England and Wales High Court (Commercial Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
LONDON MERCANTILE COURT

		The Rolls Building 7 Rolls Buildings Fetter Lane London EC4A 1NL
		4 December 2015

1. MR JUSTICE COOKE: This is an application made by the defendant, Barclays, in respect of a claim brought by Mr Sivagnanam to whom I shall refer as the claimant. The application is to strike out the claim on the basis that there are no reasonable grounds for bringing it or for summary judgment, dismissing it on the basis that it has no realistic prospect of success. For the purpose of any strike out application, the court must assume the facts pleaded in the Particulars of Claim are correct. For the purpose of a summary judgment claim, there is no such assumption but, as is pointed out by Mr Maynard, here, there is no factual evidence adduced by Barclays, save for the witness statement of Ms Gibbons which, essentially, relates to redress given by Barclays to the Company, WHL, on a voluntary redress procedure.
2. The claim, as brought, which I have to examine, was brought in respect of three interest rate hedging products which were entered into not by the claimant, himself, but by WHL with Barclays between 2006 and 2008. At all material times, the claimant is and was the sole shareholder of the Company and a director of it. The Company, WHL, did not bring a claim against Barclays in relation to the sale of the products in question. Nonetheless, as appears from the witness statement of Ms Gibbons, the interest rate hedging products were entered into by the Company, WHL, on or about 22 May 2006, 17 July 2007 and 30 October 2008. On 27 July 2010, a written compromise agreement was concluded between WHL and Barclays. On 28 April 2015, there was a further review of past sales of such products pursuant to an agreement made between Barclays and the Financial Services Authority, as it then was. It was on 28 April that WHL, in a document signed by the claimant as its sole director, accepted the sum of £2,395,220.11 "in full and final settlement by the Company of all complaints, claims and causes of action, ("Claims") including for costs, expenses or damages that may be alleged to arise from or be in any way connected to the sale of the interest rate hedging products, however such Claims arise." It is, of course, plain from those terms (and it is not contended otherwise) that WHL has compromised any or all claims which it might have against Barclays in relation to the sale of the products.
3. The claimant, through his counsel, Mr Maynard, submits he is "a private person" within the meaning of Section 138D of the Financial Services and Markets Act. He says that he has suffered loss as a result of alleged contraventions by Barclays of the Conduct of Business Rules or rules in the Conduct of Business Sourcebook, those being the two relevant series of rules covering the period during which the products were sold to WHL. The wording of Section 138D (2) is as follows:

"The contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty."

4. It is common ground between the parties that the definition of a private person, to which Section 138D (6) refers is to be found in the Financial Services and Markets Act (Rights of Action) Regulations 2001/2256 at paragraph 3. There, a private person is defined as meaning:

"(a) any individual, unless he suffers the loss in question in the course of carrying on (i) any regulated activity or (ii) any activity which would be a regulated activity apart from any exclusion made by Article 72 or 72(a) of the Regulated Activities Order;

(b) any person who is not an individual unless he suffers the loss in question in the course of carrying on business of any kind."

5. There are then further exceptions in paragraph (c) and (d), which I do not need to set out in full. Sub-paragraph 2 of paragraph 3 also refers to individuals who suffer loss in the course of effecting or carrying out contracts of insurance who are not to be taken to suffer loss in the course of carrying on a regulated activity.
6. It is further common ground that WHL would not have been a private person within the meaning of this regulation because WHL had carried on a business. The question arises as to whether or not the claimant can bring the claims he does. It is accepted that he is "a private person" within the meaning of Section 138 who is not, in that sense, carrying on a business. It was the company, WHL, in which he had an interest which carried on the business but which was a customer or client of Barclays. The point which arises is a fundamental point in relation to questions of statutory duty. The terms of Section 138D are such that the court must have regard to "the defences and other incidents" which apply to actions for breach of statutory duty.
7. A fundamental principle in relation to actions of this kind is that the person who brings the claim must be one of the persons who are intended by Parliament to be protected by the relevant legislation or rule. Mr Allen, for Barclays, referred to a number of text books and authorities but it is sufficient to quote Jackson and Powell on Professional Liability for this purpose. At paragraph 14-070, the authors state this:

"In order to establish a contravention, the nature and extent of the duty need to be determined by interpreting the relevant FSA rule. Moreover the claimant must be within the category of person which the rule, as a matter of interpretation, is intended to protect."

