Barclays Bank Plc v Nylon Capital LLP

In 2004 Mr Alan Burnell established hedge funds called the Nylon Flagship Fund Ltd and the Nylon Flagship Master Fund Ltd. The former was a ‘feeder’ fund for the latter. Both were incorporated in the Cayman Islands and are regulated there as mutual funds. I shall refer to them collectively as “the Flagship Funds”. The Flagship Funds appointed Nylon Capital (Cayman) Ltd (“NCC”), a company incorporated in the Cayman Islands, to be their manager and NCC, as such manager, appointed Nylon Capital LLP (“NCLLP”), a limited liability partnership formed in England under the Limited Partnerships Act 2000, to be their investment manager. Under the respective management agreements the Flagship Funds were obliged to pay NCC and NCC was obliged to pay NCLLP, for their respective services, 2% per annum of the net asset value of the funds under management and a performance fee of 20% of any increase in their value in any quarter.

Barclays Bank plc (“BB”) became involved with the Flagship Funds in two capacities. First, it provided ‘seed’ capital of £250m on the terms of successive Investment Agreements dated 23rd December 2004 and 29th December 2006. Second, BB was a member, called the Investment Member, of NCLLP. BB’s interest in NCLLP was originally 12.5% but had increased to 19.5% by the time relevant to the issues on these applications. By that time the affairs of NCLLP were regulated by an Amended and Restated Limited Liability Partnership Agreement dated 29th May 2009 (“the LLP Agreement”) and made between, amongst others, Mr Alan Burnell (1), BB (2) and NCLLP (6). Provision was made in clause 9 for the production of accounts and the allocation of profit and in clause 26.1 for dispute resolution by expert determination. I shall refer to the details of those clauses later.

On 2nd December 2009 BB gave the first of four monthly notices to withdraw its investment in the Flagship Funds. On 8th February 2010 Mr Burnell instructed PKF to calculate the amounts due to the respective parties under the LLP Agreement, in particular certain amounts due to BB thereunder and the amounts due from BB with respect to its share of the expenses of NCLLP under the LLP Agreement which, Mr Burnell considered, BB was liable to pay. In its report produced on about 10th February 2010 PKF assessed those expenses at £10.6m. By an e-mail sent on 15th February 2010 the solicitors for BB asked those for NCLLP to identify the provision of the LLP Agreement under which it contended that BB was so liable. The e-mail response of the latter did not satisfy the former.

The Part 8 Claim form which initiated these proceedings was issued and served on NCLLP without warning on 17th March 2010. BB thereby sought a declaration that “[BB] has no obligation to contribute to, or reimburse [NCLLP] for [its] expenses”. In its acknowledgement of service dated 1st April 2010 NCLLP indicated that it would seek a stay of the claim pending settlement of the dispute by way of the expert determination procedure for which clause 26.1 of the LLP Agreement provided. In addition, it objected to the use of the Part 8 procedure in the circumstances that if it was unsuccessful in its application for a stay there would be substantial disputes of fact. On the same day NCLLP issued the application for a stay which is one of the two applications now before me.

Following the normal exchanges of witness statements from the respective solicitors for the parties, Mr Burnell, in his capacity as the Managing Member of NCLLP, made a witness statement on 30th April 2010 which indicated that, in his view, BB was liable not only to pay the operational expenses of NCLLP (as recorded in the PKF Report) but also that clause 9.3(E) of the LLP Agreement “requires [BB] to contribute its profits from its investment in the [Flagship Funds]”. In the light of that contention, on 6th May 2010, BB issued an application seeking permission to amend its Part 8 claim so as to seek a second declaration that “[BB] has no obligation to pay to [NCLLP] [BB]’s profits on its investment in the [Flagship Funds]”. In addition it applied for judgment in terms of the first declaration it sought on the basis that NCLLP no longer asserts that BB is obliged to contribute to or reimburse NCLLP for the costs and expenses of NCLLP.

Accordingly the issues before me are:

I have indicated the general nature of this agreement in paragraph 2 above. In addition to the parties there mentioned there were, as parties of the third and fourth parts, two corporate members, Nylon Capital Management Ltd and Nylon Capital Corporate Member Ltd, called respectively “Corporate Member” and “Second Corporate Member”. The party of the fifth part is described as each other member who executes a deed of adherence. It would appear from the accounts of NCLLP for the year ended 31st December 2008 that there were 11 of them.

