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04 March 2021
The Carlyle case arose from the collapse in March 2008 of a Guernsey fund – Carlyle Capital Corporation (CCC) Ltd – which led to the loss of all of its $1 billion of capital. CCC was set up as a Guernsey company in 2006 and invested mainly in residential mortgage-backed securities (RMBS) issued by US government-sponsored entities Fannie Mae and Freddie Mac.
The Carlyle case is of particular relevance now, during the climate of the COVID-19 pandemic, which is having severe economic repercussions worldwide and will likely lead to more fund collapses.
Lessons which can be learned from the Carlyle saga include the following:
In July 2010 CCC and its liquidators issued claims against the former executive and independent directors of CCC, the investment manager, the promoter of CCC (the Carlyle Group) and a holding company within the Carlyle structure for damages of no less than $1 billion, which rose to nearly $2 billion (including interest) at the close of trial.
The plaintiffs alleged numerous breaches of duty which were focused on the defendants' alleged fundamental failure to take steps to reduce CCC's leverage and increase liquidity. This would have been achieved by selling a substantial number of its RMBS assets, raising more capital or conducting an orderly winding down of CCC from July 2007. The alleged breaches included that the defendants had acted in breach of their duties to:
The trial took 25 weeks (almost six months), the longest in recent history for Guernsey. The Royal Court handed down judgment in September 2017. All of the 187 claims against the defendants were dismissed in their entirety.
The judge agreed with the defendants' argument that "viewed objectively and without the influence of hindsight, [the directors'] reactions to the events as they happened were appropriate, responsible and not in any breach of duty to CCC".
The defendants won everything at trial on both the law and the facts. However, despite such a comprehensive loss, the liquidators appealed. The appeal was heard over two weeks in October 2018 and the Court of Appeal handed down judgment on 12 April 2019.
The appeal included a claim that there had been a "critical misunderstanding which infects the whole body of evidence". In short, the appellants alleged that the Royal Court had been led into material error and that there should be a retrial.
The Court of Appeal held that, on the evidence, the prices at which CCC's directors would have been prepared to sell in August 2007 were lower than the trial judge had found.
However, the Court of Appeal went on to consider that even if the trial judge had made correct findings regarding the prices at which CCC was willing to sell RMBS assets in August 2007, it did not follow that there had been any breach of duty by the directors.
The Court of Appeal held that:
the existence of such an error [that the findings of the [judge] as to perception of risk were based on a misunderstanding] does not, in our judgment, have the result that the issues are at large for determination by this court or that the case must be sent back for even a partial retrial.
It went on to hold that, taken with other issues, no breach of duty could exist.
The Court of Appeal further found that other findings of the trial judge, including the risks of selling at the lower prices, were not infected by the mistake which the trial judge had made as to the prices at which CCC was willing to sell in August 2007.
In addition, there was no basis for concluding that the independent directors had lacked independence or failed properly to inform themselves of relevant matters.
The Court of Appeal held that:
it was common ground that there was nothing that CCC could have done which would have saved it from the consequences of the March 2008 liquidity crisis, which was unforeseen and unforeseeable. However startling the history of CCC'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 appellant's claim depended entirely on hindsight, and we agree with her.
Despite losing again at the Court of Appeal stage, the plaintiffs further appealed to the Privy Council. This appeal was listed to be heard during the first week of October 2020 in Guernsey.
However, in April 2020 the parties reached a non-confidential settlement. The Privy Council subsequently ordered the withdrawal of the appeal on 7 May 2020, whereafter all proceedings in all jurisdictions were brought to an end.
None of the defendants paid a penny to the plaintiffs. In fact, the plaintiffs paid millions of dollars to the defendants towards their costs of the Guernsey proceedings.
For further information on this topic please contact Bryan De Verneuil-Smith by telephone (+44 1534 514 000) or email (firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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