PCC Seminar Oct 2011

“Protected Cell Companies (“PCCs”) & Alternative Dispute Resolution (“ADR”)

The Chartered Institute of Arbitrators, London Branch

Grant Jones

Grant Jones LLM, Partner, Cooper Parry LLPChartered Accountant, Solicitor, New York Attorney, Licensed Insolvency Practitioner &

Special Professor of Laws, Nottingham Universityemail [email protected] & [email protected]

Introduction 1



I have little time: so this will be fast. I will introduce the notion of a protected cell company (PCC); insurance practitioners will be aware of PCC, but to ADR practitioners, the concept may appear bizarre. PCCs are known by different names in different jurisdictions: dedicated cell companies, segregated cell companies, portfolio companies, segregated portfolio company, et al: but they share the same vital characteristic, like the Holy Trinity, oneness and multiplicity.

I will explain the potential ADR PCC problems and issues. I'm happy after the seminar to discuss the solutions, there are solutions.

PCCs were created by insurance practitioners to gain the benefits of mutuality without its downside.

The majority of US states now have PCC legislation, all offshore centres, many Gulf nations and several EU countries. Their use has expanded outside of insurance, to all forms of finance and even to turnkey contracts.

Some commentators claim that PCC's will soon be holding 1% of the World's wealth. They are the fastest growing form of insurance company.

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The purpose of this presentation



“Protected Cell Companies: a guide to their implementation & use” by Nigel Feetham of Hassans & Grant Jones of Squire Sanders & Dempsey, published by Spiramus Press Ltd (www.spiramus.com)

Now for the Plug3



EXAMPLE PCC LTD

Single Legal Entity

Hub or Core

Cell A

Cell B

Cell C

Single Legal Entity



Example PCC Ltd

Single Legal Entity

Hub or Core

Cell A

Cell B

Cell C

Single Legal Entity



Single Legal Entity

A ‘single legal entity’, thus it is the PCC and not the hub or cells which contract. "[The] Fundamental nature of a…[PCC] (1) A... [PCC] is a single legal person (2) the creation by a.. [PCC] of a cell does not create, in respect of that cell, a legal person separate from the company". Manx PCC Act 2004 section 2.

Key Concepts; PCC Basics6



Attribution

• Attribution’ of hub and cellular assets and liabilities. Assets and liabilities are internally ascribed to the hub or specific cells.

• For example, the South Carolina Insurance Code, Title 38, definition section: -“(9) "Protected cell assets" means all assets, contract rights, and general intangibles, identified with and attributable to a specific protected cell of a protected cell company… (12) "Protected cell liabilities" means all liabilities and other obligations identified with and attributable to a specific protected cell of a protected cell company.”

• And by default, in The PCC (Guernsey) Ordinance, 1997:-“Attribution of non-cellular assets and liabilities.12. (1) Liabilities of a protected cell company not otherwise attributable to any of its cells shall be discharged from the company's non-cellular assets. (2) Income, receipts and other property or rights of or acquired by a protected cell company not otherwise attributable to any cell shall be applied to and comprised in the company's non-cellular assets.”

Key Concepts; PCC Basics7



The ProblemsInter-Cellular ADR•Can you have a arbitral dispute with yourself?•Statutory expert determination•Can inter-cellular mediation work?•ADR in PCC memorandum & articles of association•The courts & declarations•Expert determination is my choice•Regulatory decision

3rd Party ADR•Is it a multi-multi party dispute?•Mediation: has it worked?•Arbitration: the position of the cell•If ADR is truly more flexible, surely it can meet the PCC opportunity.

Can I argue with myself?

Which bit of me is arguing with someone else?

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PCC disputes are suited to declarations; ADR is not suited to declarations

“104 (1) In the event of any dispute as to:

(A) whether any right is or is not in respect of a particular Cell;

(B) whether any creditor is or is not a creditor in respect of a particular Cell;

(C) whether any liability is or is not attributable to a particular Cell; or

(D) the amount to which any liability is limited

the Tribunal, on the application of the PCC, and without prejudice to any other right or remedy of any person, may issue a declaration in respect of the matter in dispute.”

But strangely PCC & ADR exist in the same space.

Qatar Companies Regulation 2005: declarations

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“Expert determination is a historically accepted form of ADR invoked when there isn't a formulated dispute in which the parties have defined positions that need to be subjected to arbitration; but rather both parties are in agreement that there is a need for an evaluation.” Wikipedia.

A classic case is where the auditors fix the value of privately owned company shares. Expert determination is about valuation, not about a dispute proper.

If: (a) the existence of parties is a pre-requisite of a formulated dispute and a cell does not constitute a legal party, &/or (b) the celluar issues to be resolved, revolve around attribution of cellular assets and liabilities, in other words a valuation; then expert determination must be the preferred PCC ADR?

Expert determination

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PCC statutes are modern. Modern statutes like ADR. ADR sections are everywhere. This is a standard worldwide expert ADR section.

