Webster v Sandersons Solicitors (A Firm) [2009] EWCA Civ 830

[2009] EWCA Civ 830Case No A3/2009/0156
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN’S BENCH DIVISION
Venue LEEDS DISTRICT REGISTRY
MERCANTILE LIST
Mr James Allen QC
Claim No 8LS40315
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 31 July 2009
Before
LORD CLARKE OF STONE-CUM-EBONY MRLADY JUSTICE ARDENLORD JUSTICE LLOYD
Between
CHARLES FREDERICK WEBSTERClaimant/SANDERSONS SOLICITORS (A Firm)Defendants/
(Transcript of the Handed Down Judgment ofWordWave International LimitedA Merrill Communications Company165 Fleet Street, London EC4A 2DYTel No: 020 7404 1400, Fax No: 020 7404 1424Official Shorthand Writers to the Court)
William Flenley (instructed by Browns Solicitors Limited) for RespondentGraeme McPherson QC (instructed by Mills & Reeve LLP) for AppellantsHearing Hearing dates: 29 April 2009
JudgmentLord Clarke of Stone-cum-Ebony MR:Introduction
[1]This is the judgment of the court, to which all its members have contributed. It is given on an appeal against part of an order dated 6 January 2009 made by Mr James Allen QC, sitting as a Deputy High Court Judge (‘the judge’), in which he granted the claimant permission to amend his particulars of claim and schedule of loss in certain respects. He refused the defendants permission to appeal but permission was subsequently granted by Longmore LJ. The flavour of the appeal can be seen from the terms in which Longmore LJ granted permission. He said that an application to amend a claim for £1.9 million to make a claim for over £30 million in relation to events which occurred in 1993 and 1994 was, on the face of it, unattractive. He added that, although the judge’s decision to allow the amendment could be said to be a discretionary decision, the fact that the majority of the new claim was arguably not the claimant’s own loss but reflected the losses of his company and/or his pension fund did raise a point of principle, namely whether the claim comes within the Giles v Rhind [2003] Ch 618 exception to the principle in Johnson v Gore Wood& Co [2000] UKHL 65, [2002] 2 AC 1. Longmore LJ also added that the defendants must recognise that this court will regard itself as bound by Giles v Rhind, whatever the Hong Kong Final Court of Appeal may have said in Waddington v Chan Chun Hoo Thomas [2008] HK CU 1381 about not following it in Hong Kong.

