The Cayman Islands’ Court of Appeal has recently overturned the decision of the Grand Court in Weavering Macro Fixed Income Fund v. Ekstrom & Peterson [2011] 2 CILR 203, in which the trial judge had held a hedge fund’s former non-executive directors liable for $111m on the basis they had acted with “wilful neglect and default” in failing to spot that the fund’s main “assets” were fictitious swap agreements made with a related counterparty which had no assets to satisfy its liabilities.

The Court of Appeal concluded that although the non-executive directors had acted negligently, there was no evidence to support the judge’s findings that they had intended to breach their duties, nor that they had even suspected that they were failing to meet their obligations. The Court of Appeal further found that the judge was wrong to have drawn inferences of wilful default from the directors’ failures to carry out certain functions which the judge took the view should have been carried out by them.

The appeal judgment gives some comfort to current directors that the common exemption provision in a hedge fund’s articles of association, excluding liability for conduct falling short of wilful default or neglect, will apply unless any breach of duty is shown clearly to be intentional or reckless (in the sense that the directors had been conscious that they might be acting in breach, but then continued regardless). 

The question for the Cayman Islands may now be whether, as in a number of jurisdictions, the inclusion of such provisions in a company’s constitutional documents should continue to be permitted given that they make it very difficult for claimants, including liquidators of insolvent funds, to pursue any directors (including executive directors) for any default short of a deliberate or “knowingly reckless” act. In short, unless a director was deliberately dishonest, he will be entitled to his indemnity and claims against him will not be legally viable. However, if he did act deliberately then any D&O insurance is likely to be avoided, and accordingly many such claims will not be commercially viable.

The liquidators of the fund intend to appeal to the Privy Council.

Kirsten Houghton Of Campbells