Sheriff C.A.L. Scott

 

CA1/04 and CA2/04

 

DAVID GRAY v MacROBERTS

FISPAK LIMITED v MacROBERTS

 

 

GLASGOW, 7 March 2006.

The Sheriff, having resumed consideration of the cause, sustains the defenders' first plea-in-law and dismisses the action; finds the pursuer liable to the defenders in the expenses of the action; allows an account thereof to be given in and remits same, when lodged, to the Auditor of Court to tax and to report thereon.

 

 

 

Sheriff

 

 

NOTE

 

Introduction

The pursuer, David Gray, is managing director of a company called Fispak Limited. Mr Gray and Fispak seek damages following upon the alleged breach of contract and negligence of the defenders. There are two separate actions, one at the instance of Mr Gray and the other at the instance of Fispak. However, aside from the nature and extent of the respective pursuer's losses, each action is substantially similar to the other.

 

After a series of case management conferences, both cases were sent to debate with a view to determining the merits or otherwise of the defenders' preliminary pleas. In light of the inter-relationship between each action, it is convenient and appropriate to proceed upon the basis that each side's arguments embraced consideration of both litigations. Indeed, that was the manner in which the debate was approached on both sides of the bar.

 

Defenders' submissions

Under reference to paragraphs 1 and 2 of the defenders' Revised Note of Argument (March 2005) in the Gray action, it was argued that the pursuer, in that case, must aver (and prove) that, had he received the correct advice from the defenders, a different course would have been followed. It was submitted that the Gray action proceeded upon the basis that the pursuer's pension contributions, as made by Fispak, ought to have remained unaltered notwithstanding the investment by a company called ADC (Glasgow) Limited. (Hereinafter referred to as "ADC").

 

Reference was made to article 7 of the Gray record at pages 3 - 4. The pursuer averred that he and his fellow directors wished to proceed to a management buy-out. In that context, "It was understood that the members of the board of directors would be entitled to receive salary, pension contributions and bonus payments at the same or higher levels following ADC's investment to those they had received prior to the investment by ADC."

 

Notwithstanding meetings and the like, the pursuer in the Gray action explicitly averred that there was no concluded agreement regarding the retention of pre-ADC investment benefits such as pension contributions.

 

The pursuer's pleadings were silent as to what would have happened had he received correct advice from the defenders regarding the capping of pension contributions. There were no averments as to what would have been done differently.

 

All this, maintained Mr Moore, constituted a critical lacuna in the position adopted by Mr Gray. In addition, Mr Moore stressed that it was important to link that lacuna to those averments of loss said to flow from the alleged breach of duty on the part of the defenders. In article 16 of condescendence, the pursuer averred that the defenders' breach of duty caused the pursuer to suffer loss and damage.

 

In article 20, the pursuer condescended upon what had taken place once the pension capping problem had been noticed. Put shortly, albeit through a less than straightforward chain of events involving, inter alia, Fispak buying back ADC's shareholding, Mr Gray ultimately quantified his losses in the sum of £240,014.

 

In reality, contended Mr Moore, Mr Gray/Fispak had simply borrowed funds in order to displace the ADC investment, thereby removing the contractual difficulty regarding pension capping. Mr Moore submitted that Mr Gray's averments in article 20 merely served to expose a somewhat acute causation problem.

 

For reasons which were obvious, both these actions were connected and Mr Moore referred to paragraph 3 in the Fispak Note of Argument. Fispak had compromised the action raised by ADC in Ayr Sheriff Court on the basis that ADC would have been successful. Reference was made to the final averment in article 19, at page 21 in the Gray record.

 

Mr Moore claimed that, it followed that if the route devised by Mr Gray and Fispak (article 20 refers) had not been taken, Fispak, at least, would have suffered no loss.

