16 June 2016EMEA analysis

Guernsey Court hands down PCC judgment

Guernsey Court has handed down a judgement concerning Protected Cell Companies (PCC) that may have worldwide ramifications.

This is according Nigel Feetham, senior partner at Gibraltar law firm Hassans, who explained that the case arose from orders made by the Guernsey Court putting certain entities into administration management and/or liquidation based on regulatory concerns.

Global Mutual Fund PCC was put into administration in 2015 under a special statutory regime which only the Guernsey Financial Services Commissions (FSC) could apply for and the purpose of which was the protection of investors. An international accounting firm was appointed as administration manager.

In previously granting the order for the appointment of administration managers, the judge had ordered that the fees and expenses of the managers were to payable from the assets of the funds and the underlying cells. This was not challenged at the time.

Feetham explained that in the present application, the administration managers were applying for directions from the Court as to how to give effect to the cost allocation order above. The proposed approach was first of all to allocate specific costs to the specific cells in respect of which those costs had been incurred where fund-specific costs could be identified.

The administration managers had incurred further substantial costs that were general or common in nature and could not be allocated to a specific fund or cell. In relation to those expenses, the proposal was to allocate the further costs equally to all the funds concerned.

Objections were raised to the method of allocation of costs, all of which were considered but dismissed by the court.

One argument put by counsel was that the proposed allocation would defeat the object of PCC legislation.

“His submission was that the purpose of the PCC legislation was to protect the integrity of individual cells and their assets so that any one cell does not have to pay liabilities incurred by any other cell,” said Feetham.

“Counsel referred to the potential reputational damage to Guernsey and its funds industry; he submitted that the proposal put forward could undermine confidence in its PCC legislation.”

The court noted that these concerns were not shared by the Guernsey FSC. The counter-submission explained that the purpose of the statute appointing the administrator was to give the court the power to override legislation in exceptional circumstances such as the circumstances that had been identified in this case.

According to Feetham, the judge stated that the costs order he made was the only practical pragmatic order that could have been made at the time and the only basis upon which the administrative managers or indeed any other person would have accepted the role that they were being asked to undertake.

Feetham suggests that if the court had had the benefit of this argument being raised at the earlier application stage it may have reached a different decision. This would have allowed the Guernsey legislature an opportunity to make such amendment to the PCC Act as was necessary before it considered the application again.

“Indeed, promoters, investors and contractual parties alike transact with a PCC on the basis that a cell is only liable to pay for liabilities incurred on its behalf To do otherwise is to undermine the statutory ring-fencing which lies at the heart of the PCC regime,” he said.

“Worse still, this could send a contradictory message to foreign Courts who in any potential foreign proceedings would be asked to respect the ring-fence by applying PCC legislation, especially on insolvency, whilst ignoring their own domestic laws.”

Feetham added that if PCC legislation is to be treated as substantive law, the courts in the PCC jurisdiction of incorporation have to apply the cellular firewall in accordance with the terms of the PCC legislation.

“If they do not (as appears to have been the case here), there is a danger that a foreign court will also do the same and not abide by the cellular priority rules. In my view, it could therefore have a negative consequence if a foreign Court when reviewing the Guernsey PCC regime came to the conclusion that Guernsey judicial authorities introduce uncertainty as regards the statutory segregation of assets and liabilities between cells and/or blurred the distinction between substance and procedure.”

He finished by stating that there is no reason why the matter cannot be clarified by the introduction of an express provision in the Guernsey PCC Act itself in respect of the allocation of IP/administration managers costs.