New Court of Appeal decisions

It has been a busy quarter for the Cayman Islands Court of Appeal with two decisions in particular requiring consideration – Weavering and Re Dyxnet.

Weavering overturned

In an unanticipated development, the Cayman Islands Court of Appeal handed down judgment on Feb. 12, 2015 (in Weavering Macro Fixed Income Fund Limited (in liquidation) v. Peterson & Ekstrom (Feb. 12, 2015) (Court of Appeal)) and has reversed the decision of Justice Andrew Jones1 who had held that the directors of the Weavering Macro Fixed Income Fund were liable for willful 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 comprised fictitious interest rate swaps with the related Weavering Capital Fund based in the British Virgin Islands, which were designed to conceal that the fund had in fact suffered substantial losses. 

Magnus Peterson

The allegation against the directors was that they ought to have discovered the identity of the counterparty to certain interest rate swap contracts. If they had, 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, a sum that was irrecoverable.

Justice Jones concluded at the end of the trial at which both directors gave evidence, that the directors were in breach of their duty of care and skill in failing to discover who the counterparty was since the name of the counterparty appeared in a quarterly report which both directors had read. The Court of Appeal agreed.

The articles of association of the fund contained an exclusion of liability unless the directors were guilty of “willful neglect or default.” Justice Jones inferred from the evidence that the directors had been so guilty and found them liable. The Court of Appeal disagreed, concluding that the trial judge had been wrong to draw such an inference from the facts.

The Court of Appeal re-affirmed that a director could not be guilty of willful 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.2 This was the same test that Justice Jones had applied.

He inferred that the directors consciously chose not to read the 2008 report with sufficient care to satisfy themselves that there had been no breach of the investment restrictions, knowing that failure to do so was in breach of their duty. The Court of Appeal held that this inference was improper on the evidence, stating that the evidence was equally consistent with the directors having a different view as to what their high level supervisory duties required of them, and equally consistent with negligence or gross negligence, which was not sufficient to satisfy the test.

The directors’ evidence that they each genuinely believed that they were complying with their high level duty to supervise, was clear and unchallenged; therefore, the trial judge was wrong to have inferred they had consciously chosen not to perform their duties to the fund.

Justice Jones did not consider the second limb of “recklessly careless” and, in particular, left open the question of whether, in order to be held liable under this limb, it was necessary to prove that the director appreciated that his conduct might be a breach of duty and had continued regardless of the consequences.

The Court of Appeal examined the authorities relied upon by Justice Romer 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 carelessness.

The Court of Appeal judgment applies well-known principles and authorities relating to the legal test of willful neglect or default. Indeed, Justice Jones applied those same principles.  The significance of the judgment lies in the criticism by the Court of Appeal of the inferences drawn by the trial 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.

Based on the foregoing, if liability for negligence and gross negligence are excluded, the prospects of finding liability on the part of directors, administrators or auditors of funds seem very slim indeed. Accordingly, with pressure from fund investors, we may see a shift in the standards applied to directors in articles of association and elsewhere so that gross negligence becomes a more commonplace standard.

In the Grand Court’s first instance judgment, Justice Jones made obiter comments regarding the practical steps which directors of Cayman Islands funds should take in order to comply with their duties.

On appeal, no serious criticism was made by the Court of Appeal of the substance of Justice Jones’s obiter comments and, accordingly, directors of Cayman Islands funds can continue to regard his dicta as useful guidance as to some of the conduct required in order to discharge their supervisory duties. Further, the Cayman Islands Monetary Authority has now issued the Statement of Guidance for Regulated Mutual Funds on January 13, 2014. A number of principles in the SOG reflect the guidelines suggested by Justice Jones at first instance.

It is not yet known whether there will be an appeal of the Court of Appeal’s decision. If there is, the Privy Council may well provide further valuable guidance on the scope of the duties owed by Cayman Islands’ fund directors.

Re Dyxnet Holdings Ltd, Court of Appeal, reasons handed down Feb. 23, 2015

In this recent Court of Appeal decision, the court had to consider whether it had inherent jurisdiction to order a foreign company to provide security for costs in winding up proceedings.

Section 74 of the Companies Law provides that security for costs may be ordered to be provided by a plaintiff Cayman Islands company where the court is satisfied that the assets of the plaintiff company will be insufficient to pay the defendant’s costs.

This statutory provision only applies to Cayman Islands companies. The Grand Court Rules (GCR) Order 23 provides for security for costs to be provided by a foreign plaintiff. This rule, however, does not apply to winding up proceedings which are governed by the Companies Winding Up Rules, 2008 (as amended) (CWR), which make no provision for security for costs.  The Court of Appeal therefore considered, in this context, whether it had inherent jurisdiction to order a foreign company to provide security for costs in winding up proceedings. 

In Re Freerider Ltd3 [2010] (1) CILR 286, Justice Angus Foster held that there was no jurisdiction to make an order for security for costs against a non-resident individual in winding up proceedings because any inherent jurisdiction to do so would be inconsistent with the CWR.  In Re Dyxnet Holdings Ltd., Justice Peter Cresswell followed that reasoning and applied it to a foreign company.

