In these uncertain times, investors in investment funds are increasingly looking at options regarding their investment, including ways in which to redeem or recover it. However, if the fund in question is in financial difficulty, it may be harder for those investors to take action against the directors of the fund or recover their monies in full. This article looks at some of the ways in which investors in Guernsey funds which are in financial difficulty can assess the extent of that difficulty or recover their investment from either the funds themselves or third parties connected thereto.
In Guernsey, a fund may be structured as:
- a company (including a standalone company);
- a protected cell company (or a cell thereof);
- an incorporated cell company (or a cell thereof);
- a unit trust; or
- a limited partnership.
Direct actions against fund
The relationship between the investors of a fund and the fund itself is governed by the fund's constitutive documents along with the offering documentation and any subscription agreement. In order to establish a claim against a fund directly, an investor would need to show that the fund has:
- breached the terms of those documents in order to give rise to a claim for a breach of contract or misrepresentation; or
- otherwise acted in a manner which was negligent or for which it is otherwise liable in tort.
Evidence of the manner in which the fund has acted and how this has led to a causative loss will need to be compiled in order to identify whether such causes of action can be brought against the fund.
Information gathering
Prior to considering any action against a fund, investors should consider making a request for information. Such information may assist in identifying whether the fund is in financial difficulty or whether there are any issues in respect of its operation. However, an investor's right to such information may be significantly limited, as set out below.
Constitutional documents
The rights in the fund's constitutional documents should be carefully reviewed for rights to access information. However, as a general proposition, these are likely to be limited.
Guernsey law
Guernsey law provides investors with limited rights to access fund information and documentation. Pursuant to the Companies (Guernsey) Law 2008 (as amended) (Companies Law), companies must send a copy of their accounts, directors' report and auditor's report to each member within 12 months of the end of the financial year to with they relate. However, these are unlikely to provide investors with insight relating to any current or likely future issues with the fund.
Limited partnerships must keep certain documents, including accounting records, at their registered office and these are available for inspection by any partner. In addition, under the Limited Partnerships (Guernsey) Law 1995 (as amended), a limited partner has the right to be given:
- true and full information of all things affecting the partnership on demand; and
- a formal account of partnership affairs whenever circumstances render it just and reasonable.
However, both of these rights are subject to the express provisions of the relevant limited partnership agreement.
In respect of trusts, the trust instrument may provide unitholders with rights to access information regarding a fund established as a unit trust, and the Trusts (Guernsey) Law 2007 (as amended) (Trusts Law) provides that, subject to the terms of the trust, a beneficiary (which a unitholder would be characterised as) may make a written request of the trustee to provide full and accurate information as to the state and amount of the trust property.
Guernsey regulatory rules
Guernsey regulatory rules apply equally to all fund structures and provide no further rights for investors to gain access to information. However, these rules require a fund to state in its information memorandum when and where financial information about the fund will be published and available to investors.
Searches
Although public searches of the company and limited partnership registers will not reveal information as to a fund's balance sheet position (as accounts are not available for inspection at the Guernsey Companies Registry), Royal Court searches and a review of ads placed in La Gazette Officielle may indicate whether insolvency proceedings have been issued against the fund or whether a liquidator or administrator has been appointed.
Unfair prejudice claims
A shareholder which can establish that the affairs of a company are being, have been or may be conducted in a manner that is unfairly prejudicial to the interests of members generally or of some part of its members (including at least themselves) may apply to the Royal Court for an order. The Royal Court, on being satisfied that the shareholder has established a claim, has broad powers to grant relief, including:
- making orders regulating the conduct of the company's affairs in the future;
- requiring the company to refrain from doing or continuing to do the act complained of by the applicant or to do any act that the applicant has complained that the company has omitted to do; and
- authorising civil proceedings to be brought in the name and on behalf of the company by such persons and on such terms as the Royal Court may direct.
In limited circumstances, a shareholder may be able to ask the Royal Court to bring an action on behalf of the company against its directors.
Other avenues
General meetings cannot address the concerns of a single investor but rather deal with concerns common to all investors. The terms of a fund's constitutional documentation may allow its investors (or a certain representation of the investors in the form of a committee) to call a meeting. Further, in relation to a company fund, the Companies Law allows members with more than 10% of voting rights (either singly or in concert with other members) to requisition a meeting of the company. At such a meeting, investors may request further information about matters concerning them and the steps to be taken by the fund.
In addition, where investors are more confident in respect of potential issues with the management of a fund, they may have rights under the constitutional documents to appoint or dismiss directors, general partners or trustees. In this way, investors could ensure that they have a person or entity in management that represents their interests.
Finally, if there is sufficient concern among investors and subject to the fund's constitutional documents, investors may seek to amend the terms of those constitutional documents to allow more transparency in or change the management process.
