By Stephen Alleyne
From time immemorial we have had people in Barbados accepting directorships on the boards of companies and statutory corporations without ever addressing their minds to the serious duty the law imposes on them as directors, but I feel that is about to change in the wake of the collapse of CLICO.
Clearly, the role of an individual director is not to sit passively while certain co-directors – who may be considered king-pins or may even be shareholders in the entity they serve – dictate to them or do as they wish carte blanche. Each director is under the law answerable for his performance during his or her tenure of service.
To bring this into perspective, it is always good to look first at what the legislation says about the particular area of law. Under section 95(1) of the Companies Act, Chapter 308, every director of a company in exercising his powers and discharging his duties is required to: (a) act honestly and in good faith with a view to the best interests of the company; and (b) exercise the care, diligence and skill that a reasonably prudent person would exercise in comparable circumstances.
The Act goes on to say in section 95(2) that a director, in determining what the best interests of the company are, must have regard to the interests of the company’s employees in general and the interests of the company’s shareholders. However, what section 95(3) of the Act says is extremely important: it goes on to say that the duty imposed on the directors by section 95(2) is owed to the company alone, and that it is enforceable the same way as any other fiduciary duty that the directors owed to a company.
What the Act has done in the section 95(2) is to make it clear that the duties imposed on company directors under section 95 are indeed fiduciary duties and has also made it clear that there are other fiduciary duties imposed on company directors by law, besides those spelt out in the Act. To glean and understand the other fiduciary duties imposed on company directors, it is necessary to examine the common law to understand how they have evolved and continue to evolve, an exercise which it is impossible to achieve in a single article.
In the recent Cayman Islands case of Weavering Macro Fixed Income Fund Limited (In Liquidation) v Stefan Peterson and Hans Ekstrom, a case decided in the Grand Court of the Cayman Islands, for example, the official liquidators of the Macro Fund brought a claim against Stefan Peterson (Stefan) and Hans Ekstrom, two of the directors of the Macro Fund, for damages for breach of their duties as directors of the fund.
The Macro Fund was incorporate in 2003 as an open-ended investment company, and, except for the composition of its board of directors, it had a conventional management structure. However, Magnus Peterson, the brother of Stefan and stepson Ekstrom, was the owner and controller of Weavering Capital (UK) Limited, the investment manager of the fund. He had appointed Stefan and Ekstrom as directors of the fund to meet minimum “legal requirements without burdening himself with a real board of directors who could be expected to perform their supervisory role in an ordinary businesslike manner”. Ekstrom by then had retired and Stefan had been working for an insurance company in Oslo.
The practice in the Cayman Islands is that investment management, administrative and accounting functions are delegated to professional service providers, but a company’s independent non-executive directors retain a high level supervisory role. Those three functions were in this case properly delegated to one of Magnus Peterson’s company and PNC Global Investments Servicing (Europe) Limited, but that did not absolve the two directors, ostensible as they may seem, from the duty imposed on them by law. They had hardly, if ever, attended any directors’ meetings and all they had done was to rubberstamp various documents delivered to them. The liquidators alleged that they were in breach of their duty to exercise independent judgment, to exercise reasonable care, skill and diligence and to act in the interests of the Macro Fund.
Having found that the structure of the Macro Fund was not materially different from other open-ended investment companies registered under the mutual funds law of the Cayman Islands, the court, adapting conventional company law principles in the circumstances, concluded that the relevant principles of law were, among other things, that:
• Whilst independent directors rarely have the technical expertise and experience to be able to monitor sophisticated investment strategies and trading techniques in a direct hands-on manner, they are expected to satisfy themselves (on a continuing basis) that the fund is complying with investment restrictions set out in the offering documents and to acquire a proper understanding of the financial results of the investment and trading activity, without which they would not be in a position to perform an overall supervisory role.
• It is their duty to satisfy themselves that there is an appropriate division of function and responsibility between the investment manager and administrator. They need to satisfy themselves, on a continuing basis, that the various services providers are performing their functions in accordance with the terms of their respective contracts and that the managerial and/or administrative functions which ought to be performed are left undone.
• Independent directors must do more than simply react to whatever problems may be brought to their attention by the other professional service providers. They must apply their minds and exercise an independent judgment in respect of all matters falling within the scope of their supervisory responsibilities.
• Reviews of financial accounts must be conducted in an inquisitorial manner, the directors making appropriate enquiries of the administrator and auditor. The directors are not entitled to assume that the other service providers have all performed their respective roles (actual or perceived) and therefore do not need to be supervised in any way whatsoever.
• Independent directors are expected to be able to read a balance sheet and have a basic understanding of the audit process. If they accept a responsibility for a fund’s financial statements (by issuing management representation letters and signing financial statements), it is their duty to exercise an independent judgment in satisfying themselves that the financial statements do present fairly the fund’s financial condition.
The court found in conclusion that the two directors here were guilty of willful neglect and default because they consciously chose not to perform their duties to the Macro Fund, or at least not in a meaningful way. The court awarded damages in the sum of US$111 million against each of the directors and costs.
These principles of law discussed in this case should stir the minds of all directors in this country and make them understand that their appointments come with a heavy responsibility. Directors must not be mere automatons who sit passively and take instructions from other directors of the boards they serve, but must use their own judgment in the decisions they make. Of course, under the Companies Act, a director may dissent to a resolution passed or action taken at a meeting, but he must request that his dissent be entered in the minutes of the meeting and he must send his written dissent to the secretary of the meeting before it is adjourned or to the registered office of the company.
(Stephen Alleyne is an attorney-at-law and former member of the Royal Barbados Police Force.