Under the Companies Act (As Revised) of the Cayman Islands (the “Companies Act”), the Registrar of Companies (the “Registrar”) will de-register a Cayman Islands exempted company incorporated with limited liability and with a share capital (the “Applicant”) which proposes to be registered by way of continuation as a body corporate limited by shares under the laws of any jurisdiction outside the Cayman Islands (the “Relevant Jurisdiction”) if:

1.1 the Applicant proposes to be registered by way of continuation in a jurisdiction which permits or does not prohibit the transfer of the Applicant;

1.2 the Applicant has paid to the Registrar a fee equal to three (3) times the annual fee that would have been payable in the January immediately preceding the application for de-registration; and

1.3 the Applicant has filed with the Registrar, notice of any proposed change in its name and of its proposed registered office or agent for service of process in the Relevant Jurisdiction.

In order to be effective, the transfer must be approved in accordance with the Applicant’s Memorandum and Articles of Association. Usually, a special resolution of the shareholders of the Applicant will be required. Depending on the terms of the Applicant’s Articles of Association, it may even be necessary to amend the Applicant’s Memorandum and Articles of Association to permit de-registration. The directors of the Applicant must approve the de-registration and transfer by way of continuation.

An affidavit must be sworn by a director of the Applicant. The director must swear that, having made due enquiry, he or she is of the opinion that:

i. no petition or other similar proceeding has been filed and remains outstanding or order made or resolution adopted to wind up or liquidate the Applicant in any jurisdiction;

ii. no receiver, trustee or administrator or other similar person has been appointed in any jurisdiction and is acting in respect of the Applicant, its affairs or its property or any part thereof;

iii. no scheme, order, compromise or other similar arrangement has been entered into or made whereby the rights of creditors of the Applicant are and continue to be suspended or restricted;

iv. the Applicant is able to pay its debts as they fall due;

v. the application for de-registration is bona fide and not intended to defraud creditors of the Applicant;

vi. any consent or approval to the transfer required by any contract or undertaking entered into or given by the Applicant has been obtained, released or waived, as the case may be;

vii. the transfer is permitted by, and has been approved in accordance with, the Memorandum and Articles of Association of the Applicant;

viii. the laws of the Relevant Jurisdiction with respect to transfer have been or will be complied with; and

ix. once re-registered the Applicant will continue as a body corporate limited by shares under the laws of the Relevant Jurisdiction.

The affidavit must also include a statement of the assets and liabilities of the Applicant made up to the latest practicable date before the making of the affidavit.

The Applicant must deliver to the Registrar an undertaking signed by a director that notice of the transfer has been or will be given within 21 days to the secured creditors of the Applicant (if there are no secured creditors an appropriate negative statement to that effect may be included in the director’s affidavit).

The Registrar is required to publish in the Cayman Islands Gazette details of the de-registration, the jurisdiction under whose laws the Applicant will be registered or existing and the name of the Applicant if changed from the current name.
In so far as it is possible, it is advisable that the re-registration of the Applicant in the Relevant Jurisdiction is co-ordinated with its de-registration in the Cayman Islands so that both events take place on the same day. If not, there could be a period in which the Applicant is not registered in any jurisdiction (or is registered in two at the same time).

The Registrar, if she is not aware of any other reason why it would be against public interest to de-register the Applicant, will issue a de-registration certificate under her hand and seal of office stating that the Applicant has been de-registered as an exempted company and enter into the Register of Companies the date of de-registration.

From the date of the de-registration the Applicant shall cease to be an exempted company under and subject to the Companies Act.
From the date of de-registration the Applicant shall continue as a company under the laws of the Relevant Jurisdiction provided that this shall not operate to:

i. create a new legal entity;

ii. prejudice or affect the identity or continuity of the Applicant as previously constituted;

iii. affect the property of the Applicant;

iv. affect any appointment made, resolution passed or any other act or thing done in relation to the Applicant pursuant to a power conferred by the Memorandum and Article of Association of the Applicant or by the laws of the Cayman Islands;

v. affect the rights, powers, authorities, functions and abilities or obligations of the Applicant or any other person; or

vi. render defective any legal proceedings by or against the Applicant any legal proceedings that could have been continued or commenced by or against the Applicant before its de-registration may, notwithstanding re-registration, be continued or commenced by or against the Applicant after de-registration.

