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
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
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). 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 & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd 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 or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.