Protected Cell Companies (‘PCC’)

A series of new laws have been implemented over the past 12 months with the principal aim of promoting business in Bahrain and encouraging investors to choose Bahrain as their destination of choice when doing business in the Middle East. The most recent of these changes include the introduction of protected cell companies. 

This article explains how this new type of legal entity it operates in relation to banking and finance services and products.    

The Protected Cell Companies Law (Law No. 22 of 2016) (‘PCC Law’) was implemented on 13 October 2016 and introduced PCCs in Bahrain.  

What is a PCC?

A PCC is a single legal entity made up of a core and one or more parts called ‘cells’. Once incorporated, a PCC can have unlimited cells. The cells do not have their own legal personality but do offer ring-fencing of assets and liabilities. A PCC has one board of directors that manage the affairs of the PCC as a whole. PCCs are regulated by the Central Bank of Bahrain (“CBB”). 

Purpose of a PCC

The purpose of a PCC is to provide a vehicle which can create cells, separate parts within which assets and liabilities can be segregated. This concept of ‘ring-fencing’ is fundamental to PCCs. The key principle is that the assets of a cell are only available to the creditors and shareholders of that particular cell. However, the PCC Law provides that the PCC shall be entitled to conclude an agreement with a third party whereby the third party has the right of recourse to the assets of the core for any liability that may arise from its transaction with any of the PCC’s cells, in addition to the assets of the cell in question. This provision is untested and its practical impact is unclear.  

Setting up a PCC

PCCs can either be a newly incorporated entity, or an existing company can be converted to a PCC subject to CBB’s approval. It is unclear how efficient and straightforward the conversion option is and whether it is an attractive option where there is already an established company in Bahrain. There is no minimum capital requirement for the core or any cell; however, the CBB will determine the minimum capital requirement in each case. 

Permitted activities for PCCs 

PCCs cannot be used for ordinary trading activities. A PCC may only undertake the following activities: 

1.A private investment undertaking (‘PIU’). A PIU is defined by the CBB as investment undertakings/funds registered with the CBB, initiated by or offered to high net worth individuals or institutional investors, and impose a minimum initial investment/participatory interest of USD3 million (or equivalent in any other currency);

2.A collective investment undertaking (‘CIU’). A CIU is defined by the CBB as undertakings 

a. the sole object of which is the collective investment of capital raised from the public through private placement, including investments seeded by the operator in financial instruments, and other assets, and which operates on the basis of risk-spreading as appropriate; and 

b. the holdings of which may be re-purchased or redeemed out of those undertakings’ assets as appropriate;

3.Securitisation. This is the process of taking an illiquid asset, or group of assets, and, through financial engineering, transforming them into security. An example of this is mortgage backed security; 

4.Insurance captives. A captive insurer is generally defined as an insurance company that is wholly owned and controlled by its insureds. Its primary purpose is to insure the risks of its owners, and its insureds benefit from the captive insurer’s underwriting profits; and

5.Any additional activities that may be later identified and added into the regulation by the CBB (collectively referred to as the ‘Permitted Activities’).

The introduction of PCCs is likely to enhance Bahrain’s competitiveness in the financial services sector by making it easier to structure investment activities. It is hoped and anticipated that the flexibility under Bahrain law will allow continued innovation in relation to the use of PCCs. We hope that these changes boost Bahrain’s position as a financial hub. 

The writer is a Banking and Finance Associate in Tamimi’s Bahrain office, and has experience in a broad range of corporate, commercial, banking and regulatory matters including syndicated lending and project finance.