Cayman Limited Partnership Law revisions keep the Islands ahead on offshore private equity models
September 2014 | SPECIAL REPORT: PRIVATE EQUITY
Financier Worldwide Magazine
One of the many attractions of the Cayman Islands as a centre of financial structuring is the commercial focus and flexibility of its domestic laws. The elected government in the Islands works very closely with the financial services industry to ensure that the Islands’ laws remain sufficiently balanced between the twin objectives of ensuring adequate and sensible regulation of the industry but also allowing for as much flexibility as possible in order that the demands of a wide range of clients can be met. The Cayman Islands closely guards its position as a leading offshore financial centre which attracts clients from all major financial and industrial centres across the world and to that end continuously reviews and, where necessary, updates its suite of laws employed for commercial purposes.
As a strong example of this process of improvement, the Exempted Limited Partnership Law, 2014 (ELPL), which repealed and replaced the previous law, was enacted on 2 July 2014. The ELPL recognises developments in commercial practice, clarifies certain matters in order to ensure consistency of advice and allows for greater contractual flexibility to accommodate developing trends in the formation, regulation and operation of Cayman Islands exempted limited partnerships. Broadly welcomed by the legal profession in Cayman, the new ELPL also clarifies certain technical matters in order to ensure consistency of advice across the profession. We have highlighted below those changes which reflect the improvement of the commercial effectiveness of this particular piece of legislation.
There is a new definition of ‘commitment’ that includes services rendered, and the revised definition of ‘contribution’ also includes ‘services’. This makes clear that employees of the general partner can receive a limited partnership interest in return for services performed.
The new ELPL clarifies that the limited liability enjoyed by limited partners is not lost simply by reason of the partnership ceasing to have a qualifying general partner.
Where there are multiple general partners, the partnership agreement may now specify which general partner shall exercise an authority, consent or power, and allow for specific and separate authorities. This gives statutory basis for provisions such as those appointing a tax matters partner with authority to make all tax filings on behalf of the partnership.
The ability of exempted limited partnerships to create floating charges over the assets of the partnership is now expressly permitted.
All rights or property of the exempted limited partnership are now vested in any incoming general partner automatically without the requirement for further formalities. On the withdrawal of any general partner, all rights or property of the exempted limited partnership will similarly vest in the remaining general partners automatically without the requirement for further formalities.
The partnership agreement can be expressly drafted to vary the statutory duty of a general partner to act in good faith so as to allow the partnership to deal in a practical manner with issues such as conflicts of interest.
Subject to any express provision of the partnership agreement, a limited partner does not owe fiduciary duties to any other partner arising from its rights or obligations under the partnership agreement.
A wide discretion is allowed in specifying the consequences of a breach of partnership agreement (for example, default sanctions) and provides that such provisions are not to be unenforceable solely because they are penal in nature.
The formalities associated with the admission and transfer of partnership interests are simplified, by providing that admission is effective as long as it is in compliance with the partnership agreement’s prescribed protocol, even though formalities otherwise required have not been complied with.
The time period that applies to ‘statutory clawbacks’ in the event of the insolvency of an exempted limited partnership are clarified. If a limited partner receives a payment representing a return of any part of its contribution (or is released from any outstanding obligation in respect of its commitment) at a time when the exempted limited partnership is insolvent and the limited partner has actual knowledge of such insolvency, such limited partner shall be liable to repay such amount for a period of six months commencing on the date that the payment was made.
Exempted limited partnerships may now have a dual name in another language (in line with Cayman Islands companies).
The limited liability ‘safe harbour’ is expanded to include limited partners serving on any board or advisory committee, or being an officer, director, shareholder, partner, member, manager, trustee, agent or employee of, or a fiduciary or contractor for, any person in which the exempted limited partnership has an interest, or any counterparty to the exempted limited partnership or a general partner.
The partnership agreement may be enforced by the members of advisory boards notwithstanding that they may not be parties to the partnership agreement.
The new ELPL provides that the register of limited partners need only contain the name and address of each person who is a limited partner, the date on which such person became a limited partner and the date it ceased to be a limited partner. Details of contributions may now be kept in a separate register which may only be inspected with the consent of the general partner, preserving the confidentiality of such information.
An application may now be made to have an exempted limited partnership that is no longer carrying on business struck from the register. A partner or creditor may apply to the Court to restore an exempted limited partnership within certain timeframes.
A foreign limited partnership can now be registered in the Cayman Islands in order that it may act as the general partner of a Cayman Islands exempted limited partnership. Previously, only Cayman Islands persons or foreign companies registered in the Cayman Islands could act as a general partner of a Cayman Islands exempted limited partnership.
There is now a specific process for a Cayman Islands exempted limited partnership to transfer to another jurisdiction by way of continuation. The new procedure is equivalent to the procedure which exists for Cayman Islands companies.
Jonathan Law is of counsel at Campbells. He can be contacted on +1 (345) 914 5862 or by email: email@example.com.
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