Babbé LLP win Carlyle
3 Min Read
The Carlyle litigation, which included the longest and most complex trial in Guernsey legal history, has resulted in important developments in the understanding of the duties of Guernsey directors.
Partners Todd McGuffin and Ian Swan (now retired), who acted for the successful executive directors of Carlyle, explain more.
The Facts and the Royal Court Judgment – Carlyle Capital Corporation Ltd
Carlyle Capital Corporation Limited (“CCC”) was a publicly-listed Guernsey investment fund. A key part of its business was to borrow money on a short-term basis in the repurchase market and to use those funds to purchase US residential mortgage-backed securities.
In March 2008, the global economic crisis caused a massive contraction in financing. CCC was subject to margin calls which it could not meet and therefore went into liquidation. The liquidators of CCC brought
187 claims against the directors of the company alleging breaches of fiduciary duty and breaches of the duty of skill and care. The liquidators sought damages approaching $US 2 billion from the directors.
Babbé LLP became involved in the longest and most complex trial in Guernsey legal history. In September 2017, after six months of hearings (notably the company only operated for nine months), Lieutenant Bailiff Marshall QC of the Royal Court of Guernsey dismissed all claims against the directors finding that they had fulfilled their duties to the company.
The heavyweight nature of the case is amply reflected in the 524-page written judgment (which weighed 1.3 kilograms!).
Directors’ Duties Under Guernsey Law
In finding in favour of the directors, the Royal Court, for the first time, endorsed the distinction between a director’s fiduciary duties (duty of loyalty owed to the company by virtue of his or her position as director) and a director’s duty of care (the general duty to exercise reasonable skill and diligence).
This core fiduciary duty of loyalty is the “subjective” duty to act in what the director honestly considers to be the best interests of the company. If the director honestly believes that he or she is acting in the company’s best interests, then the duty is discharged. This is so, even if the relevant act was not in the company’s best interests viewed from an objective standpoint. Directors must exercise their own independent judgement and will fail in this duty if they merely do, or follow unquestioningly, what they are told by others. They must also act for the “proper purposes” of the company.
Duty of Care Guernsey Directors’ Duties
Unlike the fiduciary duties, the duty of care is an “objective” duty. A director can fail to exercise the standard of care required, even if the director honestly believes that he or she has acted with proper skill and diligence. The standard of care required is that of a reasonable person having both (i) the director’s knowledge, skill and experience; and (ii) the knowledge, skill and experience that may be reasonably expected of someone with the director’s function. To evaluate the level of diligence and skill reasonably expected involves considering the role of the director in the governance and management of the company, the level of skill which the director has held themselves out as having, their level of remuneration and the size of the company and nature of its business. The duty of care is not determined by the application of universal rules or procedures for directors, but rather a standard to which directors must adhere in their particular circumstances.