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Reflective loss and the beneficiaries of discretionary trusts – Bermuda Court considers issue in strike-out summons

In a recent decision of the Bermuda Supreme Court, Chief Justice Hargun clarified when a strike-out application will be allowed to proceed, and confirmed that strike-out is not an appropriate procedure for determining controversial points of law in a developing area.

In this case, the controversial point was whether a diminution in value of a trust fund arising from the wrongdoing of a third party caused loss to a discretionary beneficiary or was more properly reflective loss and, therefore, irrecoverable by the beneficiary.

The two trusts, the Mandalay Trust and the Green Vals Trust, were governed by Singapore and New Zealand law respectively. The Mandalay Trust held all of the shares in a BVI company, Meadowsweet Asset Limited, which had an account with the defendant, an insurance company incorporated in Bermuda and part of a global financial services group providing private wealth management services. Similarly, the Green Vals Trust’s held all of the shares in a Bahamian company, Sandcay Investments Limited, which also had an account with the defendant. The plaintiffs, comprising five discretionary beneficiaries together with Meadowsweet and Sandcay, claimed that the account assets had been reduced by US$195 million due to the alleged fraudulent activities of certain employees in the defendant group.

The defendant sought to strike out the claims for breach of common law and statutory duties made by the discretionary beneficiaries who, in turn, applied for the summary dismissal of the strike-out summons.

In determining the correct approach, the Court applied the test in Kingate Global Fund Ltd (in Liquidation) v Kingate Management, namely that if the strike out application is likely to involve “serious and prolonged argument” it will not generally proceed unless the Court:

  • harbours doubts about the soundness of the pleadings; and
  • is satisfied that the application will simplify matters (the Exception).

Given that the application would be argued by Queen’s Counsel with a time estimate of between 1-2 days and would involve questions of law of considerable difficulty, the matter clearly met the Kingate test. As for the Exception, the Court rejected the defendant’s contention that it only had to satisfy (a) or (b) in order to proceed with its strike-out application; both limbs of the Exception must be satisfied, which, on the facts, the defendant failed to do.

As for the reflective loss point, the Court applied Altimo Holdings v Kyrgyz and Freeman v Ansbacher Trustees (Jersey) Limited holding that a strike-out application is not an appropriate procedure for determining controversial points of law in a developing area such as this.

Reflective loss

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