 

In the years preceding the ADC investment, the level of pension contributions had ranged from 18.67% to 33% of Mr Gray's salary. Following the investment, the contributions had varied from 33% of his salary in 2000 to 36-38% in 2002. It was, therefore, inaccurate, maintained Mr Moore, to suggest that the contributions were being maintained at the pre-management buy-out and investment level. The post-investment contributions were substantially in excess of the pre-investment average. Mr Moore, accordingly, submitted that the enhanced level of contributions had only been achieved because of the significant ADC investment which was in place. By the same token, Mr Moore pointed to the pursuer's averments towards the end of article 20, at page 24 (Gray record):

 

"Fispak did wish to pay the pursuer pension contributions in excess of contributions actually paid between April 2002 and May 2003. ADC refused to consent to any bonus payments being made during that period. Fispak has not made payments to the pursuer to restore him to the position he would have been in because Fispak has no cash available to do so, having bought back ADC's shares."

 

To say that any "losses" involved here were "doing the rounds" was literally correct. Both pursuers' contentions regarding alleged financial losses were "circular" in nature submitted Mr Moore and were, consequently, absurd. For those reasons, their respective claims fell to be treated as irrelevant in law.

 

Mr Moore also proceeded to analyse the averments regarding a claim for diminution in the value of Mr Gray's shareholding in Fispak. As part of the negotiated settlement in the Ayr Sheriff Court action Fispak did not repay any money to ADC nor did Fispak seek recovery of the overpayment from Mr Gray himself. Instead, it was arranged that Fispak would buy out ADC's shareholding. The shares were redeemed and, therefore, Mr Gray now had 81% of the issued share capital of Fispak. His shareholding previously constituted 64% (page 23 of the Gray record refers).

 

Mr Gray's claim for diminution of the value of his shareholding was predicated upon the proposition that the value had diminished by May of 2003. Esto there had been any discernible reduction in the value to be attributed to Mr Gray's holding in the company, it had, in reality, resulted from the burden of the loan taken on to buy out ADC. In any event, Mr Moore queried why the court should be asked to take cognisance of an alleged drop in value as at May 2003 as opposed to any earlier or subsequent date. Reference was made to paragraphs 8 and 9 in the (Gray) Revised Note of Argument. This aspect of Mr Gray's case was truly irrelevant contended Mr Moore. His pleadings on this point reflected the lack of reality attaching to the whole manner in which the claim was presented.

 

The current value of Mr Gray's shareholding was not specified. The value as at April or May 2003 was irrelevant. The diminution in value of his shareholding, viz. £163,331, was quantified as at April/May 2003. The validity of such an approach could be tested thus; there was no suggestion that Mr Gray had sold his shares, indeed, the very fact that he claimed regarding diminution of his shareholding implied that he still retained that asset. What if, for whatever reason, those shares had now increased in value? It would be wrong for the defenders to be required to pay for an alleged diminution in 2003 which, by now, had itself diminished.

 

As far as Fispak were concerned, Mr Moore observed that they were always going to have cash borrowings in the event of the ADC investment being replaced. It was submitted that any loss suffered by the company was reflected only in Mr Gray's valuation of his shareholdings. If one were to follow through that approach to assessment of loss, Mr Moore argued that there was then no reason why the defenders should not be "credited" for the extra monies which remained in the Fispak coffers all because they did not have to pay the excess pension contributions. This, Mr Moore reiterated, simply served to underline the artificiality of the whole situation.

 

By way of further submission, it was contended that the loss which Mr Gray claimed was actually a loss sustained by the company. Accordingly, in the Gray action, it was not a good head of claim. Reference was made to the case of Johnson v Gore Wood & Co [2001] 1 All ER 481. Lord Bingham, at page 35, set out various propositions all of which were highlighted by Mr Moore. In particular, he founded upon the first of these propositions which Lord Bingham characterised in the following terms:

 

"Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. 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."

 

Lord Bingham considered that proposition to be well‑established having regard to the various authorities cited at page 35, including the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch.204.

