Reflective loss

The appellant company succeeded in its appeal against a finding that sums that it sought to recover fell outside the ‘reflective loss’ principle. The Supreme Court held that the approach adopted in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] 1 All ER 354 was correct. However, the rule in Prudential was limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they received as shareholders, had been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way. Consequently, Prudential had no application to the present case, since it did not concern a shareholder.

The respondent (S) was the owner and controller of two companies incorporated in the British Virgin Islands (together, the companies). The appellant company (Marex) commenced proceedings against the companies for sums allegedly due.

At first instance, Marex was successful. However, it was alleged that, after the handing down of a draft judgment, S took steps to move money from the companies into his personal control, so that the companies could not pay the judgment sums.

In December 2013, S placed the companies into liquidation. Marex alleged that the liquidator had failed to properly proceed with the liquidation.

Marex sought damages in tort for: (i) inducing or procuring the violation of its rights under the judgment and order of 25 July 2013; and (ii) intentionally causing it to suffer loss by unlawful means.

Marex claimed for, among other things: (i) the amount of the judgment debt, interest and costs awarded by the court, less an amount recovered in US proceedings concerning the bankruptcy of a company which had been indebted to the companies; and (ii) costs incurred by it in proceedings and in other attempts to obtain payment of the judgment debt. S alleged that the sums in (i) fell outside the scope of the ‘reflective loss’ principle.

The case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)[1982] 1 All ER 354 established the rule that a diminution in the value of a shareholding or in distributions to shareholders, which was merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, was not, in the eyes of the law, damage which was separate and distinct from the damage suffered by the company, and therefore was not recoverable.

The Court of Appeal, Civil Division, found for S. Marex appealed to the Supreme Court.

The court considered two issues: first, whether the no reflective loss rule applied in the case of claims by company creditors, where their claims were in respect of loss suffered as unsecured creditors, and not solely to claims by shareholders. Second, whether there was any and, if so, what, scope for the court to permit proceedings claiming for losses which were prima facie within the no reflective loss rule, where there would otherwise be injustice to the claimant. That injustice would be through inability to recover, or practical difficulty in recovering, genuine losses intentionally inflicted on the claimant by the defendant in breach of duty both to the claimant and to a company with which the claimant had a connection, and where the losses were felt by the claimant through the claimant’s connection with the company.

It was necessary to distinguish between: (i) cases where claims were brought by a shareholder in respect of loss which he had suffered in that capacity, in the form of a diminution in share value or in distributions, which was the consequence of loss sustained by the company in respect of which the company had a cause of action against the same wrongdoer; and (2) cases where claims were brought, whether by a shareholder or by anyone else, in respect of loss which did not fall within that description, but where the company had a right of action in respect of substantially the same loss (see [79] of the judgment).

In cases of the first kind, the shareholder could not bring proceedings in respect of the company’s loss, since he had no legal or equitable interest in the company’s assets. However, depending on the circumstances, it was possible that the company’s loss could result (or be claimed to result) in a fall in the value of its shares. Its shareholders could, therefore, claim to have suffered a loss as a consequence of the company’s loss. Depending on the circumstances, the company’s recovery of its loss could have the effect of restoring the value of the shares. In such circumstances, the only remedy which the law was required to provide, in order to achieve its remedial objectives of compensating both the company and its shareholders, was an award of damages to the company. There could, however, be circumstances where the company’s right of action was not sufficient to ensure that the value of the shares was fully replenished (see [80], [81] of the judgment).

The critical point was that the shareholder had not suffered a loss which was regarded by the law as being separate and distinct from the company’s loss, and therefore had no claim to recover it (see [83] of the judgment).

In the second kind of case, the arguments which arose in the case of a shareholder had no application. There was no analogous relationship between a creditor and the company. There was no correlation between the value of the company’s assets or profits and the ‘value’ of the creditor’s debt, analogous to the relationship on which a shareholder based his claim for a fall in share value. When applied to a debt, the word ‘value’ reflected the fact that it was a different kind of entity from a share (see [84] of the judgment).

Where a company suffered a loss, it was possible that its shareholders could also suffer a consequential loss in respect of the value of their shares, but its creditors would not suffer any loss so long as the company remained solvent. Even where a loss had caused the company to become insolvent, or had occurred while it was insolvent, its shareholders and its creditors were not affected in the same way, either temporally or causally. In an insolvency, the shareholders would recover only a pro rata share of the company’s surplus assets, if any. The value of their shares would reflect the value of that interest. The extent to which the company’s loss could affect a creditor’s recovery of his debt would depend not only on the company’s assets but also on the value of any security possessed by the creditor, on the rules governing the priority of debts, and on the manner in which the liquidation was conducted. Most importantly, even where the company’s loss had resulted in the creditor also suffering a loss, he had not suffered the loss in the capacity of a shareholder, and his pursuit of a claim in respect of that loss could not therefore give rise to any conflict with the rule in Foss v Harbottle (see [85] of the judgment).

Where the risk of double recovery arose, how it should be avoided would depend on the circumstances. The avoidance of double recovery did not entail that the company’s claim had to be given priority. Nor did the pari passu principle entail that the company’s claim had to be given priority (see [87] of the judgment).

It was also necessary to consider whether double recovery could be avoided by other means than the prioritising of one claim over the other (see [88] of the judgment).

The approach adopted in Prudential was correct. However, the rule in Prudential was limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they had received as shareholders, had been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way (see [89] of the judgment).

The rule in Prudential had no application to the present case, since it did not concern a shareholder. That disposed of the questions of whether the ‘reflective loss’ principle applied to creditors as well as shareholders, and whether the exception in Giles v Rhind applied (see [92] of the judgment).

Giles v Rhind [2002] 4 All ER 977 overruled; Gardner v Parker [2004] All ER (D) 249 (Jun) overruled; Perry v Day [2004] All ER (D) 327 (Oct) overruled; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] 1 All ER 354 applied; Johnson v Gore Wood & Co (a firm) [2001] 1 All ER 481 explained; Foss v Harbottle (1843) 2 Hare 461 considered; Christensen v Scott [1996] 1 NZLR 273 considered; Chen v Karandonis [2002] NSWCA 412 considered; Shaker v Al-Bedrawi [2002] 4 All ER 835 considered; Gardner v Parker [2004] All ER (D) 249 (Jun) considered; Townsing v Jenton Overseas Investment Pte Ltd [2007] SGCA 13 considered; Waddington Ltd v Thomas [2008] HKCU 1381 considered; Freeman v Ansbacher Trustees (Jersey) Ltd [2009] JRC 003 considered; Hodges v Waters (No 7) (2015) 232 FCR 97 considered; Re Creative Finance Ltd (In Liquidation) et al (2016) 543 BR 498 considered; Alico Life International Ltd v Thema International Fund plc [2016] IEHC 363 considered; Primeo Fund v Bank of Bermuda (Cayman) Ltd Court of Appeal of the Cayman Islands, 13 June 2019 considered.

Appeal allowed.

George Bompas QC and Sophie Weber (instructed by Memery Crystal LLP) for the appellant.

David Lewis QC and Richard Greenberg (instructed by Mackrell Turner Garrett) for the respondent.

Peter Knox QC, Simon Reevell, Richard Samuel, Amit Karia and Chloe Shuffrey (instructed by Trowers & Hamlins LLP (London)) for the All Party Parliamentary Group on Fair Business Banking, as intervener.

Toby Frost - Barrister.