Dr. Matthew Bianchi Ganado & Associates, Advocates 176, Old Bakery Street, Valletta VLT09, Malta...

Dr. Matthew BianchiGanado & Associates, Advocates

176, Old Bakery Street,

Valletta VLT09, Malta

[email protected]

www.jmganado.com

January, 2007

An An OOverview of Malta’s Pverview of Malta’s PCCCC RegulationsRegulations

Ganado & Associates, Advocates - 2007

OverviewOverview

• Maltese Laws & Regulations

• Introduction to PCCs

• Legal & Practical Considerations

• ‘Insulation’ of Cellular Assets & Liabilities

• Cell Dividends

• Cell Closure

• Transfer of a Cellular Assets

• Cell Solvency Requirements

• Management and Administration of PCCs

• Fees


Applicable Laws & RegulationsApplicable Laws & Regulations

• The Companies Act, 1995 (“CA”)

• The Insurance Business Act, 1998 (“IBA”)

• The Insurance Intermediaries Act, 2006 (“IIA”)

• The Companies Act (Cell Companies Carrying on Business of Insurance) Regulations, 2004 (“PCC Regulations”)

• The Insurance Business (Insurers Assets and Liabilities) Regulations, 2005 (“Assets and Liabilities Regulations”)

• MFSA Insurance Rules and Insurance Intermediaries Rules


The The PCC RegulationsPCC Regulations

• Based on the provisions of the Guernsey Protected Cell Companies Ordinance, 1997.

• The PCC Regulations apply to:

– Insurance undertakings / Affiliated Insurance Companies

– Insurance brokers

– Insurance managers.

• The PCC Regulations allow each of these types of companies to be either formed as or converted into Protected Cell Companies.


Introducing Protected Cell CompaniesIntroducing Protected Cell Companies • A PCC is a regular trading company constituted as a Cell Company

which is able “to create one or more cells for the purpose of segregating and protecting the cellular assets of the Company”.

• A PCC is at all times a single legal person. Cells within a PCC are not endowed with a legal personality seperate from that of the Cell Company.

• Some jurisdictions, namely Guernsey and Jersey, have now introduced the concept of Incorporated Cell Companies where each cell is bestowed with its own legal personality.


Protected Cell Companies IllustratedProtected Cell Companies Illustrated


Advantages of Advantages of Protected Cell CompaniesProtected Cell Companies

• Segregation of assets and liabilities.

• Cell assets are ‘insulated’ from liabilities of the Core and of other Cells in the company.

• Enables promoters to shared overhead costs with other promoters without losing protection from the insolvency of others.

• Capital, Own Funds and some other regulatory requirements apply to the cell company as whole.

• Easier access to the ‘captive’ market.

• Access to the reinsurance market for smaller investors.

• Shared administration e.g. Cells may interact with the Regulators/Authorities through the PCC’s central administration.


Converting / Forming a PCCConverting / Forming a PCC

• The M&A of any PCC, whether incorporated afresh or converted, must satisfy the following conditions:

– The company name must include the expression “Protected Cell Company” or “PCC” (e.g. Atlas Insurance PCC Limited);

– The memorandum must provide that the company is a cell company;

– Every cell created by the company must have its own distinct name or designation;

– The M&A must distinguish between cell shares and non-cellular shares.

• PCC Statement:

– A cell company must indicate in its business letters / forms that it is a cell company;

– MFSA have developed adequate wording which Atlas Insurance PCC Limited is already using in all its forms;


Objects & Powers of PCCsObjects & Powers of PCCs

• A Company converting into a PCC must be empowered to do so in terms of its M&A. The addition of this power is usually the first step to a conversion.

• Upon conversion/formation the Objects of the Company should extend to the promotion, creation, management, administration of Cells

• The Powers of the Company should include the power to achieve these objects and to trade/deal in respect of the various Cells created by the Company.


Creation of CellsCreation of Cells

Cell shares:

– A Cell is a class of shares designated as a Cell by the Company;

– A PCC will typically have ordinary shares issued to the promoters of the Company (core shares or non-cellular shares) and various classes of Cell shares issued to Cell promoters;

– The PCC may also have classes of shares which are not designated as cell shares. These will not be subject to the PCC Regulations e.g. Assets, liabilities will not be segregated;

– It is common practice for Cell shares to be a class of preference shares but the law imposes no restrictions. Cell shares may be ordinary shares in the company too.


Cell Share RightsCell Share Rights• The M&A must allow the company to issue classes of shares and to

designate same as Cells.• The M&A may even create certain restrictions which the promoters may

wish all Cells to be subject to. For instance:– Should Cell Shareholders have a right to vote at general meetings

too?– Should they be allowed to organise Cell shareholder meetings?

What would the purpose of any such meetings be? – Should the Company be able to attend Cell Shareholder meetings?– Should the M&A provide for resolution thresholds/quorums of such

Cell meetings?– Should the Company be bound by resolutions of a Cell meeting? Or

should the meeting simply recommend to BOD?– Should the Cell meeting approve cellular dividends?


Segregation / Assets & LiabilitiesSegregation / Assets & Liabilities

• Assets and Liabilities of the PCC may be either Cellular or Non-Cellular

• Cellular assets of a particular Cell must be separate and identifiable from other cellular assets and non-cellular assets of the PCC

• The Directors of the PCC are responsible for the separation and segregation of assets at all times

• Collective management or investment of assets is permitted as long as identification is possible at any time. This is particularly applicable to fungible assets

• The Regulations also allow a PCC to hold cellular and non-cellular assets through a subsidiary company whose shares constitute Cellular or non-Cellular assets


Cellular AssetsCellular Assets • Cellular Assets comprise:

– The proceeds of Cell Share Capital

– “Reserves” attributable to the Cell including retained earnings, capital reserves and share premium reserves

– Any other assets attributed to the Cell and held by the PCC

• Non-Cellular assets are all assets of the PCC which are not attributable to a Cell.


