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<p style="text-align: center;"><span style="font-family: arial,helvetica,sans-serif; font-size: 12px;"><strong><strong>Cayman Islands Court of Appeal Ruling on Weavering Case</strong></strong></span><br /><span style="font-family: arial,helvetica,sans-serif; font-size: 12px;"><strong><a href="http://newsletter.ie/run/v3.aspx?m=KEoUo3rsdOXZXdy%2BwVUNIIW2NrJrVMqRLNzZ2lC7dbRFcoWvj710gR%2BlNTcXWAKJYerzzn4Cnz8%3D_zek_d7ddk">View in browser</a> | <a href="http://newsletter.ie/run/tafn.aspx?m=KEoUo3rsdOXZXdy%2BwVUNIIW2NrJrVMqRLNzZ2lC7dbRFcoWvj710gR%2BlNTcXWAKJYerzzn4Cnz8%3D_zek_d7ddk" >Tell a Friend</a><br /></strong></span></p>
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<h2 style="padding-top: 4pt; line-height: 1.15; text-align: left; color: #365f91; font-size: 12pt; font-family: 'Cambria'; font-weight: bold;"><span>March 2015</span></h2>
<h1 style="line-height: 1.15; text-align: left; color: #365f91; font-size: 14pt; font-family: 'Cambria'; font-weight: bold;"><span>Cayman Islands Court of Appeal Ruling on Weavering Case</span></h1>
<h2 style="line-height: 1.15; text-align: left; color: #365f91; font-size: 12pt; font-family: 'Cambria'; font-weight: bold;"><span>Post-Weavering governance reforms have changed the face of fund oversight</span></h2>
<p>The Cayman Islands Court of Appeal has recently found that the directors of the failed Weavering fund (Weavering Macro Fixed Income Fund Limited vs Stefan Peterson and Hans Ekstrom) could not be found liable for wilful default due to insufficient evidence placed before the judge in the original case.</p>
<p>However, this is unlikely to affect the expectations of Cayman courts and regulators regarding the standards now established for Cayman fund boards.</p>
<p>Although it did not create any new law, the original Weavering case has prompted substantial improvements in the overall standard of Cayman Islands fund governance and allocators are now much more sensitive to ‘red flag’ exemption clauses in articles of association. Consequently, directors of fund boards will need to adhere to the best practice standards established by the case and reinforced by guidance issued by CIMA in its wake.</p>
<p><strong>Background</strong></p>
<p>Following the collapse of the Weavering Macro Fixed Income Fund (the Fund) in 2009, the Grand Court of the Cayman Islands found against the fund’s directors, Peterson and Ekstrom, on the grounds that they had failed to monitor the operations of service providers adequately (failure to detect that the counterparty to an interest rate swap was a related party) and thus failed to discharge their duties to exercise independent judgment, to exercise reasonable care and skill, and to act in the Fund’s best interests.</p>
<p>At the time, the ruling of the Grand Court helped to establish important expectations that Cayman courts would now have of fund boards and directors sitting on those boards.</p>
<p>The Weavering case also provided the impetus for extensive reforms by the Cayman Islands and minimum conduct standards on the part of the Cayman Islands Monetary Authority (CIMA) which affect Cayman fund boards and are still very much in place.</p>
<p><strong>The Ruling</strong></p>
<p>Last month the Court of Appeal of the Cayman Islands heard an appeal against the Grand Court’s earlier judgement on the grounds that the first instance Judge had not had sufficient evidence to conclude that the Fund’s directors were ‘wilful’ in their default, i.e. they were negligent and did not pay attention to what was happening in the Fund, rather than deliberately breaching their duties.</p>
<p>It is important to note that the law discussed in the Grand Court case was reaffirmed, but the reversal related to findings of fact. Also, the Court of Appeal did find the directors’ actions were likely to be grossly negligent, but the indemnity provisions in the Fund’s articles of association did not carve out negligence or gross negligence.</p>
<p>The Court has upheld the appeal and on this basis the directors can rely on the indemnity provisions in the Fund’s articles of association to protect themselves. The Court has set aside the original judgement of $111 million against the directors which was awarded to the liquidators, and now the Fund faces a claim for costs from the directors.</p>
<p>The ruling is a technical one, focusing on whether the directors were ‘wilful’ in their default, which turns on the facts of the case presented. The directors are variously called thoroughly inept and even slapdash, but insufficient evidence of intent to breach their duties was presented.</p>
<p><strong>What does this mean for Cayman funds?</strong></p>
<p>The important findings in the original ruling by Justice Jones still stand as a foundation for future fund governance and Cayman courts will likely refer to these in any cases that occur in the future.</p>
<p>Since the original Weavering hearing, the Cayman Islands Monetary Authority (CIMA) has acted to require the registration of fund directors and in its Statement of Guidance in 2014 has emphasised that directors and boards should act independently, meet at least twice a year and have the necessary skills and experience to supervise funds. CIMA also expects that fund boards will adequately supervise service providers.</p>
<p>CIMA has published its Statement of Guidance principles for Cayman fund boards in order to establish what it considers to be a minimum level of governance standards for Cayman Islands funds. The principles enshrined here were reached following extensive consultation with industry stakeholders, including fund investors.</p>
<p>The Court of Appeal also noted that the board in Weavering had set high standards for themselves in their first set of minutes, and reiterated that directors will be judged by their own skillset and experience. This means that professional directors who undertake to discharge their duties to a higher standard will be held to such higher standard of care.</p>
<p><strong>Important lessons</strong></p>
<p>The directors of Weavering were close family members. While the Court of Appeal acknowledged that directors may delegate and are then entitled to trust their delegates, they still need to supervise such delegates. The facts of this case show that family members are very unlikely to supervise as closely as truly independent directors.</p>
<p>Investors should check the standard of care in the articles of association of a fund and require a higher standard of care than wilful default in indemnity clauses.</p>
<p> </p>
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<p><span style="font-weight: bold; text-decoration: underline;">About Carne</span></p>
<p>Carne is a leading international specialist in the provision of independent governance services and European management company solutions to the global asset management industry. We advise both hedge fund and traditional fund managers on their governance, oversight and management needs, as well as providing independent Directors to the boards of some of the most respected investment funds globally. Carne has fund directors resident in the key fund jurisdictions, including the Cayman Islands, Channel Islands, Ireland, Luxembourg, Switzerland, the UK and USA.</p>
<p><strong><a style="text-decoration: none; color: #365f91; border-bottom: 1px dotted #365f91;" href="http://www.carnegroup.com">www.carnegroup.com</a></strong></p>
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