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The Jersey Law Review – June 2006

MISCELLANY

CELL COMPANIES

1       On 1st February 2006 the provisions of the Companies (Amendment No.8) (Jersey) Law 2005 introducing cell companies to the law of Jersey came into effect.  The cell company trail was blazed by Guernsey with its Protected Cell Companies Ordinance 1997.  Others followed suit.  By the end of 2005, entities called (or having the features of) protected cell companies were available under the laws of jurisdictions as diverse as the Cayman Islands,[1]St Vincent and the Grenadines,[2]Mauritius,[3]Belize,[4]Bermuda,[5]Gibraltar,[6]the Seychelles,[7]Malta,[8]the Isle of Man[9]and Anguilla[10]and.   To some Jersey will look like the Johnny-come-lately to this particular party.  That may be so: but the Island has equally had time to observe the strengths and weaknesses of cell company legislation elsewhere and is now promoting itself as offering an improved, state-of-the-art product.

2       The structure of a cell company enables its assets to be compartmentalised so that they can be available only to the creditors of a particular cell.  First developed in response to the needs of the captive insurance industry, cell companies can equally be used as cost-effective vehicles for corporate umbrella funds, multi-issue securitisations backed by particular classes of assets and, no doubt, other arrangements which, within regulatory control, will test the creativity of finance lawyers in the years to come.  The Jersey legislation promises a strengthened ring-fencing of assets and liabilities, a clearer distinction between members of cells and the members of the core company and a reduced risk of insolvency of the core company.  The protected cells of a protected cell company are not separate legal entities, although they are to be treated as such for most purposes of the Companies (Jersey) Law 1991.  An entirely novel feature of the Jerseylegislation, however, is the alternative it offers of an incorporated cell company whose cells are indeed separate legal entities.  This novel creation of Jersey law should meet the more stringent requirements of rating agencies where a cell is to be used as a debt-issuing vehicle; it may also find favour if assets are to be held or business conducted in jurisdictions which have not yet adopted or recognised the concept of a protected cell.  Despite the growing number of offshore centres which offer protected cell companies, the integrity of the cellular structure does not appear to have been fully tested in the bankruptcy courts of any jurisdiction, and in particular it has not been scrutinised in an onshore court.   The fundamental question is whether a relevant onshore bankruptcy court will, as a matter of its own private international law, treat the protected cells of a protected cell company, and the company itself, as a single entity whose assets should be available pari passu to all unsecured creditors even though they may have transacted with the company only in respect of one particular cell.  The recent litigation in Guernsey and England involving the Guernsey protected cell company Messenger Insurance PCC Limited was settled without requiring any decision on such fundamentals.  To the extent that this risk is perceived, the Jerseyincorporated cell company now offers an important new alternative, for each incorporated cell is stated by the legislation to be a separate company.

3       This and other innovatory aspects of the Jersey Law deserve trumpeting.  It must be said, however, that Jersey has been cautiously slow in developing its own cell company legislation. In a competitive world, jurisdictions such as Jerseyand Guernsey will increasingly need to promote themselves as being at the forefront of business-responsive legal innovation.   This not only requires the devising of new laws; it also requires a constant awareness of how existing laws may, with the experience of practice, be updated and improved – Jersey's new cell company legislation included.  Under Article 127YA(6) of the Law, for example, a cell (whether a protected or an incorporated cell) potentially has the ability to alter its own articles of association without a special resolution or any public filing at all.  The potential for such lack of constitutional transparency runs counter to the normal principles of company law and appears to be without justification.

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