Guernsey: Carlyle Capital Corporation Limited (In Liquidation) And Others v William Elias Conway Jr And Others

Last Updated: 9 May 2019
Article by Simon Davies

"However startling the history of [Carlyle Capital Corporation's] short life appears at first sight, its failure was the result of circumstances beyond the control of any board of directors.  The Lieutenant Bailiff's view was that the Appellants' claim depended entirely on hindsight, and we agree with her."

A judgment handed down in April 2019 by the Court of Appeal of Guernsey has upheld the decision at first instance that the directors of Carlyle Capital Corporation Limited (CCC) were not in breach of their duty of skill and care or their fiduciary duty.  The judgment further upholds the decision as first instance that CCC's investment manager, Carlyle Investment Management LLC (CIM) was not in breach of its contractual obligations pursuant to an investment management agreement with CCC or its obligations in tort.

The first instance judgment was handed down in September 2017 by the Royal Court of Guernsey. Copies of the Ogier articles produced on the initial judgment are available at  How the £1 billion, seven-year Carlyle case puts Guernsey on the map for funds litigation and The Carlyle case and Directors' Duties. Simon Davies of Ogier (Guernsey) LLP acts for CIM and was instructed by Williams & Connolly LLP of Washington DC.

Background

CCC was an investment fund set up as a Guernsey company which went into insolvency  in 2008, losing all of its $1 billion of capital.  CCC invested mainly in residential mortgage backed securities (RMBS) issued by US government sponsored entities known as Fannie Mae and Freddie Mac.  The RMBS purchased by CCC had express guarantees that principal and interest would be paid by the government agencies in the event of any default by the homeowners and also carried the implied guarantee of the US government itself.

The RMBS assets were purchased using one-month repurchase (repo) borrowing.  The assets were subject to daily margin calls if prices changed and CCC's investment guidelines provided that CCC should have a 20% liquidity cushion in cash (or equivalent) that could be used to meet foreseeable margin calls should they occur.

The claims at first instance were brought by the fund in liquidation and its liquidators against the executive and independent directors of the fund, CIM as the investment manager, the promoter of the fund and a Carlyle holding company of the structure.

The central allegation pursued by the Plaintiffs was that the Defendants breached their duties to CCC by failing to insist or recommend that CCC take urgent steps to sell down CCC's RMBS assets, raise additional equity capital or conduct an orderly winding down of CCC from the end of July 2007.

Although this allegation was rejected by the Royal Court at first instance, the Plaintiffs alleged on appeal that the Lieutenant Bailiff had misunderstood and overemphasized the risks of selling RMBS such that, when properly understood, the only reasonable response to the crisis was to sell RMBS starting in October 2007 (the Plaintiffs having abandoned any allegation of breach prior to that time).

As a result, it was alleged by the Appellants on appeal that "the Lieutenant Bailiff made a fundamental error when she held that any reasonably competent director would have perceived that there were very significant risks in selling RMBS at [the relevant time] ... That there was no evidence upon which the Lieutenant Bailiff could properly make such a finding and that, when that finding is removed, selling RMBS was the obvious thing to do ...".

Breach of Duty by the Directors

The Court of Appeal heard significant discussion during oral submissions about the attitude of the directors of CCC to the sale of the RMBS in connection with an emergency joint meeting of the board of CCC and its Asset and Liability Committee on 23 August 2007.

Although the Court of Appeal found that findings at trial as to perception of risk were based on a misunderstanding, it went on to hold that "the existence of such an error [had] not, in [their] judgment, [had] the result that the issues [were] at large for determination". The Court stated that, even if findings had been made:

(i) that CCC was prepared to sell a material tranche of RMBS in August 2007 at or about repo prices (which were on average lower than the prices the trial judge purportedly held CCC would have sold at);

(ii) that CCC was not at that point concerned that such sales would send a damaging message to the market; and therefore

(iii) that such sales could have been undertaken without risk,

they would not, in themselves, lead ineluctably to a conclusion that the defendants were in breach of their duties as directors. There was no criticism of the capital preservation strategy adopted in August 2007, nor did the Court agree that there was any overriding imperative on CCC to restore its liquidity cushion (which had been diminished due to the turbulent market conditions which CCC found itself in).

The Court ruled that the Lieutenant Bailiff's conclusions were "wholly unaffected by the ... mistaken view that CCC was only prepared to contemplate sales at [higher] IDP prices". [Indeed, the Court noted that some repo dealers were still using IDP prices such that a willingness to sell at repo prices did not preclude sales at IDP prices.] It went on to state its agreement with the Lieutenant Bailiff's statements at first instance, that the Plaintiff's claim depended entirely on being "wise with hindsight".

Breach of Duty by the Independent Directors

The Appellants raised similar allegations against the independent directors of CCC, that they "should have required CCC to raise liquidity by selling RMBS". In light of the judgment of the Court of Appeal in respect of the breach of duty by the directors of CCC in not selling the RMBS, and the Court's decisions in relation to the capital preservation strategy, the Court of Appeal agreed with the Lieutenant Bailiff's conclusion that the independent directors were not in breach of fiduciary duty as contended by the Plaintiffs.

Consideration of the Defences

Although the defences raised by the Respondents did not arise for decision, as they were argued, the Court felt that resolution of some of them may be of assistance in the future. In particular, the Court ruled:

(i) the directors of CCC would have been able to rely upon a provision in CCC's articles exempting them from liability in certain circumstances, despite not being included in their contacts of employment. Reinforcing the decision in Perpetual Media Capital Limited v Enevoldsen [2014] GLR 57, the Court ruled that "where a person accepts appointment as director, the starting point will be that he does so upon the terms set out in the articles";

(ii) that, for the purposes of section 106 of the Companies (Guernsey) Law, 1994 (which is couched in very similar terms to section 422 of the Companies (Guernsey) Law, 2008), 'misfeasance' does not include a simple breach of the duty of skill and care. Further and as a result, any alleged wrongful retention of RMBS was a simple allegation of negligent breach of duty, and did not constitute misfeasance for the purposes of section 106;

(iii) As a consequence, the provisions of section 67F of the Companies (Guernsey) Law, 1994, which render void exoneration and indemnification provisions which exempt or indemnify a person from claims under section 106, above, did not preclude the directors from relying on the indemnifications and exculpations in CCC's articles; and

(iv) had the Court found that the directors of CCC had been in breach of duty, they would not have been guilty of wilful default or wilful neglect. This would have mean that they were able to rely on the provisions of CCC's articles in (i) above, which carved out  instances of wilful default or wilful neglect. The Court ruled that "in order for a person to be guilty of wilful default (or misconduct or wrongdoing) ... it is necessary for the person concerned to have suspected ... that his conduct might constitute a breach of duty but to have decided to continue with the conduct nevertheless";

Conclusion

Dismissing the appeal, the Court of Appeal upheld the Lieutenant Bailiff's decision at first instance with regards to directors' duties, and CIM's contractual and tortious obligations.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions