Offshore Limited Recourse Vehicles: A Barrier To Success In Onshore Insolvency Proceedings?

Article by Sarah Gabriel, Partner and Brandon

Barnes, Associate in the Commercial Ltigation and Civil Fraud

Department.

This article was first published in Tolley's Company Law and

Insolvency Newsletter, Volume 8, Bulletin 9, March 2009.

Introduction

Offshore jurisdictions are traditionally associated with tax

avoidance for wealthy individuals. Banking secrecy, relaxed

residency and directorship requirements for registering companies,

and a friendly judiciary have combined to make many tax-shelters

household names (the Cayman Islands, the British Virgin Islands,

and the Channel Islands come to mind). In addition to servicing the

wealth retention needs of those who can afford it, offshore

jurisdictions have played a key role in enabling securitisations

and the issue of derivative securities. Legislation friendly to the

issuance of significant volumes of debt have enabled offshore

jurisdictions both old and new to lure the capital markets to their

doorstep, with consequences for the investor attempting to collect

on defaulted financial instruments.

The liquidity crisis and consequent recession is the first of

the 'global economy', arriving after two decades of

loosening regulations on cross-border capital movements and the

emergence of new markets for investment and trade. English

investors, banks and brokerages may find structural barriers to

recovery and litigation in offshore jurisdictions whose regulatory

regime enabled the explosion of derivatives issuances for the past

twenty years. For the first time, insolvency proceedings in English

courts (with English solicitors and insolvency practitioners) will

grapple with limited recourse vehicles and cellular corporate

structures.

Structure Of The Vehicle

The 'limited recourse vehicle' is a corporate form

apparently originating in Guernsey with the enactment of the

Guernsey Protected Cell Companies Ordinance in 1997. The July 2008

enactment of the Guernsey Companies Law preserves the existence of

protected cell companies The Guernsey structure is typical of

limited recourse vehicles in other jurisdictions: a company

consists of a 'core' and a number of 'cells', to

which corporate assets can be allocated. Any non-allocated assets

are part of the core, with the core and cells administered together

with one board and sharing a common legal personality. Cells have

their own members and notional share capital. Cellular assets are

'ring-fenced', meaning they can only be liquidated in the

event of insolvency to the benefit of those creditors...