Swynson Ltd v Lowick Rose LLP (formerly Hurst Morrison Thomson LLP) ((in Liquidation))
| Jurisdiction | England & Wales |
| Judge | Lord Sumption,Lord Neuberger,Lord Clarke,Lord Hodge,Lord Mance |
| Judgment Date | 11 April 2017 |
| Neutral Citation | [2017] UKSC 32 |
| Date | 11 April 2017 |
| Court | Supreme Court |
[2017] UKSC 32
Lord Neuberger, President
Lord Mance
Lord Clarke
Lord Sumption
Lord Hodge
Appellant (Lowick)
Mark Howard QC
David Turner QC
Nicole Sandells
(Instructed by RPC LLP)
Respondents (Swynson/Hunt)
Hugh Sims QC
Gerard McMeel
James Wibberley
(Instructed by Gardner Leader LLP)
Heard on 21, 22, 23 and 24 November 2016
(with whom Lord Neuberger, Lord ClarkeandLord Hodgeagree)
The distinct legal personality of companies has been a fundamental feature of English commercial law for a century and a half, but that has never stopped businessmen from treating their companies as indistinguishable from themselves. Mr Michael Hunt is not the first businessman to make that mistake, and doubtless he will not be the last.
Mr Hunt is a wealthy investor. The judge found that at the relevant time one of his "preferred methods of investment" was to lend money to companies whose business was too risky for them to be able to borrow on normal terms from banks. For this he would charge a substantial arrangement fee and interest at a relatively high rate. Swynson Ltd was a company controlled and beneficially owned by Mr Hunt which was used as a vehicle for such transactions, including the one which has given rise to these proceedings.
On 31 October 2006, Mr Hunt caused Swynson to lend £15m to Evo Medical Solutions Ltd (or "EMSL") for a period of a year. The purpose of the loan was to enable EMSL to finance the management buy-out of an American company called Medical Industries America Inc, trading as "Evo", which distributed medical equipment in the United States. Shorn of peripheral detail, the result of the buy-out was that the £15m was spent on buying out the existing owners of Evo. Evo then became a wholly-owned subsidiary of EMSL, whose shares were owned 71.4% by Evo's management, 25% by Mr Hunt and 3.6% by an associate of Mr Hunt who joined its board. Swynson's loan to EMSL was secured by charges over Evo's assets and limited personal guarantees by the management.
Before entering into this transaction, Swynson and EMSL jointly instructed a firm of accountants, Hurst, Morrison Thomson, to carry out due diligence on Evo. They subsequently changed their name to Lowick Rose LLP, but I shall refer to them throughout as "HMT". They are now in liquidation. Their report failed to draw attention to some fundamental problems about the company's finances, in particular the insufficiency of its working capital. It is now common ground that that failure was negligent, and that if HMT had carried out their task properly they would have reported the problem and the transaction would not have gone ahead.
In the course of 2007, Evo began to experience severe cash-flow problems and EMSL began to default on its interest payments. In July 2007, Mr Hunt was told that Evo was at risk of collapse without a substantial cash injection. He decided that the only way of recovering his money would be to provide further funding until Evo was restored to financial health, when it could either be floated or sold. To that end he caused Swynson to lend a further £1.75m to EMSL in 2007. A yet further loan of £3m was made in July 2008, as part of a larger transaction, under which Mr Hunt became the controlling shareholder of EMSL with 85% of the equity, leaving 15% in the hands of the management. Evo's financial position did not improve, however, and neither the original nor the further loans were repaid.
On 31 December 2008, rather more than two years after the original transaction, the 2006 and 2007 loans were refinanced. Mr Hunt and EMSL entered into a loan agreement under which Mr Hunt personally made a short-term loan of £18.663m to EMSL, secured by fixed and floating charges over its assets and undertaking. The loan was interest-free, although there was a provision for default interest. It was a term of the agreement that EMSL would apply the loan moneys in satisfaction of the outstanding balance of the 2006 and 2007 loans. EMSL duly did this. There were two reasons for these transactions. The first was that under UK tax legislation governing close companies, once Mr Hunt, who already controlled Swynson, acquired control of EMSL in July 2008, Swynson became assessable to tax on the interest payments due from EMSL notwithstanding that those payments were not being made. The second was that Mr Hunt took the view that it was disadvantageous for Swynson to have a large non-performing loan on its books. The result was that the 2006 and 2007 loans were discharged, as Mr Hunt intended. Only the 2008 loan of £3m remained outstanding on Swynson's books.
