Shaker v Al-Bedrawi (Shaker v Masry, Shaker v Steggles Palmer)

The rule against reflective loss does not bar a beneficiary’s claim against a trustee for profits derived from shares held in trust unless the defendant establishes that the whole profit reflects a loss which the company has an available cause of action to recover. The rule is exclusionary, so its applicability must be proved by the defendant.

A court should not use the absence of foreign-law evidence automatically to apply a domestic statutory regime which is confined to locally registered companies. Particular caution is required where that course would determine a preliminary issue and impose an absolute bar to an otherwise viable claim.

The claimant invested through a corporate vehicle whose shares were found to be held for him and another beneficiary. He alleged that the trustee, who controlled the company, secretly diverted part of the proceeds from a sale of its businesses. He sought an account and relief against the trustee and solicitors alleged to have assisted, received funds or made a deceitful statement.

Lawrence Collins J determined as a preliminary issue that the rule against reflective loss precluded all three actions. The claimant appealed, contending that at least some of the money might have been lawfully extracted from the company and therefore constituted a profit for which the trustee remained accountable. The central issue was whether the reflective-loss rule barred the claims before the legality of the extraction and the company’s corresponding rights had been tried.

1. Appeal allowed. Peter Gibson LJ delivered the judgment of the court. The rule in Prudential Assurance v Newman Industries (No 2), as explained in Johnson v Gore Wood & Co, did not preclude the claimant from pursuing the trustee or the solicitors.

2. A trustee holding shares for a beneficiary must account for a profit derived from those shares to the extent that the profit was obtained without breach of a duty owed to the company. If, however, the money was misappropriated from the company or unlawfully distributed, the company would have the prior claim and the reflective-loss rule would bar the beneficiary’s overlapping claim. Different causes of action would not prevent the rule from applying where the substance of the beneficiary’s claim reflected the company’s recoverable loss.

3. The reflective-loss rule is exclusionary. The defendants therefore had to establish both that the whole claimed profit reflected the company’s loss and that the company had an available cause of action on the assumed facts. They could not do so on this preliminary issue. It remained possible that part of the money had been extracted lawfully as a distribution of profits, repayment of debt or remuneration.

4. The judge should not have applied Part VIII of the Companies Act 1985 to the Pennsylvania company. That Part applied only to companies registered under the Companies Acts and contained requirements derived from a European harmonisation regime directed principally to public companies. On the limited material before the court, its relevant-accounts requirement could not be treated as a generally applicable rule governing the foreign private company.

5. The same unresolved issue governed the dishonest-assistance and knowing-receipt claims against the solicitors. Only the claimant could sue upon the alleged deceit, although the resulting loss might still be reflective if the relevant funds had been unlawfully extracted. None of those claims could yet be barred.

6. The court exercised its discretion to permit the claimant’s new legal formulation because it was substantially foreshadowed by the pleadings and required no further evidence. It nevertheless refused fresh expert evidence of Pennsylvania law. The first condition in Ladd v Marshall was unsatisfied because reasonable diligence could have obtained that evidence for the trial.

1. Court of Appeal: Allowed the claimant’s appeal from the determination of the preliminary issue. The claims against the trustee and solicitors were not barred at that stage by the reflective-loss principle. The application to adduce fresh evidence was refused.
2. High Court, Chancery Division: Lawrence Collins J held on 26 July 2001 that the principle against reflective loss precluded the claimant from proceeding against any defendant in relation to the sale proceeds.