 

Mr Moore also referred to the second and third propositions laid down by Lord Bingham. Moreover, he pointed to Lord Bingham's consideration of whether, on the facts pleaded in a case, a shareholder's claim was sustainable in principle. The answer to the question whether the loss claimed was "merely a reflection of the loss suffered by the company" was, in some cases, clear, as where the shareholder claimed a diminution in the value of the shareholding attributable solely to depletion of the company's assets. Mr Moore argued that the circumstances in the present actions provided an example of just what Lord Bingham was referring to.

 

In addition, reference was made to the dicta of Lord Goff at page 41 and Lord Millett at pages 61‑62 and page 66. The latter's observations were as follows:

 

"The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and 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." (page 62)

 

Lord Millett also stated, at page 66, that:

 

"... 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. The present case is a fortiori; Mr Johnston cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another."

 

Mr Moore submitted that Mr Gray had decided to compromise Fispak's position, firstly, by determining that Fispak would not seek to recover the money it was entitled to recover and, secondly, by proceeding, at his instance, with a litigation against the defenders, in which he, inter alia, claimed in respect of a diminution in the value of his shareholding. Mr Moore posed what he suggested was the pertinent question in these circumstances; why was it that Mr Gray was pursuing this claim when the limited company, Fispak, were not? The correct analysis of matters disclosed that Mr Gray had created a significant loss for the company and had then proceeded to characterise that loss as an alleged diminution in his own shareholding, which he now sought to recover. That approach, Mr Moore maintained, conflicted with the principles approved of by the House of Lords in the Johnson case.

 

Mr Moore accepted that the authorities disclosed exceptions to the general rule. The case of Giles v Rhind [2003] Ch 618 was an example of such an exception. However, the court's decision turned upon the facts and circumstances peculiar to that case. On the pleadings in the Gray/Fispak actions, Mr Moore submitted that Mr Gray's loss was derived from and reflective of the company's loss and that, on the strength of the decision in Johnson, it was irrecoverable. He renewed his motions to the effect that each action be dismissed.

 

 

Pursuers' Submissions

Counsel for each of the pursuers commenced her reply by reminding the court of the test of relevancy as laid down by the House of Lords in the well‑known case of Jamieson v Jamieson 1952 S.C.(H.L.) 44. She also referred to what is often described as the "agony rule" which demands that the court should not take a strict view of a party's behaviour when it comes to mitigation of losses.

 

Counsel observed that during the course of the arguments advanced on behalf of the defenders, it had more than once been contended that "Fispak had no loss" and, by way of a preliminary submission, counsel pointed out that if that were correct then in no sense could the court be called upon to determine any issue relating to reflective loss under reference to the Johnson case and others.

 

At all odds, returning to the case of Jamieson, and the opinion of Lord Normand, counsel for the pursuers maintained that the dismissal of an action for want of relevancy involved the application of a somewhat exacting test.

 

"The true proposition is that an action will not be dismissed as irrelevant unless it must necessarily fail even if all the pursuer's averments are proved. The onus is on the defender who moves to have the action dismissed, and there is no onus on the pursuer to show that if he proves his averments he is bound to succeed." (Jamieson at page 50)

 

Turning to the general question of mitigation of loss, counsel founded upon paragraph 7‑064 in McGregor on Damages which commenced in the following terms:

 

"In mitigating his loss the claimant victim of a wrong is only required to act reasonably and the standard of reasonableness is not high in view of the fact that the defendant is an admitted wrongdoer."

 

Within the same paragraph, reference had been made to the case of Banco de Portugal v Waterlow & Sons Limited [1932] A.C.(H.L.) 452. Counsel argued that whether a claimant had acted reasonably was a question of fact, not law. She contended that the steps taken in the aftermath of the defenders' alleged negligence were utterly restorative. On the basis of the pursuers' pleadings, Mr Gray was to be entitled to receive pension contributions at a similar level to those preceding the ADC investment.

 

Counsel made reference to the penultimate sentence in article 7 of condescendence in each record, which was in the following terms:

 

"For the avoidance of doubt, while there was broad agreement that the pursuer would be entitled to receive salary and pension contributions at the same or higher levels following ADC's investment there was insufficient evidence that a concluded agreement was made to that effect."

