Alico Life International Ltd v Thema International Fund Plc

• Jurisdiction: Ireland
• Judge: Ms. Justice Costello
• Judgment Date: 26 May 2016
• Neutral Citation: [2016] IEHC 363
• Date: 26 May 2016
• Court: High Court
• Docket Number: [2009 No. 5142 P] [2009 No. 211 COM] [2009 No. 5116 P] [2009 No. 219 COM]

BETWEEN

ALICO LIFE INTERNATIONAL LIMITED

PLAINTIFFS

AND

THEMA INTERNATIONAL FUND PLC

AND

HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED

DEFENDANTS

BETWEEN

SHMUEL HARLAP

PLAINTIFF

AND

THEMA INTERNATIONAL FUND PLC

AND

HSBC INSTITUTIONAL TRUST SERVICES (IRELAND) LIMITED

DEFENDANTS

[2016] IEHC 363

Costello J.

[2009 No. 5142 P]

[2009 No. 211 COM]

[2009 No. 5116 P]

[2009 No. 219 COM]

THE HIGH COURT

COMMERCIAL

Company – Practice & Procedures – O. 25 of the Rules of the Superior Courts – European Communities (Undertaking for Collective Investments in Transferable Securities) Regulations 2003 – Council Directive 85/611/EEC Undertakings for Collective investment in Transferable Securities (UCITS) – The rule against shareholders' recovery of reflective loss

Facts: The first named defendant/company sought declarations under o. 25 of the Rules of the Superior Courts to the effect that it did not owe any actionable duty to the plaintiffs as the plaintiffs were not unit holders in the first named defendant/company and that the claims of the plaintiffs were barred since it sought to obtain losses, which were reflective of company losses. The plaintiffs who had already instituted proceedings against the defendants claiming the notional value of their investments contended that since they had invested in the fund operated by the first named defendant, they became unit holders in the first named defendant. The main issue between the parties pertained to the definition of the term ‘unit holder’. The plaintiffs argued that a purposive interpretation should be given to the European Communities (Undertaking for Collective Investments in Transferable Securities) Regulations, 2003, and Council Directive 85/611/EEC to include retail investor in the unit holder. The defendants alleged that notwithstanding the interpretation given by the Courts to reg. 46 of the 2003 Regulations, the entire claims of the plaintiff were barred as the losses suffered by the plaintiffs were the losses of the first named defendant and it had already sued the second named defendant for the entire net asset value.

Ms. Justice Costello held that the claims of the plaintiffs against the defendants were barred by virtue of the application of the rule in relation to the recovery of reflective loss. The Court held that the rule against shareholders' recovery of reflective loss was made to ensure protection to the creditors to avoid double recovery and multiplicity of actions as it required that only a company could sue to recover the losses suffered by it. The Court observed that it had no discretion to modify or alter the said rule in any way. The Court opined that the rule laid down under Foss v. Harbottle (1843) 2 Hare 461 applied to the plaintiffs as it was the company that was the proper plaintiff to bring an action for damages. The Court cited with approval the decisions of the Courts of Luxembourg in Luxalpha (Luxembourg District Court 4th March 2010, Luxembourg Court of Appeal 15th July 2014 and Luxembourg Supreme Court 2nd July, 2015) wherein it was held that Council Directive 85/611/EEC did not recognize a right of direct action against the depositary for the benefit of a shareholder of an investment company. The Court found that since art. 9 of the said Directive 85/611/EEC gave a limited right to a unit-holder to sue a depositary directly where there existed a legal relationship between the individual unit-holder and depositary, thus, art. 16 could not be construed as conferring a right of action upon unit-holders. The Court found that the plaintiffs were neither the shareholders, nor unit-holders in the first named defendant.

JUDGMENT of Ms. Justice Costello delivered on 26th day of May, 2016

1 In this application the first named defendant seeks a declaration pursuant to O. 25 of the Rules of the Superior Courts or otherwise that:

(a) the first defendant does not owe any actionable duty to the plaintiff in circumstances were the plaintiff is not a unit-holder in the first defendant.

(b) even if the plaintiff was a unit-holder in the first defendant, any duty to the plaintiff is barred as a result of the rule in Foss v. Harbottle (1843) 2 Hare 461 and/or the related rule against reflective loss.

