{"id":9043,"date":"2024-11-04T11:31:00","date_gmt":"2024-11-04T16:31:00","guid":{"rendered":"https:\/\/www.campbellslegal.com\/?p=9043"},"modified":"2024-11-04T11:42:28","modified_gmt":"2024-11-04T16:42:28","slug":"privy-council-clarifies-test-for-derivative-actions-by-a-limited-partner-in-a-cayman-islands-exempted-limited-partnership","status":"publish","type":"post","link":"https:\/\/www.campbellslegal.com\/client-advisory\/privy-council-clarifies-test-for-derivative-actions-by-a-limited-partner-in-a-cayman-islands-exempted-limited-partnership-9043\/","title":{"rendered":"The Port Fund: Privy Council clarifies test for derivative action by a limited partner"},"content":{"rendered":"

Summary<\/strong><\/h3>\n

In the recent judgment of Kuwait Ports Authority and Ors (Respondents) v Mark Eric Williams & Ors (Appellants)<\/em>,[1]<\/a> delivered on 28 October 2024, the Judicial Committee of the Privy Council (\u201cJCPC<\/strong>\u201d) clarified the test for determining whether a limited partner in a Cayman Islands exempted limited partnership (“ELP<\/strong>“) is entitled to bring a derivative action on behalf of the ELP. This test is governed by section 33(3) of the Exempted Limited Partnership Act (2021 Revision) (\u201cELP<\/strong> Act<\/strong>\u201d), which provides that such an action may be brought by a limited partner only if the general partner has \u201cwithout cause, failed or refused to institute proceedings\u201d<\/em>. This is the first case in which this test has been considered by the JCPC.<\/p>\n

The Board ultimately dismissed the appeal, finding that the limited partner Respondents had the right to bring the derivative action because the general partner had failed to bring proceedings without cause as its decision making was subject to a relevant inhibition in the form of a conflict of interest. In doing so, the Board overruled certain material aspects of the lower Court decisions, and endorsed eleven principles which will serve as a useful guide for approaching and determining future applications made under section 33(3).<\/p>\n

The Board also dismissed the Respondents\u2019 cross-appeal, which concerned the point at which the section 33(3) test is to be assessed, upholding the Court of Appeal\u2019s finding that the relevant point in time is the date of the strike out hearing, rather than, as the Judge had held, the time the derivative action was commenced.<\/p>\n

Background<\/strong><\/h3>\n

The Port Fund L.P. (the \u201cFund<\/strong>\u201d), a private equity fund structured as an ELP, is the subject of ongoing litigation in the Cayman Islands[2]<\/a>, and is the first Cayman Islands ELP in which limited partners have brought derivative claims under section 33(3) of the ELP Act.\u00a0The relevant limited partners are two Kuwaiti state entities, the Kuwait Ports Authority and the Public Institution for Social Security (\u201cKPA<\/strong>\u201d and \u201cPIFSS<\/strong>\u201d respectively, together the \u201cRespondents<\/strong>\u201d).<\/p>\n

The Respondents have issued proceedings against (amongst others) Port Link GP Ltd (the general partner of the Fund – the \u201cGeneral<\/strong> Partner<\/strong>\u201d), Mark Williams (the ultimate beneficial owner of the General Partner), Wellspring Capital Group Inc (\u201cWellspring<\/strong>\u201d), and KGL Investment Company Asia Ltd (\u201cKGLI<\/strong> Asia<\/strong>\u201d) (together, the \u201cAppellants<\/strong>\u201d). The Respondents\u2019 claims are in unlawful means conspiracy, and allege dishonest breaches of trust and fiduciary duty, knowing receipt and\/or dishonest assistance. The claims are brought both as direct claims for the alleged loss each Respondent claims to have suffered as a limited partner of the Fund, and as derivative claims on behalf of the Fund.<\/p>\n

In the Grand Court of the Cayman Islands, the Appellants and the General Partner sought to strike out the Respondents’ derivative claims on the basis that the Respondents did not have a right to bring such actions by operation of section 33 of the ELP Act, subsection 1 of which provides that a claim belonging to an ELP must be brought by the general partner acting on behalf of the ELP. Exceptionally, pursuant to section 33(3) of the ELP Act, a limited partner may bring a derivative claim for and on behalf of an ELP if the general partner has \u201cwithout cause, failed or refused\u201d <\/em>to bring the claim.<\/p>\n

The Appellants and the General Partner argued that the Respondents did not have a right to bring the derivative actions because the professional directors of the General Partner, who took office after the alleged wrongdoing, had conducted an extensive investigation into the subject matter of the derivative claims and concluded that there was not cause to bring the derivative claims advanced by the Respondents. Having taken these steps, it was submitted that the General Partner had not, without cause, failed or refused to institute proceedings, and therefore the Respondents did not have a right to bring a derivative claim on behalf of the Fund.<\/p>\n

The Respondents argued that section 33(3) does not require the Court to embark on a detailed enquiry of the merits of the underlying claims. Their case was that the derivative claims are maintainable as pleaded and that the General Partner had a reasonable opportunity to bring those claims but did not do so. It therefore failed to do so “without cause”, within the meaning of section 33(3) of the ELPA.<\/p>\n

On 25 November 2021, the Grand Court found[3]<\/a> that there was a good arguable case that the General Partner had failed or refused to bring the claims, and that it still has a ‘relevant inhibition’ to do so because it is conflicted (it being the target of or alleged to be implicated in certain of the claims). The Grand Court therefore dismissed the strike-out applications.[4]<\/a><\/p>\n

The Appellants and the General Partner appealed to the Court of Appeal of the Cayman Islands (the “CICA<\/strong>“). On 20 January 2023, the CICA struck out[5]<\/a> the derivative claim against the General Partner on the basis that direct claims are being pursued against it. However, it upheld the Grand Court’s decision not to strike out the derivative claims brought against the Appellants owing to the inhibition of the General Partner.[6]<\/a><\/p>\n

Privy Council decision<\/strong><\/h3>\n

The Appellants appealed to the JCPC, which heard the appeal in June 2024.<\/p>\n

JCPC\u2019s findings<\/u><\/p>\n

The JCPC ultimately dismissed the appeal and the cross-appeal.<\/p>\n

The JCPC agreed with the reasoning and conclusion of the CICA that a failure to bring proceedings may be \u201cwithout cause\u201d for the purposes of section 33(3) where the decision making is subject to a relevant inhibition, and that an actual conflict of interest would amount to a relevant inhibition.[7]<\/a> In this case, the JCPC found that the General Partner had an actual conflict of interest by reason of it (amongst other things) having been the subject of the derivative claim that it refused to bring.[8]<\/a><\/p>\n

The Board also agreed with the CICA and Grand Court that the fact that a commercial decision was taken by the General Partner\u2019s professional directors not involved in the alleged wrongdoing did not avoid that conflict of interest for three reasons:[9]<\/a><\/p>\n