Giles v Rhind

The no-reflective-loss principle is not a blanket bar to a shareholder’s personal contractual claim. It prevents recovery of loss that merely reflects loss suffered by the company where the company has its own effective cause of action. It does not necessarily apply where the wrongdoer’s conduct has disabled the company from pursuing its remedy. A shareholder may also recover separate personal loss caused by breach of an independent duty, including loss arising from termination of employment or destruction of the value of an investment. At a preliminary strike-out stage, the claim should proceed unless it is clear that no pleaded head can succeed. Questions of causation, remoteness, quantification and double recovery ordinarily require evidence.

Edward Giles and Roderick Rhind were directors and shareholders of Surrey Hills Foods Ltd. They entered into a shareholders’ agreement containing mutual confidentiality obligations. Rhind breached those obligations by diverting a major customer’s business, contributing to the collapse of the company.

The company commenced proceedings but discontinued them after becoming unable to provide security for costs. Giles then pursued personal claims for lost remuneration, employment benefits, loan interest and the lost value of his shares and loan stock. Liability had been established, but damages had not been assessed.

On a preliminary issue, Blackburne J held that all heads of loss were irrecoverable under Johnson v Gore Wood & Co [2002] 2 AC 1. The central questions were whether the no-reflective-loss principle applied where the wrongdoing had disabled the company from pursuing its claim, and whether the claimed employment benefits were reflective of the company’s loss.

1. Appeal allowed unanimously. Waller LJ, Chadwick LJ and Keene LJ held that the preliminary issue had been decided too broadly. The court was concerned only with whether the claims were plainly incapable of succeeding. The questions of causation, remoteness and quantification required evidence and could not properly be resolved at that stage.
2. The ordinary no-reflective-loss principle, derived from Johnson v Gore Wood & Co [2002] 2 AC 1, prevents a shareholder recovering loss which merely reflects loss suffered by the company where the company has its own cause of action. The principle protects company autonomy, creditors and other shareholders, and prevents double recovery.
3. The principle did not compel dismissal here. Johnson concerned a company which had pursued and compromised its claim. It did not decide whether the principle applied where the wrongdoer’s conduct had caused the company to become unable to pursue its remedy. It was necessary to determine at trial whether Rhind’s breach caused the company’s inability to continue its proceedings, or whether the company’s discontinuance constituted a new independent cause.
4. Waller LJ considered that the loss of the shares was not necessarily merely reflective. The destruction of the business could have caused a distinct personal loss which would remain even if the company recovered damages for the diverted contract. Giles was therefore entitled to pursue that head, subject to proof and the avoidance of double recovery.
5. Chadwick LJ distinguished accrued remuneration from future benefits. Accrued remuneration could reflect the company’s inability to pay its debts. Future remuneration and employment benefits, however, flowed from the termination of Giles’s employment after the destruction of the business and would not be compensated by damages recovered by the company. Those claims were not barred as reflective loss.
6. All heads of claim were allowed to proceed to assessment. The court did not determine the amount recoverable or whether each head would ultimately be established.

• Court of Appeal: The appeal was allowed unanimously. The Court held that the claims should not have been struck out at the preliminary stage under Johnson v Gore Wood & Co [2002] 2 AC 1.
• High Court, Chancery Division: Blackburne J held on 24 July 2001 that none of Giles’s heads of loss was recoverable and granted permission to appeal.
• Earlier proceedings: Liability for breach of the confidentiality obligations had been established by a deputy High Court judge. Assessment of damages was left outstanding.