[1] The article is limited to the law of England and Wales.

[2] This was part of a wider proposition, that a derivative action (claim), is an exception to this elementary principle. In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, the Court of Appeal said, at 210:

'A derivative action is an exception to the elementary principle that A cannot, as a general rule, bring an action against B to recover damages or secure other relief on behalf of C for an injury done by B to C. C is the proper plaintiff because C is the party injured, and, therefore, the person in whom the cause of action is vested.'

[3 Two things.

[1] The quotation from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 ('Prudential') is part of a wider passage, that repays reading. 

By way of basic facts. In Prudential, L and B were rogues, who caused Newman Industries Ltd ('N Ltd') to enter into a purchase agreement with Thomas Poole & Gladstone China Ltd ('TPG Ltd'), which was inflated (the assets purchased by N Ltd. were overvalued by £45,000; (at 234) not £445,000 as held at first instance). P Ltd was a 32% shareholder in N Ltd and P Ltd brought: (a) a derivative claim; (b) shareholder claim (the 'personal claim'); (c) representative shareholder claim. In relation to (b) - the personal claim - this was a claim that the wrong committed by L/B to N Ltd, had, in essence, 'harmed' its shares in N Ltd. 

The Court of Appeal recorded the first instance judge's (Vinelott J's) judgment, at 222E:

'Vinelott J. upheld the [P Ltd] personal claim, and also the representative claim with which it was linked. He began with the proposition, which accorded with his findings, that [N Ltd] had been induced by fraud to approve an agreement under which [N Ltd] paid more (he thought about £445,000 more) than the value of the assets acquired and thus £445,000 more than it needed to pay; therefore [N Ltd's] indebtedness to its bankers immediately after the transaction (about £5m.) was £445,000 more than it would have been but for the fraud; therefore the fraud caused a reduction in net profits, which must have affected the quoted price of [N Ltd] shares; therefore, the [P Ltd] suffered some damage in consequence of the conspiracy and that was sufficient to complete the cause of action, the quantum of damages being left to an inquiry.'

As to this, the Court of Appeal in Prudential said, at 222G to 225A:

'In our judgment the personal claim is misconceived. It is of course correct, as the judge found and [B] did not dispute, that he and [L], in advising the shareholders to support the resolution approving the agreement, owed the shareholders a duty to give such advice in good faith and not fraudulently. It is also correct that if directors convene a meeting on the basis of a fraudulent circular, a shareholder will have a right of action to recover any loss which he has been personally caused in consequence of the fraudulent circular; this might include the expense of attending the meeting. But what he cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a "loss" is merely a reflection of the loss suffered by the company. The shareholder does not suffer any personal loss. His only "loss" is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent. shareholding. The [P Ltd's] shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves. his right of participation, are not directly affected by the wrongdoing. [P Ltd] still holds all the shares as his own absolutely unencumbered property. The deceit practised upon [P Ltd] does not affect the shares; it merely enables the defendant to rob the company. A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, of which 99 are held by [P Ltd]. [P Ltd] holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades [P Ltd] to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of [P Ltd's] shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on [P Ltd] and the robbery of the company. But the deceit on [P Ltd] causes [P Ltd] no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. [P Ltd] obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company.

Counsel for [P Ltd's] sought to answer this objection by agreeing that there cannot be double recovery from the defendants, but suggesting that the personal action will lie if the company's remedy is for some reason not pursued. But how can the failure of the company to pursue its remedy against the robber entitle the shareholder to recover for himself? What happens if the robbery takes place in year 1, the shareholder sues in year 2, and the company makes up its mind in year 3 to pursue its remedy? Is the shareholder's action stayed, if still on foot? Supposing judgment has already been recovered by the shareholder and satisfied, what then?

A personal action could have the most unexpected consequences. If a company with assets of £500m. and an issued share capital of £50m. were defrauded of £500,000 the effect on dividends and share prices would not be discernible. If a company with assets of £10m. were defrauded, there would be no effect on share prices until the fraud was discovered; if it were first reported that the company had been defrauded of £500,000 and subsequently reported that the company had discovered oil in property acquired by the company as part of the fraud and later still reported that the initial loss to the company could not have exceeded £50,000, the effect on share prices would be bewildering and the effect on dividends would either be negligible or beneficial.

[P Ltd] in this action were never concerned to recover in the personal action. [P Ltd] were only interested in the personal action as a means of circumventing the rule in Foss v. Harbottle. [P Ltd] succeeded. A personal action would subvert the rule in Foss v. Harbottle and that rule is not merely a tiresome procedural obstacle placed in the path of a shareholder by a legalistic judiciary. The rule is the consequence of the fact that a corporation is a separate legal entity. Other consequences are limited liability and limited rights. The company is liable for its contracts and torts; the shareholder has no such liability. The company acquires causes of action for breaches of contract and for torts which damage the company. No cause of action vests in the shareholder. When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting. The law confers on him the right to ensure that the company observes the limitations of its memorandum of association and the right to ensure that other shareholders observe the rule, imposed upon them by the articles of association. If it is right that the law has conferred or should in certain restricted circumstances confer further rights on a shareholder the scope and consequences of such further rights require careful consideration. In this case it is neither necessary nor desirable to draw any general conclusions.

The rule in Foss v. Harbottle is founded on principle but it also operates fairly by preserving the rights of the majority. We were invited to give judicial approval to the public spirit of [P Ltd] who, it was said, are pioneering a method of controlling companies in the public interest without involving regulation by a statutory body. In our view the voluntary regulation of companies is a matter for the City. The compulsory regulation of companies is a matter for Parliament. We decline to draw general conclusions from the exceptional circumstances of the present case. But the results of the present action give food for thought. Vinelott J. thought it possible that [N Ltd] had suffered damage amounting to £445,000 by the fraud of [B] and [L]. Counsel for [N Ltd] submitted in the court below that damage to [N Ltd] by the prosecution of the action exceeded the benefits liable to be derived from the action. The costs of the proceedings at the end of the trial were said in newspaper reports to be in the region of £750,000. If the judge's order is upheld and if the damages suffered by [N Ltd] are assessed at £445,000 and the costs at £750,000 then those damages and about 95 per cent. of the costs will fall on [TPG Ltd] pursuant to the judge's order except in so far as they are recovered from [B] and [L]. If [N Ltd] recover any damages they must indemnify [P Ltd] thereout against the difference between the costs of [P Ltd] paid by [TPG Ltd] and (with small exceptions) the costs of [P Ltd] on a common fund basis. Part of [N Ltd's] costs must be borne by [N Ltd] in any event. Part of [P Ltd's] costs must be borne by [P Ltd] in any event.

