The court\u2019s task is an evaluative one, and the Grand Court was wrong to hold that the defendants bear the onus of satisfying the strike out threshold. Rather, the CICA held at [118] that:<\/li>\n<\/ol>\nThe court must 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.\u00a0 In reaching this evaluative conclusion, the Court will no doubt have regard, inter alia, to the strength of the evidence that the general partner has failed or refuse 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.<\/em><\/p>\n\n- In determining this issue, the court is likely to be assisted by consideration of whether special circumstances exist, but the court\u2019s task remains one of applying the statutory test set out in section 33(3).<\/li>\n
- The court is required to consider the test by reference to the facts at the time of the hearing, not at the time of commencement of the action as Parker J had held.<\/li>\n
- Even if the court is satisfied that a plaintiff can bring himself within section 33(3), the court still has a residual discretion whether to permit the derivative claims to continue, and one relevant factor in the exercise of the discretion is whether the plaintiff has an alternative remedy such that the derivative action is not necessary.<\/li>\n<\/ol>\n
Having clarified the test to be applied, the CICA went on to strike out the derivative claims against the GP on the basis that (i) the Fund had suffered no distinct or separate loss from that of its limited partners, and there was no claim held by the Fund which the GP could fail or refuse to bring, and (ii) the limited partners already had an alternative remedy in the form of their direct claims against the GP.<\/p>\n
The derivative claims against D2-D4 were permitted to continue on the basis that the GP was under a relevant inhibition because (i) the essential wrongdoing giving rise to the allegations against D2-D4 was that of the GP itself (albeit while under the control of different directors), and (ii) the GP would have to consider whether it should sue itself as a co-conspirator. On the question of discretion and the presence of an alternative remedy, the CICA held there was sufficient uncertainty about whether the plaintiffs had direct claims against D2-D4 and would permit both the direct and derivative claims to continue for practical reasons.<\/p>\n
Analysis<\/strong><\/h3>\nWhile the judgment provides greater clarity concerning the test to be applied under section 33(3), and should ensure that investors cannot abuse the derivative jurisdiction against the interests of other stakeholders in an ELP, some points of concern still remain.<\/p>\n
Of potential significance is the finding made in both courts that the GP remains subject to a conflict of interest (and therefore a relevant inhibition for the purposes of the special circumstances test) notwithstanding that, at the time of assessing the claims for the purposes of the section 33(3) the GP was under the control of independent directors. It follows that unless a limited partnership agreement permits a change of the general partner (and such change does not trigger a winding up of the fund or other adverse consequences), the courts\u2019 findings tend to suggest that all<\/u> general partners will always<\/u> be subject to such a relevant inhibition as soon as its conduct has been at least arguably impugned in a statement of claim; the general partner can never rid itself of the conflict of interest even if there is a complete change of directors. The CICA did not accept D2-D4\u2019s submission that the appointment of independent directors to consider the alleged historic wrongdoing of the GP was tantamount to official liquidators investigating the affairs of a company or suing a former director.<\/p>\n
Stakeholders may also be concerned by the fact that the CICA permitted the plaintiffs to continue their derivative claims against D2-D4 notwithstanding the existence, on the plaintiffs\u2019 own case, of corresponding direct claims. Allowing plaintiffs to \u2018ride both horses\u2019 in this way might be considered contrary to the structure of the ELP Act, the exceptional nature of derivative claims, and the historical approach of permitting such claims to be brought only where no other remedy is available.<\/p>\n\r\n\t\t\t