Cayman Islands Grand Court’s recent ruling on Cybernaut Growth Fund L.P.
A discussion by Laura Hatfield and Richard Addlestone from Solomon Harris
Liquidating a Cayman ELP: Can your LPA exclude the ELP law?
CYBERNAUT GROWTH FUND, L.P. IN THE GRAND COURT OF THE CAYMAN ISLANDS FINANCIAL SERVICES DIVISION, CAUSE NO: FSD 73 OF 2013 (AJJ)
On 23 July 2013, the Grand Court of the Cayman Islands gave its ruling on whether the liquidation clause in a Limited Partnership Agreement (LPA) of an Exempted Limited Partnership (ELP) could oust the relevant provisions of the Cayman Islands Exempted Limited Partnership Law (ELP Law).
What had happened?
Cybernaut Growth Fund, L.P. was registered as an ELP under the ELP Law. Five of the limited partners (the Partners) presented a winding up petition pursuant to section 15(4) of the ELP Law. The petition was opposed by the General Partner (GP) and the only other limited partner (Oriental). The GP and Oriental were related parties and together owned 50.04% of the partnership interest. They sought to have the petition struck out as an abuse of the process on the grounds that there was a valid arbitration agreement, and the Partners should proceed under its terms. Furthermore, they argued that by agreeing to the provisions for termination set out in the LPA, the Partners had contracted out of their rights under the ELP Law to present a winding up petition or apply to the Court for the appointment of an independent liquidator instead of the GP being the liquidator.
Had the Partners contracted out?
The LPA had extensive clauses dealing with the termination of the partnership and one of the clauses made it clear that the LPA was to be subject to the ELP Law. Had the parties successfully contracted out of the ELP Law? The judge considered a Cayman Islands Court of Appeal (CICA) case from 2009 (TNT N.V. -v- Logispring GP L.P.) on a very similar point in regard to the ability to apply for the appointment of a liquidator other than the GP. That case held that had the parties genuinely intended to contract out of the ELP Law they would have chosen appropriate words to do so.
Could the Partners have contracted out?
In this case the Judge specifically declined to say whether a clearly drafted LPA could ever have the effect of contracting out of the ELP Law in regard to appointing liquidators and winding up, and considered that the point had been left open by the CICA in the Logispring case. However, the CICA made several references to the fact the none of the provisions of the ELP Law in force at the time the LPA was drafted “deferred to the terms of the partnership agreement, as several sub-sections of [the ELP Law] do now” This seems to imply that the CICA considers that clear clauses in the LPA would be capable of trumping certain provisions of the ELP law which are expressed to be subordinate to what the parties agree in the LPA.
Missed opportunity?
It is a shame the opportunity was not taken to clarify this point, as it leaves the ambiguity in the legislation. Some ELP Law provisions appear to allow for the ELP to be master of its own liquidation destiny through provision of terms for liquidation in the partnership agreement. But the waters are muddied by other provisions which apply to winding up and dissolution. Those imply, albeit not clearly, that regimes should apply which differ to whatever the parties have set out in their LPA. For example, the ELP Law imports provisions on liquidating companies from the Cayman Island’s Companies Law: it is not clear whether an LPA’s provisions on winding up and liquidation will trump those Companies Law provisions. It may be that this only happens where the Companies Law conflicts with the ELP Law.
The past
To work out what was intended, it may well be necessary to look at the drafting history of the relevant sections of the ELP Law. The previous legislation provided that a liquidation should follow the process set out in the LPA or, absent provision in the LPA, in accordance with orders made by the Court, upon application. The previous legislation was changed and the concept behind the change was to provide an automatic mechanism for liquidation if the LPA did not have one. That way there would be no lacuna if a dissolution event occurred and no Court orders had been made.
The present
It would seem the legislative intention was that where there are clear enough terms in the LPA, an ELP liquidation will be done on the basis of the LPA, even if it excludes rights that partners would have had if the liquidation were done under the ELP Law. There is some support for this thinking in the comments of the CICA in the Logispring case.
The future
There are competing schools of thought on whether it is possible to contract out of the ELP Law on the liquidation of a Cayman ELP. For an ELP to argue the point successfully before a Court, it will take a very clearly drafted, precisely worded, LPA, ideally one which covers every ELP Law provision on liquidation and specifically excludes the ELP Law provisions it is substituting. Until there is a case which deals with the issue, then the matter remains unclear.
For further information, please contact:-
Laura Hatfield
+345 949 0488
Or
Richard Addlestone
+345 814 0866
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