The Court of Appeal has upheld the judgment of Jack J in Minette Compson v The Chief Executive Officer of the Financial Services Commission and Brian Weal v The Chief Executive Officer of the Financial Services Commission, which provided guidance as to what, in practice, is required of persons acting as licensed directors of Experienced Investor Funds, as well as the steps such directors ought to take to ensure they are properly discharging their duties.
Advalorem Value Asset Fund Limited (“Advalorem”) was a collective investment scheme registered under the Financial Services (Collective Investment Schemes) Act 2011 as an Experienced Investor Fund. Advalorem’s investment objective was to invest in distressed assets on the terms set out in the offer document issued by Advalorem. The Gibraltar Financial Services Commission (“FSC”) conducted an investigation into Advalorem, between February and October 2013, following which it petitioned the Supreme Court for an order to protect the interest of participants and potential participants. This protection order was granted on January 2014 and the Supreme Court appointed an administrator to safeguard Advalorem’s assets. Subsequent regulatory action by the FSC in respect of Mrs Minette Compson (a director of a company that was itself a director of Advalorem) and Mr Brian Weal (a director of Advalorem), was taken in the public interest to protect investors and, in particular, to address what the FSC considered were serious and significant corporate governance failings on the part of Mrs Compson and Mr Weal. These principally related to investments made by Advalorem following inappropriate property valuations (the valuations made special assumptions that were inapplicable and unrealistic). The FSC’s decisions were appealed by Mrs. Compson and Mr. Weal, but in a judgment of 29 April 2015, the Supreme Court dismissed both appeals against the FSC’s decisions. My first case note on the Supreme Court decision under appeal sets out all relevant information (http://www.gibraltarlawyers.com/files/Directors_Duties_Brought_into_sharp_focus_in_Gibraltar-May_20150.pdf ).
In a judgment (in which Dudley CJ, the Chief Justice of the Supreme Court of Gibraltar gave the leading judgment, and with whom Dame Janet Smith, JA and Sir Colin Rimmer, JA concurred) the Court of Appeal upheld the findings of Jack J and dismissed the appeal of Mr Weal. Mrs Compson had also appealed the decision of Jack J and although she subsequently withdrew it, joint grounds of appeal had been filed.
The only ground of appeal advanced on behalf of Mr Weal against the judgment of Jack J concerned the standard of care, which should have been applied to measure Mr Weal’s performance as a director of Advalorem. Accepting that Jack J had correctly identified the test by which Mr Weal’s claimed shortcomings fell to be assessed and rejecting the point put forward, that a general assessment was required as to Mr Weal’s competence, character, diligence, honesty, integrity or judgment, or his current ability to perform the duties of an licensed person, the Court of Appeal found that there was no need for Jack J to have considered the wider matters about Mr Weal’s competence etc. This was because, once the FSC had found that Mr Weal had breached the fifth statement of principle applying to him under the Financial Services (Conduct of Fiduciary Services Business) Regulations 2006 (“the FSC Regulations”), which provides that “a licensee shall act with due skill, care and diligence in the conduct of its fiduciary services business”, that was sufficient to entitle the FSC to take the enforcement action that it took. Given that Jack J’s view was that the FSC’s findings in this respect were unassailable, there was no need for him to consider beyond this.
Given that, in his judgement, Jack J had found that there had been a breach of the FSC Regulations, the Court of Appeal was not required to specifically consider Mr Weal’s actions in the context of the common law duty of skill and care which he owed to Advalorem and whether the common law test should be subjective or objective in nature. This was because the application of that test needed to be considered in the statutory context, in that Mr Weal was no ordinary director, but rather a licensed Experienced Investor Fund director subject to regulation by the FSC. Accordingly, the Court of Appeal was only required to consider the statement of principle under the FSC Regulations which required Mr Weal to act with due skill, care and diligence in the conduct of his fiduciary services business, in determining whether the FSC had correctly issued the sanctions that it did. The Court of Appeal took the view, that the plain reading of the FSC Regulations establishes an objective test. Whilst this in itself, does still not determine whether unfitness of directors generally (in every context, whether or not involving regulated business) is to be determined by an objective or subjective standard, as not every director of a Gibraltar registered company would be bound by the FSC Regulations on which this decision turned, the fact that the duty of care stated under the statement of principle under the FSC Regulations accurately states the duty of care owed by any director at common law, it could be argued that an objective test similarly applies. Counsel for Mr Weal, sought to rely on section 174(2) of the English Companies Act 2006 to attempt to import a dual objective/subjective test. The Court of Appeal rejected this, on the basis that there was no need to consider such a test. Accordingly, the question of which test should be applied in cases of breach by a director of his common law duty of due skill, care and negligence (and not breach of the equivalent statement of principle under the FSC Regulations) remains unanswered.
One final point to take from this appeal derives from certain matters of fact. Whilst, the decision of Jack J in the Supreme Court on any question of fact was final and Mr Weal was bound by the findings of fact made by Jack J, there was an attempt it appears, to re-argue the facts. It was advanced on behalf of Mr Weal that acceptance of the valuation reports and the approval of the purchase of land should not have been construed as being in the nature of a final decision of the board but rather as part of a continuum. It was further submitted that Mr Weal had intended to travel to Scotland to undertake further inquiries in respect of the land. Therefore, whilst Mr Weal may not have undertaken a detailed forensic examination of what was before him at the board meeting, had there not been supervening events he would have undertaken his duties with skill, care and diligence albeit adopting a different approach. Without regurgitating in any particular detail, the Court of Appeal took the view that Mr Weal’s shortcoming was in assenting to a resolution by Advalorem’s board to pursue the attempted purchase of the two sites without, apparently, giving any consideration to matters which he should have considered. It is clear from this that directors should insist that when board meetings are held those meetings are fully and accurately documented. Far from merely signing pro forma minutes that are drafted in advance and which simply “note” certain matters (as appeared to be the case in this instance), board minutes should provide a record of the substance of discussions among the directors and other meeting participants, any enquiries that are made and any approvals or resolutions in relation thereto, whether such approvals or resolutions are final or contingent on some other action being taken or indeed, the dissenting opinions or concerns of individual directors.
As pointed out by Samantha Barrass, the CEO of the FSC, this decision once again sends an important signal that there will be real and meaningful consequences for those who disregard their corporate governance responsibilities and put investors at risk. The important findings in the original judgment by Jack J will no doubt stand as a foundation for future fund governance and Gibraltar courts will likely refer to these in any cases that occur in the future. Following Jack J’s judgment, the FSC issued a paper, which sets out the FSC’s expectations of the directors of Experienced Investor Funds.
Jonathan Garcia, Senior Associate, ISOLAS