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The Matter of Padma Fund L.P. and potential impac

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 in order to become the qualifying general partner of the ELP? How easy will it be to successfully bring a winding up petition in Offshore zones against a U.S. domiciled company registered in Offshore zones 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 Offshore zones. For specific advice, please contact your usual Edlescher attorney or any of:

Regulation of crypto exchanges and other crypto services in the Offshore zones

The Virtual Asset (Service Providers) Act, 2020 (VASP Act) as amended, provides a legislative framework for the conduct of virtual assets busi¬ness in the Offshore zones, and the registration and licensing of persons providing virtual asset services. Since the introduction of the VASP Act, the Offshore Zones Monetary Authority (OZMA) has seen a large number of registration applications and, where applicable, licence applications relating to crypto exchanges, crypto custody and brokerage, crypto marketplaces, initial coin offerings, security token offerings, and other businesses operating in, and services being provided in, the digital assets space utilising Offshore zones entities.

According to information from the CIMA, 55% of the VASPs are trading platforms with a daily transaction volume of USD5.1 billion (2 to 3% of total global volumes).

What is a virtual asset?

The VASP Act defines a «virtual asset» as «a digital representation of value that can be digitally traded or transferred, and can be used for payment or investment purposes, but does not include a digital representation of fiat currencies». The VASP Act makes a distinction between a virtual asset, as defined above, which will be regu¬lated, and a «virtual service token», which is defined as «a digital representation of value, which is not transferrable or exchangeable with a third party at any time, and includes digital tokens whose sole function is to provide access to an application or service or, to provide a service or function directly to its owner».

The distinction is meant to deal with the usual question as to whether or not a digital token or coin is a security or a utility token. Virtual service tokens will be treated as utility tokens and, therefore, will fall outside the registration regime and the licensing regime under the VASP Act. Section 3(2) of the VASP Act makes this clear by stating: «For the purposes of this law, virtual service tokens are not virtual assets and a person or legal arrangement that provides services that involve virtual service tokens only are not required to have a licence or registration under this law.»

What are virtual asset services?

The VASP Act states that virtual asset service means: (1) the issuance of virtual assets; or (2) the business of providing one or more of the following services or operations for, or on behalf of, a natural or legal person or legal arrangement:

1. Exchange between virtual assets and fiat currencies;
2. Exchange between one or more other forms of convertible virtual assets;
3. Transfer of virtual assets;
4. Virtual asset custody services; or
5. Participation in and provision of financial services related to a virtual asset issuance or the sale of a virtual asset.

Who is a VASP?

A person is a virtual asset service provider (VASP) under the VASP Act if it is: (1) a company, or a general partnership, or a limited partnership, or a limited liability company, or a foreign company registered in the Offshore zones; and (2) providing a virtual asset service as a business, or in the course of business in or from within the Offshore zones, and is registered or licensed in accordance with the VASP Act, or is an existing licensee that is granted a waiver under the VASP Act.

The trading activity of the Offshore zones entity to acquire and dispose of cryptocurrencies for its own benefit would not be regulated under the VASP Act, as it is not providing a virtual asset service as a business, or in the course of business. Outside the activity of issuing virtual assets, the VASP Act will only affect persons that undertake virtual asset ser¬vices as a business, or in the course of a business for or on behalf of other persons. A natural person cannot carry on or purport to carry on a virtual asset service as a business, or in the course of busi¬ness in or from within the Offshore zones.

The VASP Act requires a VASP to either register with the CIMA or be licensed by the CIMA. Whether the VASP will have to register or be licensed will be dependent on the activity carried out by the VASP. However, broadly speaking, in the case of the provision of virtual asset custodial services, or the operation of a virtual asset trading platform (e.g. crypto exchanges, trading platforms), the VASP is required to have a virtual asset service licence. It appears that in most cases where the VASP is carrying on business as a VASP, but is not providing virtual asset custodial services or the operation of a virtual asset trading platform, only registration with the CIMA is required.

Offshore zones entities operating in breach of the VASP Act without the CIMA registration or a licence with the CIMA (as appropriate) will, among other things, subject VASPs and their operators to substantial administrative fines from the CIMA.

