$111 million. It really is a lot of money. It is also the value
of the personal liability awarded against the two directors of the
Weavering Macro Fixed Income Fund Limited by the Grand Court of the
Cayman Islands in late summer last year.
The decision brought into sharp focus an issue that has been
growing in significance for a number of years. This issue is the
standards of governance of investment funds. The Weavering case is
an extreme example, but all participants exposed to investment
funds business should take it as a salutary lesson and familiarise
themselves with the principles identified by the court regarding
The issue of governance has been growing in importance since the
credit crunch of 2007 and the collapse of Lehman's in 2008.
Investors in openended funds discovered, in some cases, that the
approach of the directors in responding to liquidity or other
difficulties that arose appeared to favour not the investors but
the investment managers (and some investors also felt that the
investment managers were putting their own interests ahead of
investors'). As a consequence, investors' due diligence
practice when making an investment decision about a new fund
investment has developed, and investors increasingly want to be
sure that fund directors are demonstrably independent of the
investment manager and have as a body the skills and acumen to
exercise that independence in the interests of the investor body as
In the Weavering case the facts found by the court are such that
it was easy for the court to conclude that the two directors of the
fund had been guilty of wilful neglect or default in their duties
as directors. Broadly speaking the court found that they had never
truly put their mind to their role and obligations, relying
entirely upon others without enquiry or examination. As a
consequence of the finding that they were guilty of willful default
or neglect any insurance that was carried for the benefit of the
directors was likely to be void and so this truly is a personal
Whilst the decision of the court did not create new law in
relation to directors' duties or responsibilities, the
application of existing law in the context of investment fund
structures and the summary of applicable law provides a useful
analysis. The court did make some recommendations as to how
directors should address some issues that might surprise some
practitioners in the industry and perhaps do not sit easily with
common market practice. The consequence may be a modification of
market practice to address these issues and directors would be wise
to have them to mind.
The court recognised that as an investment manager is usually
the driving force behind the establishment of a fund, it is often
the case that the support team (investment manager, administrator,
custodian/prime broker, legal advisers, auditors etc) is informally
put in place for the fund before the directors first come together.
A consequence of this is that in the early stages of the life of
the fund the board must carefully consider the relationships
between the fund and those service providers and satisfy itself
that, where there are any gaps or limitations in the contractual
services to be provided, the fund itself can fill those gaps or
address those limitations. It may therefore be an onerous task for
a director to carefully consider all facets of the fund before
accepting his appointment to the new vehicle, and the directors (or
the board as a whole) may wish to consider whether separate support
or advice should be taken.
The comments of the court would suggest that once the fund is
established it is important that the board regularly reviews the
performance not only of the fund but of the service providers; for
every service provider that has a contractual relationship with the
fund vehicle, the board should receive input and examine and assess
their performance and how they contribute to the success of the
fund. As noted, this is no more than a reiteration of established
law on directors' duties albeit in the specific context of
investment fund directors. The court noted the particular nature of
investment funds and the fact that save for the board, the
fund's functionality will be wholly reliant on delegates.
Perhaps the key point to draw from both the court's decision
in Weavering and from the greater attention to this area being paid
by investors is for directors to understand that they can no longer
fulfil their role in a relatively passive manner but must in fact
take an active approach ensuring not only that they make enquiry
and consider the input of the various service providers, but also
that those steps that are taken are fully recorded.
As originally appeared in Business Brief, Issue 278
– February 2012
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.
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