Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22

Primeo Fund, a Cayman Islands investment fund, suffered losses through the Madoff Ponzi scheme. The Privy Council considered whether the reflective loss rule barred Primeo's claims against its administrator and custodian. The Board held the rule did not apply as Primeo's losses arose before it became a shareholder in Herald Fund.

Facts

Primeo Fund was a Cayman Islands open-ended mutual investment fund which invested directly and indirectly with Bernard L Madoff Investment Securities LLC (BLMIS). The first respondent (R1) acted as Primeo’s administrator and the second respondent (R2) as its custodian. When the Madoff Ponzi scheme collapsed in December 2008, Primeo suffered substantial losses. In May 2007, Primeo had transferred its direct BLMIS investments to Herald Fund in exchange for Herald shares (the Herald Transfer). Primeo claimed damages from R1 and R2 for breach of their duties as administrator and custodian.

Issues

The principal issue was whether Primeo’s claims against R1 and R2 were barred by the reflective loss rule, which prevents shareholders from recovering losses that merely reflect losses suffered by the company. Key sub-issues included: (1) The relevant time for determining whether the rule applies; (2) Whether the Herald Transfer extinguished Primeo’s existing causes of action; (3) Whether R1 and R2 were ‘common wrongdoers’ vis-à-vis both Primeo and Herald/Alpha.

Judgment

The Privy Council allowed Primeo’s appeal on the reflective loss issue. The Board held that the reflective loss rule, as clarified in Marex Financial Ltd v Sevilleja [2020] UKSC 31, is a substantive rule of company law, not a procedural rule. The relevant time for assessing its application is when the loss is suffered, not when proceedings are commenced.

The critical point is that the shareholder has not suffered a loss which is regarded by the law as being separate and distinct from the company’s loss, and therefore has no claim to recover it.

Lord Kitchin and Lord Sales explained that Primeo’s losses from direct BLMIS investments occurred before it became a shareholder in Herald in the relevant sense. These losses were suffered by Primeo in its personal capacity, not as a shareholder in Herald. The Board rejected the argument that the Herald Transfer retrospectively extinguished Primeo’s existing causes of action against R1 and R2.

In the Board’s view, the ‘follow the fortunes’ bargain which arises from membership of a company is forward-looking, not backward-looking.

On the common wrongdoer issue, the Board held that the Court of Appeal erred in treating R1 and R2 as common wrongdoers where Herald had no direct claim against R1 and Alpha had no direct claim against R2. Extending the rule to cover chains of onward claims would be an unwarranted expansion contrary to Marex.

Implications

This judgment provides important clarification on the scope and application of the reflective loss rule following Marex. It confirms that the rule is substantive rather than procedural, requiring assessment at the time loss is suffered. It establishes that causes of action acquired before becoming a shareholder are not retrospectively extinguished by the rule. The decision emphasises the importance of separate corporate personality in identifying a ‘common wrongdoer’ and rejects extending the rule to chains of potential onward claims. The case reinforces the narrow parameters within which the reflective loss rule operates.

Verdict: The Privy Council allowed Primeo’s appeal on the reflective loss issue, holding that the reflective loss rule did not bar Primeo’s claims against R1 and R2 in respect of losses from direct investments in BLMIS made before the Herald Transfer, nor in respect of indirect investments where there was no common wrongdoer.

Source: Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22