This publication is not intended to be a substitute for specific legal advice or a legal opinion on the laws governing virtual assets in the Offshore zones. For specific advice on the regulatory requirements for please contact your usual Edlescher attorney or any of:

Key Features of Offshore LLCs zones and the purposes for which they are used

Question: What are the key features of the Offshore zones LLC?

Answer: The key features are:

• Offshore Zones Limited Liability Company («LLC») is a corporate entity with separate legal personality to its members.
• The LLC is formed under the Limited Liabilities Companies Act (as Revised) (the «LLC Act») and is similar in structure to the Delaware LLC as the LLC Act is broadly based on the Limited Liability Company Act in the State of Delaware, U.S.A. However, the LLC Act has also preserved the broad legal principles applicable to the Offshore zones companies and the rules of equity and common law.
• Formation of an LLC is straightforward. It requires the filing of a registration statement with the Companies Registry and payment of the requisite Government fee.
• An LLC must have at least one member. It can be member managed (by some or all of its members) or the LLC agreement can provide for the appointment of persons (who need not be members) to manage and operate the LLC.
• The LLC must have a written LLC agreement or operating agreement of the member/members of the LLC which sets out the internal governing terms for dealing with the affairs of the LLC. The LLC agreement is not required to be filed with the Companies Registry.
• The liability of an LLC’s members is limited. This means that each member’s liability is limited to the amount that the member has agreed to contribute to the assets of the LLC, whether in the LLC agreement or otherwise, and such other liabilities and/or obligations that is set out in the LLC agreement.
• Members can have capital accounts and can agree amongst themselves (in the LLC agreement) how the profits and losses of the LLC are to be allocated and how and when distributions are to be made (similar to the Offshore zones exempted limited partnership).
• An LLC may be formed for any lawful business, purpose or activity and it has full power to carry on its business or affairs unless its LLC agreement provides otherwise.
• The following statutory registers are required to be maintained for an LLC but, similarly to the requirement for a Offshore zones exempted company, only an LLC’s register of managers is required to be filed with the Companies Registry:
  1. a register of members;
  2. a register of managers; and
  3. a register of mortgages and charges.
• The register of managers and register of mortgages and charges are required to be maintained in a manner similar to the register of directors and register of mortgages and charges for the Offshore zones exempted company.
• Subject to any express provisions of an LLC agreement to the contrary, a manager of the LLC will not owe any duty (fiduciary or otherwise) to the LLC or any member or other person in respect of the LLC other than a duty to act in good faith in respect of the rights, authorities or obligations which are exercised or performed or to which such manager is subject in connection with the management of the LLC provided that such duty of good faith may be expanded or restricted by the express provisions of the LLC agreement.

Question: For what purposes are Cayman LLCs being used?

Answer: LLCs are being used as private equity funds and venture capital funds because they have the combined features of separate corporate personality (like an exempted company) with the ability to deal with the allocation of profits and losses in manner similar to a partnership.

They are also being used as (i) general partner vehicles in GP/LP investment fund structures, (ii) joint venture companies, (iii) investment vehicles in private equity transactions, and (iv) operating vehicles in certain digital asset transactions.

For more information, please contact any of the below:

Voluntary liquidation or Strike-off?

Alternatives to voluntarily achieving the conclusion of operations and dissolution of Cayman companies

There are two principal routes to voluntarily dissolving Offshore zones company after the conclusion of its operations. Dissolution can be achieved either through (i) voluntary liquidation or (ii) a strike-off. The dissolution will mean that the company is removed from the Register maintained by the Registrar of Companies in the Offshore zones and cease to exist ultimately. If the company has entered into any agreements with clients, customers and suppliers and/or undertaken any trading activities since its incorporation, the more common and appropriate choice is to undertake a formal liquidation of the company by way of a shareholders’ voluntary liquidation. If the company has not entered into any agreements and/or undertaken any trading activities since its incorporation then it might consider a strike-off. However, a strike- off is only suitable as an alternative to a voluntary liquidation for companies that have never actually traded or have not traded for a long period of time because any shareholder or creditor, during the period of two years (see further details below) of the strike-off, can apply to have the company restored to the Register maintained by the Registrar of Companies in the Offshore zones.

Assessment

1. The main advantage of seeking dissolution of the company via the strike-off route is that this would be a simpler legal process (even though not necessarily a simpler process for the company’s Directors as they have to deal with paying, settling and discharging all liabilities and distributing any remaining company assets prior to a strike-off) and is normally quicker than a shareholders’ voluntary liquidation of the company.
2. There are risks associated with achieving a dissolution via the strike-off route, including:
   1. the strike-off process is more suited to companies which have never traded because it does not deal with the company’s liabilities to creditors and is not suitable for companies with extensive trading operations or valuable assets;
   2. in cases where there are any dissatisfied creditors or shareholders of the company, they can apply to the Offshore zones Court at any time within a period of up to 2 years (this period may be extended by the Governor of the Offshore zones for up to 10 years from the strike-off date) after the strike-off to have the company restored to the Companies’ Register. The Court will normally order a restoration if it feels that the company was at the time of the strike-off, carrying on business, or was in operation, and it is «just» to restore it — for example, in cases where the Court feels that creditors should be allowed to take proceedings to recover assets. If the company is restored to the Register it is deemed to have continued in existence as if its name had not been struck off but the Court can also make other orders as seem «just» for placing the company and all other persons in the same position as nearly as may be as if the name of the company had not been subject to a strike-off;
   3. unless the company has properly distributed all residual assets prior to strike-off, any assets held by the company at the time of strike-off will pass to the Financial Secretary of the Offshore zones government (and will be subject to being disposed of by the Governor of the Offshore zones or being retained for the benefit of the Offshore zones) upon dissolution;
   4. the strike-off process, therefore, does not cut off creditors’ options in the way that a properly executed voluntary liquidation process would, and the creditors who wish to challenge distributions made to the shareholders prior to a strike-off, for example, may be able to apply to the Court to have the company restored and raise claims well after the strike-off and dissolution.
3. Unlike the strike-off process, the ability to restore the company is not available to creditors or shareholders after the conclusion of a properly executed voluntary liquidation.
4. In determining whether to (i) seek a voluntary liquidation or (ii) a strike-off, the directors of the Offshore zones company should assess, among other things:
   1. the nature and extent of the assets and liabilities of the company and deal with these accordingly (i.e. discharge any and all creditors and transfer out all assets);
   2. whether or not there is a real risk of, for example, a shareholder or creditor seeking a restoration of the company in the future if the company is dissolved by strike-off.

Renewal of Director registration

Directors who are registered with CIMA in accordance with The Directors Registration and Licensing Law, 2014 («DRLL») in connection with being a Director of an entity that is registered with CIMA (e.g. registered Mutual Fund or an investment management or investment advisory entity that has «Excluded Person» status under the Securities Investment Business Law (2015 Revision)) (a «Covered Entity») should by this time of the year have received a reminder from CIMA to renew registration via the CIMA portal https://gateway.cimaconnect.com. A Director should renew his or her registration with CIMA if he or she will continue to be a Director of one or more Covered Entity that either (1) will carry on business for some or all of 2017, or (2) is in the process of winding down such business but the process will not cease prior to 31 December 2016.

Resignation from a Covered Entity

CIMA has stated[i] that if a Director no longer wishes to be registered or licensed as a Director of a Covered Entity, the Director must liaise with the Covered Entity’s registered office and ensure that CIMA receives written resolutions or an updated register of directors, stamped by the Registrar of Companies, to duly notify CIMA of the Director’s resignation from that Covered Entity.

Resignation of a Director from a Covered Entity will not automatically result in a surrender of the Director’s registration or licence under the DRLL.

Surrender of Director registration

CIMA has also stated[ii] that if a Director no longer wishes to be registered or licensed as a Director in accordance with the DRLL, he or she must first resign as a Director of all Covered Entities, then log into the CIMA portal, complete the requisite information under «Surrender», and pay the relevant surrender fee (US$731.71).

