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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Ellis & Anor v Property Leeds (UK) Ltd. [2002] EWCA Civ 32 (31st January, 2002) URL: http://www.bailii.org/ew/cases/EWCA/Civ/2002/32.html Cite as: [2002] 2 BCLC 175, [2002] EWCA Civ 32 |
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COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM MR JUSTICE ROUGIER
IN THE HIGH COURT OF JUSTICE QUEEN’S
BENCH DIVISION.
Royal Courts of Justice Strand, London, WC2A 2LL | ||
B e f o r e :
LORD JUSTICE MANTELL
and
MR JUSTICE WALL
____________________
NORMAN BARRY ELLIS & ANOTHERAppellant - and - PROPERTY LEEDS (UK) LIMITED Respondent
Smith Bernal Reporting Limited, 190 Fleet Street
London EC4A 2AG
Tel No: 020 7421 4040, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
MR M. DRISCOLL QC & MR C.G. RUSSELL (instructed by Hammond Suddards Edge for the Respondent/Defendant)
____________________
AS APPROVED BY THE COURT
Crown Copyright ©
Lord Justice Mantell:
Introduction.
Background.
“Dear Barry
Re: The Riverside, Ripon
Enclosed please find valuation report which I trust you will find adequate.
Unfortunately, (for you), considerable work was involved in preparing it in this format and I have therefore to make the appropriate charge – my account being enclosed herewith. Yours sincerely”
The invoice to which the letter referred was addressed to Cross Lane Business Park the amount being £750 plus VAT. On its face the invoice is shown as cancelled with a note to the effect that a fresh invoice had been sent to Cross Lane Construction Ltd. It is clear from an internal memorandum that the invoice should not have been sent to Cross Lane Construction Ltd either. Whether that was a mistake on the part of Mr Ellis or somebody at Eddisons does not show from the material before the judge. However on 14th November 1991 Mr Thorpe wrote to Mr Clayton at Cross Lane Business Parks Ltd in the following terms:
“Dear David
I refer to our invoice dated 31st May in the above and which unfortunately has found its way into the wrong file. It is necessary therefore to re-invoice – this being enclosed herewith.
Yours sincerely.”
The invoice addressed to Cross Lane Business Parks Ltd was duly paid. The valuation for the entire site was £4,705,000. In arriving at that figure Mr Thorpe stated:
“In arriving at our valuation we have taken into account all relevant matters not only the state of the housing market itself but the knock on effect that this has had on potential purchases of units on the site. This is a large undertaking but carefully phased and sensibly marketed over a period of some eighteen months to two years we would expect the units to sell. This is something of an unique site and it is rare indeed that such come onto the market.
We understand that there are one or two minor matters still to resolve – the only significant one however being the bridge and which the Local Authority are claiming is partially sited on their bank. We further understand however that the Receivers of Meridian Housing Association are prepared to offer the appropriate indemnities and our valuation assumes that there are no significant and unsoluble (sic) problems.”
The proceedings.
“10. The representations pleaded in Paragraph 8 were false. The true valuation of the Site as at August 1990 was no more the £2,750,000, and as 31st May 1991 was no more the £2,500,000 and there were no reasonable grounds to support the valuation in fact given which was not the professional opinion of Mr Thorpe. Furthermore there were no reasonable grounds to support his expressed opinion as to the selling time which was not the professional opinion of Mr Thorpe.
11. Furthermore the representations were given negligently. No reasonably competent valuer could on reasonable grounds have concluded that the value of the site was £4,750,000 or any figure of that order or that all the units would sell at the prices given within eighteen months to two years if carefully planned and sensibly marketed.
12. Furthermore the representations were not given with any honest belief in the truth of their terms and were therefore fraudulent.”
Thereafter followed particulars and it is the thinly veiled allegation that Eddison’s and Mr Thorpe were acting entirely in the interests of the Society and in total disregard of their duty towards Mr Ellis and Mr Clayton. The losses are pleaded at paragraph 13 of each of the statements of claim. In each case the pleading is in narrative form and of considerable length. I do not consider it necessary to set it out in full. It is perhaps sufficient to say that the claims fall into three categories. The first relates to the collapse of the various companies including Cross Lane Construction Ltd leading to insolvency and the extinction of their assets. The second head of loss is in respect of loans made by Mr Ellis and Mr Clayton to the various companies in order to secure their survival. The third head of claim relates to the liability of Mr Ellis and Mr Clayton under their personal guarantees.
The Appeal.
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 shareholders share holding 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 companies 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.
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.
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.
The principles were further explained by Lord Millett at pp. 125 and 126. Lord Millett’s exposition is so illuminating that I hope I will be forgiven for citing it in full.
“I cannot accept this reasoning as representing the position in English law. It is of course correct that the diminution in the value of the plaintiffs’ shares was by definition a personal loss and not the company’s loss, but that is not the point. The point is that it merely reflected the diminution of the company’s assets. The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder’s loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders.
Thomas J acknowledged that double recovery could not be permitted, but thought that the problem did not arise where the company had settled its claim. He considered that it would be sufficient to make an allowance for the amount paid to the liquidator. With respect, I cannot accept this either. As Hobhouse LJ observed in Gerber Garmment Technology Inc v Lectra Systems Ltd [1997] RPC 443, 471, if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company’s decision not to pursue its remedy and not by the defendant's wrongdoing. By a parity of reasoning, the same applies if the company settles for less than it might have done. Shareholders (and creditors) who are aggrieved by the liquidator’s proposals are not without a remedy; they can have recourse to the Companies Court, or sue the liquidator for negligence.
But 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 Johnson cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another.
Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other. In principle, the company and the shareholder cannot together recover more than the shareholder would have recovered if he had carried on business in his own name instead of through the medium of a company. On the other hand, he is entitled (subject to the rules on remoteness of damage) to recover in respect of a loss which he has sustained by reason of his inability to have recourse to the company’s funds and which the company would not have sustained itself.
The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company’s claim. The Plaintiff’s primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.”
“If they had, then it seems to me the claimants have no claim personally for what is effectively the same damage; if they had not, then they fall within the second limb of the proposition set out by Lord Bingham.”
The appellants do not disagree with that approach. They merely assert that the judge reached the wrong answer. Neither do I disagree except to the extent that I would wish to add that even if the case falls within the second of Lord Bingham’s propositions it would still have to be shown that the shareholder (Mr Ellis or Mr Clayton) has an independent cause of action.
“So in the submission of the valuation and the account for it, we have three of the group member companies named and in the picture, so far as Mr Thorpe was concerned.
It seems to me that against the background which I have endeavoured to describe, that it was, on the claimant’s case, hoped that the group controlled by the claimants would be persuaded to buy and develop the site. There seems to me to be only one answer to this question: I regard the valuation as the key document. The word “Messrs.” seems to be entirely meaningless. It was sent to Mr Ellis as Director of the various companies within the group, and in so far as he or Mr Clayton took action in reliance on that valuation, they did so as directors of the various companies who became embroiled to their disadvantage. I do not think it can be sensibly argued in any other way.”
Mr Justice Wall:
15. I have had the advantage of reading in draft both the judgment of Mantell LJ and the judgment of Peter Gibson LJ which follows. I agree with both and there is nothing I can usefully add.
Lord Justice Peter Gibson:
Order: Appeals dismissed. Order as minuted by Council.