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Industry Updates

When May a Director Agree to Disagree? The Implications of Madoff v Raven

29 Oct 2013

A very recent decision of the English High Court, in Madoff Securities International Limited (In Liquidation) v Raven and Ors [2013] EWHC 3147 (Popplewell J)1 has clarified the scope, on a practical level, of a company director's common law duty to act in what the director considers in good faith to be the interests of the company. 

The judgment provides useful guidance to directors (executive and non-executive) of Cayman Islands companies as to how to balance their legal duties as directors with the practical commercial aspects of their role, particularly the need to listen to and work together with other directors. 


The judgment in Madoff v Raven is in respect of an action brought by the liquidators of Bernard Madoff's London business, Madoff Securities International Limited ("MSIL"), against MSIL's former directors, and against Mrs Sonja Kohn, an Austrian businesswoman, and entities with which she was connected.  

The backdrop to the claims was the (now) notorious Ponzi scheme operated by Bernard Madoff through the investment advisory division of his New York business (BLMIS).  MSIL's business (proprietary trading) was legitimate and it was not part of the Ponzi scheme. 

Claims were pursued against five directors, including Bernard Madoff's sons, Mark and Andrew Madoff.  It was common ground that none of the directors knew or suspected that the Ponzi scheme existed; the principal claims against them related to payments ("the MSIL-Kohn Payments") totalling around US$27million and made by MSIL to entities connected with Mrs Kohn. 

Among other allegations made against the directors, MSIL's case was that: 

(a)  The directors believed that the MSIL-Kohn Payments, made regularly throughout a 15 year period and amounting to significant sums of money, were being made in exchange solely for written research which the directors considered useless and of no relevance to MSIL's business. 

(b)  In reality, the MSIL-Kohn Payments were being made in exchange solely for introductions of potential investors by Mrs Kohn to BLMIS (it was not alleged that Mrs Kohn knew or suspected that the investment advisory business was part of a fraudulent scheme).  It was common ground that such introductions were valuable and the payments made were no more than a reasonable amount.  

(c)  However, as the directors did not know of the introductions, MSIL's case was that they could not rely upon them as justifying their decisions to cause/permit the MSIL-Kohn Payments. 

(d)  Accordingly, in causing/permitting the MSIL-Kohn Payments while believing such payments to be solely for worthless and irrelevant research, each of the directors was alleged to be in breach of his duty to act in the way he considered in good faith to be in the interests of the company (i.e., MSIL).  

This alleged breach of duty (among others) by the directors was said to have been dishonest and fraudulent, on the basis that the directors were said by MSIL either to have known they were in breach of their duties or, alternatively, to have been recklessly indifferent as to whether they were breaching their duties. 

On 18 October 2013, Popplewell J dismissed all the claims against the directors, criticising the liquidators for bringing an "unfounded claim" involving serious personal allegations of dishonesty.  

Useful guidance for directors of Cayman Islands companies can be obtained from Popplewell J's observations in relation to the scope of a director's "core" duty to act in what he considers in good faith to be in the interests of a company.2  

The duty to act in what a director honestly believes to be the interests of the company 

This has always been one of the fundamental fiduciary duties of a director of a company at common law and it applies in the same way to all company directors, whether they hold executive or non-executive positions.  

The duty has been described as a duty to act in what the director believes, not in what the court believes, to be the company's best interests.3  

The test for whether the duty has been breached is therefore subjective: whether the director honestly believed that his act or omission was in the interests of the company.  The test is not whether (viewed objectively) the act or omission was in fact in the interests of the company, and it is certainly not whether the court would have acted differently if it had been in the director's position.  Plainly, as an evidential matter, if the act or omission in question caused significant harm to the company, it is likely to be more difficult for a director to persuade a court that he honestly believed it to be in the company's best interests; however, that does not alter the fact that the test is subjective.4

Of course, it should also be borne in mind that, even if a director honestly believed that an act or omission was in the best interests of the company, and therefore was not in breach of this subjective duty, he may still have breached his (non-fiduciary) duty to exercise reasonable care, skill and diligence, which duty has an objective element to it. 

Popplewell J reiterated a number of well-established principles concerning the scope of the duty to act in what a director honestly believes to be in the best interests of the company: 

(a)  While it is legitimate and necessary for there to be some division or delegation of responsibility for particular aspects of the management of a company, a director nevertheless owes duties to inform himself of the company's affairs and to join with his fellow directors in supervising such affairs.  It is therefore a breach of duty for a director to allow himself to be dominated, manipulated or 'bamboozled' by a dominant fellow director (or dominant fellow directors) so as to abrogate his responsibility entirely. 

(b)  Similarly, it is the duty of each director to form an independent judgment as to whether acceding to the request of a shareholder (in this case, the requests of Bernard Madoff, who was the holder of the vast majority of the voting shares in MSIL) is in the best interests of the company.  

(c)  Moreover, a director who has knowledge of a fellow director's misapplication of company property, but takes no steps to prevent it, will himself be treated as a party to the breach of fiduciary duty.

All of these principles are entirely consistent with the statements made in the decision of the Grand Court of the Cayman Islands in Weavering Macro Fixed Income Fund Ltd. (In Liquidation) v Peterson and Ekstrom regarding the scope of directors' duties.  

Essentially, the key point to note from both Weavering and Madoff v Raven is that a director (whether executive or non-executive) cannot passively allow others to manage the company without supervising the actions taken (or not taken) on behalf of the company and without independently reaching his own decision as to whether any act or omission is (in his own view) in the interests of the company. 

In addition, Popplewell J made the following observations, which are helpful in understanding how directors are expected to comply with this duty in practice, given the commercial realities of serving as a company director:

(a)  A director is entitled to rely upon the judgment, information and advice of another director whose integrity, skill and competence he has no reason to suspect.5

(b)  The making of decisions by directors often requires the exercise of judgment in relation to which opinions may legitimately differ and therefore board decisions may require a certain amount of "give and take".    

(c)  A director is entitled legitimately to defer to and to take into account the views of his fellow directors, provided he believes that his fellow directors' views have been put forward in what they perceive to be in the best interests of the company.  

(d)  Where a decision as to the commercial wisdom of a transaction is taken by a majority of the board, a minority director is not obliged to respond by resigning or by refusing to be party to the implementation of that decision.  A director is not in breach of his duty to act in what he considers to be in the best interests of the company simply because, if he had been left to himself, he would have done things differently.  While this may seem obvious as a matter of common-sense, it is not a point with which many previous authorities have expressly dealt; therefore it is helpful to have judicial guidance in this respect. 

Although Madoff v Raven is not binding upon Cayman Islands courts, it is likely to be persuasive in cases concerning the scope of a director's duty (at common law) to act in what he considers to be the best interests of the company.  This is particularly so given that the judgment is consistent with and reinforces the statements of principle made in the decision of the Cayman Islands Grand Court in Weavering.  The clarification and further guidance which Madoff v Raven provides should therefore be welcomed by directors of Cayman Islands companies. 

Lara Kuehl is an associate in the Litigation department of Maples and Calder.  Before joining Maples and Calder in October 2013, Lara practised as a barrister in England & Wales.  Lara represented one of the successful defendant directors in Madoff v Raven. 

1 The judgment was handed down on 18 October 2013. 

The conduct under consideration occurred, for the most part, prior to October 2007 (when the relevant provision of the English Companies Act 2006 came into force) and therefore fell to be considered under the common law.  In any event, Popplewell J held that nothing in the case before him turned on the distinction (if there is any distinction) between the common law duty and the statutory codification of it.

See the classic formulation of the duty expressed by Lord Greene MR in Re Smith v Fawcett [1942] Ch 304 at 306.

Regentcrest Plc v Cohen [2001] BCC 494, at [120], per Jonathan Parker J. 

Applying Dovey v Cory [1901] AC 477 at 486


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