Cayman Islands: Defaulting Limited Partners: Challenges For Private Equity In 2009


Liquidity concerns are all too familiar to most private equity fund managers these days, and investors in their funds have not been immune. However, at the time of writing, there have been few significant public defaults by investors in the major private equity funds. There are a number of reasons for this: among them, changes to the credit environment and the consequent (and widely documented) drop-off in deal flow have meant that capital calls are simply not being made at their usual levels of frequency or size, providing a safety valve for investors who would otherwise be feeling the pinch. To date, General Partners have been able to manage the issue by either holding off on investments (whether by choice or circumstance), or by restructuring their funds (for example in a way that offers investors the ability to elect for the consequences of default without being subject to formal default proceedings).

There are some indications that the status quo is coming under increasing strain. A small number of investors with more liquid resources are starting to insist that General Partners put the committed capital to work. Investment opportunities at knock-down prices are emerging from the fall out in the debt and capital markets. For many General Partners, follow-on investments in the debt and/or equity of their portfolio companies are either necessary or are available at rates that are too attractive to ignore. These and other factors have meant that General Partners are considering more closely their rights and obligations in relation to actual and potential defaults by Limited Partners. This note examines some of the key legal issues from a Cayman Islands perspective.

This note is a summary of the relevant issues. However, these are complex legal and factual issues and this note is not a substitute for considered legal advice in relation to the specific partnership agreement in question, the particular circumstances of the relevant investors and the extent to which capital commitments have drawn down and invested.

Distinguishing between Limited Partners

It is helpful to divide Limited Partners into two broad groups: investors that cannot fund and investors that would prefer not to do so. Within those groups, it's probably worthwhile to draw a further distinction between those whose difficulties are temporary and those in respect of which the concerns are more permanent.

Selective use of remedies

Partnership agreements invariably provide the General Partner with a range of possibilities when faced with a defaulting Limited Partner. The first, and most common question, is whether it is available to the General Partner to apply those remedies selectively both generally and on a basis that treats a range of defaulting Limited Partners differently. Subject to what follows, the answer is almost certainly yes.

Scope of fiduciary duty

The key consideration for the General Partner is to act in good faith in the best interests of the Partnership. There is no reported authority in the Cayman Islands as a result of which formulates a test as to the standard of care applicable to a General Partner. In recent years the English and Commonwealth common law authorities have moved towards an objective test when establishing the standard of skill and care that should be exercised by directors. The Cayman Islands courts may look to these authorities for guidance.

Remedies cumulative

It would be unusual for the default provisions of a partnership agreement to express the remedies available to a General Partner other than on the basis that they are cumulative rather than exclusive, and it is usually available to the General Partner to select from the remedies available to it. It is also usual for the partnership agreement to provide that the remedies are not exclusive of any remedy that may otherwise be available under applicable law. This latter provision is important to the extent that the default provisions constitute a claim for liquidated damages, because absent such a provision the General Partner may be restricted to the options enumerated in the partnership agreement: see the discussion in this regard that appears below.

Treating Limited Partners differently

In pursuance of its fiduciary obligation, there is nothing under Cayman Islands law to prevent the General Partner from distinguishing between defaulting Limited Partners and treating them differently in consequence on any basis that is relevant to the best interests of the Partnership. By way of illustration, treating a permanently insolvent investor harshly by applying a forfeiture provision, whilst at the same time simply charging an investor with temporary liquidity issues interest on an outstanding contribution on the basis that the General Partner reasonably considers that funding beneficial to the Partnership will be forthcoming in future, may be legitimately in the best interests of the Partnership. On the other hand, accommodating an investor solely on the basis that the General Partner wishes to manage the client relationship in order to secure commitments for future unrelated funds is unlikely to be a legitimate basis to draw a distinction.

These issues will inevitably become more focussed in circumstances where there is an actual or perceived conflict of interest on the part of the General Partner, and in those circumstances care should be taken to ensure that the actions of the General Partner are independently justifiable.

