Cell companies offer many benefits, but what are these? Morever, why would you want to use a cell company in the first place? These are some of the questions answered by Fiduchi's Associate Director of Corporate Services Terry Northcott.
A cell company is simply a company that can create one or more cells that contain assets and liabilities that are distinct from its own assets and liabilities and from those of any other cells that it may create. There are two types of cell company available in Jersey; the Protected Cell Company (PCC) and the Incorporated Cell Company (ICC).
PCCs were first developed in Guernsey in the late 1990s and were soon introduced by other jurisdictions once their benefits and advantages became apparent. In 2006, Jersey enhanced the cellular concept and became the first jurisdiction to introduce ICCs. Several other jurisdictions have now emulated Jersey's innovative ICC regime.
The core benefit is the clear and obvious ‘ring-fencing’ of corporate assets and the fact that this is done at a legislative level. Under the law, the assets and liabilities of a company can be segregated into different cells and, where one of those cells enters into a transaction, a claim by any person in connection with that transaction will only apply to that particular cell’s assets. In short (unless the articles of incorporation state otherwise), a creditor of a cell will have no right of recourse to the cell company’s other assets or to the assets of any other cell that may exist.
Correspondingly, investor returns of one cell are not affected by any negative returns within any other cell. Each cell pays its dividends based on its own assets, liabilities and profitability.
Jersey has designed its cell companies to be as flexible as possible whilst at the same time providing robust investor protection. Just as importantly, Jersey structures are transparent - with each cell and its constitution publically registered at the Companies Registry, and with the rights and interests of cellular owners set out in the articles of each cell. This provides clarity for all parties, including creditors, and helps reinforce the certainty of cellular segregation. This simple clarity is expected to assist courts in foreign jurisdictions recognise the cellular divisions that exist.
The law is clear that cells are not subsidiaries of their cell companies. Each cell may be formed with its own constitution and with a different share structuring. This means that cell companies can establish cells that issue par value shares at the same time as having cells with no par value or unlimited shares etc.
The cell company does not need to hold shares in a cell (and usually does not). However, despite this lack of an ownership relationship between the cell company and its cells, a cell may only change its constitution by way of a special resolution of its members and of the cell company – this allows the cell company to retain some control.
Each cell can have different shareholders and will have its own directors who will manage the cell (who may be different from those of the cell company). Each cell has the same secretary and registered office as its cell company but will have its own constitutional documents and registers.
Each cell must prepare a set of accounts in the same manner as any ordinary Jersey company. As such, the cell company and each cell are free to choose their own basis of preparation and acceptable accounting principles.
The law allows cell companies to convert to generic companies and generic companies to switch to cell companies. In addition, PCCs can convert to ICCs and ICCs can convert to PCCs, and individual cells can convert into ordinary companies.
The difference is straightforward but important. Each cell of an ICC is fully incorporated as a company in its own right. As such, each cell has separate legal personality from the ICC and any other cell. An ICC cell can hold assets in its own name, incur liabilities in its name and necessarily act in the same manner as any other Jersey company.
A PCC takes a different approach. The cells of a PCC are not a corporate body and do not have a legal personality separate to the PCC. However, special provisions within the law require a protected cell to be treated as though it is a separate legal entity. The PCC attributes assets either to itself or to different cells, and anything so attributed is ring-fenced under the law from the PCC’s own assets and those of other individual cells. In this way, the law protects the assets of any one cell, and the non-cellular assets of the cell company itself, against the liabilities of other individual cells.
Traditionally, cell companies were used for captive insurance structures, and then for collective investment fund structures and securitisation structures. Indeed, many jurisdictions limited the use of cell companies to these specific industries. Jersey imposes no such limitation, and although, as a matter of policy, cell companies should not be used for ordinary trading activities, a Jersey cell company may be established for any lawful purpose.
This flexibility has seen cell companies used in Jersey for increasingly different structures such as very private funds, umbrella funds, property holding structures, Sharia-compliant structures, financial guarantee vehicles, SPVs and joint ventures.
At Fiduchi, we have managed cell companies for:
It is expected that we will see increased use of cell company structures within the Jersey Private Fund Regime (link to JPF guide), where the ability of the cell company to efficiently manage the segregated assets of different investors through clearly segregated cells may be considered especially attractive.
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