The Rule in Prudential clarified: The Privy Council decision in Primeo v Bank of Bermuda
On 9 August 2021, the Judicial Committee of the Privy Council handed down its judgment in Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd and another, on appeal from the Cayman Islands Court of Appeal.
The decision concerns the application of what is now better known as the Rule in Prudential following the landmark United Kingdom Supreme Court decision in Sevilleja v Marex Financial Ltd  UKSC 31. You can read more about the Rule in Prudential and Marex in our earlier blog post here.
Primeo was a Cayman Islands investment fund that made substantial direct and indirect investments with Bernard Madoff’s infamous investment vehicle BLMIS. Primeo was placed into liquidation when BLMIS was revealed as a fraud, and its liquidators brought claims against its former professional service providers in relation to direct investments into BLMIS that Primeo subsequently converted into an indirect holding through another fund called Herald and investments that were made into BLMIS indirectly through Herald.
The defendant service providers argued that, because of the Rule in Prudential, Primeo had not sustained any loss at all (the loss having been suffered by Herald). This raised issues about the operation of the Rule in Prudential not determined by the Supreme Court in Marex, namely: at what point in time should the rule be applied (at the time the cause of action arises or when the claim is brought?) and whether the rule only applies where the alleged wrongdoer is common to both the company and shareholder.
Consistent with Supreme Court’s view that the Rule in Prudential is a bright line rule of company law, the Privy Council decided against arguments that would have had the effect of potentially broadening the scope of the rule, holding that:
- As a substantive forward looking rule and not a backward looking procedural rule, the Rule in Prudential should be applied at the time the cause of action arises, not when the claim is brought. The rule therefore did not prevent Primeo from pursuing claims arising from direct investments into BLMIS that later on came to be held indirectly via Herald.
- The Rule in Prudential only applies where the same person commits the wrong against the shareholder and the company because, if there are different wrongdoers, the shareholder’s loss is distinct from the company’s loss. The rule therefore did not prevent Primeo from pursuing service providers who were not also service providers to Herald.