Kuwait Ports Authority & Ors v. Port Link GP Ltd & Ors (CICA (Civil) Appeal Nos. 002 & 003 of 2022, 20 January 2023) was the first decision by the Cayman Islands Court of Appeal considering section 33(3) of the ELPA on derivative claims brought by a limited partner on behalf of an ELP.

Re Formation Group (Cayman) Fund I, L.P. (FSD 366 of 2021 (IKJ), 21 April 2022)) was the latest decision in a series of conflicting decisions of The Grand Court of the Cayman Islands (the ‘Grand Court’) on whether a winding up petition could be presented against an ELP.

Introduction

ELPs are a popular structure adopted for use as a closed-ended investment vehicle. An ELP is a partnership that is registered under the ELPA. In contrast to a company, an ELP has no separate legal personality and exists only as its constituent partners. This means that the general partner of an ELP holds its rights and property of every description, including choses in action, on trust for each of the partners.

At the heart of these two recent Cayman decisions is the question of interpretation of section 33 of the ELPA, which concerns legal proceedings by or against an ELP. Section 33(1) of the ELPA provides that: ‘Subject to subsection (3), legal proceedings by or against an exempted limited partnership may be instituted by or against any one or more of the general partners only, and a limited partner shall not be a party to or named in the proceedings.’

The exception under section 33(3) then states that ‘A limited partner may bring an action on behalf of an exempted limited partnership if any one or more of the general partners with authority to do so have, without cause, failed or refused to institute proceedings.’

Kuwait Ports Authority & Ors v. Port Link GP Ltd & Ors

Background

The ELP in question is The Port Fund L.P., which has one general partner and eleven limited partners. Two of the limited partners commenced these proceedings, alleging wrongful misappropriation of the ELP’s assets held on trust by the general partner. The plaintiffs (i.e. the two limited partners) pleaded (i) individual direct claims against the defendants for losses each of them has suffered as a limited partner (the ‘Direct Claims’); and (ii) derivative claims against the general partner and the other defendants on behalf of the ELP (the ‘Derivative Claims’). The defendants applied to strike-out the claims.

The direct claims

The Court of Appeal of the Cayman Islands (‘CICA’) refused to strike-out the Direct Claims. CICA confirmed that Sections 33(1) and (3) of the ELPA apply only to derivative claims and have no application to direct claims brought by a limited partner in respect of its own right of action against the general partner and others.

The CICA further held that it is not appropriate to require that a direct claim by a limited partner against the general partner must always be initially brought by way of a claim for partnership accounts. It is not necessary to protect the positions of the creditors and of the other limited partners by requiring this. As for the direct claims against the other defendants, the CICA was of the view that the two limited partners have the requisite standing.

The derivative claims

The CICA’s judgment is instructive in its construction of section 33(3) of the ELPA against the background of the law on derivative claims. Some of the principles highlighted by the CICA are:

• A limited partner is not required to seek leave from the court to bring derivative proceedings under section 33(3), and is free to commence such proceedings without leave.
• However, in accordance with section 33(3) a limited partner may only bring a derivative claim if the general partner has refused or failed to do so without cause.
• The court’s task is to decide, on the basis of the material before it, whether the likelihood of the general partner having failed or refused to institute proceedings without cause is sufficient to lead the court to conclude that a derivative action should be permitted in the interests of justice. In reaching this evaluative conclusion, the court will have regard, inter alia, to the strength of the evidence that the general partner has failed or refused to institute proceedings without cause, the strength of the underlying claim which is sought to be brought and the likelihood and nature of any injustice if the derivative claim is not permitted.
• Even where the requirements of section 33(3) are met, the court has a discretion whether to permit a derivative claim to continue. One of the factors which is likely to be relevant in exercising that discretion is whether the plaintiff has an alternative remedy.

Applying these principles, the CICA struck-out the limited partners’ derivative claims against the general partner. The first basis for this decision was that on the first instance judge’s finding the ELP has suffered no loss or damage. There was no appeal against the judge’s finding that the partnership had no form or joint right or claim against the general partner. When the ELP does not have a claim of its own to bring, the limited partners cannot be permitted to bring a claim derivatively and there can be no failure by the general partner to bring such a claim without cause.

The CICA’s second reason for strike-out was as a matter of discretion. As the limited partners had an adequate alternative remedy in the form of a direct claim against the general partner, there was simply no need for a derivative action.

As for the derivative claims against the other defendants, the CICA held that by reason of conflict of interest, the general partner was under an inhibition which would amount to a special circumstance justifying the limited partners’ ability to bring a derivative claim. This inhibition also means that the failure by the general partner to bring proceedings against the other defendants was without cause for the purposes of section 33(3). Accordingly, the limited partners were allowed to pursue the derivative claims against the other defendants.

Re Formation Group (Cayman) Fund I, L.P.

Background

These proceedings concerned a winding up petition presented by six limited partners against an ELP on just and equitable grounds. The general partner applied to strike-out the petition on the basis that it was presented against the ELP rather than against the general partner.

The key question before the Grand Court was whether winding up proceedings can validly be brought against an ELP in its own name as opposed to against the general partner.

In an earlier decision of the Grand Court in 2021, Re Padma Fund LP (FSD 201 of 2021 (RPJ), 8 October 2021), Parker J held that the Grand Court had no jurisdiction under the Companies Act to wind up an ELP on a creditor’s petition. Such a decision resulted in some uncertainty as to the proper process for bringing proceedings against an ELP. In the present case, Kawaley J however took a contrary view which was consistent with his earlier decision in Re XIO Diamond LP (FSD 256 of 2019 (IKJ), 30 April 2020).

Decision

Kawaley J. embarked on a process of statutory interpretation of section 33(1) of the ELPA and other relevant provisions in the same statute relating to winding up under the Companies Act. In particular:

• Reference was also made to section 36 of the ELPA, which deals with the application of Part V of the Companies Act (2021 Revision) and the Companies Winding Up Rules, 2018 to the winding up of an ELP.
• Section 36(3) provides that an ELP may be wound up under Part V of the Companies Act and the Companies Winding Up Rules on the same grounds as would be available to a contributory in relation to a company. References in Part V to a ‘company’ apply to an ELP and references to a ‘contributory’ apply to a limited partner. By necessary implication, a limited partner may petition to wind up an ELP.
• Section 33(1) does not impose a mandatory requirement that all proceedings against an ELP must be brought against the general partner of an ELP.

The strike-out application was accordingly dismissed.

Conclusion

In light of the unique nature and status of an ELP, it is not surprising that there are heated debates around a limited partner’s standing to commence proceedings and the question of whether the ELP could be named as a respondent in its own name. The above decisions have provided useful guidance on the interpretation of section 33 of the ELPA and helped to shed some light on these issues. However, this is unlikely to be the end of the debates.

In particular, the question of whether an ELP could be sued in its own name remains controversial. Strictly speaking, Re Padma is still authority on the appropriate route for a creditor to petition and the conflicting views of the judges in Re Padma and Re Formation Group are yet to be resolved by an appellate court.

It is anticipated that jurisprudence concerning disputes involving ELP will continue to develop and provide more clarity to parties pursuing their claims.

This article first appeared in Volume 20, Issue 3 of International Corporate Rescue and is reprinted with the permission of Chase Cambria Publishing.