Cayman Islands to Revise ELP Law and Introduce New Third Party Rights Law
By Nicholas Butcher, Partner, and Nick Evans, Partner, Maples and Calder
Published: 30 June 2014
On 21 February 2014, the Cayman Islands government published two eagerly awaited Bills. The first is intended as a comprehensive revision of the current Exempted Limited Partnership Law and the second will be a brand new law, the Contracts (Rights of Third Parties) Law, which will recognise third party rights and make them enforceable. The purpose of this article, which assumes the laws will be enacted substantially in the form of the Bills, is to summarise certain key provisions of both Bills and to assess their practical implications once in force. At the time of writing, the Bills have not yet been enacted. It is expected that both will be passed into law in or around the second quarter of 2014.
Exempted Limited Partnership Law
The Exempted Limited Partnership Law (2013 Revision) is to be repealed and replaced by the Exempted Limited Partnership Law, 2014 (the "ELP Law"), but the new law will not make fundamental alterations to the nature, formation or operation of Exempted Limited Partnerships (ELPs).
The basic constitution of an ELP will remain the same. An ELP will continue to require a general partner, who will have unlimited liability, to act for and on behalf of the limited partners, who will have limited liability. As previously, an ELP will not have separate legal personality meaning that it will continue to contract through, and property or other assets of the ELP will continue to be held by, the general partner for and on behalf of the ELP. The establishment of an ELP through execution of an LPA between the partners followed by registration using a simple statement will remain the same, as will the basis on which an ELP is dissolved.
However, in a number of significant respects, the law governing ELPs will be improved or clarified and, in addition, welcome new concepts will be introduced. These include:
Fiduciary Duties
The ELP Law will amend the statutory duty of good faith for the general partner in the following respect:
"A general partner shall act at all times in good faith and, subject to any express provisions of the partnership agreement to the contrary [emphasis added], in the interests of the exempted limited partnership."
This means the absolute requirement of the general partner to act at all times in good faith will be preserved, but the LPA will be able to determine in whose interests the general partner is required to act in any given circumstance. This will enable the LPA to manage competing interests, for example, in the context of conflicts of interest or where the general partner is general partner to multiple partnerships. The default position in the absence of express provisions in the LPA is that the general partner will be required to act in good faith in the interests of the ELP (which in effect means the limited partners taken as a whole).
The ELP Law will expressly confirm that neither limited partners nor members of any board or committee of an ELP owe any fiduciary duty in exercising any of their rights or authorities or in performing any obligations under the LPA or as a member of the board or committee as the case may be. In both cases this will be subject to the express provisions of the LPA to the contrary so that the application and scope of fiduciary duties can be adjusted by agreement of the partners. This does not mean that limited partners or members of a committee will never owe any duty or obligation in any circumstance. Duties can be accepted through contract or conduct. It is also submitted that the Cayman Islands court will not give the benefit of exculpation or indemnification provisions in the LPA in cases of dishonesty or other unconscionable behaviour. Limited partners and members of committees should continue always to act in good faith.
Key Investor Improvements
The ELP Law will enhance the protections and safe guards available to the limited partners of an ELP which in turn will make the operation of an ELP both more efficient and certain. These improvements include:
- An expansion of the express limited liability "safe harbours" with respect to membership and operation of boards and committees related to an ELP. The limited partners of an ELP can lose limited liability if they take part in the conduct or management of the business of the ELP. The ELP Law sets out a comprehensive list of activities which, if undertaken by a limited partner, will be deemed not to be taking part in the conduct or management of the business.
- Ability to enforce committee terms. Where the LPA contains provisions for the establishment and regulation of any boards or committees of the ELP, or of its partners or a class or category of those partners, then subject to the express provisions of the LPA any person duly appointed to the board or committee shall have notice of those provisions which will not be unenforceable by such person by reason only that the person is not a party to the LPA. This will provide comfort to committee members that they will have the benefit of committee terms of reference set out in the LPA even if they are not an express party to the LPA.
- Streamlining and simplifying the technical requirements for the admission of partners and transfer of partnership interests. As the LPA is simply a contract, it is necessary to make sure that all of the partners either on admission or following a subsequent transfer of an interest are brought into a contractual relationship with all of the existing partners (general and limited). The ELP Law will contain new provisions confirming that admissions or transfers will be perfected provided that any requirements for or conditions thereto contained in the LPA have been complied with or waived in accordance with their terms. This will also have retrospective effect.
- Amendment to the circumstances in which there can be a clawback of capital contributions made to a limited partner in the event of insolvency of the ELP. Going forward, the clawback obligation will only arise if the ELP is insolvent at the time a capital distribution is made and the limited partner has actual knowledge of the insolvency of the ELP.
- Introduction of new provisions relating to the maintenance of the register of partnership interests and the recording of contributions and distributions in order to simplify the requirements of the statutory register. The register of partnership interests, which can be held in the Cayman Islands or elsewhere, will need to contain simply the name and address of each limited partner, the date the person became a limited partner and the date the person ceased to be a limited partner. The register will be capable of inspection by all partners, subject to an express or implied term of the LPA to the contrary, and any other person with the consent of the general partner. However, financial details, such as with respect to contributions and payments representing a return of contribution, can be kept on a separate record maintained by the general partner in any country or territory. The record will be open to inspection only with the consent of the general partner.
Operational enhancements
The ELP Law will introduce a number of new provisions and confirmations intended to simplify the administration and operation of ELPs and to assist with partnership transactions. These include:
- Enabling registration of foreign limited partnerships to allow such partnerships to qualify as a general partner of an ELP. In addition to Cayman Islands companies, ELPs and registered overseas companies, overseas partnerships will be able to register in the Cayman Islands for the purposes of being a qualifying general partner of an ELP. This will require the filing of formation documentation together with a certificate of good standing with respect to the foreign partnership similar to the procedures through which an overseas company is registered in the Cayman Islands. This will avoid the need for a second, or administrative, general partner to be appointed to act as the qualifying general partner if it is intended that an overseas partnership, such as a Delaware limited partnership, should carry out the substantive general partner duties.
- Introduction of a short form method of dissolving an ELP through strike-off. This ability will enable the Registrar where there is reason to believe that an ELP is not carrying on business or is not in operation to be struck from the Register and be dissolved. The strike-off may be effected directly by the Registrar or following a request by the general partner to strike the ELP. An ELP struck from the Register will be capable of restoration within two years on general application and up to 10 years with the approval of the Cayman Islands government. The striking-off of an ELP will not affect the liability, if any, of any general partner or limited partner.
- Introduction of new provisions enabling an ELP to transfer by way of continuation, "migrate", from the Cayman Islands to another jurisdiction. If allowed by the laws of the incoming jurisdiction, that continuation can be as a partnership, body corporate or other form of entity. This will provide greater certainty and ease in re-domiciling an ELP to another jurisdiction.
-
Enabling third parties to execute the LPA in order to take the benefit of a particular provision without being deemed a partner. This will enable stakeholders to the ELP who properly are not partners, such as managers or sponsors, to take the benefit or obligation of the terms of the LPA without risking adverse consequences if they would otherwise be characterised as a partner of the ELP.
- Express confirmation that an ELP can create a floating charge over its assets or any class of assets. This will remove any uncertainty as to whether an ELP can create a floating charge due to an absence of corporate personality.
- Express confirmation that any right to make capital calls vested in the general partner or in the name of the ELP shall be held by the general partner as an asset of the ELP. This will put the right to make capital calls on the same footing as any other asset of the ELP and will give greater certainty in the context of assignment of the right to make capital calls by way of security in finance transactions.
- Introduction of new provisions creating a statutory novation of assets and liabilities on substitution of a general partner such that all rights and property of every description of the ELP held by the former general partner will vest without further formalities in the incoming general partner (and any continuing existing general partners). Similarly, the ELP Law will confirm that upon the withdrawal of a general partner all rights and property of the ELP will continue to be held by the remaining general partners. This will simplify the administration of changes in general partners and avoid the need, as a matter of Cayman Islands law, for express transfers of assets and liabilities as between general partners on any change in the constitution thereof.
- Introduction of new provisions confirming that if the LPA provides that where a partner fails to perform any of its obligations under or otherwise breaches the LPA, the sanctions applicable for the failure of performance or breach will not be unenforceable solely because they are penal in nature. Pure penalty provisions (i.e. remedies which are not commensurate with loss calculated in accordance with Cayman Islands damages principles) may be unenforceable as a matter of Cayman Islands law generally. This amendment will make clear that the sanctions routinely found in LPAs, for example in the context of failure to commit additional capital when called upon to do so, will not be unenforceable solely by virtue of being deemed a penalty.
Contracts (Rights of Thirds Parties) Law
Cayman Islands law observes privity of contract, meaning that only parties to an agreement have the benefit and burden of its terms. Consequently, it is usually not possible for a person who has not signed an agreement to enforce its terms even if the actual signatories have sought to recognise that person under the agreement (often called "third party beneficiary rights").
The Contracts (Rights of Third Parties) Law, 2014 ("CRTPL") will confer on third parties, via an opt-in requirement, a statutory right of enforcement, in their own right, of contractual terms afforded to them which are contained in a Cayman Islands law governed agreement even though they are not a party thereto. Only contractual terms that are expressed in writing to be capable of enforcement by the relevant third party will be so enforceable. Having opted in, the parties to the contract may not rescind or vary the contract so as to alter or extinguish a third party's rights without his consent, unless the contract expressly excludes that entitlement.
Scope of application
Contractual terms capable of being enforced by third parties under the CRTPL include indemnities and exculpations and other limitations of liability. However, certain contracts will be specifically excluded from the new law, including company memoranda and articles of association, bills of exchange, promissory notes or other negotiable instruments; claims against employees under an employment contract; contracts for carriage of goods by sea, road or air; and letters of credit.
Effect on existing contracts
Terms and contracts entered into prior to enactment of the CRTPL will be capable of enforcement by third parties in their own right if the relevant contract:
- already contains appropriate opt-in language, which will now be effective; or
- is amended to contain such language.
Notwithstanding the above, however, a third party will only be able to enforce a right which occurs on or after the date on which the CRTPL comes into force or the contract is amended, as the case may be.
Enforcement by third party
A third party will have no greater rights than a contracting party to enforce the terms benefiting the third party, including with respect to the availability of defences and the submission of disputes to arbitration in accordance with the terms of the agreement. The law will also disallow double recovery such that where a contract is enforceable by both a third party and a contracting party, the Cayman Islands court may take account of any previous recoveries made by the contracting party when assessing a recovery under the CRTPL.
Conclusion
2013 saw a record number of ELPs registered in the Cayman Islands. The suite of revisions to the ELP Law and the introduction of the CRTPL are welcome additions to the already very well developed body of Cayman business laws and, once enacted, will help maintain the Cayman Islands as an attractive and versatile jurisdiction in which to establish and operate partnerships.
This article is intended to provide only general information for clients and professional contacts of Maples and Calder. It does not purport to be comprehensive or to render legal advice.