Inversiones Frieira SL & Anor v Colyzeo Investors II LP & Anor

By Clause 3.5.1 “to formulate the investment policy of the Partnership” provided that CIM had due regard to the purpose of the Partnership as set out above:

By Clause 3.5.2 “to acquire…or otherwise deal in or with the Investments…whether directly or indirectly, through subsidiaries, partnership interests, securities, joint venture or otherwise”:

By Clause 3.5.7 “to open and maintain bank accounts in the name of the Partnership”:

By Clause 3.5.19 “to arrange for the assets of the Partnership to be held in the name of [Capital] or to procure that the assets of the Partnership are held by a custodian and to maintain the Partnership’s records and books of account at the Partnership’s principle place of business and to allow any Limited Partner or its representative access thereto at any time during normal business hours by prior arrangement for the purpose of copying the same…”:

By Clause 3.5.22 “to engage…investment and financial advisors and consultants as it may be necessary or advisable in relation to the affairs of the Partnership”:

By Clause 3.5.29 “in connection with its Investments [to] purchase typical hedging instruments…designed to protect the Partnership against adverse movements in currency, stock price and/or interest rates but not intended to speculate on an uncovered basis…or to trade in the foregoing”.

Clause 3.6.1 imposed a limit on the size of any investment CIM could make in an individual project:

By Clause 3.6.5 CIM agreed not to borrow money or enter into credit facilities or to purchase derivatives which were speculative in nature and not used as hedging instruments relating to an Investment or the financing thereof: and

Not to make any Investment without having been advised by Colyzeo Investment Advisors Limited (another Colony company) to do so.

The Deed also contains (in Clause 14) provision for an Advisory Committee composed of persons not associated with Investments. But Clause 14.4 provided that CIM should not be required to follow any advice or recommendation of Advisory Committee but had authority to exercise its powers as set out in the Deed and in the Management Agreement at its own discretion.

By Clause 3.4 of the Deed it was provided that:-

“The Limited Partner shall take no part in the management, operation and administration of the business and affairs of the Partnership, and shall have no right or authority to act for the Partnership or to take any part in or in any way to interfere in the management, operation and administration of the Partnership…otherwise than as provided in [the Limited Partnerships Act 1907] or as set forth in this…Deed”.

Clause 3.4 continued expressly to provide that the limited partners and their duly authorised agents “shall at all reasonable times have access to and the right to inspect the books and accounts of the Partnership”.

The Limited Partnerships Act 1907 (to which Clause 3.4 referred) provided for a limited partner’s access to information in slightly different terms. Section 6(1) says:-

“A limited partner shall not take part in the management of the partnership business, and shall not have power to bind the firm: Provided that a limited partner made by himself or his agent at any time inspect the books of the firm and examine into the state and prospects of the partnership business and may advise with the partners thereon”.

Clause 8.1 of the Deed declares that no investor can take part in the management or control of the business of the Partnership, but that the exercise of any rights and powers pursuant to the 1907 Act or the terms of the Deed “shall not be deemed taking part in the day to day management of the Partnership or the exercise of control over the Partnership affairs”.

Under Clause 11.1 of the Deed to maintain “full and accurate books of the Partnership…in the name of and separate and apart from the books of [CIM] and [Capital]…showing all receipts and expenditure, assets and liabilities, profits and losses, and all other books, records and information required by [the 1907 Act] or necessary for recording the Partnership’s business and affairs”.

Also under Clause 11.1 of the Deed to maintain these “books and records” in accordance with Generally Accepted Accounting Principles.

Under Clause 11.2 to afford “full and complete access” to “all records and books of account of the Partnership for a purpose reasonably related to the Partner’s interest as a partner” each partner having “the right of inspection and copying such records and books of account” at its own expense.

Also under Clause 11.2 of the Deed to reasonably co-operate with any Partner or the agent of a Partner in connection with any “authorised review or audit of the Partnership or its records and books”.

Under Clause 11.3 to cause to be furnished to each Partner with respect to each accounting period of the Partnership an audited balance sheet, income statement, cash flow statement and statement of capital account prepared in accordance with GAAP which (unless CIM in its absolute discretion otherwise determined) needed to relate only to the Partnership (and would not include a consolidation of entities in which the Partnership had invested).

Under Clause 14.6.5 of the Deed CIM was bound to supply “the Advisory Committee” of the Partnership with all information and data which it reasonably requested to enable it to be, on a continuing basis, fully informed about the Partnership’s activities.

The irreducible right of a limited partner is that conferred by Section 6 of the 1907 Act “at any time [to] inspect the books of the firm and examine into the state and prospects of the partnership business”.

The commentary in Blackett-Ord “Partnership Law” 3rd Edition paragraph 24.10 says that a limited partner “is entitled to all information about the firm” (citing a Canadian case).

In Lindley and Banks on Partnership (19th Edition) there is quoted (at paragraph 23-96) the observation of Lord Lindley that “the right of every partner to a discovery from his co-partner of all matters relating to the partnership dealings and transactions is as incontestable as his right to an account”.

In Section 6 of the 1907 Act the reference to “the books of the firm” is a reference to any written document in the possession of the firm because the dictionary definition of “book” includes “a written document”.

The purpose of the statutory right of inspection is to enable a limited partner “[to] examine into the state and prospects of the partnership business” and “[to] advise with the partners thereon”. So the statutory right of inspection must be read as conferring a right to see whatever is necessary for that purpose. It is said that this approach is confirmed by authority. In Wan v The General Commissioners (2004) 76 TC 211 I held (in the context of an ordinary partnership) that each partner had access to the partnership books (which in that context meant the payroll records and returns, the amount of the salary paid to an individual, that individual’s National Insurance number, any profit shares paid to that individual, and the partnership accounts and income tax computations). In Re Pickering (1883) 25 ChD 247 the beneficiary of a deceased partner applied for an order that the surviving partner should file an affidavit “of all the books and documents relating to the affairs of the partnership”. The court (which included Lindley LJ) ordered him to disclose the whole of “the letters entered in the letter books of the partnership” unless he stated on affidavit the nature of the transactions to which those letters related and demonstrated that they did not pertain to the partnership business. But the surviving partner was obliged to produce letters to his private friends, to his solicitors and to his bankers (simply because they were found in the letters book of the partnership) because they might relate to partnership matters and because it was not right that the surviving partner should be trusted to decide whether they did or not. It was submitted that these cases underlined the freedom of access which a partner should enjoy to documents relating to the partnership affairs.

There was no true analogy between the right of access of a partner to partnership documents and the right of access of a shareholder or a director to accounting records and company documents. But if such an analogy is to be drawn then Conway v Petronius [1997] 1 WLR 72 shows that the court will, at the suit of a director, order the company to produce all books of account, management accounts, working papers, bank statements, cheque stubs, contracts, invoices and instruments of transfer (provided the right of inspection is being exercised for the benefit of the company).

The statutory right of inspection under the 1907 Act and the contractual rights of inspection under the Deed are cumulative. Clause 3.4 of the Deed confers a right to inspect “the books and accounts of the Partnership” and the separate reference shows that the “books” must be something different from the “accounts”.

The Deed also confers a contractual right upon IFS as limited partner enforceable against Capital as general partner and CIM as manager to be afforded full and complete access to all “records and books of account of the Partnership for a purpose reasonably related to the Partner’s interest as a partner”, the terms in which the right is conferred demonstrating that “records” are something different from “books of account” with no limitation that the “records” be financial in nature. The absence of any limitation is re-enforced by the fact that it is one of the terms of the partnership that the manager shall maintain (under Clause 11.1) “full” books of the partnership.

Taking Section 6 of the 1907 Act as the starting point, it is submitted on behalf of Capital as general partner of the Partnership and CIM that this to be read as conferring two discrete rights, a right to “inspect the books of the firm” and a right to “examine into the state and prospects of the partnership business”.

That insofar as there is a right to inspect “the books” this is a right to inspect the summary financial records (and not a right to inspect the underlying primary documents) because inspecting the operational documents would be inconsistent with not exercising a management role (which restriction lies at the core of a limited partnership).

This is supported by Blackett-Ord “Law of Partnership” (op. cit.) which at page 203 comments that “the partnership books” means “the firm’s financial records and papers relating to the partnership relationship rather than all papers to do with every aspect of its business or its customers or its clients, some of which will be confidential”.

So far as the firm’s “financial records” are concerned, an analogy may properly be drawn with the “accounting records” of a company for which provision is made in Section 386 of the Companies Act 2006 namely, records that are sufficient to show and explain the company’s transactions (in particular day to day entries of all sums received and expended and the matters in respect of which the receipt and expenditure takes place) and which disclose with reasonable accuracy at any time the financial position of the company at that time. The reference to “accounting records” (and also, it is submitted, to “partnership books”) is accordingly a reference to the summary accounting records and not to the primary material from which the entries in those records are derived.