Recourse Recourse to Cellular Assetsto Cellular Assets

• Assets attributable to a Cell may only be used to satisfy claims made by creditors of the particular Cell

• Creditors of a particular Cell have no right of recourse against cellular assets of another Cell

• Creditors of a Cell also have a right of secondary recourse to non-cellular assets of the PCC but only once cellular assets of that particular Cell have been fully exhausted

• Creditors of the PCC which are not creditors of a particular Cell only have a right of recourse against the non-cellular assets of the PCC


‘‘Insulation’ of Cellular AssetsInsulation’ of Cellular Assets

• The Regulations address this issue in detail because it is one of the key features of any PCC legislation:

– Firstly, the Regulations prohibit any person from making (or attempting to make) any claim against assets attributable to a Cell for which he is not a creditor

– Secondly, the Regulations provide that should anyone manage (by any means) to use cellular assets to satisfy a liability not attributable to that particular Cell, such person will be liable to pay back the ‘value of the benefit thereby obtained’


‘‘Insulation’ of Cellular Assets (contInsulation’ of Cellular Assets (contdd.).)

– If an executive warrant is issued and enforced on the assets of a Cell in respect of a liability that is attributable to another Cell or to the Core and it is impossible to restore or compensate the said assets lost by the Cell, then the Company is:

a) obliged to instruct its auditors (acting in an expert capacity) to establish the true value of the assets lost by the cell; and

b) to transfer such amount from the cellular or non-cellular assets of the Company to which the liability was properly attributable

– Moreover, if the Cell to which the liability was properly attributable does not have sufficient cellular assets to compensate the Cell affected, the Company is required to make up the difference from the non-cellular assets.


Cellular DividendsCellular Dividends

• The PCC Regulations provide that Cellular Dividends are“dividends payable by a PCC in respect of Cells Shares”.

“cellular dividends may be paid… by reference only to cellular assets (including reserves) and liabilities, or the profits attributable to the cell”

– The M&A must provide for a the issue of cellular dividends in relation to profits of the particular cell independently of any profits or losses of the Core or of any other Cell in the PCC

– Dividends are determined by the Board as in any company and approved by the members. The M&A will typically allow Cell shareholders to approve or decline the cellular dividend.

– This could be one of the functions of the Cell class meetings – This distinguishes Cell Shares from typical preference shares with fixed

coupon / interest rates


Redemption of Cell SharesRedemption of Cell Shares

• Both the PCC Promoters and the Cell Shareholders will want to retain control over termination of the Cell.

• Termination of a Cell implies winding up or liquidating the cell and redeeming the Cell shares out of profits and assets therein.

• The Cell Class meetings should be empowered to meet to resolve the redemption of the Cell Shares or to request the Directors to do so. Cell Shareholders in Atlas Insurance PCC will have the right to make such a request to the Board.

• MFSA may issue regulations to govern Cell liquidation.


Transfer of Transfer of CCellular ellular AAssetsssets

• Cell companies may transfer cellular assets to third parties, including other Cell companies.

• The transfer must be approved by the MFSA.

• The MFSA will only approve the transfer if creditors of the cell have been informed of such transfer and consented.

• The transfer of cellular assets to another person shall not of itself entitle creditors of the cell to have recourse against other assets of the transferee.

• Cell transfer approval is not required for transfers made in the course of ordinary administration of the cellular assets e.g. In order to invest the cellular assets, make payments, settle claims etc.


Cell Cell SolvencySolvency Requirements Requirements

• Each Cell in a PCC must satisfy the solvency requirements under the Assets & Liabilities Regulations individually.

• Solvency is not calculated on a ‘consolidated basis’ (Core + Cells) as one Cell’s surplus cannot make good for the solvency deficit of another cell.

• It is only the minimum guarantee fund (plus any ‘buffer’ which may be required by the MFSA) which applies to the PCC as a whole.

• The valuation of assets and exposure limits provisions in the Assets & Liabilities Regulations apply to both cellular assets and non-cellular assets.


The Management of the CellsThe Management of the Cells• As a general rule, the management of each of the Cells and their assets and

liabilities is entrusted to the Board of Directors of the PCC.

• The Board of Directors may delegate the management of a particular Cell or Cells to 3rd party Insurance Managers. In which case the Managers will always be subject to the overall supervision and control of the Board.

• The Board may also establish a committee or commitees to oversee the administration of a particular Cell. The Committee will be accountable to the Board and should report regularly.

• Persons who may sit on this committee may include a representative of the third party Insurance Manager, Investment Advisors, Shareholders, etc.

• It is important to keep in mind that ultimate responsibility for the handling of Cellular Assets remains with the Directors.


MFSA FeesMFSA FeesInsurance UndertakingsMFSA Fees in respect of each cell:

- Submission of application - Lm300 - Acceptance of application - Lm300 - Supervisory Fee (annual) - Depends on Gross Premiums

Receivable by the Cell.

Insurance IntermediariesMFSA Fees in respect of each cell:

- Submission of application – Lm100 - Acceptance of application – Lm100 - Supervisory Fee (annual) – Depends on Gross Commissions

Receivable by the Cell.


TThank youhank you

Dr. Matthew Bianchi Ganado & Associates, Advocates 176, Old Bakery Street, Valletta VLT09, Malta...

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