We reviewed the decision of the Court of Appeal of the Cayman Islands (“CoA”) in Weavering Macro Fixed Income Fund Limited (In Liquidation) (the “Respondent”) v Stefan Peterson and Hans Ekstrom (the “Appellants”) on 12 February 2015.
In a judgment dated 26 August 2011, the Appellants had been found to have been in breach of their duties as directors of the Respondent, a failed fund. The Grand Court of the Cayman Islands (“Grand Court”) also found that the Appellants were guilty of willful neglect or default and that, accordingly, the indemnity and exculpation clause contained in the articles of association of the Respondent (which would render the directors not liable for losses arising out of their actions save in the event of their willful neglect or default) would not apply. Judgment was therefore entered against each of the directors in the sum of US$111 million. This decision was widely reported and analysed due to the extensive guidance it provided as to directors’ best practices and procedures and due to the severe financial penalties handed down to each of the Appellants.
The Appellants appealed this decision and the CoA has now found in their favour. The CoA’s decision was that, whilst the directors had clearly breached their duties and been negligent, the indemnity and exculpation clause was there to protect “directors who do their incompetent best” and that “negligence, however gross, is not enough”. It remains to be seen what the impact of the judgment will be but, due to the emphasis being placed on the inexperience of the Appellants and the delegation and trust placed in professional advisors, there is likely to be little practical significance for the majority of companies or funds with professional, experienced directors. However, shareholders and investors should perhaps be aware that, if they expect a director to be personally liable for his gross negligence, they will need to ensure that the articles of association do not provide for exculpation in such circumstances as, following the CoA’s decision, it is now clear that gross negligence and willful neglect are by no means the same in the eyes of the Court.
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