The Exempted Limited Partnership (Amendment) Law, 2009 (the ‘Amendment Law’) that came into force on 11 May 2009, introduced significant changes to the statutory regime that governs the creation, operation and termination of exempted limited partnerships established in the Cayman Islands. It brings clarity to certain issues, is less restrictive and permits greater freedom of contract between the parties to limited partnership agreements.
Role of limited partners
One of the areas of uncertainty under the Exempted Limited Partnership Law (2007 Revision) was whether particular activities of limited partners would constitute participating in the conduct of the business of the ELP such that limited partners would lose their limited liability and be treated instead as general partners. These activities included, (a) being a limited partner of, or holding an office or interest in, or having a contractual relationship with a general partner; (b) appointing a person to an advisory board or committee of the ELP; and (c) consenting or withholding consent to any action proposed, in the manner contemplated by the LPA with respect to the business of the ELP, all of which are often engaged in by limited partners. While many practitioners would previously have opined that these did not constitute participating in the conduct of the business, the Amendment Law now makes it clear that they do not. Further, the Amendment Law adds the following to the list of ‘safe harbour’ activities, (i) calling, requesting, attending or participating in any meeting of the partners of the ELP; (ii) taking any action that results in the winding up or the dissolution of the ELP; and (iii) taking any action required or permitted in the LPA or by law to bring, pursue, settle or terminate any action or proceedings brought in circumstances where the general partners have authority to do so but refuse, without good cause, to institute such proceedings. These are all subject to the overriding provision that, in order to avoid liability, limited partners must refrain from engaging in activities on behalf of the partnership with third parties that may therefore believe they are in fact general partners.
Transfer of ELP interests
Under the ELP Law the prior written consent of at least one general partner was required for the assignment, either absolutely or by way of mortgage, of a partnership interest and the general partner could withhold its consent for any or no reason irrespective of any provision in the LPA. The Amendment Law permits the provisions of the LPA to govern any restrictions on transfer which will allow more flexibility for limited partners obtaining loans and granting security interests over their limited partnership interests.
Further, this new provision is retroactive so that existing LPAs, which purported to permit transfers of partnership interests without the consent of the general partner, are now enforceable.
Dissolution and winding-up
The inflexible provision of the ELP Law that required automatic dissolution immediately upon the death, withdrawal or insolvency of the last remaining general partner has been relaxed so that the rule is now subject to the provisions of the LPA, or where this is not addressed in the LPA, notice is required to be given to the limited partners, which may within a period of 90 days appoint a replacement general partner and continue the partnership. Unanimous consent of the limited partners is no longer required for this purpose. Instead, the LPA will determine the requisite majority, and in the absence of any such a provision a simple majority of limited partners will be sufficient. The Amendment Law provides that a two-thirds majority of limited partners is required to wind-up and dissolve the partnership unless the LPA provides otherwise. In addition, the partners may now appoint someone other than the general partner to wind up the affairs of the ELP in accordance with the terms of the LPA.
While previously the ELP Law provided for the Court to make such orders as it would consider just and equitable on a winding-up application, for the first time there is clarity and authoritative guidance on the practice and procedure for the winding-up of ELPs. This is provided by reference to the procedure applicable to companies under Part V of the Companies Law (2007 Revision) (as amended by the Companies (Amendment) Law, 2007 which came into force on the same date as the Amendment Law) and the Companies Winding-Up Rules, 2008, except to the extent it is inconsistent with Exempted Limited Partnership Law, and substituting ‘ELPs’ for ‘companies’, ‘limited partners’ for ‘shareholders’ or ‘contributories’, and ‘general partner’ for ‘directors’ or ‘officers’. The Companies Insolvency Rules Committee is empowered to issue rules and prescribe forms for the purposes of giving effect to or interpreting these provisions.
Return of contributions
Previously, the ELP Law included a prohibition on limited partners receiving a return of capital contribution when the ELP is insolvent. This prohibition has been removed and the clawback provision is amended to state that if a limited partner receives a payment representing a return in part of his contribution to the ELP (including the release of any capital commitment) within six months before the insolvency of the ELP, such limited partner shall be liable to repay such payment, with simple interest at a rate of 10 per cent per annum or otherwise as may be specified in the LPA. The ability to determine any rate of interest in the LPA will be particularly important to Sharia-compliant partnerships which prohibit usury. Where the ELP is being voluntarily wound-up the six month period will commence on the earliest of, (a) the time of the passing of the resolution for the winding-up; (b) the occurrence of the event specified in the LPA; or (c) the insolvency of the ELP. The clawback is only available to the extent that such contribution or part thereof is necessary to discharge a debt or obligation of the ELP incurred during the period that the contribution represented an asset of the ELP.
The register of mortgages of partnership interests may now be kept at the ELP’s registered office in the Cayman Islands in either electronic form or written form. The register of partnership interests maintained at the ELP’s registered office may also be kept in electronic form rather than written form. The partnership register will now be required to show details not only of capital contributions but also of capital commitments.
Inspection of the register of partnership interests is no longer open to the public and is only open to the partners or any other person with consent of the general partner.
The Amendment Law allows for the de-registration of an ELP without the need for winding-up or dissolution provided such deregistration is permitted by the terms of the LPA.
The above amendments have been made as a response to an initiative from the private sector to enhance the exempted limited partnership as a vehicle for private equity and alternative investment funds. It is expected that additional amendments will be forthcoming after further review by both government and private sectors. In the meantime, the Amendment Law stands as the newest testament to the healthy partnership between the Cayman Islands government and the private sector.