The Cayman Islands government announced on 21 February 2014 its intention to comprehensively revise the law applicable to Exempted Limited Partnerships ("ELPs") in the Cayman Islands. This will be effected by a repeal of the existing Exempted Limited Partnership Law and its replacement with a new law. The intention behind the changes is not to make fundamental alterations to the nature, formation or operation of ELPs, but does have the following principal objectives:
(a) To promote freedom of contract between partners.
(b) To the extent consistent with Cayman Islands law, to help
synchronise the drafting of a Cayman Islands partnership agreement
with its onshore counterpart where a structure comprises both
onshore and offshore partnerships.
(c) To deal with certain issues which the market has
signalled it would like to have addressed in order to make ELPs
even more straight forward and cost effective to set up and
manage.
The Cayman Islands government also announced the introduction of a brand new law, the Contracts (Rights of Third Parties) Law ("CRTPL"), which will recognise third party beneficiary rights and make them directly enforceable.
The new laws are not yet enacted. It is expected they will be passed in or around the second half of March 2014, and a further advisory will be published at that time with greater detail of the new laws and their practical implications for clients.
The purpose of this advisory is to highlight the principal proposals under the new laws.
Revised Exempted Limited Partnership Law
(a) Preservation of the requirement of the general partner
to act at all times in good faith whilst enabling the partnership
agreement to manage competing interests, for example, in the
context of conflicts of interests.
(b) Confirmation that, subject to the partnership
agreement, a limited partner does not owe fiduciary duties.
(c) Enabling registration of foreign limited partnerships to
allow such partnerships to qualify as a general partner of an
ELP.
(d) Introduction of new provisions regulating advisory
boards specifically to:
(i) make the terms of the partnership agreement relating to
advisory boards applicable to members notwithstanding that they may
not be parties to the partnership agreement; and
(ii) confirm that, subject to the partnership agreement, an
advisory board member does not owe fiduciary duties.
(e) Express ability for third parties to execute the
partnership agreement in order to take the benefit of particular
provisions without being deemed partners.
(f) Expansion of express limited liability "safe
harbours" with respect to membership and operation of boards
and committees of an ELP.
(g) Streamlining and simplifying the technical requirements for
the admission of partners and transfer of partnership
interests.
(h) New provisions expressly confirming that an ELP may create a
floating charge and that the property of the ELP includes any right
to make capital calls and receive the proceeds thereof.
(i) New provisions expressly confirming that default
sanctions will not be unenforceable solely because they are penal
in nature.
(j) New provision expressly preserving limited liability of
limited partners if the last remaining qualifying general partner
is lost or removed.
(k) New provisions relating to the maintenance of the register
of partnership interests and recording of contributions and
distributions in order to simplify the requirements of the
statutory register.
(l) Clarifying clawback provisions to affirm that repayment
of capital contributions will only be required if the ELP is
insolvent at the time the original distribution was made.
(m) Clarifying and streamlining the procedures for
dissolution of an ELP.
(n) Introduction of a short-form strike off mechanism for
ELPs (equivalent to the procedure which already exists for Cayman
Islands companies).
(o) Introduction of the ability to transfer an ELP out of the jurisdiction (equivalent to the procedure which already exists for Cayman Islands companies).
Contracts (Rights of Third Parties) Law
Cayman Islands law observes privity of contract, meaning that only parties to an agreement have the benefit and burden of its terms. This means that it is usually not possible for a person who has not signed an agreement to enforce its terms directly even if the actual signatories have sought to recognise that person under the agreement (often called third party beneficiary rights).
The CRTPL will confer on third parties, via an opt-in requirement, a statutory right of direct enforcement of contractual obligations contained in an agreement even though they are not a party. Only terms which are expressed in writing to be capable of enforcement by the relevant third party will be so enforceable.
In the context of ELPs, the new law is expected to assist most with indemnity and exculpation provisions of the partnership agreement which commonly seek to benefit a wider class of persons than the parties to the agreement itself. Once passed, CRTPL will allow the partners to opt-in to the new law via the partnership agreement to enable covered persons to enforce such provisions directly without the use of a deed poll or other solution to the privity rule.
As noted above, a detailed advisory will be issued on introduction of the new laws.
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.
