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

The court determined ten preliminary issues concerning whether institutional limited partners could bring derivative claims on behalf of a limited partnership and various points of construction of the partnership and management agreements. The judge held that a derivative action by limited partners against the General Partner was unnecessary because each limited partner has an individual claim against the General Partner under the Restated Partnership Agreement; such claims are not partnership assets. By contrast a claim against the Manager is a partnership asset and, given an inescapable conflict of interest on the part of the General Partner (the Manager being a sister company), limited partners may bring a derivative action in the name of the Partnership, but doing so will constitute "taking part in the management" under section 6(1) of the Limited Partnerships Act 1907 and will expose those limited partners to liability as if they were general partners for the period of their participation.

On contractual construction issues the judge largely favoured the defendants: the Partnership Agreement and Management Deed permitted the Laing plc acquisition (including limited non-PFI or "bridging" investments within the Commitment Period) and the Acquisition Debt was not a borrowing by the Partnership within the borrowing limit clause. Clause 5.3(y) (a general enabling provision) was held to be qualified by a reasonableness standard. Clause 18.1 and 18.2 (exculpation and indemnity) were held apt to cover losses arising in connection with the services performed under the agreements unless the Indemnified Persons were guilty of the specified types of culpable conduct.

The claimants were 22 institutional limited partners (LPs) holding the majority of committed capital in a limited partnership (Fund II) formed to invest in PFI/PPP concession companies. The Partnership, its General Partner and its Manager are related Henderson entities. The Manager caused Fund II to participate in the acquisition of John Laing plc, a listed corporate group containing many PFI concession projects and also substantial non-PFI assets and liabilities.

The LPs alleged that investing in Laing plc and the allocation of assets/liabilities was unauthorised by the Restated Partnership Agreement (RPA) and the Management Deed and sought (i) derivative claims on behalf of the Partnership against the Manager (and also against the General Partner as both personal and derivative claims), and (ii) declarations and a pre-emptive costs indemnity. The parties agreed ten preliminary issues addressing whether derivative claims could be brought by LPs without forfeiting limited liability, whether a costs indemnity should be ordered, and several construction issues about the scope of the Investment Policy, Bridging Investments, borrowing limits and the effect of clause 5.3(y) and clause 18 (exculpation/indemnity).

The court first analysed the law of derivative actions outside the company context and identified the need for "special circumstances" (e.g. conflict of interest) to justify allowing a representative derivative action. Applying those principles, the judge found an irreconcilable conflict of interest as the General Partner could not be expected to sue its sister company Manager in circumstances where the claim was a Partnership asset. That conflict constituted the special circumstance justifying a derivative action against the Manager. However the judge held that claims against the General Partner were individual claims of each LP under the RPA and not Partnership assets; accordingly there was no need for a derivative action against the General Partner.

The judge held that if LPs pursued the derivative claim against the Manager they would be "taking part in the management" within section 6(1) of the Limited Partnerships Act 1907 and would thereby incur the same liability as a general partner for debts and obligations incurred while so taking part. The court refused the LPs' requested declaration limiting that retrospective liability to costs alone and refused a pre-emptive costs order.

On construction the court concluded that Schedule 2 of the RPA properly allowed limited non-PFI investments during the Commitment Period (and required reasonable endeavours to divest them), that the "look-through" proviso in Schedule 1 applied only to PFI projects (not non-PFI assets or the investment in Laing plc as a whole), that the Acquisition Debt was not a Partnership borrowing within the RPA borrowing limit, and that clause 5.3(y) was a reasonableness-qualified enabling provision. Finally the court held that clauses 18.1 and 18.2 were apt to exculpate or indemnify the General Partner and Manager against losses arising in connection with services performed under the agreements unless the specified misconduct or culpable negligence were established.

At first instance the court allowed in part the Claimants' applications. The judge held that (i) the Claimants may not bring a derivative action against the General Partner because each limited partner has its own individual claim against the General Partner under the RPA; (ii) the Claimants may bring a derivative action on behalf of the Partnership against the Manager due to a special circumstance (an inescapable conflict of interest) but, if they do so, their conduct will amount to "taking part in the management" under section 6(1) of the Limited Partnerships Act 1907 and they will become liable as if they were general partners for the period of such participation; (iii) the construction issues were largely decided for the defendants: the RPA and Management Deed permitted the Laing acquisition within the Investment Policy and Bridging Investment regime, the Acquisition Debt was not a borrowing by the Partnership within the RPA cap, clause 5.3(y) operates subject to a reasonable opinion standard and clauses 18.1/18.2 may exculpate/indemnify the Manager/General Partner absent fraud, wilful misconduct, bad faith, reckless disregard or culpable negligence. Costs consequences to follow depending on whether the Claimants pursue derivative claims.