Article 84C of the Companies Act2 enables the legislator to “make regulations which provide for the formation, constitution, authorisation and regulation of cell companies, and which make it possible for a securitisation vehicle to convert into a cell company and for all matter that may arise in connection therewith”. The SCC Regulations were enacted on 28 November 2014 following a period of consultation.
MALTA’S LEGAL EXPERIENCE IN CELL STRUCTURES
The SCC Regulations continue to build on Malta’s experience in legislating for cell entities in various sectors including insurance (protected cell companies or PCCs), funds (umbrella or multi-fund structures), private client and the not-for-profit sectors (foundations and other legal organisations). The SCC Regulations draw on the successful features of Malta’s various pieces of cell legislation in these sectors and also introduce some important innovations that will provide securitisation structures with the flexibility and utility of cell entities.
Regulation 4 of the SCC Regulations provides that an SCC may be established solely for the purpose of either entering into securitisation transactions or the assumption of risks as a reinsurance special purpose vehicle.
The term “securitisation” is defined in Art 2 of the Securitisation Act3 as a:
“transaction or an arrangement whereby a securitisation vehicle, directly or indirectly: (a) acquires securitisation assets from an originator by any means, or (b) assumes any risks from an originator by any means, or (c) grants secured loan or other secured facility or facilities to an originator and finances any or all of the above, directly or indirectly, in whole or in part through the issue of financial instruments, and includes any preparatory acts carried out in connection with the above”.
Although the Securitisation Act caters for securitisation transactions involving the assumption of risks, vehicles established for the specific purpose of issuing insurance-linked securities are also subject to the Reinsurance Special Purpose Vehicles Regulations (RSPV Regulations)4 which transpose the provisions of the Solvency II Directive (and its implementing measures) regulating the authorisation of such issuers. The RSPV Regulations define a reinsurance special purpose vehicle as:
“an undertaking, other than an existing insurance undertaking or reinsurance undertaking, which assumes risks from a ceding undertaking and which fully funds its exposure to such risks through the proceeds of a debt issuance or any other financing mechanism where the repayment right of the providers of such debt or financing mechanism are subordinated to the reinsurance obligations of such a vehicle”.
ESTABLISHMENT OF AN SCC
No prior regulatory or administrative approval is required for the establishment of an SCC, unless the SCC is established as a reinsurance special purpose vehicle or a public securitisation vehicle that issues securities to the public on a continuous basis, in which case the SCC would require authorisation pursuant to the RSPV Regulations or the Securitisation Act, respectively.
The memorandum and articles of association of the SCC must state that the company is an SCC. In addition, the name shall include the designation “Securitisation Cell Company” or “SCC”.
The minimum share capital required for the establishment of an SCC (established as a private limited company) is €1,165, of which at least 20% must be paid up. Shares in the SCC are to be subscribed by a minimum of two shareholders and its affairs administered by at least two directors.
An SCC can be established as a private limited company with a single director, two shareholders (one of whom can hold a single non-voting and non-participating share), and a minimum authorised and issued share capital of €1,165 (at least 20% of which must be paid up). However, if the SCC intends to list its securities and/or offer those securities to the public, then it must be established as a public limited company with two directors, two shareholders (one of whom can hold a single non-voting and non-participating share), and a minimum authorised and issued share capital of €46,588 (at least 25% of which must be paid up). Share capital can be applied towards the initial and ongoing expenses of the vehicle, whether it is a private or public company.
It is expected that the Companies Act will shortly be amended to allow private limited companies to list their securities provided that they are not also offered to the public.
SINGLE LEGAL ENTITY; MULTIPLE PATRIMONIES
While a cell company may create one or more cells, reg (4) of the SCC Regulations provides that cells do not have a separate legal personality and that the SCC will be treated as a single legal person.
Nevertheless, reg 4(4) provides that the assets and liabilities attributable to each cell will be treated as a segregated patrimony distinct from the assets and liabilities attributable to other cells and separate from the assets and liabilities attributable to the SCC generally (ie the non-cellular or “core” patrimony).
SEGREGATION OF PATRIMONIES; NO CROSS-CONTAMINATION
The SCC Regulations contain various provisions designed to ensure the segregation of assets and liabilities between the different cells and to ensure that no cross-contamination (consolidation) occurs in the event of insolvency of a cell.
Cellular assets attributable to a cell of an SCC are only available to the creditors of the vehicle in respect of that cell and are not available to meet liabilities attributable to other cells.
Conversely, reg 12 of the SCC Regulations provides that a liability attributable to a cell may only be met using assets attributable to that particular cell. Regulation 12(2) will allow a vehicle’s promoters to make provision in the company’s constitutive documents to apportion certain costs relating to the day-to-day administration of the vehicle to the various cells.
Regulation 10(1) of the SCC Regulations provides that it shall be an implied term in every transaction with an SCC that no party to that transaction may seek to satisfy any liability not attributable to the cell by seeking to recover by any means against assets attributable to other cells. In the event that a creditor succeeds in recovering a sum in contravention of this Regulation, the creditor would be required to refund the cell from which the assets were wrongly obtained.
The SCC Regulations also importantly provide that any proceeding taken against an SCC shall respect the status of each cell as a segregated patrimony separate from the assets and liabilities of other cells and from the non-cellular patrimony of the SCC. Moreover, any administrator or liquidator appointed in respect of an SCC is required to respect segregation between cells. Regulation 7(2) of the SCC
Regulations requires directors of an SCC to keep assets attributable to the different cell separately identifiable from the assets attributable to other cells and from the assets not attributable to any cell, including a specific requirement to hold separate records, accounts and statements.