Clause 1 sets out a number of defined terms “save where the context otherwise requires” to which I shall refer after I have set out the provisions to which they relate. Clause 1.7 specifies that the agreement took effect as from 28th November 2008. Clause 4 describes the business of NCLLP to be

Clause 9 is central to the issues before me. It is headed ‘Allocations’. Clause 9.1, headed ‘Accounts’ provides, so far as relevant, that:

Clause 9.2, headed ‘Determination of Allocations’, requires the Managing Member following the end of each financial year and by reference to the audited accounts of NCLLP to

Clause 9.3 is headed ‘Principles of Allocation’. It provides:

Clauses 9.4 and 9.6 to which the provisions of Clause 9.3 are subject are not relevant to the issues before me but the definition of some of the terms used in clause 9.3 contained in clause 1.1 are. First, the “Investor Member” referred to in clause 9.3(A)(1) is BB. The expression ‘Third Party Profit’ used in the same sub-paragraph is defined in clause 1.1 in these terms:

That definition uses the terms “BB Investment” and “BB Investment Profits”. The definition of the former is part of the definition of “BB Investment Management Agreement” contained in clause 1.1, the latter is itself a term defined in clause 1.1. Those definitions are in the following terms:

It should be noted that definition of BB Investment Profits differs from that of Third Party Profit in that the words “management of” appear in the latter in the phrase “the net profit attributable in any financial year to the management of funds” but are not to be found in the equivalent phrase in the former; that reads “the net profit attributable in any financial year to the BB Investment”. It is on that distinction that the issue reflected in the second declaration BB seeks in this action rests. NCLLP contends that the BB Investment Profits mean the profit due to BB from its investment in the Flagship Funds not, as in the case of Third Party Profits, the profit derived by NCLLP from the management and performance fees payable in respect of BB’s investment in the Flagship Fund.

It is now clear from the response of the solicitors for NCLLP to the e-mail from the solicitors for BB dated 15th February 2010, to which I referred in paragraph 3 above, and the written and oral argument of counsel for NCLLP before me that NCLLP does not claim that BB is personally liable to pay the costs and expenses of NCLLP (or of either corporate member). In the e-mail response dated 15th February 2010 the solicitor for NCLLP wrote:

In the written argument of counsel for NCLLP the same point is made as an introduction to the conclusion in paragraph 33

Clause 26.1 is headed Expert Determination. It provides:

Counsel for NCLLP emphasises a number of aspects of clause 26.1. First, it applies to “any dispute” of the relevant description. Second, the requirement that such dispute has arisen “regarding” the matters described in the ensuing descriptions envisages something less than a direct connection. Third, the words in parentheses in paragraph (B) emphasise the breadth of application of the clause in that the dispute may relate to the interpretation of the LLP Agreement or the jurisdiction of the expert. Fourth, that paragraph and paragraph (D) both recognise the ability of the expert to seek and act on legal advice. Fifth, the quality of expert envisaged by paragraph (A) and the obligation of the parties to co-operate with him both indicate that the scope of paragraph (A) is not subject to any implied limitation.

I have referred in paragraphs 3 and 15 above to the circumstances which led to the issue of the claim form seeking the first declaration to which I have referred in paragraph 4 above. It is now clear that NCLLP does not contend that BB is under any personal liability or obligation to pay or provide for the relevant costs. Their provision is a matter for the Managing Member in the exercise of his functions under clause 9.2. He has not purported to make any allocation. BB does not contend that, when he comes to do so, he is not bound to give full and proper effect to all the terms of clause 9.3. Those terms include requirements to deduct from the Third Party Profit and the BB Investment Profits, as defined, the expenses required by those definitions to be deducted before the allocations referred to in paragraphs (C) and (E) are made. In those circumstances there is no dispute regarding any actual or potential allocation of profit under clause 9.3 or regarding its amount. Accordingly there is nothing for an expert to determine. Nor, for the like reason, is there any need for this action to continue for the resolution of the issue the subject matter of the first declaration sought. I will consider later whether I should make any and if so what order in respect of that matter.

I have indicated in paragraph 14 above the nature of the issue to which the second declaration sought is directed. There can be no doubt that in relation to that issue there is a dispute. But is it a dispute to which clause 26.1(A) applies? The argument of counsel for NCLLP is that the definition contained in clause 1.1 of BB Investment Profits embraces the profits derived by BB from its investment in the Flagship Funds. Accordingly, so it is submitted, those profits are included in the profits to be allocated by the Managing Member under clause 9.3(E). It is not suggested that there is any provision in either the BB Investment Management Agreements, the constitution of either of the Flagship Funds or the LLP Agreement requiring the BB profits to be paid by the Flagship Fund or BB to NCLLP whether to be treated as part of the assets of NCLLP or otherwise. The highest it is put by counsel for NCLLP is that, as BB is a party to the BB Investment Management Agreement and the LLP Agreement, it is bound to give effect to clause 9.3 by bringing its profits from the Flagship Funds into account in the allocation of the profit of NCLLP. These submissions are contested by counsel for BB.

I reject the submissions of counsel for NCLLP for substantially the reasons given by counsel for BB. Clause 26.1 only applies to “any dispute regarding...the amount of any profit or loss allocations due to a Member pursuant to Clause 9”. I accept the broad approach to the interpretation of clause 26.1 for which counsel for NCLLP contended but the relevant dispute must have some connection with an allocation of profit pursuant to clause 9. The provisions of Clause 26.1(B) to (D) must all be read in that context.

Clause 9.3 is quite explicit. It applies and applies only to the allocation of the profits of NCLLP in respect of the relevant financial year or years. Clause 9.2 requires the Managing Member, by reference to NCLLP’s accounts, prepared as required by Clause 9.1 “in accordance with generally accepted accounting principles” for that financial year, to allocate the profits amongst the members. The audited accounts of NCLLP for the years ended 30th November 2004, 2005, 2006, 2007 and 2008 consistently show the management and performance fees earned by NCLLP from its management of the investments of the Flagship Funds and certain other income and gains arising from its own assets. None of them shows as income of NCLLP any income or gains accruing to BB in either of the Flagship Funds. This is not a mistake. Counsel for NCLLP did not assert that BB was obliged to account to NCLLP for the profits on its investment in the Flagship Funds so as to constitute them the profits of NCLLP. There is no provision in any of the many documents before the court on these applications to suggest any such obligation.

The only provisions relied on are the definition of BB Investment Profits in clause 1.1 and the reference to them in clause 9.3(E). I do not accept that they are sufficient to require the allocation of BB’s profits from its investment in the Flagship Funds to the members of NCLLP. The structure of clause 9.3 and the opening words of paragraph (E) show that the clause as a whole is dealing with the profits of NCLLP, not those of BB, and paragraph (E) is dealing with “the remainder” of those profits. Not only is the word “allocation” inappropriate to describe the diversion of the assets of BB to the members of NCLLP but the context of clause 9.3 in general and of paragraph (E) in particular is sufficient to displace the definition of BB Investment Profits in clause 1.1. The words in paragraph (E) “being the remainder of...the BB Investment Profits” is a misdescription if it is taken literally to refer to BB’s profit from its investment rather than NCLLP’s profit from its management of that investment. For these reasons I do not consider that the issue to which the second declaration sought by BB relates comes within the purview of clause 26.1 either.

In the light of my conclusions in relation to both issues I can deal with the remaining issues shortly. First, there can be no question of granting a stay of this claim if Clause 26.1 is inapplicable. In that event there is nothing to refer to an expert for his determination and no reason to interfere with the normal progress of this claim. Accordingly I dismiss the application of NCLLP. Second, the issue reflected in the first declaration sought is not disputed so that there is no reason for it to go for trial. But the form of declaration sought is ambiguous. It should be made plain that it does not extend beyond the absence of any personal obligation as described in paragraph 15 above. Accordingly I invite counsel to agree a form of declaration to give effect to that limitation. To that extent I accede to paragraph 2 of the application notice issued by BB on 6th May 2010. The permission to amend the Part 8 claim sought by paragraph 1 of that application notice was not opposed and I grant it. This leaves the objection made in the acknowledgement of service to these proceedings continuing as a Part 8 claim. Counsel for NCLLP assures me that it is necessary for his client to raise a number of factual matters as relevant to the circumstances surrounding the execution of the LLP Agreement. In those circumstances I will direct pursuant to CPR rule 8.8(2) that this claim continue as if commenced by a Part 7 claim.

For all these reasons: