Jersey Unreported Judgments

Taxation - reasons in respect of application by defendant to strike out plaintiff's claim for enquiry.

[2015]JRC142

Royal Court

(Samedi)

29 June 2015

Mr A. P. Booth appeared in person.

Advocate M. P. Cushing for the Defendant.

CONTENTS OF THE JUDGDMENT

judgment

the master:

Introduction

1.        This judgment represents my detailed written reasons in respect of the defendant's application to strike out the plaintiff's claim for an enquiry into damages and for an account of surplus income over expenditure of the ITPM System on the basis that such losses are irrecoverable as amounting to reflective loss. 

Background

2.        The background to these claims is set out at paragraphs 2 to 9 of my earlier decision in this matter reported at Booth-v-Zenith Trust Company Limited [2014] JRC 231 where I struck out claims for breach of trust.  In a further decision I dealt with an application for specific discovery brought by the Plaintiff reported at Booth-v-Zenith Trust Company Limited [2015] JRC 126.  I refer to paragraph 2 of the 2015 judgment for the procedural history of this matter.

The defendant's application

3.        The defendant's application at its heart was based on the submission that the losses claimed by the plaintiff were reflective of losses suffered by the offshore companies administered by the defendant. 

4.        The defendant therefore relied on Freeman v Ansbacher Trustees (Jersey) Limited [2009] JLR 1 and the observations of Deputy Bailiff, Birt (as he then was) at paragraph 73 to 76.  For the purposes of this application, the remarks of Lord Millett, cited at paragraphs 76 of Freeman summarised the defendant's application and are as follows:-

"76 Lord Millett explained the position with great clarity in the following terms (ibid., at 61-62):

"A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf. Correspondingly, of course, the company's shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company's net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact.

This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none-‰.-‰.-‰. Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course, show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant's actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder.

The position is, however, different 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. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, though they have not always been faithfully observed." (emphasis added)

5.        Advocate Cushing contended that even if the plaintiff disclosed an arguable case that duties were owed by the defendant to the plaintiff, and even if it could be proved that such duties were breached, what Mr Booth was claiming was a surplus of income over expenditure as referred to at paragraph 56 of the amended order of justice.  It was not in dispute that the relief sought in paragraph 56 was an account of surplus income over expenditure. 

6.        The defendant further relied on the plaintiff's skeleton argument filed in opposition to the application where at paragraph 4.16 the plaintiff stated "the plaintiff seeks to recover those sums that would have been ordinarily retained in the offCos had it not been for the unlawful actions of the defendant that required the plaintiff and his co-director to take legal advice, paid for by the offCos".  The reference to "offCos" was a reference to the offshore companies administrated by the defendant as summarised at paragraph 2-9 of my decision in 2014 as part of the ITPM System. 

7.        The plaintiff in response however contended that his claim was not a claim as shareholder or director or brought on behalf of the offCos but a personal claim.  In summary he relied on the following:-

(i)        Mr Russell of Russell Limebeer on behalf of Sierra Trust Limited (which entity it is contended became the defendant) agreed to act initially to promote an earlier scheme to the ITPM Scheme known as RAMS which had been developed by the plaintiff (see paragraph 7 of the order of justice). 

(ii)       Under the RAMS Scheme the plaintiff was to receive 20% of gross proceeds as a result of anyone entering into the RAMS Scheme (paragraph 13). 

(iii)      The plaintiff gave permission for the RAMS Scheme to be used in the IT sector on the basis of the same terms as had been agreed in respect of the RAMS Scheme (see paragraph 18(b)).  This became the ITPM System. 

(iv)      The plaintiff argued at paragraph 30(c) that the defendant owed the plaintiff duties to set up, operate, and wind down the ITPM System at all times in accordance with the plaintiff's intellectual property and other rights.  This allegation was repeated at paragraph 33(j). 

8.        The plaintiff therefore contended that he was advancing this part of his claim in two different ways.  Firstly, he was claiming 20% of gross revenues in respect of his intellectual property rights which the defendant said it would account for and, secondly, in the alternative, he was claiming an account of a surplus of income over expenditure. 

Decision

9.        Insofar as the plaintiff was claiming a surplus of income over expenditure, I agreed with Advocate Cushing that what was being claimed was the profits the offshore companies should have made.  The plaintiff was therefore claiming reflective loss because he was in effect claiming a loss of dividends which the offshore companies would have declared in his favour.  In reaching this view I assumed, without deciding the point, that the plaintiff had a separate cause of action based on duties owed to him personally by the defendant and that arguably a breach of such duty or duties had occurred.  However, in light of the plaintiff's own words in his skeleton argument referred to above, that he was seeking to recover those sums that ordinarily would have been retained by the offshore companies, I reached the view that this part of his claim had to be considered a claim for reflective loss and therefore breached the principles set out in Freeman v Ansbacher cited above. 

10.      However, this was not the end of the matter.  In the plaintiff's oral submissions, he made it clear he was putting his claim on two alternative bases as I have set out above.  This was the first time I had understood this to be the case; I observe in passing that at paragraph 10 of my judgment of 24^th November, 2014, reported at Booth-v-Zenith Trust Company Limited [2014] JRC 231, I had indicated it was not clear to me what loss the plaintiff was claiming. 

11.      Having heard from the plaintiff, it is now clear to me that the plaintiff is claiming 20% of gross revenues representing his intellectual property rights in the ITPM System out of any surplus of income over expenditure.  This is consistent with the wording of the agreement made on 18^th July, 2003, set out at paragraph 21 of the 2014 decision. 

12.      This claim is advanced on the basis that it was a personal obligation of the defendant to account for such monies to the plaintiff on the basis that it was the defendant who was operating the ITPM System through its administration and day to day control of the offshore companies.  Advocate Cushing also fairly accepted in reply that such a claim would not be covered by the reflective loss principle, a concession in my view he was right to make. 

13.      Accordingly, I ruled that the plaintiff's claim for an account in paragraph 56 of the order of justice should be limited to 20% of the gross revenues of the offshore companies in accordance with the plaintiff's intellectual property rights, by reference to the matters pleaded at paragraphs 7, 13, 18(b), 30(c) and 33(j) of the amended order of justice, out of any surplus of income over expenditure arising out of the ITPM System. 

14.      In respect of costs I indicated, and the parties accepted, that the right order in view of my decision was costs in the cause. 

Authorities

Booth v Zenith Trust Co Limited [2014] JRC 231.

Booth v Zenith Trust Co. Limited [2015] JRC 126

Freeman v Ansbacher Trustees (Jersey) Limited [2009] JLR 1.