Court holds that a limited partner has extensive rights to discover “what has actually happened to his money”
The High Court gave judgment on 14 July 2011 in Inversiones Frieira v Colyzeo Investors. The court had to consider the extent to which an investor, who was a limited partner in an English limited partnership, could have access to the documents relating to individual investments made by the limited partnership – or whether, in the words of the judge, “he must simply rely on what is reported to him by way of explanation as to why his investment has halved in value”.
The case is of interest as the judge had to consider the provisions of documents constituting an English limited partnership and its investment management and advisory arrangements.
The facts, in brief
Inversiones Frieira (IF) was a limited partner in an English limited partnership (LP). The LP made some severely loss-making investments. IF asked the LP investment manager (IM) for information on two of those investments. The IM refused access to anything other than the “financial books and records” (the term used in the partnership deed) of the LP; the IM construed that term narrowly.
IF sought an order from the court that it be given access to, in short, all the documents related to the failed investments – it listed 60 categories of documents to which it wanted access.
The judgment: Victory for IF
The judge considered relevant provisions from the contractual matrix that constituted the LP arrangements – the LP Agreement and the Management Agreement in particular – and from the Partnership Act 1890 and the Limited Partnership Act 1907, as well as case law. Using language drawn from Bevan v Webb 1901 the judge formulated a general test for the documents that a limited partner might have access to:
“…the books which they desire to inspect, and which they have a right to inspect, are their own books. For what purpose is this provision made? It must be that the partners may be able to inform themselves of the position of the partnership.”
However, having drawn this general test, the judge found it of little use, stating that “there is little to be gained from looking at decided cases to see if they establish categories of documents” which every partner has the right to inspect.
Instead, the judge stated that in each case it is necessary to examine the particular contractual matrix relating to limited partner access to books and records; and look at matters such as how asset ownership is proven, how the rights of partners are determined between themselves and whether the document to which access has been sought has (ultimately) been paid for by the LP. Using that functional test, the judge handed a comprehensive victory to IF, holding that IF was entitled to sight of:
- Documents showing title over the physical assets of, and giving rise to rights of action by, the LP – which would include documents supporting hedging and derivative transactions;
- Documents supporting valuations provided to partners, which may include the raw data of the IM;
- Professional advice paid for by the LP; and
- Correspondence between the various management and advisory entities.
Two other issues considered by the judge worth mentioning
1. The judge had no time for the defendant’s argument that analysing information and conferring with other partners would mean a limited partner was participating in the management of the LP; only participation in individual investment decisions would equate to management involvement.
2. Nor did the defendant’s argument that IF was involved in a pre-litigation “fishing trip” find favour with the judge. Only if the purpose of the request for information was clearly to injure the partnership, or otherwise for a manifestly improper purpose, would the request be refused. In this case, the defendant came “nowhere near” establishing impropriety by IF sufficient to bar access to the documents.
Given the number of troubled co-investment vehicles, a case that is likely to be of use to indignant limited partners.
Friendly Corporate PSL
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