So far as “papers relating to the partnership relationship” are concerned, these will be the partnership Deed and the Schedules showing the capital commitment of the parties, together with legal opinions paid for by the partnership in relation to partnership relationship matters: see BBGP Managing General Partner Limited & Others v Babcock & Brown Global Partners [2010] EWHC 2176.

Insofar as assistance can be gleaned from the authorities they support this analysis. In Wan (supra) the documents in question were the payroll records (which are summary financial records). In Pickering (supra) a clear distinction was drawn between “books” and “documents”. In Bevan v Webb [1901] 2 Ch 59 the partnership deed itself drew a distinction between “proper books of account” and “all bills, letters, and other writings which shall from time to time concern the said partnership business”.

As to contractual rights, a distinction must be drawn between the right which a limited partner has to inspect partnership documents and the right which a limited partner has to inspect the discretionary investment manager’s documents. Both are to be read restrictively having regard to the fact that the clear economic structure is that the limited partner invests money but that the actual investment of that money is delegated by Capital (as general partner) to CIM (as manager) and it is CIM which chooses and oversees the investments. So where Clause 3.4 of the Deed confers a right to inspect “the books and accounts” this is a right simply to inspect (not examine) the “books of account”. Where by Clause 3.5 CIM is authorised on behalf of the partnership “to maintain the Partnership’s records and books of account” this is a clear reference to “books of account” and to the documents which pertain to the partnership relationship. Where Clause 11.1 of the Deed imposes on the manager an obligation to maintain “full and accurate books of the partnership…and all other books, records and information…necessary for recording the Partnership’s business and affairs” the requirement that such books and records “shall be maintained in accordance with GAAP” shows that the principle reference is to summary documents of account to be prepared according to proper accounting principles (and cannot be a reference to operational or transactional documents, advice or records of meetings). Where Clause 11.2 of the Deed gives a partner access “to all records and books of account of the partnership” the following sentence which gives the right to a partner “to audit such records and books of account by an accountant of its choice” demonstrates that the records and books of account there referred to are in nature summary financial records capable of audit by an accountant.

Although the economic purpose of Colyzeo Investors II LP is that it is a collective investment scheme the legal structure of the scheme is that it is a partnership. The legal rights of the investors are determined by that legal structure and not by the economic purpose. Although the claimants are in one sense “investors” they are in law and in reality partners who have put capital at risk in a business.

Every partner has a right to disclosure by his co-partner of all matters relating to the partnership dealings and transactions: this was the principle stated by Lord Lindley and it finds its current expression in section 28 of the Partnership Act 1890 which provides that

“..partners are bound to render true accounts and full information of all things affecting the partnership to any partner or his legal representatives ”.

This is as much the right of a limited partner as it is the right of an ordinary partner. Section 7 of the 1907 Act says that the provisions of the 1890 Act and the rules of equity and of common law applicable to partnerships (except insofar as they themselves are inconsistent with the 1890 Act) apply to limited partnerships.

Section 7 of the 1907 Act is expressed to be “subject to the provisions of this Act”. Section 6 of the 1907 Act restricts the right of a limited partner to take part in the management of the partnership business and says that he does not have the power to bind the firm: but it is not implicit in either of those restrictions that the limited partner’s right to information about the partnership business is restricted. His capital remains at risk in the partnership business, the entire conduct of which he has entrusted to the general partner. There is every reason why the general partner should be obliged to render a true account and provide full information: it is simply an aspect of the central duty of good faith which the general partner owes to the limited partners as the party having the sole power to bind the partnership. The fact that the general partner has delegated the exercise of some of his powers as general partner (and the performance of some of his duties) makes no difference.

The 1907 Act recognises this right. The proviso to section 6(1) of the 1907 Act is not conferring some peculiar right on limited partners. It is recognising the right which every partner has (“at any time [to] inspect the books of the firm and examine into the state and prospects of the partnership business”) and is making clear that the exercise of that right will not constitute “[taking] part in the management of the partnership business”. That is why it takes the form of a proviso.

These general common law and statutory rights are subject to modification by special agreement. Clause 2.1 of the Deed addressed the rights of the limited partners and said that they should be as provided in the Deed unless otherwise expressly provided in the 1907 Act. In fact clauses 3.4 and 8.1 (read in the light of clause 15.10) mean that a limited partner has the statutory rights referred to in the 1907 Act plus any additional rights conferred by the Deed.

By clause 3.3 of the Deed Capital was authorised to delegate to CIM the exclusive responsibility for the management, operation and administration of the business and affairs of the Partnership. But the authority to delegate does not mean that Capital was relieved of its obligation to supervise CIM, to hold CIM to account or to obtain from CIM any information relevant to the partnership business (save insofar as the Management Agreement either provided that CIM should not be supervised or restricted CIM’s duty to account or provide information). CIM was the agent of the Partnership and bound to behave as such: and Capital (as the only member of the Partnership authorised to deal with the outside world on behalf of the limited and general partners) was bound to hold CIM to the Management Agreement and seek any information that the members of the Partnership could properly ask for.

Under the Management Agreement CIM was bound to maintain “full and accurate books of the Partnership… in the name of and separate and apart from the books of [CIM] and [Capital] ... and all other books records and information ... necessary for recording the Partnership’s business and affairs”. Under the Deed each partner has the right to be afforded by CIM full and complete access to all those records and books of account for any purpose reasonably related to that Partner’s interest as partner (and in that regard the rights of a limited partner are identical to those of Capital as general partner): and in clause 2.3 of the Management Agreement CIM has promised to perform its duties in compliance with the Deed.

In deciding what is the content of this obligation fine distinctions are not to be drawn between “the books and accounts of the Partnership”, “the books of the firm”, “the books and records of the Partnership”, “statements reports and accounts”, “books of the Partnership”, “records and books of account of the Partnership” and “Partnership records and books” because the draftsman of the Deed and of the Management Agreement does not appear to have used language with such precision that one can say he was consciously departing from the statutory language or was consciously creating different categories of information to be recorded and accessed and different rights of inspection, examination and copying.

That which CIM had to maintain (and that which Capital would otherwise have had itself to maintain but for the delegation to CIM) was a record (either by processing raw data and creating an account or other document, or by organising raw data so as to make key data accessible) of the Partnership’s business and affairs sufficient to enable a partner, whether general or limited, with access to it to examine into the state and prospects of the partnership business. I use language derived from the 1907 Act. But I also have in mind the words of Collins LJ in Bevan v Webb [1901] 2 Ch 59 at 68 (expressed in relation to section 24(9) of the 1890 Act):-

“ ... What is the object with which this right, or permission, or privilege is given to each of the partners in a partnership? What is the common sense meaning of it? Surely the object is to enable the partners to ascertain the position of the partnership business. The partnership business is their own business, the books are their own books, and each of them has a right in them. Of course, their rights are qualified and regulated by the corresponding rights of the other partners; but the books which they desire to inspect, and which they have a right to inspect, are their own books. For what purpose is this provision made? It must be that the partners may be able to inform themselves of the position of the partnership.”

What is required to fulfil such a general obligation will vary from case to case depending on the nature of the partnership business and its mode of conduct and the terms of the governing documents read in the light of current business practice. There is little to be gained by looking at the decided cases to see if they establish categories of document which as a matter of law every partnership must maintain as part of its records and which every partner has a right to inspect. The test is a functional one. As a rough rule of thumb, if it would be necessary or advantageous for CIM or Capital to rely on the document or record in order to establish the rights of the Partnership as against a third party, or in order to determine or adjust the rights of the partners inter se,then it is a “book, document or record” which relates to the affairs of the Partnership, and a limited partner is entitled to see it: and if the Partnership has paid for the document that would also establish that it related to the affairs of the Partnership (for why else would a fiduciary agent like Capital or CIM charge the Partnership for it?).

In this case the starting point is clause 11.1 of the Deed: CIM had to keep full and accurate books of the Partnership (separate from its own books and separate from the books of Capital) showing all receipts and expenditure, assets and liabilities, and profits and losses: and all other books, records and information necessary for recording the Partnership’s business and affairs. If CIM has not done so then the limited partners must see the primary documents from which such books of the Partnership would have been prepared. If CIM has done so then the limited partners are in principle entitled to inspect the documents which record and which establish (for example) the assets and the liabilities.

