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

“(1)

managing on a discretionary basis the investment or trading of assets belonging to other persons and entities, (2) marketing shares or interests in such other persons and entities and (3) activities associated therewith.”

Clause 7 deals with capital and loan contributions. Clause 7.6 relates to “Third Party Funding” being funding of NCLLP obtained otherwise than from its members. It is not to be confused with Third Party Profit as defined in clause 1.1. Clause 8.1 provides that all expenses incurred in the establishment of NCLLP and with the LLP Agreement shall be borne by NCLLP.

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

“The Managing Member shall procure that accounts are drawn up in accordance with the provisions of this Clause and otherwise in accordance with generally accepted accounting principles in the United Kingdom in respect of each financial year of [NCLLP].”

It specifies that the accounts should consist of a profit and loss account and balance sheet. It requires the Managing Member to procure such accounts to be audited.

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

“determine the allocation of the profits amongst the Members in accordance with the provisions of Clause 9.3 and....determine what proportion of such profits as have been so allocated shall be retained in [NCLLP] or made available for drawing by Members.”

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

“Subject to Clause 9.4 (in relation to capital profits) and Clause 9.6, the profits of the [NCLLP] in respect of each financial year of [NCLLP] shall be allocated amongst the Members as follows:

(A)

Firstly, the Managing Member shall determine such amount of profits (if any) as shall in his good faith opinion be required to be retained in [NCLLP] as working capital to meet anticipated, current or foreseen liabilities and expenditure of the [NCLLP], is sufficient to cover other contingencies in accordance with general principles of prudent management and satisfies any obligation imposed on [NCLLP] by FSA to maintain a minimum level of financial resources. Such retained profits shall be allocated as follows, in each case as capital to the Capital Contribution Account of the Relevant Member:

(1)

to the Investor Member, an amount equal to 19.5% of that proportion of the retained profits which is equal to the proportion of the total profits of [NCLLP] for that financial year represented by the Third Party Profit; and

(2)

as to the balance of the retained profits to the Corporate Member.

(B)

Secondly, there shall then be allocated to the Corporate Member such amount of profits as are necessary, as reasonably determined by the Managing Member, to cover any expenses of the Corporate Member in relation to the provision of the Corporate Member Services, but excluding any expenses in relation to the provision of the HR Services or the provision of any other Corporate Member Services supplied to the Corporate Member by any Member or by the Associate of any such Member, which have not otherwise been reimbursed by [NCLLP] in accordance with Clause 8.2.

(C)

Thirdly, there shall be allocated to the Investor Member an amount equal to 19.5% of the Third Party Profit.

(D)

Fourthly, there shall be allocated:

(1)

any payment agreed to be paid to any Outgoing Member (or their personal representatives) pursuant to Clause 17; and

(2)

any payment to the Corporate Member to cover any expenses in relation to the provision of any Corporate Member Services not covered under Clause 9.3(B) above (but excluding any expenses in relation to the provision of the HR Services).

(E)

The remainder of the profits, being the remainder of the Third Party Profit and the BB Investment Profits, shall be allocated to the Corporate Member, the Second Corporate Member, the Managing Member and Executive Members in such proportions as the Managing Member shall in his absolute discretion determine, or as he may have agreed with any Member, including to the Corporate Member in relation to the provision of the HR Services.”

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:

“"Third Party Profit" means the net profit attributable in any financial year to the management of funds or other managed accounts other than the BB Investment and any other profits (not being BB Investment Profits) of the Partnership after deduction of a pro rata proportion (by reference to the weighted average assets under management during the relevant financial year) of all fixed and variable costs and expenses of the Business (other than any amounts paid to any Member or Associate of any Member, save for amounts allocated to the Corporate Member pursuant to Clause 9.3(B) or paid under Clause 8, and provided that no amounts allocated to the Investor Member or the Corporate Member as capital to its Capital Contribution Account pursuant to Clause 9.3(A)(1) or Clause 9.3(A)(2) (respectively) shall be treated as costs or expenses of the Business);”

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:

“BB Investment Management Agreement" means the agreement for the discretionary investment management by [NCLLP] of the sum of £250 million to be provided by BB (the "BB Investment") on the terms of an investment and/or an investment management agreement between BB and [NCLLP] and a Fund, as applicable;”

“"BB Investment Profits" means the net profit attributable in any financial year to the BB Investment after deduction of a pro rata proportion (by reference to the weighted average assets under management during the relevant financial year) of all fixed and variable costs and expenses of the Business (other than any amounts paid to any Member or the Associate of any Member, save for amounts allocated to the Corporate Member pursuant to Clause 9.3(B) or paid under Clause 8, and provided that no amounts allocated to the Investor Member or the Corporate Member as capital to its Capital Contribution Account pursuant to Clause 9.3(A)(1) or Clause 9.3(A)(2) (respectively) shall be treated as costs or expenses of the Business);”

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 applying the allocation principles in clause 9.3..., it is necessary to deduct from the net profit attributable in any financial year to the BB Investment (being the £250m initially provided by Barclays in the Fund) a pro rata proportion of all fixed and variable costs and expenses of [NCLLP and the Corporate Member] by reference to the weighted average assets under management (see the definition of BB Investment Profits). Accordingly, in order to arrive at the net profits available for allocation, [BB] must meet these costs and expenses.”

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

“It can therefore be seen that an essential step in the calculation of BB Investment Profits available for distribution is the calculation and deduction of the costs and expenses of [NCLLP] including those of the Corporate Member.”

In oral argument counsel for NCLLP accepted that NCLLP did not have any cause of action against BB for payment of its expenses. There is, as he accepted, no independent and free standing liability of BB. For its part BB did not dispute that in the allocation of profit in accordance with Clause 9.3 expenses of NCLLP and the Corporate Member would have to be provided for under Paragraphs (A), (B) and the calculation of Third Party Profit as defined.

Clause 26.1 is headed Expert Determination. It provides:

“(A)

In the event of any dispute regarding (i) the amount of any profit or loss allocations due to a Member pursuant to Clause 9 or (ii) any payment due to an Outgoing Member under Clause 17, then if such dispute has not been resolved within 30 days following any determination by the Managing Member under Clause 9.2 or allocation under Clause 9.3, or any calculation or valuation made or required under Clause 17, any affected party may refer the matter or matters in dispute to a partner in an independent firm of internationally recognised chartered accountants agreed upon between them, or failing such agreement within 7 days to be selected at the instance of any party by the President for the time being of the Institute of Chartered Accountants of England and Wales. The parties shall use their respective best endeavours to procure that the accountant delivers his decision within such time as may be stipulated in the terms of reference.

(B)

Such accountant shall act as an expert and not as arbitrator and shall determine the matter or matters in dispute (which may include any dispute concerning the interpretation of any provision of this Agreement or his jurisdiction to determine the dispute or the content or interpretation of his terms of reference) and his decision shall be final and binding on the parties hereto.

(C)

Each of the parties hereto shall provide to the accountant such information as the accountant may reasonably require a party to provide for the purpose of determining the dispute and which such party has in its possession or under its control.

(D)

The fees and expenses of the accountant shall be borne by the parties hereto equally or in such other proportions as the accountant shall direct.”

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: