Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis

The Journal of International Banking Law and Regulation (JIBLR) has published an article written by members of our securities class action practice: Capital Raisings and Opportunistic M&A in a Covid-19 Environment—Lessons Learned from the Global Financial Crisis.

Covid-19 will make it inevitable that some companies will need to bolster their capital positions, which will lead to rights issues and other forms of capital raising later this year and into 2021. On the other hand, there will be other companies who emerge from the immediate crisis and identify opportunities to gain market share or pursue other strategic goals through mergers and acquisitions. The article considers class action specific issues which companies may face during these types of transaction. There are certain parallels which may be drawn between the current environment and the financial crisis, and the article identifies learning points from the two class actions commenced in the English courts following major transactions in the run-up to and at the height of the financial crisis—the Royal Bank of Scotland rights issue and Lloyds’ acquisition of HBOS.

In particular, the article considers:

  • The legal tests governing what information is required to be disclosed;
  • Relevant considerations when information is excluded from public disclosures;
  • Forward-looking guidance;
  • Specificity of risk factors;
  • The impact of timetable pressure;
  • Working capital statements;
  • Recommendations to shareholders; and
  • Regulator capriciousness.

Please contact Ceri Morgan if you would like to request a copy of the full article.

Simon Clarke
Simon Clarke
+44 20 7466 2508
Harry Edwards
Harry Edwards
+61 3 9288 1821
Chris Bushell
Chris Bushell
+44 20 7466 2187
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

High Court tests newly narrowed scope of the “reflective loss” rule in first decision since the Supreme Court’s judgment in Marex

In the first decision to consider the so-called “reflective loss” principle since the Supreme Court’s judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31 earlier this year, the High Court has emphasised the newly narrowed scope of the rule: Broadcasting Investment Group Ltd & Ors v Smith & Ors [2020] EWHC 2501 (Ch).

As a reminder, the Supreme Court in Marex confirmed (by a 4-3 majority) that the reflective loss principle is a bright line legal rule, which prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer. Marex confirmed the narrow ambit of the rule, which should be applied no wider than to shareholders bringing such claims, and specifically does not extend to prevent claims brought by creditors. For a more detailed analysis of the decision in Marex, see our blog post: Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule.

The issue arose in the present case on an application for strike out / reverse summary judgment by the defendant to a claim for alleged breach of a joint venture agreement. The court found that the claim brought by the first claimant – a direct shareholder in the company that suffered the relevant loss – was a paradigm example of a claim within the scope of the reflective loss principle. The court was prepared to determine this question finally and strike out the claim, on the basis that the reflective loss principle is a rule of law and it was not suggested that further relevant evidence might emerge at trial.

However, the more interesting aspect of the decision considered whether the reflective loss principle should bar the claim of the third claimant, who was a “shareholder in a shareholder” in the first claimant (conveniently described in the judgment as a “third degree” shareholder).

The nub of the argument was that the third claimant should be treated as a “quasi-shareholder” in the relevant company, by reason of the chain of shareholdings connecting him to that company. The defendant argued that the third claimant should not be put in a better position, for the purposes of the rule, than if he had actually been a shareholder in that company (i.e. than the first claimant).

However, the court rejected this argument, and held that the reflective loss rule did not operate to bar the claim of a “quasi-shareholder” in this way. The court was particularly impressed by the emphasis in Marex that the reflective loss rule bars only shareholders in the loss-suffering company and is a “highly specific exception of no wider ambit”. This sentiment was antipathetic to any incremental extensions of the rule beyond that described in Marex. The court therefore refused to strike out the claim of the “third degree shareholder”, which will proceed to trial.

Considering the implications of this decision in a financial services context, the robust confirmation and clarification of the reflective loss principle in Marex has generally been well-received by the market. Although the rule has certainly been pruned, there was a clear risk in Marex that the principle, as a binding rule of law, could be lost altogether. In its surviving form, the reflective loss rule will continue to play an important part in the defence of shareholder claims against banks (aside from claims brought under section 90 and 90A of the Financial Services an Markets Act 2000, which provide a statutory exemption).

The present decision could (at first glance) raise concerns of opening the door to novel claims against the bank. For example, where it is alleged that a corporate customer has suffered loss for which the bank is responsible, a claim could theoretically be brought by both that company and by a “quasi-shareholder”, where there is a chain of shareholder ownership in the relevant company. However, the “quasi-shareholder” must have an independent cause of action against the bank, and in most cases there should be good arguments to say that there is no contractual relationship and no duty of care is owed to a second or third degree shareholder.