This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide an overview and general guidance on the de-registration and transfer by way of continuation of Cayman Islands exempted companies. For more specific advice on the de-registration and transfer by way of continuation of Cayman Islands exempted companies, please refer to your usual Loeb Smith contact or:

Gary Smith
Partner
Loeb Smith Attorneys

Cayman Islands

T: +1 (345) 749 7590

M: +1 (345) 525 0900

E: gary.smith@loebsmith.com

Elizabeth Kenny

Senior Associate

Loeb Smith Attorneys

Cayman Islands

T: +1 (345) 749 7594

M: +1 (345) 325 4824

E: elizabeth.kenny@loebsmith.com

www.loebsmith.com

This Briefing sets out, among other things, the following positions under Cayman law with respect to matters to consider when a Cayman company faces liquidity issues and financial difficulties which might lead to the relevant entity’s insolvency:

i. The liquidator of a Cayman company can apply to the Court to set aside a transaction of the company in favour of any creditor, at a time when the company is unable to pay its debts, where such transaction was entered into with a view to giving such creditor a preference over other creditors, if such transaction was made, incurred, taken within six (6) months immediately preceding the commencement of a liquidation of the company.

ii. The Directors of a Cayman company, the General Partner of an ELP and the Manager of an LLC should exercise caution and seek legal advice from Cayman legal counsel where there is any uncertainty about the solvency (on a cashflow basis) of the applicable Cayman entity which they are managing. These situations might, for example, arise within the context of an investment fund with severe liquidity issues.

iii. Every disposition of property made at an undervalue by or on behalf of a Cayman company with intent to defraud its creditors is voidable at the instance of its official liquidator.

iv. If in the course of the winding up of a Cayman company it appears that any business of the company has been carried on with intent to defraud creditors of the company or

creditors of any other person or for any fraudulent purpose, the liquidator may apply to the Court for a declaration that any persons who were knowingly parties to the carrying on of the business with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose are liable to make such contributions, if any, to the company’s assets as the Court thinks proper.

v. When Directors of a Cayman company are considering their fiduciary duties, the weight to be given to the interests of creditors will increase as the company’s financial difficulties become increasingly serious. Creditors’ interests will take precedence over the interests of the company’s shareholders at the point where insolvent liquidation or administration is inevitable.

The Companies Act (As Revised) of the Cayman Islands (the “Act”) provides that “every conveyance or transfer of property, or charge thereon, and every payment obligation and judicial proceeding, made, incurred, taken or suffered by any company in favour of any creditor at a time when the company is unable to pay its debts within the meaning of section 93 with a view to giving such creditor a preference over the other creditors shall be voidable upon the application of the company’s liquidator if made, incurred, taken or suffered within six months immediately preceding the commencement of a liquidation.”

It is important to note that a payment to a “related party” of the Cayman company shall be deemed to have been made with a view to giving a creditor a “preference” and therefore would be voidable upon the application of the company’s liquidator if made, incurred, taken or suffered within six (6) months immediately preceding the commencement of a liquidation.

A creditor is treated as a “related party” if it has the ability to control the Cayman company or exercises significant influence over the company in making financial and operating decisions.

A Cayman company is deemed to be unable to pay its debts if:

(a) it fails to comply with a statutory demand;

(b) the company fails to satisfy a judgment debt; or

(c) it is proven to the satisfaction of the Court that the company is unable to pay its debts.

Under Cayman law, the compulsory winding up of a company is deemed to commence at the time of the presentation of the petition for the winding up or, in the case of a voluntary liquidation, at the time of the resolution or expiry of the relevant period, or occurrence of an event provided by the company’s Articles of Association upon which the company is to be wound up, or in the case where a restructuring officer has been appointed pursuant to section 91B or 91C of the Act and the order appointing the restructuring officer has not been discharged, at the relevant time on the date of the presentation of the petition to appoint a restructuring officer pursuant to section 91B of the Act.

