B e f o r e :
LORD JUSTICE PETER GIBSON
LORD JUSTICE MANTELL
and
MR JUSTICE WALL
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NORMAN BARRY ELLIS & ANOTHER
| Appellant
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| | - and -
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| | PROPERTY LEEDS (UK) LIMITED
| Respondent
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(Transcript of the Handed Down Judgment of
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MR P. BROOK-SMITH (instructed by Castle Sanderson for the Appellant/Claimant)
MR M. DRISCOLL QC & MR C.G. RUSSELL (instructed by Hammond Suddards Edge for the Respondent/Defendant)
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HTML VERSION OF JUDGMENT
AS APPROVED BY THE COURT
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Lord Justice Mantell:
Introduction.
- In a consolidated action Norman Barry Ellis and David Clayton each claim damages against Property Leeds (UK) Ltd (Eddison’s) for the alleged fraudulent and/or negligent misrepresentations of one Thorpe acting as Eddison’s servant or agent. On 21st June 2001 Rougier J gave summary judgment to Eddison’s in respect of the greater part of both claims. He did so on the basis that any losses suffered by Mr Ellis and Mr Clayton simply reflected losses sustained by companies of which each was a director. Alternatively the judge held that, with regard to such losses as were represented by the diminished value of trust funds in which each claimant had a beneficial interest, the right to sue lay not with the claimants but with the trustees.
- Having the judge’s permission to appeal Mr Ellis and Mr Clayton now challenge the correctness of both decisions. It is accepted that if the Judge is upheld on the first, their appeals must fail.
Background.
- On a Part 24 application this is to be taken from the pleaded case with such written evidence as was put before the Court under rules 24(4) and 24(5). The relevant pleadings and those upon which the judge acted are the re-re-amended statement of claim of Mr Ellis served on 20th July 2001 and the re-amended statement of claim of Mr Clayton served on the same date, both of which were in front of the judge in draft form and in respect of which he gave leave to make further amendments. The written evidence was that of Mr Ellis and Mr Clayton and of a Mr Coulson, a solicitor acting for Eddisons. What follows is a brief summary collected from those combined sources.
- In 1990 a company called Meridian Housing Association Ltd (Meridian) went into receivership after experiencing financial difficulties over the development of a substantial building site in Ripon. By that time Meridian owed the Leeds Permanent (now the Halifax) Building Society over £4M. The Receivers put the building site up for sale. The Society assumed responsibility for marketing. To that end they engaged Mr Thorpe, a surveyor and valuer, of Eddisons. Mr Thorpe knew Mr Ellis and Mr Clayton. He also knew that through various companies they had been engaged in property development. He thought they might be interested. They were. On 4th October 1990 Mr Ellis and Mr Clayton offered to buy the site for £4M with the whole of the purchase price to be furnished by the Society. The offer was subject to contract and was accepted on that understanding. It is not difficult to see why the arrangement might have appeared attractive to the Society which had little interest in the true value of its security. Not so Mr Ellis and Mr Clayton who commissioned a valuation from Eddisons which in due course was provided by Mr Thorpe under cover of a letter dated 31st May 1991. The valuation itself states that it was “made upon instructions received from Messrs Cross Lane Group.” The letter was addressed to Mr B Ellis, Cross Lane Business Park, 2A Colbeck Row, Birstall Batley and reads as follows:
“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.”
- Relying upon that valuation and Mr Thorpe’s expert opinion as to the prospects of onward sales, Mr Ellis and Mr Clayton proceeded to put in hand the arrangements for buying the site. In fact they chose to do so through Cross Lane Construction Ltd. The transaction took place on 5th July 1991 and the total price paid was £3,925,000. The finance was provided by the Society. In fact the advance made on 6th January 1992 was for £4.5M, the balance being required to help finance the development. The Society was granted a First Charge over the site. Further to that, various companies controlled by either Mr Ellis or Mr Clayton or both were persuaded to guarantee Cross Lane Construction’s indebtedness not only to the Society but also in respect of further borrowings from National Westminster Bank PLC. Also Mr Ellis and Mr Clayton entered into personal guarantees limited to £350,000 each and each provided second mortgages over certain properties which they owned. Mr Clayton also procured a second charge over property which was owned by a company called Fairburn House (Horsforth) Ltd of which he was a director. Further still Mr Ellis and Mr Clayton lent considerable sums to Cross Lane Construction Ltd in order to allow the development to continue.
- In fact on the claimant’s case the valuation provided by Mr Thorpe was not only inaccurate, it was fraudulent. It seems that in June 1990 Mr Thorpe had advised the Receivers that the site was worth £3,325,000 which by 17th August 1990 had come down to £2,750,000. Throughout this same period he was becoming increasingly less sanguine about the resale of the units under development.
- Of course all this was at a time when the property market was less than buoyant. The venture failed. All the guarantees offered by the associated companies were called in as were the loans from National Westminster Bank. The result has been the collapse not only of Cross Lane Construction Ltd but also of the several companies controlled by Mr Ellis and Mr Clayton which had become financially involved in the enterprise. Mr Ellis’s and Mr Clayton’s share holdings in those companies have now become valueless.
The proceedings.
- As I have said the claim of both Mr Ellis and Mr Clayton lies in negligent or fraudulent misrepresentation. It is not alleged that there was any contract between them in their personal capacity and Eddisons. The nub of their case is found at paragraphs 10, 11 and 12 of their respective pleadings.
“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.
- By the time Eddison’s application for summary judgment came before the court the third head of claim had evaporated one supposes as a result of a compromise agreement. As indicated the judge allowed the application in relation to the companies losses having accepted the submission made for Eddison’s that the Claimant had suffered no loss distinct from the loss suffered by such companies, and accordingly has no cause of action in respect of such loss. He did not give summary judgment in respect of or strike out the claim for loss arising out of the several loans made by Mr Ellis and Mr Clayton to their suffering companies. There is no cross appeal against that ruling and all we are left with, therefore, are the two questions identified in the opening paragraph of this judgment.
The Appeal.
- The finding by the judge that the various companies of the group had their own individual claims against Eddisons was central to his judgment. In so stating the learned judge was mindful of what is sometimes called the rule in Foss v. Harbottle (1843) 2 Hare 461 which has recently been reaffirmed and explained by the House of Lords in Johnson v. Gore Wood & Co. (a firm) (2001) 2 WLR 72. The judge extracted the following three principles from the speech of Lord Bingham at p.94
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.”
- The learned judge considered that this first issue might be resolved by looking to see whether or not the various companies of the group had their own individual claim against Eddisons. As he put 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.
- The judge then proceeded to examine the material in front of him. He noted that the parties to the sale agreement were on the one hand the Meridian Housing Association and on the other Cross Lane Properties Ltd. He looked at the covering letter which accompanied the valuation and referred to the fact that Cross Lane Business Park was the name of another company in the group. He considered the reference to “Messrs Cross Lane Group” in the valuation itself. Finally he looked at the question of payment and observed that the bill had originally been sent to Cross Lane Business Park before being re-submitted to Cross Lane Construction Ltd. He set out his conclusion as follows:
“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.”
- Neither do I. The losses suffered by Mr Ellis and Mr Clayton were simply reflections of the losses which had been incurred by the various companies in the group. Each individual company would have its own remedy either against Eddisons or another member of the group to which it had lent money. It is nothing to the point that it would be fruitless to claim against another member of the group which had itself become insolvent.
- So I would uphold the judge on the first question which effectively disposes of the appeal. As to whether the claimants as beneficiaries of a trust can sue in their own right I express no opinion save to observe that the way in which the matter is now put does not seem to have been pleaded or argued before Rougier J.
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:
- The central question on this appeal, as it was before Rougier J., is whether each of the appellants, Mr. Ellis and Mr. Clayton, has a real prospect of establishing that the companies, of which they were directors and the shares in which were held by one or the other or both of them or by trustees of a settlement of which one or the other was the principal beneficiary, had no cause of action against the respondent in respect of the fraudulent or negligent misrepresentation alleged to have been made by the respondent’s Mr. Thorpe. If such a prospect can be shown and it can also be shown that the misrepresentation was made to the appellants in a personal capacity, then the judge was wrong to grant summary judgment to the respondent under CPR Part 24. If such a prospect cannot be shown, then the judge was entitled to grant summary judgment to the respondent.
- Mantell L.J. has already set out the applicable principles derived from the recent decision of the House of Lords in Johnson v Gore Wood & Co. [2001] 2 WLR 72 and it is unnecessary to repeat them. It is clear that if a shareholder or director of a company or a beneficiary under a settlement the trustees of which are shareholders in the company suffers a loss which merely reflects the loss suffered by the company, for which it can sue, that shareholder, director or beneficiary cannot as a matter of policy be allowed to bring proceedings to recover his loss, but it must be left to the company to take proceedings to recover its loss.
