Krys and others v KBC Partners LP and others

In construing partnership articles, the court must read the provisions as a whole, in the context of the partnership’s principal objective and commercial scheme. A word such as “sale” is not automatically confined to its strict legal meaning where that would conflict with the structure and purpose of the agreement. However, clear language cannot be displaced merely because its operation appears harsh or commercially unattractive. Where carried interest is expressly conditional on the sale of all investments, and no applicable alternative provision applies, the relevant partners may receive only the entitlement expressly preserved by the agreement.

Value Discovery Partners LP was a British Virgin Islands limited partnership established to manage and realise investments contributed principally by New World Value Fund Ltd. KBC Partners LP and SCI Partners LP were special limited partners whose interests included senior and strategy carried interest.

The partnership reached its final termination date without any investment having been sold. In liquidation, the special limited partners claimed a 30% share of profits or gains based on the value of the assets and their eventual disposal. The Court of Appeal of the Eastern Caribbean Supreme Court overturned the first-instance judgment and held that they were not entitled to carried interest. The issue before the Privy Council was whether the articles required a sale of all investments, in the strict sense, before carried interest could be allocated and distributed.

1. The appeal was dismissed. Lord Sumption delivered the majority judgment, with Lord Reed, Lord Toulson and Lord Hodge agreeing. Lord Mance dissented and would have allowed the appeal.
2. The articles distinguished between sale, distribution and exchange. In their ordinary legal sense, the words “sale of all Investments” in clauses 7.2.1 to 7.2.3 meant a transfer of property to another party for money consideration. A distribution in specie therefore did not satisfy that condition.
3. Clause 7.3.8 did not create a wider entitlement. It deemed assets distributed in specie to be realised only for calculating Capital Gains, Capital Losses and Capital Proceeds at their value. It did not make those assets a sale for the operative allocation provisions in clauses 7 and 8.
4. Clauses 7.2.2 and 7.2.3 were expressly predicated on the sale of all investments. The interim provisions in clauses 8.2.3 and 8.2.4 could permit preliminary carried-interest payments to SCI where their conditions were met, but no sale had occurred and no basis existed for a further carried-interest distribution under the articles.
5. The requirement in clause 8.2.1 for distributions under the relevant waterfall provisions to be made at the end of the partnership term referred to distributions during liquidation by reference to the state of affairs at the commencement of liquidation. It did not permit a later liquidation sale to generate an entitlement that had not arisen by termination.
6. The apparently contingent or all-or-nothing result was not absurd or commercially unwise on the evidence. Carried interest was a success fee for selling investments, while the general partner also received a management fee and limited preliminary carried interest could arise from partial realisations. Clear contractual language was not displaced by hypothetical examples or evidence of market remuneration.
7. Lord Mance’s dissent treated the articles as a whole and considered that the principal objective, the provisions for in-specie distributions and the valuation machinery required “sale” to bear a broader realisation meaning in liquidation. That reasoning did not command the Board’s decision.

• Privy Council: The Board dismissed the appeal and advised Her Majesty accordingly: [2015] UKPC 46.
• Court of Appeal of the Eastern Caribbean Supreme Court (British Virgin Islands): Overruled the first-instance decision and held that the special limited partners were not entitled to carried interest.
• First instance: Bannister J held in favour of the two special limited partners. No citation for that decision is stated in the judgment.