Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson PFI Secondary Fund II LP & Ors

A derivative action may be available outside the company context where special circumstances make it necessary to avoid injustice. An alternative remedy is relevant but not conclusive. A limited partner could therefore pursue a partnership claim against a conflicted manager, but commencing and conducting that litigation constituted taking part in management under section 6(1) of the Limited Partnerships Act 1907. The claimants consequently became liable for the partnership’s debts and obligations incurred while they pursued the claim, as though they were general partners. No derivative action was available against the general partner because each limited partner had an individual contractual or fiduciary claim against it. A pre-emptive costs order was refused. The contractual exculpation clause also extended to losses arising from unauthorised investment or borrowing, absent fraud, wilful misconduct, bad faith, reckless disregard or the specified negligence.

Twenty-two institutional limited partners challenged the investment of a limited partnership in the John Laing group and the allocation of associated assets, liabilities and borrowing. They sought to bring derivative claims in the name of the partnership against the general partner and its sister-company manager. They also sought declarations that pursuing those claims would not affect their limited liability, or alternatively that any increased liability would be confined to litigation costs, together with a pre-emptive costs order.

The court determined preliminary issues concerning derivative standing, the effect of section 6(1) of the Limited Partnerships Act 1907, construction of the partnership and management agreements, and the scope of contractual exculpation and indemnity provisions.

Derivative claim against the general partner. There was no room for a derivative action against the general partner. The partnership had no separate legal personality, and the alleged liabilities under the Partnership Agreement were claims belonging individually to the limited partners. They could sue the general partner for their own loss.

Derivative claim against the manager. The claim against the manager was a partnership asset. The general partner’s inescapable conflict of interest, coupled with the impracticality and commercial disadvantages of replacing it, constituted special circumstances making a derivative claim necessary to avoid injustice. The existence of personal claims against the general partner and the possibility of replacing it were relevant alternatives, but neither was conclusive.

The merits could be considered only to the limited extent that a claim had no realistic prospect of success, or was very strongly supported. The preliminary issues did not justify a final merits assessment. The claimants were entitled in principle to pursue the derivative claim against the manager.

However, commencing, conducting or settling proceedings against a third party on behalf of the partnership was management of the partnership business. Section 6(1) therefore applied, notwithstanding the conflict of interest or the allegation that the manager had acted outside its authority. The claimants would become liable for all debts and obligations of the firm incurred during the period in which they pursued the claim, as though they were general partners. The words “while he so takes part” imposed a temporal limitation.

A pre-emptive costs order was refused. The litigation was hostile and the claimants were financially able to pursue it; the court could not be satisfied that a trial judge would necessarily order payment from the partnership fund.

On construction, the investment provisions did not impose quantitative “principal” and “ancillary” limits of the kind proposed by the claimants. The look-through proviso applied only to individual PFI projects. The acquisition debt was not borrowing by the partnership because the partnership was not liable for it. Clause 5.3(y) extended authority where the manager reasonably considered the relevant activity necessary or desirable and consistent with the Agreement. Clause 18 applied to losses arising in connection with the partnership’s activities, including unauthorised investment or borrowing, subject to its stated exclusions. Issue 11 was academic.