Gibraltar: Fund Judgment Brings Gibraltar Director's Duties Into Focus

Last Updated: 29 July 2015
Article by Jonathan Garcia

Introduction

Corporate governance is an important live issue worldwide particularly in the alternative fund management space, fuelled both by scandals (for example Madoff and Weavering) and tightening regulation. The role of the Gibraltar fund director came under the microscope last week when the Supreme Court of Gibraltar ("Court") found that directors of a failed investment fund had breached their duties as directors. The judgment contains important commentary, although the implications for well-advised investment funds with competent and diligent directors are limited. Nevertheless, all directors should revisit their practices to ensure that they remain consistent with key corporate governance principles.

Background to the Advalorem Case

Advalorem Value Asset Fund Limited ("Advalorem") was a collective investment scheme registered under the Financial Services (Collective Investment Schemes) Act 2011 as an Experienced Investor Fund. Advalorem's investment objective was to invest in distressed assets on the terms set out in the offer document issued by Advalorem.

The Gibraltar Financial Services Commission ("FSC") conducted an investigation into Advalorem, between February and October 2013, following which it petitioned the Court for a protection order to protect the interest of participants and potential participants. The protection order was granted in January 2014 and the Court appointed an administrator to safeguard Advalorem's assets.[1]

Subsequent regulatory action by the FSC in respect of Mrs. Minette Compson (a director of a company that was itself a director of Advalorem) and Mr. Brian Weal[2] (a director of Advalorem), was taken in the public interest and to protect investors and in particular to address what the FSC considered were serious and significant corporate governance failings on the part of Mrs. Compson and Mr. Weal. In a nutshell, these related to investments made by Advalorem following inappropriate property valuations (the valuations made special assumptions that were inapplicable and unrealistic).

The FSC's decisions were appealed by Mrs. Compson and Mr. Weal, but in a judgment of 29 April 2015, the Court dismissed both appeals against the FSC's decisions[3] and not only did the Court confirm the expected duties and responsibilities of investment fund directors but also made it clear that it will not normally interfere with any sanctions imposed by the FSC (however severe) where directors choose to ignore their responsibilities as directors.

The Court's findings - Directors' duties

The Court found that this was a serious case of two directors ignoring their obligations as directors and that their conduct fell well below that which was required of them.

The judgment does not create any new directors' duties - it serves as a reminder that investment fund directors and others are required to exercise care, skill and diligence in the performance of their duties. Specifically, the judgment deals with the extent to which ignorance can constitute a defence in a director's breach of duties. The Court confirmed that the often cited principles of Jonathan Parker J in Re Barings Plc[4] as regards directors' duties form part of Gibraltar law, including that:

  • Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company's business to enable them properly to discharge their duties as directors; and
  • While directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve directors of their duty to supervise the discharge of the delegated functions.

In Advalorem, the Court rejected the argument put forward by Mrs. Compson and Mr. Weal, that since they were not the directors of Advalorem with particular expertise in property matters (they were not the only directors of Advalorem), they lacked the relevant knowledge, either actual or constructive, of the inappropriateness of the valuations obtained by Advalorem. The Court rejected this argument on the basis that the valuation processes were set out in the offer document which was a document that all directors should have been familiar with. Any director should have been able to identify that the offer document was being breached, irrespective of property-related expertise. The regulatory design of the Experienced Investor Fund regime means that great importance is placed on the declarations/warranties made by the directors in the offer document, including truth and accuracy of the contents of the offer document and it is apparent that the Court followed a similar approach.

The Court did accept that there were some matters, such as the commercial attractiveness of the land that could perhaps be the subject of reliance on the property expert directors. This however would not absolve Mrs. Compson and Mr. Weal of responsibility, that is, the duty to supervise cannot be delegated. This shows that although investment fund directors are not expected to be experts in every field, they are required to apply their minds to the appropriate issues and not rely solely on the explanations of others.

Ultimately, whether a director discharged his/her duty to display appropriate levels of knowledge, skill and experience will depend on the facts of each particular case, which assessment will necessarily include a detailed examination of that director's particular role in the management of the company and his/her own individual skills or experience. Likewise, the extent to which an individual director can rely on the expertise of other directors is fact-sensitive. In some cases it will be appropriate; in other cases it will not be. The Court did not rule on whether unfitness of directors was to be determined by an objective or subjective standard, given that the Court was ruling on the validity of the directions imposed by the chief executive officer of the FSC and there had been clear evidence to support a finding of breach. It is unclear what standard would be applied under Gibraltar law should such a case go before the Court. Under English law, the common law test was heavily subjective. Accordingly,              this allowed unskilled, inexperienced and incompetent directors to use their deficiencies as a shield against liability. Accordingly, a dual subjective/ objective test relating to the duty to exercise reasonable care, skill and diligence was codified in England through the enactment of section 174(2) of the English Companies Act 2006. Gibraltar law does not have an equivalent. However, the Corporate Governance Code for Gibraltar Collective Investment Schemes issued by the Gibraltar Funds & Investments Association[5], although of voluntary application, imposes a dual test and this underpins not only the view of the industry on this matter but also that of the FSC, concerning the proper operation and governance of an investment company.

Regulatory action by FSC

The Court also considered the enforcement powers of the FSC specifically in respect of the imposition of sanctions and it is not the intention to set these out in full, suffice to say that the Court confirmed that the chief executive officer of the FSC is afforded significant discretion when enforcement action is concerned. The Court referred to the FSC and its chief executive officer as being likely to be better placed than the Court to determine what measures are necessary in order to protect the good reputation of Gibraltar, to protect consumers and to reduce financial crime, as well as pursuing the other regulatory objectives of the FSC. The Court endorsed the suggestion that deterrence of other directors from failing to monitor the activities of companies on whose boards they sit, is a justifiable regulatory consideration when imposing sanctions.

The Court went further and confirmed that it would have upheld the imposition of even stiffer sanctions on Mr. Weal, had the chief executive officer of the FSC so determined. This was the case notwithstanding that the Court in its judgment, found that Mr. Weal's involvement in the matters complained of was less than that of Mrs. Compson, that he was not a property expert and that he was not present at a specific board meeting where the approval was given to acquire certain special purpose vehicles which held land and notably, that no investor had lost money even presumptively from his action. The Court, having indicated that the imposition of stiffer sanctions for Mr. Weal would have been supported, makes it clear that whilst the Court is willing to consider the actions of individual directing minds of an investment company, it will not be sympathetic towards a director who has seriously breached his/her duties, irrespective of specific involvement nor will it be a defence that a director has held office for a short period of time. New directors should therefore ensure that they acquire key information when they are first appointed and that they are well versed with the investment fund's history and any major events affecting the investment fund. A comprehensive and formal induction should be provided so that a new director is provided with the information he/she will need to become as effective as possible in their role within the shortest practicable time.

Other points to note

Other matters of note arose from the proceedings although, as these did not form part of the case found by the chief executive officer of the FSC, such matters should be considered for information purposes only.

Firstly, directors must satisfy themselves that the terms of contracts with the investment fund are in the best interests of the investment fund and the directors cannot simply rely on a person who is not on the record as providing a function in respect of the investment fund to negotiate its terms, not least because such person may have a vested interest in the terms of contact with the investment fund.

Secondly, investment funds should be acutely aware of the use of Gibraltar funds as part of a pension liberation exercise. Investment funds are advised to refer to the letter sent by the FSC during December 2013, to every Experienced Investor Fund registered with the FSC, by way of a reminder.

Thirdly, there was no finding of dishonesty either by the Court or the FSC, even though a letter from the FSC to Mrs. Compson said that she furnished false, misleading or inaccurate information to the FSC. In the Court's judgment, there was evidence it said, on which the chief executive officer of the FSC could properly have come to the view that Mrs. Compson had furnished false, misleading or inaccurate information to the FSC. However, the chief executive officer of the FSC had made no finding that Mrs. Compson had deliberately lied to the FSC. Given the seriousness of such an allegation, it was incumbent on the chief executive officer of the FSC to make that allegation clear to Mrs. Compson and to make clear findings on it. Since the allegations of the chief executive officer of the FSC relied solely on failures to exercise due care, skill and diligence and these allegations were inconsistent with an allegation of dishonesty, the Court did not consider it right to make a finding of dishonesty.

Lastly, Mrs. Compson was dealt with by Court separately, had she been a directly appointed director of Advalorem, rather than having been a director of a body corporate which itself was a corporate director of Advalorem. Arguments were raised as to whether she did or did not owe duties to Advalorem. The Court took the view that because the case related to her fitness to be involved in the financial services industry, this was independent of that consideration and the Court was therefore not required to rule on whether it would look at the ultimate directing mind of an investment company, irrespective whether management and control is being exercised directly or through a body corporate.

Conclusion

This decision gives some guidance as to what, in practice, is required of directors of Gibraltar investment funds, as well as the steps directors ought to take to ensure they are properly discharging their duties. Since there is no statutory codification of the duties of directors of a Gibraltar company and the duties are derived primarily from English case law, the consideration by a Gibraltar court of directors' duties in the particular context of investment funds is welcome. However, this judgment has shown that good corporate governance is no less important for an investment fund than for any other entity regulated under any of the FSC's Supervisory Acts. Directors must strive to ensure that their role does not become a "tick-box" function and that they are fulfilling their high-level supervisory role.

The guidance that can be drawn from this case is not exhaustive but it shows the ongoing active role that directors must take in the affairs and business of the investment fund during its life, despite the usual delegation of their functions to the other members of the board. Directors must continually take active steps and apply their own judgement to satisfy themselves that the investment fund's business is undertaken properly. It does not matter that the directors may have used their powers of delegation to delegate certain functions to other directors. The fundamental duties owed by a director remain undiminished and directors must satisfy themselves that the director who is performing a delegated function is complying with all terms of the investment fund's offer document. This includes ensuring that any professional service providers appointed by such director (for example, property valuers) are performing their functions in accordance with their contractual obligations.

The Court also expressed its reluctance to interfere with a sanction imposed by the chief executive officer of the FSC, unless it is clearly wrong or if the chief executive officer of the FSC has taken irrelevant considerations into account. Therefore, it is clear that the term "fit and proper" as determined by the FSC and which is not defined in law, will continue to be defined based on the considerations which the chief executive officer of the FSC considers relevant. Lastly, whether or not the chief executive officer of the FSC intended to make a finding of dishonesty is not clear. However, if this was the intention, it was incumbent on the chief executive officer of the FSC, rather than the Court, to make clear findings on it.


[4] Re Barings plc (No 5) [2000] 1 BCLC 523

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions