Stein v Blake

A shareholder cannot personally recover a loss that is merely the diminution in share value caused by misappropriation or other loss to the company. The company’s recovery restores the share value, and personal recovery would duplicate the company’s claim. A personal claim may arise where the wrong directly induces or compels the shareholder to dispose of shares at an undervalue, because that loss is distinct and the company may have suffered no loss. Here, the plaintiff retained his shares and pleaded only loss reflected in the companies’ losses. The claim was therefore properly struck out. Leave to appeal was set aside because the decisive point was short and could be disposed of without a further appeal hearing.

The plaintiff appealed from an order of Sir John Vinelott in the High Court, which struck out the writ and statement of claim and dismissed the action. He alleged that the first defendant had misappropriated assets from companies in which they were equal shareholders and sought personal damages, an account and related relief. The companies were not parties, and most were in insolvent liquidation.

The central questions were whether the plaintiff had suffered a separate personal loss, rather than a loss reflecting loss to the companies, and whether leave to appeal should be set aside.

1. Disposition. The defendants’ application was allowed. Leave to appeal was set aside, with costs, and an order nisi was made against the Legal Aid Board.
2. Reflective loss. Millett LJ, whose judgment was agreed by Mummery LJ and Woolf LJ, held that a shareholder cannot recover personally for a diminution in the value of shares which merely reflects loss suffered by the company. The proper claimant is the company, or a shareholder bringing a derivative action on the company’s behalf where that procedure is available. Personal recovery would risk double recovery and, in this case, prejudice the company’s creditors. The Court followed Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204.
3. Separate shareholder loss. A shareholder may have a personal claim where the defendant’s wrong directly induces or compels the shareholder to dispose of shares at an undervalue. That loss is distinct from any loss to the company, and recovery by the company would not compensate the former shareholder. The Court distinguished Heron International v Lord Grade [1983] BCLC 244 because it concerned that separate form of loss, while the company’s assets remained unaffected.
4. Application to the pleading. The plaintiff still held his shares. The pleaded wrongdoing was misappropriation of corporate assets, and the only alleged personal loss was the resulting diminution in share value. No separate loss was pleaded. The High Court was therefore plainly right to strike out the statement of claim, and the proposed appeal was hopeless.
5. Set-aside procedure. Woolf LJ added concurring procedural guidance, referring to Smith v Cosworth (26 February 1997). A respondent bears a heavy onus when seeking to set aside leave, and the better course ordinarily is to seek directions isolating a decisive issue or providing for a split hearing. This case was exceptional because the point was short, decisive and capable of disposal without another hearing.

• Court of Appeal: Aldous and Judge LJJ granted renewed leave ex parte on 4 July 1997 without reasons. The present court set aside that leave and awarded costs.
• Court of Appeal: Peter Gibson LJ had refused leave on 29 May 1997.
• High Court, Chancery Division: Sir John Vinelott decided that the action was improperly constituted, struck out the writ and statement of claim, dismissed the action and refused leave to appeal.