The underlying facts of the dispute are complex, but relate to the development of a start-up company in the technology sector. In broad summary, in October 2012 an alleged oral joint venture agreement (JV Agreement) was entered into by the claimants, the first defendant (Mr Smith), the second defendant (Mr Finch) and certain other parties. Under the terms of the JV Agreement, it was intended (among other things) that a joint venture vehicle would be set up, called Simplestream Group plc (SS plc), and that Mr Smith’s shares in two existing software companies would be transferred to SS plc.

SS plc was subsequently formed and its shareholders were Mr Smith, Mr Finch and the first claimant, Broadcasting Investment Group Limited (BIG). In alleged breach of the JV Agreement, the relevant shares were not transferred to SS plc, and SS plc subsequently entered creditors’ voluntary liquidation.

BIG brought a claim against Mr Smith and Mr Finch (and others) for breach of the JV Agreement, claiming specific performance as regards the transfer of shares to SS plc, or damages in lieu of specific performance. Alternatively, BIG claimed that it suffered loss by reason of the consequent diminution in the value of its shareholding in SS plc and loss of dividend income from SS plc.

The second claimant (VIIL) was the majority shareholder of BIG and the third claimant (Mr Burgess) was, in turn, the majority shareholder of VIIL. Mr Burgess brought parallel claims to those brought by BIG, on the basis that both BIG and Mr Burgess personally were alleged to be parties to, and therefore prima facie entitled to enforce, the JV Agreement.

Mr Smith applied for strike out / reverse summary judgment on the basis that the claims of BIG and Mr Burgess were barred by the rule against reflective loss, as recently affirmed by the Supreme Court in Marex.

At the date of the hearing to which the present judgment relates, the liquidator of SS plc had not indicated any intention to pursue any claims which SS plc might have in relation to the JV Agreement.


The court held that, while BIG’s claim to enforce the JV Agreement was barred by the rule against reflective loss first established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, and should be struck out, Mr Burgess’ claim was not barred by the same principle and could proceed to trial.

The court considered a number of other issues, but this blog post focuses on the court’s analysis of the reflective loss principle, being the first case to consider and apply the Supreme Court’s decision in Marex earlier this year.

Application of the Supreme Court’s decision in Marex

The application for strike out / summary judgment had been adjourned pending the determination of the appeal to the Supreme Court in Marex, which the court noted had clarified the law governing the reflective loss principle and made the task of considering the application at hand considerably more straightforward.

The court acknowledged that – strictly speaking – the application of the reflective loss principle to claims by shareholders was not a matter for decision in Marex, because the question before the Supreme Court considered the specific position of a creditor who was not a shareholder. Nevertheless, all members of the Supreme Court in Marex made it clear that it was necessary for them to review the scope of the principle in its entirety in order to decide whether it should be extended to creditors. It followed that the reasoning of the majority in Marex represents the law which must now be applied to all attempts to rely on the principle of reflective loss, whether the claims are by shareholders or others.

A detailed analysis of the Supreme Court’s decision in Marex can be found on our banking litigation blog. In summary, the Supreme Court (by a majority of 4-3) confirmed that the “reflective loss” rule in Prudential is a bright line legal rule of company law, which applies to companies and their shareholders. The rule prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer. However, the Supreme Court unanimously held that the principle should be applied no wider than to shareholders bringing such claims, and specifically does not extend to prevent claims brought by creditors. The majority of the Supreme Court (led by Lord Reed) emphasised that the rule is underpinned by the principle of company law 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. On this basis, a shareholder does not suffer a loss that is recognised in law as having an existence distinct from the company’s loss, and is accordingly barred.

Requirement for concurrent claim

The court’s starting position was to determine whether SS plc (theoretically) had a cause of action arising out of the JV Agreement. It said this was the logical first question, since the rule in Prudential is concerned only with concurrent claims, one of which must be vested in the company which has suffered the relevant loss. The court stated that, if SS plc did not have such a claim, then the application should fail.

In response to this preliminary question, the court found that SS plc had a contractual claim to enforce the JV Agreement by virtue of the s.1(1)(b) of the Contracts (Rights of Third Parties) Act 1999 (1999 Act), which provides that a person who is not a party to a contract may in his/her own right enforce a term of the contract if “the term purports to confer a benefit” on that person.

One of the terms of the JV Agreement pleaded by the claimants (and therefore of course taken as factually correct for the purpose of the application), provided that the shares to be transferred to SS plc would be held by the company beneficially, which in the court’s view, appeared ostensibly to bestow an advantage on SS plc for the purpose of s1(1)(b). This analysis was unaffected by the fact that the agreement in question was oral rather than written, and the court found on the facts nothing to suggest that the parties did not intend the term in question to be enforceable by SS plc, so as to engage s.1(2) of the 1999 Act and disapply s.1(1)(b).

Scope of the rule in Prudential / the reflective loss principle

Having concluded that SS plc had a concurrent claim to enforce the JV Agreement, the court turned to consider whether the rule in Prudential, as explained by Marex, barred : (1) the claim brought by BIG, a shareholder in SS plc; and/or (2) the claim brought by Mr Burgess, who was not a direct shareholder in SS plc.

(1) BIG’s claim

In the court’s judgment, BIG’s claim was a paradigm example of a claim that was within the scope of, and was therefore barred by, the rule in Prudential.

The court accepted that BIG’s claim was in respect of a loss suffered by SS plc, because:

  • BIG’s claim was to enforce the JV Agreement, and in particular, Mr Smith’s alleged obligation to transfer shares to SS plc.
  • BIG was a shareholder in SS plc and its loss was merely reflective of that suffered by SS plc, as was apparent from the claimants’ pleaded case.
  • Since SS plc and BIG had concurrent claims against Mr Smith, BIG’s claim was barred by the rule in Prudential.

The court confirmed that the rule in Prudential extended to both the claim for damages and to the claims for specific performance of the JV Agreement. In particular, the court noted Lord Reed’s explanation in Marex that one of the consequences of the rule in Prudential 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. There was no suggestion in Marex that any specific remedy, such as specific performance, is exempt from the rule; to allow otherwise would permit the avoidance of the rule in Foss v Harbottle.

(2) Mr Burgess’ claim

The court then turned to consider whether Mr Burgess’ claim was within the scope of the rule in Prudential.

The court said the real question here was whether, following Marex, the rule in Prudential can apply to bar the claim of someone who is not a shareholder in the company which suffers the relevant loss (i.e. SS plc). As explained above, Mr Burgess was not a shareholder in SS plc directly. He was the majority shareholder in VIIL, which was the majority shareholder in BIG, which was a shareholder in SS plc.

The court noted that, given the conclusion reached by Lord Reed, the answer to this question might appear obvious (emphasis added):

“The rule in Prudential is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way.”

While Lord Reed limited the application of the rule, in terms, to claims by shareholders in the relevant loss-suffering company, it was argued that a number of the justifications underlying the rule applied with equal force to Mr Burgess’ claim. This was because Mr Burgess was in the position of “a shareholder in a shareholder” or of “a shareholder in a shareholder in a shareholder” (conveniently described in the judgment as “second degree” or “third degree” shareholders).

The court commented that the nub of the argument seemed to be that Mr Burgess should be treated as a “quasi-shareholder” in SS plc who, by reason of the chain of shareholdings connecting him to SS plc, could not be in a better position, for the purposes of the rule, than if he had actually been a shareholder in that company.

The court was not persuaded, and held that the rule in Prudential did not operate to bar Mr Burgess’ claim, for the following key reasons:

  1. The judgments of the majority of the Supreme Court in Marex make it clear that the rule only bars claims by shareholders in the loss-suffering company.
  2. The descriptions of the rule in the judgments of Lord Reed and Lord Hodge are antipathetic to any incremental extension of the rule to non-shareholders, whatever policy justifications may be advanced for such an extension.
  3. A “second degree” or “third degree” shareholder is not, in fact or in law, a shareholder in the relevant company. To blur that distinction would be to ignore the separate legal personality of the companies which form the intervening links in the chain between the claimant and the loss-suffering company. In the present case, none of the limited circumstances applied for the court to “pierce the corporate veil”.
  4. The rule in Prudential derives from the legal relationship between a shareholder and his/her company; and the rule is something which the shareholder contracts into when he/she acquires his/her shares. This reasoning cannot apply to a second degree or third degree shareholder who does not acquire shares in the relevant company and therefore never contracts into the rule so far as it affects recovery of losses by that company.

Interestingly, there does not appear to have been any discussion of the lack of connection between the claim brought by Mr Burgess (where the cause of action was a personal claim for breach of the JV Agreement to which he was a party), and the loss alleged to have been suffered, which arose separately through his indirect shareholding in SS plc. As a result of the failed application, Mr Burgess’ claim will proceed to trial, which may offer the opportunity to consider this issue.

Suitability for summary judgment

The court rejected the claimants’ suggestion that the application of the rule in Prudential is inherently unsuitable for summary determination because there is a discretion in the operation of the rule.

The court commented that both the application of the Prudential rule itself and the question of whether SS plc had an independent cause of action under the 1999 Act raised questions of law, which were suitable for determination on a strike-out / reverse summary judgment application (following the court’s observations in Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch)).

Harry Edwards
Harry Edwards
+61 3 9288 1821
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948

The Tesco Litigation: lessons learned from split trial orders in the context of securities class actions

The long-running Tesco Litigation (a securities class action brought by shareholders under section 90A Financial Services and Markets Act 2000 (FSMA)) has reached the Pre-Trial Review stage and there are a couple of snippets arising from the PTR judgment which will be of interest to those who follow the development of the class action landscape in the UK: Manning & Napier Fund, Inc & Anor v Tesco plc [2020] EWHC 2106 (Ch).

First, it is apparent from the judgment that one of the claimant groups (the group of shareholders represented by Stewarts Law) have settled their claims (on confidential terms) with Tesco, leaving the Manning & Napier Fund and Exeter Trust Company claimants (represented by Morgan Lewis, the MLB Claimants) to continue alone. One potential reason for the difference in approach to settlement (at least for now) may be the difficulties which one of the MLB Claimants appears to have in establishing its reliance on the alleged disclosure defects, highlighting the critical importance of that battleground in these types of claim.

Second, the court’s decision brought into focus a key case management decision for securities class actions; whether the trial will be split and, if so, what the precise split of issues to be determined should be.

In this blog post, we consider the relevance of the different elements of the typical causes of action pursued in shareholder claims to parties’ preference for a split trial, and the approach the court has adopted to date in the key securities class actions which have progressed through the courts of England and Wales.

Key elements of shareholder claims

A securities class action brought under section 90A FSMA (as in the Tesco Litigation) or under common law (such as a negligent misstatement, as was the case in the Lloyds/HBOS Litigation) requires claimants to establish that:

  • There was a defect in the disclosures made with the requisite degree of fault on the part of relevant officers of the company;
  • The claimants relied on the alleged defect in their investment decision;
  • The claimants suffered loss; and
  • This loss was caused by the defect (i.e. but for the alleged breach by a defendant, the claimants would not have suffered that loss).

The enquiry into the existence of a defect and establishing the requisite knowledge and fault on the part of the company will inevitably focus principally on the position and conduct of the company, placing a heavy burden in the production of documentary and witness evidence squarely on the defendant(s) in a securities class action.

By contrast, the need for the claimants to prove reliance involves an enquiry into their investment decision-making and, as we have commented previously, courts have been clear that claimants will not be able to side-step the need to undertake an appropriate search for documents and produce witness evidence in support of their case on this issue (see our previous blog posts: The Lloyds/HBOS litigation: The first shareholder class action judgment in England & Wales and High Court orders claimants to provide disclosure to prove investment decisions were made in reliance on defective publications in the Tesco section 90A FSMA group litigation).

Claimants will also need to incur substantial time and expense in preparing the evidence which is required to establish causation and loss, a large part of which will be expert in nature but may also include (as is the case in the Tesco Litigation – see below) evidence about the alternative investments which the claimants may allege they would likely have made but for the defects.

Accordingly, it is natural for the question of a split trial to be a key case management battleground for parties seeking a strategic, as well as practical, advantage: claimants will often seek to defer the expenditure of the costs involved in establishing reliance, causation and loss to a later trial and have the focus of trial one solely on the defendants’ conduct.

Approaches to split trials in securities class actions to date

It is interesting, therefore, to compare the different approaches taken by the courts in the cases which have been pursued to date on this critical case management question:

  • In the RBS Rights Issue Litigation, only questions of breach were going to be determined at the first trial. This was in large part because the defendants accepted that section 90 FSMA (which governs claims for prospectus liability) did not require the claimants to establish that they relied on any defects in the disclosures. Accordingly, the court was persuaded that, for reasons of efficiency, the difficult questions of causation and loss could be held over until a second trial (if that was necessary based on the finding in trial one). Given the breadth of the issues in the case and hence the number of permutations of potential findings on questions of breach, it was simply unworkable for issues of causation and loss to be prepared for a unitary trial (for example, involving expert reports) on the basis of assumptions as to what findings the court might make at trial on questions of breach. However, this had a clear strategic benefit for the claimants who were able to focus all of their resources on seeking to establish that there had been disclosure breaches. Indeed, in contrast to the enormous volume of documents which the defendants had to search for and ultimately disclose, the claimants were required to produce no disclosure whatsoever for the purposes of trial one.
  • By way of contrast, in the Lloyds/HBOS Litigation, the defendants successfully resisted attempts by the claimants to seek a split trial. The question of whether the claimants relied on the alleged defects was an essential part of the liability question. Moreover, the evidence on causation and loss was bound up in the important question about the materiality of the information which was said to have been omitted (an essential element of establishing breach) since proving loss largely depended on the market reaction when the information was subsequently disclosed.
  • In the Tesco Litigation, the claimants initially proposed a split trial along similar lines to the RBS Rights Issue Litigation so that the first trial focused only on the allegations of breach and all other issues (including reliance, causation and loss) would be dealt with at a second trial. However, at the first CMC the court ordered a single trial, reserving only the question of whether “quantum calculation issues” should be decided separately. Accordingly, issues of reliance and causation fell within the scope of the first trial (reflecting the centrality of those questions to any claim under section 90A FSMA). At the second CMC, the court ordered that “issues of quantum calculation shall be dealt with at a subsequent hearing, if necessary”. As a result (and borne out in the disclosure issues which have led to various case management judgments during the lead up to trial), the claimants have not been able to defer production of evidence on these issues and, at the upcoming trial, reliance and causation issues will no doubt feature heavily in the course of evidence and argument. Indeed one of the issues at the PTR was a specific disclosure application by Tesco for documents relating to whether the relationship between one of the MLB Claimants and its investment adviser was one of agency such that any reliance which the adviser placed on the defects when making investment decisions would meet the reliance requirement of section 90A. The judge made the order, noting that the issue was “an important one capable of being determinative”.

Cautionary note: the importance of precision in your case theory

One of the issues which arose at the PTR in the Tesco Litigation highlights the importance of precisely analysing the elements of a claim which parties need to establish at a trial. This need is particularly acute when a trial is split:

  • The MLB Claimants’ primary loss claim is calculated by reference to the difference between the purchase price of the Tesco shares and the value of those shares on 23 October 2014 (when Tesco disclosed the “expected impact” of the £263 million overstatement in its previous profits guidance statements). In addition to this primary loss claim, the MLB Claimants are claiming for loss of profits they allege they would or might have made had their money not been invested in Tesco.
  • Although the loss of profits claim requires a loss calculation, which will be determined (if necessary) in the second trial, it also gives rise to questions of reliance and causation, which are issues which were ordered to be dealt with at the first trial.
  • It appears from the judgment that the MLB Claimants mistakenly assumed that all aspects of the loss of profits claim would be dealt with at the second trial and their witness evidence had not, therefore, addressed what alternative investments the MLB Claimants would have been made. Accordingly, in the absence of such evidence, the loss of profits claim would have to fail at trial.
  • At the PTR, the MLB Claimants sought permission to rely on evidence in relation to the loss of profits claim, which had been adduced out of time. The court viewed the application as a question of relief from sanctions, rather than an application for permission out of time, and was critical of the MLB Claimants failing to appreciate that such an application was necessary much sooner.
  • The court has given the MLB Claimants a short timeframe (until 14 August 2020) to provide relevant disclosure evidence in support of its loss of profits claim, but the application will be refused if the resulting extra work for Tesco in processing the disclosure is not fairly and proportionately manageable.
  • The court was reluctant to make an order, given that it will likely deprive the MLB Claimants of the chance to obtain full recovery of its losses, but gave significant weight to Tesco’s objections that any substantial exercise would distract them from trial preparation.

Simon Clarke
Simon Clarke
+44 20 7466 2508
Harry Edwards
Harry Edwards
+61 448 072 588
Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

High Court orders expedition to determine issues relating to a financial restructuring given insolvency alternative

The High Court has expedited a trial at which it would be determined whether luxury car manufacturer McLaren Group could obtain the release of certain security for the benefit of its senior noteholders, failing which a financial restructuring which was contingent on that release could not be implemented: McLaren Holdings Ltd v US Bank Trustees Ltd [2020] EWHC 1892 (Ch). The court concluded that, absent determination of the proceedings within one month, McLaren Group would have no choice but to enter an insolvency process and that this justified expedition in this case.

The court also held that a senior noteholder should be joined to the proceedings to represent the interests of the senior noteholders.

The decision provides a useful illustration of the willingness of the courts to support efforts to financially restructure a company and save it from insolvency, even where the company does not seek assistance of the court via a more commonly used restructuring jurisdiction of the court (such as its ability to sanction a scheme of arrangement). That is particularly the case where all parties to the dispute have an interest in the company’s survival and ability to meet its debts as they fall due, as demonstrated by the senior noteholders’ decision in this case not to oppose expedition. For companies and their creditors dealing with urgent liquidity crises, the court’s practical approach in this case will be welcomed.


As a result of the COVID-19 pandemic, McLaren fell into severe financial difficulty, to the point that it was forecast to run out of money by 17 July 2020. If McLaren ran out of money, the court concluded “that will be that for the company”.

In order to raise new money, McLaren proposed a restructuring of its senior notes including the release of certain security which was granted for the benefit of senior noteholders so that the secured assets could instead be used to secure new debt. McLaren’s proposals were opposed in correspondence by its existing senior noteholders, who argued that it would be unlawful for the existing security over the cars and properties to be released. The senior noteholders also wished to make proposals to refinance the company based on their existing security package, but McLaren did not wish to pursue that form of refinancing.

As a result, on 16 June 2020, McLaren filed a Part 8 claim against US Bank Trustees Limited (USBT) seeking a declaration that the security interests could be released. USBT was the sole defendant and, as a mere security agent and trustee for the senior noteholders, USBT raised concerns that, without the participation of a senior noteholder in the proceedings, there was a risk that senior noteholders could challenge the situation even after the declaratory relief had been granted.

That risk was exacerbated where the senior noteholders had already noted their objection to the release of the security in correspondence. If a senior noteholder was to be joined to the proceedings, there was an issue as to whether that senior noteholder should be joined in a representative capacity effectively on behalf of all senior noteholders. One senior noteholder had requested to be joined to the proceedings so the questions for the court were whether it should be joined and, if so, whether it should be taken to represent the interests of (and therefore effectively bind to any judgment) the other senior noteholders.

Having issued proceedings, McLaren applied for expedition. Its proposed timetable was described by the court as “incredibly compressed” and “ambitious”, requiring not only a trial but also the handing down of a final judgment by 10 July 2020. McLaren’s evidence was that, if the judgment was in its favour, this would leave five working days between 10 and 17 July 2020 for the relevant security to be released and the financial restructuring completed.


The court dealt with expedition first. It concluded that expedition would not involve an unfair or improper allocation of court resources to the parties to this dispute relative to the parties to other disputes before the court. That was particularly so where McLaren’s survival depended on the financial restructuring, which could only be completed if the court determined that the existing security in favour of the senior noteholders should be released. The court also pointed to the need for this sort of case to be given priority given the objectives of the Financial List and the significance in value and consequences for McLaren of this dispute.

The court’s principal concern was whether the expedition of a final judgment within one month from the issue of proceedings could practically be achieved and, if so, whether that would compromise the need for there to be a just trial. No party suggested that it would not be possible for there to be a fair trial within three weeks and the court concluded that all parties seemed able to cope with the expedited timetable proposed, notwithstanding that it was “one of the most aggressive trial timetables [the court had] ever seen”.

However, the order for expedition was made subject to two conditions. First, McLaren had to explain what steps it was proposing to take in relation to the security and the financial restructuring more broadly. That is because McLaren’s evidence in support of the application had stated only what form the financial restructuring might take, not the form it actually would take.

Second, and more importantly, the senior noteholder who wished to be joined to the proceedings would need to submit a position paper identifying the points that it wished to take when arguing that release of the security would be unlawful. Pending sight of that position paper, the court was not able to conclude that a judge would have sufficient time to prepare for trial because the issues in dispute had not been fully canvassed in statements of case, given that the application for expedition had been made before a defence had been filed. The court directed that, upon service of a position paper, the question of expedition would be revisited.

The parties having agreed that a senior noteholder would be joined to the proceedings, and a willing senior noteholder having been identified, the court ordered joinder. While USBT did not object to joinder, it did ask the court to clarify CPR 19.7A, which provides that where a claim is brought against a trustee in that capacity, it is not necessary also to join the beneficiaries and that the beneficiaries will nevertheless be bound unless the court orders otherwise. USBT was concerned to ensure that all creditors of McLaren for whom USBT acted as trustee were bound by any judgment in the proceedings.

