Introduction
A Protected Cell Company (“PCC”) is one of the legal forms of companies that may be incorporated in the Dubai International Financial Centre (“DIFC”). As a corporate vehicle, the DIFC Protected Cell Companies share similarities with ‘segregated portfolio companies’ or ‘protected cell companies’ available in other financial jurisdictions.
In essence, a PCC is a single company consisting of a core and a number of cells, which are legally ring-fenced from each other. Each cell has assets and liabilities attributed to it and its assets cannot be used to meet the liabilities of any other cell. A PCC also has core assets (non-cellular) that may be used to meet liabilities that cannot be attributed to a single cell. *
Legal Framework
Protected Cell Companies are governed by the DIFC Companies Law 2 of 2009 (“Companies Law”) and Chapter 12 of the DIFC Companies Regulations (the “PCC Regulations”). PCC’s differ from other corporate entities that can be set up in the DIFC in that they are subject to a certain degree of authorization and regulation by the Dubai Financial Services Authority (“DFSA”). As such, certain rules of the DFSA Rulebook also apply to Protected Cell Companies.
Types of Protected Cell Companies and Permitted Activities
A Protected Cell Company may be formed as Open Ended or Closed Ended:
- An Open Ended Protected Cell Company has a variable share capital and its articles of association must allow its shareholders to have their shares redeemed by the Fund Manager (as defined in the Collective Investment Law 2010) upon request at a price based on the net asset value of the property of the relevant cell in the manner provided in the CIR module of the DFSA Rulebook. An Open Ended Protected Cell Company may only be established as a Fund (as defined in the Collective Investments Law 2010) entity. The PCC structure is particularly relevant to Umbrella Funds, as the segregated cell structure allows the establishment of sub-funds as separate cells of the main fund.
- Any other PCC is a Closed Ended Protected Cell Company. A Closed Ended Protected Cell Company may only carry on Insurance Business (as defined in the Regulatory Law 2004) activities, either as a non-captive or as a captive insurer.
Incorporation of Protected Cell Company
The process of incorporating a Protected Cell Company in the DIFC involves:
- The applicant must first obtain the DFSA’s consent to the incorporation of the company;
- Once the DFSA’s consent has been secured, the applicant may submit to the Registrar of Companies an application for registration together with supporting documents and fees payable.
Consent of the DFSA
Given the nature of their permitted activities, as mentioned above, PCC’s cannot be incorporated without the prior consent of the DFSA. Moreover, following their incorporation, PCC’s are subject to supervision of the DFSA. Any change in a PCC’s articles must be approved by the DFSA in writing. Furthermore, any failure by the PCC to comply with the DFSA’s rules or licensing conditions, the Companies Law or the PCC Regulations may result in the DFSA giving directions to the company or even revoking its consent.
Shares and Shareholders of a Protected Cell Company
A Protected Cell Company may create and issue cell shares and related cell share certificates in respect of each cell. The cell share capital is comprised in the cellular assets attributable to the cell for which the cell shares were issued. Cellular dividends are calculated in respect of the profits and losses of each specific cell and cannot be paid out of another cell or non-cellular profits and losses.
A register of shareholders and an index of the names of the shareholders must be kept by the company.
Separation of Assets
The assets of a Protected Cell Company are either cellular assets or non-cellular assets. The cellular assets are attributable to the cells of the company (proceeds of cell share capital and reserves, including retained earnings, capital reserves and share premiums). The other assets of a Protected Cell Company are non-cellular or core assets.
The directors must keep cellular assets attributable to each cell distinct and separately identifiable from non-cellular assets and cellular assets attributable to other cells. If any director breaches his duty to keep assets separate he is personally liable for any loss or damage incurred as a result of such breach (although he has a right of indemnity against the non-cellular assets of the company, unless he was fraudulent, reckless or negligent, or acted in bad faith).
Prohibition of Dealings between Cells
Any transfer of cellular assets attributable to a cell to another cell or an amalgamation or consolidation of a cell with or into one or more other cells of the PCC is prohibited unless it has been approved by Court order. When considering whether to make an order the Court will take into account factors such as whether the creditors (without recourse to the assets of the relevant cells) have consented to the transaction and whether the Company’s and the relevant cells’ shareholders have been prejudiced by the transaction. The Court will also consider the DFSA’s representations.
Creditors’ Rights
One of the PCC’s main features is that liability arising out of a particular cell can only be satisfied by using the assets of that particular cell and a creditor cannot resort to the assets of any other cell of the PCC. As for liability not attributable to a particular cell, only non-cellular assets might be used to satisfy such liability.
Disclosure Requirements
A PCC must, when transacting with a person, give such person clear information on the type of company it is, on the particular cell involved in the transaction and on the rules of liability in relation to cells of a PCC. Failure to provide such information may result in the directors incurring personal liability to that person in respect of the transaction subject to the Court’s decision. Personal liability incurred by the directors in this case cannot be avoided by contract.
Conclusion
Since the number of Closed Ended Protected Cell Companies and Open Ended Protected Cell Company established in the DIFC is currently very low, the success and feasibility of DIFC Protected Cell Companies in fund structures remains to be determined.
* Source: DIFC Reinsurance Captives Guide