The development of the claimant’s claims

[2]We can take the background largely from the judgment. The underlying subject matter of the action concerns investments made in 1993 and early 1994 in a project for purposes which were said to be the extraction of coal from spoil at mines in the USA. The claimant’s case is that the monies invested amounted to over £1 million and that they were all lost. The claimant’s case is further that advice and encouragement to invest in the project was given in 1993 and thereafter by Walker Morris, solicitors, and that the monies were lost as a result of a breach of duty owed by Walker Morris to the claimant.[3]The claimant instructed the defendant solicitors (‘Sandersons’) to act on his behalf in making a claim against Walker Morris. Proceedings (‘the original proceedings’) were issued in the name of the claimant against Walker Morris on 31 January 2001. On 30 May 2001 Sandersons sought and obtained an order extending time for the service of the original proceedings on Walker Morris until 31 July 2001. They were served on 30 July. However, Walker Morris subsequently succeeded in having the order set aside on 21 September 2001 and an appeal from that decision failed on 5 November 2001. This had the effect that service of the original proceedings was deemed to have taken place after the period for service of the claim form lapsed, with the result that the original proceedings could not be pursued.[4]The claimant’s case is that Sandersons, in failing to serve the claim form in time, were in breach of a duty owed to him and that he has suffered loss in consequence. The loss alleged is the amount that he would have recovered from Walker Morris in the original proceedings. The basis of the claim against Walker Morris was, in part,that they advised the claimant that Guy Cramer, whose project it was, was honest and trustworthy, that there was no reason to doubt that the project was a good investment and that sufficient security would be forthcoming for the monies advanced. It is alleged that that advice was given negligently in breach of contract or duty. As against Sandersons it is alleged that, by reason of their breach of contract or duty, the claimant lost all chance, alternatively a significant chance, of recovering his loss from Walker Morris.[5]As pleaded before the amendments the loss alleged was as follows:(1) £1,904,193.60, which was the total sum said to have been invested by the claimant in the project;(2) £700, which he paid to Sandersons in respect of the original proceedings; and(3) £6,341.30 in respect of his liability to Walker Morris in respect of the costs of those proceedings. Sandersons did not say that he should not be permitted to claim those sums from them. No separate schedule of loss was annexed to the original particulars of claim, which are dated 11 September 2007.[6]The appeal has been argued on the basis that the relevant limitation period expired on 6 November 2007. During 2008 the claimant produced draft amended particulars of claim which, in place of the sum of £1,904,193.60, claimed the amounts set out in a draft schedule of loss. The claimant made an application for permission to amend the particulars of claim which was opposed on a number of grounds. At least one of the objections succeeded. It related to a new cause of action which did not arise out of the same or substantially the same facts as before and thus fell outside section 35 of the Limitation Act 1980. Most, if not all, of the other objections failed. Before the judge they ranged over a wide area, including (apart from limitation) abuse of process, remoteness, causation and unfair prejudice.[7]The appeal is brought only in relation to quantum and relates to parts of the schedule of loss which are said to be losses, not of the claimant himself but of his company and his pension fund. In the original particulars of claim there was no mention of a company or a pension fund. By contrast, in the draft amended particulars they play an important part. The claimant and his mother owned and controlled a company called Sterling Construction (Yorkshire) Ltd (‘SCYL’), of which the claimant was the managing director. It is said that the claimant owned 99 per cent of the shares and his mother 1 per cent, but that is not alleged in terms, nor is it formally in evidence. We do not know the defendants’ position in that regard, but we will assume the facts in the claimant’s favour as if they had been pleaded.[8]SCYL is said to have made the investments in question in 1993 and 1994. The evidence is incomplete and unclear as to its history after that. It is said that a winding-up petition was presented on 13 November 1995 and a winding-up order made on 19 December 1995. (A receiver is said to have been appointed in 22 January 1996. We have disregarded that fact as this appointment would make no material difference to our analysis.)On 23 December 1996 Walker Morris issued proceedings to recover some £18,000 due in respect of fees. SCYL defended and counterclaimed, acting by the claimant’s present solicitors, Browns, the defence and counterclaim being served on 15 January 1997. We will say a little more about the course of that litigation later. On 28 April 1998 a further winding-up petition was issued and on a date in November 1998 a winding-up order was made. It seems likely that the first winding-up order was rescinded or otherwise set aside. The appointment of a receiver is not necessarily inconsistent with a continuing liquidation, but the documents relating to the proceedings show no sign that there was then a liquidator in place, and a second winding-up order could not have been made if there was already one in force. The defendants’ evidence in opposition to the claimant’s application to amend also states that it is believed that SCYL may have been struck off the register. The claimant’s evidence does not confirm or otherwise comment on that.[9]SCYL operated a pension scheme of which the claimant and his mother are said to have been the beneficiaries, until his mother’s death in February 2002, and since then he is said to be the only beneficiary. It seems that the claimant has always been one of the trustees of the pension fund, and that his mother was during her life, but that there has always been another trustee, a corporate body. Currently it is said to be Hornbuckle Mitchell Trustees Ltd.[10]The claimant’s case as pleaded in the draft amendment before the judge was that Walker Morris acted for the claimant, SCYL and the pension fund in relation to substantial payments made to the project in 1993 and 1994. The schedule of loss is divided into 11 sections from A to K. In each case the basis of the claim is that the amount included is calculated on the basis that, but for Sandersons’ negligence or breach of duty, the action against Walker Morris would have been tried in about May 2002. A further claim for interest at 1 per cent above base rate is made on top. After the hearing of the appeal counsel were asked to prepare schedules showing the nature of the claims as they stand now. We attach to our judgment as Appendices A and B the very helpful schedules that were produced. Appendix A was prepared by Mr McPherson Q.C., acting for the defendants, and Appendix B by Mr Flenley, for the claimant. We have no reason to believe that they are not both an accurate reflection of the position as at the time they were prepared and before the subsequent exchanges referred to below. In Appendix B we have added some references to Appendix A for the purposes of clarification.[11]As appears from Appendix A, Section A of the claim contains the amounts said to have been invested in the project. Payments amounting to £172,564.38 were made by the claimant, £813,966.52 by SCYL and £428,200.00 by the pension fund. The total is £1,414,730.90, which it can readily be seen is significantly less than the £1,904,193.60 originally pleaded. Moreover the amount now said to have been paid by the claimant as an investment is only £172,564.38. As can be seen from Appendix A, claims are made in respect of payments made or losses incurred by the claimant personally in only some of the other sections, namely Section E in respect of ‘interest payments made to Anthony Clarke’ amounting to £33,485.50 ‘plus further unparticularised sums’, Section H in respect of ‘income loss as a result of loss of employment’ by SCYL amounting to between £120,000 and £300,000 ‘for an unparticularised number of years’, Section J in respect of ‘liability for increased indebtedness’ of SCYL and the claimant in the amount of £6 or £7 million and Section K in respect of ‘fees paid to Argen Investments and legal fees’ in the amount of £9,612.50.[12]Appendix A also sets out payments made by SCYL in Sections B, C, D, F and G in respect of various amounts for various purposes to different recipients amounting to £231,968.94. Together with the figure for investments in Section A of £813,966.52, that makes a total of £1,045,935.46. In addition, Section I asserts a loss by SCYL on five property transactions of £17,919,650, ‘alternatively unquantified’. Finally, as already stated, Section J asserts a liability of SCYL and the claimant in the amount of £6 or £7 million.[13]As to the pension fund, the schedule asserts in Section A an investment of £428,200.00 and in Section G an unquantified claim in respect of ‘costs incurred in selling property at 111-113 New Road site’ and the ‘cost of mortgage over Sterling House’.[14]As mentioned already, Appendix B is a document prepared after the hearing of the appeal which sets out how much loss is now claimed in four categories and on what basis.[15]Category (i) sets out the claims which the defendants accept amount in principle to the claimant’s loss. They are Sections A, E and K in Appendix A and amount to £206,049.88. Mr Flenley correctly observed that, since the defendants have not yet served a defence, it is not known whether or not it is accepted that these sums were in fact paid by the claimant. The time for service of the defence was extended by the court and has since been extended by agreement pending the outcome of this appeal.[16]Category (ii) sets out sums that the claimant accepts amount to SCYL’s and not the claimant’s loss, subject to the principle stated in Giles v Rhind. They are divided into basic losses (A), lost profit to SCYL (B) and indebtedness of SCYL (C). The basic losses are those set out in Sections A, B, C, D and F of Appendix A and amount to a total of £1,010,114.96. The lost profit relates to loss said to have been referable to five specified development sites and is set out in Section I. It amounts to a total of £17,919,650 subject to a comparatively small discount in relation to one of the sites. The indebtedness of SCYL is in respect of the interest element of SCYL’s indebtedness to Barclay’s Bank and is ‘an unparticularised proportion of the figure of £6 to £7 million’ referred to in Section J of Appendix A. It follows that the particularised claims in category (ii) amount to £18,929,764.96.[17]Category (iii) sets out sums claimed which the claimant accepts derive from payments made by the pension fund. As Appendix A shows, the claimant claims in respect of the extent to which these payments resulted in a diminution in the value of the pension fund available to him personally. They are the items referred to in Sections A and G of Appendix A. The amount contributed by the pension fund is £428,200.00. Appendix A does not set out the amount claimed in respect of the loss by way of the reduction of pension payments to the claimant because it has been agreed that time for compliance with the order that he produce the relevant figures has been extended until after the result of this appeal is known.[18]Category (iv) sets out sums in respect of which there is a dispute as to whether they amount to the claimant’s personal loss or SCYL’s loss. They are Section H and part of section J of Appendix A. The claim in Section H is in respect of the claimant’s loss of income from SCYL as a result of the termination of his employment with SCYL due to its collapse. The amount claimed is ‘of the order of £120,000 to £300,000 per annum’. The amount claimed as part of Section J is an unparticularised proportion of the total figure of £6 to £7 million, which is indebtedness of SCYL to its bank, for which the claimant is liable as guarantor.[19]We will consider each of the categories in turn but, before doing so, we will briefly sketch in the history of proceedings involving SCYL and the pension fund.

