Reflections on the 20th anniversary of PCCs

PCC legislation was first enacted in Guernsey in 1996. This was primarily to encourage growth of the captive insurance industry. In some jurisdictions a PCC is also known as a ‘Segregated Accounts Company’ or ‘Segregated Portfolio Company’. The clear statutory intention of the cell regime is that the assets attributable to a particular ‘cell’ (a legal fiction) are not available to meet the claims of creditors of other cells (in and outside insolvency). Of course, ‘cell captives’ began their life well before PCC legislation was introduced through contractual arrangements that ‘ring-fenced’ specific assets from creditor claims against related assets. I first became professionally involved in the setting up of contractual cell companies in 1995. But admittedly only a statutory regime could provide the necessary certainty and predictability.

What many people still do not appreciate, however, is that PCC legislation is not the only segregated business form in existence. Segregated business forms exist in numerous jurisdictions, including the US and Europe. They are intended to segregate assets and liabilities for specific business transactions and whilst the most familiar is still the PCC, there are other types of structures in many jurisdictions that perform a similar function such as the US Series LLC, the Italian regime (’dedicated assets to a specified activity’ and ’financing allocated to a specific business activity’), the Luxembourg SICAV and securitisation regimes, the Irish investment fund, the French FCC, and more recently, the UK open-ended investment company (among others). Segregated business forms (and especially Protected Cell Companies) are today widely used in international business transactions.

Guernsey was the first jurisdiction to introduce Protected Cell Companies and it did so in 1997. Since then other ‘offshore’ jurisdictions have followed Guernsey, including Cayman, Bermuda, Gibraltar and Malta. In more recent years, a segregated company regime has been implemented in many states of the United States, in the UK, Dublin and Luxembourg.

Whilst the exact number of companies operating as protected cells across the European Union itself is not known, it is likely to be over one hundred in all jurisdictions and sectors (if we included, investment funds). I am not surprised that they have become so popular and the only question now in my mind is which countries will ‘not’ have cell-type legislation in the future.

The biggest challenge facing PCC legislation was and continues to be “will a foreign Court respect the statutory ring-fence” (i.e. grant the assets of a cell the same level of protection afforded by its operating legislation) in foreign legal proceedings. This question spurred the writing of my co-authored book “Protected Cell Companies: a Guide to their Implementation and Use”. Interestingly, over the last two years, segregated business forms have actually come before the courts in various jurisdictions.

It is important for readers to understand how cell companies can potentially face challenge in foreign Court proceedings. There are possibly three ways in which this can happen. One, if local legislation required local courts to ignore PCC legislation on the issue of liability. Two, if PCC legislation was deemed contrary to local public policy. Three, if PCC legislation was classified as procedural, rather than substantive. Let me take each in turn.

The first is the easiest to deal with. I am not aware of any statute anywhere in the world that purports to declare that a local Court should not give effect to foreign PCC legislation. This is hardly surprising since such outright rejection of a foreign law would hardly sit well with the principle of comity of nations.

The second can also be dealt with swiftly. Far from offending any notion of public policy (or principle of justice), in my view PCC legislation underpins the fundamental principle of modern commerce that owners of capital should be able to deploy that capital in commercial enterprise and limit their liability to such capital and no more. Most (if not all) legal systems around the world recognise this as part of their substantive law in one way or another. Indeed, many countries have other laws which are almost indistinguishable from the PCC regime in what they are intended to achieve. It is therefore difficult to imagine how PCC legislation could be considered contrary to public policy or justice by a foreign Court if its own local laws contained or recognised something similar. This is the case even in insolvency.

Lastly, absent any local rules to the contrary, and applying well established private international law principles recognised in most (if not all) civil and common law countries, it is not easy to conceive why a Court should decline to give effect to foreign ‘substantive law’. To do otherwise would not only be an affront to principles of comity but also undermine international commerce. Most countries around the world establish under their conflict-of-laws rules the distinction between the application of foreign substantive law (where the rule is that foreign laws containing substantive rights should be applied) and procedural law (where local rules of procedure are applied). Since the PCC Act is undoubtedly intended to be substantive in nature, it is difficult to see why a foreign Court should not recognise PCC legislation as such.

Ultimately, however, the argument that I think would prevail is this: if investors pursuing a bona fide commercial activity have sought the benefit of the capital protection laws afforded by PCC legislation (in much the same way they would have done had they decided to conduct their business through an ordinary limited company or limited partnership, or as ship-owners seeking the benefit of maritime limitation of liability laws have done for well over a century), why should they (and the body of creditors who have dealt with the PCC expecting that their rights will be determined in accordance with PCC laws) be deprived of such protection by the Court? Viewed in this way, PCC legislation is, in effect, a capital and creditor protection rule like any other. For a foreign Court to hold otherwise would in my view be to undermine the very principles on which international trade has developed since at least the eighteenth century, namely, the dual principle of limited liability for those that put capital at risk and also acceptance that in a global economy countries must recognise each others commercial laws.

Surprisingly, as far as I am aware there have only been a handful of reported Court cases on the subject of cell companies anywhere in the world, and, until recently, none in an ‘onshore’ jurisdiction where a Court has considered in detail the legal status of a protected cell company. That recent case is the decision of the Montana Federal Court in PAC RE 5-AT v. AMTRUST NORTH AMERICA, INC., No. CV-14-131-BLG-CSO (D. Mont. May 13, 2015). Whilst the Montana case did not concern a cross-border situation, the judge did consider the legal status of the PCC. Essentially, the question before the Court was who the proper party to a contractual dispute concerning a PCC was. This decision is widely considered by captive professionals as making an important contribution to judicial understanding of the workings of PCCs. In setting the background, the judge (Carolyn S Ostby) stated:

 “The capacity to sue or be sued is determined under the laws of the state where the court is located. F. R. Civ. P 17(b)(3). In 2003, Montana enacted statutory provisions enabling the creation of a protected cell captive insurance company (“PCC”). MCA § 33-28-301 et al. Protected cell company legislation is a relatively recent creation in offshore jurisdictions such as Guernsey, Bermuda and the Cayman Islands, and in onshore jurisdictions in many states. See generally Nigel Feetham & Grant Jones, Protected Cell Companies: A Guide to Their Implementation and Use (2d ed. Spiramus Press 2010).”

As I pointed out in the PCC book, conceptually (but not legally), the conduct of business at Lloyd’s of London also has some similarities with a segregated business structure akin to a PCC. Substantial business is conducted through Lloyd’s of London every year around the world. Except for the right to call upon the Central Fund (which is funded by members contribution annually) to satisfy any excess liability, the business of each Lloyd’s ‘syndicate’ is (as in the case of a cell in a PCC) separate and distinct from other syndicates and one member is not responsible for the liabilities (or losses) of other members. This was implicitly accepted when Lloyd’s recently disclosed that they were interested in a cell company structure as a post-Brexit solution for their pan-European business.

But the most significant development of the last few years in the PCC space has to my mind been the announcement by the UK Government of its intention to introduce PCC legislation for ILS business. If the UK Government can embrace the Brave New World by encouraging innovation and entrepreneurial risk-taking (which was at the heart of England’s first Industrial Revolution that turned a small country into the leading global economic power), the UK economy should have no difficulty in reinventing itself. The introduction of PCCs could be a first step in that direction.

This article was first published in Captive Review on 1 February 2017.

Nigel Feetham