15 October 2020 - Post by:Tomasz Hara
In BIG, Burgess and others v Smith and others, the court applied the reflective loss rule, as recently restated by the Supreme Court in Marex: in circumstances where a shareholder and their company have concurrent claims in relation to the same loss, the shareholder’s loss is not recognised in law as having an existence distinct from the company’s loss.
This was a strike out / reverse summary judgment application, and so the facts were assumed:
1. There was an oral agreement among a number of parties, including BIG, Mr Burgess (an indirect shareholder in BIG), and Mr Smith.
2. Under that agreement, a holding company (Streaming) was to be set up, with BIG as shareholder. Thereafter, Mr Smith was to procure the transfer to Streaming of two further companies.
3. Streaming was duly set up, with BIG as shareholder (and Mr Burgess as indirect shareholder).
4. Mr Smith failed to procure the agreed transfer.
The loss to both BIG and Mr Burgess was a consequence of Mr Smith failing to procure the transfer of two companies to Streaming. It was reflective of the loss to Streaming. Two questions arose from this fact pattern.
First, could BIG’s claim under the agreement be barred even though Streaming was not in existence when the agreement was made? On a true construction of the agreement, Streaming was entitled to a benefit thereunder (the transfer of the two companies to be procured by Mr Smith) and could enforce its rights under the Contracts (Rights of Third Parties) Act 1999. As a result, BIG’s claims were concurrent with those of Streaming and were therefore barred by the reflective loss rule.
Secondly, did the rule apply to the loss suffered by Mr Burgess, an indirect shareholder in Streaming? The Claimants suggested that Mr Burgess’ claims were barred by the rule “three times over”. The court disagreed. The rule originates from the special relationship between a shareholder and their company. It does not apply in circumstances where that relationship is missing, as it was here.