Cayman Islands: the duties of a hedge fund's non-executive directors

The Grand Court gave judgment late last month in Weavering Macro Fixed Income Fund Ltd. (in liquidation) v Peterson and Ekstrom: see here (pdf). The case concerned a claim by the liquidators of a hedge fund (formed as an open ended investment company), which was listed on the Irish Stock Exchange, against its two non-executive directors. These directors were closely related to the fund's promoter and principal investment manager. The company entered liquidation shortly after it was discovered that many of the assets on its balance sheet did not exist.

Consistent with common practice, the investment management, administration and accounting functions of the fund had been delegated to professional service providers. The role of the non-executive directors was to perform a supervisory function. The liquidators argued that the directors had failed in this regard and had breached their duty of skill, care and diligence; the losses suffered by the fund, it was argued, arose because of their neglect. The liquidators were successful in their claim against the directors. The trial judge found that the directors had, amongst other things, assumed the "posture of automatons" by signing whatever documents were put in front of them by the investment manager and made no attempt to understand exactly how each of the service providers intended to perform its duties.

The judgment contains much about the standards expected of the non-executive directors under the law of the Cayman Islands, and there are many references to decisions of the English courts. For example, the judge held that the the scope of the directors' duties was not reduced because they were unpaid and received no expenses. The judge also explained what he expected of the directors in terms of the conduct of board meetings and the matters that the directors should have discussed. He criticised the production of standard form minutes for meetings. The directors of investment funds, he observed, had a duty to ensure that minutes of meetings were taken which enable the reader to understand the basis on which decisions were taken. Moreover, not once in six years did the directors ask for a written report, or receive an oral report, from those they were required to supervise.