Marcus Cake

On 1st November 2006, the Isle of Man’s new Companies Act came into effect. The legislation included the ability to create “Protected Cell Companies” (PCC). “A PCC is a company with an internal structure that allows for the legal segregation of assets and liabilities into different cells and a central core. This framework is designed to offer increased protection to investors in individual cells from the liabilities and creditors of other cells.” The PCC is not mentioned in information outlining the new Companies Act. I discovered the PCC while reading the Companies Act directly. It is an innovation in corporate law.

A PCC would appear to be a viable and useful structure with many applications. The PCC regulations restrict the use of PCC’s to “International schemes” as defined in Section 11 of the Financial Supervision Act. This adds additional requirements and significant compliance costs which mean that only large organisation can utilise the PCC. A PCC may still be available for use by smaller organisation if it meets requirements which grant it an exemption from Section 11. To be exempt, the PCC would be exempt under section 11(7) if - (a) it has less than 50 participants; and (b) the relevant constitutional document prohibits the making of an invitation in any part of the world to the public or any section of it to subscribe for or purchase units in the scheme.

Only time will reveal its competitive advantage against other types of structures and the innovative uses this structure may be used. Quality legal advice will need to be obtained before proceeding with this structure. I have provided additional information below.

An overview of Protected Cell Companies

Extract from Protected Cell Companies Guidance Note (click here to download)

• “It is one legal entity (the company)”
• “It provides for legal segregation and protection of assets and liabilities of each cell”
• “It may create core shares and cell shares, thereby providing two classes of share capital - core (attributable to the PCC directly) and cellular (attributable to the individual cells)”
• “It can create an unlimited number of cells (and new cells can be added at any point)”
• “An existing company can convert into a PCC - It offers flexibility in the allocation of capital between the core and individual cells”
• It is a requirement of the PCC Act that PCCs have the words “Protected Cell Company” or “PCC” in their title and that their status is covered in the constitutional documentation. In addition, PCCs must inform persons with whom a cell does business that the Company is a PCC and that any transactions with the PCC will be with reference to that particular cell and that in the event of default their recourse is limited to the assets of that cell only.
• “Creditors of a cell have recourse to core assets but do not have recourse to assets of other cells”.
• PCCs are a relatively new concept and whilst they are, for example, recognised under Isle of Man law it is uncertain whether the segregation of cells under Isle of Man law would be upheld if there were a legal action in another jurisdiction disputing the PCC’s segregated cell status. This legal status has not been tested in court.
• “the PCC Regulations limit the use of the PCC structure to international schemes (including EIFs and PIFs but excluding Exempt International Schemes) under S11 of the Financial Supervision Act 1988 (“FSA 88”).”

The PCC structure is restricted to international schemes as defined by section 11 of the Financial Supervision Act, unless it is an exempt scheme. The scheme is criteria under s11(7) are satisfied.

Financial Supervision Act Section 11 (click here to download):

11. (1) Every international scheme shall have a manager and a trustee who must be different persons and who must each be either -

(a) an authorised person who is licensed to act as a manager or, as the case may be, trustee of a collective investment scheme; or

(b) authorised to act as a manager or, as the case may be, trustee of a collective investment scheme under the law of any country or territory prescribed for the purpose of this section.

(2) Within 14 days of any scheme becoming an international scheme, the operator shall -

(a) give written notice of the fact to the Commission; and

(b) provide the Commission with a copy of the documents constituting the scheme.

(3) Within 14 days of any scheme ceasing to be an international scheme, the operator shall give written notice of the fact to the Commission.

(4) Sections 6, 7(1) (with the omission of the requirement relating to the advocates certificate) and (2), [10]1, 16(1)(b) and (c), (5) and (6), 17 and 18 shall have effect in relation to international schemes as they have effect in relation to authorised schemes.

(5) Subject to subsections (7) to (11), in this section, “international scheme” means every collective investment scheme, not being an authorised scheme or a recognised scheme, which is established in the Island.

(6) For the purpose of this section, a scheme is established in the Island-.

(a) if -

(i) it is operated in or from the Island; or

(ii) it is constituted in, or under the law of, the Island; or

(b) in the case of a scheme which is an open ended investment company, but without prejudice to the generality of paragraph (a), if it is -

(i) a company incorporated in the Island under the Companies Acts 1931 to 1986; or

(ii) a company incorporated outside the Island and is registered under Part XI of the Companies Act 1931.

(7) Subject to the provisions of subsections (8) to (10), a scheme is exempted from this section if -

(a) it has less than 50 participants; and

(b) the relevant constitutional document prohibits the making of an invitation in any part of the world to the public or any section of it to subscribe for or purchase units in the scheme.

(8) For the purposes of subsection (7), “the relevant constitutional document” is -

(a) in the case of an open ended investment company, the articles of association of the company;

(b) in the case of a unit trust scheme, the trust deed; and

(c) in any other case, the principal constitutional document of the scheme.

(9) The exemption provided by subsection (7) shall not apply to a scheme where units are held by participants as a result of an invitation in any part of the world to the public or any section of it whether by the operator or another.

(10) The following shall not be treated as invitations to the public or a section of the public -

(a) invitations issued to existing participants in a scheme inviting them to subscribe for or purchase further units in that scheme;

(b) invitations to persons whose ordinary business involves the acquisition and disposal of property of the same kind as the property, or a substantial part of the property, to which the scheme relates;

(c) any invitation of a class which is permitted by virtue of regulations made under section 1(3).

(11) The Treasury may by order -

(a) extend or restrict subsections (6) to (10);

(b) exempt any schemes or persons from this section.

(12) For the purposes of this section, a scheme which falls within the definition of an international scheme and which is in existence immediately before the date on which this section comes into operation, shall be treated as becoming an international scheme 6 months after that date.

The Isle of Man Companies Act 2006 may be downloaded here. Part VII starting on page 53 contains the sections relating to PCC’s.

NOTE: I will try to confirm whether the above accurately reflects PCC’s in the Isle of Man. My reference material included Guidance Notes and Bills. I need to confirm the above was legislated.