The Protected Cell Companies Law

The last several years have seen the introduction of a series of laws designed to further develop Bahrain’s financial sector, facilitate local and foreign investment, and promote the country as a simple, secure and cost-effective place to do business in the Middle East.  The suite of new legislation introduced since 2014 includes three rounds of amendments to the Commercial Companies Law in 2014, 2015 and 2018, the introduction of the Financial Trusts Law and the Protected Cell Companies Law (PCC Law) in 2016, and the 2018 Investment Limited Partnerships Law.

The PCC Law, Law No. 22 of 2016, was developed by the Central Bank of Bahrain (CBB) in coordination with the Bahrain Economic Development Board. It is the first of its kind in the GCC, adding to the range of structures available by allowing a new and innovative mechanism for structuring and raising finance for investment.

Main features of a protected cell company (PCC)

A PCC is a distinct legal entity, regulated by the CBB that is made up of a core and one or several parts called cells.  The cells of the company do not have their own legal personality, and are governed by a single board of directors that is responsible for overseeing the operation and management of the PCC and all of its cells as a whole. The PCC law allows for both the creation of new PCCs and for the conversion of existing companies into PCCs, provided the CBB has given their approval for the same.  Once established and approved by the CBB, there is no limit to the number of cells a PCC can create.  While though there is no minimum capital requirement for establishing the core or of any of the cells, the CBB shall regulate the minimum capital requirement where applicable. The most distinguishing feature of a PCC is its separation of assets and liabilities.  By segregating the assets and liabilities of a company cell from the core and other cells, such assets are only available to the creditors and shareholders of that particular cell. As such, the mechanism strengthens investors’ rights and powers to protect their assets from the wider company and its creditors.  Notably, the PCC Law also allows PCCs to give transacting third parties rights of recourse to both the assets of the company core and the appropriate cell for any liability that may arise from such transaction.

Importantly, PCCs may only undertake certain activities as listed in Article 3 of the PCC Law.  Such activities are limited to:

  • Private investment undertakings;
  • Collective investment undertakings;
  • Securitisation;
  • Insurance captive; and
  • Any other financial services subsequently listed by the CBB.

Benefits of the PCC Law to investors

Immediate benefits of the PCC company structure include improved efficiency of company administration, cost savings and improved investor confidence. PCC companies are flexible and easy to establish, to operate and to liquidate, and there is no minimum capital requirement. Existing companies may be converted into PCCs and once the PCC is established, repeat transactions or other common operations among the cells can be processed in an efficient and cost-effective manner.

The most notable advantage of the PCC structure is that the insolvency of one cell does not ordinarily affect the solvency of either the core or any other cells.   As such, the structure allows investors to easily limit exposure to creditors and shareholders between cells and the core, and individual cells may enter into a range of transactions without fear of placing the PCCs assets as a whole at risk.

The PCC Law forms an important part of the recent reforms to Bahrain’s Companies Law framework. The law was not introduced until late 2017 and, as such, fully gauging its effects on Bahrain’s investment landscape has been a bit difficult to date.  Nevertheless, such reforms bring Bahrain firmly in line with international best practices and affirm its reputation as an accessible destination for local, regional and global investors.

(This article was published on Oxford Business Group The Report: Bahrain 2020 Edition)

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