Complaints to GFSC and Channel Islands Financial Ombudsman
The Guernsey Financial Services Commission (GFSC) cannot adjudicate disputes between investors and regulated entities. However, it does ensure that regulated entities have satisfactory regulatory systems and controls in place to deal with complaints in a thorough and prompt manner.
While complaints may not result in redress for the complainant, they may indicate a pattern of behaviour which the GFSC can examine further to see whether it raises any regulatory or prudential concerns. However, the GFSC cannot share the outcome of its investigation with the complainant.
In certain limited instances, a complaint may be made to the Channel Islands Financial Ombudsman in relation to investment dealers, investment intermediaries and managers and other functionaries of recognised Class A funds in Guernsey.
Actions against directors of company funds
The actions below may also be relevant in respect of corporate general partners and corporate trustees.
Directors' liability in tort
A director may be jointly and severally liable with the company where they are complicit in the commission of a tort by the company, even though the company committed the tort. Provided that the directors owe the relevant person a duty of care, a person who suffers financial or other loss as a result of acting in reliance on a misstatement (whether negligently or fraudulently made) contained in an offering memorandum may be able to bring an action for rescission or damages in lieu of rescission against the directors of the fund. In addition to statutory obligations regarding the accuracy and completeness of offering documentation, directors also owe a duty of reasonable care and skill to the company to ensure that the offering memorandum is accurate and does not omit any material information. If they fail in this duty and the company suffers a loss, the directors may be liable to compensate the company.
Fiduciary duties
Directors owe both fiduciary and other common law duties to a company, including the duty to:
- act in good faith and in the company's best interests;
- not act for a collateral or improper purpose;
- exercise independent judgement;
- avoid conflicts of interest; and
- exercise reasonable skill and care.
Ordinarily, it would be for the company to bring an action against a director who has failed to comply with their duties. However, if the company is unwilling or otherwise fails to bring a claim, a member may, with the Royal Court's permission, bring an action by way of a derivative action or an unfair prejudice application. For example, if a director carries out their responsibilities negligently and causes loss to shareholders, they may be liable to pay damages to the relevant shareholders as a result of such derivative action.
Companies Law
The Companies Law provides that where an offence by a company is proved to have been committed with the consent or connivance of, or to be attributable to any neglect on the part of, any officer of the company (including a director or shadow director or any person purporting to act in that capacity), they, as well as the company, are guilty of an offence and may be prosecuted and punished accordingly.
Restraint of excess powers
Further, under the provisions of the Companies Law in favour of a person dealing with a company in good faith, directors' powers to bind a company, or authorise others to do so, are deemed free from any limitations contained within the company's memorandum or articles or resolutions or any agreement between the company's members. However, if a shareholder believes that the directors are acting in a manner which is beyond their powers by virtue of such limitations, they may apply to the Royal Court for an order restraining such an act.
Actions against general partners of limited partnership funds
Under the Limited Partnerships (Guernsey) Law, subject to limited exceptions, a general partner has the same duties as a partner in a partnership which is not a limited partnership. These duties include to act in utmost good faith towards every member of the partnership. If the investors (as limited partners in the limited partnership) can establish that the general partner has breached this duty, they may be able to make a claim against them.
Actions against trustees of unit trust funds
Under common law and the Trust Law, a trustee owes duties to the beneficiaries of the trust, including the duty to:
- act in utmost good faith;
- get in and preserve the trust property; and
- not profit from the trusteeship.
If investors can establish that a trustee has breached any of these duties, they may be able to make a claim against it.
Actions against funds' third-party service providers
Funds have contractual arrangements with third-party service providers such as auditors, accountants, administrators, custodians, investment managers and advisers. Investors are unlikely to be a party to those contracts, so are generally unable to claim directly against the third-party service providers if they have breached the terms and conditions imposed under the contracts between them and the fund. Investors must ordinarily rely on the fund itself to bring such actions for breach of contract.
However, subject to the contractual arrangements between a fund and its service providers, investors may be able to establish that the service providers owed them a duty of care and that the manner in which they acted in carrying out their responsibilities under the contracts with the fund has given rise to a claim of negligence or other liability in tort (eg, fraud or wilful misconduct) for failing to act in accordance with that duty. Again, the specific terms of the arrangements between the fund and third-party service providers and the service providers' actions must be scrutinised to determine whether such actions can be brought.
Protection of Investors (Bailiwick of Guernsey) Law
Pursuant to Section 34 of the Protection of Investors (Bailiwick of Guernsey) Law 1987, where there has been a breach of the law or any rules or regulations made thereunder, any investor who has suffered a loss or been otherwise adversely affected may bring a claim in the appropriate court. It is suggested that this provision is limited to an investor who has suffered a loss as a result of statutory breach (and that this is a personal claim by the investor against the fund) or those who have purportedly breached the statutory provisions.
Michael Rogers, senior associate, assisted in the preparation of this article.
