Ireland: Madoff Litigation: UCITS Investor Rights And Depositary Liability

The Irish Commercial Court (Costello J) has recently clarified a number of issues regarding an Irish investment company authorised as a UCITS fund which will also have relevance for investment companies generally.[1] 

The judgment: (i) clarified the difference between an "investor" and a "unit-holder"; (ii) restated long-established rules of company law, including who can sue when a company suffers loss; and (iii) opined on the liability of depositaries under the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003 (as amended) (the "2003 UCITS Regulations"), implementing Directive 85/611/EEC (as amended) (the "Directive") (which are commonly referred to as the "UCITS III" regime). [2]


Thema International Fund plc ("Thema") is an Irish regulated investment company governed by Irish company legislation.  It appointed HSBC Institutional Trusts Services (Ireland) Limited ("HSBC") as the depositary (known as a "trustee" under the 2003 UCITS Regulations) for its assets.  A central requirement of the UCITS regime is that fund assets are entrusted to a depositary for safekeeping, which must then hold such assets separate from its own assets, and generally its liability is not affected when delegating safekeeping to any sub-custodian.

HSBC appointed Bernard Madoff Investment Securities LLC ("BLMIS") as sub-custodian of substantially all of the assets in the Thema fund.  The entire Thema fund was lost due to the collapse of the enormous Ponzi scheme operated by Bernard Madoff and BLMIS.

In December 2008, Thema instituted proceedings against HSBC arising from the Madoff fraud, alleging various wrongs against HSBC and its agents, including breaches of the 2003 UCITS Regulations, breach of contract, breach of fiduciary duty and tortious breaches. HSBC ultimately settled with Thema.  [3]

The plaintiffs (Alico Life International Ltd and Mr Shmuel Harlap) instituted proceedings against Thema and HSBC in 2009.  In response, Thema and HSBC contended that they did not owe any actionable duty to the plaintiffs in circumstances where the plaintiffs were not unit-holders in the fund.  

They also contended that, even if the plaintiffs were unit-holders, any duty to the plaintiffs was barred by operation of the rule in Foss v Harbottle [4] and/or the rule against reflective loss. [5]  HSBC also argued that the plaintiffs did not enjoy any direct right of action under the 2003 UCITS Regulations against it in its capacity as depositary/trustee.

Meaning of "Unit" and "Unit-Holder"  [6]

The Commercial Court determined that "units" in the context of an investment company  [7]  are the shares in that company, and not any other type of interest or instrument in the company.  

The plaintiffs argued that they were unit-holders in Thema notwithstanding the units in question were held through nominees, meaning they were investors and not registered shareholders in Thema.

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

Unit-Holder Claim against the Depositary

The plaintiffs made a separate argument that as unit-holders in Thema  [8]  they should have a direct right of action against HSBC pursuant to Article 16 of the Directive. [9]  That provision states a depositary is liable to the investment company and the unit-holders for loss suffered by them as a result of the depositary's unjustifiable failure to perform its obligations, or its improper performance of them.  [10]

The court took the view that Article 16 did not confer a direct cause of action by unit-holders in an investment company UCITS against a depositary.  

Article 16 did not require Ireland to grant a cause of action to a unit-holder in an investment company against a depositary, if Ireland wished to do so it could enact legislation to that effect (which it did not); therefore the court was satisfied that Article 16 introduced no such direct cause of action.

Rule in Foss v Harbottle

The defendants (Thema and HSBC) argued that, even if they were unit-holders, the plaintiffs' cases were not maintainable as it offended the rule in Foss v Harbottle. This is an established principle of company law which dictates that where damage has been suffered by a company, the proper plaintiff is the company itself and not a shareholder (subject to certain exceptions). 

The court, observing that the assets which were lost by the Madoff fraud were clearly those of Thema (and not the shareholders), held that the plaintiffs had no right to sue for that loss.

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 application of the rule against reflective loss.

Where a company suffers loss as a result of the conduct of a third party, a shareholder will often suffer a loss in the form of a diminution in the value of his shareholding.  The shareholder's loss would be made good in those circumstances by the company enforcing its rights against that third party.  In such a situation, the rule against reflective loss prevents a shareholder from recovering separately for the diminution in the value of his shares as this would constitute double recovery for the same loss, i.e. the loss in value of the shares is reflective of the company's loss. 

The test for determining whether the loss is reflective in nature is whether a full recovery by the company of its loss in an action against the wrongdoer would make good the loss suffered by the shareholder.

Thema had sued HSBC for the loss of the assets of the Thema fund.  The plaintiffs here sued for the loss in values 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 court upheld and restated the rule against reflective loss, meaning the plaintiffs' claims were barred. 

