Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson PFI Secondary Fund II LP & Ors

I have to determine 10 preliminary issues, the form of which has been agreed between the parties, following an order by Teare J in respect of the first three, which relate to the question whether the claimants can bring a derivative action against the defendants and, if so, the effect of it. The balance relate to issues of construction of two agreements, with reference to a third document, which are said to govern the relationship between the parties and the conduct of the Limited Partnership which is central to the dispute between them.

The firm named as the first defendant is a limited partnership regulated by a Partnership Agreement dated 12 September 2006, as amended and restated on 19 September 2006 and by the Limited Partnership Act 1907 (the “LPA”). It was established to invest in private finance initiative (“PFI”) and public private partnership (“PPP”) concession companies. (It is referred to in this judgment as “the Partnership” or as “Fund II”.)

The claimants are 22 of the 29 Limited Partners in the Partnership, all of which administer or are trustees of substantial pension or investment funds. Fund II is a private equity fund, only available to sophisticated institutional investors. The claimants invested in the Partnership as Limited Partners, with partnership capital and loan capital under a Partnership Agreement, which, in its original form dated 12 September 2006 with the General Partner and two founding partners in the Henderson Group, was registered under sections 5 and 6 of the LPA the following day. The third defendant is the General Partner and the second defendant the Manager appointed by the General Partner, on behalf of the Partnership, under a Management Deed dated 14 September 2006. The Partnership was expected to last for at least 10 years, with the possibility of seven annual extensions thereafter (although there are provisions for earlier termination).

In December 2006, the Manager (who had identified the potential for such an investment in November 2005) caused Fund II to acquire equity interests in the subsidiaries of John Laing plc (“Laing plc”). Laing plc was a large public company whose shares were listed on the London Stock Exchange. It was the holding company for a group (the “Laing Group”), which specialised in projects arising out of the PFI, and as such owned a portfolio of shares in numerous operational and non-operational PFI concession companies. The Group also included other infrastructure assets such as Chiltern Railway Company, a rail franchise, and a minority stake in Octagon Group Limited (“Octagon”), a house builder. Fund II had been established to take advantage of the investment opportunity in the Laing Group, although, because of the requirements of the Takeover Code, the Manager was forbidden to identify the target to potential investors. The Fund acquired the whole of the issued, and to be issued, share capital of Laing plc for £1,004,000,000 by way of scheme of arrangement. The acquisition was actually made by Henderson Infrastructure Holdco Ltd (“HIH”) which was funded by a loan from West LB of £220m, £288m approximately from another limited partnership (Fund I), £530m approximately from Fund II and some £2.75m from Co-Investment funds

In return for its contribution to the funding of the acquisition, Fund II was to receive part of the revenue derived from part of the businesses of Laing plc. In particular the PFI concession Agreements were expected, with their indexed linked payments, to produce a good return for onward transmission through the complex structure of the arrangements to the Partners.

Among the claims made by their Amended Particulars of Claim, the Claimants claim that neither the investment in Laing plc nor the way in which the benefits and burdens of the investment were allocated to Fund II (as compared with a parallel fund, Fund I) were authorised by the Restated Partnership Agreement or by the Management Deed. The construction issues relate to these two instruments.

Commitments to Fund II were solicited by a draft Private Placement Memorandum dated 8 December 2005 (“the draft PPM”) which was circulated by the Manager with a draft of the Partnership Agreement and a blank Deed of Adherence. Commitments were made by undated Deeds of Adherence executed between 7 December 2005 and August 2006 and addressed to the Manager and the General Partner. By virtue of clause 1 of the Deed of Adherence the Manager had the right to accept the commitment and to admit the applicant to the Partnership.

On 19 September 2006

By reason of a rival bid, it was not until 22 December 2006 that the takeover was concluded at an increased price of £1.004m.

The claimants’ fundamental allegation is that the Manager and the General Partner did not cause Fund II to invest in a portfolio consisting exclusively or principally of PFI concession companies, as they say it was required to do, but instead used the capital advanced by investors to acquire a corporate group, which included substantial quantities of assets which fell outside that definition.

The claims based on the Claimants’ fundamental allegation, fall into three main groups:

The present hearing is concerned with the first and second types of claims only. The claimants together make up about 83.52% of the total amounts that were committed to the Partnership but they are all Limited Partners, with the restrictions placed upon them by the LPA of 1907.

The LPA provides:

“3 Interpretation of terms.

In the construction of this Act the following words and expression shall have the meanings respectively assigned to them in this section, unless there be something in the subject or context repugnant to such construction:-“Firm,” “firm name,” and “business” have the same meanings as in the Partnership Act 1890:“General partner” shall mean any partner who is not a limited partner as defined by this Act.

4(2) A limited partnership…must consist of one or more persons called general partners, who shall be liable for all debts and obligations of the firm, and one or more persons to be called limited partners, who shall at the time of entering into such partnership contribute thereto a sum or sums as capital or property valued at a stated amount, and who shall not be liable for the debts or obligations of the firm beyond the amount so contributed.

6(1) 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 may 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.

If a limited partner takes part in the management of the partnership business he shall be liable for all debts and obligations of the firm incurred while he so takes part in the management as though he were a general partner.

7

Law as to private partnerships to apply where not excluded by this Act.

Subject to the provisions of this Act, the Partnership Act 1890, and the rules of equity and of common law applicable to partnerships, except so far as they are inconsistent with the express provisions of the last-mentioned Act, shall apply to limited partnerships.”

It is clear therefore, that in the ordinary way, the Limited Partners cannot sue a third party in the name of the Partnership. Only the General Partner can do that, since the commencement, conduct and settlement of proceedings is part of the management of the Partnership. Should a Limited Partner take such a step, the effect would be as set out in the third subparagraph of s 6 (1). Here, the claimants wish to sue the General Partner and a third party, the Manager, which is a sister company of the General Partner (and was required to be such, by the terms clause 5.1 of the RPA) and to do so by way of derivative action in the name of the Partnership without potential liability either for the debts of the Partnership or for the costs of the derivative actions.

The first three issues for determination are as follows:

“1.

Are the claimants entitled to a declaration that pursuit of the derivative claims (in paragraph 89 of the Particulars of Claim) will not constitute taking part in the management of the partnership business for the purposes of section 6(1) of the Limited Partnerships Act 1907, such that the Claimants’ liability for the debts and obligations of the Partnership would remain limited to the extent of each of their commitments to the Partnership (alternatively that any unlimited liability of the Claimants is restricted to the debt and obligations incurred as a result of or in connection with pursuit of the Derivative Claims (viz. legal costs))?

2.

Subject to the Court having granted the relief referred to in paragraph 1, are the Claimants entitled (or are they to be permitted) to pursue the claims in paragraph 89 of the Particulars of Claim as derivative claims against the Manager and General Partner on behalf of the Partnership?

3.

Subject to the Court having granted the relief referred to in paragraph 1, are the Claimants to be granted a costs order that they be indemnified out of the Partnership’s assets in respect of the legal costs of the derivative claims?”

The preliminary issues of construction are as follows:

“4.

Did the investment in John Laing plc breach the obligation on the Manager (under paragraph 1, Schedule 2 to the Management Deed) to manage the investments, money, assets and borrowings of the Partnership on the basis that the Partnership’s investment objective was as set out under the ‘Investment Strategy and Objectives’ on page 15 of the Private Placement Memorandum, for the following reason: that the assets and liabilities of John Laing plc were not a portfolio of investments in, or at least principally in, operational PFI concession companies?

5.

Does the proviso in paragraph 1 of schedule 1 of the Partnership Agreement require the test in subparagraphs 1(a), (b) and (c) of that paragraph to be applied on a “look through” basis to each of John Laing plc’s individual PFI projects or to assets which are not PFI projects or to the investment in John Laing plc itself?

6.

& 7. Did the investment in John Laing plc fall outside the final bullet of Schedule 2 to the RPA because, while that investment included investments in operational concession companies and pre-operational concession companies, and occurred during the Commitment Period:

(a)

it was not an investment principally in operational PFI concession companies;

(b)

it was not an investment principally in PFI concession companies;

(c)

it included investments in assets other than operational PFI concession companies, which investments were not ancillary to the investments in operational PFI concession companies; or

(d)

it included investments in assets other than PFI concession companies, which investments were not ancillary to the investments in PFI concession companies?

8.

Was the Acquisition Debt a borrowing within clause 5(3)(g) of the RPA?

9.

Would it make any difference to the outcome of the preliminary issues of construction referred to above if any or all investors knew or suspected in advance of the transaction being announced that the investment opportunity was John Laing plc?

10.

If the answers to any of the issues in paragraphs 4,6 or 8 above is “yes” or the answer to the issues in paragraphs 5 or 7 is “no”, are the General Partner and the Manager entitled to the benefit of the exculpation in clause 18.1 of the RPA and/or the indemnity in clause 18.2 of the RPA (subject to any arguments that the Claimants raise in respect of fraud, wilful misconduct, bad faith reckless disregard or negligence on the part of the General Partner and the Manager or, in the case of the Manager only, in respect of the breach of any duty it may have, or any liability it may incur, to the Partnership or any Investor under the Regulatory System (as defined in the FSA rules) applicable to it under the FSMA)?

11.

If the answer to question 10 is “yes” in respect of the indemnity, are the General Partner and the Manager entitled to the benefit of the indemnity in clause 18.2 of the RPA with retrospective effect and in priority to any indemnity that the claimants might be awarded pursuant to paragraph 1(c) of the Order of Mr Justice Teare dated 27 January 2012.”

It is first necessary to explore the nature of a derivative claim. The classic example is that of the minority shareholder who seeks to bring a derivative claim on behalf of a company against wrongdoers who are in control of the company. The classic expression of the rationale behind the procedure is Lord Denning MR’s dictum in Wallersteiner v Moir (no.2) [1975] QB 373 at 390:-

“suppose [a company] is defrauded by insiders who control its affairs – by directors who hold a majority of the shares – who can then sue for damages? Those directors are themselves the wrongdoers. If a board meeting is held, they will not authorise the proceedings to be taken by the company against itself. If a general meeting is called they will vote down any suggestion that the company should sue themselves. Yet the company is the one person who is damnified. It is the one person who should sue. In one way or another, some means must be found must be found for the company to sue. Otherwise the law would fail in its purpose. Injustice would be done without redress.”

It is common ground that derivative claims are not limited to the corporate context. They can arise in other circumstances where the justice of the case demands it, such as where a beneficiary sues to enforce the cause of action vested in a trust or where a legatee under a will seeks to enforce a cause of action vested in the estate. There is however a need for “special circumstances” to justify a derivative action. What matters is the person seeking to pursue the derivative action has a legitimate interest in the relief claimed, sufficient to justify him in bringing the proceedings to obtain it. It is agreed that there is no example in English law of a claimant limited partner seeking to pursue a derivative claim on behalf of a limited partnership, but the claimant submits there is no reason in principle why such a claim should not be made provided that there are special circumstances which would warrant a departure from the usual rule that the party in whom the cause of action vests must bring the claim. There is an example of such a claim which was accepted by the Court of Appeal of British Columbia in Watson v Imperial Financial Services (1994) 111 BLR (4th) 643, where the general partner was conflicted and the limited partners were allowed to bring a claim. Since the point of principle was not however argued, the decision is of no real assistance.

Both parties focussed on the decision in Roberts v Gill [2011] 1 AC 240, where a beneficiary of an estate sought to bring a derivative action on the part of the personal representatives of the estate against two firms of solicitors who had given advice to them.

In Lewin on Trusts (18th Edition) at paragraph 43-05, the authors state that a derivative action is one in which the beneficiary stands in the place of the trustees and sues in right of the trust and does not enforce duties owed to him personally, rather than to the trustees. A beneficiary can bring a derivative action only in special circumstances, ‘for example circumstances which tend to disable the trustees from suing (as where their acts and conduct with reference to the trust fund are impeached) or circumstances rendering it difficult or inconvenient for the trustee to sue, as where there is a conflict between their interest and duty. Special circumstances are not confined to circumstances of these kinds’.

