By Tim Bull and Lisa Jonesi
On 26 August 2011, the Grand Court of the Cayman Islands found that directors Stefan Peterson and Hans Ekstrom of Weavering Macro Fixed Income Fund (the “Fund”) were guilty of wilful neglect in the discharge of their duties. This is an important case for insurers of investment fund administrators, corporate trustees, corporate service providers and D&O insurers generally.
The claim was brought by the Fund’s liquidators, PricewaterhouseCoopers. The judgment is the first time the Grand Court has found two directors of a failed investment fund to be guilty of such an offence.
The Fund collapsed in 2009 after it was unable to meet redemptions. At the point of collapse the Fund’s only asset was a $637m swap agreement with a Weavering controlled company.
In his judgment, Justice Jones QC found that the directors, from the setting up of the Fund through to its collapse, “consistently signed [documents] without making any enquiry whatsoever.” In 2007, they signed sham investment management and advisory agreements without either reading them or knowing that the agreements would never be acted upon. In addition, following the collapse of Lehman Brothers, they produced false board minutes stating that they had reviewed the Q3 2008 Quarterly Report.
The judge was critical of the fact the directors completely relied on their legal advisers, with no analysis of the advice they received. In his judgement, the judge commented: “whilst the involvement of reliable and experienced lawyers is obviously helpful … it is important to understand that a lawyer’s duty to their client is quite different to that of the director’s duty to the company.” Further, the judge stated in this instance: “It is clear that Mr Ekstrom and Mr Peterson never made any attempt to understand exactly how each of the professional service providers intended to perform their respective duties.”
The directors benefited from an indemnity under the Fund’s constitution which covered all losses, apart from those caused by the directors’ wilful neglect or default and, in this case, the judge had no hesitation in finding that the directors’ inactivity amounted to wilful neglect.
This case is important for insurers as it clarifies the onerous duties and obligations of directors and, in particular, “outside directors” (usually placed on the board of funds by the administrators, trustees or corporate service providers). When the fund or asset collapses, the directors are in the firing line of the liquidators and/or investors. This case demonstrates that it is no defence for an outside director to say that they are merely an “arms-length” director and, therefore, have less onerous duties than full time directors. The judgment is clear that the duties of all directors are the same. Outside directors can still take a less active role in the management of the fund than full directors but they must ensure they still meet the minimum requirements of their role by reviewing documents, attending board meetings and considering the advice of their advisers. Failure to fulfil their role could, in more extreme cases, of “sitting idly by” be taken as wilful default or gross negligence and be deemed sufficient to remove the protection of any indemnity or exoneration clause.
Insurers should seek to ascertain at the proposal stage the level of interest senior employees in the proposing company have in outside directorships by requiring details of their involvement in the day to day running and supervision of the company on whose board they sit and whether there are any checks in place to ensure the directors are carrying out their roles diligently. It is notable that this judgment probably reflects the likely approach of the courts in similar offshore jurisdictions.
i RPC (Reynolds Porter Chamberlain LLP)