8. In that context, Mr Allen submits that the claimant was not intended to be protected by the rules of either COB or COBS which are said to have been breached by Barclays when dealing with WHL. In my judgment, that is a submission which is well founded. The point is made good simply by reference to the Particulars of Claim as they are pleaded. At paragraph 13, a number of rules in COB are set out which are all aimed specifically at the customer or the client. I need not go into any detail in respect of that but it is apparent, simply from reading the rules, that they are designed for protection of a customer or a client of a regulated firm or company. At paragraph 14, it is pleaded that WHL was a private customer of the defendant within the meaning of COB. The pleading goes onto to state that COB was superseded by COBS in the FSA's revised consolidated rules and then at paragraph 16, a series of further citations are made of those rules. Once again, I do not need to go through those in detail but they all refer to the best interests of the client, to communications to the client, to taking reasonable steps to ensure that recommendations are suitable for the client, to obtaining information from the client and to ascertaining the client's knowledge and experience. The KYC rules, as they are often referred to, speak for themselves, in as much as they are directed very specifically towards the protection of those who are clients of regulated bodies. At paragraph 17, it is pleaded that after 31 October 2007, WHL was a client of the defendant within the meaning of COBS.
9. At paragraph 22 of the pleading, it is asserted that the claimant is a private person with a right of action against the defendant for breach of statutory duty under Section 138D (2) of FSMA:

"A contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty."

10. When then the allegations of breach are examined, it can be seen, from paragraphs 33, 40, 44, 45, 46, 48 and 49 that each of the relevant breaches of the rules is pleaded by reference to the position of WHL. It is, in my judgment, clear beyond argument that the rules were designed to protect the customers who constituted private persons within the meaning of Section 138D. It was not intended that the Act should apply to a different group of people who fell outside that category to whom no duty was owed and in respect of whom no breach of duty has even been pleaded. In short, the claimant is not a person whom the legislation was designed to protect. He asserts no claim at all for breach of duty to him in relation to the interest rate hedging products. The only plea which relates to the position of the claimant, as such, appears in paragraph 35 of the Particulars of Claim. There, the following appears without any allegation of breach of duty by reference to FSMA or the rules, at all:

"Amongst other things, the Defendant required the Claimant to inject a further personal money into the business and to provide further security in the form of personal guarantees and charges over property owned by him."

11. That is not sufficient to amount to a plea that there has been a breach of duty on the part of Barclays to him under the terms of COB, COBS or FSMA.
12. In this context, it is irrelevant whether or not WHL has a claim under FSMA against Barclays (it being accepted it has not) or whether the claimant, himself, had a claim at common law against Barclays in respect of any loss that he might personally have suffered. The point is reinforced by the decision of Morison J in Diamantides v JP Morgan Chase Bank & Ors [2005] EWHC 263 (Comm). A rather similar type of claim was being pursued there under earlier legislation. I am reminded by Mr Maynard that I have to construe the current legislation and not previous legislation, which may have been aimed at protecting investors and different classes of people from those referred to in the current statute. Nonetheless, the underlying point remains good by reference to that earlier legislation. The Judge held, at paragraph 27, that there was no credible case being advanced, that the Bank and the individual were in a contractual relationship of banker and customer, in circumstances where it was the company of which he was the sole shareholder and controller (much as here) which was, in fact, the customer of the Bank. As the Judge put it:

"Because Pollux is a company which carried on the business of investing for its sole shareholder's benefit, it did not have the protection afforded by the statutory scheme then in force to protect a 'private investor'. The discussion in Johnson as to reflective loss is not pertinent in my Judgment. Pollux has a cause of action against the Bank; if that claim failed because of some exclusionary clauses in the contractual documents, than that does not give Mr Diamantides a good claim against the Bank. If Pollux succeeds then Mr Diamantides' own losses will be reflective of the losses for which Pollux is making its claims; if Pollux fails, then the shareholder will bear the loss."

13. That was the reality of the position. He went on to say this, in paragraph 28:

"I think it was rightly submitted that this is an unprincipled attempt by an individual, who chose to invest through a corporate vehicle, to pierce the veil of his own company. That is not in law permissible – see Trustor AB v Smallbone [2001] 1 WWR 1177. The beginning and end of this case is that Pollux was the customer; Mr Diamantides was not. As Pollux's voice, the advice was given to him on behalf of Pollux and he caused Pollux to act on it. There is no commercial sense in a split between advisory and transaction activities. It is frankly meaningless and would make the regulatory regime impossible. I regard the amended pleading as a construct designed to avoid the consequence of Pollux not being a private investor..."

14. There was a range of arguments put forward there which are not put forward here, but the underlying thrust of what was said is, in my judgment, of application. This decision was upheld by the Court of Appeal, albeit not for entirely the same reasons. Moore-Bick LJ, with whom the other Lord Justice and Lady Justice agreed, simply said that at the end of the day, the facts set out in the consolidated Particulars of Claim were not capable of supporting the case that was sought to be made. In my judgment, that is exactly the position in the present case.
15. I should just say, in the context of the arguments made by Mr Maynard, who said everything that could possibly be said, that he argued that the particular terms of Section 138 did not justify any limitation to any class such as a customer but only a limitation in respect of the specific exceptions that were there set out. For the reasons I have already given, I do not accept that submission. There is a much more fundamental point which is the question as to whom it was the statute and the rules in question were intended to refer; for whose benefit was the protection being given. Once it is shown, as it is clearly in my judgment shown here, that the claimant fell outside the scope of the persons who were intended to be protected, it matters not that he is a private person and the limited exceptions to that do not assist in the argument, one way or the other.
16. There is a second basis for rejecting the claim as put. This point arises, essentially, out of the line of authority which is primarily set out in the decision in the House of Lords in Johnson v Gore Wood [2002] 2 Appeal Cases 1 and amplified in Gardner v Parker [2004] EWCA Civ 781. The point is, again, when ultimately reviewed, a relatively simple one. It is well established that a shareholder of a company cannot sue to recover damages for a loss which is reflective of a loss suffered by the company if the company could, itself, put forward a claim for that loss. Specific attention should be paid to what is said by Lord Millett at pages 66 and 67 in Johnson v Gore Wood and what is said by Lord Justice Neuberger, as he then was, in paragraph 33 of Gardner v Parker. I need not set out the passages in extenso but draw attention to the very useful summary at paragraph 33 in Gardner v Parker. He stated there, in sub-paragraph 3, that 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 to other payments which the company would have made if it had the necessary funds, even if the plaintiff would have received them qua employee and not qua shareholder. He went on to say that the principle is not rooted simply in the avoidance of double recovery but 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. Provided the loss claimed by the shareholder is merely reflective of the company's loss and provided the defendant wrongdoer owed duties to both the company and the shareholder, it is irrelevant that the duties so owed may be different in content.
17. One has only to look at the way in which the claim for loss has been framed to see that it falls foul of the principle of non-recoverability of reflective loss. I have already drawn attention to the way in which the duties owed to WHL were set out and how the breaches of those duties were pleaded. When the pleading comes to the question of causation, paragraph 54 simply says:

"By reason of the matters aforesaid the Claimant has suffered loss and damage."

18. Thereafter, followed Particulars of Loss in the following terms:

"(i) As a result of the payments made under the miss-sold IRHPs and the breakage charges the shareholder's funds in WHL which otherwise would be available to the Claimant, have been diminished. (ii) But for the payments made under the miss-sold IRHPs and the breakage charges WHL would have been able to repay in full the director's loans and other monies advanced to it by the Claimant or paid by him on its behalf. In the premises the Claimant has lost the value of the said loans and monies."

19. I have already referred to paragraph 35 of the pleading, where it was said that the defendant required the claimant to inject further personal money into the business and to provide security in the form of guarantees and charges over property, but what is being pleaded here by way of loss in relation to breaches of the rules and duties owed to WHL is that shareholders' funds have been diminished and that loans and monies made by the claimant have not been repaid. What is quite clear from the way in which those matters are framed is that what is actually being said is that WHL, itself, has lost assets. It, itself, has been deprived of monies which it otherwise would have used, treating them as shareholders' funds, paying dividends or by way of repayment of loans made to the claimant as a creditor (the loans in question being made as shareholders' or directors' loans). It is beyond doubt that the loss claimed, therefore, is the loss to the Company which is then reflected in its lesser ability to pay the claimant or in the value of the claimant's stake in WHL. Mr Maynard said that this was all very well but the one thing that had not been established was that the Company, itself, WHL, could make its own claim against Barclays. It was accepted by both sides that such a claim would not run under FSMA. It was asserted by Mr Allen that there were potential realistic claims at common law simply on the basis of the pleading made. Mr Maynard said, to the contrary, that it could not be taken as read that there was any assumption of duty or any breach of a common law duty, at all. The Bank, Barclays, had failed to set out in any way exactly what the common law duty was, how it was breached and how causation and damage arose. It was not, therefore, for the court, on the basis of assumption or speculation, to reach a conclusion, for the purposes of summary judgment or striking out, that there was a valid claim which could have been made by WHL against Barclays at common law. There were a number of factors which would have to be examined in that context, particularly to see what the contract exclusions might have been and whether any duty to advise could arise in such circumstances. Because the Bank had not set out its position, the claimant could not say whether or not there was any agreement and whether there was any realistic prospect of success of such a claim.
20. The difficulty which that argument faces is the fact that there is, in the present case, evidence before the court that redress was paid. Of course, that redress was paid in the sum of nearly £2.4 million, not on the basis of any specific common law claim or, indeed, I imagine, any claim under FSMA. It was part of a voluntary procedure and to this extent, Mr Maynard is right, that it cannot be said that it was made on the basis of an admission of legal liability. It cannot, therefore, he says, be taken as evidence of any separate right of action, which the company could have brought. That is all very well in theory but in practice, is it perfectly clear that the parties, WHL and Barclays, have proceeded on the basis of compensation being made in respect of any advice that WHL might have had in relation to the sale of the interest rate hedging products. In such circumstances, it cannot lie in the mouth of WHL, nor its sole shareholder and director, the claimant, to say that there was no realistic prospect of success on a claim by WHL against the Bank. There are any number of claims currently being brought by customers against their banks in respect of the mis-selling of products of this kind. Hence, the very procedure which took place which resulted in the recovery on the part of WHL.
21. The nature of the reflective loss is demonstrated here very clearly, indeed. The sum of £2.4 million, approximately, has been received by the company and were the sole shareholder to recover, there would be, undoubtedly, an element of double recovery. One of the purposes of the rule of reflective loss is to prevent that happening. There is also, however, as has been pointed out, the question of policy because shareholders, creditors and employees all have relative priorities in respect of their claims against any company. It is important, therefore, that they should not receive any preference in bringing claims when the claims are properly to be brought on behalf of the company and then allocated according to the rules which govern priorities in insolvency or similar situations. In short, for this reason too, I am satisfied that there is no basis upon which the claimant could succeed in his claim against Barclays.
22. There is a third point which I need not dwell on because it was, essentially, common ground between the parties and that is a point which arises out of the Limitation Act. It is common ground that claims in respect of the mis-selling of two out of the three interest rate hedging products would be time barred and, therefore, no recovery could fall to be made in respect of them, at all. The third interest rate hedging product would not fall into that category. Quite how this would work in the context of the loss that is claimed is hard to fathom. So far as the redress that was actually given is concerned, both the first and second hedging products gave rise to a recovery of a sum just short of £20,000, whereas the vast majority of the recovery was made in respect of the third product where no time barred point arises. How the claim of the claimant in respect of his loss would fall to be characterised is another question entirely but does rather emphasise the point as to reflective loss, which I have already made.
23. In these circumstances, I am entirely satisfied that the Bank satisfies the requirements of CPR 24 in respect of summary judgment, that there are no realistic prospects of success on the claim, and there is no other compelling reason why this matter should go to trial. In that situation, Barclays must be entitled to summary judgment and I so order.