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Guernsey acts quickly to amend legislation to protect integrity of PCC Ordinance after PCC expert raises concerns

On the 15 June 2016, Nigel Feetham, partner of Hassans, published an article on a judgment concerning PCC cells recently handed down by the Courts of Guernsey. The case arose from orders made by the Court putting certain entities into administration management and/or liquidation based on regulatory concerns. The decision is Global Mutual Fund PCC Limited (In Administration) et al and Guernsey Financial Services Commission.

Nigel highlighted his concerns that the Court’s ruling on the allocation of costs arising from the administration procedure produced doubts over Protected Cell Companies segregation of assets and liabilities and could have unintended consequences.  A copy of the article can be found here.

In his commentary on the Court ruling Nigel stated:

“Perhaps had the Court, at the earlier application stage, had the benefit of the argument raising the objection as to any allocation shortfall, as it had at the directions hearing, it may have reached a different decision, allowing the Guernsey legislature an opportunity to make such amendment to the PCC Act as was necessary before it considered the application again.

In my book “Protected Cell Companies: A Guide to Their Implementation and Use” (2010, 2nd edition, Spiramus Press), co-authored with Grant Jones, on the issue of IP costs we pointed out “A PCC’s raison d’être is cellular integrity and cellular integrity should even extend to IPs.” (p. 284).

Indeed, promoters, investors and contractual parties alike transact with a PCC on the basis that a cell is only liable to pay for liabilities incurred on its behalf. To do otherwise is to undermine the statutory ring-fencing which lies at the heart of the PCC regime. Worse still, this could send a contradictory message to foreign Courts who in any potential foreign proceedings would be asked to respect the ring-fence by applying PCC legislation, especially on insolvency, whilst ignoring their own domestic laws. If PCC legislation is to be treated as substantive and law (as opposed to rules of procedure), the Courts in the PCC jurisdiction of incorporation have to apply the cellular firewall in accordance with the terms of the PCC legislation. If they do not (as appears to have been the case here), there is a danger that a foreign Court will also do the same and not abide by the cellular priority rules. In my view, it could therefore have a negative consequence if a foreign Court when reviewing the Guernsey PCC regime came to the conclusion that Guernsey judicial authorities introduce uncertainty as regards the statutory segregation of assets and liabilities between cells and/or blurred the distinction between substance and procedure. There is no reason, however, why the matter cannot be clarified by the introduction of an express provision in the Guernsey PCC Act itself in respect of the allocation of IP/administration managers costs.”

The article was widely reported in leading insurance journals, and, as a result, the matter was being followed closely by the international cell captive industry.

Since then the Guernsey legislature has acted quickly to amend the relevant legislation (Protection of Investors (Administration and Intervention) (Bailiwick of Guernsey) Ordinance, 2008). The amendment was brought into effect on the 25 July 2016. The new statutory provision makes it clear that the Courts power under the Ordinance to make orders on an application for directions is subject to the PCC statute:

“(3A) For the avoidance of doubt, the powers conferred on the Court by subsection (3) are, except where express provision to the contrary is made by any enactment, subject to the provisions of Part XXVII of the Companies (Guernsey) Law, 2008 (“protected cell companies”).”

The amending statute is the Protection of Investors (Administration and Intervention) (Bailiwick of Guernsey) (Amendment) Ordinance, 2016.

Nigel Feetham said: “Guernsey’s decision to move quickly with this amendment to protect the integrity of its PCC legislation demonstrates the Island’s awareness of its competitive position. Courts do not always get it right but where this relates to an important sector of financial services (such as in this case) local legislatures must be prepared to step in to remove any future uncertainty. To my mind the words “for the avoidance of doubt” are intended to signify that the amendment simply clarifies what was originally intended and thereby also sends a message to the local courts that it is very important for the segregation of assets and liabilities in PCC legislation to prevail in the event of a conflict with other statutory enactments. At the same time, the Guernsey legislature has corrected any uncertainty that may arise in foreign court proceedings, again, a concern I highlighted in my article.”

“Admittedly, this was a difficult case for any court to have decided because the judge’s original order had not been previously challenged and no objection was raised by the regulator. Although there was a conflict between the PCC and administration statutes, the Court was applying the administration legislation before it and any unintended consequence would not have been apparent beyond the submissions of the parties to the proceedings. The Court certainly deserves credit for issuing a written judgment, which itself is public.”

Catherine Knock, Head of Marketing at Hassans said: “Nigel spends a lot of time thinking and writing about, and generally following legal developments in the area of, segregated business forms. This particular article posted on Mondaq received a high number of views and was quoted widely elsewhere. Through his thought-leadership at an international level, Nigel has become a leading voice on the subject of Protected Cell Companies around the world. Last year his co-authored book “Protected Cell Companies: a Guide to their Implementation and Use” was cited by the US Federal Court in PAC RE 5-AT v. AMTRUST NORTH AMERICA, INC., No. CV-14-131-BLG-CSO (D. Mont. May 13, 2015).”

Published: Tuesday 9th August 2016.

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