Court of Appeal Takes a Hard Look in the Mirror: the Policy Behind Reflective Loss

Andrew Tarnowskyj and Seamus Brand

The Court of Appeal of the Cayman Islands handed down its decision in Primeo Fund (In Official Liquidation) v Bank of Bermuda (Cayman) Limited and HSBC Securities Services (Luxembourg) SA CICA (Civil) Appeal No. 21 of 2017 on 13 June 2019. While the Court of Appeal overturned several of Justice Jones’ first instance findings ([2017 (2) CILR 334]), the plaintiff/appellant, Primeo Fund (“Primeo”), was nonetheless prevented from recovering the loss it suffered by operation of the reflective loss principle.

Primeo was a feeder fund of Bernard L. Madoff Investment Securities (“BLMIS”) and from May 2007 it invested indirectly through shareholdings in two other funds: Herald Fund SPC (“Herald”); and Alpha Prime Fund Limited (“Alpha”). Primeo sought to recover damages of approximately US$2 billion from its former administrator, Bank of Bermuda (Cayman) Limited (“BoB Cayman”) in respect of its alleged breach of an implied term of one of its administration agreements by failing to reconcile information received from BLMIS with an independent source. Primeo also sought to recover damages from its former custodian, HSBC Securities Services (Luxembourg) SA (“HSSL”), in respect of its liability as sub-custodian for BLMIS, following BLMIS’s alleged negligence or wilful breaches of duty. At first instance, Jones J held (at [281]-[300]) that Primeo’s claims against BoB Cayman and HSSL would have been barred because any loss suffered by it was reflective of loss in fact being claimed, or capable of being claimed, either by Herald or by Alpha and was not separate and distinct from their loss.

In summary, the Court of Appeal held that:

  • The assessment of whether or not loss is reflective is made at the time a claim is made, rather than when a cause of action accrued, such that it was not relevant that Primeo was not a shareholder in the company at the time it suffered loss; and
  • The correct formulation of the test which should be applied in relation to a claim which is said to give rise to the application of the reflective loss principle is whether the claim has ‘a realistic prospect of success’.

Reflective Loss

Primeo’s challenge to the findings of Jones J with respect to reflective loss concerned two issues:

  1. for the reflective loss principle to apply it is necessary that the plaintiff be a shareholder in the company at the time the cause of action accrued (“timing issue”); and
  2. to engage the principle, it must be shown that the company’s claim ‘was likely to succeed’ and, on the balance of probabilities, would succeed (“the merits test issue”).

Timing issue

Primeo submitted that losses it sustained from its investments in BLMIS before May 2007 (when it invested in BLMIS directly) were not for a diminution in the value of any shares held by it in Alpha or Herald or any claim by it against them. Primeo argued that the principle of reflective loss only applies where a plaintiff is in substance claiming, in its capacity as a shareholder or a creditor, for a diminution in the value of its shares in the company or its claim against the company. It was further submitted that a plaintiff cannot claim in the capacity of a shareholder for losses incurred before it was a shareholder in the company and before the company was incorporated.

The Court of Appeal observed (at [403]) that Johnson v Gore Wood (a firm) [2002] 2 AC 1 was a binding decision which clearly rejected limiting the ambit of the principle of reflective loss to claims brought by a shareholder in his or her capacity as such. The Court held that (at [415]):

“what is relevant are the factual circumstances that obtain at the time the claim is made. The argument that for the principle to apply it is necessary for a person to be a (material) shareholder at the time that person’s cause of action accrues is inconsistent with according centrality to the type of loss because the application of the principle would be determined by examining how and when the plaintiffs cause of action arose rather than by the type of loss suffered and whether it would be made good.”

While the Court of Appeal accepted that the nature of a loss sustained which is separate and independent cannot change and become reflective of a company’s loss just because the plaintiff later becomes a shareholder, whether a loss is in fact reflective is to be tested and determined in the light of the circumstances that exist when the claim is made.

Although the Court of Appeal considered that the risk of double recovery could not be excluded, it disavowed reliance on any such risk as a basis for applying the rule. The Court of Appeal said (at [422]):

“It is not necessary to do so because … the authorities show that the principle is not rooted simply in the avoidance of double recovery and may apply even where there is no prospect of that. But the justifications reflected in considerations (iii) and (iv) in Garcia’s case apply because of the possibility of Primeo “scooping the pool” before the companies’ claims, prejudicing other shareholders and creditors and because of the impact of these proceedings on [Bob (Cayman) and HSSL]’s ability to settle the companies’ claims.”

Merits issue

On the merits issue, Primeo submitted that Jones J erred in holding that the test for determining whether the reflective loss principle is engaged is whether the company’s claim has ‘a realistic prospect of success’. It contended that, on the correct formulation, it must be shown that the company’s claim ‘was likely to succeed’, and that what was required was a claim which, on the balance of probabilities, would succeed.

In rejecting Primeo’s contentions, the Court of Appeal considered that the policy justifications for the reflective loss principle were relevant to the determination of the threshold to be met in relation to the merits of a company’s claim. The Court of Appeal considered that claims with a reasonable prospect of success, particularly in complex commercial litigation, are seen to have a value which can be realised and which the company should be entitled to realise. The Court of Appeal considered (at [435]-[437]) that setting the threshold at Primeo’s contended level would:

  • Make it difficult for a company to settle such claims and would increase the risk of an individual shareholder ‘scooping the pool’ at the expense of other shareholders or creditors;
  • Lead to a number of significant practical difficulties in all but the simplest of cases. The merits of a company’s claim would have to be determined in proceedings to which the company is generally not a party. It would also be particularly difficult where, as in these proceedings, the plaintiff shareholder’s claim comes before the court before the company’s claim is particularised and before it is known what the evidence will be in it; and
  • Lead to a court having little assistance because the parties to a claim by a shareholder will have no incentive to argue that the company’s claim will succeed. The plaintiff will not do so because that would bar its claim. The defendant will not do so because that would be to admit liability in another claim


The Court of Appeal’s analysis closely examined the rationale for and justifications of the reflective loss principle rather than merely considering issues of double recovery. The Court of Appeal recognised the capacity for the principle to apply in cases where there is no risk of double recovery and that avoidance of double recovery is not the primary concern of the rule. Instead, the primary concerns are the need to avoid prejudice to minority shareholders and other creditors and to prevent individual plaintiffs from ‘scooping the pool’.


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