Broadcasting Investment Group Ltd & Ors v Smith & Ors

The rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) is a narrow rule of company law. It bars a shareholder’s claim for diminution in share value or distributions where the loss merely reflects loss suffered by the company, which has its own cause of action. The rule applies to claims for specific performance and other relief, not only damages. It does not extend to a person who is merely a shareholder in a shareholder, because separate corporate personality must be respected. Under section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999, a contractual term confers a benefit if it appears ostensibly to give the third party an advantage. The statute does not distinguish major and minor benefits.

The claimants alleged an oral joint venture agreement under which Adam Smith was to procure the transfer of shares in two operating companies to Streaming Investments PLC. Broadcasting Investment Group Ltd (“BIG”) claimed as a shareholder in that company, while Kenneth Burgess claimed through a chain of shareholdings. Adam Smith applied to strike out or obtain reverse summary judgment under CPR 3.4 and CPR 24.2.

The application concerned whether Streaming Investments PLC had an enforceable third-party right under section 1 of the Contracts (Rights of Third Parties) Act 1999, whether BIG’s claims were barred by the rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) as explained in Marex Financial Ltd v Sevilleja, whether that rule applied to Mr Burgess, and whether an alternative restructuring agreement had been properly pleaded.

1. BIG’s claim. Streaming Investments PLC had an independent contractual claim under section 1(1)(b) of the Contracts (Rights of Third Parties) Act 1999. The pleaded term requiring transfer of the shares to it ostensibly conferred an advantage on it. The fact that it was not yet incorporated did not prevent enforcement, and nothing in the pleaded agreement rebutted the presumption of enforceability under section 1(2).
2. The court followed the narrow rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2), as reaffirmed and applied in Marex Financial Ltd v Sevilleja. BIG’s alleged loss was a diminution in the value of its shares in Streaming Investments PLC resulting from loss suffered by that company. Its claim was therefore barred. The rule applied to damages, specific performance, proprietary estoppel and constructive trust relief. It was a rule of law, not a discretionary assessment of double recovery.
3. The court rejected the submission that the rule could not apply because the agreement was between BIG and Mr Smith, or because the claim sought specific performance. The reasoning in George Fischer (Great Britain) Ltd v Multi-Construction Ltd was distinguishable because the subsidiary there had no cause of action. The reasoning in Latin American Investments Ltd v Maroil Trading Inc concerning restoration of property or payment to the company was not accepted.
4. Mr Burgess’s claim was not barred. The rule is confined to a shareholder in the company which suffered the loss. A second- or third-degree shareholder is not a shareholder in that company. Separate legal personality prevented treating Mr Burgess as a quasi-shareholder, and the circumstances did not justify piercing the corporate veil.
5. The legal issues concerning BIG’s claim could properly be determined summarily on the pleaded facts. Mr Burgess’s claim for specific performance was not hopeless; questions concerning ability to transfer shares, adequacy of damages, delay and unconscionability required assessment at trial.
6. The pleaded restructuring agreement was struck out. The claimants pleaded that no such agreement had been made and were attempting to anticipate a possible defence. The proper course was to await the defence and plead a reply if necessary.

BIG’s claims were struck out. Mr Burgess’s joint venture claim proceeded to trial. The restructuring agreement claims by VIIL and Mr Burgess were struck out.