If this appeal succeeds the burden of the costs on [P Ltd] will be enormous. The innocent shareholders of [N Ltd], [TPG Ltd] and [P Ltd] may well wonder, whether this appeal succeeds or not, if there is not something to be said after all for the old fashioned rule in Foss v. Harbottle.' [bold added]

Under the heading 'Chapter 7 - Conclusions', the Court of Appeal in Prudential stated (at 225):

'The problems involved in this case were caused by the fact that the Prudential were the wrong plaintiffs.

If, indeed, [B] and [L] defrauded [N Ltd] then the proper plaintiff was [N Ltd].'

[2] In Shaker v Al-Bedrawi [2003] Ch 350, Peter Gibson LJ continued, at paragraph 2:

'This principle ("the Prudential principle") has recently been affirmed and further explained by the House of Lords in Johnson v Gore Wood & Co[2002] 2 AC 1.'

[4] In Johnson v Gore Wood & Co [2002] 2 AC 1 ('Johnson'), Lord Bingham, set out the authorities they had been referred to, at 35:

'On this issue we were referred to a number of authorities which included Lee v Sheard [1956] 1 QB 192; Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204; Heron International Ltd v Lord Grade [1983] BCLC 244; R P Howard Ltd v Woodman Matthews & Co [1983] BCLC 117; George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260; Christensen v Scott [1996] 1 NZLR 273; Barings plc v Coopers & Lybrand [1997] 1 BCLC 427; Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443; Stein v Blake [1998] 1 All ER 724 and Watson v Dutton Forshaw Motor Group Ltd (unreported) 22 July 1998; Court of Appeal (Civil Division) Transcript No 1284 of 1998.'

[5] In Johnson v Gore Wood & Co [2002] 2 AC 1 ('Johnson'), Lord Bingham, at 35 onwards, said:

'These authorities support the following propositions. (1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222-223, Heron International, particularly at pp 261-262, George Fischer, particularly at pp 266 and 270-271, Gerber and Stein v Blake, particularly at pp 726-729. (2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195-196, George Fischer and Gerber. (3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v Sheard, at pp 195-196, Heron International, particularly at p 262, R P Howard, particularly at p 123, Gerber and Stein v Blake, particularly at p 726. I do not think the observations of Leggatt LJ in Barings at p 435b and of the Court of Appeal of New Zealand in Christensen v Scott at p 280, lines 25-35, can be reconciled with this statement of principle.

These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 223) the loss claimed is "merely a reflection of the loss suffered by the company". In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.'

Then in Johnson, Lord Bingham said, at 36 (for ease of reading, the points have been separated out into separate paragraphs)::

'I turn to consider the heads of claim now pleaded by Mr Johnson. 

(1) Collector Piece Video Ltd and Adfocus Ltd. The claim is for sums which Mr Johnson, acting on [the solicitors'] advice, invested in these companies and lost. This claim is unobjectionable in principle... 

(2) Cost of personal borrowings: loan capital and interest. The claim is for sums which Mr Johnson claims he was obliged to borrow at punitive rates of interest to fund his personal outgoings and those of his businesses. Both the ingredients and the quantum of this claim will call for close examination, among other things to be sure that it is not a disguised claim for loss of dividend, but it cannot at this stage be struck out as bad on its face. The same is true of Mr Johnson's claims for bank interest and charges and mortgage charges and interest (which will raise obvious questions of remoteness). 

(3) Diminution in value of Mr Johnson's pension and majority shareholding in [Westway]. In part this claim relates to payments which the company would have made into a pension fund for Mr Johnson: I think it plain that this claim is merely a reflection of the company's loss and I would strike it out. In part the claim relates to enhancement of the value of Mr Johnson's pension if the payments had been duly made. I do not regard this part of the claim as objectionable in principle. An alternative claim, based on the supposition that the company would not have made the pension payments, that its assets would thereby have been increased and that the value of Mr Johnson's shareholding would thereby have been enhanced, is also a reflection of the company's loss and I would strike it out. 

(4) Loss of 12.5% of Mr Johnson's shareholding in [Westway]. Mr Johnson claims that he transferred these shares to a lender as security for a loan and that because of his lack of funds, caused by [the solicitors'] advice breach of duty, he was unable to buy them back. This claim is not in my view objectionable in principle. (5) Additional tax liability. If proved, this is a personal loss and I would not strike it out.'

[6] In Shaker v Al-Bedrawi [2003] Ch 350 ('Shaker'), Peter Gibson LJ gave the judgment of the court, recorded that:

(1) this finding, was actually, outside the pleaded case of Mr Shaker (paragraph 50), but this does not matter for present purposes; and

(2) there was an issue about whether the shares were in ANA Holdings Ltd, or ANA Inc, but 'For the defendants' arguments on the preliminary issue, it was immaterial whether ANA Inc or ANA Ltd was the relevant company and, for the purpose of arguing the trustee's liability to account to his beneficiary for a profit, it matters not whether the company was ANA Inc or ANA Ltd.' (paragraph 54)

[7] In Sevilleja v Marex Financial Ltd [2021] AC 39 ('Sevilleja'):

Under the heading 'Prudential Assurance v Newman Industries (No 2)', Lord Reed said, at paragraphs 23 to 39:

23. Although incorporated companies have long existed, it was only towards the end of the 19th century that the independent legal personality of the company was conclusively established by the decision of the House of Lords in Salomon v A Salomon & Co Ltd [1897] AC 22. During the 20th century, the implications of corporate personality for rights of property, and for the nature of a shareholder's interest, were addressed by the courts in a series of cases, including Macaura v Northern Assurance Co Ltd [1925] AC 619 and Short v Treasury Comrs [1948] 1 KB 116, affirmed [1948] AC 534. In more recent times, the courts have had to consider the position where a shareholder seeks to recover damages in respect of a diminution in the value of his shareholding or in the distributions received from the company, resulting from a loss suffered by the company in respect of which the company has its own cause of action.

24. The issue appears to have arisen for the first time in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204. The case concerned a situation where the directors of a company were alleged to have made a fraudulent misrepresentation in a circular distributed to its shareholders, so as to induce them to approve the purchase of assets at an overvalue from another company in which the directors were interested. Prudential, which was a minority shareholder in the company, brought a personal and a derivative action against the directors, claiming that they had committed the tort of conspiracy against the company and its members. In relation to the personal claim, the Court of Appeal (Cumming-Bruce, Templeman and Brightman LJJ) concluded that, where a company and its shareholders had suffered wrongs which resulted in a loss to the company and a fall in the value of its shares, a shareholder could not bring a personal action against the wrongdoer.

