A less commonly used legal concept with many advantages
Overview
A Protected Cell Company in ADGM (PCC), typically used in the investment funds industry, is a type of a corporate entity, with separate legal personality, governed by the ADGM’s company regulation 2020, modelled on the UK companies Act 2006[1].
Originally introduced in Guernsey[2], this legal concept found its way into many jurisdictions, such as Mauritius, Jersey, Malta, Gibraltar, Ireland, Cayman Islands[3], and many other jurisdictions. In the Middle East, the concept of Protected Cell Companies was introduced in Bahrain in 2016, through the enactment of a Protected Cell Companies Law No. 22 of 2016, that marked a significant development in the area of corporate finance in Bahrain.
What is a PCC?
A PCC is a single legal entity with one registration number, which creates cells, such that the assets and liabilities of each cell are legally separate from those of any other cell. This concept of ‘ring-fencing’ is fundamental to PCCs, thus reducing risks of cross-contamination combined with great flexibility of use. The key principle is that the assets of a cell are only available to the creditors and shareholders of that particular cell.
More precisely, a PCC consists of two organic parts, a non-cellular part (the “Core”), and one or more parts or protected cells called (the “cells”). Once registered, a PCC can create unlimited cell companies. Each cell is assigned to a specific field of activity of the company with each having its own assets and liabilities. In addition, individual cells might have different beneficiaries from the core or from each other’s.
While each cell operates independently from the others and the company’s core[4], the entirety functions as one unified legal entity. Accordingly, a PCC has one board of directors that manages the affairs of the PCC as a whole, and that takes responsibility for transactions within the Core and each of the cells, statutory and regulatory compliance and corporate governance requirements.
A PCC has, except permitted otherwise under its articles, no power to meet any liability attributable to a particular cell of the company from the non-cellular assets of the company, or to meet any liability, whether attributable to a particular cell or not, from the cellular assets of another cell of the company.
Accordingly, while dealing with third parties, a PCC must inform any person with whom it transacts that it is a PCC and must identify or specify the Cell (or Core) in respect of which that person is transacting. In this way, creditors are notified of the limited recourse they have to the assets of the PCC and the relevant Cell (or Core) involved.
Advantages of PCCs include cost savings and efficiency of managing certain risks and administration.
Difference between PCC and ICC
In addition to a PCC, ADGM regulates another type of cell companies, the “Incorporated Cell Companies (ICCs)”.
An ICC is similar to a PCC but adopts a fundamentally different approach to cells. The main difference is that the ‘protected cells’ of a PCC, do not have a legal identity separate from the cell company of which they form part. On the contrary, the ICC incorporates each cell as a separate legal entity without the cell company needing to have any shareholder relationship with the relevant cell. Such cell is called Incorporated Cell (IC). Each IC is a separate company as a matter of law.
While an ICC may seem similar to a regular corporate group, it differs legally in the following ways:
- an incorporated cell is not a subsidiary of the ICC, and conversely, the ICC does not serve as the parent entity of the incorporated cell.
- the shares in each incorporated cell are not held by the ICC but are instead owned by the owner of the assets allocated to a particular incorporated cell.
- each incorporated cell automatically shares the same secretary and registered office as its corresponding ICC.
Use of PCCs
PCCs were originally created for use in the insurance sector, although today it is also widely used for investment funds and other forms of investments structures and financing such as investment vehicles. PCCs also find significant use in private wealth management and asset allocation.
Furthermore, PCCs are adopted in non-fund structures like private equity, such as “Private Placement Memorandum” (PPM). This allows investors to segregate portfolios and investment strategies within different cells, and consolidate all their assets into one or two cells, eliminating the need to manage numerous small portfolio companies or funds. This enhances risk management and investor protection. Alternatively, investors can exit each cell individually or adjust their potential exposure based on risk appetite or available cash flow.
Setting-up a PCC in ADGM
PCCs can take a form of Public Company Limited by Shares, Private Company Limited by Shares, or Private Company Unlimited with Shares. The name of a PCC must end with the words ‘Protected Cell Company’ or with the abbreviation ‘PCC’.
The cells can be created at the time of incorporation, or post-incorporation by virtue of a special resolution of members. PCCs must assign a distinctive name to each of its cells that distinguishes the cell from any other cell of the company and that ends with the words “Protected Cell” or with the abbreviation “PC”.
Conclusion
The primary advantage of a Protected Cell Company (PCC) lies in its distinctive ability to segregate liabilities between individual cells and between these cells and the core corporate structure. This gives the PCC a clear advantage over traditional investment structures and potentially enables the setting-up of higher-risk products within the same corporate framework, thereby reducing overall expenses.
However, it’s important to note that the assessment of individual cells does not occur independently of the core legal entity, thus limiting the structure’s resilience concerning the segregations of assets and liabilities. In contrast, an Incorporated Cell Company (ICC) demonstrates more advantages in specific scenarios, such as insolvency proceedings, highlighting its potential superiority in ensuring a robust separation of assets and liabilities.
Mayssa Abboud
CSP Associate
04/12/2023
For personalized guidance regarding the establishment of Protected Cells Companies in ADGM, please do not hesitate to contact our team by sending an email to: assiss@assiss.com
DISCLAIMER: This blog post does not constitute professional advice. Additional facts or future developments may affect the content of this blog post. Before acting or relying upon any information within this document, please seek the advice of a member of our team.
[1] However, Cell companies are not provided for in the Companies Act 2006.
[2] Through the enactment of the Protected Cell Companies Ordinance, 1997 that was later replaced by the Companies (Guernsey) Law, 2008.
[3] Known as “segregated portfolios companies”.
[4] a cell of a PCC may enter into an agreement with its cell company or with another cell of the company that shall be enforceable as if each cell of the company were a body corporate that had a legal identity separate from that of its cell company.