Guernsey is introducing progressive legislation to keep it at the forefront of financial services provision. Chris bound and Sean Cheong explain the latest raft of laws
A modern and progressive body of law is critical to the delivery of high-quality offshore financial services. Guernsey has recently made substantial progress in this area, most notably by novel legislation to create protected cell companies to permit companies to amalgamate and to change their places of registration. An innovative approach has also been adopted in relation to a company providing finance for the acquisition of its own shares.
The Protected Cell Companies Ordinance 1997 came into force last February. The significance of this legislation is that it permits a protected cell company (PCC) to have separate and distinct “cells” whose assets and liabilities are segregated from other cells and which are not available to creditors of other cells in an insolvency. It is a legal framework where creditors' recourse is limited by law and not simply by agreement.
The vehicle lends itself to multi-funds or umbrella funds. For example, the PCC structure is applicable to the situation where there are multiple investment portfolios but with a single class of equity attributable to each investment portfolio.
The well-understood advantage of this structure is to reduce administrative burdens and expenses. The disadvantage is the presence of inherent risk, there being only one vehicle to be attacked by creditors.
While there may be internal divisions and appropriate non-recourse wording in documents, the fact remains that as far as third party creditors are concerned, there is simply one pot of assets to attack. There is therefore the risk of contagion, with the result that the whole company and all its shareholders suffer loss.
The risk is greatest in highly leveraged schemes or derivative trading programmes. These are high-risk activities where a problem in one fund could adversely affect sister funds.
A PCC offers a mechanism for each fund to be ring-fenced as a matter of law from creditors of sister funds within one corporate entity.
The vehicle also lends itself to captive insurance. Within a PCC captive insurance facilities can be undertaken for companies that are otherwise unrelated but share common risks. The PCC structure enables capital and premium provided by each company to be devoted to providing that company with insurance services and not to be exposed to claims in respect of underwriting risks assumed by other companies each company having its own cell within the PCC. In short, a PCC is a legal framework whereby recourse is limited by law, not simply by documentation.
Although a PCC may have created one or more cells, it is a single legal entity and the creation of a cell does not create a separate PCC legal identity.
Another recent development is the Amalgamation of Companies Ordinance 1997. This permits two or more companies to amalgamate and continue as a single company subject to certain safeguards.
The consent of the Guernsey Financial Services Commission is needed in certain cases. Notification must be given to creditors of the amalgamating companies. The Royal Court of Guernsey may, on the application of any member, creditor or third party affected by the proposed amalgamation, modify the proposals for amalgamation.
It is permissible for a company registered in Guernsey to be amalgamated with a foreign company.
The essence of an amalgamation is that all property, rights and obligations of the amalgamating companies are transferred to the amalgamated companies. The interests of the shareholders in each of the amalgamating companies are converted into interests in the amalgamated company or compensation is paid to shareholders whose interests are cancelled or reduced.
A short form of amalgamation is available to amalgamate a company and one or more of its wholly owned subsidiaries (a “vertical short form of amalgamation”) or two or more companies, each of which is (directly or indirectly) wholly owned by the same company (a “horizontal short form of amalgamation”).
A further strand of new legislation is the Migration of Companies Ordinance 1997.
This enables foreign-incorporated companies to become registered in Guernsey and Guernsey-incorporated companies to become registered in another jurisdiction provided that on registration in the new jurisdiction any previous registration is cancelled. The advantage is that the seat of registration of the company can be moved without disturbing the balance sheet.
It is intended that the registration of the company in its new jurisdiction shall not prejudice any legal proceedings which have or could have been instituted against the company prior to such registration.
The Guarantee Companies Ordinance 1997 means that it is now possible to incorporate a company (with or without share capital) with the liability of its members limited by guarantee to such amount as the members respectively undertake to contribute to the assets of the company in the event of its liquidation.
It is anticipated that such companies will generally be formed for charitable, social or other non-trading purposes for example, professional and trade associations and clubs supported by annual subscriptions.
The final strand of new legislation concerns financial assistance for the acquisition of owner shares.
A company registered in Guernsey may give financial assistance directly or indirectly for the purpose of, or in connection with, the acquisition of its owner shares provided that the company is authorised to do so by the provisions of its memorandum or articles and that immediately after the financial assistance is given the company will satisfy the “solvency test” as laid down in the Companies (Financial Assistance Requisition of Owner Shares) Ordinance 1998.
This represents a novel approach departing from the attitude of common law and English legislation, that any transaction of a company whose purpose is to give financial assistance for the purchase of the shares is prohibited, subject to certain exceptions.
The solvency test is satisfied essentially if the company can discharge its liabilities as they become due in the normal course of its business and the value of the company's assets is greater than the aggregate of its liabilities, the nominal amount of existing shares and any amount outstanding to the credit of the share premium account and capital redemption reserve fund. Special provisions apply in the case of a company subject to regulation under the Protection of investors law, the insurance law and the banking law.
It should be noted that authority must be granted by the memorandum or articles, so the legislation does not permit financial assistance per se.