In an unanticipated development, the Cayman Islands Court of
Appeal handed down judgment on 12 February 2015 and has reversed
the decision of Jones J1 who had held that the Directors
of the Weavering Macro Fixed Income Fund (the "Fund")
were liable for wilful neglect or default, and has set aside the
US$111 million judgment which had been obtained by the liquidators
of the Fund against them.
The Fund collapsed into insolvency when it was discovered that
its Net Asset Value ("NAV") comprised fictitious interest
rate swaps with the related Weavering Capital Fund based in BVI and
which were designed to conceal the fact, that the Fund had in fact
suffered substantial losses. The allegation against the Directors
was that they ought to have discovered the identity of the
counterparty to the IRS contracts, and if they had, then they would
have appreciated that the values attributed to those contracts
could not be justified and the Fund would have been put into
liquidation in November 2008 and would not have paid out US$111
million to redeemed investors which was irrecoverable.
Jones J concluded at the end of the trial at which both
Directors gave evidence that they were in breach of their duty of
care and skill in failing to discover who the counterparty was in
November 2008 as the name of the counterparty appeared in a
quarterly report which they had both read. The Court of Appeal
However, the Articles of Association of the Fund provided an
exclusion of liability unless the Fund could prove that the
Directors had been guilty of "wilful neglect or default".
Jones J had inferred from the evidence that they had indeed been
guilty and held them liable. The Court of Appeal disagreed and held
that the Judge had been wrong to draw such an inference from the
The Court of Appeal re-affirmed that a Director could not be
guilty of wilful neglect or default unless he either (i) knows that
he is committing and intends to commit a breach of his duty or (ii)
is recklessly careless in the sense of not caring whether his act
or omission is or is not a breach of duty (applying the test of
Romer J in Re City Equitable Fire Insurance 
Ch.407). This was the same test that Jones J had applied.
Jones J had found that this test had been satisfied on the
evidence. He inferred that the Directors consciously chose not to
read the 2008 report with sufficient care to satisfy himself that
there had been no breach of the investment restrictions, knowing
that failure to do so was in breach of his duty. The Court of
Appeal held that this inference was improper on the evidence. The
Court of Appeal said that the evidence was equally consistent with
the Directors having a different view from the Judge as to what
their high level supervisory duties required of them, and equally
consistent with negligence or gross negligence which was not
enough. The Directors' evidence that they each genuinely
believed that they were complying with their high level duty to
supervise, was clear and unchallenged in cross-examination and so
the Judge was wrong to have inferred that they had consciously
chosen generally not to perform their duties to the Fund.
Jones J had not considered the second limb of "recklessly
careless" and in particular had left open the question of
whether in order to be held liable under this limb it was necessary
to prove that the Director had appreciated that his conduct might
be a breach of duty and had continued regardless of the
consequences. The Court of Appeal examined the authorities which
had been relied upon by Romer J in City Equitable and
concluded that the Director must at least be shown to have
suspected that his conduct might constitute a breach of duty in
order to be found liable under the second limb. There was no
evidence that these Directors appreciated that their conduct might
be a breach of duty and so they could not be liable for reckless
The judgment applies well known principles and authorities
relating to the legal test of wilful neglect or default, indeed
Jones J had applied the same principles. The significance of the
judgment lies in the criticism by the Court of Appeal of the
inferences which had been drawn by the Judge, and their emphasis on
the fact that these Directors had not understood what their high
level supervisory duties required of them, having delegated all
important functions to the Investment Manager, the Administrator
and the Auditors.
The conclusion to be reached from the approach of the Court of
Appeal to the evidence is that if liability for negligence and
gross negligence are excluded, the prospects of finding liability
on the part of Directors, Administrators or Auditors of funds are
very slim indeed.
1 (Weavering Macro Fixed Income Fund Limited -v-
Peterson and Ekstrom  (2) CILR 203)
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