There are a couple of caveats worth noting:

  1. it will be difficult to censure a General Partner that chooses between two separate courses of action in relation to Limited Partners who are in similar position where the separate courses of action adopted are otherwise neutral to the interests of the Partnership, for reasons that may be unrelated to the interests of the Partnership;
  2. an allegation by a Limited Partner that a General Partner has acted in breach of its fiduciary duty practically carries a substantial evidentiary burden, and a Court will not easily substitute its own commercial judgment, or that of a Limited Partner, for actions taken by the General Partner in good faith.

Reluctant Investors

As indicated above, it is important to draw a distinction between Limited Partners who cannot invest, and those who are simply reluctant to do so. In the latter regard, there is far less scope for a General Partner to exercise flexibility and, in theory, the full force of the partnership agreement must be brought to bear on such persons. Alternatively, and more constructively, Partnerships could be restructured in accordance with the amendment provisions of the relevant partnership agreement by an offer being made generally to all Limited Partners.

Restructuring has been the watchword in the world of hedge funds for much of 2008, and there is no reason to believe that 2009 will not bring the same for the private equity industry. Already we have seen a major investment manager agree a reorganisation with investors that has allowed them to reduce capital commitments to one of its funds in exchange for agreeing to transfer 25% of all future distributions to continuing investors.

Enforceability of Default Provisions; Penalties

Because the provisions of partnership agreements providing for the exercise of specific remedies on default have not been tested in the Cayman Islands courts, there remains a degree of uncertainty as to their enforceability. At common law, a clause in any agreement that provides for the payment on default of a pre-determined amount will be recoverable as liquidated damages. However, where the remedy does not constitute a genuine pre-estimate of the loss likely to be suffered by the Partnership in consequence of the default and is rather a device to deter a party from breaching an agreement, it may regarded as a penalty and so not enforceable. Having said that, courts in common law jurisdictions have shown an increasing reluctance to characterise clauses negotiated between commercial parties as penal and it is now evident that the power to strike down a penalty clause is a blatant interference with freedom of contract and will not be exercised unless necessary to provide relief against oppression.

There is little or no specific guidance in the Cayman Islands courts at present in relation to what remedies they might regard as penal in the context of a partnership agreement for a Cayman exempted limited partnership, but the following factors will be relevant:

  • whether the clause was negotiated and freely entered into between parties of equal bargaining power;
  • whether the enforcement of the provision would be oppressive to the defaulting party;
  • whether the remedy specified is "extravagant and unconscionable" in comparison with the greatest loss that could possibly have been proved as a result of the breach;
  • whether there is a commercially justifiable reason for the clause;
  • whether the dominant purpose of the clause is to compensate the innocent party, or to deter the payer from committing the breach.

Practically, unless it is clear that the relevant remedy is entirely unrelated to the scope of the loss likely to be suffered by the Partnership, we would not ordinarily recommend that a General Partner seek to censure itself in enforcing the default remedies contractually available to it on the basis that any such remedy may be regarded as a penalty. Enforcement of its rights by a General Partner will not ordinarily require a determination to be made by a court, and it is only in the circumstances of a legal challenge to such enforcement that a court will be required to consider the matter. Apart from questions about the desire or ability of a financially embattled investor to engage in a difficult and uncertain course of litigation, the General Partner may adopt the strategy of not opposing any such application and simply abiding by the decision of the court: in that way, the court would ultimately determine the limits of the options available to the General Partner, and the General Partner would be free to apply any of the remaining remedies at its disposal.

Payment of an agreed sum

At its most simplistic, the claim against a Limited Partner for failure to pay a capital call comprises:

  1. the common law "action for payment of an agreed sum" which is a debt action; and
  2. a claim damages in respect of loss caused by the delay or omission in paying the debt due on time.

A debt action has certain advantages over a simple damages claim in that causation and remoteness are not relevant if the debt has become due

Alternative Remedies

It is fair to say that the majority of partnership agreements currently in existence were drafted in a different context, and in anticipation of different threats than those currently presented. The threat of forfeiture and the loss of continued investment opportunities that would have been unconscionable for an investor at the time of its initial investment may now be viewed by it as a welcome relief. The ability to force the sale of interests is severely impacted by the current state of the secondary markets. Simply put, default provisions for existing Partnerships may not have been drafted to manage short to medium-term liquidity crises. Apart from simply suing for the payment of the capital contribution on the basis that it represents an agreed sum, contractually required to be paid, what alternatives may be available to a General Partner?

