Summary

In a liquidation, special limited partners were not entitled to claim a bonus based on a sale of the assets where there had been no sale and they had been distributed in specie to the principal partner that had initially contributed them.

Facts

Two special limited partners appealed against a decision that they were not entitled to specific bonuses on liquidation of a partnership.

A British Virgin Islands limited partnership had four partners, the principal partner was a company, whose ultimate beneficial owners were, until their deaths, Boris Berezovsky and his Georgian business associate, Arkady Patarkatsishvili. The other three partners were a fund management company and two special limited partners, which represented the interests of the management team. The only assets of the partnership were contributed by the principal partner in the sum of $320 million. Those assets consisted of ordinary shares in various companies carrying on business in the Balkans and in the former Commonwealth of Independent States. The principal purpose of the partnership was to sell the assets for the maximum return, in pursuit of which it was necessary to conceal their connection to Berezovsky and Patarkatsishvili. In order to encourage sales, the special limited partners were entitled to a bonus on a sale, referred to in the articles as "Carried Interest" which could reach 30 per cent. However, at the end of the partnership term, the assets remained unsold and the joint liquidators brought proceedings to determine their distribution. The liquidators were neutral and the real issue was whether the two special limited partners were entitled to their bonus. The Court of Appeal, overruling the trial judge, held that they were not.

The special limited partners relied in support of their case on cl.7.3.8 of the partnership articles, which they argued constituted a general definition under which a distribution in specie counted as a sale.

Held

(Lord Mance dissenting) The special limited partners were only entitled to a bonus if there was a sale. The word "sale" had the well understood meaning of "a transfer of property to another party for a money consideration". It could not extend to a distribution to the principal limited partner in specie for three reasons. Firstly, because throughout the articles, other modes of disposal such as "distribution" or "exchange" were referred to when they were intended, but those clauses dealing with distribution of the bonus referred only to a "sale". Secondly, a number of clauses treated the terms "sale" and "distribution" as alternatives, notably cl.11.5.4. Thirdly, a sale could not sensibly refer to a distribution in specie to the principal partner in the course of a liquidation. With regard to cl.7.3.8, it actually had a more limited effect, only treating a distribution in specie as a sale for the purpose of valuing the assets for capital gains and losses and proceeds. It did not create any entitlement to a bonus based on those values (see paras 13-14 of judgment).

Appeal dismissed