Peterson and Ekstrom v Weavering Macro Fixed Income Fund Ltd

JurisdictionCayman Islands
Judge(Chadwick, P., Conteh and Campbell, JJ.A)
Judgment Date12 February 2015
Date12 February 2015
CourtCourt of Appeal (Cayman Islands)
Court of Appeal

(Chadwick, P., Conteh and Campbell, JJ.A)

PETERSON and EKSTROM
and
WEAVERING MACRO FIXED INCOME FUND LIMITED (in liquidation)

B. Valentin and Ms. K. Houghton for the appellants;

D. Lord, Q.C. and S. Folpp for the respondent.

Cases cited:

(1) Armitage v. Nurse, [1998] Ch. 241; [1997] 3 W.L.R. 1046; [1997] 2 All E.R. 705, referred to.

(2) Barings plc (No. 5), Re, [1999] 1 BCLC 433, followed.

(3) Barlow Clowes Intl. Ltd. (in liquidation) v. Eurotrust Intl. Ltd., [2006] 1 W.L.R. 1476; [2006] 1 All E.R. 333; 2005–06 MLR 112; [2006] 1 Lloyd”s Rep. 225; [2005] UKPC 37, referred to.

(4) Bristol Fund Ltd., In re, 2008 CILR 317, referred to.

(5) City Equitable Fire Ins. Co. Ltd., In re, [1925] Ch. 407; [1924] All E.R. Rep. 485, followed.

(6) Daniels v. Anderson(1995), 16 ACSR 607, referred to.

(7) Dovey v. Cory, [1901] A.C. 477, referred to.

(8) Forder v. Great W. Ry. Co., [1905] 2 K.B. 532, applied.

(9) Kenyon, Son & Craven Ltd. v. Baxter Hoare & Co. Ltd., [1971] 1 W.L.R. 519; [1971] 2 All E.R. 708; [1971] 1 Lloyd”s Rep. 232, referred to.

(10) Leeds City Brewery Ltd. v. Platts, [1925] Ch. 532, applied.

(11) Lewis v. Great W. Ry. Co.ELR(1877), 3 Q.B.D. 195, applied.

(12) Morley v. United Friendly Ins. plc, [1993] 1 W.L.R. 996; [1993] 2 All E.R. 47; [1993] 1 Lloyd”s Rep. 490, referred to.

(13) Prospect Properties Ltd. v. McNeill, 1990–91 CILR 171, referred to.

(14) Spread Trustee Co. Ltd. v. Hutcheson, [2012] 2 A.C. 194; 2011–12 GLR 164; [2012] 2 W.L.R. 1360; [2012] 1 All E.R. 251; [2011] UKPC 13, referred to.

(15) Westmid Packing Servs. Ltd., Re, [1998] 2 All E.R. 124; [1998] 2 BCLC 646, referred to.

Companies-directors-personal liability-exclusion in company”s articles of association of director”s liability except for ‘wilful neglect or default’ excludes liability for carelessness or negligence but not intentional or reckless breach of duty-intentional breach requires realization that conduct breaches duty-reckless breach requires suspicion that conduct may breach duty but director acts nevertheless

Companies-directors-powers and duties-duty of directors to supervise functions delegated to service providers (e.g. auditors and administrators), read reports from service providers and ensure that company”s investment restrictions observed-duty applies even if directors non-executive and unremunerated

Companies-directors-powers and duties-court not to substitute its own view of proper conduct for director”s view-ongoing serious failure to act in accordance with court”s view of proper conduct not deliberate breach of duty, though may be negligent breach

The official liquidators of the respondent company brought an action in the Grand Court to recover damages from the appellants for breach of their duties as company directors.

The company was incorporated in 2003, and was listed on the Irish Stock Exchange. HE and SP, who were close relatives of the company”s principal investment manager, MP, were appointed as directors.

In 2005, the company entered into a number of interest rate swap contracts with WCF, which was under the same management as the company. At all material times, HE was a director of WCF, and SP was a director until 2006. Interest rate swap contracts with WCF eventually constituted the majority of the company”s assets, in breach of the company”s investment restrictions and the listing requirements for the Irish Stock Exchange. The contracts were theoretically highly profitable, but in reality WCF had no substantial assets, was under the control of MP and was used by him to manipulate the company”s asset value by giving the impression that it was party to a number of highly lucrative contracts. The company”s assets were therefore grossly exaggerated. In 2008, the company received

a large number of redemption requests from investors, and it became apparent that it had insufficient assets to meet its obligations. It made a number of redemption repayments, totalling US$141m. In 2009, the company went into liquidation.

The company”s articles of association indemnified any director or agent of the company against liability incurred in carrying out his functions, unless liability was incurred by his own ‘wilful neglect or default.’ The directors had not properly read quarterly reports detailing the company”s assets and transactions, infrequently held board meetings (the minutes for which were in standard form and simply signed by the directors) and did not make any enquiries of the company”s auditors or administrators. If they had read the reports, the directors could have realized, after November 2008, that WCF was the counterparty to the contracts, and, given their understanding that WCF was dormant, appreciated that the company was therefore seriously insolvent. If they had put the company into liquidation in late 2008, redemption repayments might have been US$111m. lower.

In the Grand Court, the company submitted that (a) the directors were in breach of their duties on the basis that they routinely failed to perform basic supervisory functions such as conducting effective, frequent, board meetings, reading the company”s quarterly reports, and making enquiries into the company”s compliance with its investment restrictions; (b) this breach of duty was deliberate as their ongoing failures could only be consistent with a general and conscious disregard for their duties as directors; and (c) their knowing breach prevented any reliance on the indemnification provided by the company”s articles of association.

The directors submitted in reply that (a) they had not breached their duties as they were non-executive directors receiving no remuneration; (b) any breach was not the result of wilful neglect as it was not intentional; and (c) they were therefore entitled to rely upon the indemnification contained in the company”s articles of association.

The Grand Court (Jones, J.) found that the directors were in wilful neglect of their duties due to their failure to read the reports or regularly hold effective board meetings. Given their substantial failure to perform basic supervisory functions, in particular after the 2008 financial crash, the court”s unequivocal conclusion was that they were in knowing breach of duty. The directors had never been intended to provide effective supervision of the company, but had merely been appointed to satisfy the requirements of the Irish Stock Exchange. They could not rely on the indemnification and were liable for the difference in value between the redemption payments made and the amount that would have been payable had the company been put into liquidation in 2008 (i.e. US$111m.). The proceedings in the Grand Court are reported at 2011 (2) CILR 203.

On appeal, the directors submitted that (a) they had not breached their supervisory duties, as any duties were subjective and depended upon the context-the directors were non-executive, unremunerated, and lived in Sweden, while the company had professional auditors and administrators to hand-and they should not be judged with the benefit of hindsight

when the consequences of their failures were clearer; (b) if their supervisory duties had been breached, they were not guilty of wilful neglect or default as they were neither recklessly careless nor in knowing breach of duty; (c) in order to establish that the directors had knowingly and deliberately breached their duties, it had to be shown that they had intentionally failed to act, and not merely that they were negligent; and (d) to establish that they had been recklessly careless it had to be demonstrated that they had at least a suspicion that they might be acting in breach of duty and, despite this, failed to act.

The company agreed that it had to be shown that the directors were either in knowing breach or recklessly careless, and submitted that (a) the failure to read the reports or otherwise supervise investments were clear breaches of duty; (b) these breaches were so serious, and had continued for such a prolonged period of time, that they could only result from conscious decisions not to conduct effective supervision; and (c) if they had not consciously breached their duties, then the directors were recklessly careless, and it was not necessary to prove that they suspected they were in breach of duty.

Held, allowing the appeal:

(1) It had not been shown that the directors had breached their duties by their own ‘wilful neglect or default,’ as they had not deliberately breached their duties or been recklessly careless. They were therefore entitled to rely upon art. 182 of the company”s articles of association and claim indemnity from the company (paras. 83–85; para. 109; para. 119).

(2) The failure to discover that WCF was the counterparty to the interest rate swap contracts was plainly a breach of the directors” supervisory duties. The directors had a duty to supervise the company”s auditors and administrators (despite holding non-executive and unremunerated directorships), which required them to read and appreciate the reports provided by PNC detailing the company”s transactions in order to satisfy themselves that the company”s investment restrictions were not breached. If they had read the Q3 2008 Report, it would have been impossible for them not to notice that WCF was the counterparty to the interest rate swap contracts and, given their directorships of WCF, they would have realized that it had no substantial assets and that the contracts with it were worthless (paras. 79–81).

(3) They had not, however, deliberately and consciously failed to act in knowing breach of duty, and their failures were not so serious that they could only have been deliberate. While their supervision of the company”s investments was inadequate, it had not been established that this amounted to a knowing breach of duty. Their conduct might have been negligent, but negligence, however gross, did not amount...

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