The claims by SCYL

[20]As already stated, the investments in the project took place in 1993 and 1994. On 23 December 1996 a writ was issued by Walker Morris against SCYL in respect of fees owing in respect of work said to have been done in 1994, 1995 and 1996. On 15 January 1997 SCYL, for whom the claimant’s present solicitors, Browns, acted, served a defence and counterclaim, which alleged negligence in a matter which was wholly unrelated to the issues in this action. However, not long after that, SCYL served a draft amended defence and counterclaim which did make a similar (but much more limited) allegation to that asserted in this action, namely that Walker Morris introduced SCYL to Mr Cramer, that as a result it invested about US$2 million in the project, that it lost its money and that Walker Morris were responsible because SCYL had told them that it wanted the investment secured, which Walker Morris failed to achieve. In further and better particulars served in July 1997 SCYL alleged that Walker Morris had advised it that the investment was safe and profitable. The loss alleged was said to be in the region of £2,000,000. The parties agreed on directions in December 1997, but it is not clear what was the fate of the counterclaim. The claimant applied on 16 December 1997 for leave to serve a counterclaim out of time, but it appears that on 9 April 1998 this application was dismissed, the district judge rejecting an application for an adjournment, albeit agreed to by both sides. SCYL’s financial difficulties, which led to the issue of a winding-up petition later in April 1998, may have had something to do with the lack of progress on the counterclaim.[21]As we understand it, no further steps have been taken in that action since then, or at any rate since November 1998, when SCYL was ordered to be wound up. The liquidator could of course have continued the counterclaim or, as the case may be, mounted such a claim afresh, with or without funding provided by the claimant, or he could have assigned the cause of action to the claimant to enable the claimant to pursue it. The proceedings were no doubt automatically stayed when the CPR came into force. An application could be made to lift the stay but the prospects of such an application succeeding after all this time are perhaps doubtful, to put it no higher.[22]In paragraph 12A of the Re-Amended Particulars of Claim (introduced by the first set of amendments) the claimant alleges that “By reason of Walker Morris’ negligence as pleaded above, SCYL was unable to pursue its claim against Walker Morris. This is because on 22 January 1996 a receiver manager was appointed to SCYL and on 5 November 1998 SCYL entered compulsory liquidation” That is a mere assertion. It does not explain why the liquidator could not have sued Walker Morris, nor why and how it is said that SCYL’s financial problems are said to have been caused by any fault on the part of Walker Morris. The claimant in his evidence said that SCYL did not have enough money because of the losses on the project which he blamed on Walker Morris, that he believed that the liquidator could not afford to bring proceedings for lack of funds, and that he himself could not afford to fund proceedings in 1998, whether on his own behalf or as assignee from the liquidator.

The claims by the pension fund

[23]On 8 November 2007 the claimant and the ‘Trustees of the [SCYL] Pension Scheme’ issued proceedings against Sandersons as first and second claimants respectively. We will call these proceedings ‘the pension fund action’ but, for consistency with the above, we will continue to refer to Mr Webster as the claimant. As already mentioned it seems that there are two trustees of the pension fund: Mr Webster and a corporate trustee. On 5 September 2008 particulars of claim were served in the pension fund action. In them the claimant says that, if his application to amend the particulars of claim in the first action is unsuccessful, he will advance the claim set out in the draft amendments in the pension fund action and, if it succeeds, he will ask the court to stay the pension fund action until the first action is determined and, if the first action fails, the claimants will seek to proceed with the pension fund action. In the original particulars of claim the claim was, or was principally, for the recovery by way of damages of the sum of £428,000 invested by the pension fund in the project. However the claimants adopted the amended particulars of claim and schedule of loss in the first action by alleging that the pension fund’s case against Walker Morris would or should have been pleaded as alleged in paragraphs 1A to 9 of the draft amended particulars of claim in the first action.[24]The pension fund thus has proceedings on foot against Sandersons, which are not the subject of this appeal. Whether there are any technical or other obstacles in their way we do not know.[25]Before we return to the categories of loss advanced by the claimant against Sandersons in the first action identified above, we should say a word about the legal principles.

The legal principles

[26]In the light of the parties’ respective cases as they have now developed, it is sufficient to state the relevant principles only shortly for the purposes of this appeal. The general principle is that the only person who can sue in respect of a wrong done to a corporation is the corporation. This is the rule in Foss v Harbottle (1843) 2 Hare 461 as applied to corporations. See eg the judgment of this court, comprising Cumming-Bruce, Templeman and Brightman LJJ, in Prudential Assurance Co Ltd v Newman Industries Ltd [1982] 1 Ch 204 at 210F-211B. As the court put it later at pages 222H-223B:
“What [a shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only “loss” is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent shareholding.”
The court made it clear at page 223E-F that it makes no difference that the company has not pursued its own claim. It asked how the failure of the company to pursue its claim against a robber can entitle a shareholder to recover the loss for himself.[27]The leading case in this field is of course now Johnson v Gore Wood & Co. Mr Johnson had conducted his business through a number of companies of which he was managing director and in which he owned all but two of the issued shares, one of which was referred to by Lord Bingham as WWH. WWH had brought an action against the defendant solicitors (‘GW’) that was compromised in the course of the trial. Mr Johnson subsequently brought an action against GW making substantially the same claims that WWH had done but alleging that they owed him a duty of care and skill and that they were in breach of duty as a result of which he had suffered loss. GW applied to strike the action out on the basis, inter alia, that Mr Johnson was seeking to recover damage suffered by WWH and that, being no more than a shareholder of the company, he could not sue to recover the loss. They relied in particular upon another passage in the Prudential Assurance case, at page 210, which is quoted by Lord Bingham at page 35B:
“A derivative action is an exception to the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested.”
Mr Johnson’s response was that, if he established the duty and breach of duty, he was entitled to recover any damage which he had himself suffered as a personal loss separate and distinct from any loss suffered by WWH: see per Lord Bingham at page 35C-D.[28]Lord Bingham then referred to a number of authorities, which we set out here in order to make the references in the passage quoted below comprehensible. Lord Bingham said at page 35D-E:
“On this issue we were referred to a number of authorities which included Lee v. Sheard [1956] 1 QB 192; Prudential Assurance v. Newman, above; Heron International Ltd. and Others v. Lord Grade, Associated Communications Corp. Plc. and Others [1983] BCLC 244; R. P. Howard Ltd. & Richard Alan Witchell v. Woodman Matthews and Co. (a firm) [1983] BCLC 117; George Fischer (Great Britain) Ltd. v. Multi Construction Ltd., Dexion Ltd. (third party) [1995] 1 BCLC 260; Christensen v. Scott [1996] 1 NZLR 273; Barings plc. (in administration) and another v. Coopers & Lybrand (a firm) and others [1997] 1 BCLC 427; Gerber Garment Technology Inc. v. Lectra Systems Ltd. and another [1997] RPC 443; Stein v. Blake and Others [1998] 1 All ER 724; and Watson and Another v. Dutton Forshaw Motor Group Ltd. and others, Court of Appeal, unreported, 22 July 1998.”
[29]Lord Bingham then said that those authorities supported the following positions, which he set out at pages 35F to 36B:
“(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 shareholder’s shareholding 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 company’s 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. So much is clear from Prudential, particularly at pages 222-3, Heron International, particularly at pages 261-2, George Fischer, particularly at pages 266 and 270-271, Gerber and Stein v. Blake, particularly at pages 726-729. (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. This is supported by Lee v. Sheard, at pages 195-6, George Fischer and Gerber. (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. I take this to be the effect of Lee v. Sheard, at pages 195-6, Heron International, particularly at page 262, R. P. Howard, particularly at page 123, Gerber and Stein v. Blake, particularly at page 726. I do not think the observations of Leggatt L.J. in Barings at p. 435B and of the Court of Appeal of New Zealand in Christensen v. Scott at page 280, lines 25-35, can be reconciled with this statement of principle.”
[30]Lord Bingham then said this at page 36B-E:
“These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder’s claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder’s claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential at page 223) the loss claimed is “merely a reflection of the loss suffered by the company.”
In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company’s assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.” See also Lord Millett at pages 61-62. Lord Goff agreed with Lord Bingham and Lord Millett.[31]The pension fund is not a corporate body but a trust, whose assets are vested in the trustees for the time being. Similar principles apply. If there is a cause of action against a third party for causing loss to the trust fund, it is vested in the trustees for the time being. It can be asserted by them and, normally, only by them. The proceedings commenced in November 2007 were brought on this basis. Exceptionally, if the trustees fail to pursue such a claim, it may be open to a beneficiary to assert the claim in proceedings to which the trustees are also parties as defendants: see Hayim v Citibank [1987] AC 730. This has some similarity to a derivative action in company law, but it does not require further consideration here, since the claimant does not say that the trustees have failed to bring proceedings, and indeed he has in fact brought separate proceedings in his capacity as one of the trustees, together with the other trustee. A beneficiary under a trust does not have a direct cause of action in negligence against a person who may be liable to the trustees: see Parker-Tweedale v Dunbar Bank plc (No 1) [1991] Ch 12.[32]The present proceedings, as originally constituted, did not allege any payment by the pension fund, and therefore the claimant was not said to be suing in his capacity as a trustee of the pension fund (see CPR rule 16.2(3)). He cannot claim the pension fund losses as such in these proceedings because he does not sue in his capacity as a pension fund trustee, he has not joined the other trustee as a party, and he has not alleged (and could not do so) that the trustees have failed to bring their own proceedings.[33]Subject to any exceptions to those principles which derive from subsequent cases, in our judgment they apply to an application for permission to amend such as that before the judge. It is plain that, if they apply, the claimant is not entitled to recover loss suffered by SCYL or the pension fund. We note in passing that Lord Bingham then considered the particular heads of claim advanced by Mr Johnson at pages 36E to 37B, which may be relevant to some of the claimant’s heads of loss.