Rights and Liabilities of Limited Partners of Exempted Limited Partnerships in the Cayman Islands

What is an Exempted Limited Partnership?

• An exempted limited partnership (ELP) is a type of Cayman Islands partnership registered in accordance with the Cayman Islands Exempted Limited Partnership Act (as revised) (ELP Act).
• An ELP is required to have at least one general partner (who has responsibility for the management of the ELP) and one limited partner.
• At least one general partner must be resident (if an individual) or registered (if a company or partnership) in the Cayman Islands.
• An ELP does not have separate legal personality (unlike a Cayman company) and acts through its general partner.
• An ELP cannot conduct business with the public in the Cayman Islands other than so far as may be necessary to carry out the business of the ELP outside the Cayman Islands.
• There are currently 39,646 ELPs registered in the Cayman Islands.

What rights does a limited partner have under Cayman Law?

Contractual Rights

• The partnership agreement for an ELP (LPA) primarily governs the rights of limited partners.
• LPAs typically include rights to information for limited partners and economic rights relating to distributions and a return of capital on a winding up.

Statutory Rights

A limited partner is entitled to:

• act in its own self-interest and without regard to any duties of a fiduciary nature towards the ELP and other partners, subject to any express provisions of the LPA to the contrary (section 19(2) ELP Act);
• true and full information regarding the state of the business and financial condition of the ELP, subject to any express or implied provisions of the LPA to the contrary (section 22 ELP Act); and
• inspect the register of limited partnership interests, subject to any express or implied term of the LPA (section 29(3) ELP Act).

Does a limited partner owe fiduciary obligations to an ELP or the other partners?

A limited partner does not owe fiduciary obligations to an ELP or the other partners, subject to any contractual obligation to the contrary in the LPA.

What is the liability of a limited partner under Cayman law?

• • A limited partner of an ELP is not liable for any of the debts or obligations of the ELP, unless it “takes part in the conduct of the business of the ELP” in its dealings with persons other than partners of the ELP.
  • If a limited partner “takes part in the conduct of the business of an ELP”, such limited partner will, in the event of insolvency of the ELP and in respect of the period that such limited partner participated in the conduct of the business of the ELP, be liable:

1. 1. 1. 1. for all incurred debts and obligations of the ELP as though such limited partner was for that period a general partner; and
         2. only to a person who transacts business with the ELP with actual knowledge of such limited partner’s participation and who reasonably believed such  limited partner to be a general partner.

Safe harbour activities for a limited partner

There is a non-exhaustive list of “safe harbour” activities which, if a limited partner engages in, will not be considered “taking part in the conduct of the business of the ELP” (section 20(2) ELP Act). These include a limited partner:

• • holding an office or interest in, or having a contractual relationship with, a general partner or being a contractor for or an agent or employee of the ELP or of a general partner or acting as a director, officer or shareholder of a corporate general partner;
  • consulting with and advising a general partner or consenting or withholding consent to any action proposed, in the manner contemplated by the LPA, with respect to the business of the ELP;
  • investigating, reviewing, approving or being advised as to the accounts or business affairs of the ELP or exercising any right conferred by the ELP Act;
  • acting as surety or guarantor for the ELP either generally or in respect of specific obligations;
  • approving or disapproving an amendment to the LPA;
  • calling, requesting, attending or participating in any meeting of the partners;
  • taking any action that results in the winding up or dissolution of the ELP;
  • taking any action required or permitted by the LPA or by law to bring, pursue, settle or terminate any action or proceeding brought pursuant to section 33(2) of the ELP Act;
  • appointing a person to serve on any board or committee of the ELP, a general partner or a limited partner or removing a person therefrom;
  • serving on any board or committee of the ELP, a general partner, the limited partners or the partners, or by appointing, electing or otherwise participating in the choice of a representative or any other person to serve on any board or committee, or by acting as a member of any board or committee either directly or by or through any representative or other person, including giving advice or consenting, or refusing to consent, to any action proposed by the general partner on behalf of the ELP and exercising any powers or authorities or performing any obligations as a member of that board or committee in the manner contemplated by the LPA;
  • serving on the board of directors or a committee of, consulting with or advising or being an officer, director, shareholder, partner, member, manager, trustee, agent or employee of, or by being fiduciary or contractor for, any person providing management, consultation, custody or other services or other products for, to or on behalf of, or otherwise having a business or other relationship with, the ELP or a general partner of the ELP; or
  • voting as a limited partner on:

1. 1. 1. 1. the winding up and dissolution of the ELP;
         2. the purchase, sale, exchange, lease, mortgage, pledge or other acquisition or transfer of any asset by or of the ELP;
         3. the incurrence or renewal of indebtedness by the ELP;
         4. a change in the nature of the business of the ELP;
         5. the admission, removal or withdrawal of a general or limited partner and the continuation of the business of the ELP thereafter; or
         6. transactions in which one or more of the general partners have an actual or potential conflict of interest with one nor more of the limited partners.

Return of contributions

A limited partner that receives a return of its contributed capital within six months of the insolvency of an ELP will be liable to return the amount received (to the extent it is needed to discharge a debt or obligation of the ELP incurred during the period that the capital amount was an asset of the ELP) together with simple interest at a rate of 10% per annum (or such other rate as specified in the LPA) if at the time the payment was made, the ELP was insolvent and the limited partner has actual knowledge of the insolvency.

Legal proceedings

No limited partner may be a party to or named in proceedings by or against an ELP.  However, a Cayman Islands court may allow proceedings against a limited partner where (i) the limited partner may be liable as a general partner for the debts or obligations of the ELP (see section 4 above); or (ii) to enforce the return of partnership contributions as provided for in the ELP Act (see section 6 above).

Can a limited partner bring direct and derivative claims?

Despite the general principle that the management of the ELP is vested in the general partner, and that legal proceedings may be instituted by or against a general partner only, section 33(3) of the ELP Act provides that a limited partner may bring an action on behalf of an ELP if any one or more of the general partners with authority to do so have, without cause, failed or refused to institute proceedings.

Beneficial Ownership

Unless an alternative route to compliance is available (for regulated funds, licensed entities and listed entities) an ELP is required to identify and report particulars of its registrable beneficial owners to its corporate services provider for the purposes of maintaining and filing a beneficial owner register with the competent authority.  Registrable beneficial owners include individuals and Cayman Islands entities that (i) hold, directly or indirectly 25% or more of the partnership interests in the ELP; (ii) exercise ultimate effective control over the management of the ELP or (iii) are identified as exercising control of the ELP through other means.

The beneficial ownership information may be accessed by certain government or official bodies, or, upon approval of an application to the competent authority, by persons who can evidence a “legitimate interest” in accessing the information for the purpose of preventing, detecting, investigating, combating or prosecuting money laundering or terrorist financing.  Beneficial owners may also make an application to prevent access to their information where they reasonably believe that disclosure of their association with the ELP will place them or an individual living with them at serious risk of kidnapping, extortion, violence, intimidation or any similar danger or serious harm.

Conclusion

The rights of limited partners under Cayman law are primarily set out in the LPA for an ELP. Limited partners need to ensure that they do not take part in the management of the business of the ELP, in order to avoid losing their limited liability under Cayman law.

In summary, operating under the exempted Partnership Act allows for contractual flexibility, confidentiality, and strong creditor protections. This makes ELPs ideal for global investment funds and private equity structures and the Cayman Islands as one of the preferred global jurisdictions of choice for fund structures.

Whether structuring a new investment vehicle or ensuring an existing partnership operates efficiently, the experienced team at Appleby is available to provide comprehensive and strategic advice.