In the alternative the first named defendant seeks an order striking out the plaintiff's claim as disclosing no reasonable cause of action whether pursuant to O. 19, r. 28 of the Rules of the Superior Courts or otherwise. The second named defendant seeks similar relief. Identical motions have been brought in each of these two actions which have been heard jointly.

Order 25

2 Order 25 of the Rules of the Superior Courts provides as follows:-

‘1. Any party shall be entitled to raise by his pleading any point of law, and any point so raised shall be disposed of by the Judge who tries the cause at or after the trial, provided that by consent of the parties, or by order of the Court on the application of either party, the same may be set down for hearing and disposed of at any time before the trial.

2. If, in the opinion of the Court, the decision of such point of law substantially disposes of the whole action, or of any distinct cause of action, ground of defence, set-off, counterclaim, or reply therein, the Court may thereupon dismiss the action or make such other order therein as may be just.’

3. These motions were brought by consent of the parties, the plaintiffs having indicated that they did not object to the trial of these issues as preliminary issues in their respective proceedings.

Background to the applications

4 The proceedings arise out the role of Mr. Bernard Madoff and Bernard Madoff Investments Securities LLC (‘BLMIS’) and/or companies controlled or affiliated to Mr. Madoff and BLMIS in respect of the assets of the sub-fund operated by the first named defendant (‘Thema’). It is common case that Thema is an Irish investment company governed by the provisions of the Companies Acts and by the provisions of the European Communities (Undertaking For Collective Investments in Transferable Securities) Regulations 2003, as amended (‘the Regulations’). The Regulations have been amended and subsequently replaced since the issuance of these proceedings but for the purposes of these proceedings and this application the relevant regulations are S.I. 211/2003. The Regulations transposed into Irish law the provisions of Council Directive 85/611/EEC on the coordination of laws, regulations and administrative provisions relating to undertakings for collective investment in transferable securities (UCITS) (‘The Directive’). The Directive has been amended on a number of occasions; the most recent amendment to the UCITS Directive was made pursuant to Directive 2014/91/EU (UCITS V). For the purposes of these proceedings and this motion the relevant text is that of the first UCITS Directive as recast.

5 As it well known, Mr. Madoff operated an enormous ponzi scheme and on 13th December, 2008, by order of the United States District Court for the Southern District of New York all of the assets held by BLMIS were frozen and Mr. Irving H. Picard was appointed as trustee for the liquidation of BLMIS by further order of the U.S. Court of 15th December, 2008. The frozen assets included those of the Thema fund. Since his appointment, the Trustee has been engaged in worldwide litigation arising out of the liquidation of BLMIS. The Trustee has sued both of the defendants in courts in the United States. The case is still ongoing.

6 It is common case that the entire Thema fund has been lost as part of the Madoff fraud. These proceedings were instituted by the plaintiffs in June, 2009. The plaintiffs each claim that they were investors in the Thema fund though they accept that they are not shareholders in Thema. The plaintiffs further contend that as a consequence of their respective investments they are each a unit-holder in the Thema fund and that Thema and the second named defendant as a custodian of the Thema fund consequently owed them obligations which they each failed to meet.

7 Alico Life, the plaintiff in the first action, claims the notional value of its investments in the Thema fund of US$1,731,034.05 and €1,425,592.20 and further claims damages by way of missed opportunity and/or by way of reasonably assumed investment growth. Mr. Shmuel Harlap, the plaintiff in the second action, claims the notional value of his investment in the Thema fund of US$2,749,289.56 and €2,216,914.61 and further claims damages by way of missed opportunity and/or by way of reasonably assumed investment growth. These proceedings were effectively stayed to await the outcome of proceedings brought by Thema against the second named defendant in these proceedings, HTIE (‘The Thema proceedings’).

The defendants

8 Thema is an open ended investment company regulated by the Central Bank of Ireland in accordance with the Regulations and the Directive. It is an open ended investment company where investors invest by subscribing for shares and becoming shareholders and realise in their investment by the redemption of their shares. The investment company invests the money subscribed in accordance with the investment objective set out in the prospectus of the company. It is referred to a UCITS.

9 Pursuant to the Directive and the Regulations, Thema was required to appoint an appropriately qualified and supervised independent party for the safe keeping of its assets. In the Directive this party is referred to as the depositary and in the Regulations it is referred to as the trustee. Sometimes it is also referred to as the custodian. Initially Thema entered into a custody agreement dated 30th May, 1996, with Bermuda Trust (Dublin) Limited for the custody and safe keeping of the assets...