 

It was submitted on behalf of the pursuers that for the purposes of pleading a relevant case and defeating Mr Moore's argument on causation the foregoing averment was sufficient. The court required to look to the context in which general advice was being sought from and given by the defenders.

 

Counsel then proceeded to review the terms of articles 11 to 14 inclusive although I do not intend to rehearse all of these averments in this Note.

 

It appeared that counsel had yet to address Mr Moore's specific criticism regarding the absence of averment as to what would have happened had the pursuers been properly advised by the defenders. In facing up to that criticism, counsel observed that by the time the alleged mistake had been noticed, circumstances had no doubt changed and that it was difficult to know whether, in the event, ADC were simply "taking a hard line" or perhaps taking advantage of the situation. In any event, counsel initially seemed to suggest that, had the defenders complied with their duties, it was implicit that ADC would have agreed to allow larger pension contributions to be made. Counsel explained that the position adopted by the pursuers was that ADC would have accepted the desiderated removal of the 5% capping provision and that, moreover, there would have been an agreement between the parties reflecting what Mr Gray required regarding the level of contributions being paid into his pension fund.

 

Counsel rejected the thrust of the defenders' line of argument regarding the matter of reflective loss. She founded upon the third of Lord Bingham's propositions as set forth on page 35 in the Johnson case. That proposition was in the following terms:

 

"Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other."

 

Counsel also referred to the opinion of Lord Cooke of Thorndon at page 48 in Johnson. Counsel submitted that if the losses suffered were not suffered by the limited company then the individual shareholder was entitled to claim them. The proposition that both the company and the individual might sue to recover their own loss was, argued counsel, entirely commensurate with the law of Scotland as it related to damages.

 

There was an underlying issue of policy in terms of which the "reflective loss principles" were designed to preclude "double recovery", all as referred to by Lord Millett in Johnson at page 62.

 

Notwithstanding her principal contentions regarding reflective loss, counsel maintained that, even if those contentions were incorrect, there were a number of distinguishing factors as between the present actions and the case of Johnson. Unlike Johnson, no previous settlement had been undermined by Mr Gray's actings. Mr Gray's action did not amount to a serial claim. There was no overlap with any claim to be made by the company. In any event, where there was scope for such an overlap it seemed, from the English authorities that, where there was a doubt, the granting of a strike‑out application should not be made. The onus was on a defender to show that the company could have made a claim in respect of the loss concerned and would have succeeded. The defenders' pleadings were silent on these matters. Finally, under reference to the case of Perry v Day [2005] B.C.C. 375 the fact that a party had pursued what was described as "its commercial interests" was a matter of significance. (See Perry at page 390 B‑C.)

 

Counsel concluded her submissions regarding reflective loss by referring, firstly, to the case of Shaker v Al‑Bedrawi & Others [2003] Ch 350. According to counsel, this case provided support for the proposition that where uncertainty existed as to the nature and extent of any overlap between the two claims, the matter should be allowed to go to proof. In Shaker, it had been accepted that there might be an overlap between the plaintiff's claim and the potential claim of the company in question (see page 365 at paragraph 40). Paragraphs 83 and 84 and pages 377‑378 disclosed the approach taken by the English Court of Appeal:

 

"83. In our judgment the Prudential principle 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 Prudential 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. If in the present case it could be shown that the $6m was misappropriated from ANA Inc or unlawfully distributed so that ANA Inc was entitled to the whole of the $6m, we would accept that the Prudential principle applied to bar Mr Shaker's action.

 

84. However, for the reasons already given, that has not been, and cannot without a trial be, shown. It is possible that at least part of the $6m was lawfully taken by Mr Bedrawi. Accordingly we respectfully disagree with the conclusion of the judge that the Prudential principle applies to prevent Mr Shaker proceeding against Mr Bedrawi in relation to the proceeds of sale."

 

Secondly, in Giles, supra, the Court of Appeal held that, "... although in general a shareholder could not recover damages from a wrongdoer for a loss which was reflective of loss suffered by the company in circumstances where the company itself could have recovered in respect of that loss but had chosen not to do so, since the loss to the shareholder in such a case was caused by the decision of the company not to pursue its remedy and not by the wrongdoer's fault, there were no reasons of principle or policy to prevent a shareholder from recovering damages where the wrong done to the company had made it impossible for it to pursue its own remedy against the wrongdoer; that, since the claimant had established both a contract containing covenants in his favour the object of which was to protect his investment in, his loan to and his remuneration from the company and a breach of those covenants by the defendant of a kind that led to serious damage to his investment, irrecoverability of his loan and discontinuance of his remuneration, since the devastating effect of that breach was not only foreseeable but intended and since the company had not settled its claim but had been forced to abandon it by reason of impecuniosity attributable to the wrong which had been done to it, the claimant was entitled to pursue his claim against the defendant;"

 

Accordingly, for the reasons advanced by her and in reliance upon the authorities referred to, counsel submitted that the reflective loss principle had no application but that even if it did, there ought to be an inquiry into the facts in the first instance.

 

Somewhat surprisingly, at this stage in her submission, counsel raised the issue of amendment of the pursuers' pleadings. However, she stressed that she was merely providing the court with an indication as to the manner in which the pursuers' pleadings might be ameliorated, particularly in relation to causation. She was not seeking leave to amend at this stage.

 

Counsel proceeded to describe the insertions which she had in mind. In the Gray record at page 4, prior to the final sentence in article 7, the following passage might be worthy of insertion:

 

"Had the pursuer and Fispak expressly indicated to ADC through the process of negotiation between their agents that the payment of salary and pensions at the desiderated level was non‑negotiable, at that time, ADC would have agreed to those terms, having regard to their said desire to retain the pursuer's skills within the post‑management buy-out company."

 

Furthermore, at the top of page 15 in the Gray record, prior to the sentence commencing with the word "consequently", counsel outlined the following potential amendment:

 

"Had the pursuer and Fispak been properly advised as to the correct effect of the relative terms of the service agreement and the investment agreement, namely as imposing a 5% cap on payment of pension contributions to the pursuer (Mr Gray), he and Fispak would not have entered into or consented to those agreements."

 

 

Decision

 

Causation

(1) The defenders' principal argument was that, aside from the establishment of any alleged wrong or breach of contract, the pursuers required to plead facts from which it could be inferred that the defenders' actions had impacted upon the agreed state of affairs, to the extent of being detrimental to the pursuers.

 

(2) In the pleadings, as presently framed, the pursuers inter alia, aver that the agreement reached with ADC, meant that Fispak were unable to make a contribution to Mr Gray's personal pension plan greater than the equivalent of 5% of his salary, without first obtaining the consent of ADC. (See article 15 in each action). However, it is also averred on behalf of the pursuers that "while there was broad agreement that the pursuer would be entitled to receive salary and pension contributions at the same or higher levels following ADC's investment, there was insufficient evidence that a concluded agreement was made to that effect." (See penultimate sentence in article 7 in both actions.)

 

(3) In essence, the defenders' argument regarding this aspect of the case, relates to the issue of causation. The pursuers' complaint is that the defenders gave them incorrect advice or, at all odds, failed to provide them with correct advice as to the effect of the agreement entered into. For that advice to be actionable there had to be detrimental consequences as far as the pursuers were concerned. Both damnum and injuria required to be present.

 

(4) To assess whether the pursuers have pleaded a relevant case, the court requires to compare the actual contractual entitlement of the pursuers (as facilitated by the allegedly negligent actings of the defenders) with the entitlement which, on the pursuers' averments, would have prevailed had the defenders complied with the duties of care said to have been incumbent upon them. The actual entitlement, in terms of the agreement, resulted in pension contributions being capped at 5%. Unfortunately, the pursuers' averments, as presently framed, do not, to my mind, yield the inference that the parties would otherwise have agreed terms along the lines desiderated by the pursuer, Mr Gray.

