Ellis & Anor v Property Leeds (UK) Ltd.

A shareholder, director or beneficiary cannot recover loss which merely reflects loss suffered by a company where the company has its own cause of action. The claim remains with the company, even if the company has failed to sue or recovery against it would be fruitless. If the company has no cause of action, the individual may sue only where the individual has an independent cause of action. Summary judgment is appropriate where the pleaded case and evidence show no real prospect of establishing that the company lacked a cause of action or that the relevant representation was made to the individual personally.

Norman Barry Ellis and David Clayton brought consolidated claims against Property Leeds (UK) Ltd for alleged fraudulent and negligent misrepresentations by its surveyor concerning the value and development prospects of a property site.

They claimed losses arising from the collapse of companies through which the acquisition and development had been undertaken, loans made to those companies, and personal guarantees. Rougier J granted summary judgment on the claims relating to the companies’ losses, holding that those losses were merely reflective of losses suffered by the companies, which had their own possible claims. The claimants appealed. The central issue was whether they had a real prospect of showing that the companies had no cause of action against the respondent and that the misrepresentations were made to them in their personal capacities.

1. The appeals were dismissed. Mantell LJ delivered the principal judgment. Peter Gibson LJ agreed, and Wall J agreed with both judgments.
2. The rule against recovery for reflective loss, reaffirmed and explained in Johnson v Gore Wood & Co. (a firm) [2001] 2 WLR 72, applied. Where a company suffers loss caused by breach of duty owed to it, only the company may sue for that loss. A shareholder, director or beneficiary cannot recover a diminution in the value of an interest which merely reflects the company’s loss.
3. The analysis is not confined to diminution in share value. It extends to other payments or benefits which the individual would have received from company funds. The policy is to prevent double recovery and conflicting claims. The individual cannot recover merely because the company has chosen not to sue, has settled, or has become insolvent.
4. Even where the company has no cause of action, the individual must establish an independent cause of action. The alternative limb of the rule does not itself create a personal right to sue.
5. On the material before the court, Cross Lane Construction Ltd had a cause of action because it purchased the site and was the recipient of the re-addressed invoice. The valuation, correspondence, pleadings and surrounding circumstances also showed a real prospect that the other companies in the informal group had sufficient involvement to have claims. The references to “Messrs Cross Lane Group” and to the business park did not establish that the valuation was addressed to Ellis and Clayton personally.
6. The claimants acted through the companies as their directors. Their alleged losses therefore reflected the companies’ losses. The trust-beneficiary issue was not decided because the point had not apparently been pleaded or argued below.

• Court of Appeal (Civil Division): Appeals dismissed. The court upheld Rougier J’s summary judgment on the claims for losses reflecting losses suffered by the companies.
• High Court, Queen’s Bench Division: Rougier J granted summary judgment on the greater part of the claims on 21 June 2001.