Key Takeaways

(a) A "unit-holder" in the context of an investment company UCITS means a shareholder in that company, and therefore, investors who hold units in an investment company UCITS through a nominee are not unit-holders.  If they choose not to become unit-holders and instead invest via a nominee or other intermediary, it is their responsibility to ensure that the nominee ensures they are indirectly afforded the relevant benefits and protections under the Directive.

(b) A unit-holder in an investment company UCITS did not enjoy a direct right of action against the depositary/trustee under Article 16 of the Directive (see further below).

(c) Proceedings brought by a unit-holder seeking the recovery of the net asset value of their shares in an investment company will generally be barred by both the rule in Foss v Harbottle and the rule against reflective loss.

Depositary Liability after UCITS V

As mentioned, the court held that, although Article 16 imposed liability on the Depositary, it did not confer a direct cause of action on unit-holders.  In this regard, it should be noted that, under the Directive and the 2003 UCITS Regulations, there was a difference between depositary liability for unit trusts/contractual funds and investment companies.  Both provided that the depositary would be liable, in accordance with the laws of its home Member State, to the fund and unit-holders for loss suffered as a result of its breach of the prescribed liability standard, but for unit trusts/contractual funds there was additional wording stating that "Liability to unit-holders may be invoked either directly or indirectly through the management company, depending on the legal nature of the relationship between the trustee, the management company and the unit-holders." 

Costello J took the view that this second sentence "had to be given a meaning" and agreed with HSBC that it should be interpreted as meaning that unit-holders in a unit trust/contractual fund could have standing to sue the depositary directly where there is a legal relationship between them (or indirectly through a management company). 

There was a conscious decision of legislators to remove the above distinction in amending the UCITS regime for "UCITS V".  Article 24(5) of Directive 2009/65/EC [11]  now provides that "Unit-holders in the UCITS may invoke the liability of the depositary directly or indirectly through the management company or the investment company provided that this does not lead to a duplication of redress or to unequal treatment of the unit-holders" [12]  (emphasis added).  Since UCITS V came into effect, unit-holders in all UCITS funds, regardless of legal form, may now have a right to sue the depositary directly. 

The only qualification is that unit-holder claims should not lead to the duplication of redress or unequal treatment of unit-holders.  Interestingly, this seems to echo existing Irish company law principles summed up in the rule in Foss v Harbottle and the rule against reflective loss.  However, the courts will interpret this provision "harmoniously and autonomously" as EU law, and not necessarily in the same way as domestic legislation.

What therefore remains to be seen is how an Irish court (or indeed another EU court) will interpret Article 24(5) in any future case involving depositary liability and unit-holder loss; the primary question being whether they will find that a direct cause of action is conferred on unit-holders, and, if so, how the above qualification impacts on this. 

Any such decisions could have major implications for the depositary regime for UCITS funds and investors. 

[1] Alico Life International Ltd v Thema International Fund plc and HSBC Institutional Trusts Services (Ireland) Limited and Shmuel Harlap v Thema and HSBC [2016] IEHC 363.

[2]  The 2003 UCITS Regulations were restated and replaced under UCITS IV and subsequently amended under UCITS V since the issuance of these proceedings.  For the purposes of these proceedings, the 2003 UCITS Regulations were those which were applicable.

[3]  At the date of judgment of Costello J, the settlement amount had not yet been distributed to shareholders pending resolution of a separate issue in the US courts involving BLMIS and the defendants.

[4]  (1843) 2 Hare 461 (a decision of the English Court of Chancery).  See the paragraph on Rule in Foss v Harbottle.

[5] See the paragraph on Rule against Reflective Loss.

[6] Neither "unit" nor "unit-holder" is defined in the Directive.  Those terms are, however, both defined in the 2003 UCITS Regulations. 

[7] The Directive and the 2003 UCITS Regulations identify three distinct legal forms which UCITS may take: (i) common contractual funds managed by management companies, in which case the assets are beneficially owned by the unit-holders; (ii) unit trusts, in which case the assets are legally held by a trustee and the unit-holders have a beneficial interest in the assets of the undertaking; and (iii) investment companies.  The terms unit and unit-holder are designed to apply to all three forms of fund. 

[8] Ignoring for these purposes the court's rejection of the plaintiffs' status as "unit-holders". 

[9] Implemented in Ireland by Regulation 43 of the 2003 UCITS Regulations. 

[10] Note the liability standard for depositaries has changed post UCITS V (18 March 2016 onwards). 

[11] As amended by Directive 2014/91/EU 

[12] This provision is implemented in Ireland pursuant to Regulation 36(7) of the European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2011 (as amended), as follows:  "Liability to unit-holders may be invoked either directly or indirectly through the management company or the investment company provided that this does not lead to a duplication of redress or to unequal treatment of the unit-holders

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Stephen Carty
In association with
Related Topics
Related Articles
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of

To Use you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.


The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.


Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions