Created Date:
22 September 2021

Upon further reflection: Privy Council further clarifies scope of the reflective loss rule

In the recent case of Primeo Fund v Bank of Bermuda (Cayman) Ltd & Anor (Cayman Islands) [2021] UKPC 22, the Judicial Committee of the Privy Council (the "Board") further clarified the scope of the reflective loss rule. This is the rule that exists under both English and Cayman Islands law which operates to prevent a shareholder recovering loss which reflects loss suffered by the company in which they are invested.

The rule has long been the source of controversy and confusion. This decision of the Board provides some welcome clarification non two aspects of the rules, being the relevant time for determining whether the reflective loss rule should apply (the "Timing Issue") and the definition of a 'common wrongdoer' for the purposes of the reflective loss rule (the "Common Wrongdoer Issue").

Primeo Fund (the appellant) was a Cayman Islands company in official liquidation. It made claims against its two former professional service providers R1 and R2 in relation to loss suffered by its direct investments into BLMIS, the vehicle by which Bernard Madoff carried out his Ponzi scheme. The appeal to the Privy Council from the Court of Appeal of the Cayman Islands concerned the operation of the reflective loss rule in company law. The parties were agreed that Cayman Islands law in this aspect was the same as English law.

Nature of the reflective loss rule

The Board considered the UK Supreme Court's recent majority judgment in Marex Financial Ltd v Sevilleja (All Party Parliamentary Group on Fair Business Banking intervening) [2020] UKSC 31 as a starting point. It restated the law in Marex that the reflective loss rule is a rule of substantive company law, not a principle for the avoidance of double recovery. It therefore does not matter whether the company brings a claim of its own or decides not to claim. The key test for the application of the reflective loss rule is whether the damage is separate and distinct from the damage suffered by the company in the eyes of the law. The rule would not apply to losses suffered by a shareholder which were distinct from the company’s loss or to situations where the company had no cause of action. The scope of the rule is limited to where damage is suffered though the mechanism of a wrong done to the company which then has a knock-on effect on the value of the shares held by the shareholder.

The timing issue

In the Board’s view, since the rule is substantive rather than procedural in character, the relevant time to assess whether it is applicable is when the loss, which is said by the claimant to be recoverable in law, is suffered by it[1]. Otherwise, to test the application of the reflective loss rule at the time when proceedings are brought rather than when the loss is suffered would undermine the intended effect to the rule and the certainty that the rule is intended to achieve, as a bright line rule of law[2].

The Board then held in this case that the reflective loss rule did not bar Primeo from claiming in respect of the losses it suffered each time it made a direct investment in BLMIS, nor from claiming in respect of the losses it suffered as a result of the loss of the chance to redeem its BLMIS investments[3]. In the Board’s view, those losses were not suffered by Primeo “in its capacity as shareholder” of the company ("Herald"), as at the time Primeo suffered such losses it was not a shareholder in Herald.

Furthermore, in the Board’s view, the “follow the fortunes” bargain, which arises from membership of a company, is forward-looking, not backward-looking. This meant that although Primeo later transferred its direct BLMIS investments to Herald in consideration for its shares, Primeo was not barred from claiming its loss before it became a shareholder in Herald as a result. Extending the reflective loss rule to preclude a new shareholder from enforcing rights of action which had already accrued to it before becoming a member of the company would be an unwarranted extension of the rule[4].

The common wrongdoer issue

The Board also found that the Court of Appeal erred in holding that, since pursuant to the contractual arrangements between them, R1 would have a corresponding onward claim against R2 in respect of R1’s liability to Primeo as administrator, R2 was to be treated as a common wrongdoer as regards Herald and Primeo for the purposes of the application of the reflective loss rule. The Board found that to apply the reflective loss rule in these circumstances would amount to a significant extension of the rule beyond its current boundary and would ignore the relevance of the separate legal personality of the administrators and custodians involved in favour of an ill-defined test based on the potential economic effects of a series of inter-locking contracts[5]. Such an extension, the Board held, would result in injustice, because a person who becomes a shareholder in a company is not on notice that by doing so, claims against third parties potentially available to them according to ordinary principles of law might be rendered valueless by virtue of such indefinite onward chains of liability[6].

In conclusion, the Privy Council's decision in Primeo is particularly instructive by clarifying both the Timing Issue and the Common Wrongdoer Issue. The judgment provides more certainty in this area of law and sends a reassuring message to shareholders who wants to pursue personal claims against wrongdoers but are cautious of being caught under the reflective loss rule.


[1] Primeo Fund v Bank of Bermuda (Cayman) Ltd & Anor (Cayman Islands) [2021] UKPC 22 at para.59

[2] ibid at para. 63

[3] ibid at para. 53

[4] ibid at para. 67

[5] ibid at para. 77

[6] ibid at para. 79


An original version of this article was first published by In-House Community Magazine, September 2021.