The long awaited appeal in Weal v FSC has now been heard and the Judgment of the Court of Appeal handed down (it is available from the Gibraltar Court Service website). It is not necessary to restate the background to the case as it is amply covered elsewhere. Suffice it to say that the Court of Appeal dismissed the appeal of the appellant and upheld the decision of the Supreme Court in respect of certain regulatory sanctions. The case has inevitably been followed with interest by the financial sector locally.
In my first case note on the Supreme Court decision under appeal I expressed the view that "Whilst the case is obviously very fact-specific, it is unlikely that the legal principles set out in the Judgment will be reversed by the Courts in the future". (30 April 2015, Mondaq).
I also stated "On the facts I think this decision is not surprising and there is useful commentary from Mr Justice Jack as to how directors should discharge their directors duties". (20 May 2015, Mondaq).
The Court of Appeal Judgment is relatively short. It is therefore worth quoting from the report itself.
Per Dudley CJ, p.12-13:
"18. The relevant statutory provisions are these. By virtue of section 10(1) of the Act the CEO may impose such conditions on licences "as appear to the [CEO] to be necessary or desirable for the protection of investors". For its part section 11 allows the CEO to alter a licence inter alia if a licensee contravenes a provision of the Act or fails to satisfy an obligation to which he is subject by virtue of the Act (section 11(2)(b)), or the CEO "considers it desirable for the protection of investors, of the public or the reputation of Gibraltar as a financial centre" (section 11(2)(h)). In turn regulation 5 of the Financial Services (Investment and Fiduciary Services) Regulations 2006 provides:
"A licensee shall act with due skill, care and diligence in the conduct of its fiduciary services business."
It is self evident that a breach of regulation 5 could properly engage the exercise of the CEO's power under sections 10 and 11.
19. It follows that the test to be applied is whether Mr Weal acted with due skill care and diligence. But application of that test needs to be considered in the statutory context in that Mr Weal was no ordinary director, but rather a licensed Experienced Investor Funds director subject to regulation by the FSC. In my judgment given the nature of the enactment and its regulatory provisions aimed at the protection of investors, the plain reading of regulation 5 establishes an objective test. Although reliance upon authorities dealing with the common law test of a director's duty can assist, the dual objective/subjective test does not have to be imported."
My reading of the Court of Appeal Judgment is that the decision is both fact-specific and also regulatory-specific to EIF Directors. However, to the extent that decisions of directors generally are taken with due skill, care and diligence, they cannot be in breach of duty.
This Court decision should be extremely important to the local Experienced Investor Fund sector. EIF Directors are once again clearly put on judicial notice that the Court would expect them to properly consider proposed transactions before approving them (in particular, to challenge documentation and ask questions), and just as importantly, to obtain competent professional advice. The transactions here were found not to be bona fide between parties at arms-length.
I have previously referred to the decision of the Supreme Court as a "wake-up call". The Court of Appeal has now sounded the alarm clock just in case the previous wake-up call went unheeded. The Judgment also strengthens the hand of the financial regulator (FSC) with regards to its Thematic Review of EIF Directors. As I have also stated elsewhere, commensurate with EIF 'light touch regulation', directors end up with a higher standard of responsibility, especially so when things go wrong.
Although Gibraltar law does not recognise the concept of the 'nominee director', these Court decisions just reinforce the point even further that officers of 'corporate directors' would also be expected to exercise their own independent judgment. This is especially relevant in 'offshore' structures that use corporate directors as the Courts will clearly enquire into the decision-making process by the Board and whether the directors simply acted on instructions (i.e. rubber-stamping) from third parties.
Finally, the FSC has recently informed the insurance industry that it intends to commence a Thematic Review of another class of financial services licensee, "Insurance Management". Given that insurance managers would be subject to similar regulatory expectations (if not requirements) as EIF Directors (who themselves are licensed by the FSC as 'company managers'), the same principles as enunciated by the Court of Appeal would also appear to be relevant here.
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.