In the present case the only relevant plea is the conflict of interest which is said to arise on the part of the General Partner who in practice cannot or will not sue itself or the Manager which is a sister company. Clause 5.1.1 and 5.1.2 give rise to this inescapable conflict of interest, to which all the Limited Partners agreed.

The Claimants say that it is not necessary for the General Partner here to be acting in breach of duty in failing to sue the manager. It is enough that there is a conflict of interest where the reality is that the General Partner will not sue the Manager and cannot or will not sue itself.

It is common ground that, in order to bring a derivative claim, the Claimants, as limited partners, must be seeking to pursue a course of action which is vested in an entity or individuals other than themselves. Otherwise there is no need for such an action at all. The Claimants maintain that the cause of action against the General Partner and the Manager are both vested in the Partnership as a whole in circumstances where, under the LPA and RPA, only the General Partner can institute proceedings on behalf of the Partnership but cannot or will not do so. Justice therefore requires, in the Claimant’s submission, that the Claimant should be entitled to bring a derivative action in the name of the Partnership against the General Partner and Manager.

The defendants submit that there is a significant difference between, on the one hand, the derivative claims that the claimants wish to bring against the General Partner and, on the other, the claims that they wish to bring against the Manager. The claim against the General Partner is made under the RPA whereas that made against the Manager is made under the Management Deed. There is no bar to the claimants pursuing the General Partner under the RPA in their individual capacities, as 20 of them are currently doing. This constitutes an inter-partner dispute of a kind with which the courts are familiar, albeit in this case it is a dispute between limited partners and a general partner in a limited partnership governed by the RPA (to which they are all parties) and the LPA.

The Management Deed, by contrast, was concluded by the General Partner on behalf of the Partnership with the Manager in the name of the Partnership. Clause I provides as follows;

“1.1

The Partnership hereby appoints the Manager to be the manager of the Partnership with full power and authority (subject to the following provisions of this Deed) to act as manager of the Partnership, including for the avoidance of doubt the exercise of all of the powers expressed to be granted to the Manager pursuant to the Partnership Agreement, and as such manager to manage the Partnership to the total exclusion of any other person and the Manager hereby agrees with the Partnership to act as such manager and to accept and carry out such management responsibilities and duties otherwise imposed by the Partnership Agreement on the manager of the Partnership.”

It is undisputed that any claim against the Manager is a Partnership Asset, owned jointly by the Partners. Under the provisions of s 6(1) of the LPA and clause 5.2 of the RPA, which reinforces the statutory provision, no Limited Partner could, on behalf of the other partners and so as to bind them, sue the Manager, which is a third party. Only the General Partner can manage the business of the Partnership and its assets. Only the General Partner has the right to act for the Partnership in external relations in such a way as to bind the Partnership and therefore to bring proceedings against the Manager. If the General Partner will not do so, and here, under the arrangements made, because the Manager is its sister company, with a resulting conflict of interest for the General Partner, there is in reality no way a suit can be brought by the Partnership, unless a new General Partner is brought in who will pursue that cause of action, or the Court permits a derivative suit of some kind by Limited Partners in the name of the Partnership.

The defendants say that a derivative action should not be permitted however, since the claimants have all agreed to the structure of the Partnership, under the provisions of the LPA and the RPA, with their restrictions on the role of the Limited Partners (and concomitant tax benefits from the use of such a Limited Partnership as an investment vehicle) and since they are in a position to remove the General Partner by a 75% majority vote and appoint another, they can bring proceedings in the ordinary way through a substitute General Partner (assuming that the substitute is willing to do so).

The Partnership, unlike a limited company, does not possess a corporate legal personality. Like an ordinary partnership under the Partnership Act, “the Partnership” is simply a convenient way of referring to the body of partners as a whole. In my judgment therefore, no difficulty arises for a Limited Partner’s claim against the General Partner, regardless of whether or not removal and substitution of the General Partner is possible. The claim to be made against the General Partner is that of the individual Limited Partners and is not a Partnership Asset. Each Limited Partner has its own contractual or fiduciary claim for its own loss, where the inter-relationship with the General Partner is governed by the RPA. The Partnership, which consists of the Limited Partners and the General Partner together has no form of joint right or claim against the General Partner, as the claimants suggest.

The claimants draw attention to various provisions in the RPA which refer to the Partnership as such, when elsewhere there is reference to a Partner or Partners and to Investors (defined as any person who becomes a Limited Partner by signing a Deed of Adherence and any successors). The Partnership does not have any legal personality, being made up of the partners themselves, including the General Partner. Outside entities may contract with the Partnership, but all that means is that, in the case of an ordinary partnership, all partners are liable on the contract. In the case of a limited partnership, only the General Partner is liable, but that does not affect the nature of the partnership, which is a legal relationship between the partners themselves.

None of the provisions of the RPA, in any event, provide for the General Partner to be liable to the Partnership as a whole, even if that were possible. The obligations set out in Schedules 1 and 2 and in clause 6, which are expressed to be Partnership obligations, bind the General Partner to invest on behalf of the Partnership in accordance with those provisions, but do not create any rights in any entity which is separate from the individual Limited Partners, nor create some sort of joint right on the part of the Partnership as a whole against one of its partners. Likewise, clause 5.1.1 and clause 5.3 merely give the Manager duties and powers to act on behalf of the Partnership in such a way as to bind it in the respects there set out. Clause 16.3.6 allows a Limited Partner to sue the Partnership in debt for an outstanding loan, meaning, as the sub-clause makes clear that it is repayable out of Partnership Assets alone. Clause 16.3.2 provides however that the General Partner shall not be personally liable on that debt, so that the individual partner would sue the other partners for repayment, pursuing the General Partner in the name of the Partnership. “The Partnership” is used as a convenient shorthand for the body of partners, as it is in Clause 18.1. The reference in clause 6.4.3 to “the Partnership” and to “the Investors” is of no assistance to the claimants in their contention, since the distinction appears to be made in the context of removal of the General Partner, which requires Investor consents in differing percentages, depending on the reason for removal.

The General Partner can therefore be sued by any Limited Partner in respect of its liabilities under the RPA and there is no suggestion that this involves management of the partnership business; nor could any such suggestion sensibly be made.

In these circumstances, there is simply no need and no room for a derivative action on the part of the claimants against the General Partner. Each can sue for its own loss on its own claim, without reference to the losses of other limited partners who have chosen not to make such a claim. Why the claimants should wish to pursue a derivative claim is a matter of speculation, but there is no reason why they should represent other Limited Partners who do not wish to be represented nor obtain any protection in costs or exemption from any obligation there might be to indemnify non-consenting partners against any loss suffered by them from the bringing of proceedings in their name.

The claimants further submit that if an individual Limited Partner were to succeed in a claim against the General Partner, without a derivative claim on behalf of the Partnership as a whole against it, a difficulty would arise in respect of recoverable losses, if, as they submit, a derivative claim can be brought against the Manager. The Partnership would not be able to give credit in any claim against the Manager for any recoveries by a Limited Partner against the General Partner. In my judgment this is unreal. There is no problem of the kind to which reference is made in Johnson v Gore Wood & Co [2002] 2 AC 1 at page 62, where the shareholder is not entitled to recover for his reflective loss and the company itself alone recovers to the exclusion of the shareholder. If a derivative claim against the Manager is allowed, any recoveries made by the Partnership will redound to the benefit of the individual partners and diminish the loss suffered by each as a result of any breach by the General Partner. There can be no element of double recovery and the issue is simply a function of the order in which proceedings take place, assessment of damages occurs and recovery is made, which is a matter which the Court can control and upon which the parties can make submissions.

The claim against the Manager is however a partnership asset and, it is recognised, could not be pursued by any of the Claimants individually. If the claim is to be pursued against the Manager for breach of the duties governed by the Management Deed, either the General Partner must sue in the name of the Partnership, or it must be replaced by a new General Partner who will sue, or a derivative action must be permitted.

As this action is not in the company context, there is no requirement for permission to bring such a derivative claim but, equally, this is not a strike out application by the defendants. The question of entitlement to bring such a derivative claim is before this court as a preliminary issue to be determined on the materials available to the court. It is in this context therefore that the court has to consider whether or not there are “special circumstances” which would justify the bringing of the claim in the context of the alternative rights and remedies available to the Claimant.

The question then arises as to whether or not the merits of the claim should feature in the court’s assessment. The decision of Newey J in Anthony Kleanthous v Theodoros Paphitis and others [2011] EWHC 2287 (Ch) at paragraph 39-42 is authority that there is no merits threshold for the granting of permission under section 261 of the 2006 Act. In that case it was submitted that the claimant should show a strong case before being granted permission but the Judge, referring to an earlier decision of Roth J and the Law Commission’s report upon which the 2006 Act was to a considerable extent based, concluded that there should be no threshold test on the merits. He nonetheless accepted that the merits of the claim would be relevant to the granting of permission but without any set threshold.

In my judgment, in the context of a preliminary issue of the kind with which I am concerned, merits can play little part unless the merits are very strongly in favour of one party or the other. If the claimant had no realistic prospects of success, it could be said that there were no special circumstances which would justify the bringing of the derivative claim. If the merits were strongly in favour of the claimant, this would be a factor forming part of the assessment of special circumstances and the root question of whether injustice would be caused if no derivative claim was allowed.

Whilst I have to determine a number of preliminary issues, there remain other questions, such as allocation of the Laing plc business between Fund 1 and Fund 2 which are not to be determined and where it cannot be said, at this stage, that the case of one party or the other is so strong that it plays a part in the decision on special circumstances.

The existence of an alternative remedy to the derivative claim is plainly a factor to be taken into account when deciding whether there are special circumstances. The existence of such a remedy is not however conclusive of the matter. HH Judge Keyser QC sitting as a Deputy Judge so held in Hughes v Weiss [2012] EWHC 2363 (Ch) at paragraphs 58-62, by reference to earlier first instance decisions under the law preceding the 2006 Act, contrary to a dictum of Gibson LJ in Barrett v. Duckett [1995] BCC 362. Section 263(f) makes the existence of an available remedy a factor to be taken into account in the exercise of the court’s discretion on the grounds of permission. In the context of a non company derivative action, this must now be the correct approach. In Lewin on Trusts (18^th Edition) at paragraphs 43-04 and 43-05, there is no suggestion that the ability of a beneficiary to apply for the removal of trustees or for an administration action would constitute a bar to any claim but self evidently the availability of such remedies impacts upon the question of special circumstances which might justify the bringing of the derivative action.

Under clause 16.1 of the RPA, the removal of the General Partner pursuant to clause 6.4 results in the automatic termination of the Partnership. Under clause 6.4.2, “Investors between them holding at least 75% of the Total Commitments may, by resolution at a meeting…remove the General Partner provided that such removal shall also be approved by an Investors Special Consent, without prejudice to the rights of the General Partner to compensation in an amount of twice the General Partner’s share in respect of the Accounting Period immediately prior to the Accounting Period that termination occurs”.

Under clause 16.2, a termination of the Partnership under clause 16.1(d) gives rise to a reconstitution of the Partnership. “If the partnership would otherwise be terminated…the Partnership shall be reconstituted and its business continued…in the case of a termination pursuant to clause 16.1(d), pursuant to an Investors Special Consent electing to continue the partnership and electing a new General Partner, which consent must be obtained within 60 days after all Partners have been notified of the event of termination, whereupon the existing General Partner shall cease to be the General Partner…”. Contrary therefore to a submission made by the Claimants, the effect of such a termination and appointment of a new General Partner would be to vest the claim against the Manager in the reconstituted Partnership which the new General Partner could then pursue in the name of the Partnership. The phrase “and its business continued” is not capable of any other meaning.

The claimants submit however that this is not an adequate remedy and that the existence of this alternative remedy does not debar or even militate against their entitlement to bring a derivative claim. The fact that a beneficiary could bring proceedings to remove or replace a trustee does not bar the beneficiary from pursuing a claim by way of derivative action. Nor does the fact that the beneficiary/legatee could have commenced an administration action to compel the trustees/personal representatives to sue. Nonetheless these are factors to bear in mind in the context of deciding whether or not there are “special circumstances” which justify the bringing of the derivative claim.

The Claimants here however, in the form of the third witness statement of Mr Sparrow, have produced evidence that there was not and is not, in fact, a 75% majority of Investors (by commitment size) willing to exercise the powers set out in clause 6.4.2 to remove the General Partner. At an early stage in the preparation of the proceedings there was a view amongst Investors, which remains a continuing view, that to replace the General Partner and the Manager (which would necessarily occur since the Manager has to be a sister company of the General Partner and one authorised to conduct investments under the FSMA) would be expensive and might well exacerbate the losses already suffered by the partnership.

Mr Sparrow elaborates on this at paragraphs 11-16 of his statement pointing out that since the Partnership has so far been loss making, any new General Partner who would become liable for the debts and obligations of the firm would not assume the responsibilities under the Management Deed without receiving a substantial reward for doing so, as well as some indemnity in respect of potential exposure on existing debts and liabilities. Moreover there would be an exposure to the outgoing General Partner for the compensation referred to in clause 6.4.2 of the RPA. Additionally, a new incoming General Partner would have to assess the merits of the dispute in order to determine whether it was in the best interests of the Partnership to pursue the claims against the old Manager and it is suggested that this could not be determined without making the very application to this court which is currently being made.

It is also said that the claims being made are not of mismanagement of the Partnership as such, since the challenge is only to the decision to invest in Laing plc, the unauthorised allocation of assets and liabilities of Laing plc as between Fund 1 and Fund 2 and the extent of borrowing incurred in order to invest in Laing plc. It is said to be plainly in the best interests of the Partnership that it continues to be managed by the existing Manager and General Partner because of the general experience of the Henderson Group in managing such assets and because the Partnership’s investment in Laing plc, which is its only asset is held through a string of Henderson Group companies, which means that, in practical terms, it would be extremely difficult, if not impossible, for an entity outside the group to gain control over the management of the assets or liabilities of Laing plc itself. The present Manager is able to exercise control over Laing plc so that releasing the Manager from its contractual duties to the Partnership would be contrary to the interests of the Partnership whilst the Manager and the General Partner continue to be associated with Laing plc and Fund 1.

In general terms the claimants are not, according to Mr Sparrow, dissatisfied with the General Partner and the Manager’s efforts to ameliorate the losses already suffered by the Partnership and any transfer of responsibilities would expose the claimants to an argument that losses had been exacerbated by the transfer and the actions of the new Manager.

These are persuasive commercial reasons for the approach of the claimants but the defendants submit that this is just a matter of commercial convenience in circumstances where the claimants as, sophisticated investors, committed themselves to the structure set out in the RPA and the LPA which gave rise to very different rights. The effect of allowing a derivative claim would be to undermine and subvert the basis of the commercial deal into which the parties had entered in accordance with the statutory framework.

The defendants submit that the claimants should be held to the bargain that they made when concluding the RPA under the LPA, whereby only the General Partner can take such action against the Manager; hence no derivative action should be allowed. The defendants point to the statutory scheme for limited partnerships and the difference between that and other cases where derivative actions have been permitted. There is no statutory prohibition on shareholders being directors or taking part in the management of a limited company. There is now statutory provision for shareholder derivative actions under s260 of the 2006 Act. There is no statutory prohibition on beneficiaries or legatees taking part in the management of a trust or the administration of an estate and the Court has a general supervisory power over both. There is no undermining of any statute in allowing a derivative action in such circumstances, whereas the effect of allowing it, in the case of a limited partnership is to vest, in the limited partners, the very rights which statute prevents them from having.

The defendants point to the scheme of the LPA and the RPA with a General Partner who runs the business and specifically, by clause 5.3(h) has power to conduct litigation pertaining to the Partnership or any of the Partnership assets. By clause 5.5(d) the General Partner is given authority to represent the Partnership in its dealings with the Manager or in relation to the Partnership Assets “or in any other respect except where the power to do so is conferred on the Manager under clause 5.3 or has been assumed by the Manager under the earlier provisions of this clause”.

By the very terms of section 6(1) of the LPA, a limited partner is not to take part in the management of the partnership business and does not have power to bind the firm, which means that the limited partner cannot act in the name of the partnership in litigation under the first paragraph of that section. In other circumstances where derivative claims have been permitted, there is nothing like section 6.1 of the LPA.

Clause 5.2 of the RPA provides:

“The Limited Partners shall take no part in the operation of the Partnership or the management or control of its business and affairs, and shall have no right or authority to act for the Partnership or take part in or in any way to interfere in the conduct or management of the Partnership or vote on matters relating to the Partnership other than as provided in the [LP Act] or as set forth in this Agreement but they shall at all reasonable times, subject to having given reasonable notice, have access to and the right to inspect during normal business hours the books of the Partnership.”

There is also no equivalent provision in other cases where derivative actions have been permitted to that set out in clause 5.2 of the RPA, which provides that the limited partners shall take no part in the operation of the Partnership or the management or control of its business and affairs and “have no right or authority to act for the partnership”.

The Defendants submit therefore that the court cannot confer powers on the limited partner which run contrary to the LPA and the terms of the RPA, or at the very least, should not do so. The quid pro quo for the restriction on the limited partners and the conferring of powers on the General Partner is that the limited partners are not liable for the debts of the Partnership whereas the General Partner is. That is the whole basis upon which a Limited Partnership proceeds.

These points carry considerable weight but in my judgment do not conclude the issue. They reinforce the need for “special circumstances” before a derivative claim can be made, but if there is, in truth, no realistic way in which the Limited Partners can obtain redress against the Manager, such an action may be required in order to avoid injustice.

The Defendants point out that the Claimants can pursue their personal claims against the General Partner for failure to supervise the Manager under clause 5.1.1 of the RPA but that is self evidently not the same as being able to pursue the Manager and the test for liability would be different. The General Partner could be removed under the provisions of the RPA (with consequent removal of the Manager) but the evidence shows that this course has such disadvantages that it is not a realistic course. If the only way to hold the Manager to account is by disposing of the General Partner (and consequently the Manager itself) an injustice may be perpetrated, since huge losses may follow in addition to those currently suffered. As the Claimants submit, there is an irremediable conflict of interest between the General Partner and the Manager and the fact that this is built into the architecture of the Partnership, both by contract and statute, is, in the end, nothing to the point.

What is more, section 6(1), in one sense, does not provide an absolute prohibition on a Limited Partner taking part in the management of the Partnership business because the third subparagraph of the section expressly provides for what happens if a Limited Partner does so.

In my judgment, it is this third paragraph that holds the key to the current situation. The Limited Partners are correct in saying that the irreconcilable conflict of interest experienced by the General Partner means that the Partnership’s prospects of obtaining redress against the Manager (without a change in the identity of the General Partner) via the route provided for in the RPA and LPA are virtually eliminated, save for the case where the Manager’s defaults are so self evident and the Manager can have no defence at all. There, even a sister company might feel compelled to sue. Absent such circumstances, the General Partner is likely to be impervious to the “advice” of Limited Partners who sue the Manager and redress will not be available to the Partnership. It is here, of course, that the merits of any claim against the Manager come into play. As appears hereafter, there are serious arguments available to the General Partner and the Manager which fall to be determined in the context of the claims against them. The current General Partner might consider the arguments to be well founded and replacement of the General Partner by a substitute might result in a new General Partner taking the same view, without the conflict of interest resulting from a sister company relationship.

Moreover, if the Limited Partners sought to sue the General Partner for failure to take proceedings against the Manager, the test for liability of the General Partner would be different from that which would apply for determination of liability on the Manager itself.

If the Limited Partners are correct in their allegations that the Manager has exceeded the authority given to it in making the investments it did and/or in allocating the business that it did, a matter that can only be determined by this Court after examination of the merits of the claim, then the Partnership would be deprived of bringing that justified claim against the Manager without removal of the General Partner or being permitted to bring a derivative claim. It does not seem to me that this is just. The difficulties and uncertainties in removing the General Partner have been set out above. It is, as the Claimants point out, the irreconcilable conflict of interest on the part of the General Partner in this Limited Partnership which constitutes the “special circumstance” which would require a derivative claim to be pursued. Justice requires they be able to take this step, rather than remove the General Partner with all the drastic consequences that this entails.

Justice also requires however that regard be had to the statutory provisions relating to limited partnerships. Whilst special circumstances may exist to permit a derivative claim to be made by the Limited Partners in the name of the Partnership, where the statute provides that they should be brought by the General Partner, the statute also provides what should take place if a Limited Partner takes part in the management of the Partnership business. In such circumstances the Limited Partner is to be liable for all debts and obligations of the firm incurred while he so takes part in the management as though he were a General Partner.

In my judgment there is no doubt whatsoever that the taking of proceedings against a third party such as the Manager is no different (for the purposes of the LPA) from taking proceedings against any other third party engaged by the Partnership, whether a solicitor, accountant, surveyor or financial advisor. The claim itself is a Partnership asset and the Partnership assets have to be managed in accordance with the LPA and the RPA. If Limited Partners are pursuing a claim, albeit it a derivative claim, standing in the place of the General Partner, acting for the Partnership, they will be acting in such a way as to bind the firm contrary to the first paragraph of section 6(1) of the LPA and clause 5.2 of the RPA. It is self evidently necessary for the firm to be bound if proceedings are to be commenced, conducted or settled. Commencing such proceeding is the province of the General Partner in management.

Whilst there may be some grey areas about what might or might not constitute participation in management, the second subparagraph of section 6 shows just how limited the Limited Partner’s involvement can be without so participating. In Inversiones Frieira SL v Colyzeo Investors I and II LP [2012] Bus LR 1136 at pages 1147 and 1150, Norris J drew attention to the proviso in the second paragraph of section 6(1) which allows for a Limited Partner to inspect the books of the firm, examine the state and prospects of the Partnership business and “advise” with the Partners thereon. Such activity will not constitute participation in the management of the Partnership business. Norris J points out at page 1150 E that, having obtained information about the Partnership’s affairs, a Limited Partner who examines and analyses the material and confers with other Limited Partners does not thereby become involved in the management of the Partnership. An expression of a view to the General Partner about the performance of the Partnership, or the strategy or future direction of the Partnership, or even a preference about how a particular asset should be dealt with equally does not constitute management. As soon however as there is participation in the decision making process by requiring notice of individual decisions and the ability to make representations about individual decisions, scrutinising and commenting upon the operational business decisions taken by the General Partner, the Limited Partner will be involved in management. There are potentially grey areas no doubt but the conducting of litigation on the part of the Partnership is not one of them.

It is nothing to the point that the claim against the Manager is that the Manager has exceeded its authority. That does not prevent management of the Partnership asset, in the shape of that claim, being management of the Partnership business. It is the making of the claim which matters, not the basis upon which it is made. Moreover the General Partner’s conflict of interest cannot affect the question as to whether or not the making of the claim is management for this purpose.

I was referred to the 2001 Law Commission Consultation Paper on the LPA and the draft bill produced in consequence. The Consultation Paper contains a discussion on what constitutes “management” and draws attention to the position in other jurisdictions, in some of which a limited partnership constitutes a separate legal personality. In the Consultation Paper, the suggestion is made that the “ordinary matters” of the business should be equated with “management” and that limited partners should not be precluded from participating in decisions on “extraordinary” matters such as a change in the nature of the business or the structure or organisation of the partnership. It is suggested that specific protection might be given, as in the law of Jersey to voting, approval or disapproval of transactions in which one or more of the general partners has an actual or potential conflict of interest with one or more of the limited partners. The paper concludes that clarification is required in respect of certain classes of decisions, namely whether or not they constitute management. The draft Bill, in schedule 6 provided that the enforcement of rights under the partnership agreement should be open for a limited partner “unless those rights are to carry out management functions”. Equally, taking part in a decision which involves an actual or potential conflict of interest between a limited partner (or limited partners) and a general partner, should be permitted.

Not only has nothing been done about the Consultation Paper or draft Bill in the years since they were produced but nothing in those documents could touch the position which obtains here. Whereas the pursuit of a dispute between partners, whether limited or general, is self evidently not management of the partnership business, a claim against a third party, such as the Manager plainly is.

In the current circumstances which are special enough to give rise to a derivative claim, it follows, in my judgment that the claimants, if they choose to pursue that claim, take part in the management of the partnership business and therefore are liable in accordance with the third subparagraph of section 6(1) of the LPA.

This gives rise to a further dispute between the parties since the claimants submitted that the wording of the third subparagraph – “will be liable for all debts and obligations of the firm incurred while he so takes part in the management as though he were a general partner”, did not have a temporal meaning. It was submitted that the words required a connection between the debts and obligations incurred and the actions actually taken. The contrary, it was said, would give rise to arbitrary and unworkable results. It would be very difficult to work out when a Limited Partner took part in management, if he did a number of isolated acts, and to ascertain the period during which debts were incurred for which he would be liable if the temporal criterion was correct.

In my judgment the meaning of the third paragraph of subparagraph 6(1) is plain. The words “while he so takes part in the management” self evidently have a temporal connotation, whatever factual inquiry may be necessitated by the application of the test. The underlying rationale of the subparagraph is that, if a limited partner chooses to act as if he were the general partner in a limited partnership, he is to be treated like a general partner in that period in which he does so. He thus becomes liable for all the debts and obligations for which the general partner is liable during the period in which he so acts. The contrary to my mind is untenable.

Section 9 of the 1890 Partnership Act provides that every partner of a firm liable jointly with the other partners for all debts and obligations of the firm incurred while he is a partner. There is a temporal definition and although there is no equivalent for the general partner in section 4(2) of the LPA, the subsection provides that the general partner is liable for “all debts and obligations of the firm”, which self evidently creates liability for obligations incurred throughout the term of the partnership. The effect therefore of the third paragraph of section 6(1) is that during the period in which the limited partner takes part in the management, the limited partner is liable in exactly the same way as the general partner for all debts and liabilities incurred by the partnership.

There is self evidently the possibility that if the limited partner takes part in management, debts may be incurred by that activity for which the general partner is rendered liable. The claimants submit that this is all that section 6(1) was intended to catch but that is not what the section provides and the underlying rationale is as I have set out, different. If the limited partner takes part in the management and seeks to bind the firm, he supplants the general partner and becomes liable as if he were the general partner.

In McDonald v Horn [1995] 1 AER 961 Hoffman LJ (as he then was) gave the lead judgment in a case where several members of a pension scheme sought to bring an action against their employers, the pension fund trustees and others, alleging breaches of trust and fiduciary duty. They applied for a pre-emptive costs order because there was no serious likelihood that they could raise funds to fight the litigation on the scale involved. At page 970, the Lord Justice drew attention to Re Buckton [1907] 2 Ch 406 at 413-415 where Kekewich J (an acknowledged Master of Chancery procedure) divided trust litigation into three categories. The first consisted of proceedings brought by trustees to have the guidance of the court as to the construction of the trust instrument or some question arising in the course of administration. In such cases the costs of all parties were treated as necessarily incurred for the benefit of the estate and were order to be paid out of the fund. Secondly there were cases in which the application was made by someone other than the trustee but raised the same kind of point as in the first class of case and would have justified an application of that kind by the trustees. That class was to be treated in the same way as the first. Thirdly, there were cases in which a beneficiary was making a hostile claim against the trustees or other beneficiaries and that class of case was to be treated in the same way as an ordinary common law piece of litigation, with costs following the event. It was said to be difficult often to distinguish between cases in the second and third categories but, once it was determined that the issue was the rights of adverse litigants, then ordinary costs orders should follow.

Hoffman LJ at page 971 then stated that the court might feel sufficiently confident that the case fell within the first or second categories to be able to make a prospective order that parties other than the trustees were to have their costs in any event (the pre-emptive cost order). Unless however a judge was satisfied that he would be likely to make an order that all parties’ costs were to come out of the fund at the end of the day, it could not be right to make an order at an earlier stage of the proceedings. In order to grant a pre-emptive application in ordinary trust litigation or trust proceedings concerning the ownership of a fund held by a trustee or other fiduciary, the judge had to be satisfied that the judge at the trial could properly exercise his discretion only by ordering the applicant’s costs to be paid out of the fund. Otherwise the trial judge’s discretion would be fettered. The only circumstances in which such an order could be made in hostile litigation would be where the claimants were impecunious and, unless the litigation were funded, serious claims would never be investigated. That in itself would not be a sufficient reason for a pre-emptive order but, in the context of a derivative action, it was a relevant factor to the exercise of discretion.

It is accepted by the parties that a minority shareholder bringing a derivative action and suing as if it were a trustee suing on behalf of a fund could be entitled to be indemnified out of the assets against costs incurred by it and any costs it might be ordered to pay to the other party. At page 974 g-j Hoffman LJ stated that the power to make such an order in a pension fund case should be exercised with considerable care because of the dangers in too easily making orders which allow minority shareholders to litigate at the cost of the company. If the claimants had shown a sufficient case for further investigation, there might be a case for ordering the payment of costs out of the fund up to a later point in the proceedings, such as disclosure, whereupon the position could be re-evaluated.

In Smith v Croft [1986] 1 WLR 580 at 597, Walton J expressed the need to hold the balance as fairly as possible between claimants and defendants in a minority shareholders action against a company and some of its directors. He said it was incumbent on the claimants applying for an order to show it was genuinely needed inasmuch as they did not have sufficient resources to finance the action in the mean time. If they had, he saw no reason at all why the extra burden should be placed upon the company. The rationale for a pre-emptive order was to ensure that the claimant in a minority shareholder’s action should not be prevented from pursuing an obviously just case through lack of funds or fear that he might, for some reason, fail at the end of the day and be at risk as to costs which he could not possibly pay. The making of such an order might turn out to have imposed on the company a liability which ought never to have been imposed, which meant that caution was required in making any such order.

I was referred also to the decisions of Arnold J in IMG v HR Trustees Ltd [2010] EWHC 321 (Ch) and Warren J in IBM v Metcalfe [2102] EWHC 125 (Ch) where each explored the basis on which a pre- emptive costs order could be made in a pensions case, where the Buckton principles, as elaborated in McDonald were set out and applied - see paragraph 19 of the latter judgment.

In the present case, the Claimants cannot and do not say that they are not in a financial position to pursue this litigation. Most of the claimants are pursuing this litigation on an individual basis, regardless of the derivative claims. If this case falls into the third category referred to by Hoffman LJ and Kekewich J, then a pre-emptive order is out of the question. If it arguably falls into the first or second category, then a pre-emptive order should only be made if I can be satisfied that, at the end of the day, a trial judge would order that the costs be paid out of the Fund. I am not so satisfied. Nor if I were exercising any residual discretion, could I see any reason to make such an order. In my judgment this plainly is hostile litigation as between the Limited Partners, albeit suing the Manager in the place of the Partnership, and the General Partner, as well as the Manager. The claim against the General Partner and the Manager are closely intertwined. There is a Partnership dispute bound up with the claim against the Manager. Moreover, even if the claim against the Manager does not, of itself, fall into category three, I cannot say at this stage that, at the end of a trial a court would be bound to find costs payable out of the Fund, if the Claimants failed. If their claims prove to be unfounded, there is no reason why the General Partner, which is liable for all the debts and obligations of the Fund should be prejudiced by the payment of the unsuccessful claimants costs out of that fund. I decline therefore to make any such pre-emptive order.

In paragraph 85 of the Amended Particulars of Claim, the claimants state that they do not make and will not pursue any derivative claims unless the court makes one of two declarations. The first declaration sought is that pursuit of the Derivative Claims will not in and of itself constitute “taking part in the management of the partnership business” for the purposes of section 6(1) of the LPA. The alternative declaration is that, if pursuit of those claims would constitute taking part in the management of the partnership business for the purpose of section 6(1), “the unlimited liability of the claimants is restricted to the debts and obligations incurred as a result of or in connection with that action (viz. legal costs)”.

The claimants stated that they were prepared to proceed with the derivative claims even if the declaration bound only the General Partner and the Manager although, in the title of the action as currently constituted, the Manager is “sued on its own behalf and on behalf of all creditors of Henderson PFI Secondary Fund II L.P. from time to time) and the Manager is also reportedly sued on the same basis. As I have decided that pursuit of the derivative claims would constitute taking part in the management of the Partnership business with concomitant liability to all creditors, the claimants are not entitled to either of the declarations sought and the question of other creditors being bound in a representative action does not rise. I am bound to say however that I see considerable difficulty in the idea that there is a common interest between the General Partner and the Manager on the one hand and all other creditors of the Fund who might have very diverse interests in wishing to pursue the Limited Partners in respect of debts of the Partnership, on the other. It is at this stage impossible to anticipate what their interests might be and how they might differ from those of the General Partner or the Manager. Whilst at present the Manager and General Partner are apparently the only creditors, future creditors might have security for loans or rights of set-off which could be affected if specified Limited Partners were or were not exempt from liability as if they were a General Partner. Without more, it is difficult to see how the words “on behalf of all creditors” can properly be included at this stage.

It is, I think, common ground that the seeking of the declarations does not amount to the participation in the management of the Partnership business but, regardless of whether it is or is not common ground, in my judgment it is not. The claimants raise these matters as questions of principle in ascertaining what their own rights are against the General Partner and the Manager and that does not constitute Partnership business. In consequence the costs of the application for these elements of relief must fall to be dealt with on the usual basis as between claimants and defendants on that footing.

Subject to any further submissions the parties may wish to make, it seems to me that the defendants are entitled to their costs on issues 1 and 3. The General Partner must equally be entitled to its costs on issue 2 but the costs relating to the derivative claim against the Manager have to be determined. Whilst I have held that it is open to bring a derivative claim against the Manager, the claimants have said that they will not do so without one of the declarations set out in paragraph 85 of the Amended Particulars of Claim which I have refused to make. Moreover, even if such a claim were now to be pursued, the costs of determining the question of principle which I have decided in favour of the claimants on issue 2, as against the Manager, could, at best, from the claimant’s perspective fall to be assessed in the light of the ultimate success or failure of that claim and the considerations to which I have already referred in relation to determination of costs of the derivative action.

It is common ground that the RPA can have only one meaning regardless of the fact that different parties to it may have had differing background knowledge to bring to bear. The factual matrix, according to the claimants excludes information provided by the Henderson companies to individual investors except for the draft PPM, the draft Partnership Agreement and the draft Deed of Adherence since the Limited Partners committed themselves to the arrangements by executing the Deeds of Adherence between about December 2005 and September 2006. By clause 15(d) of the Deed of Adherence, each Limited Partner warranted that the purchase of a Commitment in the Partnership was made on the basis of the information in the draft PPM and the draft Partnership Agreement and not on any other oral or written statement. Although the draft PPM said that no investment decision should be made on the basis of it, the Claimants case is that, by the Manager’s acceptance of the Deed of Adherence on 19^th September 2006 there was agreement that the investors could rely on the draft PPM subject to amendments.

It is accepted that the terms of the RPA prevail over the PPM both because paragraph 2 of the draft PPM provided that the Partnership Agreement would override it and because clause 20.3 of the RPA stated in terms that, in the event of any conflict, the terms of the RPA should prevail.

It is accepted that the Limited Partners are sophisticated investors. Fund II was an unregulated collective investment scheme which was only made available to such sophisticated institutional investors. The effect of section 238 of the Financial Services and Markets Act 2000 (the “FSMA”) was that it could not be promoted to the general public but could be promoted to investment professionals or sophisticated investors within the meaning of the FSMA 2000 (Promotion of Collective Investment Schemes) (Exemptions) Order 2001. Such investors were capable of taking advice both from consultants and lawyers and many apparently did so. Several of them had previously invested in Fund I.

The draft PPM also stated that “Limited Partners will not be entitled to participate in the management of the Fund in respect of investment or other decisions. Accordingly, Investors must be prepared to entrust the management of the Fund to the Manager.” The document provided, in the shape of the Draft Partnership Agreement, made it plain that the Manager was to be an Authorised Person under FSMA who would manage the investment portfolio under the supervision and authority of the General Partner and that it would be the second defendant.

The Manager issued the draft PPM and it and the Deed of Adherence made it plain that the closing of Fund II was conditional upon the consummation of a single transaction that had been identified by the Manager under the heading “Investment Risk” the following appeared:-

“The Fund is being established to take advantage of a portfolio investment opportunity that the Manager has identified. There can be no guarantee that such investment opportunity will be successfully completed, however, prospective Investors will be asked to send completed irrevocable binding deeds of adherence to the Manager prior to the date that the Manager will become aware of whether or not the investment opportunity has been successful. In the event that the investment opportunity which the Manager has identified is not consummated, the deeds of adherence will be returned to Investors, the Investors will be permanently and unconditionally released from any obligation to make a commitment to the Fund and the Fund will not hold a closing. If the investment opportunity is consummated, the Investors' deeds of adherence will be accepted at the discretion of the Manager.”

Investors also knew that this “portfolio investment opportunity” was on a large scale since Fund II was aiming to raise Total Commitments of between £350 million and £500 million but that these sums would not be sufficient to consummate the transaction. The draft PPM explained that additional capital would be provided by other funds and, if necessary by borrowing money in significant amounts up to 30% of Total Commitments on a short term basis.

The portfolio investment opportunity related to Laing plc but because it was a listed company, the Takeover Code applied and investors could not be told its identity. Whether or not any of the Claimants worked out that Laing plc was the target does not appear from the evidence but, even if they did, they would not have been able to conduct any “due diligence” prior to being bound by their commitment and they would not know in any event whether all or part of the Laing business would be subject of the investment.

For the purpose of the preliminary issues I proceed on the basis put forward by the claimants, namely that there were no other sources of information beyond those to which I have already referred. It is right to bear in mind that the RPA is the primary document governing the inter-relationship between the General Partner and the Limited Partners, quite apart from the express agreement of the parties that it should prevail in the event of any conflict with the PPM. The PPM was not a contractual document as such although the RPA makes reference to it in specific prohibitions and it is part of the background against which the RPA falls to be construed. As a placement memorandum on a confidential basis to a limited number of investors for the purpose of providing information about an investment in the Fund, it related to the full life of the Partnership, a minimum of ten years, but with specific reference to the early years also. The focus is nonetheless on the Fund as it would be after it had been constituted.

It is necessary to set out a number of these provisions in extenso, although I shall refer to specific provisions in detail when considering each of the remaining preliminary issues. The purpose of the Partnership was set out in clause 1.2 of the RPA in the following terms:-

“Without limitation the purpose of the Partnership is to carry on the business of an investor and in particular but without limitation to identify, research, negotiate, make and monitor the progress of and sell, realise, exchange or distribute investments which shall include but shall not be limited to the purchase, subscription, acquisition, sale and disposal of unquoted shares and securities, debentures, convertible loan stock and other securities, and the making of loans whether secured or unsecured to such companies in connection with equity or equity related investments in entities or companies involved in private finance initiatives. The Partnership (acting through the General Partner or persons authorised on behalf of the Partnership pursuant to this Agreement) may execute, deliver and perform all contracts and other obligations and engage in all activities and transactions as may in the opinion of the Manager be necessary or advisable in order to carry out the foregoing purposes and objectives, subject to and in accordance with the provisions of this Agreement and the Investment Policy.”

Clause 6.1 provided that “the Partnership will comply with the investment restrictions and investment procedures set out in schedule 1”. In so far as relevant for the current dispute, schedule 1 provided as follows:-

“The Partnership will not, without the prior consent of the Advisory Committee:

(a)

invest (excluding any Bridging Investment) an amount in excess of £30 million in the securities of any single Portfolio Company and its Associates;

(b)

invest (when including any Bridging Investment) an amount in excess of 30% of Total Commitments in the securities of any single Portfolio Company and its Associates;

(c)

invest an amount in excess of 20% of Total Commitments in: (i) the securities of any Portfolio Companies where the underlying project is substantially in its construction phase; or (ii) the securities of any Portfolio Companies where the underlying project is of a PFI-type but is not officially promoted by a governmental (or similar) body or organisation; …provided however that for the purpose of this provision where the Partnership is investing into a Portfolio Company with more than one PPP or PFI project the tests in 1(a), (b) and (c) shall be applied on a look through basis looking at each individual project and not at the investment in the Portfolio Company.”

Clause 5.3 of the RPA set out the authority and powers of the Manager in the following manner, so far as relevant:-

“5.3

Authority and Powers of the Manager

The Manager shall have full power and authority, on behalf of the Partnership and so as to bind the Partnership thereby:-

(a)

to identify, evaluate and negotiate investment opportunities, to prepare and approve investment agreements and to (or agree to) subscribe, purchase or otherwise acquire, alone or together with others, Investments falling within the Investment Policy, and to sell, exchange or otherwise dispose of Investments for the account of the Partnership whether by way of Asset Swap or otherwise, and to enter into investment agreements or execute investment agreements on behalf of the Partnership accordingly…

(b)

to enter into, or require the Partnership to enter (directly or through an Investment Holding Company) into underwriting commitments, to acquire Investments in a syndicate with other investors or to enter into Bridging Investments…”

The investment policy is set out in schedule 2 as follows (with paragraph numbers added):-

“[1] The Partnership will invest, directly or indirectly in Private Finance Initiative (“PFI”) and Public Private Partnership (“PPP”) concession companies in Europe with the principal focus being on investments in the United Kingdom.

[2] Investments will typically be purchased in the secondary market with the intention of meeting the following objectives:

• Providing a gross average cash yield from the Investments of 10-12% per annum;

• Creating a diversified portfolio of Investments; and

• The potential to achieve, by the termination of the Partnership a gross IRR of 15 – 18%, or greater.

[3] Without limitation to the above the Partnership may also:

• make Investments in Portfolio Companieswhose primary business involves the holding of pre-operational assets;

• invest, directly or indirectly in Portfolio Companies which are designed to achieve the same objectives as PFI or PPP concession companies but which may not be part of a European countries [sic] PFI or PPP programme provided that the aggregate amount invested in such Portfolio Companies shall not exceed 20% of Total Commitments; and

• invest, during the Commitment Period, in Investments in assets or Portfolio Companies which fall outside the Investment Policy set out above provided that the Manager shall use it[s] reasonable endeavours to realise or otherwise divest itself of such assets or Portfolio Companies during the Commitment Period.”

The Commitment Period referred to is, for practical purposes, the period of two years from the admission of the first investor as a Limited Partner. Bridging Investments are defined in the definitions sections of the RPA as:-

“Either Investments made by the Partnership (or by an Investment Holding Company) in excess of the requirement of the Partnership with a view to selling the excess to a third party within twelve months of its acquisition…or investments made by the Partnership as part of a multiple Investment transaction where the Investment Manager considers one or more of those Investments are likely to be sold or otherwise realised (whether through an Asset Swap or otherwise) during the Commitment Period”

The Management Deed contains the following relevant provisions:-

“1.1

The Partnership hereby appoints the Manager to be the manager of the Partnership with full power and authority (subject to the following provisions of this Deed) to act as manager of the Partnership, including for the avoidance of doubt the exercise of all of the powers expressed to be granted to the Manager pursuant to the Partnership Agreement, and as such manager to manage the Partnership to the total exclusion of any other person and the Manager hereby agrees with the Partnership to act as such manager and to accept and carry out such management responsibilities and duties otherwise imposed by the Partnership Agreement on the manager of the Partnership”

“1.3

Without limitation to clause 1.1, it is agreed that: (a) Investments shall be managed in accordance with and subject to the provisions set out in Schedule 2 to this Deed …”

The relevant part of schedule 2 of the Management Deed reads as follows:-

“1.

The Manager will manage the Portfolio in compliance with the FSA Rules and on the basis that the Partnership’s investment objective is as set out in the section in the Information Memorandum headed “ Investment Strategy and Objectives” in t he section headed “ Investment Process ….

2.

The Partnership may invest only in Investments complying with the Investment Policy. Monies awaiting investment will be placed on deposit in a Partnership Bank Account with a bank of repute. The Manager will comply with the Investment Policy. There is no other restriction on the amount or value of any one Investment or on the proportion of the Portfolio which may be constituted by any one Investment or on the types of Investments or markets (if any) in which the Partnership wishes transactions to be effected ….”

It can be seen that references made in paragraph 1 of this schedule to the investment objective set out in the PPM which in turn read as follows:-

“The investment strategy for the Fund is to build a diversified portfolio of investments in operational PFI concession companies in lower risk sectors of the market, such as schools, hospitals, accommodation, water and transportation. The primary geographic focus of the Fund will be the more mature UK market. However, opportunities in Continental Europe will also be considered.

Through this investment strategy, the Fund’s objective is to provide investors with a strong income stream, from the first year of investment, and stable capital values.

The Fund will target gross returns of:

• An average running cash yield of 10% to 12% per annum; and

• An IRR of 15% to 18% with the potential for further upside.”

& 7. Did the investment in John Laing plc fall outside the final bullet of Schedule 2 to the RPA because, while that investment included investments in operational concession companies and pre-operational concession companies, and occurred during the Commitment Period:

it was not an investment principally in operational PFI concession companies;

it was not an investment principally in PFI concession companies;

it included investments in assets other than operational PFI concession companies, which investments were not ancillary to the investments in operational PFI concession companies; or

it included investments in assets other than PFI concession companies, which investments were not ancillary to the investments in PFI concession companies?”

Clause 5.3 of the RPA gives the Manager power to make investments falling within the Investment Policy, whilst clause 6.1 provides that the Partnership will comply with the Investment restrictions and procedures set out in Schedule 1. That in itself is significant inasmuch as it reinforces the meaning of the words “Policy” on the one hand and “restrictions” on the other. The Investment Policy refers to an approach to be adopted, rather than to specific requirements or prohibitions on investment, whereas “restrictions” do set out specific limitations on what can properly be done.

The claimants point out that the first paragraph of Schedule 2 repeats in slightly different wording the phraseology of page 1 of the PPM. It provides for a policy of investment in PFI concession companies (not specifically in operational PFI concession companies), neither of which are defined in the RPA. The second paragraph is a précis of the second paragraph of page 15 of the PPM under the heading Investment Strategy and Objectives (as set out above). It states that, as part of the policy, investments will typically be purchased in the secondary market, which is not defined in the RPA. The PPM explains the UK PFI market in sections 1-4 and that the secondary market is for the purchase of equity interests in a consortium that has already been awarded a PFI concession contract. This can be at any point after such an award but “more usually investment opportunities arise in concession companies that have completed their construction phase or are in the lower risk operational phase of the project’s life”. The parties are expected to know this background information provided by the PPM.

The third paragraph is expressly without limitation to the earlier two paragraphs and contains three bullet points, of which the meaning of the third is in dispute. Whilst the general policy is to invest in PFI concession companies and the typical purchase is to be in the secondary market, the first bullet point makes it clear that the Partnership may invest in companies whose primary assets are still at the pre- operational (i.e. the construction) stage. The second bullet point then allows for investment in companies which are like PFI companies but not state approved, provided that the aggregate amount invested does not exceed 20% of the Total Commitments. The second bullet point and arguably the first have the effect of expanding the areas of investment beyond that which appears in the general policy statement in the first paragraph of the Schedule. If reference is made to Schedule I which sets out Investment Restrictions, it will be seen that the first and second bullet point additions to the Policy in Schedule 2 are subject to the limitation set out in paragraph 1(c) (i) and (ii) of Schedule 1, namely to investment of 20% of the Total Commitment in them, (in the case of the second bullet point, a repetition of the limit set out in the bullet point itself).