25. The court devoted most of its judgment to the derivative action, and dealt with the personal action relatively briefly. It approached the issue on the basis that the directors had acted in breach of their obligations to the shareholders (p 222), and that the loss suffered by the company had brought about a fall in the value of its shares. It recorded at p 222 that no facts were relied upon in support of the personal claim which were not relied upon in support of the derivative claim. It also expressed the opinion, at pp 223–224, that the plaintiffs were never concerned to recover in the personal action, and were only interested in it as a means of circumventing the rule in Foss v Harbottle, which stood directly in the way of a derivative action. Nevertheless, it dealt with the personal action on the basis of general principles rather than on its particular facts; and the court's decision was treated by the House of Lords in Johnson [2002] 2 AC 1 as establishing principles of general application, which Lord Bingham of Cornhill set out at pp 35–36 (see para 41 below).

26. The court disallowed Prudential's claim on the ground that it had not suffered any personal loss. It stated [1982] Ch 204, 222–223:

“But what he [the shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a ‘loss’ is merely a reflection of the loss suffered by the company.”

As that passage makes clear, the decision was concerned only with a diminution in the value of shares or in distributions, suffered by a shareholder merely because the company had itself suffered actionable damage. It was not concerned with other losses suffered by a shareholder, or with situations where the company had not suffered any actionable loss.

27. The court explained its reasoning as follows, at p 223:

“The shareholder does not suffer any personal loss. His only ‘loss’ is through the company, in the diminution in the value of the net assets of the company … The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property.”

28. That reasoning requires elaboration. It is unrealistic to assert as a matter of fact that the shareholder does not suffer any personal loss: ex hypothesi, there has been a fall in the value of his shares. It is not immediately obvious what it means to say that his only loss is through the company. It is, however, possible to explain the court's decision, particularly in the light of later passages in the judgment. As I understand its reasoning, what the court meant, put shortly, was that where a company suffers actionable loss, and that loss results in a fall in the value of its shares (or in its distributions), the fall in share value (or in distributions) is not a loss which the law recognises as being separate and distinct from the loss sustained by the company. It is for that reason that it does not give rise to an independent claim to damages on the part of the shareholders.

29. The court provided at p 223 an illustration of its approach:

“Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, of which 99 are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff's shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company … The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company.” (Emphasis added.)

The court also made it clear that the company's failure to recover its loss would not open the door to recovery by the shareholder, asking rhetorically how the failure of the company to pursue its claim could entitle the shareholder to recover the loss for himself.

30. The cash box example has been criticised for its artificiality. Certainly, by envisaging a company whose only asset was cash, the court greatly simplified a situation which, in real life, is likely to be more complex. But the point being made has a rationale in real life as well as in the simplified example.

31. The starting point is the nature of a share, and the attributes which render it valuable. A share is not a proportionate part of a company's assets: Short v Treasury Comrs. Nor does it confer on the shareholder any legal or equitable interest in the company's assets: Macaura v Northern Assurance Co Ltd. As the court stated in Prudential, a share is a right of participation in the company on the terms of the articles of association. The articles normally confer on a shareholder a number of rights, including a right to vote on resolutions at general meetings, a right to participate in the distributions which the company makes out of its profits, and a right to share in its surplus assets in the event of its winding up.

32. Where a company suffers a loss, that loss may affect its current distributions or the amount retained and invested in order to pay for future distributions (or, if the company is wound up, the surplus, if any, available for distribution among the shareholders). Since the value of a company's shares is commonly calculated on the basis of anticipated future distributions, it is possible that a loss may result in a fall in the value of the shares. That is, however, far from being an inevitable consequence: companies vary greatly, and the value of their shares can fluctuate upwards or downwards in response to a wide variety of factors. In the case of a small private company, there is likely to be a close correlation between losses suffered by the company and the value of its shares. In the case of a large public company whose shares are traded on a stock market, on the other hand, a loss may have little or no impact on its share value. If there is an impact on share value, it will reflect what Lord Millett described in Johnson [2002] 2 AC 1, 62 as “market sentiment”, and will not necessarily be equivalent to the company's loss. If the company's loss does not affect the value of its shares, then there is no claim (or at least no sustainable claim) available to a shareholder, and in principle the problem addressed in Prudential does not arise. A problem only arises where, as in Prudential, a shareholder claims that the company's loss has had a knock-on effect on the value of his shares.

33. Considering, then, the situation where a company suffers actionable loss as the result of wrongdoing, the company then acquires a right of action. If the company's loss results (or is claimed to result) in a fall in the value of its shares, then, but for the rule in Prudential, the shareholder would simultaneously acquire a concurrent right of action. The purpose of an award of damages to the company is to restore it to the position in which it would have been if the wrongdoing had not occurred. In circumstances where an award which restores the company's position to what it would have been if the wrongdoing had not occurred would also restore the value of the shares, the only remedy which the law would require to provide, in order to achieve its remedial objectives of compensating both the company and its shareholders, would be an award of damages to the company. For the shareholders to have a personal right of action, in addition to the company's right of action, would in those circumstances exceed what was necessary for the law to achieve those objectives, and would give rise to a problem of double recovery. Most of the cases in which the rule in Prudential has been applied (but not Prudential itself) have concerned small private companies, where those circumstances are likely to have existed. As I have explained, however, there are also circumstances where there may not be a close correlation between the company's loss and any fall in share value. The avoidance of double recovery cannot, therefore, be sufficient in itself to justify the rule in Prudential.

34. That conclusion is also supported by another point. What if the company fails to pursue a right of action which, in the opinion of a shareholder, ought to be pursued, or compromises its claim for an amount which, in the opinion of a shareholder, is less than its full value? If that opinion is shared by a majority of the shareholders, then the company's articles will normally enable them to direct the company's course of action by passing a suitable resolution at a general meeting. Even if the shareholder finds himself in a minority, he has a variety of remedies available to him, including the bringing of a derivative action on the company's behalf, equitable relief from unfairly prejudicial conduct, or a winding up on the “just and equitable” ground, if (put shortly) those in control of the company are abusing their powers. But what if the company's powers of management are not being abused, and a majority of shareholders approve of the company's decision not to pursue the claim, or its decision to enter into a settlement? Should the minority shareholder not then be able to pursue a personal action?