“144 (6) In the event of any...[PCC] assets attributable to a...cell of a...[PCC] being taken in execution in respect of a liability not attributable to that...[cell], and in so far as such assets or compensation in respect thereof cannot otherwise be restored to the ...[cell] affected, the company shall (a) cause or procure its auditor, acting as expert and not as arbitrator, [my emphasis] to certify the value of the assets lost to the segregated portfolio [BVI uses the term ‘segregated portfolio company’] affected; and (b) transfer or pay...the liability was attributable to the...[cell] affected, assets or sums sufficient to restore to the...[cell] affected the value of the assets lost.”

BVI Companies Act 2004: statutory endorsement of ADR, especially expert determination

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“Article I

This Convention shall apply to the recognition and enforcement of arbitral awards

... where the recognition and enforcement of such awards are sought, and arising out of differences between persons, whether physical or legal [my emphasis].”

So arbitration requires two parties, ergo, like mediation, it cannot apply to intra-PCC (i.e. intercellular) disputes?

1958 Convention On The Recognition And Enforcement Of Foreign Arbitral Awards

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“Internal transactions

14... (4) Any dispute which arises in connection with a transaction...-

(a) as between the company in respect of a given protected cell account and the company

in respect of any one or more other protected cell accounts; or

(b) as between the company in respect of the general account and the company in respect of one or more protected cell accounts;

may (notwithstanding any submission to the governing law of choice otherwise provided for in this Act or otherwise) be referred to the court or may be submitted to arbitration [my emphasis] under the Arbitration Act.”

Starting at “A”, it seems PCC statutes think it is possible to have intra-PCC arbitration; but with “may” we can create (how?) procedures to eradicate the philosophical conundrum. This is a standard worldwide clause. What however if it was a “must” in the PCC statute? Working our way to “B”. What if the biggest insurance centre said “must”?

Anguilla PCC Act 2004

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“Internal transactions

17A...Notwithstanding any enactment or rule of law to the contrary -

where a manager or officer of or other person on behalf of a...[PCC] company or a...[cell] is also acting in respect of the...[hub] and one or more of the...[cells] which are entering into a transaction,

he may so act notwithstanding any material interests or conflicts... [my emphasis].

Any dispute which arises in connection with a transaction under subsection (1)- as between the company in respect of a given...[cell] and the company in respect of any one or more other...[cells]; or as between the company in respect of the...[hub] and the company in respect of one or more...[cells]; may (notwithstanding any submission to the governing law of choice otherwise provided for in this Act or otherwise) be referred to the court or may be submitted to arbitration under the Bermuda International Conciliation and Arbitration Act 1993 and (if the matter is submitted to arbitration) as if the arbitration were an international commercial arbitration. [my emphasis].

If the managers, officers, legal advisers or others representing the company in respect of the separate interests of the affected accounts cannot agree on whether a particular matter should be referred to court or to arbitration, then that matter shall be referred to arbitration. [my emphasis].”

Wow! Huge insurance centre says notwithstanding (I) quasi-judicial arbitration, ignore conflicts of interest (II) the NY Convention definition, its international & (III) difficulties of non-agreed intra-PCC arbitration, it's arbitration. PCC statutes love ADR! But there are issues, surely?

Bermuda Segregated Accounts Companies Act 2000

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“238. (1) Any act, matter, deed, agreement, contract, instrument under seal or other instrument or arrangement which is to be binding on or to ensure to the benefit of a segregated...[cell]... shall be executed by or on behalf of the directors and on behalf of such...[cell or cells] which shall be identified or specified, and where in writing it shall be indicated that such execution is in the name of, or by, or for the account of, such...[cell or cells].

(2) If a segregated portfolio company [the Cayman Islands name for a PCC] is in breach of subsection (1), the directors shall (notwithstanding any provisions to the contrary in the company’s articles or in any contract with such company or otherwise) incur personal liability for the liabilities [my emphasis] of the company and the segregated portfolio under the act, matter, deed, agreement, contract, instrument or arrangement that was executed.”

Cayman Islands Companies Act 2007; getting the docs right & personal liability15



Make sure the ADR clause (especially an arbitration clause) makes reference to the cellular nature. Will standard arbitration clauses work? Could standard ADR clauses make a director personally liable?

Pre-empt court action and personal liability: create an in-house ADR program, ideally expert determination, via the company's articles and memorandum of association or insurance programs.

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Getting the docs right & personal liability



“C&W poised to settle £40m case as counsel walks out: Cable & Wireless and captive insurer Pender Insurance launched a claim in March 2004 against 17 defendants, including Pender's Isle of Man manager, insurance company Willis and law firm... The claimants alleged that the defendants were involved in siphoning off a total of £80m in reinsurance premiums from Pender to Guernsey-based protected cell company Messenger.

A court-ordered mediation failed last year and the case came before the High Court in October 2005. It is understood that negotiations continued simultaneously with the trial and that preliminary agreements were reached with a number of parties...in late December.”

Mediation can work with multi-party PCC disputes.

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Mediation may work



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PCC Seminar Oct 2011

Documents

Transcript of PCC Seminar Oct 2011