COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
Mr Justice Blackburne
London, WC2A 2LL
B e f o r e :
LORD JUSTICE NEUBERGER
MR JUSTICE BODEY
| RODNEY MARK GARDNER
|- and -
Smith Bernal Wordwave Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
(instructed by Messrs Willan Bootland) for the Appellant
Peter Crampin Esq, QC & Ulick Staunton Esq
(instructed by Messrs Eversheds) for the Respondent
Crown Copyright ©
Lord Justice Neuberger:
i) 9% of the issued share capital of a company called Scoutvale Limited ("Scoutvale");
ii) a debt of £799,000 owed to BDC by Scoutvale ("the Loan").
The remaining 91% of the issued shares in Scoutvale were owned by Mr Parker who was, in substance, the sole director of both BDC and Scoutvale.
"Further, as a consequence of the transfer [BDC's] assets were substantially reduced:
i) [BDC's] 9% shareholding in Scoutvale was reduced in value from £450,000 to nothing, or a nominal value;
ii) the value of [the Loan] due from Scoutvale was reduced to nothing, or a negligible amount."
"… save that nothing in this agreement shall operate to release [inter alia, Mr Parker] from claims that vest solely in the liquidators of Scoutvale and the Receiver's having no authority in that regard."
Following payment of the £350,000 to Westpac, the s423 proceedings were discontinued on the agreed terms on 9th May 1995.
"(1) whether the duties, facts and matters pleaded by Mr Gardner in relation to the Transfer are capable of amounting to a breach by Mr Parker of the pleaded fiduciary duties owed by him to BDC as its director"
"(2) whether on Mr Gardner's pleaded case, assuming that the Transfer was in breach of the fiduciary duties owed by Mr Parker to both BDC and Scoutvale, the losses identified in paragraphs 14 and 16 of the reamended statement of claim are recoverable by Mr Gardner."
The rule against reflective loss
"This is sometimes referred to as the rule in Foss -v- Harbottle (1843) 2 Hare 461 when applied to corporations, but it has a wider scope and is fundamental to any rational system of jurisprudence."
"[A shareholder] cannot … recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a 'loss' is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent. shareholding."
"A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss."
"On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation."
"The position is … where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved."
"[I]f the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. By parity of reasoning, the same applies if the company settles for less than it might have done. Shareholders (and creditors) who are aggrieved by the liquidator's proposals are not without a remedy; they can have recourse to the Companies Court, or sue the liquidator for negligence."
He then continued at 66E-F in the following terms:
"But there is more to it than causation. The disallowance of the shareholder's claim in respect of reflective loss is driven by policy considerations. In my opinion, these preclude the shareholder from going behind the settlement of the company's claim. If he were allowed to do so then, if the company's action were brought by its directors, they would be placed in a position where their interest conflicted with their duty; while if it were brought by the liquidator, it would make it difficult for him to settle the action and would effectively take the conduct of the litigation out of his hands."
"Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends … and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds."
At 67B he added:
"The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim."
"For the reasons I have endeavoured to state, Mr Johnson cannot recover the amount of the contributions which the company would have made if it had had the necessary funds; this merely reflects the company's loss and is included in its own claim. Nor can Mr Johnson claim interest in respect of the lost contributions for the same reason."
"(1) a loss claimed by a shareholder which is merely reflective of a loss suffered by the company – i.e. a loss which would be made good if the company had enforced in full its rights against the defendant wrongdoer – is not recoverable by the shareholder save in a case where, by reason of the wrong done to it, the company is unable to pursue its claim against the wrongdoer;
(2) where there is no reasonable doubt that that is the case, the court can properly act, in advance of trial, to strike out the offending heads of claim;
(3) The irrecoverable loss (being merely reflective of the company's loss) is not confined to the individual claimant's loss of dividends on his shares or diminution in the value of his shareholding in the company but extends … to 'all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds' and also to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder save that this does not apply to the loss of future benefits to which the claimant had an expectation but no contractual entitlement;
(4) the principle is not rooted simply in the avoidance of double recovery in fact; it extends to heads of loss which the company could have claimed but has chosen not to and therefore includes the case where the company has settled for less than it might ...;
(5) provided the loss claimed by the shareholder is merely reflective of the company's loss and provided the defendant wrongdoer owed duties both to the company and to the shareholder, it is irrelevant that the duties so owed may be different in content." (emphasis added)
The italicised text is taken from paragraphs 61 and 62 of the judgment of Chadwick LJ.
