The rule against reflective loss and the extent to which a shareholder could sue for loss primarily suffered by and primarily belonging to a company did not extend to loss suffered by holders of a debenture.

Edward Bartley Jones QC, sitting as a deputy judge of the High Court, so held in the Chancery Division when allowing an appeal against a decision of District Judge Giles on 27 July 2011 striking out the claim of the second claimant, Citibid Securities Ltd, a debenture holder of the first claimant, International Leisure Ltd, in an action against the defendants, First National Trustee Co UK Ltd, First National Trustee Co Ltd, Maidment Judd (sued as a firm) and Anthony Kent, a partner in the third defendant. The district judge had ruled that losses claimed by the second claimant as a debenture holder were merely reflective of the losses suffered by the first claimant and therefore offended against the rule against reflective loss. The claims against the first two defendants had been previously settled by a consent order and those defendants took no part in the present proceedings.

EDWARD BARTLEY JONES QC said that the first claimant provided security by way of a debenture to the second claimant for all monies due by it to the second claimant. The appeal raised issues as to the ambit and limits of the rule against reflective loss as discussed in Johnson v Gore Wood & Co [2002] 2 AC 1. The issue was whether the rule barred a secured creditor of a company who had suffered loss due to breaches of duties owed by a defendant, in this instance the actions of the fourth defendant as the receiver of the first claimant, to both the secured creditor and the company from recovering that loss because the company was also entitled to recover the loss. The issue of whether a claim was barred because it was for reflective loss was an issue of principle, not discretion: per Lord Millett in Johnson v Gore Wood & Co [2002] 2 AC 1, 62. The issue in the present case was whether the rule on reflective loss extended to claims by debenture holders in circumstances such as those in the present proceedings. His Lordship noted that the primary duty of an administrative receiver was to a debenture holder and not to the company in administration: see In re Johnson & Co (Builders) Ltd [1955] Ch 634, 661–663; Downsview Nominees Ltd v First City Corpn Ltd [1993] 295, 313–314 and Medforth v Blake [2000] Ch 86, 102. In addition, it was crystal clear that the receiver owed no duties to a company’s unsecured creditors: see Lathia v Dronsfield Bros Ltd [1987] BCLC 321. There was nothing in Johnson’s case that required an extension of the no reflective loss principle to circumstances such as the present. There was a fundamental distinction to be drawn between the facts and circumstances in that case and in the present case. The issue in Johnson’s case was the extent to which, if at all, a shareholder could sue for loss primarily suffered by, and primarily belonging to, the company. There was nothing in that case to compel an extension of the principle to the loss of the debenture holder and the debenture holder was the person to whom the primary duties were owed. Also, issues of causation did not apply. The second claimant as debenture holder chose to exercise its remedies in circumstances where the primary duties were owed to it and it had the primary entitlement to the loss. It also seemed that policy considerations indicated that the rule against reflective loss should not apply to claims by a secured creditor. If the rule did apply then the person who had the benefit of the primary duty, and had the primary entitlement to the loss, was being disabled from pursuing his claims directly and under his own control. His Lordship failed to see how allowing the second claimant’s claims to continue infringed the principle of company autonomy or prejudiced the creditors of the company in any way. Nor in any meaningful way did such a course result in a party recovering compensation for a loss that another party had suffered. However, as long as the court was astute to ensure that the party that had suffered loss was not arbitrarily denied fair compensation, there was a mandate for not striking out the second claimant’s claims as the debenture holder. There were fundamental distinctions between the position of an unsecured creditor and a secured creditor. No duty was owed by the receiver to the unsecured creditor and the unsecured creditor had no primary entitlement to the claimed loss. The unsecured creditor’s prejudice arose only through the depletion of the company and not, as in the present case, where the secured creditor had the primary entitlement to obtain and retain all damages awarded for the breaches of duty. Therefore, the rule against reflective loss did not apply to the second claimant’s claims and the appeal was allowed.