Kuwait Ports Authority and Public Institution for Social Security v Port Link Gp Ltd, Williams, Wellspring Capital Group Incorporated and Kgl Investment Company Asia

• Jurisdiction: Cayman Islands
• Judge: (Parker, J.)
• Judgment Date: 25 November 2021
• Court: Grand Court (Cayman Islands)

KUWAIT PORTS AUTHORITY and PUBLIC INSTITUTION FOR SOCIAL SECURITY

and

PORT LINK GP LIMITED, WILLIAMS, WELLSPRING CAPITAL GROUP INCORPORATED and KGL INVESTMENT COMPANY ASIA

(Parker, J.)

Grand Court, Financial Services Division (Cayman Islands)

Partnership — exempted limited partnership — derivative action by limited partners — derivative claims brought by limited partners not struck out — good arguable case general partner failed and refused without cause to bring claims (Exempted Limited Partnership Act, s.33(3)) — general partner conflicted in relation to claims alleging breach of duty

Held, ruling as follows:

(1) There were a number of relevant legal principles when determining strike out applications: (i) An application to strike out should not be granted unless the court was certain, not just satisfied on the balance of probabilities, that the claim was bound to fail. This was a high standard of proof. (ii) A statement of claim was not suitable for striking out if it raised a serious live issue of fact which could only be finally determined by hearing oral evidence. The live issue of fact with regard to the derivative claims was the “without cause” issue under s.33(3) of the Act. (iii) It was not appropriate to strike out a claim that raised complex issues of law, a fortiori in an area of developing jurisprudence. In such areas, decisions as to new points of law should be based on actual findings of fact. (iv) Leading counsel agreed a “mini trial” was inappropriate in deciding whether the s.33(3) criteria were satisfied in this case. (v) Likewise the allegations in the amended statement of claim were not, as leading counsel agreed, to be assessed on the merits at the hearing of the strike out applications. Notwithstanding criticism of the amended statement of claim, this was not a merits based strike out application. The court proceeded on the basis that the pleaded claims met the test of a real (as opposed to fanciful) prospect of success at trial, and they were good arguable claims. (vi) As it was for the defendants to prove that the claims should be struck out, it was only if the court was certain that the general partner had not refused or failed tobring the claims without cause that the derivative action must be struck out. It was different from the position of a shareholder asking the court to be allowed to bring a derivative action on behalf of a company, where it was for the shareholder to establish that he should be allowed to sue. (vii) The court accepted that in deciding the issue now rather than at trial the court needed to assess on the available evidence whether there was an arguable case that the general partner and, if necessary, the current directors had failed without cause to bring the claims (para. 33).

(2) A Cayman Islands exempted limited partnership was a creature of statute. It was distinct from an ordinary partnership and a company. In contrast to a company, an exempted limited partnership had no separate legal personality and existed only as its constituent partners. It could not own property in its own right. The general partner held the exempted limited partnership’s rights and property, including choses in action, on trust for each of the partners which made up the exempted limited partnership as a whole. The exempted limited partnership could not enforce the general partner’s obligations as trustee because it had no legal personality. The general partner was the only entity which could institute proceedings on behalf of an exempted limited partnership (s.33(1) of the Act). If the limited partners had claims against the general partner, it was in practice unworkable for it to bring proceedings against itself for breach of duty. If the general partner was the arbiter of whether to bring claims against itself, that clearly gave rise to a conflict of interest. The general partner’s obligations must therefore be capable of enforcement by each of the partners to whom it owed duties individually. The court accepted the plaintiffs’ submission that the general partner of an exempted limited partnership owed fiduciary duties to each of the limited partners and any breaches were enforceable by the limited partners themselves. It followed that where an exempted limited partnership was alleged to have suffered loss, as in the present case, that was the loss of each of the limited partners. There was no distinct or separate loss in respect of the partnership (TPF) which, as an entity, did not exist at law. The direct claims in respect of the individual partners’ losses were vested in the limited partners alone and were not claims that could be brought on behalf of TPF derivatively, except in the circumstances permitted by s.33(3) of the Act where the limited partners who wished to obtain redress for TPF were in effect put in the place of the general partner, and brought claims on behalf of TPF. The statutory and contractual prohibitions upon limited partners participating in the conduct of the business did not affect this conclusion, providing the conditions of s.33(3) were met. Otherwise, there would be no mechanism for a derivative claim on behalf of an exempted limited partnership to be brought against a general partner. The court did not accept that the causes of action belonged to TPF and fell to be distributed by the taking of partnership accounts and in no other way. If there was a breach by the general partner of the statutory, equitable, common law or contractual duties owed to the limited partners, those claims were vested in the limited partners themselves and could be brought directly in the ways pleaded. Thegeneral rule provided for in s.33(1) of the Act was that proceedings by or against an exempted limited partnership could only be instituted by or against the general partner, and a limited partner would not be a party to the proceedings. Section 33(3) allowed a limited partner to bring proceedings on behalf of an exempted limited partnership if the general partner had without cause failed or refused to do so. Section 33(3) was sui generis and was not subject to the rules relating to permission or for special circumstances for derivative actions in other contexts. The company and trusts law authorities to which the court was referred did not directly apply in this case, which concerned the application of a specific statutory test for Cayman Islands exempted limited partnerships (paras. 46–65; para. 78; paras. 88–100).

(3) The derivative claims would not be struck out. The evidence showed a good arguable case that the general partner had failed and refused to bring the claims over a period of years. There was a good arguable case that the general partner had a relevant inhibition because it was conflicted in relation to the claims. In exercising its fiduciary obligations to TPF, the general partner should take a neutral position with regard to claims sought to be advanced by the limited partners derivatively. It should act in what it considered to be the best interests of TPF and not with regard to its own interests. It clearly could not do so given the claims advanced against it. The decision not to bring the claims was made unsafe by the facts which gave rise to this conflict of interest. The general partner was a defendant to litigation where it was accused of serious wrongdoing: wilful default, liability under the Fraudulent Dispositions Act, and conspiracy. A large number of the claims against the other defendants were premised on a breach of duty by the general partner. In the circumstances, the general partner could not be expected to be the arbiter of whether to bring a claim against another defendant that was premised on its own breach of duty. It was incapable of exercising an impartial decision-making function. The court found that the general partner had without cause failed to bring the derivative claims. The plaintiffs should be permitted to bring the derivative claims under s.33(3) of the Act. There was an arguable case that the criteria in s.33(3) were satisfied. TPF would be joined so that it was bound by and a party to the proceedings, even though it was not a legal entity. In that way, the interests of the non-participating limited partners on whose behalf the derivative claims were also brought could be formally recognized. An additional factor in the exercise of discretion to allow the claims to proceed was that the plaintiffs, who represented the vast majority of the limited partner economic interests in TPF, were also bearing the litigation costs and adverse costs risk of litigating these claims on behalf of TPF. Moreover, TPF was no longer trading and had few creditors. The risk of real damage to ongoing commercial relationships did not appear to be material. Also, the derivative claims raised a new point of law of some importance to the funds community as to the application of s.33(3) of the Act. There would be a factual enquiry into these claims at trial. In those circumstances the right course was to allow the court at trial to assess themerits, boundaries and overlap of the direct and derivative claims against these defendants (paras. 102–138).

(4) The security for costs applications would be dismissed. The plaintiffs were ordinarily resident outside the jurisdiction and the court therefore had discretion to require them to provide security for the defendants’ costs pursuant to GCR O.23, r.1(1)(a). The issue for the court was whether the defendants had shown that there were objectively justified grounds for concluding that there were obstacles or burdens to enforcement of a costs order against the plaintiffs such that there was a real risk of non-enforcement and whether, if there were such real risks, it was just in the circumstances to order security, and if so on what terms. Where a plaintiff was a foreign government or state agency there was a presumption that security for costs should not be awarded, although each case would turn on...