There is a well-established rule against recovery of reflective loss, namely that a shareholder cannot recover damages merely because the company in which he is interested has suffered damage which is reflected in the loss in value of his shares1 (the "Rule") .The company is the proper claimant in such circumstances, not the shareholder.
A very recent High Court decision of Mr Justice Males in St. Vincent European General Partner -v- Robinson and others2 ("St. Vincent") reviewed the scope of an exception to the Rule established in the case of Giles -v- Rhind3 ("Giles").
The Giles case established that the Rule does not apply to a shareholder's claim to recover reflective loss where the wrongdoing to the company has made it impossible for the company to pursue its cause of action against the wrongdoer.
In St. Vincent, Males J. made clear that the Rule was not limited to situations where there is a realistic possibility of the company recovering the loss itself. The Rule still applied where the company had, for example, released the wrongdoer from liability or had not brought a claim in time and was statute barred. In contrast, in Giles itself, the wrongdoer had taken actions which caused the company to become insolvent and when the company sued the wrongdoer, he obtained an order for security for costs which the company could not meet and it had to discontinue its claim. In Giles, although a shareholder then sued the wrongdoer, and his claim was in respect of reflective loss, the claim nevertheless succeeded.The Giles exception appears only to apply where (1) it is impossible for the company to pursue its remedy against the wrongdoer; and (2) that impossibility was itself caused by the wrongdoing. In St. Vincent, Males J. observed that although the exception to the Rule did exist, there were hardly any other cases when it had been applied. He also indicated that where a wrongdoer – in this case a director - remained in control of the company, there could still be a claim against that wrongdoer by the company in the form of a derivative action brought by the shareholder in the name of the company4. Where such a derivative claim was still possible, it could therefore not be said that it was impossible for the company to bring a claim against that director in respect of his wrongdoing.
Therefore, for the purposes of the Giles exception set out above, a company is not to be regarded as disabled by the wrongdoing from bringing a claim where a derivative action is possible. Males J noted that the decision in Giles had not been followed in Hong Kong, but it was binding in all English courts except the Supreme Court. He acknowledged the limited scope of the exception and the demanding nature of the test of impossibility. On the facts of the case, there was no evidence to explain why St. Vincent could not have brought a derivative claim against the relevant defendants, and the Rule (against reflective loss) applied such that the shareholders' claim was not permitted.
Comment
The case serves as a useful reminder of the rule prohibiting recovery of reflective loss and clarifies the limited scope of the Giles exception, in particular, ruling out its application where the relevant company could still have brought a derivative claim. Unless the Supreme Court reverses the point, disappointed shareholders should consider carefully whether a derivative claim can be brought rather than pursuing claims in their own name.
1. Prudential Assurance Co. -v- Newman (2) [1982] CH 204
2. [2018] EWHC 1230 (Comm)
3. [2002] EWHC Civ 1428
4. A derivative claim may be brought , with permission of the Court, by a shareholder only in respect of a cause of action arising from an actual or proposed act or omission involving negligence, default, breach of duty or breach of trust by a director of the company (Companies Act, section 260(3) and (4))