Reduction of Capital Commitment

Where a Limited Partner is actually in default, it is possible to consider how the General Partner might discharge its fiduciary obligation by compromising the claim of the Partnership for the full outstanding capital commitment and accepting instead a reduced level of capital commitment. However, where a Limited Partner indicates simply that it wishes to reduce its commitment in circumstances other than following the occurrence of an actual event of default, the considerations set forth above are apposite and a global offer of variation is more likely to be required.

Anticipatory Breach

Where an investor telegraphs to the General Partner that it will be in breach of any capital call that may be made in future, the General Partner may have to consider its obligation to mitigate the loss likely to be suffered by the Partnership as a consequence. The doctrine of "anticipatory breach" provides an extreme and rather inflexible remedy that may nonetheless, in certain circumstances, be of benefit to the Partnership. In order to qualify as an anticipatory breach there must be: (i) a repudiation of the partnership agreement by the Limited Partner; and (ii) the acceptance of such repudiation by the General Partner. The repudiation of the partnership agreement requires a fundamental breach of contract by the relevant Limited Partner, such as an unequivocal statement that it will not fund its capital call when due. In those circumstances, the General Partner may affirm the partnership agreement by requiring compliance by the Limited Partner with the provisions of the capital call in due course, or repudiate the agreement by terminating it entirely with regard to such Limited Partner.

Excuse/Exclusion Provisions

Care should be taken in relying in circumstances of default or potential default on language in a partnership agreement drafted in a different context and for a different purpose. Excuse and exclusion provisions are ordinarily intended to address circumstances of regulatory concern to, or the underlying investment restrictions applicable to, Limited Partners. The provisions themselves, though, are often expressed in broad terms to refer to investments that would be materially adverse to a Limited Partner. A contractual party relying on the strict construction of a provision of an agreement negotiated and agreed amongst sophisticated persons always has a level of comfort that such a clause will be upheld on its face, but it is not without risk that a more narrow application of such a clause may be enforced by a Cayman Islands court.

Derivative Actions by Limited Partners

A Limited Partner will not ordinarily be in a position to enforce the contractual rights of the Partnership directly. In our view, this principle is likely to apply to any effort by a Limited Partner to enforce the capital commitment funding obligations of another Limited Partner directly, even though both are counterparties to the same partnership agreement. This is because the obligation to fund is one usually owed to the Partnership as a whole, and legal proceedings by a Cayman Islands exempted Limited Partnership may, subject to the nextfollowing paragraph, be instituted by the General Partner only.

There is however specific provision in the Cayman Islands legislation that grants to Limited Partners the right to bring an action against any person directly on behalf of a Partnership if the General Partner with authority to do so refuses to institute such proceedings "without good cause." 1 In our view, this statutory provision would enable a Limited Partner to proceed on behalf of the Partnership against a defaulting Limited Partner, and to exercise the contractual remedies that would be available to the General Partner, in circumstances where it is able to clear the statutory hurdle. It is not clear, though, that this adds a significant extra burden to the General Partner. If it properly discharges its fiduciary duty in electing not to proceed, the General Partner acts by necessary implication "with good cause" and it is difficult to conceive of a Court substituting the General Partner's judgement in those circumstances

Avoiding Liability for Capital Calls

It has been suggested that a defaulting Limited Partner may seek to avoid liability for a capital call on the basis that the General Partner is itself in breach of a provision of the partnership agreement, where such breach does not affect validity of the capital call itself. It is ordinarily provided for in the partnership agreement that the obligation to fund a validly-issued capital call is unconditional, in which event that defence is specifically not available. Subject to any provision of the Partnership to the contrary, there is no basis at common law upon which to assert such a defence. The remedies for a Limited Partner are either to seek specific performance to cure the alleged breach, or to sue for damages.

Unless provided for in the partnership agreement, set off is only available under Cayman Islands law as a statutory matter in the event of the insolvency of one of the contractual parties, and then only to the extent that both amounts are liquid sums.


1. Section 13(2) of the Cayman Exempted Limited Partnership Law (as amended)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.