QUEEN'S BENCH DIVISION
COMMERCIAL COURT
Strand, London, WC2A 2LL |
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B e f o r e :
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MR RAKESH MALHOTRA |
Claimant |
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- and - |
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MR RAJINDER KUMAR MALHOTRA and MR RAJIV MALHOTRA |
Defendants |
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Tom Weisselberg (instructed by Mishcon de Reya LLP) for the Defendants
Hearing dates: 17 and 24 January 2014
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Crown Copyright ©
Mr Justice Blair :
The facts
i) The Respondents shall not utilize, invest or deal in any manner the funds, monies and securities of the company (including bank account) except for the purpose of making statutory payments that may be required to be made to any government authorities and salaries of the employees in the ordinary course of business until further orders. ii) The Respondents shall not dispose of, transfer, encumber or create any charge on the assets of the company including the immovable properties until further orders. …
The parties' contentions
i) Loss of rents. As a result of the grant of the injunction, the defendants have suffered losses in respect of missed opportunities to lease out and develop certain properties owned by the Affiliated Companies. It is estimated that losses in excess of £232,000 have been suffered.ii) Loss of investments. As a result of the grant of the injunction, the defendants were prevented from making certain investments with dividends that they would have received from the Affiliated Companies. It is estimated that losses of £1,003,292 have been suffered.
The law as regards ordering an inquiry as to damages
The defendants' two heads of loss
The claimant's case on causation
Discussion and conclusion on the causation issue
The reflective loss issue
The law
"…what [a shareholder] cannot do is to 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 …"
The summary of the relevant principles is set out in Gardner v Parker [2005] BCC 46 by Neuberger LJ at [33].
(a) Where the shareholder has suffered a loss distinct from the companies' loss, he may sue and recover in respect of that loss: see Johnson v Gore Wood & Co, Lord Bingham at 35H-36A;(b) Where the company itself has no cause of action (e.g. because it was not a party to the relevant contract; or was not owed a duty of care in tort; or did not exist at the time of the wrongful conduct but was incorporated subsequently): see e.g. Rehman v Jones Lang La Salle [2013] EWHC Civ 1339 (QB) at [86], HH Judge Belcher;
(c) Where the company itself, by reason of the wrong done to it, is unable to pursue its claim against the wrongdoer: see Giles v Rhind [2002] EWCA Civ 1428, Waller LJ at [34], and Chadwick LJ at [70], [74] and [79]; Gardner v Parker [2004] EWCA Civ 781, Neuberger LJ at [33] and [57]; Webster v Sandersons [2009] EWCA Civ 830, Lord Clarke MR at [38].
The parties' contentions
(1) Damages are to be assessed on the basis that the cross-undertaking in damages is to be treated as a contract between claimant and defendants (F. Hoffman-La Roche & Co AG v Secretary of State [1975] AC 295 at 361). Given the existence of that duty, the defendants are not seeking simply to recover losses that would otherwise be available to Transauto or the Affiliated Companies. The claimant's answer is that it is irrelevant that the wrongdoer also owes a duty directly to the shareholders as well as to the company.(2) The claimant cannot show that the Affiliated Companies or Transauto would be able to recover the claimed losses from him, because he was not a director of the companies. The claim does not depend on a breach of fiduciary duty by directors in that the defendants contend that as a matter of fact they would have arranged for the Affiliated Companies to act differently. Also, a subsidiary is not usually entitled to complain about the composition of the board of its parent (i.e. Transauto). The claimant responds that the Affiliated Companies can recover directly from the claimant because they are third parties entitled to sue on the undertaking. Furthermore, they may have additional claims against the claimant, for example that he was a shadow director.
(3) The defendants' losses are different from those of the Affiliated Companies, because the loss of dividends has been caused by the fact that they are unable to run the companies in the manner in which they would have wished. The claimant responds that the recovery of lost dividends and diminution of value of shareholding is clearly precluded under the reflective loss rule.
(4) The defendants contend that it may not be possible for the Affiliated Companies to bring claims against the claimant because of what they characterise as his own continuing misconduct. It is said that because of the injunction and the proceedings in India, the Affiliated Companies are being prevented from bringing proceedings to enforce the cross-undertaking. The claimant responds that the relevant exception only applies where the company itself by reason of the very wrong done to it is unable to pursue any claim against the wrongdoer. The claimant's "wrong" ceased in November 2012 when the injunction was discharged. Labelling the "status quo undertakings" as further "wrongful conduct" by the claimant prejudges the issue before the Indian courts, which may ultimately hold that the directors have behaved lawfully and should not be replaced.
Discussion of the reflective loss issue
Conclusion