Once the Director has paid the surrender fee, CIMA will check its records to confirm that the Director is no longer listed as a Director on any Covered Entity. If he or she remains as a Director on a Covered Entity, CIMA has stated that it will be unable to process the Director’s surrender application.

In addition to submitting the surrender fee, the Director is required to submit a formal letter which MUST contain the following information:

1. that he or she has resigned as a Director of all Covered Entities;
2. that he or she no longer plans to act as a Director on any Covered Entity;
3. and that if he or she would like to act on any other Covered Entity or wishes to resume directorship services after he or she has surrendered his or her registration or licence, he or she will re-apply under the DRLL.

The Director is responsible for updating his or her records accordingly and must complete the requirements to surrender his or her registration or licence before the 31st December in order to avoid accruing next year’s annual fees, as well as penalties calculated at 1/12th of the annual fee for every month or part of a month after the 15th of January in each year that the fee is not paid.

As stated above, Directors who will continue to provide directorship services and wish to remain current with their registration or licence status under the DRLL MUST, on or before the 15th of January in each calendar year, renew their registration or licence through the CIMA portal.

Service and content of Statutory Demand

The Companies Winding up Rules 2008 (as amended) provide guidance as to the form and content of a statutory demand as well as the mode of service within the

A statutory demand should be in the format of CWR Form 1 and must be signed by:

1. the creditor; or
2. if the creditor is a firm, any partner of the firm; or
3. if the creditor is a corporate body, any director or officer who is authorised to make such a demand.

The demand must set out the amount and currency of the debt, the date on which the debt fell due, and the consideration for the debt. It must also contain the creditor’s address, or, if signed by someone other than the creditor himself, it should include the contact details of the partner, director or officer who sign on behalf of the creditor.

If the amount claimed includes any charge by way of interest not previously notified to the company as included in its liability, or any other charge accruing from time to time, the statutory demand must state the grounds upon which the company is liable to pay such interest or charge and contain particulars of the way in which such interest or charge are calculated.

Additionally, a statutory demand must include a statement that if payment is not made within 21 days of the date upon which it is served on the company, the company will be deemed to be insolvent and a winding up petition may be presented against the company in accordance with sections 92(d) and 93(a) of the Companies Law (2013 Revision).

The original hard copy should be delivered by hand to the company’s registered office — transmission of a copy by facsimile or e-mail alone is not sufficient to constitute good service. Once a statutory demand is served, the debtor has 21 days to either settle the debt, or to arrange to secure or compound for the debt to the satisfaction of the creditor. If, after 21 days, the debt has not been paid, or an agreement has not been reached and the statutory demand has not been set aside, the creditor may present a petition to the Court for a winding up order if the debt in question exceeds CI$100 (approximately US$120).

Disputing the debt/Counterclaim

The Court may dismiss a petition for the winding up of a company if the debt is disputed, or there is a genuine or serious cross claim. If the debt is disputed, the Court must be satisfied that there is a genuine dispute on substantial grounds (Re A Company (No. 006685 of 1996) [1997] BCC 830). If the creditor is aware of a genuine dispute prior to the service of the demand, cost penalties may arise (Re A Company (No. 006789 of 1995) [1996] 1 WLR 491). Therefore, the creditor should consider the possibility of a dispute or whether the creditor is able to pay before serving the statutory demand.

A court may also dismiss a petition where there is a genuine and serious counterclaim. In order for the petitioner to succeed in face of a genuine counterclaim, it must be one which the debtor is unable to litigate, be for an amount which does not exceed the petitioner’s claim, or reduce the debt to below CI $100 (approximately US$120) and there should be no circumstances that would make it inappropriate for the petition to be dismissed or stayed (Re Bayoil SA [1998] BCC 988).

If the parties to an agreement governed by Offshore zones law would like the agreement to take effect from a date earlier than the date upon which the agreement was signed and entered into, the parties should expressly state in the document that it is intended to be effective from a date earlier than the date on which the parties entered into the agreement. It should be made clear in the document that notwithstanding it being entered into on the date of execution by the parties, it is to take effect from a date in the past.

Stating that the contract or agreement will be effective from an earlier «effective date» will, however, only be effective as between or among the parties to the contract or agreement. It will not affect those parties’ obligations under the terms of the contract or agreement with regard to third parties who are not parties to the agreement. The obligations to third parties will almost invariably be based on the date that the contract or agreement was fully executed subject to any applicable special circumstances.

It is worth noting that whilst parties signing a contract or agreement may expressly state that the contract or agreement is effective from a date in the past, the parties should not «back-date» the date of execution (for example, sign the contract or agreement today and but insert an earlier date as the date of the document, thereby making it seem as if it was signed on some earlier date). This could run the risk of civil and/or criminal sanctions in a number of jurisdictions (for example, depending on, among other things, the nature and subject matter of the contract or agreement, false accounting or false statements by directors, or even conspiracy to defraud).

Administrative Fines Regulations in respect of Offshore zones Private Funds

1. Administrative Fines Regulations in respect of Cayman Private Funds

1.1. The administrative fine regime in the Offshore zones was implemented pursuant to the Offshore zones’ Monetary Authority (Administrative) Fines (Amendment Regulations), 2020, as amended («Administrative Fines Regulations») and extend the application of the fines administered by CIMA from the Anti-Money Laundering regime, to all regulatory laws, regulations and any rules issued by CIMA thereto.

1.2. The Administrative Fines Regulations categorize breaches as ‘minor’, ‘serious’ or ‘very serious’. For example, a Private Fund which accepts capital contributions from investors in respect of investment before it is registered with CIMA as a Private Fund is a «very serious breach».

1.2. The Administrative Fines Regulations impose a scale of fines dependent on the categorization of the breach as set out in paragraph 1.2 above, starting from an initial fixed fine of US$6,100 for a minor breach to a single fine up to a maximum of US$121,955 for individuals or US$1,219,515 for corporate bodies (e.g. exempt companies, SPCs, LLCs). Any administrative fines set out in the Administrative Fines Regulations which are applicable specifically to Private Funds, will be in addition to any fines which may be imposed on a Private Fund under the PFA.

2. Supervisory and enforcement powers of CIMA in respect of Private Funds

2.1. CIMA has broad discretionary supervisory and enforcements powers in respect of Private Funds.

2.2. If CIMA knows or has reasonable grounds to believe that a Private Fund:

1. is unable or appears likely to become unable to meet its obligations as they fall due;
2. is carrying on business fraudulently or otherwise in a manner detrimental to the public interest, to the interest of its clients or to the interest of its creditors;
3. is carrying on or attempting to carry on business or is winding up its business voluntarily in a manner that is prejudicial to its investors or creditors;
4. has contravened any provision of PFA or Anti-Money Laundering Regulations (2020 Revision) as amended;
5. has failed to comply with a condition of its registration; or
6. has not conducted the direction and management of its business in a fit and proper manner or has Directors, senior officers, managers or persons who have acquired ownership or control who are not «fit and proper persons»,

CIMA may take certain actions, including:

1. cancel the registration of the Private Fund;
2. impose conditions or further conditions on the Private Fund and to amend or revoke those conditions;
3. require the substitution of any promoter or operator of the Private Fund;
4. appoint a person to advise the Private Fund on the proper conduct of its affairs;
5. appoint a person to assume control of the affairs of the Private Fund;
6. apply to the Offshore zones’ Grand Court for an order to take such other action as it considers necessary to protect the interests of investors in, and creditors of, the Private Fund; and
7. if a magistrate is satisfied on an application made by CIMA or a police officer of the rank of Inspector or above that there are reasonable grounds for suspecting that an offence under the PFA has been, is being or is about to be committed in certain premises, the magistrate may issue a warrant authorizing CIMA or a police officer and such other persons as may reasonably be needed to enter and search the premises.

This publication is not intended to be a substitute for specific legal advice or a legal opinion. For specific advice on Funds in Offshore zones, please contact your usual Edlescher attorney or any of the following: