Barclays Bank Plc v Nylon Capital LLP
| Jurisdiction | England & Wales |
| Judge | The Chancellor of the High Court,The Chancellor |
| Judgment Date | 19 May 2010 |
| Neutral Citation | [2010] EWHC 1139 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC/10/00897 |
| Date | 19 May 2010 |
[2010] EWHC 1139 (Ch)
The Chancellor of the High Court
Case No: HC/10/00897
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Royal Courts of Justice
Strand, London, WC2A 2LL
MR MICHAEL TODD QC & MR NIGEL DOUGHERTY (instructed by Allen & Overy LLP) for the Claimant
MR LESLIE KOSMIN QC & MR JAMES POTTS (instructed by The Khan Partnership LLP) for the Defendant
Hearing date: 12 May 2010
Introduction
In 2004 Mr Alan Burnell established hedge funds called the Nylon Flagship Fund Ltd and the Nylon Flagship Master Fund Ltd. The former was a 'feeder' fund for the latter. Both were incorporated in the Cayman Islands and are regulated there as mutual funds. I shall refer to them collectively as "the Flagship Funds". The Flagship Funds appointed Nylon Capital (Cayman) Ltd ("NCC"), a company incorporated in the Cayman Islands, to be their manager and NCC, as such manager, appointed Nylon Capital LLP ("NCLLP"), a limited liability partnership formed in England under the Limited Partnerships Act 2000, to be their investment manager. Under the respective management agreements the Flagship Funds were obliged to pay NCC and NCC was obliged to pay NCLLP, for their respective services, 2% per annum of the net asset value of the funds under management and a performance fee of 20% of any increase in their value in any quarter.
Barclays Bank plc ("BB") became involved with the Flagship Funds in two capacities. First, it provided 'seed' capital of £250m on the terms of successive Investment Agreements dated 23rd December 2004 and 29th December 2006. Second, BB was a member, called the Investment Member, of NCLLP. BB's interest in NCLLP was originally 12.5% but had increased to 19.5% by the time relevant to the issues on these applications. By that time the affairs of NCLLP were regulated by an Amended and Restated Limited Liability Partnership Agreement dated 29th May 2009 ("the LLP Agreement") and made between, amongst others, Mr Alan Burnell (1), BB (2) and NCLLP (6). Provision was made in clause 9 for the production of accounts and the allocation of profit and in clause 26.1 for dispute resolution by expert determination. I shall refer to the details of those clauses later.
On 2nd December 2009 BB gave the first of four monthly notices to withdraw its investment in the Flagship Funds. On 8th February 2010 Mr Burnell instructed PKF to calculate the amounts due to the respective parties under the LLP Agreement, in particular certain amounts due to BB thereunder and the amounts due from BB with respect to its share of the expenses of NCLLP under the LLP Agreement which, Mr Burnell considered, BB was liable to pay. In its report produced on about 10th February 2010 PKF assessed those expenses at £10.6m. By an e-mail sent on 15th February 2010 the solicitors for BB asked those for NCLLP to identify the provision of the LLP Agreement under which it contended that BB was so liable. The e-mail response of the latter did not satisfy the former.
The Part 8 Claim form which initiated these proceedings was issued and served on NCLLP without warning on 17th March 2010. BB thereby sought a declaration that "[BB] has no obligation to contribute to, or reimburse [NCLLP] for [its] expenses". In its acknowledgement of service dated 1st April 2010 NCLLP indicated that it would seek a stay of the claim pending settlement of the dispute by way of the expert determination procedure for which clause 26.1 of the LLP Agreement provided. In addition, it objected to the use of the Part 8 procedure in the circumstances that if it was unsuccessful in its application for a stay there would be substantial disputes of fact. On the same day NCLLP issued the application for a stay which is one of the two applications now before me.
Following the normal exchanges of witness statements from the respective solicitors for the parties, Mr Burnell, in his capacity as the Managing Member of NCLLP, made a witness statement on 30th April 2010 which indicated that, in his view, BB was liable not only to pay the operational expenses of NCLLP (as recorded in the PKF Report) but also that clause 9.3(E) of the LLP Agreement "requires [BB] to contribute its profits from its investment in the [Flagship Funds]". In the light of that contention, on 6th May 2010, BB issued an application seeking permission to amend its Part 8 claim so as to seek a second declaration that '[BB] has no obligation to pay to [NCLLP] [BB]'s profits on its investment in the [Flagship Funds]". In addition it applied for judgment in terms of the first declaration it sought on the basis that NCLLP no longer asserts that BB is obliged to contribute to or reimburse NCLLP for the costs and expenses of NCLLP.
Accordingly the issues before me are:
(1) whether either or both the disputes reflected in the two declarations BB seeks fall within the terms of the provision for expert determination contained in clause 26.1 of the LLP Agreement; and if so
(2) whether I should stay these proceedings; and if not
(3) whether I should grant BB permission to amend its claim form and direct that these proceedings be continued as if begun under Part 7, not Part 8.
I will deal with those issues in due course but first it is necessary to set out the relevant terms of the LLP Agreement.
The LLP Agreement
I have indicated the general nature of this agreement in paragraph 2 above. In addition to the parties there mentioned there were, as parties of the third and fourth parts, two corporate members, Nylon Capital Management Ltd and Nylon Capital Corporate Member Ltd, called respectively "Corporate Member" and "Second Corporate Member". The party of the fifth part is described as each other member who executes a deed of adherence. It would appear from the accounts of NCLLP for the year ended 31st December 2008 that there were 11 of them.
Clause 1 sets out a number of defined terms "save where the context otherwise requires" to which I shall refer after I have set out the provisions to which they relate. Clause 1.7 specifies that the agreement took effect as from 28th November 200Clause 4 describes the business of NCLLP to be
"(1) managing on a discretionary basis the investment or trading of assets belonging to other persons and entities, (2) marketing shares or interests in such other persons and entities and (3) activities associated therewith."
Clause 7 deals with capital and loan contributions. Clause 7.6 relates to "Third Party Funding" being funding of NCLLP obtained otherwise than from its members. It is not to be confused with Third Party Profit as defined in clause 1.1. Clause 8.1 provides that all expenses incurred in the establishment of NCLLP and with the LLP Agreement shall be borne by NCLLP.
Clause 9 is central to the issues before me. It is headed 'Allocations'. Clause 9.1, headed 'Accounts' provides, so far as relevant, that:
"The Managing Member shall procure that accounts are drawn up in accordance with the provisions of this Clause and otherwise in accordance with generally accepted accounting principles in the United Kingdom in respect of each financial year of [NCLLP]."
It specifies that the accounts should consist of a profit and loss account and balance sheet. It requires the Managing Member to procure such accounts to be audited.
Clause 9.2, headed 'Determination of Allocations', requires the Managing Member following the end of each financial year and by reference to the audited accounts of NCLLP to
"determine the allocation of the profits amongst the Members in accordance with the provisions of Clause 9.3 and….determine what proportion of such profits as have been so allocated shall be retained in [NCLLP] or made available for drawing by Members."
Clause 9.3 is headed 'Principles of Allocation'. It provides:
"Subject to Clause 9.4 (in relation to capital profits) and Clause 9.6, the profits of the [NCLLP] in respect of each financial year of [NCLLP] shall be allocated amongst the Members as follows:
(A) Firstly, the Managing Member shall determine such amount of profits (if any) as shall in his good faith opinion be required to be retained in [NCLLP] as working capital to meet anticipated, current or foreseen liabilities and expenditure of the [NCLLP], is sufficient to cover other contingencies in accordance with general principles of prudent management and satisfies any obligation imposed on [NCLLP] by FSA to maintain a minimum level of financial resources. Such retained profits shall be allocated as follows, in each case as capital to the Capital Contribution Account of the Relevant Member:
(1) to the Investor Member, an amount equal to 19.5% of that proportion of the retained profits which is equal to the proportion of the total profits of [NCLLP] for that financial year represented by the Third Party Profit; and
(2) as to the balance of the retained profits to the Corporate Member.
(B) Secondly, there shall then be allocated to the Corporate Member such amount of profits as are necessary, as reasonably determined by the Managing Member, to cover any expenses of the Corporate Member in relation to the provision of the Corporate Member Services, but excluding any expenses in relation to the provision of the HR Services or the provision of any other Corporate Member Services supplied...
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