35. In Prudential [1982] Ch 204, the court answered that question in the negative, stating at p 224 that the rule in Foss v Harbottle would be subverted if the shareholder could pursue a personal action. The rule, as stated in Edwards v Halliwell [1950] 2 All ER 1064 and restated in Prudential at pp 210–211, has two aspects. The first is that “the proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation”. As was explained in Prudential at p 210, one of the consequences of that aspect of the rule is that a shareholder cannot, as a general rule, bring an action against a wrongdoer to recover damages or secure other relief for an injury done to the company. The second aspect of the rule is that:

“Where the alleged wrong is a transaction which might be made binding on the corporation and on all its members by a simple majority of the members, no individual member of the corporation is allowed to maintain an action in respect of that matter because, if the majority confirms the transaction, cadit quaestio [the question falls]; or, if the majority challenges the transaction, there is no valid reason why the company should not sue.”

This second aspect of the rule reflects the fact that the management of a company's affairs is entrusted to the decision-making organs established by its articles of association, subject to the exceptional remedies mentioned in para 34 above. When a shareholder invests in a company, he therefore entrusts the company—ultimately, a majority of the members voting in a general meeting—with the right to decide how his investment is to be protected. As the court stated in Prudential at p 224:

“When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting.”

36. Accordingly, in a situation where a shareholder claims that his shares have fallen in value as a result of a loss suffered by the company, and the company has a right of action in respect of that loss, the shareholder can exercise such rights of control over its decision-making as have been granted to him by the articles of association. These normally provide for the ultimate control of the company's affairs by a majority of the shareholders voting at a general meeting. A minority shareholder has other remedies available to him if the company's management is acting improperly, including a derivative action and an application for relief against unfairly prejudicial conduct.

37. As the court observed in Prudential, to allow the shareholder in addition to pursue a personal action would subvert the rule in Foss v Harbottle. This is not merely a theoretical concern. Examples of the use of personal actions, post- Johnson, to circumvent the rule in Foss v Harbottle are discussed in paras 52–53 below. The existence of concurrent claims could also result in the shareholder's preventing the company's management from dealing with its claim in the way they considered appropriate in the best interests of the company, thereby undermining the rule in Foss v Harbottle. That could occur, for example, where the company's management wanted to compromise the company's claim but were prevented from doing so by the shareholder's refusal to enter into a settlement with the wrongdoer. One can envisage other situations where the existence of concurrent claims could result in the shareholder's acting contrary to the company's interests, for example where the wrongdoer's assets were inadequate to satisfy both claims. But the effect of the rule in Foss v Harbottle, as the court said in Prudential at p 224, is that “[the shareholder] accepts the fact that the value of his investment follows the fortunes of the company”. It is for that reason that the rule in Prudential has been said to recognise “the unity of economic interests which bind a shareholder and his company”: Townsing v Jenton Overseas Investment Pte Ltd [2008] 1 LRC 231, para 77.

38. In addition to arguments based on Foss v Harbottle, there are also pragmatic advantages in a clear rule that only the company can pursue a right of action in circumstances falling within the ambit of the decision in Prudential. As Lord Hutton commented in Johnson [2002] 2 AC 1, 55, the rule in Prudential has the advantage of establishing a clear principle, rather than leaving the protection of creditors and other shareholders of the company to be given by a judge in the complexities of a trial. Those complexities should not be underestimated. Even without the complications arising from the existence of concurrent claims, it would not be straightforward to establish the extent, if any, to which a fall in the value of a company's shares was attributable to a loss that it had suffered as a consequence of the defendant's wrongdoing. But the existence of a concurrent claim by the company would add another dimension to the difficulties. It would be necessary, for example, to take account of the fact that the wrongdoing had resulted in the company's acquiring an asset, namely its right of action against the defendant, which might have offset any detrimental effect of the wrongdoing on the value of his shares. It would also be necessary to consider the question of double recovery, and how it should be addressed both procedurally and substantively. Those issues might have to be addressed in the context of a proliferation of claims, possibly in different proceedings, at different times, and in different jurisdictions. They would also arise in a context where there might well be conflicts of interest between the shareholder and the company's directors, its liquidator, other shareholders, and creditors.

39. In summary, therefore, Prudential decided that a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, is not in the eyes of the law damage which is separate and distinct from the damage suffered by the company, and is therefore not recoverable. Where there is no recoverable loss, it follows that the shareholder cannot bring a claim, whether or not the company's cause of action is pursued. The decision had no application to losses suffered by a shareholder which were distinct from the company's loss or to situations where the company had no cause of action.'

Under the heading 'Johnson v Gore Wood & Co', Lord Reed in Sevilleja said, at paragraphs 40 to 67: 

'40. The decision in Prudential was considered by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1. The case concerned alleged negligence on the part of solicitors acting for a private company, which caused it to suffer losses. The company brought proceedings against the solicitors, which were settled during the sixth week of the trial for a very substantial proportion of the sum claimed, as Lord Bingham explained at p 18. Mr Johnson, who owned virtually all the shares in the company and was its managing director, then brought proceedings against the solicitors in which he alleged that they had also acted in breach of a duty owed to him personally, and that he had suffered personal losses. The claim was struck out as an abuse of process. Mr Johnson appealed against the striking out of his claim, and the defendants cross-appealed to have certain heads of loss struck out on the ground that Mr Johnson was seeking to recover for damage which had been suffered by the company. It is only the latter aspect of the case which needs to be considered.

41. Lord Bingham stated at pp 35–36 that the authorities supported the following statement of principle:

“(1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss. So much is clear from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, particularly at pp 222–223, Heron International [ Heron International Ltd v Lord Grade [1983] BCLC 244 ], particularly at pp 261–262, George Fischer [ George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260 ], particularly at pp 266 and 270–271, Gerber [ Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443 ] and Stein v Blake [[1998] 1 All ER 724], particularly at pp 726–729.

“(2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding. This is supported by Lee v Sheard [1956] 1 QB 192, 195–196, George Fischer and Gerber.

“(3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other. I take this to be the effect of Lee v Sheard, at pp 195–196, Heron International, particularly at p 262, R P Howard [ R P Howard Ltd v Woodman Matthews & Co [1983] BCLC 117 ], particularly at p 123, Gerber and Stein v Blake, particularly at p 726. I do not think the observations of Leggatt LJ in Barings [ Barings plc v Coopers & Lybrand [1997] 1 BCLC 427 ] at p 435B and of the Court of Appeal of New Zealand in Christensen v Scott [1996] 1 NZLR 273, 280, lines 25–35, can be reconciled with this statement of principle.”

42. In Lord Bingham's proposition (1), the first sentence is a statement of the rule in Foss v Harbottle. The second sentence encapsulates the reasoning in Prudential, and explains why, in the circumstances described, a shareholder who is “suing in that capacity and no other” cannot bring a claim consistently with the rule in Foss v Harbottle. The third sentence should not be understood as limiting the rule in Prudential to cases where there is an exact correlation between the company's loss and the fall in share value. As was explained at paras 32–38 above, it is possible to envisage cases where there is not a precise correlation, and where recovery by the company might not therefore fully replenish the value of its shares, but where the rule in Prudential would nevertheless apply.

43. Lord Bingham's proposition (2), stating that a shareholder can sue for “reflective loss” where the company has no cause of action, on the authority of Lee v Sheard [1956] 1 QB 192, George Fischer (Great Britain) Ltd v Multi Construction Ltd [1995] 1 BCLC 260 and Gerber Garment Technology Inc v Lectra Systems Ltd [1997] RPC 443, merits closer consideration.

44. In Lee v Sheard the plaintiff was a company director and shareholder who earned his living by working for the company and being remunerated by distributions out of its profits. He suffered injuries in a road accident for which the defendant was responsible. He was unable to work while he recovered from his injuries, and as a result there was a fall in the company's profits, which led to a reduction in the distributions paid to him. He recovered damages for his loss of earnings. The company had no cause of action against the negligent driver. This was not, therefore, a case concerned with concurrent claims. The plaintiff's loss of earnings took the form of a reduction in distributions, but it was not “merely a reflection of the loss suffered by the company”, in the phrase used in Prudential (para 26 above). He, not the company, had been injured in the road accident. He, not the company, was entitled to recover damages for his loss.

45. In George Fischer (Great Britain) Ltd v Multi Construction Ltd, the defendant entered into a contract with the plaintiff company (“the shareholder”) to install equipment at the premises of one of its subsidiaries (“the company”). When the equipment proved defective, causing the company to suffer a loss of profits, the shareholder was held to be entitled to damages for breach of contract in respect of the loss which it had suffered as a result of the company's reduced profits. That was another case where the wrong was committed against the shareholder, not the company. Since the company had no cause of action, there was no reason why the shareholder should not recover its loss by means of an award of damages, in accordance with ordinary principles.

46. Similar observations apply to Gerber Garment Technology Inc v Lectra Systems Ltd. The plaintiff company was the owner of a patent which was infringed, causing it to suffer a loss of income. As the commercial exploitation of the patent was carried on by its subsidiary, the plaintiff's loss of income took the form of a reduction in the distributions it received from its subsidiary. But it was the plaintiff, not its subsidiary, whose patent was infringed, and which suffered a loss of income to which its ownership of the patent entitled it.

47. Lord Bingham's proposition (3), stating (put shortly) that a shareholder can sue to recover a loss which is separate and distinct from that suffered by the company, reflects the fact that the shareholder's loss, where it does not consist merely of a fall in the value of his shareholding, or in the distributions which he receives by virtue of his shareholding, does not fall within the ambit of the rule in Prudential. This proposition also makes it clear that the rule renders certain heads of loss irrecoverable, rather than barring a cause of action as such.

48. Lord Bingham went on to explain how courts should apply the relevant principles [2002] 2 AC 1, 36:

“On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation.”

The aims identified in the first sentence—respecting the principle of company autonomy, ensuring that the company's creditors are not prejudiced by the action of individual shareholders, and ensuring that a party does not recover compensation for a loss which another party has suffered—are all objectives or consequences of the rule in Foss v Harbottle, and are consistent with the decision in Prudential. The second sentence reflects the fact that deciding whether a loss falls within the scope of the rule may call for the exercise of judgement.

49. Before turning to Lord Bingham's treatment of the losses claimed, it is necessary to consider Lord Millett's speech, which lies at the origin of the expansion of the supposed “reflective loss” principle in the subsequent case law. Lord Millett began by discussing the relationship between the company's assets and the value of its shares. A share, he said at p 62, “represents a proportionate part of the company's net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares”. But a share is not a proportionate part of the company's net assets: see Macaura. The idea that a diminution in the value of a company's net assets will be reflected in the value of the shares is therefore not an axiomatic truth, as was noted in para 32 above. The rule in Prudential is not premised on any necessary relationship between a company's assets and the value of its shares (or its distributions).

50. Approaching the matter on the basis which he had described, Lord Millett observed at p 62 that the problem which arose, where the company suffered loss caused by the breach of a duty owed to it, and a shareholder claimed to have suffered a consequent diminution in the value of his shareholding or in distributions, caused by the breach of a duty owed to it by the same wrongdoer, was the risk of double recovery, on the one hand, or a risk to the company's creditors through the depletion of its assets, on the other:

“If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted … Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

51. As explained at para 33 above, the principle that double recovery should be avoided is not in itself a satisfactory explanation of the rule in Prudential. As was explained at paras 34–37 above, the unique position in which a shareholder stands in relation to his company, reflected in the rule in Foss v Harbottle, is a critical part of the explanation. In addition, as was explained at para 38 above, there are pragmatic advantages in adopting a clear rule. However, by treating the avoidance of double recovery—a principle of wider application—as sufficient to justify the decision in Prudential, Lord Millett paved the way for the expansion of the supposed “reflective loss” principle beyond the narrow ambit of the rule in Prudential.

52. One problem with reasoning based on the avoidance of double recovery is that the principle is one of the law of damages. It does not deny the existence of the shareholder's loss, as the rule in Prudential does, where the loss falls within its ambit, but on the contrary is premised on the recognition of that loss. Applying an approach based on the avoidance of double recovery, it is therefore possible for a shareholder to bring a personal action based on a loss which would fall within the ambit of the decision in Prudential, and to obtain a remedy which that decision would have barred to him, provided the relief that he seeks is not an award of damages in his own favour. This device has been exploited in a number of cases subsequent to Johnson, in ways which circumvent the rule in Foss v Harbottle : a rule which is not confined to actions for damages but also applies to other remedies, as explained at para 35 above.

