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Dispute Resolution analysis: This case is of interest since the court reached the conclusion that the reflective loss principle does not apply in respect of losses claimed by parties who are not shareholders at the time the claim was issued.
This case placed an important limitation on the exclusionary principle of reflective loss by confirming that it does not apply in respect of losses claimed by parties who are not shareholders at the time the claim was issued. It had been argued by the defendant that allowing former shareholders to claim for reflective loss left open the possibility that parties could deliberately circumvent the principle by divesting themselves of their shares before issuing the claim. The defendant also raised a concern that it could lead to double jeopardy, with claims being brought both by the company and by a former shareholder. Neither argument persuaded the judge in this case.
This was a consequential hearing following judgment given by Sir Michael Burton in UCP’s favour against Nectrus at a trial in May 2019 (judgment given in July 2019, see: UCP plc v Nectrus Ltd  EWHC 1732 (Comm)). The claim concerned alleged breaches of an Investment Management
Agreement. At trial, counsel for Nectrus sought to raise an argument that a significant portion of the sums claims could not be recovered as such recovery was precluded by the rule against reflective loss. This was not pleaded, however, the trial judge permitted a late amendment to the defence and consequently split the trial between liability and quantum. The issues relating to reflective loss were, therefore, deferred to this quantum hearing.
Counsel for the claimant put forward three propositions in relation to reflective loss, arguing that if any one of those propositions was not satisfied, the reflective loss defence would not be established:
Although there was a dispute about the submissions made on the facts, the second and third propositions were not disputed by the defendant. The first proposition, insofar as it purported to state the current law on reflective loss, was disputed.
The claimant submitted in relation to the first proposition that the principle against reflective loss could not apply to a former shareholder but only to a person whose loss can be made good upon the company being reimbursed in respect of its loss. Sir Michael Burton agreed with the claimant, saying ‘I consider that Lord Bingham’s [in Johnson v Gore Wood  2 AC 1,  1 All ER 481] astuteness to avoid arbitrary denial of fair compensation would apply to restrain an extension of what is a strict and inflexible rule. I would not extend it to cover an ex-shareholder. In my judgment, a claimant who is no longer a shareholder at the time of his claim is not bound by the reflective loss principle’. Such a person’s loss could not be made good upon the company being reimbursed for its loss.
• Court: Commercial Court
• Judge: Sir Michael Burton GBE
• Date of judgment: 29 November 2019
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