Corporate Managers And Officers

Now you see them ? now you don't

Company Law 101 ? if you attended the class and were

awake in it, would teach you that the classic concept of management

of a company is that the directors of a company are responsible for

its management. This concept is important in regard to such legal

issues as who owes fiduciary duties to shareholders and, in the

case of insolvent companies or those teetering on the brink of

insolvency, creditors, as well as some constitutional and

regulatory matters. You may also have learnt that the Directors are

officers of the company along with such people as the Secretary,

Treasurer and others elected to positions of responsibility at the

Annual General Meeting.

It may, therefore, come as a bit of a surprise to learn that

such service providers to a company such as auditors and investment

managers may also be either officers, or management, of a company.

The auditor or investment manager may even be surprised to learn

they are an officer, or part of management, of the company and, in

some cases, may be dismayed by the legal consequences of such a

designation for which they may not be insured.

In the Cayman Islands Grand Court the decision in the

liquidation of Beacon Hill Master Ltd. ("BHM") (and its

Cayman feeder fund) in regard to an appeal of the rejection of a

proof of debt submitted by the auditor Ernst & Young Cayman

Islands ("EYCI") established that the auditors were, in

that case, officers of the company.

The Liquidators, and some feeder fund investors, of BHM had

alleged that EYCI had failed to detect that the investment manager

of BHM had produced false values for the assets of BHM and were

liable for the loss suffered by BHM as a result of that failure.

EYCI claimed to be a creditor of BHM for all costs and liability

arising out of the Liquidators' and investors 'proceedings

against it by virtue of the existence in their favour of

indemnities from BHM (and the feeder funds).

In the course of examining whether EYCI had an indemnity from

BHM, pursuant to the terms of the Articles of Association, the

Grand Court of the Cayman Islands had to decide if EYCI was an

officer of the company. The Grand Court referred to the case of

Mutual Reinsurance Co Ltd. vs Peat Marwick Michell & Co (a

firm) and another [1997] 1 BCLC 1 which found that under English

Law (which is of persuasive authority in the Cayman Islands)

auditors were officers of a company. The Grand Court was further

supported in its conclusion by the...