Upon Further Reflection: Privy Council Judgment Further Clarifies Scope Of The Reflective Loss Rule

• Published date: 24 September 2021
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Arbitration & Dispute Resolution, Shareholders
• Law Firm: Carey Olsen
• Author: Mr Jeremy Lightfoot, Xia Li and Yi Yang

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...