From Solomon Harris

Rhone Holdings LP, In the matter of

A July 2015 Cayman islands (‘CI’) judgment dismissed a winding up petition (‘Petition’), holding that it was an abuse of process for Petitioners to present a petition to wind up a CI Exempted Limited Partnership (‘ELP’) when they were contractually precluded from doing so by a term of the Limited Partnership Agreement (‘LPA’) which they had agreed to and signed. Here we look at the Judge’s reasons, published by the Grand Court (‘Court’) on 16 September 2015.

The LPA

The ELP was named Rhone Holdings LP (‘Rhone’), and the relevant provisions in its LPA which was subject to the jurisdiction of the Court, and governed by CI Law (except for any determination of gross negligence), included:

‘Term’ (‘Clause 5.12’)

‘The Partnership shall continue its existence until terminated in accordance with this Agreement’;

‘Termination’ (‘Clause 12.1’)-

the LPA could be terminated at any time, with the approval of all the Parties

‘Bankruptcy’

‘not to cause (a) an involuntary proceeding to be commenced or an involuntary petition to be filed seeking (1) winding up, liquidation, dissolution, reorganization, or other relief in respect of the Partnership…’;

Attempted Termination

One of the General Partners (‘the Respondent’) refused to agree to the termination. This meant that the terms of the LPA for termination could not be met. The other Parties applied to the Court for an Order to appoint joint provisional liquidators in accordance with the CI Companies Law (2013 Revision) (the ‘CL’) and the Exempted Limited Partnership Law (2014 Revision) (the ‘ELP Law’). This was granted without hearing from the Respondent.

Strike out application

The Respondent applied to strike out the Petition, and at that hearing its Counsel pointed out that the first Order had been made without considering s.95(2) of the CL, which provides that:

The Court shall dismiss a winding up petition hearing of a winding up petition on the ground that the petitioner is contractually bound not to present a petition against the company.

Free to agree

There was no dispute that the Petitioners had contracted not to present a winding up petition. In the Judge’s interpretation of the position at common law, relevant precedent and statute she found that partners are free to put enforceable termination provisions in their partnership agreement. By extension their agreements can also include provisions barring partners from presenting a winding up petition, and not to do any of the other matters set out in Clause 5.12 of Rhone’s LPA. The Judge considered that despite the Petitioner’s arguments to the contrary, enforcing the terms of Clause 5.12 was in keeping with public policy as it preserves the right of partners to be free to enter into such agreement as to the duration of their partnership as they think fit. Further she considered that public policy could not override the clear statutory provision of s.95(2), which she considered was mandatory. Consequently when a petition was issued where there was clear agreement not to do so it must be dismissed.

Adjournment, Strike out and costs

The Judge accepted the Petitioners’ argument that the Court had the power to adjourn rather than dismiss a petition. Her view was that this would only be where an adjournment would serve some useful purpose, such as allowing a creditor to take over the application to wind up in a clear case of insolvency. Having struck out the Petition as being an abuse of the process of the Court, the Judge awarded costs against the Petitioners on the indemnity basis, such costs having been incurred unnecessarily.

So what should you do?

The Rhone case shows that the Court will enforce the terms of partnership agreements. It is, therefore, crucially important to ensure that partnership agreements do reflect what the partners intend. Termination clauses, in particular, may not be appropriate now that it is established that the provision of the CL which makes it mandatory for the Court to enforce an agreement not to wind up a company also applies to an ELP or other partnership.

Solomon Harris

We would recommend that all existing partnership agreements (both ELP and others) should be reviewed to confirm the terms for termination, and other prohibitions against partners actions, are consistent with the partners’ intentions. If they are not then these may need renegotiation and re- drafting. Such a review should also consider other recent changes in aspects of CI law that might affect the partnership. If you have a CI ELP and would like advice or assistance with a review of the partnership agreement or other aspects of the partnership arrangements and operation please contact us on [email protected].