[34]In the course of this appeal there was much discussion of the decision of this court in Giles v Rhind, which is said to be authority for an exception to the principles discussed above where the wrong done to the company had made it impossible for it to pursue its own remedy. In the later case in the Final Court of Appeal in Hong Kong of Waddington v Chan Chun Hoo Thomas Lord Millett, with whom the other members of the court agreed, succinctly described the position in Giles v Rhind in this way at [84]. It was a case in which the company, which was in administrative receivership, brought proceedings against the wrongdoing director, who demanded and obtained an order for security for costs which successfully stifled the proceedings. When the company discontinued the action a shareholder brought proceedings on its own behalf to recover its own loss. It was conceded that this was reflective loss but this court allowed the claim to proceed.[35]We note in passing that Lord Millett recognised at [85] and [86] that there should be some means by which an action should be possible against the wrongdoer. If the company had not been in administrative receivership, the simplest course, he said, would have been to allow the shareholder to bring a derivative action. As it was, that course would not have been open, for the company was no longer under the control of the wrongdoer, but the court could have given the shareholder leave to apply to direct the administrative receiver to bring the action if the shareholder was willing to fund it.[36]It is plain from [85] that Lord Millett was of the view that Giles v Rhind was wrongly decided (though he was wrong to say that this court had followed that decision in Day v Cook [2001] EWCA Civ 592, which in fact preceded it). However, it is binding on this court. It is, moreover, a recent decision of this court and, in our judgment, there is no proper basis upon which we should decline to follow it. Only the House of Lords or, from October, the Supreme Court of the United Kingdom could do so. Since it was decided, Giles v Rhind has been considered by this court in Gardner v Parker [2004] EWCA Civ 781, [2004] 2 BCLC 554, where Neuberger LJ, with whom Mance LJ and Bodey J agreed, discussed the rule against reflective loss at some length from [23] to [33]. For present purposes it is sufficient to refer to [33] where he set out the principles in Johnson v Gore Wood as qualified by this court in Giles v Rhind. He said that, as amended by two qualifications deriving from the judgment of Chadwick LJ in Giles v Rhind at [61] and [62], with whom Keene LJ agreed, Blackburne J’s formulation at first instance was correct.[37]As so qualified, the relevant principles are therefore as follows, the qualifications being in italics:
“(1) a loss claimed by a shareholder which is merely reflective of a loss suffered by the company – i.e. a loss which would be made good if the company had enforced in full its rights against the defendant wrongdoer – is not recoverable by the shareholder save in a case where, by reason of the wrong done to it, the company is unable to pursue its claim against the wrongdoer; (2) where there is no reasonable doubt that that is the case, the court can properly act, in advance of trial, to strike out the offending heads of claim; (3) The irrecoverable loss (being merely reflective of the company’s loss) is not confined to the individual claimant’s loss of dividends on his shares or diminution in the value of his shareholding in the company but extends … to ‘all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds’ and also 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 save that this does not apply to the loss of future benefits to which the claimant had an expectation but no contractual entitlement; (4) the principle is not rooted simply in the avoidance of double recovery in fact; it extends to heads of loss which the company could have claimed but has chosen not to and therefore includes the case where the company has settled for less than it might ...; (5) provided the loss claimed by the shareholder is merely reflective of the company’s loss and provided the defendant wrongdoer owed duties both to the company and to the shareholder, it is irrelevant that the duties so owed may be different in content.”
[38]By contrast with Johnson v Gore Wood the critical point in Giles v Rhind was, as Waller LJ put it at [28], that the company was disabled from bringing the claim by the very wrongdoing which the defendant had by contract promised him, as a shareholder, and the company that he would not carry out. That is not so here because, as explained above, SCYL has brought proceedings and there was nothing to prevent the liquidator from pursuing its claims. The same is true of the pension fund, which, again as explained above, has proceedings on foot. There is, in any event, no equivalent to Giles v Rhind, and no basis for one, in relation to proceedings by the trustees of the pension fund.[39]As already mentioned, the claim is for the loss of a chance, namely that of recovering substantial sums against Walker Morris if the action brought against them had been able to be taken to trial. The claimant has to show that he has lost a more than negligible chance of recovery, and the court has then to assess the value of the chance lost, by reference to the value of the claim, discounted for the prospects of success or failure. The schedule of loss is put on the basis that the trial would have been in May 2002. Mr Flenley therefore submits that one has to look back to that time and to assess how the case would have been approached in practice, whatever may be the court’s present view of the relevant issues of law. In support of that he cited Cohen v Kingsley Napley [2006] EWCA Civ 66. In principle that is a fair comment, but in practice it seems to us that it does not make any difference in the present case. The only development in the relevant law subsequent to May 2002 is the decision of this court in Giles v Rhind, given in October 2002. If that had been relevant (contrary to our view, as we will explain later) it might have favoured the claimant. However, the essential principles as regards the right to recover loss had been established long before 2002. In the company field, Prudential Assurance v Newman Industries makes the position clear, and Johnson v Gore Wood (decided in 2000) would have been available to the judge hearing the hypothetical trial, and to the parties’ lawyers preparing for it, in any event. As regards claims for the benefit of a trust, equally the position was clear long before 2002. Accordingly, it does not seem that any allowance should be made, on the main points at issue on this appeal, for the fact that what is at issue is the indirect question of the loss of a chance of recovery against Walker Morris, rather than the direct question of such recovery which would have arisen in proceedings against them. It should be assumed that these points would have been taken on behalf of Walker Morris.[40]We turn to the heads of claim as they stand at present. In considering them, save where necessary, we will not further trace their history. It is convenient to discuss them by reference to the categories in Appendix B, which was prepared by Mr Flenley.

