Company – Strike out – Reflective loss – Appellants and respondent entering into investment agreement – Appellants allegedly induced to enter agreement by false representations – Judge concluding claims against respondent barred by reflective loss principle – Appellants appealing – Whether judge right to strike out claim as barred by reflective loss principle – Appeal dismissed
The appellants were all former shareholders in a company. In 2015, there were negotiations which ultimately led to the respondent entering into an investment agreement with the appellants and the company.
The appellants subsequently commenced proceedings against the respondent alleging that they had been induced to enter into the agreement by false representations. They contended that they had suffered loss as a result of the alleged misrepresentations and breaches of contract.
In its defence, the respondent not only denied the substance of the appellants’ allegations against it but asserted, amongst other things, that the loss which the appellants alleged that they had suffered was reflective of loss that would also have been suffered by the company and so was not recoverable by the appellants as a matter of law. Accordingly, the respondent applied for the claim to be struck out, or for summary judgment in its favour.
The High Court concluded that all the claims against the respondent were barred by the “reflective loss” principle: [2022] EWHC 368 (Ch).
The appellants appealed contending, amongst other things, that the issue was not suitable for summary determination because it raised fact-sensitive questions and the relevant law was uncertain and developing; and that their claims were not in any event barred by the reflective loss principle.
Held: The appeal was dismissed.
(1) The “reflective loss” principle applied where a shareholder brought a claim 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.
A shareholder could not escape the principle merely by showing that he had an independent cause of action against the defendant. He must also have suffered separate and distinct loss, and the law did not regard a reduction in the value of shares or distributions, which was a knock-on effect of loss suffered by the company, as separate and distinct.
There need be no exact correlation between the shareholder’s loss and the company’s for the reflective loss principle to apply. The principle could apply where recovery by the company might not fully replenish the value of its shares. Equally, the company’s loss could exceed the fall in the value of its shares.
The reflective loss principle would not be in point if, although the shareholder’s loss was a consequence of loss sustained by the company, the company had no cause of action against the defendant in respect of its loss; Nor would the principle apply to a claim which was not brought as a shareholder but rather as, say, a creditor or an employee.
The court had no discretion in the application of the reflective loss principle, which was a rule of substantive law. The applicability of the principle was to be determined by reference to the circumstances when the shareholder suffered the alleged loss, not when the claim was issued: Sevilleja v Marex Financial Ltd [2020] UKSC 31; [2020] EGLR 32 applied.
(2) The appellants had argued that the law relating to the reflective loss principle was uncertain and developing; and that the applicability of the principle in the present case should be determined at trial rather than on the basis of assumed facts as the law was in a state of transition.
However, the principle had recently been considered by the Supreme Court in Marex, which confirmed its existence and explained its scope. The mere fact that it might be possible to identify other issues on which the implications of the “reflective loss” principle might be the subject of argument could not have required the judge to decline to determine the strike out/summary judgment application: Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22; [2022] 1 All ER 1219, Allianz Global Investors GmbH v Barclays Bank plc [2022] EWCA Civ 353, Broadcasting Investment Group Ltd v Smith [2022] EWCA Civ 912; [2022] 1 WLR 1 and UCP plc v Nectrus Ltd [2022] EWCA Civ 94 considered.
In all the circumstances, the court was not persuaded that the strike out/summary judgment was unsuitable for summary determination on the basis that the relevant law was uncertain and developing.
(3) The appellants alleged that they had suffered a very substantial loss of share value as a result of misrepresentations by the respondent. However, it was evident from the particulars of claim that, supposing the allegations of misrepresentation to be well-founded, the company would itself have had a cause of action against the respondent in respect of them. The loss of share value would be a knock-on effect of loss suffered by the company for which it would itself have had a cause of action and, hence, not be recognised by the law as “separate and distinct”.
The claim was in that respect one relating to loss which the appellants would have suffered as shareholders in the form of a diminution in share value 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. It was thus barred by the reflective loss principle. The applicability of the principle did not depend on the resolution of any factual disputes.
(4) The breach of contract claim proceeded on the footing that the investment agreement contained implied terms as to good faith which the respondent had breached. The judge was right that the reflective loss principle also applied to that head of loss.
The value of a share could in principle be assessed by reference to the company’s anticipated future earnings, to the prospects of distributions to shareholders and to what the share could be sold for. The appellants were claiming in respect of loss in the form of a diminution in share value, which was the consequence of loss sustained by the company in respect of which it had a cause of action against the respondent.
Accordingly, the judge was right to decide that the claim was barred in its entirety by that principle and to strike it out.
Stephen Auld KC and KV Krishnaprasad (instructed by Stewarts Law LLP) appeared for the appellants; Andrew Thompson KC and Ben Griffiths (instructed by Reynolds Porter Chamberlain LLP) appeared for the respondent.
Eileen O’Grady, barrister
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