53. For example, in Peak Hotels and Resorts Ltd v Tarek Investments Ltd [2015] EWHC 3048 (Ch), the judge considered it arguable that the “reflective loss” principle, as explained by Lord Millett in Johnson, did not bar proceedings by a shareholder, who complained of a fall in the value of his shares resulting from loss suffered by the company in respect of which the company had its own cause of action, where the relief that he sought was not damages but a mandatory injunction requiring the defendant to restore property to the company. A similar view was taken in Latin American Investments Ltd v Maroil Trading Inc [2017] 2 CLC 45, where the shareholder complained of a fall in the value of its shares resulting from a breach of obligations owed to the company, which also involved a breach of contractual obligations owed to itself. It responded to the argument that its claim was for “reflective loss” by seeking an order for the payment of the contractual damages not to itself but to the company. A further example is Xie Zhikun v Xio GP Ltd (unreported) 14 November 2018, Cayman Islands Court of Appeal. Summarising complex facts, in that case the shareholder applied for a quia timet injunction to prevent the breach of fiduciary duties owed both to the company and to himself, which would cause the company to suffer loss, and would consequently affect the value of his interest in it. Sir Bernard Rix JA observed at para 66 that he did not see “how, other than perhaps in terms of pure formalism … the present claim differs from … a derivative action”.

54. Those cases demonstrate how right the Court of Appeal was in Prudential in considering that the rule established in that case, based on the absence of separate and distinct loss, was necessary in order to avoid the circumvention of the rule in Foss v Harbottle. The exception to that rule is the derivative action. Whether a shareholder can bring such an action depends on whether the relevant conditions are satisfied.

55. The most obvious difficulty with the avoidance of double recovery, as an explanation of the judgment in Prudential, is perhaps its unrealistic assumption that there is a universal and necessary relationship between changes in a company's net assets and changes in its share value. Another serious problem is its inability to explain why the shareholder cannot be permitted to pursue a claim against a wrongdoer where the company has declined to pursue its claim or has settled it at an undervalue, and the risk of double recovery is therefore eliminated in whole or in part.

56. In addressing this point, Lord Millett relied on a number of arguments, none of which, with respect, appears to me to be persuasive. The first was based on causation. Lord Millett stated [2002] 2 AC 1, 66 that, “if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing”. The same reasoning, he added, applies if the company settles for less than it might have done. The logic of the argument is that it is impossible for the shareholder to suffer a loss caused by the wrongdoer, since his actions result in the company's loss being balanced by a right of action of equivalent value, so that its net assets are unaffected. It is only if the company fails to enforce its right of action that the shareholder can suffer a loss, and his loss will in that event be caused by the company. That reasoning might be contrasted with the logic of the argument based on the avoidance of double recovery, namely that the company's loss results in the shareholders suffering an equivalent loss, because their shares “represent” the company's net assets.

57. As Lord Hutton observed in Johnson at p 54, causation does not provide a satisfactory explanation. One difficulty is that the failure of the company to sue the wrongdoer, or its decision to settle with him for less than the full value of its claim, may be the result of its impecuniosity, caused by the defendant's wrongdoing. In those circumstances, the company's failure to recover its loss can hardly be regarded as interposing a novus actus interveniens between the defendant's wrongdoing and the shareholder's loss. Furthermore, in an economic tort case, where the shareholder's claim is based on an allegation that the wrongdoer committed the wrongdoing with the intention of causing the shareholder to suffer loss, it is bizarre to say that the loss which the defendant intended to cause, and which ensued from his wrongdoing, was nevertheless not caused by what he did.

58. In addition to the causation argument, Lord Millett put forward at p 66 two other reasons, which he described as policy considerations, for excluding the shareholder's claim where the company had settled its claim. The first was that the personal interests of the directors might otherwise conflict with their fiduciary duty to the company. Presumably Lord Millett was envisaging a situation where the directors were also shareholders, and might be tempted to settle the company's claim at an undervalue, or fail to pursue it altogether, in order to recover the balance of the loss for their personal benefit. This reasoning does not, however, explain why shareholders are generally prevented from pursuing a claim for a fall in share value which is consequential on the company's loss, when the company has its own cause of action: the principle is not confined to shareholders who are also directors. Nor is it apparent why, having prohibited directors from acting in breach of their fiduciary duties, the law should also impose a disability on shareholders (who normally owe the company no such duties) as an additional, indirect, and indiscriminate safeguard.

59. The second policy consideration was that it would be difficult for a liquidator to settle claims against wrongdoers for the benefit of the company's creditors, if the wrongdoers remained exposed to further claims brought by the shareholders: the conduct of the company's claims would effectively be taken out of the liquidator's hands. This point is addressed by the rule in Prudential, consistently with the underlying rule in Foss v Harbottle, as was explained in para 37 above.

60. The most serious difficulty with the approach favoured by Lord Millett is that the possibility of double recovery can arise where concurrent claims exist at the instance of companies and of persons who have suffered loss otherwise than as shareholders. As will be explained, Lord Millett's approach has been interpreted in subsequent cases as extending to such persons the same categorical exclusion of claims as he applied to shareholders. That is not the position on the approach adopted in Prudential : the loss suffered by a creditor, for example, when he cannot recover a debt owed to him by a company because of losses which it has incurred, stands in a different relationship to the company's loss from the loss sustained by a shareholder whose shares have fallen in value, and raises different issues. This is discussed at paras 62–63 and 84–85 below.

61. Lord Millett went on to express the opinion that the concept of reflective loss extended beyond the diminution of the value of shares and the loss of dividends, stating at p 66 (omitting the citation):

“it extends to … all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. All transactions or putative transactions between the company and its shareholders must be disregarded. Payment to the one diminishes the assets of the other. In economic terms, the shareholder has two pockets, and cannot hold the defendant liable for his inability to transfer money from one pocket to the other.” (Emphasis added.)

It appears from the passage cited in para 62 below that those observations may have been intended to apply only to payments receivable by shareholders in that capacity, in which case they correctly recognise that distributions can take other forms besides the payment of dividends. However, the words that I have italicised repeat a point made earlier on p 66, when Lord Millett said:

These passages appear to suggest that the separate legal personalities of the company and its shareholder are to be disregarded in this context. That would provide a simple explanation of why the company and its shareholders cannot have concurrent claims, but would also introduce an important exception to the fundamental principle in Salomon v A Salomon & Co Ltd [1897] AC 22, with potentially significant ramifications. That issue was not discussed.

62. In words which have had a particular influence on later developments, Lord Millett continued [2002] 2 AC 1, 67:

“The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim.”

This is not altogether easy to follow. Lord Millett's reasoning in the preceding passage, cited (first) in para 61 above, is not transferable to persons whose claims are not brought as shareholders, but, for example, as employees or creditors of the company. As Lord Millett had indicated, a company may be regarded in economic terms as the alter ego of its shareholders. It cannot be regarded as the alter ego of its creditors or employees, or of shareholders whose claims are brought in the capacity of creditors or employees.

