Vol 13 (2016) - Issue 1

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Weavering: Establishing Wilful Neglect or Default by Way of Recklessness

For many years questions of corporate governance within English common law jurisdictions were seen as largely uncontroversial: the substance of the duties owed by directors, whether codified in statute or derived from the common law (or a combination of the two), were seen as largely settled and, in short, could be reduced to a handful of bullet points. Perhaps it was the size of the judgement, or that for the first time a court provided guidance as to the scope of the duties owed by directors of investment funds, and the steps directors would need to go to discharge those duties, but the discussion which followed the court’s decision in Weavering Macro Fixed Income Fund Limited v Peterson and Ekstrom suggested that the application of those principles was far from clear. It naturally follows that the Court of Appeal’s recent decision, in which it overturned the first instance decision of Mr Justice Andrew Jones QC, has added a further dimension to the discussion.
As was widely reported, on 26 August 2011 the former directors of the failed Weavering Macro Fixed Income Fund (Fund) were found to have breached their duties, resulting in an award of damages in the sum of USD 111m. Central to those findings were not only the breaches of duty, but the conduct of the directors was such that those breaches arose as a result of their own wilful neglect or default. The indemnity provision found within the Fund’s constitutional documents had the effect that, absent a finding of this nature, the claims brought by the Fund (on the instruction of its liquidators, Mr Ian Stokoe and Mr David Walker of PricewaterhouseCoopers) would have failed.
The relevant provision was contained in article 182 of the Fund’s articles of association. It provided that:
'Every director, agent or officer of the Company shall be indemnified out of the assets of the Company against any liability incurred by him as a result of any act or failure to act in carrying out his functions other than such liability (if any) that he may incur by his own wilful neglect or default. No such director, agent or officer shall be liable to the Company for any loss or damage in carrying out his functions unless that liability arises through the wilful neglect or default of such director, agent or officer.'

Both at first instance, and on appeal, the court proceeded on the basis that the relevant test was that set out by Romer J in Re City Equitable Fire Insurance, namely:
'An act, or an omission to do an act, is wilful where the person of whom we are speaking knows what he is doing and intends to do what he is doing. But if that act or omission amounts to a breach of his duty and therefore to negligence, is the person guilty of wilful negligence? In my opinion that question must be answered in the negative unless he knows that he is committing, and intends to commit, a breach of his duty, or is recklessly careless in the sense of not caring whether his act or omission is or is not a breach of duty.'

There are thus two distinct limbs to the test: either an intention to commit a breach of duty or being recklessly careless. At first instance Mr Justice Jones QC found that the directors’ conduct fell within the first of these limbs, and it was thus unnecessary to consider the question of recklessness. On appeal Chadwick P, who gave the leading judgement of the Court of Appeal, found that, on the evidence available to him, although the directors were in breach of their duties it was not possible to conclude that those breaches were intentional. It thus became necessary to consider the second limb of the test.