Reflective loss rule limits success for shareholder’s claim

Rawnsley and The Canal Dyeing Company (in liquidation) v Weatherall Green & Smith North and O'Hara (as liquidator of Canal Dyeing Company)

(High Court of Justice – Chancery Division — 30 September 2009)

The defendants were sued for misfeasance (improper performance of statutory duties) and negligence arising out of the voluntary liquidation of The Canal Dyeing Company. Mr Rawnsley was a former director, shareholder and creditor of CDC.

The principal allegation was that CDC's main asset — the property — had been sold by the liquidator Mr O'Hara at a significant undervalue, resulting from Weatherall Green & Smith North's negligent valuation and Mr O'Hara's failure to market it. Mr O'Hara was also sued for failing to pursue Weatherall for negligence.

The defendants applied to strike out the claim and avoid trial. CDC's claims were struck out for want of prosecution, as it had done nothing to pursue the claim other than issue proceedings. Mr Rawnsley's claims brought as a shareholder were struck out owing to the rule against reflective loss. Reflective loss occurs where loss is suffered by both company and shareholder but the shareholder's loss (which is almost always reduction in share value) would be remedied if the company took action against the wrongdoer. In such cases the shareholder is precluded from bringing a claim, regardless of whether or not the company takes any action itself.

However, Mr Rawnsley's claims brought as creditor were allowed to proceed. It was held that Mr O'Hara's failure to market the property could amount to breach of duty and was not suitable for summary determination, particularly considering the sale price obtained of £400 000 and the offer of £1.75m only eight months later which demonstrated arguable issues on causation and loss. The claim against Mr O'Hara for failure to pursue Weatherall for negligence was also arguable.

Mr Rawnsley's claim against Weatherall (which had been assigned to him from CDC) also survived. Weatherall argued that its negligent valuation (if proved) had no causative effect in view of Mr O'Hara's failure to market the property, but His Honour Judge Behrens considered that, while this may be correct, it was not appropriate for this issue to be decided without a full trial.

Comment

Claims brought by shareholders should be examined to determine whether the claim is effectively in respect of reflective loss. There are very few exceptions to the rule against reflective loss, so an application for strike out/summary judgment should be considered in every case. Michael Bluthner Speight, BLM Manchester

The following law report contributed by specialist insurance practice Berrymans Lace Mawer (www.blm-law.com) first appeared in Post Magazine on 12 November 2009

Disclaimer: The law report contains information of general interest about current legal issues, it does not present a complete or comprehensive statement of the law, nor does it constitute legal advice. Specialist legal advice should always be sought in any particular case.