In October 2012 Swynson and Mr Hunt brought the present proceedings in support of a claim against HMT for damages of £16.157m, being the principal amount of all the loans of £19.75m, less sums received under the management's personal guarantees and the value of recoveries from cash and assets in the hands of Evo. The matter came on for trial before Rose J. Liability was conceded in the course of the trial, and by the time that the judge came to give judgment the only outstanding issues related to damages. She found that only the 2006 loan had been made on the strength of HMT's report, but that losses arising from the 2007 and 2008 loans were in principle recoverable as the cost of reasonable steps taken in mitigation, subject to an overall cap of £15m agreed in the letter of engagement.
That left for decision the main point taken on damages, and the only one which is presently before this court, which concerned the effect of the discharge of the 2006 and 2007 loans as a result of the refinancing of December 2008. HMT submitted that EMSL having repaid these loans to Swynson, albeit with money borrowed from Mr Hunt personally, Swynson had suffered no loss in respect of them which could be recovered by way of damages. In response, Swynson and Mr Hunt argued four points: (i) that the December 2008 refinancing was res inter alios acta and did not affect the amount of Swynson's recoverable loss; (ii) that if the loss was not recoverable by Swynson it was recoverable by Mr Hunt, on the footing that HMT owed him a duty of care; (iii) that Swynson was entitled to recover on the principle of transferred loss; and (iv) that HMT having been unjustly enriched by Mr Hunt's provision of funds to EMSL to repay Swynson, Mr Hunt was subrogated to Swynson's claims against them.
The judge accepted point (i) and awarded damages of £15m on that basis. On point (ii) she held that no duty of care was owed to Mr Hunt personally. Points (iii) and (iv) did not arise having regard to her conclusion on point (i) and she did not deal with them.
In the Court of Appeal, Mr Hunt abandoned the argument that a duty of care was owed to him personally. But the other three points remained in issue. The Court of Appeal held by a majority (Longmore and Sales LJJ) that the judge had been right about point (i) ( res inter alios acta) and dismissed the appeal on that basis. The majority disagreed about point (iv) (unjust enrichment and equitable subrogation). Longmore LJ would have rejected it, while Sales LJ would have accepted it. Davis LJ rejected all three points and would have allowed the appeal. The issues before this court stand as they did in the Court of Appeal. There is, as will be apparent, a measure of overlap between them.
The general rule is that loss which has been avoided is not recoverable as damages, although expense reasonably incurred in avoiding it may be recoverable as costs of mitigation. To this there is an exception for collateral payments ( res inter alios acta), which the law treats as not making good the claimant's loss. It is difficult to identify a single principle underlying every case. In spite of what the latin tag might lead one to expect, the critical factor is not the source of the benefit in a third party but its character. Broadly speaking, collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss. Thus a gift received by the claimant, even if occasioned by his loss, is regarded as independent of the loss because its gratuitous character means that there is no causal relationship between them. The same is true of a benefit received by right from a third party in respect of the loss, but for which the claimant has given a consideration independent of the legal relationship with the defendant from which the loss arose. Classic cases include loss payments under an indemnity insurance: Bradburn v Great Western Railway Co (1874–5) LR 10 Ex 1. Or disability pensions under a contributory scheme: Parry v Cleaver [1970] AC 1. In cases such as these, as between the claimant and the wrongdoer, the law treats the receipt of the benefit as tantamount to the claimant making good the loss from his own resources, because they are attributable to his premiums, his contributions or his work. The position may be different if the benefits are not collateral because they are derived from a contract (say, an insurance policy) made for the benefit of the wrongdoer: Arab Bank Plc v John D Wood Commercial Ltd [2000] 1 WLR 857 (CA), at paras 92–93 (Mance LJ). Or because the benefit is derived from steps taken by the Claimant in consequence of the breach, which mitigated his loss: British Westinghouse Electric and Manufacturing Co Ltd v Underground Electric Railways Ltd [1912] AC 673, 689, 691 (Viscount Haldane LC). These principles represent a coherent approach to avoided loss. In Parry v Cleaver, at p 13, Lord Reid derived them from considerations of "justice, reasonableness and public policy". Justice, reasonableness and public policy...
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