Claim right to be struck out on the principle that reflective loss cannot be recovered (Burnford and ors v Automobile Association Developments Limited)

The Court of Appeal has upheld the decision of HHJ Paul Matthews striking out a claim on the basis that the loss claimed was reflective loss which could not be recovered. In so doing, the Court of Appeal has given a useful summary of the relevant authorities in this area.

Burnford and ors v Automobile Association Developments Limited [2022] EWCA Civ 1943

What are the practical implications of this case?

This decision offers a useful summary of a number of recent authorities, including the decision of the Supreme Court in Marex Financial Ltd v Sevilleja [2020] UKSC 31 concerning the circumstances in which a claim can be made for the recovery of reflective loss. Seven points were noted. 1. The “reflective loss” principle applies where a shareholder brings a claim “in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer”; 2. A shareholder cannot escape the “reflective loss” principle merely by showing that he has an independent cause of action against the defendant. He must also have suffered “separate and distinct” loss, and the law does not regard a reduction in the value of shares or distributions which is a knock-on effect of loss suffered by the company as “separate and distinct”; 3. There need be no exact correlation between the shareholder’s loss and the company’s for the “reflective loss” principle to be applicable. The “reflective loss” principle can apply “where recovery by the company might not … fully replenish the value of its shares”. Equally, the company’s loss can exceed the fall in the value of its shares; 4. The “reflective loss” principle will not be in point if, although the shareholder’s loss is a consequence of loss sustained by the company, the company has no cause of action against the defendant in respect of its loss. 5. Nor will the “reflective loss” principle apply to a claim which is not brought as a shareholder but rather as, say, a creditor or an employee; 6. The Court has no discretion in the application of the “reflective loss” principle, which is a rule of substantive law; 7. The applicability of the “reflective loss” principle is to be determined by reference to the circumstances when the shareholder suffered the alleged loss, not those when the claim was issued.

What was the background?

The Claimants were the former shareholders in a company called Motoriety (UK) Ltd. They issued proceedings against the Defendant for fraudulent or negligent misrepresentation and/or for breach of contract. Motoriety entered into various arrangements with the Defendant in 2015 but it then went into administration in May 2017 and was dissolved in June 2019. The arrangements were intended to expand Motoriety’s customer base by offering access to the AA’s membership. Heads of Terms were entered into after (the Claimants say) various representations made by the Defendant. One of the alleged misrepresentations was that the Defendant would provide Motoriety with access to the AA’s customer base of 4 million personal members and 9 million business members. A further alleged representation was that over a 12-month period, approximately 5 million of AA’s customers would receive a reminder that their MOT was due. In August 2015, Motoriety, the Claimants and the Defendant entered into an investment agreement, pursuant to which the Defendant agreed to subscribe for 50% of the share capital of Motoriety for £400,000, the Defendant would obtain representation on the board of Motoriety and a call option for the remaining 50%. Motoriety granted the Defendant a licence to use certain software. The Claimants say that they entered into the investment agreement as a result of the representations made by the Defendants and alleged that the representations were false. Proceedings were issued on 7 May 2021. On 8 October 2021, the Defendant applied to strike out the claim and/or for reverse summary judgment. They argued that all the losses claimed by the Claimants were barred by the “no reflective loss” principle. Applying the decision in Marex Financial Ltd v Sevilleja [2020] UKSC 31, HHJ Paul Matthews struck out the claim on the basis of that principle. The Claimants appealed.

What did the court decide?

The appeal was dismissed. The Claimants argued first that the issue was not suitable for summary judgment because it raised fact-sensitive questions in respect of an issue where the law was not certain. They argued in any event that their claims were not barred by the no reflective loss principle. They raised a third ground of appeal, arguing that a settlement agreement did not prevent one of the Claimants, Mr Astley, from pursuing his claims. Summarising Marex and the preceding authorities, the Court of Appeal set out the seven points relevant to arguments relating to reflective loss set out above. The Court of Appeal noted that a number of subsequent cases had grappled with the recovery of reflective loss since Marex, however, did not accept that the law in this area could be described as uncertain and developing. Each part of the claim as pleaded was considered in turn and the Court of Appeal concluded that the principle barring the recovery of reflective loss could be seen to be applicable at this preliminary stage even without the matter going to trial. The third ground of appeal, relating to the settlement agreement was also dismissed.

Case details

• Court: Court of Appeal Civil Division
• Judge: Lord Justice Lewison, Lord Justice Newey, Lady Justice Asplin
• Date of judgment: 14 November 2022

Article by Phillip Patterson – first published by LexisNexis