i) the losses claimed to have been suffered by BDC are losses suffered in its capacity as shareholder in, or creditor of, Scoutvale: that is made as clear as could be in paragraph 14 of the Re-amended Statement of Claim;
ii) the damages claimed in these proceedings against Mr Parker, being based on the losses suffered by BDC as a result of the transfer of the Old Hall Shares at a substantial undervalue, are damages which would have been made good if Scoutvale "had enforced its rights against" Mr Parker. The fact that BDC only had a proportion of the issued shares in Scoutvale, and the fact that one may not be able to "trace" Scoutvale's loss to the shareholders, without effecting some sort of adjustment, cannot make any difference. If it were otherwise, then the reflective loss principle would in practice rarely apply.
The first contention: the rule against reflective loss does not apply to a claim for breach of fiduciary duty
"The question which therefore arises is whether the [rule against reflective loss] also applies in circumstances where a beneficiary with an equitable interest in a company's shares which are held in trust by a trustee sues the trustee for an account of the profit taken by the trustee, that profit being monies in respect of which the company may have a prior claim against the trustee in his capacity as a director of the company for breach of fiduciary duty."
"81. We agree … that if the claim by [the claimant] for an account is in substance a claim to monies to which [the company] has a claim against [the defendant], then consistently with the reasoning in Johnson the [rule against reflective loss] would bar [the claimant's] claim for what in effect reflects part of the loss suffered by [the company], and it matters not that the causes of action of [the claimant] and [the company] are different. Nor does it matter that [the company] has not yet brought proceedings against [the defendant]: the … principle still bars a claim reflective of the company's loss
83. In our judgment the [rule against reflective loss] does not preclude an action brought by a claimant not as a shareholder but as a beneficiary under a trust against his trustee for a profit unless it can be shown by the defendants that the whole of the claimed profit reflects what the company has lost and which it has a cause of action to recover. As the … principle is an exclusionary rule denying a claimant what otherwise would be his right to sue, the onus must be on the defendants to establish its applicability. Further, it would not be right to bar the claimant's action unless the defendants can establish not merely that the company has a claim to recover a loss reflected by the profit, but that such claim is available on the facts. …" (emphasis added).
The second contention: the rule against reflective loss should be disapplied as a result of the 1995 Settlement?
"a wrongdoer who, in breach of his contract with the company and its shareholders, 'steals' the whole of the company's business, with the intention that the company should be so denuded of funds that it cannot pursue its action against him, and who gives effect to that intention by an application for security for costs which his own breach of contract has made it impossible for the company to provide." - per Chadwick LJ at paragraph 66.
As Chadwick LJ went on to say in the same paragraph:
"I would not find it easy to reconcile [such a] result with Lord Bingham's observation, at p36C, that 'the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation'."
"One situation which is not addressed [in Johnson] is the situation in which the wrongdoer by the breach of duty owed to the shareholder has actually disabled the company from pursuing such cause of action as the company had. It seems hardly right that the wrongdoer who is in breach of contract to a shareholder can answer the shareholder by saying, 'The company had a cause of action which it is true I prevented from bringing, but that fact alone means that I the wrongdoer do not have to pay anybody'."
In paragraph 35, he went on to hold that the contention that the wrongdoer could answer the shareholder's claim in this way was "unarguable".
"It is not suggested by [counsel then appearing for Mr Gardner] that it can be shown (and it is certainly neither pleaded nor a matter of common ground between the parties) that Scoutvale was disabled from pursuing any claim against Mr Parker by reason of a lack of financial means caused by his wrongdoing. On the contrary, [counsel] very fairly conceded in his skeleton argument that 'the financial pressures on … Scoutvale … may have that effect [ie an inability to pursue any claim against Mr Parker] independent of any action taken by Mr Parker to deplete its assets'. Nor does the fact, if fact it be, that Mr Parker has continued to control Scoutvale mean that Scoutvale has been disabled from bringing a claim."
The third contention: BDC's claim as creditor is not barred by the rule against reflective loss.
"… [T]his claim relates to payments which the company would have made into a pension fund for Mr Johnson: I think it plain that this claim is merely a reflection of the company's loss and I would strike it out."
Mr Justice Bodey:
Lord Justice Mance: