Protected Cell Companies

Nigel Feetham is a partner at Hassans International Law Firm. His area of practice includes insurance, funds and structured finance. He has played a major part in some of the most significant developments in the Gibraltar finance sector. Grant Jones is an insolvency accountant partner with Cooper Parry LLP. He also practises as an attorney, in-house with a UK hedge fund and as a consultant to the UK firm of Taylor Vinters and the Gibraltar firm of Ellul & Co, as well as having his own arbitration practice. He is a member of the Governing Council of the ICAEW, President of the London Society of Chartered Accountants and a Special Professor of Law at Nottingham University.

Acknowledgments v
About the Authors vi
Preface to the Second Edition. vii
Foreword to the Second Edition. xi
Foreword to the First Edition. xv
Contents.. xix
Tables of Authorities xxviii
Introduction.. 1
1. RING FENCING AND THE EVOLUTION OF THE CELL COMPANY 3
1.1.... The Cell Captive. 6
1.2.... The Cell Captive structure: how does it work?. 7
1.3.... Claims Limitation. 9
1.4.... Unfair Contract Terms Directive. 10
1.5.... Why the need for the protected cell?. 13
1.6.... Repackaging. 17
1.6.1..... What is a repackaging?. 18
1.6.2..... Asset Swap.. 18
1.6.3..... The Special Purpose Vehicle. 19
1.6.4..... Credit-linked Notes. 20
1.7.... Funds. 23
2. THE ADVENT OF THE PCC. 29
2.1.... The Challenge. 31
2.2.... Substantive versus procedural 33
2.3.... Location of assets, custodian and Collateral Directive. 37
2.4.... Beware of claims that may not be limited! Especially involuntary creditors 39
2.5.... Provisions of Gibraltar (and Guernsey) PCC legislation. 40
2.5.1..... Requirements on incorporation/conversion.. 40
2.5.2..... Duty to inform third parties. 41
2.5.3..... Separation of assets. 41
2.5.4..... Share capital 43
2.5.5..... Administration.. 43
2.5.6..... Cells are not legal entities. 45
2.6.... Entrenchment 45
2.7.... Market acceptance and respecting the intention of the parties. 46
3. SERIES LLC: AN ANALOGOUS BUSINESS FORM TO THE PCC. 49
3.1.... Delaware. 49
3.2.... US Case-law.. 57
3.3.... SEC Prouncement 61
3.4.... Statutory segregation under Italian law.. 63
3.4.1..... “Allocation of dedicated assets to specified business activities” 66
3.4.2..... “Financing allocated to a specific business activity”. 67
4. THE INSURANCE COMPANY PCC: WITH A FOCUS ON THE EU.. 69
4.1.... What is a captive?. 70
4.2.... Application of the PCC concept 71
4.3.... Lloyd’s of London and the PCC. 74
4.4.... Fronting versus Risk Bearing Cell 77
4.5.... Future developments. 80
4.6.... Solvency II 82
4.7.... Summary. 84
4.8.... Documentation. 84
5. MANAGING A PCC CAPTIVE. 85
5.1.... Regulatory. 89
5.2.... Branch or Services?. 91
5.3.... Will the intermediary/service provider be subject to the direction and control of the Insurer? 92
5.4.... Is the intermediary able to commit the Insurer?. 92
5.5.... Has the intermediary received a permanent brief from the Insurer? 93
5.6.... Freedom of Services. 93
5.7.... Governing law and jurisdiction clauses. 95
5.8.... Should the PCC structure be offensive to a regulator?. 100
5.9.... Who should perform the compliance function?. 101
5.10.. Cell Management Contract 101
5.11.. Directors’ Duties. 102
5.12.. Checklist of Dos and Don’ts. 103
6. GROWING MARKET FOR THE PCC. 105
6.1.... The PCC and the Investment Fund. 105
6.2.... The PCC in the world of Structured Finance. 113
6.3.... Portfolio transfers and the potential use of the PCC. 115
6.4.... Is the use of the PCC a possible solution for the UK pensions problem? 116
6.5.... Shariah law and the PCC. 117
6.6.... The PCC Life Company. 118
6.7.... The Credit Crunch and Madoff 121
6.8.... Could a PCC redomicile between jurisdictions or amalgamate? 123
6.8.1..... Why should a PCC be objectionable to a foreign jurisdiction? 128
7. BASIC INSOLVENCY PRINCIPLES RELEVANT TO PCCs. 133
7.1.... Pari Passu. 133
7.1.1..... Pari Passu and PCCs internationally. 133
7.2.... Hotch pot 134
7.3.... ‘Pro-Creditor’ v ‘Pro-Debtor’ 134
7.4.... The Insolvency Practitioner 136
