Krys and Others v KBC Partners LP and Others (British Virgin Islands)
| Jurisdiction | UK Non-devolved |
| Judge | Lord Sumption,Lord Mance |
| Judgment Date | 19 November 2015 |
| Neutral Citation | [2015] UKPC 46 |
| Date | 19 November 2015 |
| Docket Number | Appeal No 0089 of 2014 |
| Court | Privy Council |
[2015] UKPC 46
Privy Council
From the Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands)
Lord Mance
Lord Sumption
Lord Reed
Lord Toulson
Lord Hodge
Appeal No 0089 of 2014
Appellants
Ian Mill QC
Philip Jones QC
Tom Weisselberg QC (Instructed by Brown Rudnick LLP)
Respondents ( Kenneth Krys and John Greenwood - Liquidators) David Head
(Instructed by Jones Day)
Respondent (New World Value Fund Limited) Christopher Pymont QC
Ciaran Keller (Instructed by Signature Litigation LLP)
(with whom Lord Reed, Lord Toulson and Lord Hodge agree)
Part VI of the Partnership Act 1996 of the British Virgin Islands provides for the creation of limited partnerships on the footing that the partnership business is conducted by the general partner, and the limited partners are not liable for partnership obligations unless they participate in its management. This appeal arises out of a dispute about the distribution of partnership assets upon its dissolution.
Value Discovery Partners LP ("VDP") was a BVI limited partnership formed in 2004. Its purpose was expressed in its articles of partnership (clause 1.2) to be:
"to carry on business and in particular but without limitation to identify, research, negotiate, make and monitor the progress of and sell, realise, exchange or distribute investments which shall include but shall not be limited to the purchase, subscription, acquisition, sale and disposal of shares, debentures, convertible loan stock and other securities in unquoted companies and in certain quoted situations, and the making of loans whether secured or unsecured to such companies in connection with equity or equity-related investments, with the principal objective of providing the Limited Partners with a high overall rate of return."
There were four partners:
(1) The Principal Limited Partner was New World Value Fund ("NWVF"), a company registered in Gibraltar whose ultimate beneficial owners were Boris Berezovsky, a controversial Russian politician and businessman who died in 2013, and his Georgian business associate Arkady Patarkatsishvili, who died in 2008. NWVF contributed assets valued at US$320m to the partnership, substantially the whole of the initial capital. These assets consisted of ordinary shares in various companies carrying on business in the Balkans and the former CIS states. They were divided into categories, corresponding to business areas, which are referred to in the articles as "Strategies".
(2) The General Partner was a company called Salford Capital Partners Inc ("Salford"), which was controlled by a Mr Eugene Jaffe, a professional fund manager. Salford was entitled under the articles to a management fee of 2% of the aggregate capital contributions of the limited partners.
(3) In addition, there were two Special Limited Partners, KBC Partners LP and SCI Partners LP, referred to in the articles as Special Limited Partner I and II respectively. KBC and SCI were BVI limited partnerships owned by Mr Jaffe which made nominal capital contributions of $100 each. Their role was to represent his interests and those of a number of individuals working for Salford or otherwise concerned in the management of VDP.
It is clear from the terms of the articles that the principal purpose of the partnership was to manage the investments contributed by Messrs Berezovsky and Patarkatsishvili through NWVF with a view to selling them off within the partnership term and achieving the maximum return. It is apparent from the evidence that the disposal of the investments was expected to be difficult, partly because of their location in a part of the world where business conditions are notoriously difficult, and partly because their sale value was likely to be undermined if their connection with Messrs Berezovsky and Patarkatsishvili became known. NWVF and VDP were structured in such a way as to conceal that connection as far as possible.
Clause 1.5 of the articles provided that the partnership should terminate on 1 July 2008, subject to clause 11.2, which provided for this date to be extended for successive periods by the General Partner "in order to permit an orderly liquidation of the Partnership Assets". An extension was conditional on the General Partner notifying the limited partners in writing that it was of the view that an orderly liquidation of the partnership's assets was not possible by the existing date of termination. The management fee payable in respect of the extended period was reduced to 0.4%. In no case were the extensions to exceed four years in total. In other words, the last possible date of termination was 1 July 2012. In the event, the duration of the partnership was successively extended, but none of the partnership assets had been sold when the partnership was finally terminated on the long-stop date 1 July 2012. It is now in liquidation.
The present appeal arises out of proceedings brought in the BVI by the joint liquidators to determine the distribution of the partnership's assets in the liquidation. The joint liquidators are neutral on this issue, and have taken no substantial part in this appeal. The real issue is between NWVF, which had contributed substantially all the capital, and the two Special Limited Partners KBC and SCI, which represented the interest of those contributing management skills. Shortly stated, the question is whether the Special Limited Partners are entitled to recover a sum referred to in the articles as "Carried Interest" in circumstances where the assets had not been sold at the time of termination. The Court of Appeal, overruling the trial judge, held that they were not.
Carried Interest is in substance a bonus or success fee payable to interests associated with the management for selling the investments. The articles provide for two kinds of "Carried Interest". "Senior Carried Interest" is related to the management of the assets as a whole and is payable to KBC ("Special Limited Partner I") at 24% of the net profits and gains realised on the sale of the investments. "Strategy Carried Interest" is related to the management of the assets comprised in individual "Strategies" and is payable to SCI ("Special Limited Partner II") at 6% of the profits and gains realised on sale. The combined effect of the provisions for Carried Interest is that individuals associated with the management stood to gain 30% of any profits or gains made on the sale of the investments.
Clause 11.5 deals with liquidation. Clause 11.5.3 provides:
"Upon termination or liquidation of the Partnership … no further business shall be conducted except for such action as shall be necessary for the winding-up of the affairs of the Partnership and the distribution of the Partnership Assets amongst the Partners."
Clause 11.5.4 provides for the treatment of the assets of the partnership on liquidation after termination:
"Upon termination of the Partnership, the liquidating trustee or trustees may sell any or all of the Partnership Assets on the best terms available or may, at its or their discretion, distribute all or any of the Partnership Assets in specie. … The remaining proceeds and assets (if any) shall be distributed amongst the Partners on the basis set out in clause 8."
Clause 8 provides for distributions, some of which may be made at any time at the discretion of the General Partner, and some of which may be made only upon termination. Among those which can be made only upon termination are sums allocated under clauses 7.2.2 and 7.2.3, which deal with Carried Interest.
At this point it is convenient to set out, so far as relevant, clauses 7 and 8 of the articles, whose construction is decisive of the issue now before the Board:
"7.2 Allocation of Remaining Income and Gains
7.2.1 Except as provided in clause 7.1, all Net Income, Net Losses, Capital Gains and Capital Losses of the Partnership shall be allocated between the Partners only following the sale of all Investments of the Partnership or at such other time as may be agreed by the General Partner and the Limited Partners.
7.2.2 Subject to clause 7.1, if following the sale of all Investments of the Partnership the Annual Rate of Return of the Partnership exceeds 0%, then cumulative Net Income, Net Losses, Capital Gains and Capital Losses of the Partnership shall be allocated between the Partners by allocating the portion of each such amount equal to the Senior Carried Interest multiplied by such amount to the Special Limited Partner I, the portion of each such amount equal to the Strategy Carried Interest multiplied by such amount to the Special Limited Partner II, and the balance of such amount to the Principal Limited Partner.
7.2.3 Subject to clause 7.1, if following the sale of all Investments of the Partnership the Annual Rate of Return of the Partnership is 0% or less and the Annual Rate of Return of at least one Strategy exceeds 0%, then the cumulative Net Income, Net Losses, Capital Gains and Capital Losses of each Strategy shall be allocated between the Partners as follows:
(a) for each Strategy for which the Annual Rate of Return exceeds 0%, such amounts shall be allocated between the Partners by allocating the portion of each such amount equal to the Strategy Carried Interest multiplied by such amount to the Special Limited Partner II, and the balance of such amounts to the Principal Limited Partner; and
(b) for all other Strategies, 100% to the Principal Limited Partner.
7.2.4 Subject to clause 7.1, if neither clause 7.2.2, nor clause 7.2.3 applies, then Net Income, Net Losses, Capital Gains and Capital Losses of the Partnership shall be allocated 100% to the Principal Limited Partner.
…
7.3.8 If a decision is made to distribute any Partnership Assets in specie in...
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