In its recent decision in Alico Life International Ltd ("Alico") v Thema International Fund plc ("Thema") and HSBC Institutional Trusts Services (Ireland) Limited ("HSBC") and Shmuel Harlap v Thema and HSBC [2016] IEHC 363, the Irish Commercial Court:

1              clarified the difference between an "investor" and a "unit-holder"; and

2              opined on the liability of depositaries under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003 (the "2003 UCITS Regulations"), implementing Directive 85/611/EEC (as amended) (the "Directive").


Thema is an Irish regulated investment company and had appointed HSBC as depositary for its assets. HSBC in turn appointed Bernard Madoff Investment Securities LLC ("BLMIS") as sub-custodian and the entire fund was lost as a consequence of the collapse of the Ponzi scheme operated by Bernard Madoff and BLMIS.

The plaintiffs (Alico and Mr Harlap) instituted proceedings against Thema and HSBC. Thema and HSBC contended that they did not owe any actionable duty to the plaintiffs as the plaintiffs were not unit-holders in the fund. They further contended that, even if the plaintiffs were unit-holders, any duty to the plaintiffs was barred by the rule in Foss v Harbottle and/or the rule against reflective loss.  HSBC also argued that the plaintiffs did not enjoy any direct right of action against it in its capacity as depositary.

Meaning of "Unit" and "Unit-Holder"

The court determined that "units" in an investment company are its shares and not any other type of interest or instrument in the company. The plaintiffs argued that they were unit-holders, notwithstanding that their units were held through nominees and that they were investors and not registered shareholders in Thema.

The court concluded that the definition of "unit-holder" in the 2003 UCITS Regulations can only mean shareholder in the case of an investment company and does not mean a beneficial owner or the person who invested capital indirectly (ie, via a nominee arrangement).

Unit-Holder Claims against the Depositary

The plaintiffs also argued that, as unit-holders in Thema, they enjoyed a direct right of action against HSBC pursuant to Article 16 of the Directive, which states that a depositary is liable to the investment company and the unit-holders for loss suffered as a result of the depositary's unjustifiable failure to perform its obligations or its improper performance of them.

The court held that Article 16 did not confer a direct right of action by unit-holders in a UCITS investment company against a depositary. 

Rule in Foss v Harbottle

The court, observing that the assets which were lost by the Madoff fraud were those of Thema (and not the shareholders), held that the plaintiffs, even if they had been found to be unit-holders, had no right to sue for that loss as a result of the rule in Foss v Harbottle.

Rule against Reflective Loss

Finally, the court held that, even if it was wrong in all of its other conclusions, the plaintiffs' cases were still barred by the rule against reflective loss. Thema had sued HSBC for the loss of its assets. The plaintiffs here sued for the loss in value of their shares attributable to the diminution in the fund's net asset value. Thus, their loss was identical to that claimed by Thema. The plaintiffs' claims were therefore barred by the rule against reflective loss.

The original version of the article can be found here.

This post comes to us from Maples and Calder. It has been co-authored by John Breslin, Brian Clarke, Stephen Carty, John Gallagher, and Nicholas Cole.