The Cayman Islands Court of Appeal has reversed an earlier court decision that had ruled in 2011 that the directors of the Weavering Macro Fixed Income Fund were personally liable to pay $111 million to the liquidators of the fund because of their wilful neglect.
The nub of the case rested on the definition of wilful neglect, according to a legal note by Solomon Harris. The appeal considered whether the directors' conduct could be classed as 'wilful neglect or default', which would leave them personally liable for the $111 million award of damages.
The key issue was whether the contractual limitation and indemnity clauses in the directors' contracts would cover them, regardless of the negligent conduct of their duties. While the Grand Court judge in 2011 found that the directors had caused the loss through their 'wilful neglect or default', the Court of Appeal (CICA) took a different view.
Solomon Harris explained that the CICA came to the conclusion that for neglect or default to be wilful there needs to be a conscious decision on the part of a director not to perform their duties to the standard they knew was expected of them. Carrying out duties in a negligent way was not enough to make the neglect or default 'wilful'- no matter how badly the duties were carried out.
The CICA concluded that there was not enough evidence to show 'wilful' neglect or default and allowed the appeal.
In terms of what this means for Cayman directors going forward, Solomon Harris noted: “This CICA decision makes it clear that whether a director's act or omission is wilful neglect or default depends entirely on the subjective view of the director, and not on what anyone else thinks they should do - even a judge. If the directors believe they are doing what is necessary to perform their job then, even if they are not doing what needs to be done and/or they are doing it very badly, it is not a wilful default.
“The initial decision included a list of actions that the Judge considered would be required of a director exercising high level supervision, which had many in the industry concerned. The CICA decision did not say those requirements were wrong but only that a failure to meet those requirements does not, in and of itself, mean the court can say there was an intention by a director not to do his job.
“The Weavering decisions do give guidance to fund directors as to what they should be doing in order to carry out their job properly. The appeal established that the directors had been negligent because they had failed to meet the expected level of skill and care, particularly when dealing with the report.
“The reason they are not liable to Weavering for that negligence is because their contractual indemnity covered them, no matter how negligent they were. Whilst that may mean the directors do not have to pay $111 million, their reputations remain in shreds. Negligence may not cost a director money if they have the benefit of a provision exempting them from anything other than wilful acts or defaults, but it will cost them their reputation and, as a result, probably their livelihood.”
The Cayman Islands Court of Appeal, Weavering Macro Fixed Income Fund, Solomon Harris, Cayman