Duty of skill and care
Royal Court decision
Court of Appeal decision
This article is part of a series on director's duties in Guernsey. For previous articles in the series, see "Carlyle case: introduction to director's duties in Guernsey" and "Carlyle case: alleged breaches of fiduciary duties".
This is a duty of competence. The judge stated that the test for the standard of care is that of a reasonably diligent person having both the general knowledge, skill and experience that may reasonably be expected of a person carrying out the same functions as those of the relevant director and the actual knowledge, skill and experience of that director. She also confirmed that it is a combined objective and subjective test, with the latter being capable of raising but not lowering the standards to be expected of a particular director.(1)
There were five matters that the judge mentioned were relevant in determining the scope of this duty and whether it has been performed by a particular director:
- the particular role of the director in the governance and management structure of the company;
- the particular skills that they have or have held themselves out as having;
- their level of remuneration;
- the size of the company and the nature of its business; and
- the circumstances of the company at the time of any alleged breach.(2)
On the question of whether a breach has occurred, the defendants argued, and the judge agreed, that the test for whether there has been a breach is a high one. It requires a court to be satisfied that no reasonably diligent director with the material degree of knowledge, skill and expertise could have acted in the way in which the particular director acted. The court must find that the director's decision "went beyond a mere error of commercial judgment".(3)
The plaintiffs complained that the independent directors had breached this duty by bringing too passive a view to their roles and failing to acquire sufficient knowledge of Carlyle Capital Corporation Ltd's (CCC's) ongoing affairs.(4)
The plaintiffs also alleged that CCC's board was "dysfunctional" and in breach of this duty by not holding enough board meetings.(5) In response, the judge held that, apart from any legal requirement to hold a meeting under statute or to comply with the company's articles of association, there was no general legal requirement to hold meetings. Holding meetings was not an end in itself but a means to the end of arriving at considered and appropriate decisions on relevant aspects of the conduct of the company's business.(6) The duty of a director in this regard was to:
gain and maintain a sufficient understanding of the company's business and to inform and keep himself informed as to the surrounding facts and circumstances of such business, sufficiently to enable himself to participate effectively in the making, together with his co-directors, of such decisions as the board is required to make, in whatever manner is effective.(7)
It was alleged by the plaintiffs that the defendants were guilty of the Guernsey statutory offence(8) of wrongful trading, which is similar to the offence contained in English Insolvency legislation,(9) by continuing the operation of CCC's business from August 2007 in circumstances where the defendants knew or ought to have concluded that there was no reasonable prospect of CCC's avoiding going into insolvent liquidation.
The judge rejected this allegation since she was satisfied that at no time prior to an "immaterial" few days shortly before CCC was actually placed in insolvent liquidation did the defendants conclude or ought reasonably to have concluded that there was no reasonable prospect that CCC would avoid going into insolvent liquidation.(10)
The trial took 25 weeks (almost six months), the longest ever in Guernsey. The Royal Court handed down judgment in September 2017. All of the 187 pleaded breach of duty claims against the defendants were dismissed in their entirety.
The defendants won everything at trial on both the law and the facts. However, despite such a comprehensive loss and after having consented to a costs order against them on an indemnity basis, the plaintiffs appealed. The appeal was heard over two weeks in October 2018 and the Court of Appeal handed down judgment on 12 April 2019.
The appeal included a claim that there had been a "critical misunderstanding which infects the whole body of evidence".(11) In short, the appellants alleged that the Royal Court had been led into material error and that there should be a retrial.
The Court of Appeal held that, on the evidence, the prices at which CCC's directors would have been prepared to sell in August 2007 were lower than the trial judge had found.(12)
However, the Court of Appeal went on to consider that even if the trial judge had made correct findings regarding the prices at which CCC was willing to sell residential mortgage-backed securities assets in August 2007, it did not follow that there had been any breach of duty by the directors.(13)
The Court of Appeal held that:
the existence of such an error [that the findings of the [judge] as to perception of risk were based on a misunderstanding] does not, in our judgment, have the result that the issues are at large for determination by this court or that the case must be sent back for even a partial retrial.(14)
It went on to hold that, taken with other issues, no breach of duty could exist.(15)
The Court of Appeal further found that other findings of the trial judge, including the risks of selling at the lower prices, were not infected by the mistake which the trial judge had made as to the prices at which CCC was willing to sell in August 2007.(16)
In addition, there was no basis for concluding that the independent directors had lacked independence or failed properly to inform themselves of relevant matters.(17)
The Court of Appeal held that:
it was common ground that there was nothing that CCC could have done which would have saved it from the consequences of the March 2008 liquidity crisis, which was unforeseen and unforeseeable. However startling the history of CCC's short life appears at first sight, its failure was the result of circumstances beyond the control of any board of directors. The Lieutenant Bailiff's view was that the appellant's claim depended entirely on hindsight, and we agree with her.(18)
Despite losing again before the Guernsey Court of Appeal, the plaintiffs further appealed to the Privy Council. This appeal was listed to be heard during the first week of October 2020 in Guernsey.
However, in April 2020 the parties reached a non-confidential settlement. The Privy Council subsequently ordered the withdrawal of the appeal on 7 May 2020, after which all proceedings in all jurisdictions were brought to an end.
None of the defendants paid a penny to any of the plaintiffs. In fact, the plaintiffs paid approximately £24 million to the defendants towards their costs of the proceedings.
The CCC case is of particular relevance during the climate of the covid-19 pandemic, which is having severe economic repercussions worldwide and will likely lead to further fund collapses.
When considering what lessons can be learned from the CCC saga, it must be borne in mind that the Guernsey litigation was an extreme case but against that background, parties should:
- ensure that directors and officers insurance is adequate, so a director is covered for the largest financial loss that can reasonably be contemplated for that specific business, and, in particular, ensure that it covers defence costs during any proceedings. This case only ended some 13 years after the events complained of took place;
- make sure that company documentation is kept up to date and appropriate minutes are kept, and are written contemporaneously where possible, and that declarations of conflicts of interests are registered, updated and tabled to meetings from time to time in accordance with the constitution of the company and local law;
- ensure that the fact that questions have been raised by board members is recorded, especially where there is dissent, even if the content of the discussion is not fully recorded;
- if the company strategy is to do nothing differently, because that is what is in the best interests of the company, ensure that consideration of this and any alternatives (or even lack of alternatives) are documented so that any future criticisms of a strategic decision are unlikely to succeed; and
- be aware of specific experience and skills that board members may have, as that may increase (but not decrease) both the scope and standard of duties that are owed by directors.
For further information on this topic please contact Bryan De Verneuil-Smith or Simon Davies at Ogier by telephone (+44 1481 721672) or email ([email protected] or [email protected]). The Ogier website can be accessed at www.ogier.com.
(1) At  of Carlyle (Guernsey Judgment 38/2017).
(2) At – of the trial judgment.
(3) At  of the trial judgment.
(4) At  of the trial judgment.
(5) At  of the trial judgment.
(6) At  of the trial judgment.
(7) At  of the trial judgment.
(8) Companies (Guernsey) Law 2008 section 434.
(9) Insolvency Act 1986 section 241.
(10) At  and [2639(5)] of the trial judgment. At  the judge made an interesting observation that CCC's situation did not fit the classic situation when wrongful trading has been found, since, if it had continued business as usual, without an unforeseeable global liquidity event (which occurred in March 2008), it would have been able to survive.
(11) Carlyle Capital Corporation Limited (In Liquidation) v Conway  GRC014 CA at .
(12) At –,  of the appeal judgment.
(13) At  of the appeal judgment.
(14) At  of the appeal judgment.
(15) At , , [235(i)] of the appeal judgement.
(16) At  of the appeal judgment.
(17) At  of the appeal judgment.