The Companies Law includes a number of provisions designed to reinforce the separateness of the cell companies and cells, in order to reinforce the ring fencing of assets and liabilities. Each cell company and cell has its own memorandum and articles of association, and its own shareholders, and shareholders invest directly in shares in the cells, rather than through the cell company, as is the case with protected cell vehicles in other jurisdictions. The Companies Law also clarifies that creditors transacting with a protected cell of a PCC only have the right of recourse against the assets of that protected cell and, again unlike certain other jurisdictions, do not have any rights against the non-cellular assets of the cell company. The ICC is perhaps considered even more robust as a structure due to the status of each incorporated cell as a separate company with separate legal personality.
These features ensure the independence of the cell companies and cells, provide as much legal certainty on the robustness of the cell company structure as is possible, and deal with a number of the issues found with cell companies in other jurisdictions.
Reduced complexity and administrative cost savings
A cell company structure is particularly suitable for repeat transactions in collective investment funds and securitisation programmes. Where a structure is required to be regulated, once the basic structure has been given regulatory consent, it is generally possible to add a new cell to the existing framework swiftly and with much reduced regulatory scrutiny. The administrative benefits can be considerable.
Protected cells may invest in other protected cells within the same cell structure. Cells within the same structure may have different features and share capital. An ordinary company may convert into a cell company and a cell of a PCC may be incorporated. Similarly, an incorporated cell may be incorporated as a company independent of its ICC. Cells may also be transferred between cell companies.
A separate legal regime applies to cell companies established and operating under Guernsey law (see our briefing "Cell companies in Guernsey").
 Companies (Amendment No.8) (Jersey) Law 2005
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Richard Le Liard
Partner | Jersey