Every disposition of property made at an undervalue by or on behalf of a company with intent to defraud its creditors shall be voidable at the instance of its official liquidator (i.e. the liquidator of a Cayman company which is being wound up by order of the court or under the supervision of the court and includes a provisional liquidator). The official liquidator bears the burden of establishing an “intent to defraud” (i.e. the official liquidator must establish that there was an intention to wilfully defeat an obligation owed to a creditor). The intention to defeat a creditor needs only be “a” purpose and not the sole or dominant purpose. No legal proceedings may be brought by the official liquidator under after six (6) years following the date of the relevant disposition or transaction.

The term “undervalue” in relation to a disposition of a company’s property means (i) the provision of no consideration for the disposition; or (ii) a consideration for the disposition the value of which in money or money’s worth is significantly less than the value of the property which is the subject of the disposition.

However, the rights of the transferee of such property are subject to some protection. In the event that any disposition is set aside and the Court is subsequently satisfied that the transferee has not acted in bad faith: (i) the transferee will have a first and paramount charge over the property which is the subject of the disposition, of an amount equal to the entire costs properly incurred by the transferee in the defence of the action or proceedings; and (ii) the relevant disposition will be set aside subject to the proper fees, costs, pre-existing rights, claims and interests of the transferee (and of any predecessor transferee who has not acted in bad faith).

If in the course of the winding up of a Cayman company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose, the liquidator (i.e. official liquidator or voluntary liquidator) may apply to the Court for a declaration that any persons who were knowingly parties to the carrying on of the business with intent to defraud creditors of the company or creditors of any other person or for any fraudulent purpose are liable to make such contributions, if any, to the company’s assets as the Court thinks proper. Directors of a Cayman company will face the real risk of liability when managing a company’s business if that business is carried on fraudulently. Unlike dispositions at an undervalue, there is no applicable limitation period for fraudulent trading.

In addition to Cayman companies, Cayman Islands law as stated above may also apply to limited liability companies (LLCs) and exempted limited partnerships (ELPs). Accordingly, the Directors of a Cayman company, the General Partner of an ELP and the Manager of an LLC should exercise caution and seek legal advice from Cayman legal counsel where there is any uncertainty about the solvency (on a cashflow basis) of the applicable Cayman entity which they are managing. These situations might, for example, arise within the context of an investment fund with severe liquidity issues. Directors should consider carefully the point at which creditors’ interests take priority over shareholders’ interests and how those interests are best served (e.g. appointment of a liquidator or a restructuring officer). Failure to seek urgent advice on their duties could increase the Directors’ exposure to risk of personal liability.

The fiduciary duty of directors is to act in good faith in the interests of a Cayman company. The interests of the company have until recent times been treated as being the interests of its members as a whole. However, in the UK Supreme Court’s decision given on 5 October 2022 in BTI 2014 LLC (Appellant) v Sequana SA and others (Respondents), which is persuasive authority in the Cayman Islands, it was re-affirmed that directors of financially distressed companies are required to consider, as one of the relevant factors, the interests of creditors. The Supreme Court concluded that the weight to be given to the interests of creditors will increase as the company’s financial difficulties become increasingly serious. Creditors’ interests will take precedence over the interests of the company’s shareholders at the point where insolvent liquidation or administration is inevitable.

Transactions which are void ab initio

When a winding up order has been made, any disposition of the company’s property and any transfer of shares or alteration in the status of the company’s members made after the commencement of the winding up is, unless the Court otherwise orders, void.

The commencement of a winding-up is the date a petition is presented to the Court (or, if the company was first placed into voluntary liquidation, the passing of that resolution) rather than the date when the Court grants a winding-up order. Accordingly, any transaction during the period between the presentation of a winding-up petition and its resolution before the Court, will be avoided if a winding-up order is ultimately granted, unless the Court validates the transaction.

The presentation of a winding-up petition can have a material adverse effect on a company’s business, due to the uncertainty during the period between the presentation of a winding-up petition and its resolution before the Court. A validation order takes away that uncertainty and enables companies to continue to operate in the ordinary course of their business prior to the hearing of the petition.

Any transfer of shares, not being a transfer with the sanction of the liquidator, and any alteration in the status of the company’s members made after the commencement of a voluntary winding up is void. Unlike a compulsory liquidation, a transfer of the company’s property is not automatically void. There is not normally the same uncertainty with voluntary liquidations because upon the appointment of a voluntary liquidator, all of the powers of the directors cease and are displaced by the voluntary liquidator (except so far as the company in a general meeting or the voluntary liquidator sanctions their continuance). Accordingly, the transfer of property is not automatically void but any transfer of property effected by the company after the appointment of a voluntary liquidator should be authorized by the liquidator.

This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. For more specific advice on setting aside of antecedent transactions in the Cayman Islands, please contact any of:

E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E. peter.vas@loebsmith.com

E: wendy.au@loebsmith.com

E: elizabeth.kenny@loebsmith.com

Loeb Smith is an offshore corporate law firm, with offices in the British Virgin Islands, the  Cayman Islands, and Hong Kong, whose Attorneys have an outstanding record of advising  on the Cayman Islands’ law aspects and BVI law aspects of international corporate,  investment, and finance transactions. Our team delivers high quality Partner-led professional  legal services at competitive rates and has an excellent track record of advising investment  fund managers, in-house counsels, financial institutions, onshore counsels, banks,  companies, and private clients to find successful outcomes and solutions to their day-to-day  issues and complex, strategic matters.

Introduction

The most common structure for a Cayman Islands domiciled private equity fund (“PE fund”) or a Cayman Islands domiciled venture capital fund (“VC fund”) is as an exempted limited partnership (“ELP”) formed under the Exempted Limited Partnership Act (As Revised) (“ELP Act”). However, there are some Fund sponsors who choose a Cayman Islands exempted company or a Cayman Islands limited liability company (LLC) instead of an ELP as the corporate structure for their PE funds or VC funds for a number of reasons, including, their own specific onshore tax or regulatory requirements or benefits, or the investors are more familiar with or prefer to invest in a Cayman Islands exempted company or LLC.

Who can be General Partner?

The ELP is required to have a general partner (“GP”) which is most commonly a Cayman Islands exempted company. However, a foreign company upon its registration as a foreign company in the Cayman Islands or another ELP are able to qualify as the GP of an ELP. The list of persons who may qualify as a GP of an ELP also includes a limited partnership or limited liability partnership established in a recognized jurisdiction (e.g. United States, United Kingdom, Hong Kong, BVI, Singapore, Jersey, Luxembourg) (a “foreign limited partnership”) provided such a foreign limited partnership is registered as a foreign limited partnership in the Cayman Islands.

The Directors and shareholders of the GP are typically persons who are affiliated with the sponsor of the PE fund or VC fund. There is no requirement for any Director or shareholder of the GP to reside in the Cayman Islands. The GP will not be carrying on a ‘relevant activity’ for economic substance purposes in solely acting as the GP of an ELP.

Who are the Limited Partners?

The limited partners of the ELP will be the investors subscribing for limited partnership interests in the ELP. There are no restrictions on the number of limited partners that may be admitted to an ELP. There is no requirement for any limited partner of the ELP to reside in the Cayman Islands.

No Corporate Personality

An ELP does not have a legal personality of its own. The ELP is a legal arrangement between its GP and its limited partners and the terms of this legal arrangement are governed principally by the terms of the limited partnership agreement (“LPA”). The contractual rights and equitable interests in the assets of the ELP are held on trust for the ELP by its GP (and, if there is more than one GP, by the general partners jointly).
The ELP Act states clearly that (i) relevant provisions of the Cayman Islands’ Partnership Act are preserved in relation to ELPs, and (ii) the principles of common law and equity applicable to partnerships also apply to ELPs.

Tax Transparency

Not having its own legal personality, the ELP is generally regarded from an onshore tax perspective as being tax transparent (or as having “see-through”, “look-through” or “flow-though” status, which signify the same thing) with the effect that the ELP itself will not be liable to any onshore taxes; and value distributed by it will “flow-through” to the investors (and may be subject to local taxes in their hands).

Limited Liability

A limited partner of the ELP will not lose its limited liability unless it takes part in the conduct of the business of the ELP in its dealings with persons who are not partners of the ELP as if it was, for the period of participating in the ELP’s business, a general partner of the ELP. In such circumstances, the limited partner may be liable to a person who transacts business with the ELP with actual knowledge of the limited partner’s participation in the management/operation of the ELP and who then reasonably believed the limited partner to be a general partner.

A limited partner may not participate in the conduct of the ELP’s business, and all contractual documents and papers must be executed by the GP as the contracting party acting on behalf of the ELP. As stated above, any limited partner participating in the management/operation of the ELP, as though it were a GP will, for that period of management participation be liable for the debts and obligations of the ELP, if the ELP goes insolvent, to any person transacting business with the ELP through the limited partner and who had actual knowledge of such limited partner’s participation and who reasonably believed that limited partner to be a general partner.

The ELP Act sets out certain non-exhaustive “safe harbours” of activities in which a limited partner may engage without risk of being deemed to be participating in the conduct/management of the ELP’s business and thereby losing its limited liability status. These include:

i. 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;

ii. 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;

iii. 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;

iv. acting as surety or guarantor for the ELP either generally or in respect of specific obligations;

v. approving or disapproving an amendment to the LPA;

vi. calling, requesting, attending or participating in any meeting of the partners;

vii. taking any action that results in the winding up or the dissolution of the ELP;

viii. taking any action required or permitted by the LPA or by law to bring, pursue, settle or terminate any action or proceedings brought pursuant to section 33(2) of the ELP Act;

ix. 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 GP 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;

The LPA may nonetheless provide for any amount of limited partner participation in the conduct of the ELP’s business.

A limited partner of an ELP owes no fiduciary duty to any other partners of the ELP or to the ELP itself in exercising any of its rights or performing any of its obligations under the LPA, except to the extent that it has expressly agreed to such fiduciary obligations in the LPA. Partners may nevertheless agree to set out certain fiduciary obligations in the LPA. They might, for example, agree to impose fiduciary duties on members of an LPAC or other advisory committees of the ELP.

With the consent of the GP, a limited partner may transfer or grant a security interest over its partnership interest in the ELP, subject to it complying with any provisions in the LPA dealing with the requirement for consent. In the case of a transfer of a partnership interest, the transferee is typically admitted to the ELP in accordance with the formalities prescribed in the LPA. When the requirements for admission have been met, the ELP Act provides that the incoming partner is deemed to have agreed to and be bound by the terms and conditions of the LPA as if all parties had together duly executed and delivered it. The GP may also, subject to the terms of the LPA, transfer or grant a security interest in its general partnership interest with the written consent of any other general partner.

The LPA typically includes provisions setting out the consequences for a partner who fails to perform any of its obligations under the LPA. The LPA may, for example, provide that if a limited partner fails to contribute to the ELP such funds as have been committed, that partner shall forfeit its partnership interest. The ELP Act expressly provides that such provisions in the LPA will not be unenforceable solely on the basis that they may be penal in nature.

The ELP Act provides that if a limited partner receives a payment representing a return of any part of that person’s contribution or is released from any outstanding obligation in respect of that person’s commitment and at the time that the payment was made or the release effected:

i. the ELP is insolvent including where the payment or release causes the insolvency; and

ii. the limited partner has actual knowledge of the insolvency of the ELP,

then for a period of six (6) months commencing on the date of that payment or release but not thereafter, the limited partner shall be liable to the ELP for the amount of the payment or the due performance of the released obligation in respect of that person’s commitment in each case to the extent that the repayment or performance of the released obligation is necessary to discharge a debt or obligation of the ELP incurred during the period that the contribution or commitment represented an asset of the ELP.

The Private Funds Act (2021 Revision) (the “PFA”) requires the registration of “private funds” with the Cayman Islands Monetary Authority (“CIMA”). A “private fund” includes an ELP that “offers or issues or has issued investment interests, the purpose or effect of which is the pooling of investor funds with the aim of enabling investors to receive profits or gains from such entity’s acquisition, holding, management or disposal of investments, where:

(a) the holders of investment interests do not have day-to-day control over the acquisition, holding, management or disposal of the investments; and

(b) the investments are managed as a whole by or on behalf of the operator of the private fund, directly or indirectly, but does not include:

(i) a person licensed under the Banks and Trust Companies Act (2021 Revision) or the Insurance Act, 2010 [Law 32 of 2010];

(ii) a person registered under the Building Societies Act (2020 Revision) or the Friendly Societies Act (1998 Revision); or

(iii) any non-fund arrangements”

The PFA applies to PE funds, VC funds, and other types of closed-ended funds which fall within the definition of “private fund” above and so ELPs need to consider (i) whether their business falls within the scope of a “private fund” as defined, and (ii) the issue of registration with CIMA.

An ELP may also be used for the purposes of operating a mutual fund and in that case, the GP of the ELP needs to consider (i) whether their business falls within the scope of a mutual fund, and (ii) the issue of registration with CIMA.

Formation and registration of an ELP and its GP can take place either on a same-day express basis with the payment of an express fee of approximately US$488 to the Registrar of Companies or within 5-7 business days on a standard basis.

There are no capital gains, income, profits, withholding, estate or inheritance taxes in the Cayman Islands. The ELP can apply for (and can expect to obtain) an undertaking from the Cayman Islands government that no form of taxation that may be introduced in the Cayman Islands will apply to the ELP for a period of 50 years from the undertaking being given. The GP can also apply for (and can expect to obtain) an undertaking from the Cayman Islands government that no form of taxation that may be introduced in the Cayman Islands will apply to the GP for a period of 20 years from the undertaking being given.

Ongoing obligations of an ELP

The GP has the responsibility for maintaining (or causing to be maintained) the following statutory registers:

i. Register of limited partners. This register must contain the name and address of each limited partner and the date on which a person became or ceased to be a limited partner. The register of limited partners can be kept anywhere in the world. If the register is kept at a place other than the registered office it must still be readily accessible, as it is required to be made available at the registered office should there be a notice or order for production under the Cayman Islands’ Tax Information Authority Act. The register of limited partners can be kept in electronic form and must be updated within 21 days of any changes. The ELP Act provides that subject to any express or implied term of the LPA, the register (and the record of address at which the register is maintained if it is not maintained at the registered office) is open to inspection by all partners and by any other person with the consent of the GP. If the GP defaults in complying with the above requirements for maintaining the register of limited partners it commits an offence and is liable on summary conviction to a fine of approximately US$12,200 for each day that the default continues and the GP is required to indemnify any person who thereby suffers any loss.

ii. Record of contributions and payments. The ELP Act also provides that the GP must maintain a record of contributions and payments which must show the amount and date of the contribution or contributions of each limited partner and the amount and date of any payment representing a return of the whole or any part of the contribution of any limited partner, and this record may be kept within or outside of the Cayman Islands but must be updated within 21 days of any change and be accessible to the registered office. These records are only available for inspection by any person (including a limited partner) with the consent of the GP.

iii. Register of security interests in relation to limited partnership interests. The ELP Act places an obligation on the GP to maintain or cause to be maintained at the ELP’s registered office, a register of security interests that have been granted over any limited partnership interest. When a security interest is granted over the whole or any part of a limited partnership interest, the ELP Act requires that notice must be given by the grantor (i.e., the limited partner) or the grantee (e.g., the lender) to the ELP at the registered office. The GP must then enter on the register of security interests (i) the identity of the grantor and the grantee, (ii) the relevant partnership interest, and (iii) the date on which notice of the security interest was validly served. The register must be open for public inspection during regular business hours. Any security interest has priority according to the time that the written notice is validly served at the registered office.

iv. Changes to the Section 9 Statement. Any changes to the Section 9 Statement of the ELP must be promptly notified to the Registrar of Exempted Limited Partnerships, by filing an amended statement signed by the GP. In general, changes must be notified within 60 days; however, a change to the GP is required to be filed within 15 days of the change and is not effective until that filing is made.

The GP is required to keep (or cause to be kept) proper books of account. The records must be sufficient to give a true and fair view of the business and financial condition of the ELP and to explain its transactions. The accounting records are required to be retained for a minimum period of five (5) years. Subject to the terms of the LPA, each limited partner may demand and receive from the GP a true and full picture of the state of the business and financial condition of the ELP. There is no requirement for the accounts of an ELP to be audited each year under the ELP Act, although this may be required if the partnership is otherwise regulated, for example under the PFA or the Mutual Funds Act.

The GP is required to make an annual return to the Registrar of Exempted Limited Partnerships in January each year regarding compliance with the ELP Act and to pay an annual return fee. The annual return will generally be signed on behalf of the GP by the ELP’s registered office agent.
This Briefing Note is not intended to be a substitute for specific legal advice or a legal opinion. It deals in broad terms only and is intended to merely provide an overview and general guidance on Cayman Islands exempted limited partnerships only. For more specific advice on the formation and usage of exempted limited partnerships as investment funds, and in corporate and financing transactions, please refer to your usual Loeb Smith contact or:

Gary Smith
Partner
Loeb Smith Attorneys
Cayman Islands
T: +1 (345) 749 7590
M: +1 (345) 525 0900

Side letters should not prohibit, restrict or impose limitations on the incurrence of debt, the giving of a guarantee and/or the granting of security, if that cuts across the terms of the proposed subscription financing. To the extent that an investor wishes to include such provisions in a side letter, carve-outs should be included to accommodate the financing transaction.

An investor may wish to be excused from honouring a drawdown notice with respect to immoral investments, or in geographies or industries to which the investor is politically sensitive. These types of rights are relatively common and are typically accommodated by most lenders. However, a lender will usually seek to exclude such an excused investor from the relevant ELP’s borrowing base and may insist on a default event if the excused commitments exceed a specified threshold. This is typically negotiated, as excuse rights are investor-specific and generally unrelated to the creditworthiness of an investor.

Any restrictions that prevent the disclosure of investor information are likely to lead the lender to exclude

the applicable investor from the relevant ELP’s borrowing base because a lender may not be able to enforce its security if it does not have details of the investor, or be in a position to satisfactorily complete legally required “know your customer” checks. A compromise may be to agree to disclosure on a default, or to reassure investors that the lender has robust confidentiality safeguards.

A lender will usually take issue with a provision which provides that an investor only owes direct obligations to the fund parties, as this may undermine its ability to enforce any security. If an investor is concerned about granting broad powers or rights to a non-fund party, such as a lender, a compromise may be to make clear that any limitations are not intended to prohibit or limit a lender from taking enforcement action on a default.

An investor may wish to receive side letter comfort that it will not have to sign or provide any documentation to a lender in connection with a subscription financing. Provided that the LPA includes customary representations and covenants that prospective financiers have the benefit of, this may prove sufficient from a lender’s perspective. The LPA could impose an obligation on the relevant ELP to use its best endeavours to avoid any requests to investors.

A lender may exclude an investor that has the benefit of immunity from the relevant ELP’s borrowing base, but that will ultimately depend on the specific credit analysis that is undertaken. As a minimum, an investor that has such benefit will usually be asked to confirm that its obligations to the ELP are not subject to such immunity.

An investor may wish to have the option to transfer its interest in the relevant ELP to an affiliate specified by it. A lender may seek to exclude such an affiliate from the relevant ELP’s borrowing base from a credit perspective. A compromise may be to permit transfers to affiliates, as long as this does not breach the ELP’s borrowing base.

As a final point, it is important to note that any adverse consequences for a lender of side letter terms may be multiplied if MFN provisions are included. A cost-friendly solution may be to include a carve-out with respect to provisions that detrimentally impact a lender in a subscription financing.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. If you require further advice relating to the matters discussed in this Briefing, please contact us. We would be delighted to assist.

E: gary.smith@loebsmith.com

E: robert.farrell@loebsmith.com

E: elizabeth.kenny@loebsmith.com

E: cesare.bandini@loebsmith.com

E: vivian.huang@loebsmith.com

E: faye.huang@loebsmith.com