Breeze & Anor v The Chief Constable of Norfolk Constabulary (Reflective loss principle)

The reflective loss principle is not confined to claims based on breach of a duty owed to the company. It applies where the company has a cause of action for an actionable wrong which, if pursued, could restore the loss reflected in the shareholder’s diminished share value. The principle applies even if the company does not sue. A potential exception arises where the wrongdoer’s conduct has made it impossible for the company to pursue its remedy. That exception requires a properly pleaded case that the tort prevented the company from suing the wrongdoer to judgment. Where a pleading is deficient but there is a realistic prospect of curing it, the court may allow an amendment before striking out the claim.

The claimants were major shareholders in Cawston Park Holdings Ltd. They sued the Chief Constable for malicious prosecution and/or misfeasance in public office following their unsuccessful prosecution. They claimed more than £30 million for the diminution in value of their shareholdings.

The company had entered receivership and had not brought proceedings against the defendant. The defendant applied to strike out, or obtain summary judgment on, the share-value claims as barred by the reflective loss principle. The claimants relied on the exception recognised in Giles v Rhind. The central issues were the scope of the reflective loss principle and whether the pleadings should be amended to rely on that exception.

1. Reflective loss. The claimants’ argument that the principle applied only where the defendant had breached a duty owed to the company was rejected. Reading Johnson v Gore Wood (No. 1) as a whole, the principle extends to any actionable wrong for which the company had a cause of action and which could have enabled it to recover the loss. It therefore applies where the company could have sued for the loss of company value, even if it did not do so.
2. The company could in principle have sued for misfeasance in public office. Three Rivers DC v Governor and Company of the Bank of England (No. 3) and Akenzua v Home Secretary established that a company could have standing to bring such a claim. The claimants’ share-value claims were accordingly reflective losses, subject to the Giles v Rhind exception.
3. The exception applies where the defendant’s torts prevented the company from being able to sue the defendant to judgment. It is not necessary that the company actually considered bringing proceedings, but the pleadings must allege that the torts caused that inability. The existing pleading did not fully do so. It alleged that the defendant’s officers knew the investigation and prosecution would lead to the business’s demise, but did not allege that the torts prevented the company from suing or address the receiver’s decision not to sue.
4. The court nevertheless declined to strike out immediately. The existing allegations, the pleaded total loss of the company’s value, and the potential injustice of ending claims exceeding £30 million provided grounds to believe that a proper amendment might realistically be available. An unless order was therefore appropriate: unless the claimants applied by the specified date to amend their Particulars of Claim to plead reliance on Giles v Rhind and the necessary facts, the relevant claims would be struck out. The judge was minded to order the claimants to pay the defendant’s costs of the application.