Weavering back again!
In last's month's newsletter, we wrote that the former Weavering Capital (UK) Limited founder and hedge fund manager convicted of fraud, Ulf Magnus Michael Peterson, was sentenced to 13 years imprisonment on 23 January 2015. We noted that this had followed a judgment in 2011 against the former directors of the Weavering Macro Fixed Income Fund for their wilful negligence while holding the position of director.
It now seems that Mr. Peterson's sentence was not the end of this saga as the former directors, Stefan Peterson and Hans Ekstrom, had their appeals against the judgment upheld by the Cayman Islands Court of Appeal on 12th February 2015.
The successful appeal raises two interesting points:
1. Was the considerable attention attracted by the earlier Grand Court judgment justified?
2. How far can exculpatory provisions go in protecting negligent directors?
The earlier judgment in 2011 was a clear statement that the long established provisions on director's duties applied to the directors of Cayman Island Funds. A lot of the directors duties discussed appear in some shape or form throughout innumerable legislative provisions and statements of common law duties across the globe. They certainly remain relevant and we highlighted their continued and heightened relevance in the Irish context given the newly enacted Companies Act 2014. It is simply unusual that we would see such a clear and detailed judicial pronouncement on these duties and somewhat especially from the Cayman Islands. Why the reversal in the decision? It seems that this comes down to difference of opinion in the application of the relevant law. The Grand Court was happy it had sufficient evidence before it to determine there was wilful negligence, the Appeal court was not. Where the line is drawn isn't entirely clear but this leads on to the second point and a point which is almost unique to the Cayman Islands.
In Weavering, the Funds' Articles, unlike the position in Ireland, England, and some other offshore jurisdictions, contained clauses which operate to relieve directors of liability for their actions. These are called exculpatory clauses and such are permissible in the Cayman Islands. Most of these types of clauses limit that protection to "carve out" liability attributable to the directors' fraud, wilful neglect or default. Weavering's directors sought to rely upon this clause to avoid liability. At first instance, the Grand Court had concluded that, because the directors knew that they had a duty of supervision but consciously chose not to perform it any meaningful way, they were guilty of wilful neglect or default. It observed that they would have been protected had they failed to perform their duties as a result of their carelessness, no matter how gross; in other words that even if they had merely done their "incompetent best" . The Court of Appeal however disagreed and found that there was not enough evidence to show their action or indeed inaction amounted to wilful negligence and as such they were entitled to rely on the clause.
This case hopefully stands as an exception rather than the rule and in fact, many of the points raised in the Grand Court judgment relating to directors' duties were subsequently given regulatory force by the Cayman Islands Monetary Authority in its Statement of Guidance for Regulated Mutual Funds issued in December 2013. The steps which the Grand Court considered that the directors should have taken to discharge their legal duties should still be regarded as the minimum required performance by fund directors of their duties: good governance and practice will often require a director to do more than this. Just be careful to check your fund's Articles closely if doing business in the Cayman Islands!