Nectrus Ltd v UCP Plc
| Jurisdiction | England & Wales |
| Judge | Lord Justice Flaux |
| Judgment Date | 21 January 2021 |
| Neutral Citation | [2021] EWCA Civ 57 |
| Date | 21 January 2021 |
| Docket Number | Case No: A4/2020/0105A, 0341A and 0410A |
| Court | Court of Appeal (Civil Division) |
[2021] EWCA Civ 57
Lord Justice Flaux
Case No: A4/2020/0105A, 0341A and 0410A
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
COMMERCIAL COURT (QBD)
SIR MICHAEL BURTON GBE (sitting as a Judge of the High Court)
CL-2017-000542
Royal Courts of Justice
Strand, London, WC2A 2LL
Mr Andrew Butler QC, Mr Andrew Legg and Mr Edward Blakeney (instructed by Hugh Cartwright & Amin) for the Applicant
Mr Huw Davies QC and Mr Felix Wardle (instructed by Skadden, Arps, Slate, Meagher & Flom (UK) LLP) for the Respondent
Hearing date: Wednesday 13 January 2021
Approved Judgment
Introduction
The applicant Nectrus makes an application dated 28 September 2020 for reconsideration under CPR 52.30 of my Order dated 24 July 2020 refusing it permission to appeal. Such applications are normally dealt with on paper, but at the request of the applicant, I fixed the application for a full hearing on 13 January 2021, at which both parties were represented. To put the application in context it is necessary to examine the facts and the procedural history in a little detail.
Factual and procedural background
UCP and its then 100% subsidiary, Candor, engaged Nectrus to provide investment management advice under a tripartite Investment Management Agreement (“IMA”) dated 14 December 2006. UCP made substantial investments in India through Candor which held shares in a number of Indian SPVs. Nectrus caused or permitted the Indian SPVs to place substantial amounts of cash with SREI and a number of entities associated with the Aten Group. The cash invested with the Aten Group was then invested onwards in a number of manifestly inappropriate companies which were referred to before the judge, Sir Michael Burton, as the Sham Entities. That money was ultimately not recovered. The sums invested with SREI and the Aten Group are referred to as “the Stranded Deposits”.
In 2013, a company in the Brookfield Group expressed an interest in purchasing UCP's 100% shareholding in Candor. During the due diligence exercise, the existence of the Stranded Deposits became apparent to UCP and Brookfield. Brookfield did not wish to purchase the right to seek to recover the Stranded Deposits, so it was agreed that the sale price of Candor would be reduced to reflect the value of the Stranded Deposits if they were not returned by the completion date. Completion was on 4 November 2014 and the Stranded Deposits had not been recovered, so the sale price paid by Brookfield to UCP for Candor was adjusted downwards by about £15.8 million to reflect the value of the Stranded Deposits.
In its claim before the Commercial Court issued on 31 August 2017, UCP claimed damages from Nectrus for breach of the IMA, in the amount of the discount from the purchase price. In his Liability Judgment dated 5 July 2019, the judge held that, in causing or permitting the investment with the Aten Group, Nectrus had breached the IMA. UCP's complaints about the SREI investments were dismissed by the judge and, although the Court of Appeal gave permission to appeal, the appeal was not pursued by UCP.
The trial had been a split one because, at the outset of the liability hearing, Nectrus raised for the first time a defence which relied upon the rule against reflective loss, asserting that the losses claimed were irrecoverable because they were reflective of losses suffered by Candor. It was said that, after Brookfield purchased Candor at the discount price, Candor could nonetheless have sued Nectrus under the IMA for the same amount as UCP was seeking to recover from Nectrus, so UCP's claim was barred by the “no reflective loss” rule.
The judge rejected that argument in his Quantum Judgment dated 29 November 2019, upholding the argument of Mr Huw Davies QC on behalf of UCP that the no reflective loss rule did not apply to a claim made by a party who was an ex-shareholder in the company at the time of the claim, distinguishing my judgment in the Court of Appeal in Marex v Sevilleja [2019] QB 173. As the judge noted, the Supreme Court had heard the appeal in Marex, but judgment was awaited. The judge also held at [27] that UCP's claim as ex-shareholder was a separate and distinct claim from that of the company, Candor. The judge awarded damages corresponding to the shortfall in the sale price attributable to the Aten investments, some £5.8 million.
Nectrus applied for permission to appeal on various grounds. By my Order dated 29 May 2020 I refused permission on all but one of those grounds, which was Ground 2, that the judge had been wrong not to apply the rule against reflective loss to this claim, on the basis that UCP should not be entitled to escape the rule by having sold its shareholding at what it knew to be an undervalue prior to bringing a claim. At the time that I was considering the application for permission to appeal, the judgment of the Supreme Court was still awaited. Accordingly, I granted contingent permission to appeal in these terms:
“On the basis of the law as it stands set out in my judgment in Marex v Sevilleja [2019] QB 173, it is arguable that the judge erred in not concluding that UCP was precluded from recovery by the reflective loss principle. Whether my judgment does correctly state the law will depend upon the outcome of the appeal to the Supreme Court from that decision. Unfortunately the judgment(s) of the Supreme Court have not yet been handed down, so it seems appropriate to grant permission to appeal on Ground 2 on the contingent basis that the matter is referred back to me for further consideration when the judgment(s) of the Supreme Court have been handed down.”
The Supreme Court judgments in Marex
The judgments of the Supreme Court were handed down on 15 July 2020. Lord Reed (with whom Lady Black and Lord Lloyd-Jones agreed) held that the rule against reflective loss was limited to cases of shareholders within the original rule as formulated by this Court in Prudential Assurance Co Ltd v Newman Industries (No 2) [1982] Ch 204. Two citations from his judgment will suffice to demonstrate this point.
At [9] he identified that case as establishing a “highly specific exception to the general rule” in these terms:
“9. The fact that a claim lies at the instance of a company rather than a natural person, or some other kind of legal entity, does not in itself affect the claimant's entitlement to be compensated for wrongs done to it. Nor does it usually affect the rights of other persons, legal or natural, with concurrent claims. There is, however, one highly specific exception to that general rule. It was decided in the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 that a shareholder cannot bring a claim in respect of a diminution in the value of his shareholding, or a reduction in the distributions which he receives by virtue of his shareholding, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, even if the defendant's conduct also involved the commission of a wrong against the shareholder, and even if no proceedings have been brought by the company. As appears from that summary, the decision in Prudential established a rule of company law, applying specifically to companies and their shareholders in the particular circumstances described, and having no wider ambit.” (my emphasis)
Having then analysed all the authorities from Prudential onwards, he concluded at [89]:
“89. I would therefore reaffirm the approach adopted in Prudential and by Lord Bingham in Johnson, and depart from the reasoning in the other speeches in that case, and in later authorities, so far as it is inconsistent with the foregoing. It follows that Giles v Rhind, Perry v Day and Gardner v Parker were wrongly decided. The rule in Prudential is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way.” (my emphasis)
Lord Hodge delivered a concurring judgment limiting the rule to the position of shareholders covered by the principle in Prudential saying at [99]–[100]:
“99. The Court's reasoning [in Prudential] on p 223, which Lord Reed has quoted at paras 27 and 29 above, has been criticised because the stark assertion, that the shareholder “does not suffer any personal loss” by the diminution in the value of its shares or of the distributions which it received, cannot be taken at face value — clearly the shareholder suffers economic loss — and because the example of a non-trading company whose only asset was a cash box containing £100,000 is an oversimplification. But the reasoning is nonetheless clear where the Court asserts (a) that the deceit on the shareholder causes the shareholder “no loss which is separate and distinct from the loss to the company” (p 223), (b) that “when the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting” (p 224), and (c) that “[a] personal action would subvert the rule in Foss v Harbottle”, a rule which “operates fairly by preserving the rights of the majority” (p 224). I agree with Lord Reed (para 28 above) that what the Court was saying is that where a company suffers a loss as a result of wrongdoing and that loss is reflected to some extent in a fall in the value of its shares or in its distributions, the fall in the share value or in the distributions is not a loss...
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