63. If Lord Millett meant that all claims against a wrongdoer in respect of amounts which the company would have paid to the claimant if it had had the necessary funds must be excluded where the company also has a cause of action, then I would respectfully regard the dictum as going further than was necessary for the decision of the appeal, and as being mistaken. For example, one might envisage a situation in which a creditor of a company has entered into a contract with the wrongdoer, the performance of which would have preserved the company's solvency, and the wrongdoer then breaches the contract and also his duties to the company, rendering it insolvent and unable to pay the debt it owes to the creditor. If the creditor sues the wrongdoer for breach of contract, he is entitled to damages. The fact that the company also has a cause of action is no reason why the creditor should be deprived of the benefit of his contract. In the event that any issue of double recovery arises, it will need to be addressed; but that possibility is no reason for barring the creditor's claim, regardless of whether any such issue arises in the particular case. Where the creditor's claim against the wrongdoer is based on tort, it is equally important that he should not be deprived of the protection afforded by the law of tort, merely because the debt in question is owed to him by a company rather than a natural person.

64. Turning to the remaining speeches in Johnson, Lord Goff of Chieveley agreed with Lord Millett's analysis. Lord Cooke of Thorndon accepted the correctness of the decision in Prudential, and agreed that the English authorities cited by Lord Bingham supported the three propositions which he had stated. He also concurred in the order proposed by Lord Bingham. On the other hand, some of his observations (at pp 45 and 47) suggest that he regarded the avoidance of double recovery and of prejudice to creditors as the critical considerations. Lord Hutton also emphasised those considerations (at p 54). He considered that the Prudential principle should be upheld, although he was critical of the reasoning in that case in so far as it denied that the shareholder had suffered a personal loss.

65. The decision on the facts of Johnson is also important. The House of Lords concluded that two of the heads of loss should be struck out. The first of these was a claim for the fall in the value of Mr Johnson's shareholding in the company. Its being struck out followed from Lord Bingham's proposition (1). The second was a claim for loss in respect of the value of a pension policy set up by the company for Mr Johnson's benefit. Since the striking out of this head of loss has featured prominently in the subsequent case law, it is necessary to consider the matter in some detail. Mr Johnson claimed that he had suffered loss as a result of the company's failure to make payments into the policy which it would have made out of its profits if it had not suffered the losses caused by the defendants. It was not suggested in any of the speeches, or in the judgment of the court below [1999] BCC 474, that the company was under any obligation to Mr Johnson to pay the pension contributions. That aspect of his claim was not, therefore, brought as a creditor of the company. It appears, instead, that the pension contributions were a form of distribution of the company's profits to its 99% shareholder: an alternative to the payment of dividends or bonuses.

66. Lord Bingham dealt with this aspect of the case extremely briefly: an indication that he did not regard it as raising any issue which he had not already addressed in his discussion of shareholders’ claims. He stated [2002] 2 AC 1, 36: “this claim relates to payments which the company would have made into a pension fund for Mr Johnson: I think it plain that this claim is merely a reflection of the company's loss and I would strike it out.” The other members of the House agreed. There is no indication in the speeches, other than possibly in the passage in Lord Millett's speech cited at para 62 above, that the Appellate Committee intended, in its treatment of this element of Mr Johnson's claim, to suggest that the principle which excluded a shareholder's claim for a diminution in the value of his shares or in the distributions which he received should also apply to claims brought otherwise than in the capacity of a shareholder. Lord Bingham clearly intended that the principle which he had explained should be confined to claims brought in that capacity: see the second sentence of his proposition (1), cited in para 41 above. His conclusion that this head of loss should be struck out was consistent with the application of that proposition.

67. In summary, Johnson gives authoritative support to the decision in Prudential that a shareholder is normally unable to sue for the recovery of a diminution in the value of his shareholding or in the distributions he receives as a shareholder, which flows from loss suffered by the company, for the recovery of which it has a cause of action, even if it has declined or failed to make good that loss. Lord Bingham's speech is consistent with the reasoning in Prudential. On the other hand, the reasoning in the other speeches, especially that of Lord Millett, departs from the reasoning in Prudential and should not be followed.'

Under the heading 'Later cases', Lord Reed in Sevilleja said, at paragraphs 68 to 71:  

'68. Johnson has been followed by a multitude of cases in which litigants, usually relying on the speech of Lord Millett, have sought either to establish exceptions to the general principles laid down by Lord Bingham, or to establish that the rule against the recovery of reflective loss extends more widely than Johnson had determined. One of the issues which remained controversial was whether, notwithstanding Lord Bingham's analysis, there were circumstances in which a shareholder could recover for loss which flowed from the company's loss where the company had a cause of action but failed to pursue it.

69. In Giles v Rhind [2003] Ch 618 the Court of Appeal decided that such circumstances existed. The claimant was a former company director who was also a shareholder in the company. He brought proceedings against a defendant who had conducted a business in competition with that of the company, in breach of contractual obligations owed to both the claimant and the company. The company's action for damages had been discontinued due to its inability to find security for costs, as a result of impecuniosity caused by the defendant's wrongdoing. The terms on which the action was discontinued precluded the company from bringing any further proceedings in relation to its claim. The claimant sought to recover for a variety of losses, including the loss of the value of his shares. The Court of Appeal allowed the claim to proceed to trial. It considered that it would be unjust to allow a wrongdoer to defeat a claim by shareholders on the basis that the claim was trumped by a right of action held by the company which his own wrongful conduct had prevented the company from pursuing. It concluded that the “reflective loss” principle, in so far as it was relevant, did not apply in those circumstances.

70. One can sympathise with the Court of Appeal's sense of the unattractiveness of the defendant's position, but the fact that a wrongdoer has unmeritoriously avoided his liability in damages to A is not a reason for requiring him to pay damages to B. The basis of the decisions in Prudential and Johnson is that a shareholder, whose shares have fallen in value as the consequence of loss suffered by the company for the recovery of which it has a cause of action, has not suffered a recoverable loss. That conclusion does not depend on whether the company is financially able to bring proceedings or not. If the shareholder has not suffered a recoverable loss, he has no claim for damages, regardless of whether, or why, the company may have failed to pursue its own cause of action.

71. The same criticism applies to the later decision in Perry v Day [2005] 2 BCLC 405, where the court followed Giles v Rhind in a situation where the wrongdoer had abused his powers as a director of the company so as to prevent it from bringing a claim under which it could have recovered its loss. The solution which company law provides, in a situation of that kind, is the derivative action.'