The Court of Appeal in Dyxnet, however, held that he was wrong to do so, relying upon the observations of Lord Scott in the Privy Council appeal in the Cayman Islands case of Bancredit4: “

It seems to their Lordships clear from the case law dealing with security for costs issues that the court has an inherent jurisdiction to make security for costs orders but that the exercise of that jurisdiction is subject to what has become the settled practice of the court…The Rules of Court did not create or confer the power to do so but, rather, harnessed the power so as to control its exercise.”

Lord Scott went on to say5: “The effect, therefore, of statutory provisions such as Section 74, or of Rules of Court such as Order 23 Rule 1, is not to confer a jurisdiction that the courts did not previously have, but, in the case of Section 74 and its statutory predecessors, to exclude impecunious corporate plaintiffs from the established settled practice that security for costs orders could not be based on mere impecuniosity and, in the case of Order 23 Rule 1, to specify particular circumstances in which the jurisdiction could properly be exercised …”

The Court of Appeal emphasized that although there was nothing in the CWR that empowers the court to order security for costs, neither was there anything in the CWR which would be inconsistent with the exercise of an inherent power to order security for costs against a non-resident limited liability company in proceedings under the CWR. It was effectively silent.

The current position is that where the petitioner is an individual in winding up proceedings, there is no power to award security for costs, the Court of Appeal approving the narrower basis for the decision in Freerider. Where the petitioner is a company, however, there is power if the court is satisfied that there is reason to believe that the assets of the plaintiff company will be insufficient to meet the costs of the company against which the petition is brought, either under Section 74 if the petitioner is a Cayman Islands company or under the court’s inherent jurisdiction if it is a foreign company.

US FATCA – time for reporting

As we have discussed in previous “Law Talk” articles, the application and implementation of the foreign account tax compliance provisions (FATCA) of the U.S. Hiring Incentives to Restore Employment Act, 2010, to relevant entities in the Cayman Islands is now in full swing and we are heading into the first round of reporting.

For reporting Cayman Islands financial institutions (Cayman Islands FIs), as described in FATCA and the Model 1B intergovernmental agreement between the Cayman Islands and the U.S., 2015 is the first year in which they are required to report to the Cayman Islands Department for International Tax Cooperation (the Cayman TIA). 

Cayman Islands financial institutions should now have a Global Intermediary Identification Number (GIIN) from the U.S. Internal Revenue Service. Further, on or before April 30, 2015, each Cayman Islands financial institutions is required to notify the Cayman TIA that they intend to make a report and include their name, FATCA categorization and GIIN. Notification may be conducted by or on behalf of Cayman Islands FIs directly to the Cayman TIA via the Cayman Automatic Exchange of Information (AEOI) Portal. The Cayman AEOI Portal opened in March 2015 and can be accessed from the website

Further, on or before May 31, 2015, each Cayman Islands financial institution is required to report to the Cayman Islands TIA in respect of U.S. reportable accounts6. A NIL report is required even where the Cayman Islands financial institution has no U.S. reportable accounts.

The reporting format will be consistent with currently published schemas by the IRS for FATCA and by the OECD for the common reporting standard and will be in XML format. Cayman Islands financial institutions will have the option of submitting reports to the Cayman TIA individually, by entering information manually on the website, or via bulk ability to upload an XML file containing information for multiple Cayman Islands FIs. Failure to report to the Cayman TIA could result in penalties and/or enforcement action.

Reporting and notification for U.K. FATCA, similar to U.S. FATCA, commences in 2016. We will provide further updates as the Cayman Islands continues to navigate its way through the demanding FATCA process. 


  1. Weavering Macro Income Fund Limited v. Peterson and Ekstrom [2011] (2) CILR 203.
  2. Applying the test of Romer J in Re City Equitable Fire Insurance [1925] Ch. 407
  3. 2010] (1) CILR 286
  4. [2009] CILR 578 at 582-83
  5. Ibid., at  585
  6. Reportable Accounts are financial accounts where the account holder is either a “specified U.S. person” (broadly, any U.S. person or person liable to pay U.S. tax with some exceptions) or is a non-U.S. entity the controlling persons of which include one or more specified U.S. persons.


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Tania Dons

Tania advises on all areas of corporate and commercial law but with a particular focus on establishing and advising hedge funds and private equity funds and related regulatory matters. Tania has over 12 years of legal experience and represents major institutions, investment banks, fund managers, directors and trustees in all aspects of investment funds, including structuring and ongoing operations. Tania regularly advises on fiduciary duties, side letters, managed accounts, managing illiquid assets and other key issues facing investment funds.

Tania Dons
Conyers Dill & Pearman
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Grand Cayman KY1-1111
Cayman Islands


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Conyers is a leading international law firm with a broad client base including FTSE 100 and Fortune 500 companies, international finance houses and asset managers. The firm advises on Bermuda, British Virgin Islands and Cayman Islands laws, from offices in those jurisdictions and in the key financial centres of Hong Kong, London and Singapore. We also provide a wide range of corporate, trust, compliance, governance and accounting and management services. The Cayman Islands office provides advice on all aspects of Cayman Islands corporate, company and commercial law as well as commercial litigation and private client matters. SIX, 2nd Floor, Cricket Square, PO Box 2681, Grand Cayman, KY1-1111, Cayman Islands
Tel +1 345 945 3901 Email: [email protected]