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You are here: BAILII >> Databases >> England and Wales High Court (Queen's Bench Division) Decisions >> Breeze & Anor v The Chief Constable of Norfolk Constabulary (Reflective loss principle) [2018] EWHC 485 (QB) (15 March 2018) URL: https://www.bailii.org/ew/cases/EWHC/QB/2018/485.html Cite as: [2018] EWHC 485 (QB) |
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QUEEN'S BENCH DIVISION
B e f o r e :
B E T W E E N :
____________________
(1) Andrew Breeze (2) Dominic Wilson |
Claimants |
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- and |
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The Chief Constable of Norfolk Constabulary |
Defendant |
____________________
Mr. Jason Beer QC and Ms Charlotte Ventham (instructed by Messrs Weightmans LLP, Solicitors) appeared on behalf of the Defendant.
Hearing: 5th October 2016
____________________
Crown Copyright ©
Keywords:
Reflective loss principle (exceptions to) - shareholders - pleading - principles on amendment of statements of case - strike out
Johnson v Gore Wood (No. 1) [2002] AC 1
Bank Mellat v HM Treasury [2016] EWCA Civ 452
A v Hoare [2008] 1 AC 844
Letang v Cooper [1965] 1 QB 232
Three Rivers DC v Governor and Company of the Bank of England (No. 3) [2003] 2 AC 1 at 191B-193H
Akenzua v Home Secretary [2003] 1 WLR 741 at para. 29-32
Giles v Rhind [2002] EWCA Civ 1428
Gardner v Parker [2005] BCC 46
Towler v Wills [2010] EWHC 1209 (Comm)
Kim v Park [2011] EWHC 1781 (QB)
Spencer v Barclays Bank PLC (unrep) [2009] EWHC B9 (Ch)
MASTER VICTORIA McCLOUD:
The application
The parties and history
The application before me
"Please confirm whether it is the Claimants' intention to advance a case at trial that, by reason of the alleged malicious prosecution and/or misfeasance in public office on the part of the Defendant's officers, the company (latterly known as Cawston Park Holdings Ltd) suffered a diminution in its share value which, in turn, caused the Claimants to sustain financial losses in the sum of £15,151,874 each, which sums represented the diminution in their respective share values in the company?"
To which the answer was "Yes".
The arguments and law
(i) That the claim cannot succeed because it falls foul of the 'Reflective Loss' principle
"These authorities support the following propositions:
1) 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. So much is clear from Prudential, particularly at pages 222-3, Heron International, particularly at pages 261-2, George Fischer, particularly at pages 266 and 270-271, Gerber and Stein v. Blake, particularly at pages 726-729.
2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v. Sheard, at pages 195-6, George Fischer and Gerber.
3) 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. I take this to be the effect of Lee v. Sheard, at pages 195-6, Heron International, particularly at page 262, R. P. Howard, particularly at page 123, Gerber and Stein v. Blake, particularly at page 726. I do not think the observations of Leggatt L.J. in Barings at p. 435B and of the Court of Appeal of New Zealand in Christensen v. Scott at page 280, lines 25-35, can be reconciled with this statement of principle.
These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. 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 problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential at page 223) the loss claimed is "merely a reflection of the loss suffered by the company." In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant"
"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, insofar 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. The position was explained in a well-known passage in Prudential v Newman[1] at p. 222:
"But what [the 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 of the value of the net assets of the company, in which he has (say) a 3 per cent. shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company. "
Per Lord Hutton at 51C onwards:
"I consider it to be clear that where a shareholder is personally owed a duty of care by a defendant and a breach of that duty causes him loss, he is not debarred from recovering damages because the defendant owed a separate and similar duty of care to the company, provided that the loss suffered by the shareholder is separate and distinct from the loss suffered by the company. This principle was recently stated in the judgment of the Court of Appeal delivered by Sir Christopher Slade in Walker and others v. Stones and others [19th July 2000], the court stating that a claimant is entitled to recover damages where:
"131. (a) the claimant can establish that the defendant's conduct has constituted a breach of some legal duty owed to him personally (whether under the law of contract, torts, trusts or any other branch of the law) AND
132. (b) on its assessment of the facts, the Court is satisfied that such breach of duty has caused him personal loss, separate and distinct from any loss that may have been occasioned to any corporate body in which he may be financially interested.
133. I further conclude that, if these two conditions are satisfied, the mere fact that the defendant's conduct may also have given rise to a cause of action at the suit of a company in which the claimant is financially interested (whether directly as a shareholder or indirectly as, for example, a beneficiary under a trust) will not deprive the plaintiff of his cause of action; in such a case, a plea of double jeopardy will not avail the defendant."
But a more difficult question arises where the shareholder claims a loss which is not separate and distinct from the loss suffered by the company but his loss flows from loss suffered by the company. In Prudential Assurance Co. Ltd. v. Newman Industries Ltd. [1982] 1 Ch. 204, the claimants sued the directors of the company alleging that they had issued a circular to the shareholders containing a fraudulent misrepresentation concerning the true value of certain assets, and the court stated at pp. 222h and 223a-b:
[ ][2]
I shall call this statement "the Prudential Assurance principle"." [ ]
and at 55E:
"My Lords, whilst in a case such as Christensen v. Scott[3] there may be merit in permitting an individual shareholder to sue, the decision in Prudential Assurance has stood in England for almost twenty years and, whilst the decision has sometimes been distinguished on inadequate grounds, it has been regarded as establishing a clear principle which the Court of Appeal has followed in other cases. I further consider that the principle has the advantage that, rather than leaving the protection of creditors and other shareholders of the company to be given by the trial judge in the complexities of a trial to determine the validity of the claim made by the plaintiff against the defendant, where conflicts of interest may arise between directors and some shareholders, or between the liquidator and some shareholders, the principle ensures at the outset of proceedings that where the loss suffered by the plaintiff is sustained because of loss to the coffers of the company, there will be no double recovery at the expense of the defendant nor loss to creditors of the company and other shareholders. Therefore whilst I think that this House should uphold the Prudential Assurance principle, I also consider that it is important to emphasise that the principle does not apply where the loss suffered by the shareholder is separate and distinct from the loss suffered by the company."
"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 represents 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: see Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1982] Ch. 204 at p. 210. Correspondingly, of course, a 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, as in Lee v. Sheard [1956] 1 Q.B. 192, George Fischer (Great Britain) Ltd. v. Multi Construction Ltd. [1995] 1 B.C.L.C. 260, and Gerber Garment Technology Inc. v. Lectra Systems Ltd. [1997] R.P.C. 443. 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."
And at 63E:
" It has sometimes been suggested (see, for example, George Fisher v Multi Construction at p. 266 g-i) that Prudential v Newman is authority only for the proposition that a shareholder cannot recover for the company's loss, and is confined to the case where the defendant is not in breach of any duty owed to the shareholder personally. That is not correct. The example of the safe-deposit box makes this clear. It is the whole point of the somewhat strained business of the key. The only reason for this is to demonstrate that the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally."
"The explanation by Lord Bingham at pages 35-36 of the circumstances where a shareholder can bring a claim in relation to a loss suffered by the shareholder and the company is premised on the existence of a separate duty to the shareholder and a loss to the shareholder distinct and separate from the loss suffered by the company .. as Lord Millett makes clear at page 66 the fact that the shareholder has suffered loss because the company has not brought an action is caused by the decision of the company not to pursue its remedy and not by the wrong of the defendant".
"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."
In other words, the formulation based specifically on a breach of a duty owed to the company, causing it loss, was the formulation which balanced the two considerations identified by their Lordships. This court was urged not to accept the broader approach proposed by the defendant.
Conclusion on the issue of scope of the Reflective Loss Principle
"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" [ ]
"the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential at page 223) the loss claimed is "merely a reflection of the loss suffered by the company.""
Lord Hutton:
"the principle ensures at the outset of proceedings that where the loss suffered by the plaintiff is sustained because of loss to the coffers of the company, there will be no double recovery at the expense of the defendant nor loss to creditors of the company and other shareholders"
Lord Millett:
"If the company has a cause of action, this represents 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."
"the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally."
Could the company have sued as a matter of law?
(2) Exception to the Reflective Loss principle: Giles v Rhind [2002] EWCA Civ 1428
MASTER VICTORIA MCCLOUD
15/3/18
Note 1 [1982] 1 Ch. 204 [Back] Note 2 See the same quotation already provided above from the speech of Lord Bingham. [Back] Note 3 A New Zealand case reported at [1996] 1 NZLR 273. [Back]