Originally published in Longtail's A Guide to International Finance Centres, What Chinese Investors Need to Know, March 2011

Alan Chick, Chairman of Richmond Fiduciary Group, considers the structuring opportunities made possible by Guernsey's new and innovative companies legislation.

On 1 July 2008, the Companies (Guernsey) Law 2008 (the Law) was introduced. The Law consolidated much of the companies legislation enacted in the wake of the Companies (Guernsey) Law, 1994, and many of the former law's provisions remain in the updated statute.

Provisions were made in the Law for both Protected Cell Companies (PCCs) and Incorporated Cell Companies (ICCs). The benefit of these cellular structures is the ability to segregate and manage risk; features I will expand upon below. The Law also streamlined the administrative procedures for amalgamating a company and migrating a company in or out of Guernsey by abolishing the requirement for Royal Court approval. Both procedures will now require the consent of the Guernsey Financial Services Commission (GFSC), followed by an application to the Guernsey Registry.

Types of Guernsey Company

There are five main types of company which can be formed under Guernsey company law:

  1. Company limited by shares;
  2. Company limited by guarantee;
  3. Unlimited company;
  4. Mixed liability company; and
  5. Cellular company

The first four company types mentioned above are generally referred to as 'non-cellular' companies. The fifth type of company is referred to as a 'cellular' or 'cell' company. As mentioned above there are two types of cell company: Protected Cell Companies and Incorporated Cell Companies. In this article, I am going to focus on these cell companies because their use is becoming increasingly common in corporate structures. It should be noted that PCCs and ICCs can only be administered by entities in Guernsey licensed by the GFSC.

The Protected Cell Company

The PCC is a single corporate entity structured to segregate the assets and liabilities of different cells (all of which could have different owners) from each other and from the general assets of the main body or 'core' of the PCC (which may be owned by a party unconnected to the individual cell owners).

Alternatively the core and cells may be owned by the same individual or entity. Section 441 of the Law provides that the creation by a PCC of a cell does not create, in respect of that cell, a legal entity or person separate from the PCC itself even though a PCC may have created one or more cells.

Subject to the articles of incorporation of the PCC, a cell is established by board resolution of the PCC. A PCC may in respect of its cells create and issue cell shares. The proceeds of issue will form part of the cellular assets. The provisions of the Law apply to cell shares and cell share capital as they would apply to shares and share capital of a non-cellular company. In the case of dividends and distributions, regard must be had to the assets and liabilities of the relevant cell, or, as the case may be, the core.

Subject to the terms of any recourse agreement, where any liability arises which is attributable to a particular cell, the cellular assets attributable to that cell are liable and it is not a liability of the protected assets i.e. assets held in the core or other cells. Similarly, where any liability arises which is attributable to the core, the core assets are liable and it is not a liability to be met from the cellular assets.

Any liability not attributable to a cell is a liability of the core. Therefore, it is important to identify the cell to which the liability relates.

Extra-territorial effect

In respect of the liability of cellular and core assets, the key aspects of the segregation of assets and liabilities are expressed to have extra-territorial application. In insolvency proceedings in two jurisdictions, this raises issues of conflicts of law and whether another jurisdiction would accept the extraterritorial effect.

The usual approach in the case of double insolvency is to treat the insolvency proceedings in the place of incorporation as the principal insolvency and to treat the additional insolvency proceedings as being ancillary. This would suggest that in any double insolvency affecting a PCC, the protected cell structure would be respected i.e. the place of incorporation will ultimately determine the attribution of assets and liabilities.

However, where either significant assets of a cell are held in a jurisdiction other than Guernsey or liabilities are incurred under foreign laws, foreign legal opinion should be obtained on whether a foreign court would accept the cellular integrity of the PCC in that jurisdiction. International jurisdictions like the United Kingdom do in fact recognise and provide for the PCC concept in their tax framework.

The Incorporated Cell Company

An ICC is an extension of the principle of a PCC with a number of essential differences. The significant difference is the existence of separate legal entities (incorporated cells (ICs) with their own legal personality) within another legal entity (the ICC).

Unlike a PCC which has separate and distinct 'cells' whereby the assets and liabilities of a cell are legally segregated from those of other cells, an ICC effectively houses one or more incorporated cells within it, each ring-fenced by virtue of its separate legal existence from other ICs and the ICC itself.

It should, however, be noted that the IC is not, by virtue of its incorporation, deemed to be a subsidiary of the ICC.

A cell is created by the ICC passing a special resolution. Once the resolution has been passed, the memorandum and articles of association adopted by the resolution are filed with the Registry. Each ICC and IC therefore has its own memorandum and articles of association.

There is only one board of directors and one registered office for the ICC and its IC(s). The directors must ensure for any transaction entered into that it is clearly stated whether the transaction is entered into on behalf of an IC or the ICC itself and, if the transaction is entered into on behalf of an IC, which IC.

The directors of an ICC must keep the assets and liabilities of the ICC separate and separately identifiable from the assets and liabilities of the ICs and the assets and liabilities of each IC separate and separately identifiable from other ICs. The Law does, however, allow the assets of the ICC and ICs to be collectively invested or managed, provided that they remain separately identifiable.

The ICC provides additional inter-cell security in the event of insolvency and unlike the PCC permits cells of the ICC to contract with each other.

To transfer ownership of the IC to an unconnected third party, the directors simply pass a resolution to terminate the association with the ICC and the IC becomes a stand-alone entity under the control of the new owner and a newly appointed board of directors.

The above is a very brief overview of two types of company available from service providers in Guernsey which may be of interest to those looking to invest within and outside of China. The PCC, if structured correctly, could be used to satisfy the requirements of the CFC rules and the ICC could be used in conjunction with the Private Trust Company structure mentioned by one of my fellow Guernsey authors in his article.

For more information about Guernsey's finance industry please visit www.guernseyfinance.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.