Cayman Islands Court of Appeal confirms general partners are replaceable as liquidators

This piece was first written for Global Restructuring Review, contributed to by our partner Rupert Bell and associate Sam Hall. 

Walkers partner Rupert Bell and associate Sam Hall in the Cayman Islands discuss the recent case of One Thousand & One Voices Africa Fund I, L.P. (the Partnership), which saw the Cayman Islands Court of Appeal confirm that the Grand Court has the power, and may exercise its discretion, to remove general partners as liquidators of exempted limited partnerships (ELPs) when they have failed to act reasonably and appropriately and contrary to the interests of a significant percentage of limited partners in a winding up.

In Cayman Islands limited partnership agreements, the GP is typically the contractually agreed party that is to act as the person responsible for the winding up and dissolution of the ELP. The case involving the Partnership was no different. The GP was automatically appointed as the 'Liquidating Agent' of the Partnership pursuant to the limited partnership agreement following the requisite number of limited partners resolving that the Partnership be wound up and dissolved.

However, following a variety of allegations being made against the GP involving misconduct and mismanagement of the affairs of the Partnership during the winding up, an overwhelming majority of limited partners requested that the GP step aside and appoint independent liquidators over the Partnership pursuant to the limited partnership agreement. When the GP refused to do so, one of the limited partners (who had the support of limited partners of the Partnership) (the LP) applied to the Grand Court seeking the appointment of independent liquidators over the
Partnership to conduct the winding up and dissolution.

The GP attempted various defences to the application. First, it sought to raise various technical objections as to the ability of the LP under the Cayman Islands Exempted Limited Partnership Act (as Revised) (ELP Act) to pursue the application (including as to jurisdiction) and asked for that issue to be determined by way of a preliminary issue.

Second, it filed evidence in response to the allegations of misconduct and mismanagement.

Third, following an initial hearing at which the Grand Court ruled against the GP on its technical objections (the Jurisdiction Ruling), the GP (a) purported to unilaterally remove the LP as a limited partner in the Partnership; and (b) commenced proceedings in the United States District Court for the Southern District of New York (the New York court) seeking a declaration that the New York court had exclusive jurisdiction in relation to the matters before the Grand Court, and sought to impugn the validity of the Jurisdiction Ruling.

Justice Ian Kawaley concluded that these actions of the GP were an abuse of process. The judge found that the attempt to remove the LP as a limited partner was 'manifestly abusive' and designed to '[manufacture] a new standing ground to … deprive the [LP] of access to this Court'. He also found the proceedings filed before the New York court represented a flagrant collateral attack on the Jurisdiction Ruling and said it was impossible to see how the GP could have taken such steps in good faith. Accordingly, independent liquidators were appointed over the Partnership.

The appeal

On appeal, the GP raised a further technical argument concerning the power of the Grand Court to appoint (cf. remove) the independent liquidators under the ELP Act, which was actually inconsistent with the position the GP pursued at first instance. The gist of the argument was that the relevant section of the ELP Act only dealt with appointment, and not removal, of alternative liquidators. It was contended that, while the section permitted the appointment of alternative liquidators in circumstances where, for example, the contractually agreed liquidator was somehow disqualified or incapacitated or declined to assume the role or resigned, there was no express wording actually permitting the removal of the contractually agreed liquidator, and such power could not be implied.

The Court of Appeal disagreed and concluded that it had no doubt the Grand Court had the necessary power to appoint independent liquidators to the exclusion of the GP. While the Court of Appeal accepted the winding up of an ELP shall be conducted pursuant to its agreed contractual arrangements, in upholding the decision at first instance, it affirmed that the Grand Court has various tools available to it to regulate who will be the voluntary liquidator of an ELP and how their powers are exercised.

Walkers successfully acted for the LP in the matter, noting the decision serves as a warning to GPs that if they act improperly in the course of a winding up (including by acting contrary to the interests of an overwhelming majority of LPs) that they may face replacement by the Grand Court if sought by limited partner/s.

Team representing LP:
Rupert Bell, Siobhan Sheridan and Sam Hall from Walkers (Cayman) LLP

David Allison KC and Ryan Perkins of South Square Chambers

Liquidators Appointed:
Alexander Lawson and Christopher Kennedy from Alvarez & Marsal Cayman Islands

You can find the original publication on Global Restructuring Review here.