7.5.... Internationalism v Nationalism.. 136
7.6.... Seat Theory v Centre of Main Interest (COMI) 137
7.6.1..... Rescue Culture. 138
7.6.2..... Transnational and International Insolvency Regimes. 139
7.6.3..... Preferential or priority creditors and involuntary creditors. 140
7.6.4..... Secured or in rem creditors. 142
7.6.5..... Antecedent transactions or detrimental acts. 143
8. EU REGIMES: AN INTRODUCTION.. 145
8.1.... Background. 145
8.2.... Relevant EU Directives and Regulations; an introduction. 146
9. THE EU REGULATION: AN OVERVIEW.. 149
9.1.... The EU Regulation: a detailed analysis of its PCC relevant provisions 149
9.1.1..... Introduction.. 149
9.1.2..... Article 1. Ambit 149
9.1.3..... The initial question.. 149
9.1.4..... Article 3 - international jurisdiction - the centre of main interest or COMI. 153
9.1.5..... Article 4 - law applicable - Renvoi 155
9.1.6..... Article 5 - third parties rights in rem, i.e. secured rights of third parties. 156
9.1.7..... Article 6 - set-off 159
9.1.8..... Article 11 - effects on rights subject to registration.. 160
9.1.9..... Article 13 - detrimental acts (or “antecedent transactions”) 160
9.1.10... Article 20 - return and imputation - “the hotch pot rule”. 161
9.1.11... Article 26 - public policy. 162
9.1.12... Article 32 - exercise of creditor rights. 163
9.1.13... National exceptions within the EU.. 164
9.2.... Part 1 of the Gibraltar PCC Act of the EU.. 168
9.2.1..... Section 3 - PCC “Formation and Attributes”. 168
9.2.2..... Section 6 – “the position of creditors”. 168
9.2.3..... Section 8 – “Cell shares and share capital”. 171
9.2.4..... Section 13 – “Liability of cellular assets”. 171
9.2.5..... Section 15 – “Company to inform persons they are dealing with... [PCC]” 171
9.3.... Parts II (sections 19-23) and III (sections 24-28) - Receivership and Administration Orders 172
9.3.1..... Introduction.. 172
9.3.2..... The three insolvency processes under the Gibraltar PCC Act 172
9.3.3..... Gibraltar and its relationship to the UK re the EU Insolvency Regulation 173
9.3.4..... The Gibraltar liquidator process. 174
9.3.5..... The Gibraltar receiver process. 176
9.3.6..... The Gibraltar administrator process. 177
9.4.... THE EU Insurance Insolvency Directive. 178
9.4.1..... Background.. 178
9.4.2..... The EU Insurance Insolvency Directive and its Recital: its general aims, purpose and ambit 180
9.5.... The EU Insolvency Insurance Directive: Articles. 182
9.5.1..... Article 1. 182
9.5.2..... Article 2 - definitions. 183
9.5.3..... Article 4. 184
9.5.4..... Article 9. 184
9.5.5..... Article 10. 184
9.5.6..... Articles 19-26: provisions common to reorganisation measures and winding-up proceedings 185
9.5.7..... Article 27 - Administrators and liquidators. 185
9.5.8..... Article 30 – “Branches of third country insurance undertakings” 186
9.6.... The EU Insurance Regulation and the UK.. 186
10. UNCITRAL MODEL LAW.. 191
10.1.. Background. 191
10.2.. The Title – “Model Law”, etc. 193
10.3.. Article 1 of the Model Law – Scope of Application. 193
10.4.. Article 2 – “Definitions”. 194
10.4.1... Proceedings. 194
10.4.2... Debtor. 196
10.5.. Article 5 – Foreign Representative. 198
10.6.. Article 6 – Public Policy Exception. 198
10.7.. Articles 11 and 12 – Foreign Representatives and Proceedings 198
10.8.. Article 13 – Creditor Discrimination. 198
10.9.. Article 16 – Presumptions Concerning Recognition. 199
10.10 Article 17 – Recognition and Relief Re Foreign Proceedings. 209
10.11 Articles 21 and 22 – relief granted and creditor protection. 210
10.12 Articles 25 and 27 – Cooperation and Direct Communication. 215
10.13 Article 32 – “Hotch pot”. 215
11. THE COMMONWEALTH INSOLVENCY REGIME AND OTHER UK MATTERS 217
11.1.. Section 426 of the Insolvency Act 1986. 217
11.1.1... Section 426: an introduction.. 217
11.1.2... What Commonwealth Jurisdictions are covered by Section 426 and have PCC legislation? 217
11.1.3... Interaction between Section 426, and the Model Law and the EU Regulation 219
11.1.4... What is the “insolvency law” within section 426. 220
11.1.5... Court Cooperation.. 220
