Protected Cell Company Structure Cited In Employment Case

Scott v EC Maritime PCC Ltd (Debarred) [2016] UKEAT 0032_16_1010 was an appeal against a Judgment of the Southampton Employment Tribunal. The Claimant appealed from that ruling on two grounds, but for the purposes of this article it is the first ground of appeal that is of interest to the present writer, namely, whether the Employment Tribunal erred in concluding that the Respondent’s failure to look for alternative work in other protected cells of the Protected Cell Company of the Respondent did not render the dismissal unfair.

A copy of the judgment can be found here: http://www.bailii.org/uk/cases/UKEAT/2016/0032_16_1010.html

Whilst the case does not provide any important judicial insight into PCCs, it is one of very few cases anywhere in the world where a dispute concerning a PCC has come before a foreign court.

The background to the protected cell company structure is set out in the Appeal Tribunal judgment and is quoted below:

“3. The Claimant [upon leaving his former employment] made a career in the security industry; specifically, from 2011, working as a Maritime Security Officer (“MSO”).  Initially he had worked for an organisation [the named organisation] and was deployed on various clientsships, essentially as an armed guard.

4. Towards the end of 2011, [the named organisation] transferred its MSOs – including the Claimant – to the Respondent, a Guernsey-registered company structured on a protected cell basis. A protected cell company has a central hub or core and a number of separate cells into which the company can segregate its assets whilst remaining one single legal entity (see paragraph 10 of the ETs Decision in this regard). The Respondent thus contracted to provide MSOs to [the named organisation] but also to other companies working in the maritime security industry.  The Claimants employment duly transferred to the Respondent, and he was employed on a rolling fixed-term contract from 1 February to 31 January each year, the last such contract effective from 1 February 2014 and then due to expire on 31 January 2015.”

The judgment sets out the facts and dispute in question. Suffice it to say for present purposes that by his Employment Tribunal claim the Claimant pursued complaints of unfair dismissal and breach of contract.  Importantly, the Employment Tribunal rejected the Respondent’s contention that it did not have territorial jurisdiction to determine the Claimant’s unfair dismissal complaint and further found that the Claimant had sufficient continuity of service to enable him to pursue that claim.

What was the Claimant’s submission with regards to the cell company structure? Again this can be surmised from the judgment:

“14. On behalf of the Claimant it is submitted that the ET erred in refusing to make a finding on the main plank of the Respondents defence, its assertion that it was illegal as a matter of Guernsey law for a search for alternative work to be conducted elsewhere within the other cells.  Such material as the Respondent had adduced in this regard did not prove its point, as the ET would have been bound to find had it investigated that question.  That in turn would have meant the ET would have been bound to find that the failure to look for alternative work rendered the dismissal unfair.”

The Appeal Tribunal, however, found:

“18. On the specific issue of alternative work, I am not persuaded that the ET necessarily erred in declining to investigate further the precise legal position of the protected cell company.  I do not read its conclusion as dependent upon an acceptance of the Respondents position in that regard.  Although it apparently considered it relevant that the Respondent as a matter of practice – even if not as required by law – did not look to see if alternative work was available in other cells of the company, that was not the determining factor in the ETs assessment of fairness, hence the use of the word “however” at the start of paragraph 70.

19. It is, moreover, paragraph 70 that explains the ETs crucial finding: that there simply was no evidence of alternative work being available. It was that, coupled with the Respondents cell structure, that meant the failure to look for alternatives did not render the dismissal unfair.”

The appeal was nevertheless allowed on the second ground of appeal and the matter was therefore remitted to a freshly constituted Employment Tribunal for re-hearing. It is of note that the judgment states “Having failed to enter a Respondents Answer or to respond to the EATs correspondence, the Respondent was debarred from participating in the appeal.” No information is given as to why this was so.

We can make several general observations from the perspective of the cell company regime and cell captives specifically:

(1). Here it is interesting to see that a Protected Cell Company (incorporated in Guernsey) is used outside the traditional areas of insurance and structured finance. The company appears to be an offshore employer within the maritime security industry, providing security officers to a number of maritime security companies. The offshore nature of the commercial arrangements were clearly not a bar to the English Employment Tribunal assuming territorial jurisdiction. This is a salutary example of the fact that the authors’ mantra in my co-authored book of ‘keep everything generally within the PCC jurisdiction’ is not always possible and may not therefore prevent proceedings in a foreign jurisdiction.

(2). English law does not currently have Protected Cell Company legislation in the Guernsey sense  and it is always a concern that a foreign court unfamiliar with the cell company regime might view it with a degree of caution (essentially as a statutory creature of ‘some offshore island’). In this case, from my reading of the law report, neither the Employment Tribunal nor the Appeal Tribunal had difficulty in accepting the cell company structure. It evidences that the concept has now gone mainstream, so to speak. Indeed, it is no coincidence that the UK itself is now proposing to implement PCC legislation for ILS insurance business.

(3). There is no information in the judgment on what assets would be available to satisfy a potential claim against the relevant cell or indeed whether any such claim could be discharged from the assets of the core (depending, of course, on the underlying manner of contracting). Nor whether any assets are situated in the UK (or solely in Guernsey). In the case of a captive insurance cell structure, the parties to the contractual arrangements are, typically, corporate entities (as insured/policyholders), and the affairs of the company are managed locally, typically, by a captive manager. As such, the Protected Cell Company will usually have no employees and where it does these employees are usually (if not exclusively) based in the jurisdiction where the captive is incorporated (consequently, any employment dispute would be heard and determined locally).

(4). A Protected Cell Company (whereby a promoter provides services to different legally segregated economic interests within a single legal entity) should, in my opinion, consider litigation as a distinct risk (within its risk register) facing the cell structure, and consequently, its mitigation. Litigation risk includes, in relation to a particular cell, the risk that the cell might (for whatever reason) not defend legal proceedings. This could have serious consequences for the Protected Cell Company as a whole since undefended legal action may result in a judgment being obtained against it, and in extreme cases, the winding-up of the company (subject to local legislation). In a cell captive, aside from risk mitigation clauses ordinarily inserted into all contracts with third parties, regulators would generally expect the ‘core’ to fund any litigation expense to protect the integrity of the Protected Cell Company (as a legal entity) if, for example, assets are not available within the relevant cell to allow the company to do so. Given the level of regulatory capital an insurer is required to maintain within the company, this is less of a risk for a cell captive PCC than it might be for other kinds of unregulated trading activities.

3rd January 2017

Nigel Feetham is a senior partner at Gibraltar law firm Hassans and the co-author (with Grant Jones) of “Protected Cell Companies: a Guide to their Implementation and Use” which was cited by the judge in PAC RE 5-AT v. AMTRUST NORTH AMERICA, INC., No. CV-14-131-BLG-CSO (D. Mont. May 13, 2015). He is also a Visiting Professor of law at Nottingham Trent University.