ESTABLISHMENT OF CELLS
A cell may be established by means of a resolution of the board of directors of the company resolving to establish a cell for the purpose of entering into a securitisation transaction. Each cell shall have its own distinct name or designation, which shall include the word “cell”.
Although it is not required to constitute a cell, an SCC may issue shares, referred to as “cell shares”, in respect of cells it establishes and the proceeds of the issue of cell shares would form part of the patrimony of the cell in respect of which the shares were issued. Shares may also be issued by the vehicle in respect of its non-cellular patrimony, in which case the proceeds would be considered as non-cellular assets. Unlike protected cell companies or multi-fund structures, therefore, the establishment of a cell need not be linked to the issuance of cell shares or a separate class of shares — a board resolution in the required terms will suffice.
An SCC is required to deliver a copy of the resolution establishing the cell to the Registrar of Companies in Malta within 14 days of its date.
In addition, an SCC is also required to notify the Malta Financial Services Authority (MFSA), in its capacity as competent authority under the Securitisation Act, that it intends to enter into one or more securitisation transactions in respect of a cell prior to the commencement of business of that cell.
An SCC can enter into one or more securitisation transactions in respect of a single cell, provided that there can only be one originator of securitisation assets for each cell. This is the case irrespective of the purpose for which the SCC was established, ie whether for insurance-linked securitisations or other forms of securitisation transactions generally. In either context, entities that form part of the same group will be considered as a single originator.
REINSURANCE SPECIAL PURPOSE VEHICLES
One of the main attractions of SCCs is their potential for use as platform structures for insurance-linked securities transactions such as collateralised reinsurance, private catastrophe bonds and bespoke longevity solutions.
An SCC may be established as a reinsurance special purpose vehicle only after prior authorisation by the MFSA is obtained. The authorisation process for the establishment of an SCC for the purpose of issuing insurance linked securities incorporates the criteria set out in the RSPV and the Solvency II regime for securitisation vehicles.
Each cell of an SCC authorised as a reinsurance special purpose vehicle is also subject to prior regulatory approval by the MFSA.
As indicated above, each cell established by an authorised SCC (authorised as a reinsurance special purpose vehicle) may enter into one or more insurance-linked securitisation transactions provided that the insurance risks assumed always originate from the same insurance undertaking or an insurance undertaking belonging to the same group. However, different cells may enter into transactions with different originators thus enabling SCCs to be used as platform structures.
The fully funded capital requirement that applies to securitisation special purpose vehicles established under the RSPV Regulations (and therefore in accordance with Solvency II) will apply on a cell-by-cell basis.
PUBLIC SECURITISATION VEHICLES
A securitisation vehicle that issues or intends to issue financial instruments to the public on a continuous basis will be considered as a public securitisation vehicle under the Securitisation Act, and will accordingly require a license from the MFSA prior to issuing financial instruments to the public.
ISSUE OF FINANCIAL INSTRUMENTS
Maltese SCCs may, in respect of any of its cells, issue one or more financial instruments in one or more tranches, the proceeds of which would form part of the cellular assets of the cell in respect of which the financial instruments are being issued.
The SCC Regulations empower the directors of the company to choose a different base currency of each cell of an SCC, and the base currency of each cell may be different from the currency of the non-cellular share capital of the SCC. Where the directors do not specify the base currency of a cell, it will be deemed to be the currency of the non-cellular share capital of the SCC. While a cell can have only one base currency, financial instruments issued in respect of that cell may be denominated in multiple currencies.
Annual accounts of the SCC can be drawn up in the currency of the non-cellular share capital or the base currency chosen in respect of any of the cells. Directors of an SCC are also required to maintain accounting records in respect of each cell in the base currency chosen in respect of that cell.
APPLICATION OF THE SECURITISATION ACT
SCCs are also subject to the provisions of the Securitisation Act. The Securitisation Act provides several statutory solutions that were specifically designed to provide greater certainty in respect of the typical structuring concerns of investors and credit rating agencies, including true sale, bankruptcy remoteness, non-petition clauses, priority of creditors and limited recourse provisions.
Moreover, SCCs are specifically exempt from any kind of licence (except that required for public securitisation vehicles or reinsurance special purpose vehicles, of course). In this regard, the Securitisation Act also specifically provides that a securitisation vehicle will not be considered to be a collective investment scheme (and, correspondingly, not an alternative investment fund) under Maltese law,5 which is particularly relevant to securitisation transactions that involve a dynamic portfolio of underlying assets.
CONTINUING MALTA’S TRADITION
The SCC Regulations continue Malta’s tradition in legislating for cell structures by extending the concept to the securitisation context, providing a statutory confirmation that each cell constitutes a separate patrimony and that the segregation of assets between cells will be respected, both in the event of insolvency or otherwise. When considered with the innovative provisions of the Securitisation Act, and, in the case of reinsurance special purpose vehicles, those of the RSPV Regulations, the SCC Regulations broaden the structuring opportunities available for arrangers of securitisation transactions.
1 Subsidiary Legislation 386.16, Laws of Malta.
2 Chapter 386 of the Laws of Malta.
3 Chapter 484 of the Laws of Malta.
4 Subsidiary Legislation 403.19, Laws of Malta.
5 See GANADO, Ambery, Mizzi, ‘Maltese Securitisation Vehicles are not Alternative Investment Funds’,  7 JIBFL 465.
This article was published in the Journal of International Banking and Financial Law,  3 JIBFL 164.