 

(5) The averment forming the penultimate sentence in article 7, insofar as it bears upon the issue of causation, encapsulates all that the pursuers can presently find to say. That averment in itself contains an inherent contradiction. The pursuers purport to maintain that, on the one hand, "there was broad agreement", while at the same time acknowledging the fact that a concluded agreement could not be established. Indeed, this apparent dichotomy of approach was, in effect, consolidated by counsel for the pursuers when, at the conclusion of her submissions, she indicated what the nature of an amendment by the pursuer (in the Gray action) might be. She nevertheless stressed that it was "only an indication" and that she was not moving to amend at that stage. Whatever counsel's thinking behind such an approach, either a finalised, actionable agreement existed or it did not. If it did not, then there could be no basis whereby the court might endorse the proposition that the defenders' failure to carry out instructions thereby prevented the operation of an open-ended pension contribution arrangement as between Fispak and Mr Gray. In essence, that arrangement was ultimately undermined, not because of the defenders' actings/failures but because ADC (as accepted in the pursuers' pleadings) never agreed to it.

 

(6) Accordingly, I agree with the thrust of Mr Moore's submissions on the issue of causation and, in particular, with the contentions set out within paragraphs 1-3 in the (Gray) Revised Note of Argument and paragraphs 3-5 in the Fispak note. Moreover, it is beyond dispute that ADC were prepared to go to the length of suing Fispak in respect of the breach of the 5% capping provision and in the absence of unambiguous averment to the contrary, ADC's reaction to the payment of pension contributions exceeding the 5% cap simply serves to support the conclusion that the pursuers have, indeed, failed to aver a relevant case. They do not offer to prove that Fispak's entitlement to make payment of, and Mr Gray's entitlement to receive, personal pension contributions, would, in fact, have been materially different had the defenders not been negligent/in breach of contract.

 

(7) On that basis, both actions would, in my opinion, fall to be dismissed. However, out of completeness and in due deference to the competing submissions advanced in the course of the hearing, I propose to deal with certain other aspects of these litigations which, in themselves, give rise to no little difficulty. I shall also return to the question of whether the court should consider the allowance of amendment by the pursuers, given the manner in which that matter was dealt with by their counsel.

 

Remoteness of Damage

(8) The rule which underpins a large portion of the defenders' contentions regarding Mr Gray's losses is that relating to remoteness of damage. In this connection, the basic issue seems to be whether the loss was or was not foreseeable.

 

(9) The starting point as regards the losses claimed in both actions is the settlement of the ADC litigation against Fispak and, more acutely, the way in which the settlement was achieved. Crucially, as averred by Mr Gray, he "used his position as majority shareholder in Fispak to procure that Fispak buy-back ADC's shareholding." It is averred that this was one of several steps taken to "mitigate" Mr Gray's losses. The buy-back, in turn, meant that Fispak required to take on a term loan to the extent of £500,000 together with an extended overdraft facility in the sum of £150,000. Needless to say that, as a consequence, Fispak "incurred finance costs it would not otherwise have incurred".

 

(10) Mr Gray avers that these finance costs meant that Fispak could not then maintain his pension contributions "at the desiderated level in the period prior to his retirement". Consequently, he seeks payment of the gross value of the lost pension payments, in the sum of £76,683.

 

(11) It is also averred on behalf of Mr Gray that the consequential reduction in the value of his Fispak shareholding has caused him to suffer a financial loss estimated to be £163,331. The total of these two figures represents the sum sued for.

 

(12) In the event of the defenders acting negligently in relation to the advice given quoad the capping of pension contributions it was, to my mind, reasonably foreseeable that ADC would, in the absence of extra judicial settlement, instigate proceedings against Fispak in the manner described in article 19 of condescendence. It was accepted by the pursuers that had it not been compromised, ADC's action would have been successful and that, as a consequence, (i) Fispak would have required to recover the excess pension contributions from Mr Gray and (ii) Fispak would have been prevented from paying any more than the 5% threshold in future. Had the excess payments been restored to Fispak, (and leaving aside the question of the expenses relating to the Ayr Sheriff Court action), then they would have incurred no loss. Mr Gray's loss would have taken the form of a diminished pension fund. In my view, that was or ought to have been the nature and extent of the loss arising "naturally and directly" out of the defenders' alleged wrongdoing. It should also be noted that the settlement of the Ayr Sheriff Court action in the manner which now forms the basis of Mr Gray's claim for damages did not restore Fispak's ability to make pension contributions exceeding the 5% threshold. The terms of the overall settlement meant that Fispak was left with insufficient capital to make the sort of payments desiderated by Mr Gray. Therefore, there was, in effect, no change.

 

(13) Instead, however, certainly as far as Mr Gray was concerned, two entirely different heads of loss were generated. The conscious decision to resolve the pension capping problem by removing ADC from the equation was extremely expensive and caused Fispak to be burdened with significant debt which they would not otherwise have had. In real terms, it is impossible to avoid the conclusion that Mr Gray's efforts purportedly to mitigate his loss caused Fispak to suffer loss. The removal of ADC's investment and, thereafter, the introduction of the term loan of £500,000 coupled with the £150,000 extended overdraft, must, inevitably, have had a material impact upon the worth of the company.

 

(14) On behalf of the defenders, the steps taken by the pursuers, including the buy-out of ADC, were not characterised as amounting to a novus actus interveniens and I think that was the correct approach. However, in my opinion, what was devised supposedly with a view to the mitigation of Mr Gray's loss was, in fact, an entirely new strategy which, along with its outcome as averred, could not have been within the reasonable contemplation of the defenders. I have some difficulty with the notion that the steps taken by Mr Gray/Fispak can properly be regarded as mitigatory. Be that as it may, I consider that the defenders' submissions as advanced in court and in terms of the (Gray) Revised Note of Argument, paragraph 11 in particular, fall to be upheld. In my opinion, alleged financial loss resulting from the buy-out of the ADC investment by Fispak, all as now claimed by the pursuer, Mr Gray, is simply too remote to form the basis of relevant heads of loss. Accordingly, the Gray action would fall to be dismissed for that reason also.

 

(15) I would add that, in my view, there is also merit in the defenders' criticisms all as outlined in paragraphs 8, 9 and 10 of the Gray Note. The averments relating to Mr Gray's claim for a diminution in value of his Fispak shareholding are to be found in article 20, largely at page 23 of the Gray record. I agree that, for the reasons put forward by Mr Moore, the selection of a point in time as at April/May 2003 for the purposes of contrasting the value of the pre-ADC buy-out shareholding with that of the post-buy-out shareholding is, indeed, artificial in the sense that the point in time selected is of no significance as opposed to any other point in time. However, the absence of any crystallised loss and the pursuer's failure to condescend upon the present value of his shareholding were also founded upon by Mr Moore. I am persuaded as to the force of this argument and the submissions of counsel for the pursuer failed to disclose any form of rebuttal. When scrutinised carefully, Mr Gray's averments regarding diminution in his Fispak shareholding are, in my opinion, almost meaningless and are, accordingly, irrelevant. I do not consider that matters rest solely on a question of quantification of the pursuer's loss. The challenge relates to the fundamental relevancy of this head of claim. In any event, paragraph 10 in the defenders' Gray note of argument, to my mind, serves to expose the fallacy of the pursuer's approach to quantification.

 

(16) The Reflective Loss Principle

Counsel for the pursuers' main contention regarding the foregoing principle was that it had no relevant application in the present case. However, the pursuer (Mr Gray) himself avers that:

 

"As a consequence of the said buy-back by the (sic) Fispak of ADC's shareholding the net asset value of Fispak has been significantly reduced. Taking the said mitigatory steps has generated a loss to the pursuer, namely the reduction in value of the pursuer's shareholding in Fispak arising from the buy-back by Fispak of ADC's shares." (Article 20, page 22-23).

 

(17) The first of the propositions formulated by Lord Bingham in Johnson was relied upon by the defenders. In my judgment, the pursuer's averments in the Gray action are such as to render that proposition applicable. The pursuer pleads that the buy-back had an impact upon the net asset value of Fispak and that that, in turn, caused a reduction in the value of the pursuer's Fispak shareholding. In my opinion, the latter feature would not have arisen were it not for the former.

 

(18) Dealing with the detail of Lord Bingham's first proposition, Mr Gray's pleadings, read as a whole, serve to establish the following:

 

(a) Fispak is a limited company;

(b) Fispak suffered loss (viz. a reduction in its net asset value and an inability to finance Mr Gray's pension payments) caused by a breach of duty owed to it;

(c) The pursuer, Mr Gray, is a shareholder in Fispak and sues the defender in that capacity;

(d) The pursuer, Mr Gray, seeks to make good a diminution in the value of his Fispak shareholding;

(e) That diminution merely reflects the loss suffered by Fispak;

(f) The Mr Gray's loss would have been made good if Fispak's assets were replenished through action against the defenders; and

(g) Fispak have, in effect, declined or failed to make good that loss at the instigation of and with the full knowledge of the pursuer himself.

 

(19)           Accordingly, it seems to me that Lord Bingham's first proposition is, indeed, applicable. In contrast, counsel favoured his Lordship's third proposition although it was never made clear to this court why that should be. In any event, Mr Gray's averments do not, in my opinion, disclose a loss which is "separate and distinct from that suffered by the company". On the contrary, Mr Gray's loss mirrors the loss of the company. The pursuer, Mr Gray, through the ADC buy-out, created a loss for Fispak and, at the same time, the value of his Fispak shareholding, it is averred, became diminished. I am in no doubt as to the existence of an overlap in the nature of Mr Gray's claim and the claim which would have been open to Fispak. To my mind, the Prudential principle is applicable. I would merely add that, on the basis of the pursuers' own pleadings, the ADC action would have succeeded. Accordingly, they must be taken to have accepted that restorative action by Fispak would, in turn, have been irresistible.

 

(20)           As indicated above, both actions fall to be dismissed standing my conclusions in relation to the issue of causation. Moreover, for the reasons I have given, the Gray action has also been dismissed under reference to remoteness of damage and the reflective loss principle. However, had it not been for my decision on the question of causation, I would otherwise have allowed a proof before answer in the Fispak action. That said, I would have restricted the scope of the pursuers' claim, as far as quantum is concerned, to what might be described as the expenses reasonably incurred in defending and, thereafter, settling the ADC action. In my judgment, any part of Fispak's claim insofar as it relates to the costs involved in engineering and giving effect to the buy-out of ADC, ought to be excluded from probation.

 

(21)           In relation to the potential for amendment of the pursuers' pleadings, I must, of course, reiterate that no motion for leave to amend was made. However, should counsel's closing remarks regarding the form amendment might take, be of any materiality as far as the disposals in these litigations are concerned, it would be of assistance were I to set out my views. Had there been a motion for leave to amend before the court, it would have been refused. The debate proceeded in the aftermath of earlier amendments by the pursuers. They had already been afforded ample opportunity to cure any defects in their averments. I would also have regarded any such motion as coming too late to justify its allowance. Additionally, it seemed that the insertions described by counsel only related to the Gray action, although I would accept that they might equally have applied to the Fispak action. Nevertheless, I considered that the averments formulated by counsel were, in any event, somewhat unspecific and did not, in my view, encapsulate a prima facie solution to the causation problem.

 

(22)           The expenses of both actions have been awarded in favour of the defenders.

 

 

 

 

 

 

 

 

SHScott.LD.Gray.1