Not Wilfully In Default: The Court Of Appeal's Judgment In Weavering

Last week, the Cayman Islands Court of Appeal handed down its judgment in Weavering Macro Fixed Income Fund Limited (in Liquidation) (the "Fund") v Stefan Peterson and Hans Ekstrom (the "Directors"). The appeal from the first instance decision was allowed and the Grand Court's order of 26 August 2011 was set aside.

In summary, while the Court of Appeal agreed with the Grand Court that the Directors of the Fund had been negligent, the Court of Appeal held that the evidence did not support a finding of wilful neglect or default. The Directors were therefore able to rely upon the indemnity and exculpation provided to them in the Fund's articles of association.

Background

The Fund collapsed in 2009 when it came to light that a high proportion of the assets (namely, a number of interest rate swaps with a related entity) on its balance sheet were fictitious. The Fund had been structured in the usual way, with responsibility for investment strategy and trading delegated to an investment manager and accounting functions delegated to a professional administrator. Unusually, though, the sole directors of the Fund were the brother and elderly father of the principal of the investment manager.

After its collapse, the Fund's Joint Official Liquidators (the "JOLs") brought claims against the Directors in the Cayman Islands. The central allegation was that the Directors had wilfully breached their duty to exercise reasonable skill and care by not properly supervising the performance of the Fund's service providers (particularly the advisor and investment manager). The JOLs' case was that, had the Directors performed their "high-level" supervisory duty to the requisite standard of skill and care they would have discovered sooner that the counterparty to the interest rate swaps was a related entity and the Fund would not have continued to make redemption payments on the basis of grossly inflated NAVs.

Grand Court Decision

At first instance, the Grand Court accepted the central allegation that the Directors had wilfully breached their duty to exercise reasonable skill and care. Although Jones J accepted that, as a result of the structure of the Fund, and the role of its other service providers, the Directors' supervisory role was a "high-level" one, he found that the Directors had wholly - and wilfully - failed to perform that role. Jones J found that the Directors ought to have discovered, by no later than early November 2008, that the counterparty to...