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

If you, as a shareholder, have suffered a fall in the value of your company shares or dividends because of the actions of the company directors or a third party, you would assume you have the legal right to bring a claim against the wrongdoers. Although this may seem logical, in many cases, your assumption would be false.

Under the principle of reflective loss, a shareholder cannot claim a fall in the value of their shares or dividends due to loss suffered by the company, where the company itself has a right to claim against the same wrongdoer. The reflective loss principle also captures potential claims by creditors and employees.

The recent case of Burnford and ors v Automobile Association Developments Limited, decided in the Court of Appeal, provides a superb summary of the case law concerning the reflective loss principle.

Background to the decision

The Claimants were former shareholders in a company called Motoriety (UK) Ltd (Motoriety) which provided software solutions for the motoring industry. In 2015, Motoriety sought investment from Automobile Association Developments Limited ( better known as the AA). It also looked to enter an arrangement to offer AA’s customer base of four million personal members and nine million business members access to its software. In addition, the AA said it would send out MOT reminders to five million members over the coming 12 months, a representation the Claimants later stated they relied on.

Motoriety and the Claimants secured an investment agreement with the Defendant in which the Defendant agreed to subscribe for 50% of the share capital of Motoriety, receive a place on the Board, and benefit from a call option for the remaining 50 % of share capital. Motoriety subsequently granted a software licence and associated intellectual property rights to the Defendant. In 2017, Motoriety went into administration and was purchased by another company in the AA group.

The Claimants stated they had relied on false representations by the Defendant, and this led to them entering into the agreement. They also claimed that the Defendant breached implied terms of the contract by taking specific actions that undermined the basis of the agreement. These factors, alleged the Claimants, resulted in Motoriety falling into administration.

The Defendant applied to have the claim struck out on the basis it was barred by the reflective loss principle. Applying the Supreme Court decision in Marex Financial Ltd v Sevilleja [2020] UKSC 31 (see below), His Honour Judge Paul Matthews agreed with the Defendants and struck out the claim.

The Court of Appeal’s discussion of the reflective loss principle

In dismissing the Claimant’s appeal, the Court of Appeal turned to the leading case of Marex Financial Ltd v Sevilleja, in which the UK’s most senior judges confirmed the definition of the reflective loss principle made by Lord Reed in Johnson v Gore Wood & Co [2002] 2 AC 1.

“a shareholder cannot bring a claim in respect of a diminution in the value of his shareholding, or a reduction in the distributions which he receives by virtue of his shareholding, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, even if the defendant’s conduct also involved the commission of a wrong against the shareholder, and even if no proceedings have been brought by the company”.

Lord Reed explained that the rationale behind the principle was that where the rule applies:

“the shareholder does not suffer a loss which is recognised in law as having an existence distinct from the company’s loss. On that basis, a claim by the shareholder is barred by the principle of company law known as the rule in Foss v Harbottle (1843) 2 Hare 461 : a rule which (put shortly) states that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself”

In Burnford, the Court of Appeal went on to set out several points that can be drawn from various case law authorities, namely:

• The reflective loss principle applied where a shareholder brought a claim in respect of loss (in the form of a reduction in share value or in distributions) which they had suffered in their capacity as a shareholder, as a consequence of loss sustained by the company, and in respect of which the company had a cause of action against the same wrongdoer.
• The fact a shareholder can prove they have an independent claim against the Defendant does not negate the application of the reflective loss principle. To circumvent the principle, the Claimant would need to demonstrate they had suffered a separate and distinct loss. A reduction in share value or distributions resulting from losses by the company does not qualify as a separate and distinct loss.
• Specific correlation between the shareholder’s and company’s losses was not required for the principle to apply.
• Because the reflective loss principle is so established, the Court has no discretion as to whether it is applied or not.
• When deciding whether the principle applied, the Court would examine the facts that were present when the loss occurred, not at the time the claim was brought.
• If the company has no claim against the Defendant, the reflective loss principle will not apply.

What does Burnford and ors v Automobile Association Developments Limited mean for shareholders?

The Court pointed out that although several case law authorities had grappled with the principle of reflective loss since the decision in Marex, there was no ambiguity concerning the rule. If the company has a claim against the Defendants, then unless shareholders can show they suffered a separate and distinct loss from that experienced by the company, they cannot bring a civil law claim.

To discuss any points raised in this article, please call us on +44 (0) 203972 8469 or email us at mail@eldwicklaw.com.

Note: The points in this article reflect sanctions in place at the time of writing, 5^th March 2023. This article does not constitute legal advice. For further information, please contact our London office.

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