11.1.6... Given a section 426 application by a PCC IP from a Designated Territory, how could a UK court react? 220
11.1.7... Schemes of Arrangement: Section 427 and alternative statutory approach to pari passu 224
11.1.8... Concluding thoughts. 226
11.2.. Part V of the UK Insolvency Act 1986 (""Part V"") 227
11.2.1... Introduction.. 227
11.2.2... Part V grounds to “wind up”. 228
11.3.. Part V and limited liability. 229
11.3.1... PCC jurisdictions and their claims to extraterritoriality. 229
11.3.2... UK Company Directors Disqualification Act 1986 (“CDDA”) and Similar Provisions 231
12. DIRECTOR LIABILITY and PCC INSOLVENCIES. 233
12.1.. Director liability – notification and segregation liabilities. 233
12.1.1... Introduction.. 233
12.1.2... Notification liability. 233
12.2.. Segregation liability - background. 237
12.2.1... Segregation Duties: Directors and IPs: a Case of Conflict of Interest 240
12.2.2... Non-Recognition Liability. 242
12.2.3... What Constitutes a Director?. 244
12.2.4... What constitutes a Shadow Director?. 247
12.2.5... What constitutes behaviour serious to warrant CDDA Prosecution? 248
12.2.6... Corporate directors. 249
13. PIERCING THE CORPORATE VEIL. 251
13.1.. Introduction. 251
13.2.. Insurance and third parties. 253
13.2.1... Sham: generally. 255
13.2.2... US Shams: an introduction.. 255
13.3.. Cell migration. 256
13.4.. International factors influencing ‘piercing the corporate veil’. 260
13.4.1... Groups. 261
13.4.2... Alter-ego. 262
13.4.3... Involuntary versus voluntary creditors. 262
13.4.4... Under-capitalisation.. 263
13.5.. Financial centres and/or OFCs. 263
13.6.. PCC conversion. 264
13.7.. Minimising measures. 264
13.8.. Antecedent transactions and detrimental acts. 265
14. PCC CELLS: AN ASSET IN AN INSOLVENCY?. 269
14.1.. The PCC as an Asset Protection Trust (APT) and “Antecedent Transactions” generally: The non-traditional uses of PCCs. 269
14.2.. Comparative PCC insolvency priorities. 272
14.2.1... Introduction.. 272
14.2.2... Different priorities. 273
14.2.3... The Jersey Difference. 277
14.2.4... The US Difference. 279
14.2.5... The Bermudan Difference. 280
14.2.6... Preferential Liabilities and PCCs. 280
14.2.7... Shareholder Liabilities. 281
14.3.. Expenses in a PCC insolvency. 281
14.3.1... IP expenses and priority allocation in a PCC or PCC cellular insolvency 281
14.3.2... The Messenger Insolvency. 282
14.3.3... How do PCC regimes address IP costs?. 283
14.3.4... Proprietary claims versus IP fees. 284
14.3.5... If PCC statues address IP fees, how do they do it?. 284
14.4.. Cellular structures and in rem or secured rights. 286
14.4.1... Proprietary Claims – the issue of subordination.. 286
14.4.2... Conflict of law: substance and procedure. 286
14.4.3... In rem v in personam liability. 288
14.5.. A consideration of UK cases and pari passu. 289
15. TAX TREATMENT OF A PCC. 293
15.1.. Tax creditors. 293
15.2.. Local v Foreign; State v Federal tax Treatment of a PCC. 293
15.3.. International Taxation and the PCC. 297
15.4.. Tax issues Regarding a Cell Captive. 307
15.5.. Concluding remarks. 308
16. WHAT ARE THE GROUP ACCOUNTING ISSUES?. 309
16.1.. Group protected cell companies - accounting considerations under International Financial Reporting Standards 309
16.2.. Group consolidation considerations. 310
16.2.1... Group general considerations. 310
16.2.2... Group special purpose entities. 311
16.2.3... Group summary. 313
17. WHAT ARE THE PCC and CELLULAR ACCOUNTING ISSUES?. 315
17.1.. Article 127 YE - Annual return in respect of cells. 315
17.2.. Article 127YF of the Law is repealed. 315
17.3.. Article 127YG Accounts of cell companies. 315
18. CONCLUSIONS. 317
18.1.. Insolvency conclusions. 317
18.2.. General Conclusion and Summary. 319
Appendix 1: Specimen Articles and Memorandum for an insurance PCC 321
Appendix 2: Specimen Articles of Contractual Cell Company 367
Appendix 3: Specimen Memorandum and Articles of Association of a PCC Umbrella Fund 405
Appendix 4: Specimen Private Information Memorandum of a PCC Umbrella Fund 461
Appendix 5: The Reinsurance Assignment Agreement. 523