Company – Reflective loss – Tort – Appellant company claiming damages against respondent in tort – Court of Appeal holding that claim barred by reflective loss principle – Appellant appealing – Whether reflective loss rule applying to claims by creditors of company in respect of loss suffered as unsecured creditors – Appeal allowed
The respondent owned and controlled two companies incorporated in the British Virgin Islands (BVI). The appellant brought proceedings against the companies for sums due under contracts it had entered into with them and obtained judgment for over US$5.5 million, plus costs of £1.65 million. The respondent allegedly procured the offshore transfer of more than US$9.5 million from the companies’ London accounts into his personal control. The companies’ assets were reduced to US$4,329.48, so that they were unable to pay their judgment debt to the appellant.
The companies went into liquidation in the BVI, with alleged debts in excess of US$30 million. The appellant was the only creditor not connected to the respondent which claimed that the liquidation process was effectively on hold, with the liquidator failing properly to proceed with the liquidation.
The appellant sought damages from the respondent in tort and served the proceedings on him out of the jurisdiction. The respondent contended, amongst other things, that the appellant’s claim was barred by the reflective loss principle, established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, that prevented a party who had suffered loss through a reduction in value of their interest in a company from claiming directly against the person who caused the loss to the company, rather than letting the company make the claim.
The Court of Appeal accepted that argument and applied the reflective loss principle to a claim brought by an ordinary creditor who was not a shareholder. The effect of that decision was that the appellant could pursue its claim only as regards the 10% of its alleged losses which were conceded not to be “reflective”. The appellant appealed.
Held: The appeal was allowed.
(1) The court in Prudential decided 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 was therefore not recoverable. Where there was no recoverable loss, it followed that the shareholder could not bring a claim, whether or not the company’s cause of action was pursued. The decision had no application to losses suffered by a shareholder which were distinct from the company’s loss or to situations where the company had no cause of action. The rule was based on the rule in Foss v Harbottle (1843) 2 Hare 461, which would be subverted if the shareholder could pursue a personal action in those circumstances.
The judgment in Johnson v Gore Wood & Co [2002] 2 AC 1; [2000] PLSCS 292 gave authoritative support to the decision in Prudential that a shareholder was normally unable to sue for the recovery of a diminution in the value of his shareholding or in the distributions he received as a shareholder, which flowed from loss suffered by the company, for the recovery of which it had a cause of action, even if it had declined or failed to make good that loss. Lord Bingham’s speech in that case was consistent with the reasoning in Prudential. On the other hand, the reasoning in the other speeches, especially that of Lord Millett, departed from the reasoning in Prudential and was not to be followed.
(2) It was necessary to distinguish between 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 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. 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. It was only the company which had a cause of action in respect of its loss. However, depending on the circumstances, it was possible that the company’s loss might result in a fall in the value of its shares. Its shareholders might 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 might have the effect of restoring the value of the shares. In such circumstances, the only remedy which the law 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. The critical point was that the shareholder had not suffered a loss regarded by the law as being separate and distinct from the company’s loss, and therefore had no claim to recover it.
In cases of the second kind, 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. In principle, recovery was permissible, although it might be necessary to avoid double recovery.
(3) In the present case, the rule in Prudential did not apply to the appellant, which was a creditor of the companies, not a shareholder and the appellant should be permitted to pursue the entirety of its claim.
George Bompas QC and Sophie Weber (instructed by Memery Crystal LLP) appeared for the appellant; David Lewis QC and Richard Greenberg (instructed by Mackrell Turner Garrett) appeared for the respondent; Peter Knox QC, Simon Reevell, Richard Samuel, Amit Karia and Chloe Shuffrey (instructed by Trowers & Hamlins LLP) appeared for the intervener.
Eileen O’Grady, barrister
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