Summary
In the recent judgment of Mark Eric Williams and Ors v Kuwait Ports Authority & Ors[1], the Cayman Islands Court of Appeal (“CICA”) confirmed that the Grand Court had jurisdiction to order the joinder of two plaintiff limited partners of The Port Fund L.P. (the “Fund”) as defendants to a crossclaim which had been filed against the general partner (the “GP”) of the Fund.
In reaching this decision, the CICA determined that the joinder did not contravene the statutory restrictions placed on limited partners pursuant to sections 14 and 33(1) of the Exempted Limited Partnership Act (2021 Revision) (the “ELP Act”), which respectively prohibit a limited partner from (i) taking part in the conduct of the business of the exempted limited partnership (“ELP”) and (ii) being a party to or named in legal proceedings against the ELP.[2]
This decision clarifies the rights and roles of limited partners in an ELP, particularly where limited partners have filed direct and derivative claims. This decision will therefore be of interest to private equity and other professionals and investors familiar with the widely-used Cayman ELP structure.
Background
The Fund is the subject of ongoing litigation in the Cayman Islands[3], and is the first Cayman Islands ELP in which limited partners have brought derivative claims pursuant to section 33(3) of the ELP Act. The relevant limited partners are two Kuwaiti state entities, the Kuwait Ports Authority and the Public Institution for Social Security (“KPA” and “PIFSS” respectively).
In February 2023, the independent directors of the GP resigned, leaving the GP without directors or officeholders, and with only illiquid assets. The GP is a party to various direct and derivative claims by and against limited partners in the Fund, and is also a defendant to crossclaims by codefendants, one of whom is the ultimate beneficial owner of the GP.
Following the resignation of the directors, KPA and PIFSS were purportedly concerned that the crossclaims against the GP may not be defended and that the success of such claims would impact upon their limited partnership interest in the Fund by diminishing the partnership assets. They accordingly sought to be joined as defendants to the crossclaim against the GP pursuant to O.15, r.6 of the Grand Court Rules, and also applied to have interim receivers appointed to the GP under section 11 of the Grand Court Act (2015 Revision).
The joinder application was opposed by the defendants who had brought the crossclaim against the GP on the basis that sections 14 and, in particular, 33(1) of the ELP Act prohibit a limited partner from (i) taking part in the conduct of the business of the ELP in its capacity as a limited partner, and (ii) being a party to or named in legal proceedings (save for the narrow exception provided in section 33(3) of the ELP Act allowing limited partners to bring a derivative claim where a general partner has, without cause, failed or refused to do so).
Section 33(1) states:
“Subject to subsection 33(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.”
Section 14(1) provides:
“A limited partner shall not take part in the conduct of the business of an exempted limited partnership in its capacity as a limited partner”
The defendants contended that they were entitled to pursue their crossclaim against the GP alone, which was the sole proper defendant to the claim pursuant to both the ELP Act and the limited partnership agreement governing the Fund.
Grand Court decision
In a judgment delivered on 25 May 2023, the Grand Court of the Cayman Islands ordered the joinder of KPA and PIFSS, limited partners of the Fund, as defendants to the crossclaim, and appointed interim receivers over the GP to manage litigation related to the GP and the Fund.[4]
Justice Parker permitted KPA and PIFSS to be joined as defendants to the crossclaim in circumstances where they had earlier been permitted to bring derivative claims against the GP and the other defendants, and as limited partners had an indirect economic interest in the crossclaim. Specifically, Justice Parker concluded that section 33(1) did not prevent joinder of KPA and PIFSS as defendants to the crossclaim for the following reasons:[5]
- The proceedings, whether based on direct claims or derivative claims authorised under section 33(3), must also include any counterclaims or crossclaims within those proceedings, such that the crossclaim could not be regarded as a separate lis standing alone.
- The direct claims do not fall within section 33 of the ELP Act.
- It would be illogical and unfair if a limited partner permitted to pursue a derivative claim under section 33(3) were not also permitted to defend a counterclaim or a crossclaim in order that the derivative claim could proceed properly.
Justice Parker separately concluded that section 14(1) did not prevent the joinder because KPA and PIFSS sought to defend the crossclaim not as limited partners, but in their “individual capacities” as plaintiffs, and were not representing or replacing the GP. In this regard, Justice Parker held that “=[d]efending the crossclaim to protect their individual interest does not involve the Plaintiffs conducting the business of TPF”.
Justice Parker also held that the Court had a wide and flexible jurisdiction pursuant to GCR O.15, r.6 to permit joinder in the interests of justice when it was appropriate to do so. Justice Parker then exercised his discretion in favour of joinder, finding that, irrespective of the appointment of an officeholder, in circumstances where KPA and PIFSS were the parties most affected by the crossclaim and would bear the actual financial loss if it succeeded, it was just to permit those parties to participate in defending the crossclaim in addition to the GP acting by independent officeholders.
CICA decision
The appellants (being the defendants who brought the crossclaim against the GP) appealed the joinder order on two grounds:
- The judge erred in law in finding that the Court had jurisdiction to make the said order notwithstanding section 33(1) and section 14 of the ELP Act.
- The judge acted outside the margin of discretion afforded to him in ordering that KPA and PIFSS be joined as defendants to the said crossclaim notwithstanding his decision to appoint independent receivers with specific authority to conduct the litigation on behalf of the GP.
Section 33(1) and 14 of the ELP Act
The CICA agreed with Justice Parker’s conclusion that sections 14 or 33(1) of the ELP Act were not bars, in this case, to the respondents being joined as defendants to the crossclaim. However, the CICA disagreed with the judge’s reasoning and arrived at this conclusion for different reasons to the judge.
Importantly, while the CICA agreed that a limited partner does not need permission to defend a counterclaim arising within a proceeding which they have commenced themselves (either directly or derivatively having obtained permission pursuant to section 33(3)), this does not necessarily mean that limited partners have authority to defend a crossclaim.[6]
The CICA held that, contrary to Justice Parker’s view, crossclaims may constitute a separate lis such that the crossclaim may fall within the terms of section 33(1). Whether a crossclaim constitutes a separate lis depends on whether the crossclaim may properly be regarded as merely a facet of the existing litigation (in which case it will not fall within the terms of section 33(1)) or the promotion of a separate cause of action (in which case it will fall within the terms of section 33(1)).[7]
Having clarified the above, the CICA then addressed the statutory bar that section 33(1) imposes on limited partners should a crossclaim (or any other proceeding) fall within its terms. The CICA found that:[8]
- Section 33(1) is not an absolute prohibition on a limited partner playing any part in proceedings by or against an ELP. Those words need to be read in the context of the overall scheme of the ELP Act.
- Taken overall, the ELP Act is designed to provide a framework through which sleeping partners may invest with the protection of limited liability, all dealings with the outside world being conducted by the general partner.
- Viewed in that light, section 33(1) is to be regarded as merely a feature of the separation of functions between limited partners and general partners; it is designed to prevent a limited partner from being sued in respect of liabilities for which, under the scheme of the ELP Act, only the general partner is liable, and to reinforce the principle set out in section 14 that a limited partner should not take part in the conduct of the ELP’s business and its dealings with the outside world.
On this basis, the CICA found that the Court had jurisdiction to join the respondents to the crossclaim and dismissed this ground of appeal. The CICA further noted that such joinder was permitted because:[9]
- Once proceedings have been commenced in compliance with the provisions of section 33(1), they come under the control of the Court in the normal way and nothing in the terms of section (1) is intended to limit the ordinary powers of the Court, including the power to join parties under GCR O.15, r.6.
- The appellants had pleaded a defence of set-off specifically as a defence to the respondents’ claims, the effect of which was to place the merits of the crossclaim in issue between the appellants and respondents, as well as between the appellants and the GP. This means that, although standing alone the crossclaim may properly be regarded as a separate lis, the defence of set-off makes it a facet of the existing proceedings which is not be regarded as falling within section 33(1).
Exercise of discretion
The CICA found that the Judge acted within his discretion in ordering the joinder of KPA and PIFSS notwithstanding that receivers had been appointed.
The CICA noted that the Judge was aware that the appointment of receivers meant that there would be officeholders in place capable of dealing with some aspects of the litigation, having taken the view that no officeholder would be in as good a position as the respondents to defend the crossclaim, that the defence of the crossclaim by officeholders would have to be funded by the respondents or (which in the circumstances is unlikely) the appellants, and that it was the respondents who had the knowledge necessary to defend the crossclaim and the economic interest in doing so.[10]
Accordingly, it could not be said that the Judge took into account any irrelevant consideration, or failed to have regard to any relevant one, or that his decision was perverse. This ground was therefore dismissed.
Comment
The CICA’s judgment is of considerable importance to the Cayman Islands’ investment regime, in which ELPs are common structures, particularly for private equity funds. This is the first time that the CICA has considered the joinder of a limited partner as a defendant to a claim against a general partner. In doing so, the CICA has provided guidance on the role of limited partners within an ELP and the scheme of the ELP Act more generally.
[1] Unreported, CICA (Civil) Appeal No. 0011 of 2023, 15 August 2024, per Martin, Field and Birt JJA.
[2] Save for the narrow exception provided in section 33(3) of the ELP Act which allows limited partners to bring a derivative claim where a general partner has, without cause, failed or refused to do so.
[3] Kuwait Ports Authority & Ors v Port Link GP Ltd & Ors – FSD 236 of 2020 (RPJ) (“FSD 236”) and Gulf Investment Corporation & Anor v Port Link GP Ltd & Ors – FSD 41 of 2022 (RPJ).
[4] Kuwait Ports Authority & Ors v Port Link GP Ltd & Ors – FSD 236 of 2020 (RPJ). See also Campbells’ client advisory dated 1 June 2023 “The Port Fund: Limited Partner Joinder and General Partner Interim Receivership”.
[5] As summarised by the CICA at [25] of their decision.
[6] [26]-[27].
[7] [26]-[27].
[8] [30].
[9] [31]-[32].
[10] [39].
