Kuwait Ports Authority and another v Mark Eric Williams and 2 others (Cayman Islands)

Under section 33(3), a limited partner may bring a derivative action where the general partner has failed or refused to institute proceedings without cause. Common-law special-circumstances principles assist the statutory assessment, particularly where a derivative action is needed to avoid injustice.

An actual and serious conflict of interest affecting the general partner may make its refusal without cause. The court makes a single evaluative determination, taking account of relevant discretionary considerations, at the hearing of the strike-out application or preliminary issue. No separate permission, leave or second discretionary stage is required.

The respondents, limited partners in a Cayman Islands exempted limited partnership, brought direct and derivative claims concerning alleged misappropriation of the Fund’s assets. The general partner, which was itself implicated in the alleged wrongdoing and closely connected with several defendants, declined to pursue the claims after an investigation by independent directors.

The Grand Court dismissed the appellants’ strike-out application. The Court of Appeal upheld the continuation of the derivative claims, finding an actual and serious conflict of interest and exercising what it considered to be a discretion to permit the claims. The appeal challenged that conclusion and the cross-appeal concerned the date at which the statutory test was to be assessed.

Lord Hamblen delivered the single judgment of the Board, which advised that both the appeal and cross-appeal be dismissed.

1. Statutory test. Section 33(3) contains the controlling criterion: whether the general partner has failed or refused to institute the relevant proceedings without cause. Common-law authorities on derivative claims by beneficiaries and limited partners are relevant because special circumstances showing that a derivative action is needed to avoid injustice may establish that the refusal was without cause.
2. Conflict of interest. The Court of Appeal correctly found an actual, obvious and serious conflict affecting the general partner. The general partner was alleged to have participated in the wrongdoing and had to consider proceedings against itself, its ultimate beneficial owner and closely associated companies. It was unnecessary to examine how the conflict had affected the decision. The conflict and resulting inhibition existed irrespective of the identity or independence of the directors.
3. Independent directors and discretion. The FFP Directors were also conflicted because their duties were owed primarily to the general partner, whose interests could conflict with those of the Fund. Section 33(3) does not impose a separate permission or leave requirement, or a second discretionary stage. Matters such as an alternative remedy, an ulterior motive or the views of other limited partners may instead be considered within the single evaluative determination under the subsection.
4. Timing and procedure. The assessment is made at the date of the strike-out or preliminary-issue hearing. The statutory language can encompass a failure or refusal continuing after proceedings commence, and “bring” includes commencing and maintaining the action. The limited partner must plead the relied-on facts. The court considers the material before it without conducting a mini-trial; the onus is not a balance-of-probabilities burden. Its decision is determinative subject to appeal.
5. Company authorities. Company derivative-action authorities, including the rule in Foss v Harbottle, offer little assistance because an ELP has no separate legal personality and has materially different contractual, trust, fiduciary, loss and governance structures.

The Court of Appeal’s guidance was endorsed subject to those clarifications. The appeal and cross-appeal were dismissed.

1. Privy Council — In [2024] UKPC 32, the appeal and cross-appeal were dismissed. The Board corrected the Court of Appeal’s guidance by removing any separate permission or discretionary stage.
2. Court of Appeal of the Cayman Islands — On 20 January 2023, the Court of Appeal dismissed the strike-out appeal save in relation to the derivative claims against the General Partner. It found that the General Partner’s refusal was without cause and treated permission to continue as discretionary.
3. Grand Court of the Cayman Islands — On 25 November 2021, Parker J dismissed the appellants’ strike-out application. Part of the General Partner’s summons was granted on discrete points, but no claims against it were struck out.