Gardner v Parker

The rule against reflective loss bars recovery of loss which would be made good if the company enforced its own rights against the wrongdoer. It applies even where the claimant and company have separate duties, and the claim is framed in fiduciary or equitable terms. The rule concerns the character of the loss, not the cause of action or remedy. It extends beyond share-value and dividend claims to other payments or debts reflecting the company’s loss. The narrow Giles exception requires proof that the wrongdoer disabled the company from pursuing its claim; non-action, settlement, receivership or a generous release is insufficient by itself. A minority holding did not avoid the rule. The appeal was dismissed.

Barclays Development Corporation plc held shares in, and a substantial loan claim against, Scoutvale Limited. Parker controlled both companies and was alleged to have procured Scoutvale’s transfer of a valuable asset to a company in which he was interested at a substantial undervalue. BDC assigned its rights of action to Gardner, who claimed damages from Parker. Blackburne J held that the pleaded conduct could constitute a breach of Parker’s fiduciary duty to BDC, but that the claimed losses were barred by reflective loss. The appeal challenged that conclusion, including in relation to an independent fiduciary duty, a settlement releasing Parker, and BDC’s creditor claim for the loan.

Disposition. Lord Justice Neuberger gave the leading judgment. Mr Justice Bodey and Lord Justice Mance agreed. The appeal was dismissed.

1. The rule against reflective loss was engaged. Parker owed separate duties to Scoutvale and BDC. BDC’s losses were suffered in its capacity as shareholder in, or creditor of, Scoutvale, and would have been made good if Scoutvale had enforced its rights against Parker. The fact that BDC held only a minority interest, or that Scoutvale’s loss could not be traced proportionately to BDC without adjustment, did not alter the analysis.
2. The rule is concerned with recovery of particular losses rather than with barring a cause of action. It therefore applies where the claimant’s case is based on breach of fiduciary duty, equity or restitution, if the claim in substance reflects loss recoverable by the company. The court followed Shaker v Al-Bedrawi [2003] Ch 350 and rejected the suggested distinction based on the form of duty or remedy. Earlier decisions, including Re Lucking’s Will Trusts [1968] 1 WLR 866 and Walker v Stones [2001] QB 902, had to be read in light of Johnson v Gore-Wood & Co [2002] 2 AC 1.
3. The exception recognised in Giles v Rhind [2003] Ch 618 is narrow. It requires circumstances in which the wrongdoer’s conduct has disabled the company from pursuing its claim, such as by causing the impecuniosity that prevents compliance with a security-for-costs order. A company’s failure to sue, a settlement, administrative receivership or a release that appears generous is insufficient without evidence of disabling wrongdoing. No such pleaded case or evidence existed here. The existence of the proceedings under the Insolvency Act 1986 also showed that receivership did not itself prevent Scoutvale from litigating.
4. The claim based on the loss or irrecoverability of the Loan was barred for the same reason. Johnson extended reflective loss beyond diminution in share value and dividends to other payments, including employment-related payments and pension contributions. The court indicated, obiter, that the principle might also apply to an otherwise identical claim by a creditor or employee who was not a shareholder.
5. The court added that, if receivers had released Parker on excessively generous terms, Scoutvale might have had a claim against them for breach of duty, subject possibly to limitation. That observation was not necessary to the disposal of the appeal.

• Court of Appeal (Civil Division) — In Gardner v Parker [2004] EWCA Civ 781 , the court dismissed the appeal.
• High Court, Chancery Division — Blackburne J decided that the pleaded conduct was capable of constituting a breach of fiduciary duty, but held that the claimed losses were barred by the rule against reflective loss.