More thoughts on the ruling in The Matter of Padma Fund L.P. and potential impact

In The Matter of Padma Fund L.P. [FSD 201 of 2021] (RJP), the Cayman Grand Court held that the Cayman Court does not have jurisdiction to order the winding up of a Cayman exempted limited partnership (“ELP”) on the basis of a creditor’s petition for the winding up of the ELP. The Court ruled that the correct procedure for a creditor to follow is to commence proceedings against the general partner of the ELP for an unpaid debt. This case has clarified the process for creditors’ claims against ELPs but has also in the process added some interesting scenarios to consider for a general partner. This is particular interesting in light of the fact that ELPs are commonly used for private equity, venture capital and other investment funds and therefore the ruling provides guidance for not only general partners but also investors and creditors.

Facts

In the Padma case, the petitioners presented the petition in July 2021 seeking orders from the Court for the winding up of Padma Fund L.P. (the “Partnership”) on the basis that the Partnership is unable to pay its debts and therefore should be wound up pursuant to section 92(d) of the Companies Act (2021 Revision), as applied by section 36(3) of the Exempted Limited Partnership Act (2021 Revision).

Certain Implications

If, as the Court ruled, the remedy of any creditor of an ELP is to commence proceedings against the general partner, how will this impact on the use of foreign companies which are sometimes registered in Cayman in order to become the qualifying general partner of the ELP? How easy will it be to successfully bring a winding up petition in Cayman against a U.S. domiciled company registered in Cayman as general partner of an ELP which can apply for Chapter 11 debtor in possession protection in the U.S.?

Will the Court’s decision, perhaps over time, change the often seen practice of having one general partner in respect of several ELPs in order to, among other things, consolidate and maintain control of several ELP investment funds? The general partner holds the assets of each ELP on statutory trust. If a winding up order is made against the general partner of an ELP, and there is a shortfall in the ELP’s assets available for distribution to creditors, the liquidator appointed has a claim against the separate assets (if any) of the general partner and such claim would constitute an unsecured claim in any liquidation of the general partner. The use of one general partner to manage and control large numbers of ELP investment funds brings the solvency of such general partner more into focus.

This blogpost is not intended to be a substitute for specific legal advice or a legal opinion on the laws governing limited partnerships in the Cayman Islands. For specific advice, please contact your usual Loeb Smith attorney or any of:

E: gary.smith@loebsmith.com
E: elizabeth.kenny@loebsmith.com
E: robert.farrell@loebsmith.com