Court of Appeal confirms reflective loss can't be recovered (Burnford v AA)

What makes loss reflective?

The following factors amplify those set out at first instance (and in Marex):

1. A shareholder must have suffered loss in their capacity as a shareholder. The loss must be a reduction in the value of their shares or distributions. The loss must be caused by a loss sustained by the company. The company must have a cause of action against the same wrongdoer (Marex at paragraph 79);
    
2. A shareholder cannot escape the "reflective loss" principle just because they have an independent cause of action against the defendant. They 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 apply. The "reflective loss" principle can apply "where recovery by the company might not … fully replenish the value of its shares" (see Marex at paragraph 42). Equally, the company's loss can exceed the fall in the value of its shares;
    
4. The "reflective loss" principle will not apply 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. The "reflective loss" principle will not apply to a claim which is not brought as a shareholder but instead, for example, as 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 relates to the circumstances when the shareholder suffered the alleged loss, not those when the claim was issued.

Background and grounds of appeal

The claimants were former shareholders in Motoriety (UK) Limited (Motoriety). Motoriety entered into various agreements with the defendant, Automobile Associations Developments Limited (AAD) (a group company within the AA group). In August 2015, Motoriety and the claimants entered into an investment agreement with AAD, through which AAD subscribed for shares in return for board representation and the option to acquire further shares. Motoriety also granted AAD a licence to use its software. Motoriety failed to prosper. It went into administration and was bought by another company within the AA group, before being dissolved in 2019. The claimants alleged that Motoriety entered into the agreements because of the defendant's misrepresentations, and that AAD breached the investment agreement. They argued that but for the misrepresentations, they would have entered into an investment agreement with a third party and the value of their shareholdings would have increased. Alternatively, they argued that but for AAD's breaches of the investment agreement it would have exercised its option to acquire more shares, for which the claimants would have received further consideration.

AAD denied the allegations and applied for strike out or summary judgment on the basis that all of the claimants' claims were barred by the rule against reflective loss.

The courts' decisions

At first instance, the court granted AAD's application and struck out the claim. That decision was upheld on appeal. Both judgments emphasised that the rule on reflective loss had been clarified by the Supreme Court in Sevilleja v Marex and that its scope and application was now sufficiently certain. In relation to both the misrepresentation and breach of contract claims, the Court of Appeal agreed that it was clear that Motoriety itself would have had the same cause of action against AAD and that any loss suffered by the claimant shareholders was in the form of a reduction in the value of their shares. Their claim fell squarely within the principles set out in Sevilleja v Marex (listed above) and was barred by the rule against reflective loss.

However, there was one area in which the reasoning of the Court of Appeal differed slightly to that expressed at first instance, and that concerns the timing of the application of the rule.

Timing of the test for reflective loss

In Nectrus v UCP ²(a judgment given on an application for permission to appeal), the court held that the time for assessing whether loss is reflective or not should be the date the claim is issued. Subsequently, however, in Primeo v Bank of Bermuda³, the Privy Council concluded that Nectrus was 'wrongly decided' and the time for assessing loss should be the date the loss was suffered. At first instance in Burnford, the court considered these conflicting authorities and determined that it was bound (as a matter of authority) to follow Nectrus and not Primeo. However, it considered it was able to distinguish Nectrus on the facts. In Nectrus, unlike Burnford, the shareholder had sold their shares before the claim was issued, and at the time of issue the company had not been dissolved. The company's loss had therefore been 'passed on' to the shareholder. When the shareholder brought the claim, there was therefore no risk of double recovery for the same loss. In Burnford, however, the company had been dissolved before the claim was issued and the claimant shareholders had not sold their shares at a reduced price. The loss therefore remained with the company where, were the company to be restored to the register, it would be able to bring the same claim. At first instance, Nectrus was therefore distinguished.

The Court of Appeal considered the conflicting authorities in Nectrus and Primeo. It held that Primeo had established that the rule against reflective loss is not simply a procedural rule designed to prevent double recovery. Instead, it is a substantive rule of law and the time for assessing it is the time the loss was suffered, not the time a claimant chooses to bring a claim.

The court also noted that the Court of Appeal in Allianz Global Investors GmbH v Barclays Bank plc [2022] EWCA Civ 353 had indicated this was the correct view. The Court of Appeal therefore crystallised this position by confirming that the correct time to assess the loss is when the loss is suffered, not when the claim is issued.