Under the heading 'Gardner v Parker', Lord Reed in Sevilleja said, at paragraphs 72 to 77:  

'72. A question left in doubt by Lord Millett's speech in Johnson was how widely the bar on the recovery of reflective loss applied. That issue came before the Court of Appeal in Gardner v Parker [2004] 2 BCLC 554. The claim was brought by the assignee of rights of action held by a company (“the shareholder”) which was both a shareholder and a creditor of a second company (“the company”), against a defendant who was a director of both the shareholder and the company. He was alleged to have sold the company's principal assets at an undervalue to another entity in which he had an interest, rendering the company insolvent, and preventing the shareholder from recovering the debt which the company owed it. In so acting, the defendant had acted in breach of fiduciary duties owed separately to the shareholder and to the company as a director of both of them. The shareholder then sought to recover in respect of the fall in the value of its shareholding, and also in respect of the loss arising from its inability to obtain repayment of the debt. Proceedings brought by another of the company's creditors against the purchaser of the company's assets had been resolved by a settlement, to which the company, acting by receivers appointed by that creditor over its property, and the defendant, were both party. Under the settlement, a payment was made to that creditor, and the defendant was released from all claims which the company might have against him (other than claims vested solely in its liquidators; but the company was not in liquidation).

73. The Court of Appeal considered three questions. The first was whether the “reflective loss” principle applied where the wrongdoing took the form of a breach of fiduciary duty rather than the breach of a duty arising under the common law. The court held that it did, following its earlier decision in Shaker v Al-Bedrawi [2003] Ch 350. That aspect of the decision is not challenged in the present appeal.

74. The second question was whether the exception established in Giles v Rhind ought to be extended to a situation in which the company had disabled itself, under a settlement with the wrongdoer, from bringing proceedings against him for the recovery of its loss. The court held that it should not. As I have explained, I would hold that no such exception exists.

75. The third question was whether the “reflective loss” principle applied to a claim arising from a creditor's inability to recover a debt owed to it by a company in which the creditor was a shareholder. The court held that it did, relying on the treatment of the claim for loss of pension in Johnson's case, and applying Lord Millett's dictum, cited at para 62 above. Neuberger LJ stated [2004] 2 BCLC 554, para 70:

“It is clear from those observations, and indeed from that aspect of the decision, in Johnson's case that the rule against reflective loss is not limited to claims brought by a shareholder in his capacity as such; it would also apply to him in his capacity as an employee of the company with a right (or even an expectation) of receiving contributions to his pension fund. On that basis, there is no logical reason why it should not apply to a shareholder in his capacity as a creditor of the company expecting repayment of his debt.”

The claim brought as a creditor was therefore dismissed. Taking this reasoning to its logical conclusion, Neuberger LJ added (ibid) that the same reasoning should apply even where the employee or creditor was not also a shareholder.

76. As was explained in paras 65–66 above, on the facts of Johnson the claim in respect of lost pension contributions was a claim for a loss of distributions, brought by Mr Johnson in the capacity of a shareholder. It therefore fell within the scope of the reasoning in Prudential, and Lord Bingham's proposition (1). The claim brought by the creditor-shareholder in Gardner v Parker did not fall within the scope of that reasoning, or Lord Bingham's proposition. It should not have been barred as reflective loss. The court might have had to consider the avoidance of double recovery, applying the general principles discussed in paras 2–7 above, if that issue had been raised; but it was not.

77. The cases since Gardner v Parker have followed the approach adopted in that case. The supposed “reflective loss” principle has been treated as being based primarily on the avoidance of double recovery and the protection of a company's unsecured creditors, and as being applicable in all situations where there are concurrent claims and one of the claimants is a company. So understood, the “reflective loss” principle, as Sir Bernard Rix JA observed in Xie Zhikun at para 95, “seems to be extending its scope wider and wider”. Sir Bernard added at para 96 that “a number of distinguished judges have commented on the uncertainties and difficulties of the reflective loss doctrine”. Professor Andrew Tettenborn has rightly warned that “Today it promises to distort large areas of the ordinary law of obligations”: “Creditors and Reflective Loss: A Bar Too Far?” (2019) 135 LQR 182. The decision of the Court of Appeal in the present case, applying the approach laid down by Lord Millett in Johnson and by the Court of Appeal in Gardner v Parker, confirms that threat. It is the first case in this jurisdiction in which the “reflective loss” principle has been applied to a claimant which is purely a creditor of a company. The extension of the principle to such cases has the potential to have a significant impact on the law and on commercial life. The possibility of the further extension of the principle to creditors of natural persons, which the Court of Appeal considered, indicates the extent to which it has become difficult to confine. As the scope of the principle has expanded, so have the volume of litigation and the level of uncertainty.'

Under the heading 'Other jurisdictions', Lord Reed said in Sevilleja, at paragraphs 78:   

'78. Almost 40 years have passed since Prudential was decided. The decisions in that case and in Johnson have been followed throughout much of the common law world, albeit sometimes on the basis of different reasoning. Without attempting an exhaustive survey, they have, for example, been followed in Australia (see, for example, Chen v Karandonis [2002] NSWCA 412 and Hodges v Waters (No 7) (2015) 232 FCR 97 ); in the Cayman Islands (see Xie Zhikun v Xio GP Ltd (unreported) 14 November 2018 and Primeo Fund v Bank of Bermuda (Cayman) Ltd (unreported) 13 June 2019, both Cayman Islands Court of Appeal); in Hong Kong (see, for example, Waddington Ltd v Chan Chun Hoo Thomas [2009] 2 BCLC 82, where Lord Millett's approach in Johnson was followed, in a judgment delivered by Lord Millett NPJ, and Giles v Rhind [2003] Ch 618 was doubted and not followed); in Ireland (see, for example, Alico Life International Ltd v Thema International Fund plc [2016] IEHC 363, where the court followed the reasoning in Prudential, and of Lord Bingham in Johnson, and rejected the reasoning in Christensen v Scott [1996] 1 NZLR 273) ; in Jersey ( Freeman v Ansbacher Trustees (Jersey) Ltd 2009 JLR 1, where the principle was treated, consistently with the reasoning in Prudential, as an aspect of the rule in Foss v Harbottle ); and in Singapore (see, for example, Townsing v Jenton Overseas Investment Pte Ltd [2008] 1 LRC 231, where the principle was explained as an aspect of the rule in Foss v Harbottle, and the reasoning in Christensen was rejected).'