The Cayman Islands Court of Appeal has recently handed down its long awaited decision in Weavering Macro Fixed Income Fund Limited (In Liquidation) v Stefan Peterson and Hans Ekstrom (Unreported, CICA, 12 February 2015).  The decision was an appeal against a first instance decision in which it was held that the defendant directors of a Cayman Islands' fund were liable to pay damages of US$111 million as a result of their alleged wilful neglect and default.  The Court of Appeal reversed the decision of the trial judge (Jones J) and held that the conduct complained of did not satisfy the applicable test of what constitutes "wilful".

On the facts, the Court of Appeal held that the directors' conduct was not "wilful", such that the directors were able to rely on an exculpation or exemption clause in the relevant Articles of Association.  However, the judgment serves as a timely reminder both that directors of Cayman Islands' companies need to be aware of their duties and do their best to fulfill their responsibilities as directors and that proper consideration needs to be given at the outset to the drafting of indemnity provisions that are likely to be closely scrutinised when the fund has suffered loss and directors' actions are called into question.

The case was brought against the defendants by the liquidators of Weavering Macro Fixed Income Fund Limited (In Liquidation) ("Company") for breach of directors duties as a result of the defendants failure, among other things, to review certain documentation which identified, in breach of the Company's investment guidelines, that a substantial proportion of the Company's investments were in interest rate swaps ("IRS") with a related party ("WCF").  As explained by the Court of Appeal, the case against the directors turned on a finding of fact by the first instance judge that the directors "ought to have discovered, not later than early November 2008, that the counter-party to the IRS contracts then outstanding was WCF; and on his further finding of fact that, had the Directors discovered in early November 2008 that WCF was the counter-party to the IRS contract then shown as assets of value in the unaudited interim balance sheet of the Company, they would have appreciated that the values attributed to those contracts could not be justified, that the Company was seriously insolvent and that it should be put into immediate liquidation." [8] Jones J had held that the Directors failed to exercise independent judgment and reasonable care and skill in conducting the affairs of the Company and that they had failed to act in the best interests of the Company.

The trial judge had been very critical of the approach taken by the defendants generally, holding that they had failed to (a) read certain quarterly reports; (b) seek information from service providers to which certain management tasks had been delegated; (c) convene and hold regular Board meetings; (d) circulate and seek comment on agendas for such Board meetings; (e) keep proper minutes of Board meetings which were held; (f) review management accounts; and (g) take steps to protect the Company following the bankruptcy of Lehman Brothers.  According to the judge, these directors had simply failed to perform their job as directors at all.  Indeed, both the Grand Court and Court of Appeal held that each of the defendants had a "high level supervisory duty", and had "failed to exercise the degree of care and skill which the law required of [them]." [80], [81] 

However, notwithstanding this accepted breach of duty, the second and third questions on appeal related to whether and the extent to which the directors were entitled to rely on the exemption clause in the Company's Articles of Association pursuant to which they would be indemnified by the Company for liability for all acts or failures to act, other than liability which were incurred as a result of the directors "own wilful neglect or default." [82]. 

The Court of Appeal referred to Justice Romer's test of what constitutes "willful neglect or default" in City Equitable Fire Insurance [1925] CH. 407, where the learned judge held that neglect or default would not be wilful unless a director made a conscious or deliberate decision to act or failed to act in knowing breach of his duties.  It was held that neither limb of this test of willful default applied on the facts; namely (a) that the person knows that they are committing, and intends to commit, a breach of duty; or (b) they are recklessly careless in the sense of not caring whether the act or omission is or is not a breach of duty.

Although the trial judge had held that the failures by the defendants to act where the defendants knew that they had a duty to supervise was sufficient to fall within the first limb of the test, the Court of Appeal disagreed with this finding on the evidence.  The Court of Appeal in overturning the decision unanimously ruled that the defendants' performance (or lack thereof) did not amount to wilful neglect or default and that "negligence, however gross, is not enough" and cannot be encompassed within the meaning of wilful.