CAYMAN 2012 - HFMWeek

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CAYMAN 2012 LEGAL security interest. Cayman law prescribes that the priority of the security interest that a lender has been granted will be determined by the timing of the notice given. ENFORCING SECURITY Although most of the security agreements will not be governed by Cayman law, Cayman Islands insolvency law provisions will still be relevant. These are substantially based on English law and, therefore, are creditor friendly. Secured creditors (as in the UK) can still enforce their security interest after the appointment of a liquidator over a Cayman Islands company (there is no enforced “moratorium”). TAKING SECURITY OVER ELP INTERESTS The terms of an ELP are set out in the limited partnership agreement (LPA). An ELP is not a separate legal entity but simply a contract between the parties to the LPA and the GP has a crucial role in the management of an ELP. This raises issues for lenders when taking security over interests in ELPs. TYPE OF SECURITY Typically, the security entered into will be a charge and assignment by way of security of the limited partnership interest in favour of the lender. ISSUES TO CONSIDER ON TAKING SECURITY IN A SECONDAR- IES TRANSACTION The first issue for a lender is to ensure the borrower does successfully acquire the ELP interest. LPAs routinely provide that any transfer of a limited partnership interest must comply with the terms of the LPA, otherwise it will be void. If the transfer is void, the grant of the security by the borrower over the interest will also be void as the borrower will not have the rights to charge the asset (not being the legal or beneficial owner). Thus, a lender (like the acquiring borrower) must be comfortable that all the requirements for the transfer are met and requisite procedures are duly followed so that the transfer is validly completed at closing when the acquisition financing is provided and the lender takes security over the interest acquired by the borrower. The LPA should be checked to ensure the security can be granted over the limited partnership interest and whether any additional consents are required. It is usual for the LPA to provide that no transfer or mortgage of a limited partnership interest is permitted without the prior consent of the GP. Thus, it is essential to obtain not only the GP’s prior consent to the transfer on ALTHOUGH MOST OF THE SECURITY AGREEMENTS WILL NOT BE GOVERNED BY CAYMAN LAW, CAYMAN ISLANDS INSOLVENCY LAW PROVISIONS WILL STILL BE RELEVANT ” acquisition of the ELP interest by the borrower but also the GP’s prior consent to the lender being granted security over the ELP interest once acquired by the borrower. Further, another ‘transfer’ takes place when a lender enforces its security upon default, which is usually effected by a transfer of the ELP interest to the lender, its nominee or a third party on sale in accordance with the terms of the charge. It is unlikely the GP will approve such enforcement transfer at the outset so the absence of such prior consent remains a risk for the lender on enforcement. PERFECTING SECURITY Section 7(7)(b) of the ELP Law requires that written notice of a charge must be given at the registered office of the ELP together with a copy of the charge. This should be done as soon as possible as statutory priority is given according to the date of service of the written notice. Further, the GP is required by statute to maintain a register of mortgages of interests of the limited partnership at the registered office of the ELP. This register is open to public inspection. A lender should check this register prior to completing any financing arrangement to ensure that no prior security over the relevant limited partnership interest has been created. CONCLUSION Given the Cayman Islands’ position as a jurisdiction of choice for the world’s offshore alternative investment funds, lenders will, increasingly, be looking at lending to Cayman Islands vehicles. It is as important as ever to make sure lending to these funds is as risk-free as possible. To achieve this, lenders must ensure they identify the potential pitfalls and address as far as possible the potential risks. n 20 HFMWEEK.COM
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