One of the casualties of the global financial crisis was Guernsey-incorporated Carlyle Capital Corporation, which collapsed in 2008. The trial against the company’s former directors lasted until earlier this year and featured in The Lawyer’s Offshore Cases report in 2012. Here, Russell-Cooke managing partner Jonathan Thornton talks about the implications of the case and what company directors can learn.
Carlyle Capital went bust in March 2008 just months after a $350m flotation and with losses, in the words of the Guernsey court, of “a remarkable $1.3bn in eight months”. It’s hardly surprising that the company’s liquidators looked to the company’s directors for redress.
Many asked: how could things have gone so wrong, so quickly without the directors being at fault? Carlyle Capital, after all, prided itself on investing only in triple A-rated securities and was part of the Carlyle private equity group.
The original lawsuit, issued at the time in both the US and Guernsey, threw the book at the directors, accusing them of recklessness, negligence and wilful misconduct and specifically of operating Carlyle Capital “in reckless disregard of overt and manifest risks….”.
More specifically, the case alleged breach by the directors of their fiduciary duties to the company, gross negligence, statutory misfeasance and wrongful trading. The total claim was nearly $2bn.
After a case lasting just over seven years the directors (represented by Philip Marshall QC of Serle Court) were exonerated. The court held that the cause of the collapse was, quite simply, “the unforeseen systemic liquidity crisis among the banks” and that Carlyle in early 2008 had “no sensible alternative but to continue making ceaseless efforts…. to obtain necessary funding [which]… was not reckless or negligent”.
To many lay observers it may seem remarkable that the directors of Carlyle could “get off scot free”. To common law lawyers though, much of the reasoning may sound familiar.
Wrongful trading in England occurs if a director knows (or ought to have known) that a company cannot avoid insolvent liquidation or administration and does not take every step to minimise the loss to creditors.
Where a company is insolvent, misfeasance means improper performance or misconduct by a director which results in a loss to the company.
In stating her conclusions, Her Hon Hazel Marshall QC, Lieutenant Bailiff, stated quite simply that:
“In a nutshell [Carlyle’s] business model was reasonable…. [its] directors made judgements to enable [Carlyle] to try to regain health and strength which were reasonable at the time…. [Carlyle’s] directors did not appreciate the depth of the instability [in the financial markets] but in this they were in wide and good company. To suggest that there was anything that they…. clearly ought to have done significantly differently…. is… being entirely wise with hindsight”.
In short, in reaching its decision the Royal Court in Guernsey seems to have taken a view that will reassure practitioners and businesspeople alike; where a company goes into insolvency and the creditors look to the directors to meet some of the company’s liabilities, the courts will not second guess the decisions of the directors, but will look at those decisions in the context as it appeared at the time.
If it was reasonable for an appropriately skilled director to make the judgement that the directors did make, then the court will not apply the benefit of hindsight to those decisions and re-open them in the light of subsequent events. Unless no reasonable director could have reached the decision that the directors did reach, the courts will not intervene.
Of course, each case turns on its facts as all lawyers know, and this case is anything but carte blanche for negligent directors. Directors cannot hide behind their own incompetence or ignorance as they will be taken to have an objective standard of ability required of a suitably skilled director in their position and will also be expected to have taken reasonable steps to ensure that they are appropriately informed about the affairs of the company for which they are responsible, its cash position and its trading position and prospects.
But directors who do that, who take appropriate advice, and make a reasonable decision based on the best information available to them can be reassured that the courts will not later substitute their own commercial wisdom for those of the directors.
Jonathan Thornton is the managing partner of Russell-Cooke. This opinion piece is part of The Lawyer’s coverage of the global financial crisis, 10 years on. Read more opinion pieces, analysis and interviews here.