Category (i)

[41]There is no dispute about these heads of claim. The defendants concede that the claimant can pursue them.

Category (ii)

[42]These are losses which were incurred by SCYL and are therefore in principle recoverable (if at all) by SCYL and not the claimant. The claimant accepts that they amount to SCYL’s loss and not the loss of the claimant. As stated in Appendix B, that was subject to the extent of the exception in Giles v Rhind. However, in the light of Appendix B, on 12 May the court sent a request to counsel inviting further written submissions on the question whether the damages claimed within category (ii) are reflective loss as opposed to loss for which SCYL (or a shareholder on its behalf in a derivative action) could sue. The court added the provisional view that it would seem that a mere claim for SCYL’s loss cannot be reflective loss within the principle in Giles v Rhind. That is because, as we understand it, reflective loss is loss sustained by the shareholder which reflects the company’s loss. If the exception in Giles v Rhind applies, it applies to such loss, not to the company’s loss itself.[43]Counsel for both parties made further written submissions. In the course of them Mr Flenley properly accepted on behalf of the claimant that he can claim the losses pleaded in category (ii) only to the extent that they would have reduced the dividends which, absent the negligence of Walker Morris, he would have received from SCYL in his capacity as shareholder. He therefore accepted that, to that limited extent, the claimant’s case must be reformulated. The claimant’s case is, or ought to be, for a loss of dividends which SCYL would have paid him in the absence of negligence. It should not be for SCYL’s losses pure and simple.[44]In our judgment, this concession was properly made by Mr Flenley. As Mr McPherson put it, the category (ii) losses are not properly to be viewed as reflective losses. They are not losses suffered by the claimant which reflect losses suffered by SCYL; they are losses suffered by SCYL itself for which SCYL and/or a shareholder suing on behalf of SCYL in a derivative action (and only they) could have sued. Moreover, as Mr Flenley recognises in his further submissions, in Giles v Rhind the claimant claimed for the loss of the value of his shares in the company, not as in the present case, at any rate under category (ii), payments made by SCYL, SCYL’s future profits or SCYL’s indebtedness. It follows from this that the judge’s approach to the category (ii) losses is unsound because he treated SCYL’s losses as within the exception in Giles v Rhind, whereas for the reasons we have given they are not.[45]Despite Mr Flenley’s proposed reformulation of the claim in respect of the category (ii) losses, it seems to us clear that the claimant cannot assert a claim for these losses, however it is put. The losses said to have been caused by Walker Morris’ negligence are losses suffered by SCYL, whether direct or consequential. If SCYL had not suffered those losses, or if they had been made good, then the claimant would not have suffered the indirect losses which he now asserts, whether as loss of dividends or otherwise. What is pleaded in the schedule of loss is SCYL’s loss; what is asserted now is reflective loss.[46]Nor can a claim for reflective loss be saved by reference to Giles v Rhind. The facts of this case have nothing relevant in common with the facts of that case, where the company had tried to sue the wrongdoer, and had been prevented from doing so because of the wrongdoer’s successful stifling of the action by an order for security for costs. In that case there was a direct relationship between the acts of the wrongdoer (quite possibly including his original wrong) and the inability of the company to recover from him. In the present case not only did SCYL have a counterclaim against Walker Morris at one stage, but it could have mounted such a claim later acting by its liquidator, or such a claim could have been asserted by an assignee from the liquidator. The fact that the claimant was not able to pursue litigation in 1998 which he can now is not sufficient to bring the case within the Giles v Rhind exception. For those reasons, the losses claimed under category (ii) ought not to have been allowed to be claimed by amendment, whether as originally formulated, or in Mr Flenley’s proposed new version of the claim.

Category (iii)

[47]As we see it, the same is true of the pension fund’s payment to the project of £428,000 and the pension fund’s unquantified costs of the sales referred to in Section G in Appendix A and category (iii) in Appendix B.[48]The judge’s approach to the investment of £428,000 was the subject of a direction given by Longmore LJ when he gave permission to appeal. He directed Sandersons to serve a note explaining what the amendment was for which the judge refused permission at [71] of his judgment, which was not reflected in his order. At [71] the judge said that it was clear that the pension fund could have commenced an action against Walker Morris at any time after 1 February 1995 and against Sandersons at any time after 31 May 2001. It followed that the claim for £428,000 was a pension fund claim and that the claimant had no real prospect of success. He added that there was no evidence that the pension fund was disabled from bringing proceedings against Walker Morris by reason of any of the alleged breaches of duty and he therefore refused permission to amend.[49]In the note requested by Longmore LJ Mr McPherson explained the position in this way. The hearing of the application before the judge was on 11 September 2008. When the judge circulated his draft judgment on 4 December 2008 he invited the claimant to redraft the amended particulars of claim to reflect the permission which had been granted. On 16 December 2008 the claimant provided the defendants with a revised version of the draft amended particulars of claim and schedule of loss. The revisions included revisions to paragraphs 10 and 38 of the draft schedule of loss to read as follows:
“10. As a result of having made the payments referred to in paragraph 7 of the Schedule, the pension fund’s ability to make pension payments to the claimant was reduced. The claimant claims damages for the extent to which loss of the said sum of £428,200 resulted in diminution in the value of the pension fund available to the claimant personally. Similarly the claimant claims damages in respect of the matters pleaded at section G of this Schedule to the extent that they resulted in a diminution of the value of the pension fund available to the claimant personally. 38. At trial in May 2002 the claimant would have been entitled to compensation to the extent that the payments totalling £428,200 resulted in a diminution of the value of the pension fund available to the claimant personally. Further the claimant would have been entitled to claim the payments totalling £67,847.66 as damages to which [the Company] was entitled.”
[50]On the defendants’ behalf, the making of these amendments was resisted before the judge, but the judge considered that the change of pleading brought the claim within paragraph [57] of his judgment. He therefore gave permission to make these amendments.[51]In paragraphs 39 and 40 of the schedule of loss, the claimant complains of two consequential items of loss to the pension fund. In those respects he alleges that he would have been entitled at trial to an order that Walker Morris repay the sums in question to the pension fund. That would have been an orthodox claim, if the trustees of the pension fund had been parties to the proceedings. It is the claim that the trustees would pursue in their own proceedings, though of course an order for payment to them, suing in their capacity as trustees, would itself amount to making compensation to the trust fund directly.[52]It seems to us that the claimant cannot sidestep the need for a claim in respect of this loss to be brought by the trustees of the pension fund. Insofar as he would claim indirectly the loss of the pension payments that he would otherwise have received, that is only a reflection of the sums which he says were lost by the pension fund trustees as such by reason of Walker Morris’ negligence. It is for the trustees to pursue for the benefit of the trust fund any claim to which they may be entitled. They have done so by the proceedings commenced in November 2007. That is the proper forum in which any issues arising on that claim should be determined. The judge should not have permitted the schedule of loss to include any of these aspects of the alleged loss. His first thoughts were correct on this aspect of the case.

Category (iv)

[53]The claims in this category are said to represent losses suffered by the claimant because of SCYL’s collapse. In paragraph 41 of the schedule of loss he claims his lost income from SCYL (which had been, he says, at a rate between £120,000 and £300,000 per year) because the collapse of SCYL meant that he lost his employment and could not find alternative employment. It may be argued that this falls within the rule about reflective loss, as summarised by Neuberger LJ in Gardner v Parker, in the proposition (3) quoted at paragraph [37] above. It seems to us that the issue on this may be one of remoteness, rather than of capacity to sue. The claimant sues in respect of Walker Morris’ duty of care to him personally; the question will be whether it is within the rules as regards remoteness of damage as regards that claim for him to be able to recover anything, and if so what, in respect of this head of loss. We do not regard it as right to disallow this amendment, bearing in mind that doubts should be resolved in favour of the claimant on a striking out (which, in effect, is what this is).[54]In paragraphs 75 and 77 the claimant refers to his personal guarantee to the bank of SCYL’s indebtedness, and his liability on that guarantee for SCYL’s debts which are said to amount to £6 to £7 million. It is the counterpart of SCYL’s claim which is item 15 in Appendix B. It is not recoverable by the claimant under this heading. If SCYL had sued, or had been able to sue, to recover this sum, directly from Walker Morris or indirectly from Sandersons, then the claimant’s liability on his guarantee would be to that extent reduced. This seems to us to show that this head of loss on his part is purely reflective of SCYL’s loss.

