Guernsey: Fund Finance And Releases Of Investor Commitments: How Can Lenders Protect Themselves?

Although the fund finance market has historically been, and continues to be, a particularly low-risk one for lenders, recent events have led some to consider a rather rare and unlikely scenario: what if a fund simply releases or waives the commitments of its investors without lender consent?

A credit agreement will usually include a contractual prohibition on a release or waiver of commitments in this manner, such that the eventuality is arguably just an example of a concern innate in any financing transaction: fraud risk (although the possibility of an inadvertent breach is not necessarily fanciful). This is perhaps particularly so in relation to covenants designed to protect and preserve a borrower's assets. Consequently, having conducted satisfactory due diligence, lenders will hopefully, for the most part, be able to regard the prospect of such a breach as sufficiently remote to proceed.

With that said, given that most lenders in the fund finance space extend credit in part or entirely in reliance upon investor commitments, the ramifications of such commitments simply disappearing are arguably more of a fundamental threat to a lender's interests than other breaches, particularly in the case of early stage funds. As such, taking reasonable steps to help protect against this concern is, in our view, appropriate and prudent.

We are aware that some jurisdictions (including for example, many US states) have enacted specific statutory provisions to help mitigate the risk of release/waiver by providing that in certain circumstances, persons extending credit to an entity in reliance on the commitments of its investors may, notwithstanding a compromise of those commitments, enforce the original obligations directly against the investors. Although this approach has been adopted in the Cayman Islands with respect to Limited Liability Companies ("LLCs"), no such provision is currently contained in the statutory regimes for Exempted Companies ("Companies") or Exempted Limited Partnerships ("ELPs"), which together constitute the vast majority of Cayman Islands funds. Consequently, while we intend to seek to have such a provision enacted in the future, it is currently worth considering as a matter of Cayman Islands law, what remedies may be available following such a waiver or release, and, perhaps more importantly, how can a lender best protect itself in advance?

Dealing with a waiver that has already happened

An affected lender's primary remedies will lie pursuant to the terms of the relevant finance documents. If the borrower is solvent then calling an event of default will ordinarily be the most straightforward route available.

The more difficult scenario is where the counterparties to the finance documents are insolvent. The remedies available in such a scenario will be highly fact-dependant (and in several instances, dependant on the knowledge and state of mind of the parties involved). This note does not purport to be an exhaustive list of all remedies that may be pursued, but rather seeks to to identify, in general terms, some of the options a lender may wish to consider in attempting to unwind or bring other claims in respect of a purported release or waiver in circumstances where the borrower is insolvent and the orthodox contractual remedies have no value.

Statutory remedies

Fraudulent transactions at an undervalue

Pursuant to the Fraudulent Dispositions Law and section 146 of the Companies Law (which effectively applies equally to LLCs and ELPs), a disposition of property by or on behalf of a fund made:

  1. within the previous six years;
  2. at an undervalue; and
  3. with an intent to wilfully defeat an obligation owed to a creditor,

shall be voidable at the insistence of the creditor prejudiced (in the case of the Fraudulent Dispositions Law) or the fund's official liquidator (in the case of the Companies Law).

A "disposition of property" should generally be construed broadly enough to capture the fund's release of obligations owed to it, and demonstrating that such release was an "undervalue" should be relatively easy in circumstances in which little is being provided by the investors in return.

Consequently, the success of such an action will commonly turn on whether or not it can be shown that the fund made the release with a mind-set that was wilfully intended to harm the lender. While this is a relatively high bar for claimants to surmount, it is at least arguable that the deliberate breach of contractual restrictions in circumstances where insolvency exists or ensues could help demonstrate the necessary intent.

Fraudulent trading

In a similar vein to the remedies identified in the preceding section, pursuant to section 147 of the Companies Law, an insolvent fund's official liquidator is able to seek a declaration from the Court requiring persons who were knowingly parties to the carrying on of business by the fund with:

  1. intent to defraud creditors of the fund;
  2. intent to defraud creditors of any other person; or
  3. any fraudulent purpose

to make such contribution to the assets of the fund as the Court thinks proper.

Although on its face a broad ranging remedy, the twin requirements to demonstrate an intent to defraud/fraudulent purpose on the part of the fund's management and knowledge of that fraud on the part of the investor whose commitment has been released, will mean that the evidential requirements to permit a liquidator to successfully make out such a claim will pose a relatively high bar.

Claims for reinstatement of commitments under the Exempted Limited Partnership Law

Pursuant to section 34 of the Exempted Limited Partnership Law, if a limited partner is released from its commitment, and at such time:

  1. the ELP is insolvent (or becomes insolvent as a result of the release); and
  2. that limited partner has "actual knowledge of the insolvency...",

then, for a period of six months from the date of such release, the limited partner shall remain liable to the ELP for its original commitment to the extent necessary to discharge any liability incurred by the fund while the commitment was in place.

The provision may prove a powerful tool for lenders in certain circumstances but there is a relatively short time frame within which the provision provides a remedy. In contrast to the fraudulent transaction legislation detailed above, there is also a need to demonstrate the knowledge and mind-set of the limited partner rather than the fund1.

We would note that while there is a substantively equivalent provision that applies to LLCs under the Limited Liability Companies Law, no such provision exists in relation to Companies.

Equitable remedies

Outside of the statutory remedies identified above, there are a range of remedies which exist as a matter of case law that may prove of assistance to an aggrieved lender in certain circumstances. A key point to note in relation to these remedies is that they are firmly grounded in the state of mind of the parties involved, and accordingly the evidential requirements can prove challenging.

Claims against management

As a result of simply releasing investor commitments without proper consideration, individual members of management2 may, depending on the circumstances, be in breach of their fiduciary duties to the fund or general partner of such fund, such that compensation can ultimately be sought from them. Notably, the right of action will generally be held by the fund (or general partner), such that a claim would likely need to be brought by a liquidator of such entity.

However, in addition to practical limitations that may result from the relative "shallowness" of management's collective pockets, unhelpfully for lenders, such individuals will commonly have been granted broad rights of exculpation and indemnification from the fund or the general partner of such fund (although generally not where a breach is wilful or fraudulent). Set against this, where D&O insurance policies have been put in place, such a claim may still provide a a basis for material recovery by a lender.

Dishonest assistance

If an investor has in some way assisted or colluded with management in procuring the release of its commitment, then (as an alternative or in addition to the possible tortious claims identified below), a claim for dishonest assistance may potentially be brought against the investor. Such a claim that will generally be held by the fund (or general partner), and would accordingly likely need to be brought by an appointed liquidator.

To vindicate such a claim it will be necessary to establish that:

  1. the release constituted a breach of fiduciary duty by management;
  2. the investor procured, induced or assisted the breach; and
  3. the investor was acting dishonestly in doing so.

The relevance of pursuing this route in lieu of (or in addition to) a tortious claim is that may open a broader ambit of potential remedies, including orders requiring that the investor commitments be honoured on their original terms.

Tortious remedies

If an investor can be shown to have encouraged or participated in the release of its commitment, it may be exposed to a tortious claim for economic loss. Although the evidentiary requirements to succeed with such a claim are challenging a key point to highlight is that if the claim exists it will likely lie in the hands of the aggrieved lender, rather than in the hands of the fund/general partner. This will mean that such claims can be pursued directly by the lender, rather than by a liquidator. Possible tortious claims include the following:

Intentionally inducing/procuring a breach of contract

To make out such a claim the lender would need to demonstrate that the borrower's breach of contract (in the form of a restriction on the release) was induced or procured by the investor, who was on notice of the existence of the prohibition (see below regarding such notice). If successful it would give rise to a direct and independent claim for damages against the investor for any losses suffered by the lender as a result of the breach.

Lawful or unlawful means conspiracy

Making out a claim for lawful means conspiracy would entail demonstrating:

  1. that the investor acted in concert with the borrower to procure the release/waiver of its commitment with the predominant purpose of injuring the lender; and
  2. that the lender was thereby injured.

An unlawful means conspiracy claim is similar, save that there is no need to demonstrate a predominant purpose to injure if the means deployed were unlawful in and of themselves. Whether such "unlawful means" would encompass a breach of contract is a matter which is not yet settled by the courts, and has been said to be one that will depend upon the precise nature of the relationship between the parties.

Protecting against the prospect of a waiver in the future

Provision in investor documentation

Absent statutory protection, a lender's strongest bulwark against a fund's unilateral release of commitments will likely be the inclusion of a specific provision in the investor documentation prohibiting the same without the express consent of the lender, drafted to ensure that it may be directly enforced by the lender pursuant to the Cayman Islands Contracts (Rights of Third Parties) Law (the "Third Party Rights Law").

As a legal matter, it is worth noting that while, in the case of an ELP, this would generally best be included in its limited partnership agreement, the ambit of the Third Party Rights Law does not extend to the memorandum and articles of a Company. As such, when dealing with a Company, such a provision should commonly be included the investors' subscription agreements instead.

As a practical matter, it is common for lenders to encounter resistance to the inclusion of third-party enforcement provisions generally and particularly where the investors documents have been finalised and the fund is already up and running. Further, there will likely be some sensitivity to seeking to seeking to include a provision specifically to address concerns about fraud-style risks. However, given that, in essence, such a provision largely seeks to replicate the practical effect of the statutory protections for LLCs referred to above (and to which many on-shore funds will already be subject), our view is that there should not normally be any substantive concern for sponsors in including it, and it may provide some genuine comfort to lenders and their credit committees.

Notifying investors of the restrictions on waiver and release

If a direct contractual nexus between the lender and the investors cannot be included in the fund documentation itself, our view is that there may still be a practical benefit to ensuring that the investors themselves are notified, in reasonable detail, of the fund's undertaking in the loan documentation not to waive or release without lender consent. By ensuring that investors are made aware of the fact that such a unilateral release or waiver would constitute a breach of contract (and perhaps certain fiduciary duties), many of the elements necessary to pursue the remedies outlined above may be easier to demonstrate.

Further, where security is being taken over the commitments, as a matter of Cayman Islands law, we would generally expect notice of the same to be being given to investors as part of the perfection process (in addition to helping guard against set-off rights arising); a summary of the contractual restrictions can thus easily be included in such notice.


As above, in our view, the risk of this eventuality is a notably small one; a view supported by the exceptional rarity of such an occurrence during the industry's decades long history.

However, as in any credit transaction, there is doubtless wisdom in taking steps to protect against even the more unlikely concerns, particularly given the fact specific nature of many of the available remedies, the minimal cost of doing so, and the likely benefit to the industry as a whole.

To download the update, please click here.


1  Although of course demonstrating a limited partner's knowledge of the insolvency is a lower burden that demonstrating an intent to willfully defeat an obligation, the requirement that the knowledge be "actual" is notable.

2  Whether directors or managers of a corporate fund, or of the general partner of an ELP.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions