This memorandum has been prepared for the assistance of clients considering creating an exempted limited partnership in the Cayman Islands. It is intended to provide a summary of the main legal requirements and general principles applicable to the formation, registration, operation and termination of exempted limited partnerships. It is not intended to be comprehensive in its scope and it is recommended that a client considering creating an exempted limited partnership should contact Ogier to obtain detailed legal advice on the proposed transaction prior to taking steps to implement it.  

Introduction

The Exempted Limited Partnership Law (2007 Revision) of the Cayman Islands (the ‘ELP Law’) as amended by the Exempted Limited Partnership (Amendment) Law, 2009 (the “Amended Law” and together with the ELP Law, the “Law”) provides the principal statutory framework for the formation, registration, operation and termination of exempted limited partnerships in the Cayman Islands. In addition, certain provisions of the Partnerships Law and principles existing at common law supplement the Law.  

An exempted limited partnership may be an appropriate structure for a number of different purposes. A common use is to serve as a vehicle for investment funds, in particular for the venture capital/private equity transactions and, in this regard, it is possible to list the interests in an exempted limited partnership on various internationally recognised stock exchanges including the Cayman Islands Stock Exchange. An exempted limited partnership may also be an attractive structure for various tax planning purposes, for instance, as a method of holding assets situated in another jurisdiction. It may also provide an attractive method of trading as a partnership where it is desirable to have the flexibility to introduce partners as passive investors on a limited liability basis.  

A Cayman Islands exempted limited partnership does not have a separate legal personality and, therefore, the powers, duties and responsibilities of the general partner are of particular importance.  

Establishing an Exempted Limited Partnership

According to the Law, an exempted limited partnership shall consist of at least one party called the general partner who shall, in the event that the assets of the exempted limited partnership are inadequate, be liable for all of the debts and obligations of the exempted limited partnership and at least one party called the limited partner who shall not generally be liable for the debts or obligations of the exempted limited partnership in excess of the capital contributed by it to the exempted limited partnership.  

In order to establish an exempted limited partnership in the Cayman Islands, the following steps need to be taken:  

(a) General partners

It is a requirement of the Law that at least one general partner of an exempted limited partnership must, if an individual, be resident in the Cayman Islands, or, if a company, be incorporated under the Companies Law of the Cayman Islands or registered in the Cayman Islands, pursuant to such law, as a foreign company, or, if a partnership, be registered as an exempted limited partnership in accordance with the Law.  

(b) Limited partners

It is an accepted principle of common law that, for a partnership to be formed, there must be two or more persons carrying on business with a view to profit. In the case of an exempted limited partnership, the general partner undertakes the conduct of the business while the limited partners are, in effect, passive investors who contribute capital in order that the business may be carried on with a view to profits being generated and allocated amongst the partners in accordance with the terms set out in the partnership agreement. In return, the limited partners generally obtain the benefit of limited liability to the extent of their interest in the exempted limited partnership.  

(c) Documents and procedure for registration

In order to gain the benefit of the Law, a partnership must be registered as an exempted limited partnership in accordance with the Law.  

Registration is effected by paying, to the registrar of exempted limited partnerships (the ‘Registrar’), an initial registration fee, details of which are set out at the end of this briefing, and filing therewith a statement, signed by or on behalf of a general partner, containing the following information:  

(i) Name of the exempted limited partnership  

The proposed name must include the words ‘Limited Partnership’ or the letters ‘L.P.’ or “LP” and the Registrar may refuse to register an exempted limited partnership, or to register any change of name of an exempted limited partnership, where the proposed name is, in the opinion of the Registrar, identical to the name of an existing exempted limited partnership or so nearly resembles that name as to be calculated to deceive. There are certain other sensitive words which, in some cases, may not be included in the name of the exempted limited partnership at all and, in other cases, require the prior consent of the Registrar.  

(ii) General nature of business  

The nature of the business of an exempted limited partnership may be unlimited or it may be specified and restricted in the partnership agreement. An exempted limited partnership may not undertake business with the public in the Cayman Islands other than as may be necessary for the carrying on of its business exterior to the Cayman Islands.  

(iii) Location of the registered office  

Each exempted limited partnership is required to maintain a registered office in the Cayman Islands at all times.  

(iv) Term of the exempted limited partnership  

An exempted limited partnership may be entered into for a fixed term or have unlimited duration. In addition, the partnership agreement may contain certain provisions relating to the winding up and dissolution of the exempted limited partnership, details of which should also be set out in the statement.  

(v) Name and address of the general partner  

The name and address of each general partner must be provided with the statement and must be accompanied by a certified copy of the certificate of incorporation and a certificate of good standing for each corporate entity acting as a general partner or, in the case of a company registered in the Cayman Islands as a foreign company, a certified copy of the certificate of registration and a certificate of good standing issued by the registrar of companies in and for the Cayman Islands and, in the case of an exempted limited partnership registered under the Law, a certified copy of the certificate of registration and a certificate of good standing issued by the Registrar.  

(vi) Statutory declaration  

The statement is completed by a statutory declaration that the exempted limited partnership shall not undertake any business with the public in the Cayman Islands other than so far as may be necessary for the carrying on of the business of the exempted limited partnership exterior to the Cayman Islands.  

On receipt of the initial registration fee, the above statement and the accompanying certificates in respect of each general partner, the Registrar will register the exempted limited partnership and issue a certificate of registration to the general partner.  

The certificate of registration is generally issued by the Registrar between three and five working days following the filing of the initial registration fee and the above statement, but there is an expedited service available such that registration can be completed within 24 hours. Details of the expedited registration fee are set out at the end of this briefing.  

Tax treatment

An exempted limited partnership is entitled to apply for an undertaking to be granted on behalf of the Cayman Islands’ Government that, for a period not exceeding fifty (50) years from the date of the undertaking, no law which is enacted in the Cayman Islands imposing any tax to be levied on profits, income, gains or appreciations shall apply to the exempted limited partnership or to any partner, in respect of the operations of the exempted limited partnership, the assets of the exempted limited partnership or the interest of a partner in the exempted limited partnership. In addition, the undertaking may also provide that such taxes or any tax in the nature of estate duty or inheritance tax shall not be payable in respect of the obligations of the exempted limited partnership or the interests of the partners in the exempted limited partnership.  

The partnership agreement

The partnership agreement sets out, in detail, the respective rights and obligations of the general partners and the limited partners and deals, in particular, with the matters set out in the registration statement discussed above. In addition, the partnership agreement will deal with the following matters:  

(a) the powers and obligations of the general partner in relation to the exempted limited partnership including, in particular, the general partner’s obligations in respect of the management of the exempted limited partnership, the conduct of its business and any limitations on its authority;  

(b) the method and procedure for the admission of additional partners to the exempted limited partnership, the retirement and withdrawal of existing partners and the transfer of interests in the exempted limited partnership;  

(c) the maintenance of accounting and other records of the exempted limited partnership;  

(d) the allocation and distribution of profits of the exempted limited partnership among the partners; and  

(e) the granting by each limited partner in favour of the general partner of an irrevocable power of attorney authorising the general partner to perform various agreed functions on behalf of the limited partners such as consenting to the admission of new partners, consenting to the transfer of interests and effecting certain minor or administrative amendments to the partnership agreement. The inclusion of a power of attorney in the partnership agreement means that the partnership agreement must be executed as a deed.  

The Law provides that various statutory powers or prohibitions are subject to the express or implied provisions of the partnership agreement and, further, that the partnership agreement may not exclude certain statutory rights or obligations. It is, therefore, essential that prior to its execution, a partnership agreement is reviewed against the Law to ensure that the rights, powers and obligations provided for in the partnership agreement are not restricted in any way by the terms of the Law.  

Rights and obligations of a general partner

As noted above, an exempted limited partnership does not have a separate legal personality and it is a requirement of the Law that all letters, contracts, deeds, instruments or documents of whatever nature shall be entered into by or on behalf of the general partner on behalf of the exempted limited partnership. Consequently, the property and assets of the exempted limited partnership will be held in the name of the general partner for the benefit of the partnership and all actions, claims, demands or proceedings raised in respect of or against the assets of the exempted limited partnership will be raised by, and in the name of, the general partner on behalf of the exempted limited partnership.  

The Law provides that any debt or obligation incurred by the general partner in the conduct of the business of an exempted limited partnership shall be a debt or obligation of the exempted limited partnership. There may be circumstances where it is unclear whether a general partner is acting on its own behalf or on behalf of the exempted limited partnership and, in these circumstances, there needs to be appropriate documentation and a clear indication as to the capacity in which a general partner is acting in order to ensure that a general partner does not incur a debt for which it, rather than the exempted limited partnership, is liable or vice versa. All documents executed by a general partner on behalf of the exempted limited partnership should clearly indicate that the general partner is acting on behalf of the exempted limited partnership.  

Clear identification of the capacity in which a general partner is acting is of particular importance where a general partner acts as such in relation to more than one exempted limited partnership. In such circumstances, it is important that the acquisition of assets by the general partner or the undertaking by it of debts or obligations, in each case, on behalf of a particular exempted limited partnership is clearly documented and made apparent to the third party involved in order that the assets held by it as general partner of one exempted limited partnership are not adversely affected by the debts or obligations incurred by it on behalf of another exempted limited partnership. Due to the potential for the confusion of assets and liabilities of the various exempted limited partnerships involved and the potential prejudice to the limited partners, we recommend that detailed legal advice should be obtained prior to any general partner acting in relation to more than one exempted limited partnership.  

The partnership agreement will normally provide for the retirement of a general partner on the giving of a certain notice period. As noted above, an exempted limited partnership is required to have at least one general partner resident, incorporated or registered in the Cayman Islands and consequently the right of the sole remaining Cayman Islands’ resident, incorporated or registered general partner to retire is normally conditional upon a suitable replacement general partner being appointed in advance.  

In the event of the death, commencement of liquidation or bankruptcy proceedings, or the withdrawal, removal or making of a winding up or dissolution order in relation to the sole or last remaining Cayman Islands resident, incorporated or registered general partner, the exempted limited partnership may be automatically wound up unless, a majority of the limited partners elect a replacement general partner. Further details relating to an automatic winding up of an exempted limited partnership are set out below.  

Rights and obligations of a limited partner

(a) Contributions  

Generally, a limited partner will be required to contribute to the exempted limited partnership the amount agreed to be contributed by it under the terms of the partnership agreement. Such amount may be contributed in a single payment or may be committed for contribution over a period or in instalments as provided for in the partnership agreement. In addition, there are no statutory requirements for contributions to be made in the form of money so, unless the partnership agreement provides otherwise, contributions of property, investments or other assets may be permitted.  

(b) Allocation of profits and return of Contributions  

The partnership agreement will also contain provisions relating to the allocation of profits among the partners, which are likely to require detailed drafting and negotiation. The partnership agreement will also contain provisions relating to the return of contributions, in whole or in part, to the limited partners and such provisions are subject to the terms of the Law which provides that any limited partner who receives a payment representing a return of any part of his contribution to the exempted limited partnership within six months before an insolvency of the exempted limited partnership shall be liable to repay to the exempted limited partnership such payment as is necessary to settle any debt or obligation of the exempted limited partnership incurred during the period that the limited partner’s contribution formed part of the assets of the exempted limited partnership. In this respect, “solvency” means that the exempted limited partnership is able to discharge its debts as they fall due without recourse to any assets of the general partner which have not been contributed to the exempted limited partnership.  

(c) Limitation of liability  

A limited partner, in order to obtain and maintain the benefit of limited liability in relation to the debts and obligations of the exempted limited partnership, is prohibited from taking part in the conduct of the business of the exempted limited partnership. Should a limited partner take part in the conduct of the business of the exempted limited partnership for any period, that limited partner shall generally be liable, in the event of the subsequent insolvency of the exempted limited partnership, for all debts and obligations of the exempted limited partnership incurred in that period. The Law provides that a limited partner will not be regarded as taking part in the conduct of the business of an exempted limited partnership in certain circumstances, including by virtue of:  

(i) holding an office or interest in, or having a contractual relationship with, a general partner;  

(ii) being a contractor, agent or employee of the exempted limited partnership or the general partner;  

(iii) being a director, officer or shareholder of a corporate general partner;  

(iv) consulting with or advising the general partner or consenting or withholding consent to any action proposed, in the manner contemplated in the partnership agreement with respect to the business of the exempted limited partnership;  

(v) investigating, reviewing, approving or being advised as to the accounts or business affairs of the exempted limited partnership;  

(vi) exercising any right conferred by the Law;  

(vii) acting as surety or guarantor for the exempted limited partnership;  

(viii) approving or disapproving amendments to the partnership agreement;  

(ix) calling, requesting, attending or participating in any meeting of the partners;  

(x) taking any action that results in the winding up or dissolution of the exempted limited partnership;  

(xi) taking any action required or permitted by the partnership agreement or by law to bring, pursue, settle or terminate any action on behalf of the exempted limited partnership in the event the general partner, without good cause, refuses to institute such proceedings;  

(xii) appointing a person to serve on any board or committee of the exempted limited partnership, the general partner or a limited partner or removing a person therefrom; or  

(xiii) voting, as a limited partner, on matters including the dissolution or winding up of the exempted limited partnership, the purchase, sale, lease, mortgage or pledge of the assets of the exempted limited partnership or the admission, removal or withdrawal of any partner including a general partner.  

The Law goes on to provide that the existence of the specific exemptions set out in the Law does not imply that the possession or exercise by a limited partner of any other power will necessarily constitute the participation by the limited partner in the conduct of the business of the exempted limited partnership.  

Admission of new partners and transfer of interests

The partnership agreement normally provides a procedure for admitting additional or replacement limited partners which is likely to involve the new limited partner executing a deed of admission in terms of which it agrees to be bound by the terms of the partnership agreement and pursuant to which it grants any power of attorney contained within the partnership agreement to the general partner. As such, the deed of admission must be executed as a deed. In addition, each of the existing partners must consent to the admission of a new partner. Procedurally, consent is normally provided by the general partner counter-signing the deed of admission for itself and, acting on the basis of the power of attorney granted to it in the partnership agreement, on behalf of each limited partner.  

The partnership agreement may also contain provisions for the transfer of all or any part of a limited partner’s interest in an exempted limited partnership to another person. If that person is not currently a partner, the transfer will normally require the transferee to complete a deed of admission to be counter-signed by the general partner for itself and on behalf of the limited partners, in the same way as for a new partner.  

Maintenance of records and accounts

The partnership agreement will normally establish procedures for the maintenance of accounting records in relation to the contributions made by partners to the exempted limited partnership, the allocation of profits among the partners and the ability of the limited partners to inspect such records. In the absence of any such provision in the partnership agreement, the Law provides that a limited partner may, at any time, demand and shallregarding the state of the business and financial condition of the exempted limited partnership.  

The Law also requires that the general partner must maintain a register of limited partnership interests which shall contain the name and address of each partner, the amount and date of each contribution made by each partner and the amount and date of the return of all or any part of a limited partner’s contribution. Note that the Law provides that the register of partnership interests shall be open to inspection by any partner during all usual business hours and may be inspected by any other person only with the consent of the general partner.  

In the event of the subsequent amendment of any of the prescribed particulars contained in the statement filed for registration described above, a general partner must file with the Registrar an updated statement of the prescribed particulars within certain specified periods depending on the nature of the proposed amendment. In addition, in order to preserve the registration of the exempted limited partnership, an annual registration fee, details of which are set out at the end of this briefing, is payable to the Registrar in January of each year.  

Winding up and dissolution of an exempted limited partnership

The termination of an exempted limited partnership consists of two distinct steps, its winding up and subsequent dissolution.  

An exempted limited partnership may be wound up in the following circumstances:  

(i) Pursuant to the partnership agreement  

An exempted limited partnership is to be wound up at the time or upon the occurrence of any event specified in the partnership agreement (a “Contractual Winding Up”).  

(ii) By resolution of the partners  

Unless otherwise specified in the partnership agreement, an exempted limited partnership continues until wound up and dissolved by resolution of all the general partners, and a two-thirds majority of partners (a “Winding Up by Resolution”).  

(iii) Automatic winding up  

In the event of the death, commencement of liquidation or bankruptcy proceedings, or the withdrawal, or the removal or making of a winding up or dissolution order (or any other events as specified in the partnership agreement) in relation to the sole or last remaining Cayman Islands resident, incorporated or registered general partner, the exempted limited partnership will, subject to any express or implied term in the partnership agreement, be immediately dissolved on the date (the “automatic dissolution date”) falling 90 days after the date of the service of a notice on all the limited partners informing them of the above mentioned events unless, a majority of the limited partners elect a replacement general partner before the automatic dissolution date to carry on the business of the exempted limited partnership. In this context, a majority of the limited partners has the meaning specified in the partnership agreement, and if no majority is specified then means a simple majority calculated by reference to capital contributions.  

Unless the partnership agreement provides otherwise, if a new general partner is not elected by the automatic dissolution date, the exempted limited partnership is wound up and dissolved in accordance with the partnership agreement or in accordance with a court order made on the application of any partner or creditor of the exempted limited partnership.  

(iv) Winding up by court order  

The Law preserves the power of the court, on the application of a partner or creditor of an exempted limited partnership, to make such orders and give such directions for the winding up and dissolution of an exempted limited partnership as may be just and equitable. The role of the court is, however, significantly expanded by virtue of the application, subject to certain limitations (please see below) of the provisions of Part V of the Companies Law and the Winding Up Rules to the winding up and dissolution of exempted limited partnerships.  

Winding Up Procedure

Companies Law and Winding Up Rules

Except to the extent that they are not consistent with the provisions of the Law and subject to any express provisions of the Law to the contrary, the provisions of Part V of the Cayman Islands Companies Law and the Winding Up Rules will apply to the winding up and dissolution of exempted limited partnerships. For that purpose references therein to companies include exempted limited partnerships, references to directors and officers of a company include the general partner of an exempted limited partnership and limited partners of an exempted limited partnership are treated as if they were shareholders of a company and contributories (but not so as to render limited partners subject to any greater liability than that for which they would otherwise be liable under the Law). It is beyond the scope of this briefing to examine those provisions in detail. Ogier should be contacted should further details be required.  

However, all but four of those provisions are excluded from application to Contractual Windings Up, and those which do apply are noted below.  

Notice  

Notice of the winding up of an exempted limited partnership is required to be filed with the Registrar (and, in the case of an exempted limited partnership carrying on a regulated business, the Cayman Islands Monetary Authority), and published in the Cayman Gazette.

Liquidator

An exempted limited partnership may be wound up by the general partner or a liquidator other than the general partner may be appointed pursuant to the partnership agreement.  

However, on a Winding Up by Resolution or an Automatic Winding Up, the liquidator must apply to the court for an order that the winding up continue under the supervision of the court unless, within 28 days of the commencement of the winding up, the general partner has signed a declaration of solvency in prescribed form.  

That declaration is to the effect that a full enquiry into the exempted limited partnership’s affairs has been made and that to the best of the general partner’s knowledge and belief, the exempted limited partnership will be able to pay its debts in full, together with interest at the prescribed rate, within such period, not exceeding 12 months from the commencement of the winding up, as may be specified in the declaration.  

Priority of claims

The Law incorporates express provisions relating to the application and distribution of exempted limited partnership property on winding up. It does so by applying the provisions of section 140 of the Companies Law (appropriately amended) to exempted limited partnerships. Thus, the exempted limited partnership property is to be applied in satisfaction of its liabilities, and any such application is required to take into account any applicable subordination agreements, contractual set off or netting arrangements (bilateral or multi-lateral) and any other agreements for the deferral, postponement or waiver of creditors’ claims.  

Any surplus remaining after satisfaction in full of all exempted limited partnership liabilities is distributed to the partners in accordance with their rights under the partnership agreement.  

Voidable Preferences and other recoverable payments

Payments to Limited Partners

As mentioned above, any limited partner who receives a return of any part of his contribution is required to return such payment in the event of the insolvency of the exempted limited partnership within six months after the date of a receipt by such limited partner.  

Where an exempted limited partnership is subject to a Contractual Winding Up, the period of six months, for the above purposes, is calculated from whichever is the earlier of the date of the passing of a resolution for the winding up of the exempted limited partnership, the time of the occurrence of the event specified in the partnership agreement and the insolvency of the exempted limited partnership.  

The definition of “insolvency” means that the general partner is unable to pay the debts of the exempted limited partnership (otherwise than in respect of liabilities to partners on account of their exempted limited partnership interests) in the ordinary course of business as they fall due out of the assets of the exempted limited partnership (without recourse to the separate assets of the general partner not contributed to the exempted limited partnership).  

Voidable Preferences

The provisions of s.145 of the Companies Law relating to voidable preferences apply, appropriately amended, to exempted limited partnerships. Thus, a conveyance or transfer of property, or a charge thereon, and any payment obligation and judicial proceeding, made, incurred, taken or suffered by an exempted limited partnership in favour of any creditor at a time when the exempted limited partnership is unable to pay its debts with a view to giving such creditor a preference over the other creditors of the exempted limited partnership is invalid, if made, incurred, taken or suffered within six months immediately preceding the commencement of the winding up of the exempted limited partnership.  

As is the case with a company, such a payment made by an exempted limited partnership to a creditor which is a related party of the exempted limited partnership is deemed to have been made with a view to giving that creditor a preference. A creditor is a “related party” if it has the ability to control the exempted limited partnership or exercise significant influence over the exempted limited partnership in making financial and operating decisions. This provision is likely to be of particular relevance to investment funds structured as master/feeder funds, where the master fund is an exempted limited partnership whose general partner is controlled by the investment manager.  

It should be noted that the solvency criterion for voidable preferences differs from that for recovery of payments to limited partners described above. A payment or disposition may be invalid as a preference if, at the time it is made, the exempted limited partnership is unable to pay its debts (i.e. unable to meet its current debts out of currently available assets, which assets will include any rights against the general partner in respect of its unlimited liability for exempted limited partnership debts), whereas a payment may be recovered from a limited partner if the exempted limited partnership becomes insolvent within six months of that payment and, as noted above, insolvency does not take account of recourse to the separate assets of the general partner.  

Dispositions at an undervalue

Under s. 146 of the Companies Law (appropriately amended to apply to exempted limited partnerships), a disposition of assets at an undervalue by an exempted limited partnership may be set aside in full at the instance of an official liquidator. This provision will be relevant only if the relevant exempted limited partnership is wound up by, or subject to the supervision of, the court. In any other circumstances, the provisions of the Fraudulent Dispositions Law (1996 Revision) will be applicable and a disposition at an undervalue may be set aside at the instance of a creditor thereby prejudiced, to the extent necessary to satisfy the obligation to that creditor.

Dissolution

On completion of the winding up, the general partner or other liquidator must sign and file a notice of dissolution with the Registrar, following which the exempted limited partnership is dissolved. An exempted limited partnership cannot be dissolved before such a notice has been filed.  

Deregistration procedure

A general partner of an exempted limited partnership, if so permitted under the terms of the partnership agreement, may deregister the exempted limited partnership as an exempted limited partnership by filing a written notice of deregistration with the Registrar, together with written confirmation that such action is authorised by the partnership agreement. Upon deregistration, an exempted limited partnership ceases to be an exempted limited partnership, but is not dissolved. It therefore continues to exist as a partnership, and all partners will have unlimited liability for its debts. Such deregistration would enable the deregistered partnership to register under the laws of another jurisdiction which permitted such registration, but care will need to be taken to coordinate deregistration under the Law and registration elsewhere, to avoid a period in which all the partners have unlimited liability.  

Registration Fees

The registration fees payable to the Register in relation to an exempted limited partnership, as at the date of this briefing note, are as follows:  

Initial Registration Fee  

US $1,220 payable on first registration  

Expedited Registration Fee  

US $488 payable in addition to the initial registration fee  

Annual Registration Fee  

US $1,220 payable in January of each year following the year of initial registration.