Protected Cell Companies
A protected cell company is a special type of corporate body which consists of several cells within the same legal vehicle. A cell is a sub-set within the corporation, which has its own assets, its liabilities, its own cellular capital, its own dividends, accounts, and all. Each cell functions as an independent unit within the umbrella of the corporation, and the debtors and creditors of each cell have no claims against the assets or liabilities of other cells.
In other words, it substitutes for several corporations, and thus leads to substantial savings in incorporation and administration expenses.
Obviously enough, a protected cell body can be incorporated only if the law of the land allows for formation of such bodies.
As the need for protected cell companies is strongly felt, several countries, primarily the tax haven countries, have enacted laws to facilitate the formation of cellular companies.
Gibralter passes protected cell company law
A law to allow formation of protected cell companies (PCCs) was passed by Gibralter in early July 2001. The House of Assembly passed a bill for a Protected Cell Companies Ordinance on 3 July 2001.
A protected cell company is a new concept in corporate legislation which allows the setting up of a multi-part company containing different cells, with each cell having its own assets, liabilities, debtors and creditors with mutual independence from other cells as also from the core capital of the company. The law allows both incorporation of PCCs as also conversion of existing companies into PCCs.
Each cell may have its own cellular capital, cellular shares and distribute cellular dividends.
Cellular companies are expected to be particularly useful for captive insurance companies, securitisation SPVs and collective investment conduits. The advantage of a PCC is that a single cellular company may act as an SPV for several transactions while still maintaining protected assets of the cell. This is a huge saving on incorporation and administration costs.
Bermuda protected cell legislation on track
Protected cell legislation, which will make it easy to float a single SPV for multiple securitization transactions, is on track in Bermuda. The law is expected to be introduced later this year. The law, titled The Segregated Accounts Act 2000 has been submitted to the minister of finance for approval after more than a dozen drafts. The minister will introduce the legislation into the Parliamentary agenda before year's end.
A protected cell company is a special corporate structure which allows a company to have several protected cells within the company, so that a single company can act have several subsets of assets and liabilities within itself, each protected from the claims of creditors of other cells.
The Bermuda is currently allowing formation of protected cell companies, but under specific acts of parliament. This is a costly and time taking process, but a number of market participants are prepared to go this route rather than wait for the specific law to be enacted. The NAIC in the USA is also in favour of a protected cell legislation in the USA.
Insurance securitization optimistic on use of protected cell companies
Insurance securitization community is optimistic that protected cell companies, a new concept that avoids setting up of an SPV for securitization of insurance risk, will make things easier, faster and cheaper.
The current approach in securitizations is to set up special purpose vehicles in tax haven jurisdictions that provide reinsurance cover to the insurance company and in turn transform the insurance risk into a capital market product.
On the other hand, if protected cell companies are used, there will be no need to set up SPVs for each transaction, as one cell company can have several cells in it and each cell can do a securitization transaction. The basic idea is not to proliferate legal entities.
Protected cell companies, it may be noted, can be used in asset securitization applications
Guernsey has already enacted a protected cell legislation. Some of the US states such as Illinois, Rhode Island and South Carolina have also passed protected cell laws. In fact, the National Association of Insurance Commissioners has also passed a model protected cell companies law. The concept has not been put to use as such but insurance market practitioners expect it would be lapped up by securitisers in due course.
Links: Click here for an article by John E Langlois on protected cell companies