- During the hearing before this court it was conceded by the appellants, though they did not do so before, that one of the small group of companies in which they were involved, viz. Cross Lane Construction Ltd. (“Construction”), the shares in which were held by the trustees of Mr. Ellis’s settlement and by the trustees of one of Mr. Clayton’s settlements, did have a cause of action against the respondent. It was the company which purchased the Ripon site and it was the company to which the respondent’s invoice was readdressed. But it was stoutly maintained by Mr. Brook Smith for the appellants that none of the other companies in that informal group of companies had a cause of action whereas the appellants themselves did.
- The starting point must be to answer the question to whom the valuation was addressed, having regard to the limiting words in the valuation, “This valuation is for the use only of the party to whom it is addressed and their financial advisers”. The valuation was expressed to have been made upon instructions received from “Messrs Cross Lane Group”. Mr. Brook Smith fastens on the word “Messrs” which suggests that individuals, not companies, were the persons instructing Mr. Thorpe to make the valuation. He also points out that Mr. Thorpe has not provided any explanation of what he intended by those words, and Mr. Brook Smith submits that the addressees of the valuation should await elucidation through evidence at the trial. I see some force in that submission, but I have been persuaded by Mr. Driscoll Q.C. that the judge was right to give summary judgment in favour of the respondent in the light of all the material before the judge.
- Whilst “Messrs” suggests only the involvement of individuals, “Group” suggests the involvement of companies forming part of a group. On this point the appellants’ own pleaded cases are of significance. They say that the valuation was provided following an approach made by Mr. Thorpe, who knew that the appellants were involved in a small group of companies and was made in the knowledge that the purchase would be effected through one or more of the appellants’ corporate bodies. The original pleading on behalf of the appellants was that instructions for the valuation were received from “inter alia” the appellants. That indicates that the instructions also came from others, although “inter alia” was deleted by amendment. Mr. Brook Smith’s concession is an acknowledgement that at least Construction had a sufficient interest to be able to sue the respondent. The pleadings identify the companies involved in the “small group of companies”. The appellants’ case is that they relied on the representations to “procure” the companies to become involved in the acquisition and development of the Ripon site. They could only do so as directors of the companies, and that suggests that insofar as the representations in the valuation were made to them, they were made to them in their capacity as directors. Whilst only one company would be chosen to purchase the site, other companies would be involved in the development of the site.
- Mr. Clayton’s witness statement is to the like effect. He acknowledges that there was a small group of companies engaged in property development and that Mr. Thorpe knew that as well as the fact that the group was on the lookout for development opportunities. In the first skeleton argument for the appellant it was accepted that each of the companies was part of a loose Cross Lane Group.
- Mr. Brook Smith sought to find significance in the fact that the valuation, the covering letter and the first invoice were sent to Mr. Ellis, his name being followed by “Cross Lane Business Park”. Mr. Brook Smith suggested that it was sent to Mr. Ellis personally and that “Cross Lane Business Park” was no more than an address. I do not agree. The method of operation of the appellants was, as Mr. Thorpe knew, through companies, and in taking decisions the appellants acted as directors. Cross Lane Business Park Ltd. is one of the companies in the group. It is one owned by the trustees of Mr. Ellis’s Settlement and by the trustees of one of Mr. Clayton’s Settlements. The invoice was addressed to “Cross Lane Business Park, 2a Colbeck Row, Birstall”. In the invoice the sum sought was expressed to be “Our charges for …. reporting to you”. “Cross Business Lane Park” could not have been a mere address but was plainly intended to be the person to whom Mr. Thorpe was reporting and who would be expected to pay the sum invoiced.
- Having regard to all the evidence and the concession made in this court I conclude that the judge was right to hold that the word “Messrs” in “Messrs Cross Lane Group” was meaningless, and that all the companies in the group were the persons within the Cross Lane Group. There is therefore no real prospect of showing that the companies do not have cause of action against the respondent in respect of the alleged misrepresentation, and the appellants cannot recover the reflected loss by actions in their own names.
- For these as well as the reasons given by Mantell L.J. I would dismiss this appeal.
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Order: Appeals dismissed. Order as minuted by Council.
(Order not part of approved judgment)
