Cayman Islands: Investment Fund Series - Exempted Limited Partnership

In our previous articles, we considered several fund issues in the context of open-ended funds (such as redemptions, redemption runs and gateway provisions). In the Cayman Islands, the most common vehicle for the use of close-ended funds is an exempted limited partnership (ELP) registered under and governed by the Exempted Limited Partnership Act, 2021 Revision (the ELP Act).

The key features of an ELP, in the context of fund disputes, are: (a) the ELP itself has no separate legal personality (akin to a trust); (b) all management responsibility vests in the general partner(s) (GP); (c) limited liability for the limited partners (LPs), except in narrow circumstances; and (d) inviolable duty of the general partner to act in good faith. Like a fund's articles of association, the ELP's limited partnership agreement (LPA) sets out the respective rights and obligations of the GP and the LPs and will be construed in a manner consistent with the parties' intention and business common sense.

Whilst it is outside the scope of this brief note to identify and discuss the wide range of disputes that can arise in the context of an ELP, we summarise the main kinds we are currently seeing.

Replacement of the GP

Noting that all management responsibility vests in the GP, a GP is frequently the target for disgruntled investors of an underperforming, financially mismanaged or distressed ELP. We are often approached to review an LP's rights under the LPA and ELP Act to replace the GP. Most commonly, this can be achieved by: (i) the utilisation of their rights under the LPA to effect such a change (albeit such a right may not be included in the terms of the LPA) whilst avoiding unintended adverse consequences; (ii) appointing an independent liquidator to displace the incumbent GP (we consider this further below); or (iii) negotiate a consensual withdrawal and replacement. The ELP Act requires that the incumbent GP files a statement with the registrar of exempted limited partnerships to give effect to the replacement and failure to do so permits any other partner to petition to the Court to direct another party to file it on behalf of the incumbent GP.

Information gathering

To assist disgruntled investors ascertain if there has been mismanagement, an LP has a statutory right to compel the GP to provide it with "true and full information" about the business, affairs and financial condition of the ELP pursuant to section 22 of the ELP Act (assuming such a right has not been curtailed or removed by the LPA). Importantly, it has been held that the motives of the LP seeking partnership information pursuant to this statutory right are irrelevant (see Dorsey Ventures 2019 (1) CILR 249, and In the Matter of Gulf Investment Corporation et al v The Port Fund LP et al (Unreported 16 June 2020). Failure to comply with section 22 is grounds to issue proceedings against the GP to compel it to disclose such information.

Liquidation proceedings

It was traditionally the view that, notwithstanding that an ELP has no legal personality, the correct respondent to a winding up petition for the appointment of liquidators was the ELP itself (and not the GP). This view was upturned by a decision of the Court in 2021, Re Padma Fund LP (FSD 201 of 2021 (RPJ), 8 October 2021), where it was held that the Court had no jurisdiction under the Companies Act to wind up an ELP on a creditor's petition (rather it was the GP that must be wound up). The Court then held in a later decision, Re Formation Group (Cayman) Fund I, L.P. (FSD 366 of 2021 (IKJ), 21 April 2022)), that a just and equitable petition issued by the ELP's LPs could be brought against the ELP itself. Given these conflicting decisions and that an appellate court has yet to resolve the issue, Re Padma remains authority that the correct respondent for a creditor's petition is the ELP. It is therefore imperative to consider in what capacity and upon what grounds the investor may petition and what the consequences of the same may be. There may also be grounds available under the LPA itself to appoint a voluntary liquidator such that an independent liquidator (albeit not Court supervised) is appointed to displace the incumbent GP and manage the affairs of the ELP.

Derivative and direct claims

It has been recently held that LPs are permitted to take direct action against the GP (rather than a derivative action on behalf of the ELP itself) and are not restricted to the taking of a partnership account (as would be the case in respect of an ordinary partnership) (see Kuwait Ports Authority & Ors v. Port Link GP Ltd & Ors (CICA (Civil) Appeal Nos. 002 & 003 of 2022, 20 January 2023 (Port Link)). Furthermore, the Court of Appeal held in Port Link that a derivative action is available to LPs only if the GP has refused to or failed to do so without good cause (which is the statutory test). It is sufficient for the LPs to show a "good arguable case" in this regard. It will therefore be important to assess as early as possible what causes of action may exist, against whom and whether such claims can be framed as direct or derivative actions.