Old Park Capital Maestro Fund Limited v Old Park Capital Limited (in liquidation) & Ors

A fund manager must exercise due care when selecting investments, having regard to the fund’s liquidity obligations and redemption terms. A power to invest in illiquid money-market instruments does not remove the obligation to manage liquidity prudently.

For deceit, the claimant must prove a false and dishonest representation, intended reliance, actual material influence and loss. A genuine but mistaken belief negatives dishonesty. A director’s duty to disclose material conflicts may be excluded by an appropriately drafted exoneration clause unless the breach involves dishonesty, fraud or wilful default.

The claimant investment fund alleged that its investment manager and associated individuals had improperly caused it to invest in commercial paper issued by Kingsway Asset Management Ltd. The investments were said to be inconsistent with the fund’s investment strategy, inadequately disclosed, conflicted and excessively risky.

The claims included deceit, breach of contract, inducing breach of contract, unlawful means conspiracy, breach of directors’ duties, breach of trust and dishonest assistance. The court considered the construction of the fund’s offering memorandum, the alleged representations, the defendants’ states of mind, liquidity risk, exoneration clauses and limitation.

1. Deceit. The investment strategy representations were that the offering memorandum accurately and completely described the fund’s investment objectives and practical investment approach. They were made by HVK at the launch board meeting and by BP through his drafting and confirmation of the offering memorandum. The representations were intended to induce the fund to appoint OPC as investment manager and the directors were materially influenced by them.
2. The offering memorandum permitted investment in illiquid money-market instruments, but required the fund to exercise judgment so that redemption requests could ordinarily be met on two business days’ notice. It did not completely describe the investment approach because it omitted the contemplated investment in KAM commercial paper. BP knew that omission was material and dishonest. HVK genuinely believed that the memorandum said everything necessary and was not dishonest.
3. The loss on the unpaid commercial paper was caused by BP’s deceit. The claim against BP in deceit therefore succeeded. The limitation defence failed because the relevant pre-existing arrangement could not reasonably have been discovered before the relevant period.
4. Contract and related economic torts. OPC breached its obligations to manage the fund’s investments properly and efficiently and to exercise due care. Holding a material proportion of the fund’s assets in highly illiquid commercial paper, when investors could redeem on two business days’ notice, created an unreasonable liquidity risk. BP knew that his conduct would breach the investment management agreement and intended the breach as a means of obtaining higher returns, but his conduct was within his authority and in good faith. The claim for procuring breach of contract, and the unlawful means conspiracy claim, failed.
5. HVK’s duties. HVK breached his duty to disclose the business relationship between OPC and Kingsway because he was participating in a transaction between the fund and OPC. The breach was nevertheless protected by the exoneration clauses because it involved neither dishonesty, fraud nor wilful default. HVK had no duty to prevent the investment or to give professional advice on its riskiness.
6. OPC was a quasi-trustee of the fund’s money and breached its fiduciary duties by making the conflicted investment. BP was not dishonest in assisting that breach. The claims against OPC were not entered because they were stayed under Insolvency Act 1986, s 130(2). All claims against HVK failed; the deceit claim against BP succeeded.