Inversiones Frieira SL and Another v Colyzeo Investors II LP and Another
| Jurisdiction | England & Wales |
| Judge | Mr Justice Norris |
| Judgment Date | 29 May 2012 |
| Neutral Citation | [2012] EWHC 1450 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC10C02611 |
| Date | 29 May 2012 |
[2012] EWHC 1450 (Ch)
Mr Justice Norris
Case No: HC10C02611
IN THE HIGH COURT OF JUSTICE CHANCERY DIVISION
Royal Courts of Justice
The Rolls Building
Fetter Lane
Strand, London, EC4A 1NL
Peter De Verneuil Smith (instructed by SC Andrew LLP) for the Claimants
Andrew Hunter (instructed by Clifford Chance LLP) for the Defendants
Hearing dates: 12 & 13 January 2012
The issue in the action is: to what documents can a general partner be ordered to provide access to limited partners in order that they may understand the business in which they have invested?
In my first judgment [2011] EWHC 1762 I sought to give an answer in principle to that question, rather than to specify individual documents amongst the many claimed in each of the 60 categories which Inversiones sought in the Schedule attached to the Part 8 Claim Form. I invited the parties to apply those principles, reach agreement on the documents to be produced, and to restore the case for the resolution of any remaining disputes. Regrettably this has led the parties into poring over the first judgment as if it was a statute.
The restored hearing took place on the 12 and 13 January 2012. No agreement had been reached at all.
In my first judgment I endeavoured to set out (in paragraph 23) what principles underpinned the right of a partner to inspect "the books of the partnership" and to describe the general nature of those "books". But I pointed out (in paragraph 23 (k)) that what would be required would vary from case to case depending on the nature of the partnership business and its mode of conduct and the terms of the partnership agreement (and any associated arrangements) read in the light of current business practice: the test being essentially a functional one. I took the view that, in general, if it would be necessary or advantageous for the general partner or its delegate to rely on a document to establish rights as against a third party or to determine rights as between the members of the partnership themselves, then the document should be available for inspection by the limited partners. Further, if it was a document for which the partners had themselves paid then that might also be taken to be a document which related to the affairs of the partnership (because otherwise it could not properly have been charged directly to the account of the partners).
The parties have not reached agreement upon what books of the partnership IFS and IVS (I will call them together "Inversiones") have to be shown to enable them to examine into the state and prospects of the partnership business and to confer with the other limited partners thereon. This is because of a fundamental difference of approach. That of Inversiones is to focus on "entitlement"; to look at each of the categories of document production of which is claimed, and then to ask in relation to that category whether if documents of that type existed then their production for inspection could be justified according to the principles set out in the judgment. That of Capital and CIM was to review what documents actually existed and then to assess each document that actually existed against the principles set out in my first judgment to see whether it formed part of the "partnership books" to inspection of which the limited partners were entitled. This detailed review (which was undertaken by a team of three solicitors over three months) produced 76 files of documents, 44 of which contained material the production of which the Defendants had previously resisted. It should be recorded that the Defendants afforded the opportunity for Inversiones to participate in this review process: but the opportunity was not taken up. The reason for that was that Inversiones fundamentally disagreed with the whole "documentary capture and review process being conducted before the relevant principles were applied".
It is regrettable that this metaphysical debate should have stood in the way of getting to Inversiones the documents they need for an understanding of the affairs of the partnership. Insofar as it arises from any lack of clarity in the first judgment I apologise to the parties. I had intended clearly to communicate my view that what must be shown to the limited partners will vary from case to case (depending on the nature of the partnership business and its mode of conduct), that there was little to be gained by looking at decided cases to see if they established categories of document which as a matter of law every partnership had to maintain and which every partner had a right to inspect; and that the whole process should be grounded upon what documents actually existed, and their function, and not upon abstract categories.
As a starting point, the process undertaken by the Defendants was essentially that which I envisaged. Whilst I recognise (and would underline) the fact that affording to limited partners access to the partnership books is not a process of disclosure (like that under the CPR) I do agree with the sentiment expressed in a letter from Clifford Chance dated 15 August 2011:—
"We do not consider that the parties can endeavour to agree the application of the principles without knowing what documentation actually exists".
An examination of the material provided establishes:—
a. That there are no real property or marketable securities directly owned by the Partnership.
b. The Partnership investments consist of participation in SPVs which ultimately own the underlying assets, and there may be multiple layers of SPVs between the Partnership and the underlying asset.
c. In no case does the Partnership wholly own an SPV which in turn wholly owns the underlying asset.
d. Accordingly, in no case can the worth of an investment held by the Partnership be determined simply by reference to the market value of the underlying asset. Every investment held by the Partnership has to be attributed a "Fair Market Value" assessed quarterly. So in relation to the Partnership's Accor investment, what is being valued is the Partnership's interest in CZ2 Day (a Luxemburg co-ownership entity) which in turn owns 45% of ColDay (another Luxemburg co-ownership entity) which in turn owns some derivatives of the Accor shares. The "Fair Value" analysis varies from SPV to SPV – depending on the nature of the underlying asset. It may be conducted by reference to market value, third party valuation, third party appraisal, earnings multiple or discounted cash flow. The analysis is summarised in a "FMV Package" for the investment.
e. Each SPV has its own income flow and its own expenses, recorded on its own financial recording system (albeit that this is maintained centrally).
f. No SPV has its own independent capital funding. Instead, the acquisition costs of the underlying investment (both price and acquisition costs and expenses, including any due diligence) and any funding costs (such as loan repayments or premiums on hedging transaction) are simply passed up the chain of SPV's until the appropriate proportion is treated as a disbursement to be paid by the Partnership out of the capital contributed by the limited partners or out of lines of credit available to the Partnership, these amounts being recorded in "a Funding Package".
At the hearing it was accepted by Inversiones that there was extensive duplication of requests within the 60 categories of documents sought. It was accepted by Capital that investors were entitled to see (subject to any necessary redaction to preserve the confidentiality of co-investors) the SPV constitutions under which the Partnership rights arise, the FMV Packages, the Funding Packages, the general ledger entries which record the dealings ultimately summarised on the financial statements provided to each partner, and the papers provided to CIM to enable it to make decisions about Partnership affairs ("the decision files").
The points of difference were recorded on a 69 page Scott Schedule, the general nature of which was canvassed at the hearing and details of which I have considered in the course of preparing judgment. But before I address the issues in detail I would note four general themes.
First, this litigation is brought by two out of a number of limited partners. They are seeking to exercise their rights as such. No doubt considerable expense will have been incurred in the preparation of documents for provision, which expense might well be charged to the Partnership generally. It is important not to lose sight of the interest of other partners when considering the rights of IVS and IFS. As Collins LJ said in Bevan v Webb [1901] 2 Ch 59 at 68 "their rights are qualified and regulated by the corresponding rights of the other partners". Whatever further provision of documents might be considered, that provision must be such as is truly appropriate to address real and substantial (and not merely theoretical) issues. Equally, it is important not to lose sight of the fact that whatever it is held must be provided to Inversiones must also be made available to every other limited partner of the Partnership.
Second, what the general partner is obliged to do is afford access to the relevant "partnership books". The exercise by Inversiones of the right to inspection of partnership books does not require the general partner or its delegate to create "partnership books" or to constitute partnership papers which are not already in existence. If such partnership books or papers ought to...
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