They are entitled (in order to gain an understanding of the state of the partnership business) to establish the existence of those assets. Where physical assets are held by the Partnership, this will comprise the documents of title and any documents recording terms which survive completion of the acquisition transaction (like “overage” or put options). Where rights of action are held by the Partnership this will comprise the documents giving rise to the right of action (the joint venture agreement and any relevant schedules relating to the size of the Partnership’s participation, or the constitution of the SPV and the documents which establish the exact level or nature of the Partnership's participation). The same is true of the liabilities to which the Partnership is directly exposed (under loan or hedging arrangements): the limited partners may see the documents from which the liabilities derive. If under GAAP the liability of an SPV should be shown as a liability of the Partnership then the limited partner must see the documents relating to that.

Proper reports to the limited partners will have put a value on the assets and will have quantified the liabilities. The limited partners are in my judgment in principle entitled to see the documents which support those valuations (be that value based on “cost less impairment”, “fair value”, a DCF analysis, NAV and/or an earnings multiple). If the value is based on CIM’s own data (and so in GAAP parlance is “unobservable”) then the limited partners should in principle see that data. It is not possible to understand the state of the Partnership business (or to confer or “advise” with the other partners as to the prospects of the Partnership business) without understanding the robustness of the attributed values and to what matters they may be sensitive.

If the Partnership has directly paid for professional advice about the acquisition, retention or valuation of an asset or the incurring of or exposure to a liability (by itself paying the fee or re-imbursing Capital or CIM for the fee under clause 4 of the Management Agreement) then the limited partner may see that. But if the cost of such advice has ultimately been borne by Capital or CIM and absorbed as part of it operating expenses then in principle such a document would not form part of the Partnership books and records unless it relates to the current state of the Partnership or the current prospects of the Partnership (and so relates to some current value adopted by CIM in the accounts it renders).

On the other hand advice by the Advisory Committee of the Partnership to Capital/CIM, instructions by CIM to Capital and advice by Colyzeo Investment Advisers Limited to CIM are all materials which the Deed contemplated should be generated and paid for through the remuneration of CIM and Capital in their respective capacities (rather than by way of reimbursement): and so should be available to the partners so far as such materials relate to assets and liabilities and receipts and expenditure of the Partnership business. Likewise minutes of meetings between CIM and Capital (which are reports by the agent of the Partnership to its principal acting by its general manager, or instructions or assent on behalf of the Partnership given through its general manager). All of these are in principle part of the Partnership books and records, necessary to understand the state of Partnership business and to assess and confer about its prospects. On the other hand internal minutes of CIM and its routine internal business documentation (such as telephone attendance notes or briefings prepared for meetings) would not in principle be books or records of the Partnership (and so could not be called for by limited partners).

The only specific restriction is to be found in clause 5.2 of the Management Agreement. This says that CIM cannot be required to disclose to the Partnership any confidential information relating to the dealings, portfolio or affairs of another client or any other person. So some documents which at the time of the request for inspection remain confidential or contain confidential information might have to appear in redacted form (for there can be no question of CIM or Capital asserting general rights of confidence against any member of the partnership which prevent production of the document as a whole).

The only general restriction is that the documents and information relate to the business and prospects of the Partnership as it is. What might have been (offers that were unsuccessfully solicited, applications which failed, proposals that did not come to fruition, drafts that were subsequently altered) is not relevant to the current state and prospects of the Partnership and would not in my judgment be in principle open to inspection or copying; unless they were documents for which the Partnership paid because the cost of their preparation was treated as an operating expense of the Partnership (in which case the limited partners would be entitled to see what was done with the Partnership money).

By merely seeking information about the Partnership’s affairs a limited partner does not thereby become involved in the management of the Partnership: it all depends on what the limited partner does with the information so provided. If IFS examines and analyses the material and then advises with (or, in other words, confers with) the other limited partners, it does not become “involved” in the management of the Partnership. If it expresses to the general partner a view about the performance of the Partnership or the strategy or future direction of the Partnership or a preference about how a particular asset should be dealt with or a particular liability covered, it does not become “involved” in the management of the Partnership. But if IFS seeks to participate in the decision-making process by requiring notice of individual decisions and the ability to make representations about individual decisions, if it seeks to scrutinise and to comment upon the operational business decisions which Capital and CIM are taking, then it would become “involved” in the management of the Partnership. But the mere fact that the provision of information might enable IFS to take that course is not a reason for the refusing to provide information to which IFS is otherwise entitled as partner.