Conclusion

[55]Thus, we allow the appeal to the extent of limiting the amendments of the schedule of loss permitted by the judge to(a) the items in category (i), and(b) the claim for lost income in category (iv). Appendix A SUMMARY OF CLAIMS (prepared by Mr McPherson QC) Section A Payments made as investments in the Global Coal project 56. By Webster £172,564.38 57. By Company £813,966.52 58. By Pension Fund £428,200.00 59. All plus interest from date of relevant payments in 1993/1994 to notional trial in May 2002 at base + 1% 60. Section B Payments made to Cramer By Company £67,314.76 Plus interest from date of relevant payments in 1993/1994 to notional trial in May 2002 at base + 1% 61. Section C Payments made to Micallef By Company £11,895.00 Plus interest from date of relevant payments in 1994 to notional trial in May 2002 at base + 1% 62. By Company £40,370.50 & £35,870.50 63. Plus interest from date of relevant payments in 1993/1994 to notional trial in May 2002 at base + 1% 64. Section E Interest payments made to Anthony Clarke By Webster £33,485.50 Plus further unparticularised sum Plus interest from date of relevant payments in 1994/1995 to notional trial in May 2002 at base + 1% 65. Section F Payments of fees to Walker Morris By Company £8,690.52 Plus interest from date of relevant payments in 1993/1994 to notional trial in May 2002 at base + 1% 66. Section G Interest payments made to Helmsley Acceptances By Company £67,847.66 Costs incurred in selling property at 111-113 New Road Side & cost of mortgage over Sterling House By Pension Fund Unquantified 67. Section H Income lost as a result of loss of employment by Company By Webster £120,000-£300,000 pa for an unparticularised no of years Plus interest from dates on which income would have been paid to notional trial in May 2002 at base + 1% 68. Section I Profit lost on 5 property transactions By Company £17,919,650, alternatively unquantified Plus interest from dates on which profits would have been received to notional trial in May 2002 at base + 1% Section J Liability for increased indebtedness of the Company and Webster 69. By Company and Webster ‘£6m or £7m’ Section K Fees paid to Argen Investments and legal fees 70. By Webster £9,612.50 71. Plus interest from dates on which profits would have been received to notional trial in May 2002 at base + 1% 72. By Webster Unquantified Appendix B SUMMARY OF CLAIMS 73. This summary was prepared on behalf of the claimant in order to demonstrate, for the purposes of the appeal, how much loss is claimed in the following categories: (i). sums which the defendant accepts amount to personal loss of the claimant; (ii). sums which the claimant accepts amount to the company’s loss subject to the application of the principle in Giles v Rhind; (iii). sums which the claimant accepts amount to the pension fund’s loss subject to the application of Johnson v Gore Wood; (iv). sums in relation to which there is a dispute as to whether they amount to the claimant’s personal loss or the company’s loss. 78. The figures are taken from the Amended Schedule of Loss (‘ASL’) at [A8/102]. 79. Category (i): Sums which the Defendant Accepts amount in principle to personal loss of the Claimant Since the defendant has not yet served a defence, it has not yet pleaded as to whether it accepts that the claimant in fact paid the sums or incurred the liability referred to here. - (Sections A, E and K in Appendix A). Item Description Source in ASL Amount (£) 1. Claimant’s personal payments to the Project Para 6 172,564.38 2. Claimant’s interest payments for loan from A. Clarke (plus unparticularised sum of unpaid interest). Para 29 33,485.50 3. Claimant’s payment to fraud investigators Argen Investigations. Para 79 9,612.50 Total 206,049.88 In addition, the claimant claims interest at 1% over base rate from the dates of payment of these sums until the notional trial of the Walker Morris action, and interest from then until trial in the present action. Category (ii): Sums which Claimant accepts amount to the company’s loss, subject to the application of Giles v Rhind. 80. A/ Basic losses – (Sections A, B, C, D, F and G in Appendix A). Item Description Source in ASL Amount (£) 4. Company’s payments to the project Para 8 813,996.52 5. Company’s payments to Peter Cramer Para 14 67,314.76 6. Company’s payments to Dr Anton Micallef Para 19 11,895.00 7. Company’s payments to Aston Rothbury & Co Ltd Para 24 40,370.50 8. Company’s payments to Walker Morris Para 31 2,164.57 6,525.95 9. Company’s interest payments for pension fund’s loan from Helmsley Acceptances Ltd Paras 37, 38 67,847.66 Total 1,010,114.96 In addition, the claimant claims interest at 1% over base rate from the dates of payment of these sums until the notional trial of the Walker Morris action, and interest from then until trial in the present action. 81. B/Lost profit of the company – (Section I of Appendix A) Item Description Source in ASL Amount (£) 10. The Collingham development site Para.49 6,218,000 11. The Scissett development site Para.55 2,646,150 12. The Keighley development site Para.60 1,925,000 13. The Wakefield development site Para.68 7,025,500 14. The Bramhope development site Para.73 105,000 Total 17,919,650 In addition, the claimant claims interest at 1% over base rate until trial against Walker Morris in relation to each of these heads of loss save the Bramhope site; in relation to the Bramhope site he accepts that any award of damages would have been discounted for early receipt (ASL para.73). 82. C/Indebtedness of the company – (Section J of Appendix A) Item Description Source in ASL Amount (£) 15. The interest element of the company’s indebtedness to National Westminster Bank Para.77 An unparticularised proportion of 6,000,000 to 7,000,000. Total of particularised elements of category (ii) £18,929,764.96. Category (iii) Sums claimed which the Claimant accepts derive from payments made by the pension fund – (Sections A and G of Appendix A). 83. The claimant’s claim is for the extent to which these payments resulted in a diminution in the value of the pension fund available to the claimant personally: ASL para 10, which in terms applies to both para.7 and section G of the ASL. Item Description Source in ASL Amount (£) 16. Pension fund’s payment to the project Para 7 428,200.00 17. Pension fund’s costs of sale of 111-113 New Road Side, Horsforth, Leeds Para 39 Unquantified 18. Pension fund’s costs of sale of Sterling House, Kirkgate, Otley Para 40 Unquantified. Total so far quantified 428,200.00 This figure shows only payments made by the pension fund and not their effect in diminishing the value of the claimant’s pension. By paragraph 2 of his order dated 6 January 2008, Deputy Judge Allen QC ordered the claimant to serve particulars of the loss claimed in respect of reduced pension payments to himself by 4pm on 6 March 2009. In light of the appeal, the parties agreed that time for compliance with that order be extended until after the result of the appeal is known. 84. Category (iv) Sums in relation to which there is a dispute as to whether they amount to personal loss of the Claimant or the company’s loss – (Section H and J of Appendix A). Item Description Source in ASL Amount (£) 19. Claimant’s lost income from the company as a result of termination of his employment with the company due to the collapse of the company. Para 41 Of the order of 120,000 to 300,000 per annum 20. Claimant’s liability, pursuant to a personal guarantee, to the interest on the company’s debt to National Westminster Bank. Paras 75, 77 An unparticularised proportion of the total figure of 6,000,000 to 7,000,000

Cited in 13 later judgments

and 4 more of the most senior