Protected Cell Companies

Protected Cell Companies

A guide to their implementation and use

Protected Cell Companies is a valuable resource for practitioners who work with this important new business form. The book provides comprehensive guidance on such complex issues as insolvency, veil-piercing, tax, and accounting, use for captive insurance companies,  and as a bankruptcy remote vehicle for special purpose vehicles, credit derivatives, and open-end investment companies.

Category: Business, Finance

This Second Edition of Protected Cell Companies is a valuable resource for practitioners who work with this important new business form. The Protected Cell Companies Act was first introduced in Guernsey in 1997 and other jurisdictions have followed this path. This gave rise to the First Edition of this book which contained the legal analysis essential to further use and development. The book provides comprehensive guidance on such complex issues as insolvency, veil-piercing, tax, and accounting. As lawyers and business people have come to understand the PCC its uses have spread from its origins in captive insurance companies to providing a bankruptcy remote vehicle for special purpose vehicles, credit derivatives, and open-end investment companies. The authors show that PCCs are now widely used by insurers, insurance brokers, banks, investment and fund managers and international tax planning advisers. They also describe the use of PCCs and related devices not only in their originating jurisdictions but in the EU, the US and around the world. This new edition contains substantial additions but with the same practical emphasis of the original book.

Protected Cell Companies is a valuable resource for practitioners who work with this important new business form. The book provides comprehensive guidance on such complex issues as insolvency, veil-piercing, tax, and accounting, use for captive insurance companies,  and as a bankruptcy remote vehicle for special purpose vehicles, credit derivatives, and open-end investment companies.

Contents

 

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

 

Index  535

Imprint
Spiramus Press
Publisher
Spiramus Press
Language
English
Product Format
Paperback
Dimensions
234 x 156
Publication Date
25 Mar 2010
Number of Pages
574
ISBN
9781904905929
Edition
2
Product Format
PDF
Publication Date
28 May 2010
ISBN
9781907444340