Limited partner in investment fund succeeds in action demanding true accounting of entitlements due to him

Lord Ericht
Lord Ericht

A limited partner in a Scottish investment fund has succeeded in the first stage of an action of count, reckoning and payment against the partnership and its general partners before the Outer House of the Court of Session.

Johann Herberstein believed that the value of his interest in the partnership had been undervalued and sought to ascertain the true balance of allocations and distributions due to him, or alternatively a payment of over 2.7 million euros. The defenders, all part of the TDR Capital group, sought to have the action dismissed.

The case was heard by Lord Ericht. The pursuer was represented by Lindsay QC and the defenders by Thomson QC.

True accounts

The pursuer and the second to fourth defenders first entered into a Limited Partnership Agreement in June 2006. As a limited partner the pursuer was incapable of taking part in the operation of the partnership in terms of the agreement and section 6 of the Limited Partnerships Act 1907 but had the right to inspect its books and accounts.

It was the position of the pursuer that the defenders had obligations to him under the 1907 Act and section 28 of the Partnership Act 1890, under which partners were bound to render true accounts of all things affected the partnership to any partner, in addition to the LPA.

Counsel for the defenders submitted that the action should be dismissed for want of relevant averments concerning the nature and scope of the obligation to account. Their position was that the pursuer’s right to inspect the accounts of the partnership was contained wholly within Clause 7 of the LPA, which obliged the manager of the partnership to make copies of the audited accounts available to each limited partner who requested a copy. The arguments concerning the 1907 Act and the Partnership Act 1890 were therefore irrelevant.

It was further submitted that the real dispute between the parties was as to what documents and information properly fell within the scope of the obligation to account, and the pursuer was requiring the defenders to create documents which did not otherwise exist in order to satisfy his wish to be placed in a position to question and interrogate the investment strategy.

Counsel for the pursuer submitted that the defences presented proceeded on a legally erroneous basis. It was not possible for a limited partnership agreement to contract out of section 6 of the 1907 Act or section 28 of the 1890 Act. Further, the question of motive or purpose was irrelevant to the exercise of a statutory right of access to the partnership books and a right to an accounting.

Accuracy and honesty

In his decision, Lord Ericht noted of the partnership generally: “Although the partnership in question in this case is a fund, it does not fall within the special statutory regime for private fund limited partnerships as it has not been designated as such in terms of the 1907 Act. The general law of Scottish limited partnerships applies, including the Scots common law which has been preserved by section 46 of the 1890 Act and section 7 of the 1907 Act.”

He continued: “In support of his submission that the action should be dismissed, senior counsel for the defenders advanced an argument that otherwise the very purpose of using limited partnerships (especially Scottish limited partnerships) as the vehicle for investment funds would be put at risk. I find that argument unpersuasive. In structuring a fund, there can be advantages in choosing to use a Scottish limited partnership vehicle because under Scots law, unlike English law, partnerships have separate legal personality.”

On whether the defenders had successfully contracted out of their duty to account to the pursuer, Lord Ericht said: “In my opinion the contractual wording in the LPA does not have that effect. These clauses regulate the administrative accounting procedures of the partnership and the mechanics of producing partnership accounts and making them available to the partners. The wording of clause 7.2 merely provides for the preparation and auditing of partnership accounts and for partnership accounts to be available to a limited partner on request.”

He concluded: “A partner has an interest in the accuracy and honesty of his partners’ intromissions with partnership funds. The real question in this action is not whether partnership accounts and his individual partner accounts were prepared and made available to the pursuer, but what sum (if any) the defenders justly owe to the pursuer. Accordingly I shall allow this action to proceed to the second stage.”

For these reasons, Lord Ericht ordered the defenders to intimate an accounting of the partnership to the court within 2 weeks.

He also noted: “I reserve my opinion on whether it is ever competent to contract out of section28or the common law obligation to account, as that issue does not arise on the wording of this particular partnership agreement.”

© Scottish Legal News Ltd 2021

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