The claimants accept that the third bullet point, if read literally, has the effect of allowing the Manager to invest in any assets at all in the Commitment Period (essentially the first two years), whether in PFI concession companies or otherwise. It is submitted that this cannot be what is meant, because the effect would be to make a nonsense of the PPM and the Policy referred to.

Reference is then made to page 1 of the PPM where it is said that “the Fund will invest in existing shareholder interests…of operational PFI concession companies”, to the Investment Strategy and Objectives set out in the PPM (and quoted above), to page 11 where it is said that “the Fund will principally be investing in these operational PFI concession companies owing to their lower risk and higher income generation” and to the reference at page 13 to “typical operational PFI investments [which] deliver an average income yield of approximately 11% pa”. It is said that the Fund objective of target returns of 10%-12% pa is only available from PFI concession companies at the operational stage.

In consequence, it is submitted by the claimants, the third bullet point in the last paragraph of Schedule 2 to the RPA must be read as an adjunct to enable ancillary investments to be made in non PFI assets only where the portfolio in which investment is made consists principally of interests in operational PFI concession companies. The third bullet point does not therefore permit investment in PFI companies at the bidding phase or in non PFI assets generally but only to the extent that investment in such assets is ancillary to investment in such operational PFI concession companies.

The claimants say that if 85% of the Total Commitment was in PFI operational concession companies or projects, or even such concession companies or projects at any phase, the criteria would be satisfied. Whilst they do not state what the minimum qualifying proportions would be, they then point to their calculation that only 39% of the Total Commitment was invested in operational PFI concession companies or projects and only 51% in PFI concession companies or projects, at any phase. They submit that there is a clear breach of authority in the making of such investments.

In my judgment this is simply not what the third bullet point says and there is no reason to read down the wording by reference to the PPM, nor to import concepts of proportionality in the size of investments in PFI and non PFI assets. The third bullet provides for “investments in assets or Portfolio Companies which fall outside the Investment Policy set out above” with a limiting proviso, which is the only proviso required by the Schedule. The rationale is not hard to fathom. The Manager is to be able to purchase non PFI assets in the initial period of two years or so, in order to seek to achieve the objective of a strong income stream from the first year of investment and the target returns set out in the PPM, whilst pursuing the strategy of building a diversified portfolio of investments in operational PFI concession companies. The proviso means that the Manager can only make such acquisitions, if it uses reasonable endeavours to divest itself of such non PFI assets, falling outside the first two paragraphs and the first two bullet points of the third paragraph of the Schedule, within the limited first two years or so that constitute the Commitment Period.

This position is made plain when reference is made to the other provisions of the RPA, which permit investment in Bridging Investments. Clause 5.3(a) empowers the Manager to invest in Investments falling within the Investment Policy whilst clause 5.3(b) empowers it to enter into Bridging Investments, which include both excess PFI assets (which it is intended to sell within 12 months of acquisition) and other investments which are part of a multiple Investment transaction where the Manager considers that they are likely to be sold during the Commitment Period. Bridging Investments do not need to be in PFI assets but, if they are not, they can only be purchased as part of a multiple Investment transaction where such PFI assets are purchased, and only with a view to sale of the non PFI assets in the Commitment Period. Furthermore, by reason of the proviso in Schedule 2, the Manager is bound to use reasonable endeavours to make such disposals.

Schedule 2 and clause 5 do therefore place limits on the powers of the Manager to acquire non PFI assets but not the limits which the claimants suggest, by reference to “principal” investment in PFI assets and “ancillary” investment in non PFI assets on a quantitative basis.

The claimants submitted that on no view could the acquisition of a pension deficit of £158.7m fall within the ambit of what was permitted investment. It was said not to be investment in a PFI concession company. It transpired that the deficit comprised debts owed by 3 companies in the Laing Group, one of which had multiple PFI projects. The acquisition of Laing plc was a Multiple Investment Transaction which involved the acquisition of some 47 PFI concession contracts. The price paid for the Group, with those companies and debts, would have taken account of that deficit, unless there was some failure on the part of the Manager in negotiation, which is not alleged. I cannot see that any separate point arises from this.

There is no basis for incorporating the PPM into the RPA, which prevails in any event if there is inconsistency between the two. The RPA is clear in what the general policy is- investment in PFI concession companies, typically in the secondary market, with various add-ons, including the third bullet point in Schedule 2, which contains its own limitation on the purchase of non PFI assets, and is to be read alongside the other provisions of the RPA, with their limitations on such purchases. There is no room for importing quantitative limits whether by purported reference to the PPM or otherwise.

The answer to all four questions raised in Issue 6/7 is “No”.

Did the investment in John Laing plc breach the obligation on the Manager (under paragraph 1, Schedule 2 to the Management Deed) to manage the investments, money, assets and borrowings of the Partnership on the basis that the Partnership’s investment objective was as set out under the ‘Investment Strategy and Objectives’ on page 15 of the Private Placement Memorandum, for the following reason: that the assets and liabilities of John Laing plc were not a portfolio of investments in, or at least principally in, operational PFI concession companies?”

The Manager by clause 1.2 of the Management Deed agreed to comply with the applicable provisions of the RPA and to ensure that all Investments fell within the Investment Policy. It agreed also that investments should be managed in accordance with, and subject to the provisions of Schedule 2 to the Management Deed.

Paragraph 1 of Schedule 2 to the Management Deed provides that the Manager will manage the Portfolio “on the basis that the Partnership’s investment objective is as set out in the section [in the PPM] headed ‘Investment Strategy and Objectives’”. There is here direct reference to the PPM. Paragraph 2 of the same Schedule provided that the Partnership could only invest in Investments complying with the Investment Policy in Schedule 2 to the RPA.

The claimants submit that, when reference is made to the PPM, it is clear that the Objective is to provide the strong income stream from the first year of investment and stable capital values, with target returns but that this is to be done through the Investment Strategy of investment in operational PFI concession companies, as set out in the first paragraph of the section of the PPM. Managing on the basis of the Objective is said to involve the adoption of the strategy, which the Manager cannot ignore. Even if, contrary to their earlier submissions, the last bullet point of paragraph 3 of Schedule 2 to the RPA does not restrict investment in the manner for which the claimants contended, the effect of this provision in the Management Deed is to the same effect.

This argument faces an insurmountable difficulty because of the second paragraph of Schedule 2 to the Management Deed. This provides that the Manager will comply with the Investment Policy but that “there is no other restriction in the amount or value of any one investment or on the proportion of the Portfolio which may be constituted by any one investment or on the basis of Investments or markets in which the Partnership wishes transactions to be effected.” The Investment Policy is reaffirmed and the Manager cannot be restricted by the Management Deed above and beyond the restrictions set out in the RPA.

The Schedule to the Management Deed is not therefore apt to create a narrower range of permitted activity on the part of the Manager. The Objective set out in the PPM does refer to income stream from the first year of investment and stable capital values and targeted returns. The strategy is to build a diversified portfolio of investments in operational PFI concession companies but this does not restrict the powers of the Manager given elsewhere as the means by which he should set about that strategy and that objective. Self- evidently it takes time to “build” a portfolio in accordance with any strategy, and managing the Portfolio “on the basis of” the objective does not entail success, nor the achievement of the targeted returns which may or may not have been achievable only from operational PFI concession companies and the prompt sale of non PFI assets. In the context of a Multiple Investment Transaction with PFI assets and non PFI assets of the kind that the Laing acquisition involved, the objective might or might not be achieved immediately or even over time. No allegation is made that the Manager failed to have regard to the objective or to the strategy in what it did. It is simply alleged that the investments made were outwith the authority conferred on it and the General Partner. Yet the Management Deed can add nothing since the Investment Policy is to be found in Schedule 2 of the RPA, to which the Management Deed expressly refers, whilst the specific restrictions on acquisitions and investments are to be found in Schedule 1 to the RPA, to which Issue 5 relates.

The Answer to the question posed in Issue 4 is “No”.

Does the proviso in paragraph 1 of schedule 1 of the Partnership Agreement require the test in subparagraphs 1(a), (b) and (c) of that paragraph to be applied on a “look through” basis to each of John Laing plc’s individual PFI projects or to assets which are not PFI projects or to the investment in John Laing plc itself?”

Both parties agreed, on their primary cases on construction, that the “look through” proviso in the last subparagraph of paragraph 1 of Schedule I to the RPA, referred only to individual PFI projects and not to non PFI assets. The difference between the parties related to subparagraph (b) and whether this referred to Bridging Investments which were in PFI projects only or to investments in non PFI assets. The point at issue is that subparagraph (b) sets an investment limit of 30% of the Total Commitment (unless prior Advisory Committee consent is obtained) in any single Portfolio Company and its associates and specifically provides for Bridging Investments to be included for the purposes of calculating that percentage.

The definition of Bridging Investments includes excess PFI projects and non PFI assets purchased as part of a Multiple Investment Transaction, as referred to earlier in this judgment. The Laing acquisition was a Multiple Investment Transaction.

Laing plc is a Portfolio Company in which some 92.5% of the Total Commitment was invested by the Fund. It is agreed that Laing plc had more than one PFI project within the meaning of the “look through” proviso and a large number of Bridging Investments in non PFI assets. (The defendants say that it had 48 PFI projects).

The claimants say that all Laing plc’s Bridging Investments must be included in the assessment to be made under subparagraph (b) of the Schedule and that the investment in Laing plc therefore exceeded the 30% limit. The defendants maintain that the effect of the “look through” proviso is that the relevant examination is simply to see whether there is an excess of 30% invested in any one of the PFI projects in the Laing Group.

The claimants say that the proviso cannot operate in that way, because subparagraph (b) requires all Bridging Investments to be taken into account, including all the non PFI assets. The “look through” proviso, by contrast only refers to PFI projects, so it does not help when considering the 30% limit on investment in any one Portfolio Company, with Bridging Investments included in the calculation. There are therefore, in their submission, two possibilities. Either Laing plc must be considered without reference to the proviso, so that the 30% limit is breached by reference to all the PFI projects and non PFI projects that it directly owns. Alternatively, if contrary to that submission, the “look through” proviso is applied, then the 30% limit can be applied to each of the PFI projects it indirectly owns, but the total of the non PFI elements held directly or indirectly by Laing plc falls to be taken into account in assessing whether there is a breach. Either way, it is said, the limit is breached. (The Pension Deficit, on its own, is said to represent almost 30% of the Total Commitment by the Fund)..

If it were otherwise, say the claimants, there would be no concentration limit which would include Bridging Investments as required by subparagraph (b), save where the PFI project and the Bridging Investment were held by the same company. This, it is said, would make no commercial sense because it would mean that there was no limit on Bridging Investments which were not held directly together with PFI projects. Further, it makes no sense to limit the concentration of investment in PFI projects in construction (subparagraph (c) (i)) and in non-governmental PFI- type projects (subparagraph (c) (ii)) yet not to impose any limit on bridging investments.

On the claimants’ construction, however, the “look through” proviso does not truly work in accordance with its terms. The first alternative involves looking at the total investment in the Portfolio Company (Laing plc), which the proviso forbids. The second alternative involves looking at PFI assets held directly but non PFI assets held indirectly, for which the paragraph and the proviso make no provision.

There are limits to Bridging Investments as I have already held. They are temporary investments only as the definition shows, and where they consist of non-PFI assets they can only be acquired as part of a Multiple Investment Transaction and subject to the intention to dispose of them within the Commitment Period with an obligation on the part of the Manager to use reasonable endeavours to do so. The restriction on Bridging Investments is to be found in Schedule 2 of the RPA and the definition itself.

The key to the construction of paragraph 1 of Schedule 1 to the RPA is to examine the proviso and to see how the paragraph works with and without it.

It is common ground that the proviso only enables one to look at PFI projects. The contrary is unarguable because the proviso only operates with a Portfolio Company with more than one PFI project. The tests in paragraph 1(a), (b) and (c) are then to be applied “on a look through basis, looking at each individual project”, which can only mean such a PFI project. The proviso goes on specifically to state that “the investment in the Portfolio Company” in such circumstances is to be ignored. There can therefore be no possibility of looking at any Bridging Investment which was not part of that PFI project in making the assessment of the percentage of the Total Commitment, when looking at that Portfolio Company with more than one PFI project.

That demonstrates the rationale which underlies paragraph 1 of the Schedule as a whole. What the draftsman had in mind, as the proviso shows, was the avoidance of concentration of investment in any single PFI asset. The paragraph is not aimed at the classes of assets in which investment can be made (save for (paragraph 1(d) which refers to speculative investments) nor aimed at the totality of investments made by the Manager. In the case of a Portfolio Company with more than one PFI project, the 30% limit set out in clause 1(b) was to apply to each project, not to the company, regardless of any Bridging Investments belonging to that company, which were not PFI assets. Similarly, when regard is had to the Portfolio Company with one PFI project only, Bridging Investments which are not PFI assets do not form part of the calculation. The reference to Bridging Investments in paragraph 1 (b) can only be to Bridging Investments in the PFI project.

The proviso applies to each of the tests in subparagraphs (a) to (c). Thus those subparagraphs must refer to the position where a single company has only one PFI project, since the proviso caters for the position where there is more than one. The paragraph as a whole is concerned with diversification and the avoidance of the concentration of investment in too narrow a range of PFI assets.

Thus subparagraph 1(a) prohibits investment of more than £30m of the Total Commitment (excluding any Bridging Investment) in the securities of any one single Portfolio Company and its associates with one such project. In such a company it is necessary to separate out PFI assets which are to be kept and those which are not to be retained (excess PFI assets which constitute Bridging Investments). The limit is then to be applied. Subparagraph 1(b) then sets a different limit by reference to the percentage of the Total Commitment, rather than a monetary limit as such, again for a company with a single PFI project, where the Bridging Investment is included. The investment in a single Portfolio Company that has one PFI project must therefore comply with two different concentration tests; first the investment in the Portfolio Company (and the PFI project it owns), which is to be retained by the Fund (i.e. excluding Bridging Investments in excess PFI which is not to be kept) must not exceed £30m (subparagraph (a)); secondly, the amount of the total investment in the Portfolio Company (and its PFI project), including the part to be retained and the excess to be sold- the Bridging Investment) must not be in excess of the 30% limit by reference to Total Commitments (subparagraph (b)). The effect is to ensure diversity in PFI assets, both in the long term (with excess PFI investments excluded from the £30m limit) and in the short term (with excess PFI assets included in the 30% limit).

Subparagraphs 1(c) (i) and (ii) prohibit investment of more than 20% in the securities of any Portfolio Company where the “underlying project” is in the construction phase or is a non- governmental project. The focus is thus on the PFI asset in which the Partnership is investing, and not on any non PFI assets.

The proviso itself, with its clear reference to PFI projects only, throws light on the terminology used earlier in the paragraph. This paragraph is not concerned with non PFI assets at all, the restrictions on which appear elsewhere, as I have already held, but with PFI assets alone. Paragraph 1(b) is consequently not aimed at limiting the total amount of Bridging Investments made by the Fund in all projects, but is aimed at capping the combined amounts of PFI permanent and Bridging investments in each project.

Whilst there are always dangers in saying that the draftsman could, if he had wanted to provide for a percentage limit on non PFI assets as well as PFI assets as compared with the Total Commitment across the board, have done so with a provision saying exactly that, it is the fact here that it could readily have been done and that, if this paragraph were intended to achieve that result, it is opaque in the extreme. If however the paragraph is read as dealing with PFI assets alone and the reference to Bridging Investments is read as meaning PFI assets excess to requirements, the paragraph fits together and makes commercial sense. The defendants’ construction, is in my view correct.

The answer to Issue 5 is that the proviso does not require the tests in the subparagraphs of paragraph 1 of Schedule 1 of the RPA to be applied to assets which are not PFI projects, nor to the investment in Laing itself- but only to each of the PFI projects.

Issue 8

“8.

Was the Acquisition Debt a borrowing within clause 5(3) (g) of the RPA?”

The acquisition debt is the sum of £220m made available by a credit facility from West LB to HIH, the company in which Fund 1 and Fund 2 invested and which, with those funds and the West LB loan (plus minor co-investments) then acquired Laing plc. It is not therefore a loan to the Fund as such.

Clause 5.3(g) of the RPA (and as incorporated into the Management Deed) gives the Manager “full power and authority, on behalf of the Partnership and so as to bind the Partnership thereby…to borrow money (either directly or through an Investment Holding Company) on a short term basis…provided that the aggregate of borrowings…shall not at any time exceed 30% of Total Commitments.” The claimants submit that the loan to HIH is a loan to the Fund through an Investment Holding Company. The defendants say that it is not.

By clause 9 of the Bid Conduct and Co-Investment Agreement, the Manager purported to agree, on behalf of both Fund I and Fund II, that £49.5 million of the term loan would be allocated to Fund I and £170.5 million to Fund II. Allocation in this context meant that the cost of the loan would be deducted from revenue which would otherwise flow to the relevant fund. It is the claimants’ case that, in fact, 100% of the cost of funding the loan was allocated to the Partnership.

An “Investment Holding Company” is defined to mean a company wholly or partly owned or acquired by the Partnership for the purpose of carrying out the investment.

The claimants submit that HIH is an Investment Holding Company and that the Term Credit Facility is indirect borrowing through HIH. The fact that the clause expressly contemplates indirect borrowing through a wholly or partly owned subsidiary can only mean that it contemplated that the borrowing limits would be engaged even where the Partnership was not itself the borrower, but the subsidiary was. This is, it is maintained, the only reading of the clause which makes literal sense and it is the only reading which makes commercial sense. Where the borrowing is indirect, it makes no difference how precisely it is funded if and to the extent that the cost of funding it falls ultimately on the Partnership.

The claimants refer, in this connection to clause 9.2 of the Bid Conduct and Co- Investment Agreement which states that Funds I and II have “agreed between themselves a notional allocation of the facility … and a priority for repayment of the respective notional allocations”. Clause 9.1 however provides for an acknowledgment on the part of each Fund that the borrowing will be made as part of the financing of the acquisition, and that “such borrowing is made without recourse to any undrawn capital contributions of any investor in the Funds or any other investment or assets of the Funds.” Each also acknowledged by the terms of the agreement that the terms of the facility would prevent any distributions or repayment of subordinated borrowings prior to full repayment or satisfaction of the facility. The returns to the Fund were therefore affected by the existence of the loan.

The claimants say that in consequence, if the effect of the allocation is that the cost of the borrowing is deducted from the monies flowing to the Fund from HIH, the Partnership must be treated as liable for the loan.

This does not follow, however. Clause 5.3(g) applies to borrowings on behalf of the Partnership, which bind the Partnership, albeit this includes loans made either directly or through an Investment Holding Company. The Partnership has however not borrowed any money, through HIH, or otherwise. It has invested in a company that has borrowed money but it is not liable on the borrowing (whether as a primary debtor or guarantor) and is not liable to indemnify the borrowing company on the loan. An indirect borrowing by the Partnership would be one where HIH borrowed and the Partnership was liable for that borrowing, either to the original lender or to HIH. That is not the position. There is no recourse to the assets of the Fund in respect of the borrowing, so that the Partnership, and the General Partner are not committed to any borrowing at all.

If one of the PFI companies in which the Fund invested obtained a loan from the Bank, the position would be comparable. The returns to the Fund would be affected by that loan, but there would be no liability in respect of the borrowing itself and the borrowing limits provided by Clause 5.3(g) could not apply. So also here.

The claimants submit that the purpose of the restriction was to protect the return on the investment of the Partnership and its impairment by excessive debt. The overall debt/equity ratio could be hugely adverse if there was no such restriction. The effect of the clause is, however, clear. It refers to borrowings and liabilities of the Partnership, whether direct or indirect and not to anything else. Its purpose must be confined to that. Any restrictions on investments and the borrowings of the companies in which investments are made, would be found elsewhere, if at all, not in the limits on the Manager’s borrowing powers on behalf of the Fund.

The answer to the question posed by Issue 8 is “No”.

Would it make any difference to the outcome of the preliminary issues of construction referred to above if any or all investors knew or suspected in advance of the transaction being announced that the investment opportunity was John Laing plc?”

As I have found in favour of the defendants on the issues of construction which relate to the allegation of unauthorised investment in Laing, on the footing that none of the Limited Partners knew that Laing was the target, this issue does not arise. Any knowledge or constructive knowledge on the part of the Limited Partners, could only serve to strengthen, rather than weaken the arguments in favour of the General Partner and Manager, but I need not decide whether they do have that effect.

Clause 5.3(y) of the RPA provides:

“The Manager shall have full power and authority on behalf of the Partnership and so as to bind the Partnership thereby:

…….

(y)

to do all or any other acts as are required of the Managers by this Agreement or as are necessary or desirable in the reasonable opinion of the Manager in furtherance of the foregoing powers and consistent with the terms of this Agreement ”.

The defendants point to a line of authorities in the corporate context which demonstrate the effectiveness of a power of this kind. I need only refer to two.

The first is Bell Houses Ltd v City Wall Properties [1966] 2 QB 656 where Danckwerts LJ gave the leading judgment, with which the other Lords Justices agreed. There the objects clause in the Memorandum of Association included a sub-clause stating that one of the objects of the company was “to carry on any other trade or business whatsoever which can, in the opinion of the board of directors, be advantageously carried on by the company in connection with or as ancillary to any of the above businesses or the general business of the company”. The Lord Justice concluded that the result of earlier authorities was that a clause of this type was sufficient to make the bona fide opinion of the directors sufficient to decide whether an activity of the company was intra vires.

A later example appears in Den Norske v The Sarawak Economic Development Corporation [1988] 2 Lloyd’s Rep 616 where at page 620, Phillips J, as he then was, applied the rationale of Bell Houses to a Malaysian public corporation which had been incorporated by statute. There the provision in Section 15 of an Ordinance empowered the corporation to “carry on all activities the carrying on whereof appears to the corporation to be requisite, advantageous or convenient for or in connection with the discharge of its duties”. Although obiter, the Judge stated that this section defined the powers of the corporation by reference to a subjective test, which was perfectly legitimate in that context.

The claimants maintain that clause 5.3(y) cannot extend the powers of the Manager to acts which are not “in furtherance of the foregoing powers and consistent with the terms of this Agreement”. If the Manager has acted outside their authority, then this sub-clause cannot avail them. This submission, however, cannot stand in the light of the wording of the sub-clause and the authorities. What clause 5.3(y) does is to make the reasonable opinion of the Manager the touchstone for its powers under this sub-clause. If the Manager reasonably takes the view that the activities on which they embark are necessary or desirable in furtherance of the powers given to them and set out earlier in the clause, and are consistent with the terms of the Agreement, what they then do is authorised. Authority is given to them on the basis of their reasonable opinion that this is the case.

This sub-clause does not, unlike the Bell Houses or Den Norske clauses, make the subjective view of the Manager determinative. Their view must be a reasonable one, so that their powers are not extended beyond the ambit of what they could reasonably conclude was in furtherance of the earlier express powers and was consistent with the RPA, but the effect is that, in grey areas, where there is room for a reasonable difference of view, the benefit of any doubt is given to the Manager.

What this means in the context of the disputes in this action, is that, even if, contrary to my judgment, the investments or borrowings made by the Manager were truly, on a correct view of the RPA and Management Deed, outwith the express powers of investment or borrowing bestowed on them or prevented by the express limitations and restrictions set out in the Schedules to which I have referred, if the Manager reasonably believed that they were within those powers, their authority was extended to include the activities in question. It necessarily follows, in my judgment, that if I should be wrong in my earlier conclusion on those express powers, limitations and restrictions, it would have been reasonable for the Manager to conclude, as I have, that they were acting within their powers and not contrary to the RPA.

If the answers to any of the issues in paragraphs 4,6 or 8 above is “yes” or the answer to the issues in paragraphs 5 or 7 is “no”, are the General Partner and the Manager entitled to the benefit of the exculpation in clause 18.1 of the RPA and/or the indemnity in clause 18.2 of the RPA (subject to any arguments that the Claimants raise in respect of fraud, wilful misconduct, bad faith reckless disregard or negligence on the part of the General Partner and the Manager or, in the case of the Manager only, in respect of the breach of any duty it may have, or any liability it may incur, to the Partnership or any Investor under the Regulatory System (as defined in the FSA rules) applicable to it under the FSMA)?”

The questions as phrased in this Issue no longer conform to the agreed format of the earlier Issues 5 and 7, but distinct issues arise under clause 18 of the RPA, because of the different terms of the two sub-clauses, it being recognised that clause 18.2 which provides for an indemnity is wider in its terms than the exculpation provision in clause 18.1. The Manager and General Partner are “Indemnified Persons” within the meaning of the RPA.

Clause 18.1 provides as follows:

“None of the Indemnified Persons shall have any liability for any loss to the Partnership or the Partners arising in connection with the services to be performed hereunder or pursuant hereto, or under or pursuant to any management agreement or other agreement relating to the Partnership ...or which otherwise arise in relation to the operation, business or activities of the Partnership save in respect of any matter resulting from such Indemnified Person’s fraud, wilful misconduct, bad faith or reckless disregard for their obligations and duties in relation to the Partnership or ... their negligence (provided that such negligence has had a material adverse economic effect on the Partners or the Partnership)...”

Clause 18.2 provides:

“The Partnership agrees to indemnify and hold harmless out of Partnership Assets the Indemnified Persons against any and all liabilities, actions, proceedings, claims, costs, demands, damages and expenses (including legal fees) incurred or threatened arising out of or in connection with or relating to or resulting from the Indemnified Person being or having acted as a general partner or manager in respect of the Partnership or arising in respect of or in connection with any matter or other circumstance relating to or resulting from the exercise of its powers a general partner or manager or from the provision of services to or in respect of the Partnership ....or which otherwise arise in relation to the operation, business or activities of the Partnership provided however that any Indemnified Person shall not be so indemnified with respect to any matter result from the fraud, wilful misconduct, bad faith or reckless disregard of their obligations and duties in relation to the Partnership or ... their negligence (provided that such negligence has had a material adverse economic effect on the Partners or the Partnership)... ”

The issues in relation to these provisions arise if I am wrong on the earlier issues and the Manager or General Partner would be, without reference to this clause, liable for investing or borrowing outside the scope of the RPA, or if the Manager or General Partner is liable in respect of the allocation of business, a matter which did not form part of the Preliminary Issues.

The claimants contend that, however widely clause 18 is drawn, it cannot apply to relieve the Manager or General Partner of liability for exceeding the authority given to them by the RPA and the Management Deed. The latter, by clause 5.1 expressly incorporates clause 18 of the RPA. They say moreover that the clause 18 is to be construed strictly as an exemption clause and contra proferentem, because it was produced by the Manager/General Partner.

Clause 18.1 of the RPA provides that the Indemnified Persons shall not have any liability for any loss “arising in connection with the services to be performed hereunder or pursuant hereto or under or pursuant to any management agreement… or which otherwise arise in relation to the operation, business or activities of the Partnership”, in the absence of fault of the type referred to in the clause (which at the time of the hearing was not pleaded, although an amendment was made to plead negligence whilst this judgment was in the course of preparation).

The claimants say that this wording is not apt to cover the making of investments or borrowings outside the scope of authority given. They submit that the commitment of funds to the General Partner by the Limited Partners and the delegation of responsibility to the Manager to manage the investments of the Partnership was solely on the basis of the authority granted to them and the obligations of both the General Partner and the Manager to observe the limits of that authority are expressed in absolute terms in the RPA and the Management Deed.

Thus, the final sentence of clause 1.2 of the Partnership Agreement provides:

“The Partnership (acting through the General Partner or persons authorised on behalf of the Partnership pursuant to this Agreement) may execute, deliver and perform all contracts and other obligations and engage in all activities and transactions as may in the opinion of the Manager be necessary or advisable in order to carry out the foregoing purposes and objectives, subject to and in accordance with the provisions of this Agreement and the Investment Policy.”

Likewise, clause 6.1 of the Partnership Agreement provide:

“The Partnership will comply with the investment restrictions and investment procedures set out in Schedule One.”

Equally clause 5.3 (g) provides that any borrowing "shall not at any time exceed 30% of Total Commitments;"

The Manager’s position is no different as:

The claimants submit that these provisions mark the limits of the General Partner’s and Manager’s authority. As the obligations are expressed in absolute terms, they are obliged – strictly – to act only within those limits. But within those limits they will be protected from liability if they perform their duties to a non-negligent standard. By the exculpatory provision, the Limited Partners therefore bear the risk that the General Partner and Manager will innocently breach their duties in the course of performing what they were authorised to do, but not the risk that they would invest the funds in an investment which they were not authorised to make at all. Put differently, there is no scope for the exculpatory provision to apply so as effectively to extend the authority granted, nor to water down the obligations so as to constitute only obligations to take reasonable care to comply with the Partnership’s mandate.

Losses flowing from an act outside the mandate are not, on this submission losses arising in connection with the services to be performed under the RPA or Management Deed or pursuant thereto. Such losses are the antithesis of such losses because they stem from acts performed outside the authority bestowed by those agreements. Nor do such losses otherwise arise in relation to the “operation, business or activities of the Partnership” because that phrase means the authorised operation, business or activities of the Partnership.

At worst, the claimants say, if there is any ambiguity or lack of clarity in clause 18.1 it must be construed against the General Partner and Manager so as not to embrace a breach of mandate.

As to this latter approach, it is true to say that the agreements were produced by the Manager. There was however some scope for negotiating variations in the form of side letters, as provided for in clause 6.6 of the RPA, in the Most Favoured Nations clause. The parties were of equivalent bargaining powers and were sophisticated commercial entities well able to take advice and to consider the effect of the provisions of the agreements put forward for them to consider as the basis of investment and evaluate the risks undertaken.

It is clear that the underlying intention of the two sub-clauses of clause 18 is to cover claims by the Limited Partners in the first sub-clause and claims by third parties in the second. The wording of the latter is however also wide enough to cover claims made by the Limited Partners, but to do so would make a nonsense of the structure of the clause. Of course it is possible that if claims are made by the Limited Partners against the General Partner or Manager, so that clause 18.1 applies, those defendants might incur solicitor and client costs in defending such claims, which might not be recoverable as party and party costs in litigation, so that an indemnity could operate in the same circumstances as the exculpation, with any difference in meaning between the two sub- clauses theoretically coming into play. As however, this could only occur if the defence under clause 18.1 was successful, any difference in wording, as clause 18.2 is thought to be wider in its effect, is of no real importance. I conclude that it is clause 18.1 which is triggered by a claim by the Limited Partners against the General Partner or the Manager and clause 18.2 which covers claims by third parties against them, because it would not make sense to have two clauses which covered the same ground and for circularity of action to be created by an unsuccessful defence under clause 18.1 and a reimbursement of liabilities paid to the Limited Partners under clause 18.2. In the event, it makes no difference which sub- clause applies here.

The structure of clause 18.1 is to relieve the Indemnified Persons from liability for Partnership losses of the kinds specified, where the Indemnified Persona have not been guilty of negligence or more culpable behaviour. This is not a provision which excludes negligence where special rules of construction can apply (see HIH Casualty and General Insurance v Chase Manhattan Bank [2003] 2 Lloyd’s Rep 61 (HL)). Here all liability of the specified kinds is expressly included, as long as it is not negligent or worse. The clear intention is to provide protection to the Indemnified Persons in errors of judgment and management, where the paradigm examples are almost certain to be in decisions about investment of the Fund, which give rise to contractual liability.

Such decisions must arise “in connection with the services to be performed” under the RPA or the Management Deed or “which otherwise arise in relation to the operation, business or activities of the Partnership”. When this phraseology is read in conjunction with the terms of clause 5.3 (a) (b) (g) and (y) of the RPA, it leaves no room for doubt that mis-judgments in relation to investments, and what are reasonably seen to be legitimate investments by the Manager, are covered by the exculpatory clause.

Further, the wording of clause 18.1 is drafted widely to allocate risk in respect of breaches of contractual duty of all kinds. There is nothing in the wording which suggests it should not apply to breaches of Schedules 1 and 2 of the RPA or Schedule 2 of the Management Deed. The ordinary and natural meaning of the words requires that they should apply to such breaches, unless there is negligence or other culpable conduct of the kinds mentioned. There is no mention of breaches of authority as a separate category of contractual breach. The loss of which complaint is made in the Amended Particulars of Claim are losses “arising in connection with the services to be performed” under the RPA or the Management Deed and the losses arose “in relation to the operation, business or activities of the Partnership”, whether or not they were truly authorised under the terms of the RPA . The losses covered by the clause are not losses resulting from authorised services performed under the RPA or Management Deed but losses which arise in connection with the services to be performed, which is a wider category of excused loss, ruled out only in the event of negligence or worse. Similarly the losses covered by the clause are not losses resulting from the authorised operation, business or activities of the Partnership, but losses in relation to such operation, business or activity, once again excused unless there is negligence or other specified culpable misconduct on the part of the Indemnified Person.

If Clause 18.2 applies, there can be no doubt that the wider wording is apt to require an indemnity from the Limited Partners to the Indemnified Persons in respect of liabilities “arising out of or in connection with circumstances relating to or resulting from the provision of services to, or in respect of, the Partnership, whether the investment, borrowing or allocation of funds was authorised or not. Much the same reasoning applies as for Clause 18.1, with less room for argument that the indemnity only operates for authorised activity by the Indemnified Person.

The answer to the question whether clause 18 is apt to relieve the General Partner or Manager, in the event of a breach by them of the RPA or Management Deed (and in particular a breach of Schedules 1 or 2 of the former or Schedule 2 of the latter), by exceeding the authorised investment or borrowing powers as alleged in the Amended Particulars of Claim, is Yes.

If the answer to question 10 is “yes” in respect of the indemnity, are the General Partner and the Manager entitled to the benefit of the indemnity in clause 18.2 of the RPA with retrospective effect and in priority to any indemnity that the claimants might be awarded pursuant to paragraph 1(c) of the Order of Mr Justice Teare dated 27 January 2012.”

There was no argument about this Issue in fact, as the defendants accepted that there was no order of priorities which governed the operation of any indemnities, whether under clause 18 or any the court might order.

For the reasons given, I answer the Preliminary questions in the manner set out above.

Questions of costs in relation to the Preliminary Issues remain to be determined. Subject to submissions which the parties wish to make, my initial view is that, should the claimants decide not to pursue the derivative claim, they should pay all the costs of determining all the Preliminary Issues. Should they decide to pursue that derivative claim, different considerations arise, as mentioned in paragraph 79 above. However the arguments deployed before me were arguments in principle and whilst there could be some deduction from the costs that they would otherwise be bound to pay to the defendants in respect of all the other issues upon which they lost, or some reservation until the final outcome of any litigation on such claims, since they had indicated that they would not pursue such claims in the absence of one of the declarations, it is hard to see why they should not bear all the costs. Such matters can be the subject of submission on the formal handing down of this judgment, which I anticipate will be effected on Friday 15th November 2012.