ISLE OF MAN 2011 - Appleby

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I s l e o f M a n 2 0 1 1
Offshore fund direcTOrs – no
more dodging and Weavering
Simon Harding, partner in the Isle of Man office of Appleby and local head of the funds team, considers the
ramifications of an interesting legal decision in the Cayman Islands
Simon Harding
is the team leader for the
funds at Appleby’s Isle of
Man office. He worked
as a solicitor in Glasgow,
after which he returned
to the island in 2000 as
an associate with Cains,
before joining the firm
and becoming partner
in 2005.
The dust has still to settle following the storm
created by the decision of the Grant Court
of the Cayman Islands in Weavering Macro
Fixed Income Fund Limited (In Liquidation)
v. Peterson and Ekstrom (August 2011)
(Weavering), but it would be unwise for fund
directors in the Isle of Man to assume that the decision of
a court of first instance on the other side of the Atlantic
concerning events in Sweden can be ignored.
Weavering dealt with unusually unambiguous facts
and, seemingly, fairly clear-cut evidence. Essentially, the
finding of the court was that the directors of this typically
structured Cayman hedge fund had acted in a fashion
representing almost a caricature of the supine non-executive
director. A complete abdication of their supervisory
responsibilities meant they had failed to expose that
a high proportion of the assets on its balance sheet were
fictitious – illusions created by the investment manager.
Had they discharged these responsibilities, subsequent
redemptions on the basis of an inflated NAV would not
have been paid.
The high degree of interest generated
by Weavering seems to arise
from a couple of factors. First, the
finding of personal liability against
each director to the tune of $111m;
this figure certainly has a headlinegrabbing
quality. Second, the trial
judge took the opportunity to conduct
a tour d’horizon of the legal
implications of the typical offshore
hedge fund structure for directors,
and to make extensive comments
about the manner in which a director
might go about discharging the
resulting duties.
Given the finding that the directors
had completely ignored
(rather than fallen short of the
required standard in the performance
of) their duties of care and skill, such comments
were probably not strictly necessary and thus not technically
part of the decision. There are, of course, many
decisions of higher courts or greater persuasive authority
on the discharge of directors’ duties, and those of
non-executive directors specifically; this judgement,
however, addresses them in the very particular scenario
of the offshore hedge fund constituted with industry
standard contractual documents.
Before the courts of
the Isle of Man, the
judgment certainly
would not have the
weight of a decision of
the higher courts in
England
”
At the time of writing, no appeal has been intimated;
nor do the terms of the judgement (save perhaps as to
the calculation of damages) brook much argument. Thus
it could be that the judge’s comments in Weavering gain
considerable currency in the offshore world by reason of
their specificity and topicality.
Before the courts of the Isle of Man, the judgement
certainly would not have the weight of a decision of the
higher courts in England (which are of high persuasive authority
and to be followed in the absence of countervailing
local considerations). But in the absence of such scenariospecific
authority from weightier sources, the comments
would certainly be treated as useful guidance.
Irrespective of the technical status of the judgement,
Weavering may well give sustenance to fund liquidators.
The encouragement afforded by this decision may tip the
balance in cases where insolvency officials are wavering as
to the merits of instigating proceedings against allegedly
delinquent directors. Especially where there could be recourse
to a D&O policy.
In addition, there is the strong possibility that these
developments will influence the
thinking of regulators. Professional
directors operating in the
Isle of Man are generally required
to be licensed to do so by the Isle
of Man Financial Supervision
Commission; the Commission
follows legal trends as closely as
the private sector and these developments
may influence its officers’
approach to supervision, enforcement
and critical decisions (such
as whether or not to institute disqualification
proceedings).
So, what does the decision in
Weavering mean for fund directors
in the Isle of Man And are
there any steps they should be taking
to ensure that they are meeting
the standards that would, on the basis of this judgement,
now be expected of them – and to demonstrate that they
are doing so No one active in the sector could pretend
that this was an unforeseeable development. AIMA’s
‘Offshore Alternative Fund Director’s Guide’ should be
required reading for all such individuals. Taken with the
comments in Weavering, one could use this to produce a
forbiddingly long list of dos and don’ts, but the following
points emerge with prominence from the case:
1 4 h f m w e e k . co m

L e g a l
• Appointment – A director does not have to
be an expert in the relevant trading strategy,
but he needs to have enough financial awareness
to review and interpret financial statements;
and the time and resources to perform
their role. While Weavering focused on duties
of care and skill, fiduciary duties are also
non-negotiable; actual and potential conflicts
need identification, careful consideration and
ongoing management.
• Fund establishment – As well as having a
clear understanding of the commercial terms
of the proposed fund and its consistency with
industry norms and ensuring full disclosure
of material facts and deviations in the offering documents,
fund directors need a detailed understanding
of which functionaries are responsible for what activities.
In Weavering, there was a failure to ensure that
adherence to investment restrictions was monitored
properly – or at all.
• Ongoing operations – Regular and substantive board
meetings with proper scrutiny of financial information
are essential and a real dialogue between the board
and all key service providers is almost a pre-condition
Service providers need
to be required to
report to the board
and to be held to
account by the board
”
to this occurring. Services providers need to be
required to report to the board and to be held to
account by the board in order to ensure the board
discharges its supervisory role. Real records of the
board’s activities need to be maintained.
• Audit – The directors need a clear understanding
of the audit process and their role and responsibilities
in relation to it.
• Significant developments – The judge in
Weavering thought it significant that the market
turbulence occasioned by the collapse of Lehman
appeared to have no effect whatsoever on the
smooth progress of the board. This was the curious
incident of the dog in the night-time: if they
had been doing their job properly, this would have
been a major event. The lesson is that in times of crisis,
the board must not rely on service providers and
must act to preserve the interests of the fund – and
be seen to do so.
Directors who already take their responsibilities seriously
should not be panicked by Weavering, but it is a
timely reminder of the dangers of complacency, and of
the need to avoid a one-size-fits-all ‘tick-box’ approach to
directorships. n
h f m w e e k . co m 15