Rising Standards Of Fund Governance: Fund Directors Beware

The Cayman Islands Court of Appeal has set-aside the order of Cayman Islands Grand Court in the case of Weavering Macro Fixed Income Fund Ltd. (in Liquidation) vs. The Stefan Peterson & Hanks Ekstrom whereby the Court of Appeals while concurring with the Grand Court that the Directors indeed acted negligently, held that there was no element of 'willful' negligence or 'default' on part of the Directors. Consequently, the Ruling against the Directors for damages of USD 111 million each was set-aside and the Directors were allowed to claim indemnity and exculpation from liability provided in the Fund's articles of association. The 2011 ruling given by the Grand Court of Cayman Islands in the case of Weavering Macro Fixed Income Fund Limited ("Fund") v. Stefan Peterson and Hans Ekstrom ("Ruling")1 had laid down certain stringent standards for directors' role in funds. The Ruling has now been set-aside by the Cayman Islands Court of Appeal's by its judgment dated February 12, 2015.2

The Court of Appeals has held that while the directors of the Fund ("Directors") acted negligently, there was no element of 'willful' negligence or default on their part. Therefore, the Directors are entitled to indemnity from the Fund, as provided under the Fund documents.

BACKGROUND

As a matter of brief background, the Fund was a Cayman Islands based hedge fund. The Fund appointed an investment manager to 'manage the affairs of the Fund subject to the overall supervision of the Directors'; and a professional administrator to conduct the accounting functions of the Fund (including maintenance of books and accounts of the administrator), as is the case with almost all private equity funds and hedge funds. The Fund went into liquidation when it was discovered that certain assets shown on the Fund's balance sheet were fictitious.

The Grand Court's Ruling

In the Ruling, the Grand Court found evidence that while board meetings were held timely, the meetings largely recorded information that was also present in the communication to fund investors and that the Directors were performing 'administrative functions' in so far as they merely signed the documents that were placed before them.

Based on such factual matrix, the Grand Court held against the Directors for willful neglect in carrying out their duties. It was also observed that based on their inactions, the defendant Directors "did nothing and carried on doing nothing". The measure of loss was determined on the...