The court indicated that, at first blush, it was inclined to agree with USBT that CPR 19.7A did mean that all beneficiaries of trusts of which USBT was the trustee would be bound by any judgment in the proceedings, but it refused to make a determination to that effect at this early stage in the proceedings, particularly given that it was not yet clear what arguments would be advanced by the willing senior noteholder and that there were certain contractual documents which may be in issue in the proceedings which bound other classes of interested parties (including other categories of creditors), who it may be appropriate to join to the proceedings at a later stage. Accordingly, CPR 19.7A could not be used at this stage to bind all creditors of the company.

Turning to the other method of binding parties who were not joined to the proceedings, the senior noteholder who was willing to be joined to the proceedings was content to represent other noteholders of his class, but not creditors more generally or anybody else. USBT conceded that the willing senior noteholder could not represent creditors generally given the potential conflict between the position of different classes of creditor. The court added a further reservation, that the willing senior noteholder could not be made to represent any class of persons he did not wish to represent. As a result, the court order that the willing senior noteholder should represent only other senior noteholders.

Natasha Johnson
Natasha Johnson
+44 20 7466 2981
Andrew Cooke
Andrew Cooke
Senior Associate
+44 20 7466 7566

High Court refuses to grant summary judgment based on contractual interpretation of Argentinian government bonds

The High Court’s recent judgment in Palladian Partners LP & Ors v The Republic of Argentina & Anor [2020] EWHC 1946 (Comm) is an interesting and high profile addition to the body of case law on the interpretation of complex financial instruments, here the terms and conditions applicable to euro-denominated government bonds issued by the Republic of Argentina in 2005 and 2010, as part of a restructuring which gave creditors of the Republic 25-35% of what they were originally owed.

The underlying dispute centres on a claim brought by three investment funds against the Republic on the basis that the Argentinian government allegedly improperly changed the baseline of the securities (referenced to the Republic’s GDP) used to calculate the amount due to the holders of the securities and declared that the relevant performance condition for payment was not met.

Applying established principles of contractual construction, the court refused to grant the Republic reverse summary judgment on the effect of two payment provisions in the terms and conditions applicable to the securities. The Republic contended that these clauses meant that the holders of the securities were bound by all calculations performed by the Argentinian Ministry of Economy in determining payment, and the claimants were therefore bound by its determination that the relevant performance condition for payment was not met.

The court did not accept that the Republic had the better of the arguments on the merits of the simple construction exercise, and stated that – in any event – this was not a case where the court could grasp the nettle and grant judgment in the Republic’s favour. It is a reminder that, while the court is willing to consider questions of contractual interpretation without the need for a full trial in an appropriate case; certain factors will make cases less likely to be suitable for summary determination, such as where the construction argument is hinged on commercial purpose for success.


The claimants are holders of the Republic’s euro-denominated securities. As per the terms and conditions applicable to the securities, the Republic is required to pay to the holders annually an amount linked to the Republic’s GDP, subject to certain conditions being satisfied. The claimants brought a claim against the Republic alleging that in 2013 the Republic had incorrectly decided that no payment was due to the holders because one of the conditions for payment under the terms and conditions, that the actual GDP growth in that year is higher than the base case GDP growth (the “Performance Condition”), had not been satisfied.

The claimants allege that when the Republic rebased the securities in 2013 and changed the baseline of the securities from 1993 to 2004, it failed to adjust the base case GDP (calculated based on 1993 prices and a factor in determining if the Performance Condition is met) by the fraction set out in the terms and conditions (the “Adjustment Provision”). The claimants’ case is that if the Republic had applied the Adjustment Provision to the base case GDP, then the Performance Condition would have been satisfied, which consequently would have required the Republic to calculate the amount due to the holders of the securities (the “Payment Amount”). The claimants allege that this would have resulted in a payment of €525-€645 million to them.

In connection with the above litigation, the Republic made the following two applications –

  1. For summary judgment – the Republic’s contention was that on the proper construction of the terms and conditions, the Ministry of Economy’s determination that no payment was due to the holders of the securities in 2013 is binding on the claimants, unless they have properly pleaded and can prove bad faith, wilful misconduct or manifest error on the part of the Ministry of Economy. Therefore, if the court agreed with the Republic that under the terms and conditions the claimants were bound by the determination made by the Ministry of Economy that the Performance Condition was not met, then the claimants’ underlying claim (including in relation to the application of the Adjustment Provision to the base case GDP) falls away.
  2. To strike out the claim – the Republic’s argument was that the claimants’ secondary allegation of bad faith, wilful misconduct and / or manifest error is not properly pleaded and is therefore defective.


The High Court (Cockerill J) dismissed both applications.

(1) Application for summary judgment

The Republic’s application for summary judgment turned on the proper construction of two instances of what were termed as the “Binding Effect Provisions” in the terms and conditions. The first instance is in the definition of Payment Amount (emphasis added):

All calculations made by the Ministry of Economy hereunder shall be binding on … all Holders absent bad faith, wilful misconduct or manifest error on the part of the Ministry of Economy”.

The other instance is in the definition of Excess GDP (a form of GDP used in the calculation of the Payment Amount) which provides that:

All calculations necessary to determine Excess GDP … will be performed by the Ministry of Economy … and such calculations shall be binding on … all Holders of this Security, absent bad faith, wilful misconduct or manifest error on the part of the Ministry of Economy”.

The Republic argued that the Binding Effect Provisions applied to all the calculations made by the Ministry of Economy in determining the Payment Amount (including the base case GDP and the Performance Condition) and not just the calculations found in the definitions of Payment Amount and Excess GDP.

The court did not accept that the Republic had the better of the arguments on the merits of the construction exercise, and stated that – in any event – this was not a case where the court could grasp the nettle and grant judgment in the Republic’s favour. In refusing summary judgment, the key observations made by the court on the question of contractual construction of the terms and conditions of the securities were as follows:

  • The court held that on a simple reading of the Binding Effect Provisions, they are intended to cover only the calculations described in the Payment Amount and Excess GDP provisions as they are not free-standing provisions but tail-end the respective definitions. The court noted that if sophisticated legally-advised parties intended the Binding Effect Provisions to have general effect, they would have included them as a separate provision. This was further bolstered by the fact that the terms and conditions included provisions that were meant to have general effect as stand-alone provisions, for instance, general limitation of liability provisions.
  • In terms of the wider context, the court considered there to be a real distinction between the wording in relation to the satisfaction of the conditions and the calculation of the Payment Amount, which further weakened the Republic’s argument. The Payment Amount is expressly stated to be subject to the conditions. The conditions are then presented separately and are expressed in terms of entitlement and conditionality, not calculation.
  • Further, though not considered in detail given the conclusions reached in the previous paragraphs, the court preferred the claimants’ argument that the Binding Effect Provisions used classical words of exception, and would therefore need to be subject to a strict approach to construction.
  • The court also considered that the Republic’s commercial purpose argument, that a comprehensive Binding Effect Provision was required to promote certainty against a background where many of the holders had bought the securities long after they were issued and where the determination of the Payment Amount requires a number of calculations, was not one which was suitable for a summary determination.

Accordingly, the court found that the claimants had the better of the arguments in relation to the interpretation of the Binding Effect Provisions and dismissed the Republic’s summary judgment application.

(2) Application to strike out the claim

The Republic’s strike out application fell away as it was contingent on the court’s ruling on the summary judgment application. However, the court still considered the application briefly. In summary, the court did not accept the Republic’s contention that at the pleading stage, reference to a specific person who made an error or acted in bad faith or engaged in wilful misconduct is necessary. In the context of fraud, the court relied on the authorities to state that at the pleading stage what is required is not a pleaded set of facts which lacks any other possible explanation than fraud, but rather the pleading of facts which, if proved at trial, tilt the balance towards justifying a plea of fraud.

Simon Clarke
Simon Clarke
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
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Mannat Sabhikhi
Mannat Sabhikhi
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Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule

The Supreme Court’s judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31 has been eagerly anticipated by financial institutions and brings much needed clarity in respect of the so-called “reflective loss” principle, first established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204.

By a majority of 4-3, the Supreme Court confirmed that the “reflective loss” rule in Prudential is a bright line legal rule of company law, which applies to companies and their shareholders. The rule prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer. However, the Supreme Court unanimously held that the principle should be applied no wider than to shareholders bringing such claims, and specifically does not extend to prevent claims brought by creditors. In doing so, the entire panel rejected the approach in cases since Prudential where the principle has been extended to situations outside shareholder claims, in a way that has been likened to a legal version of Japanese knotweed.

The majority of the Supreme Court (led by Lord Reed) emphasised that the rule is underpinned by the principle of company law 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. On this basis, a shareholder does not suffer a loss that is recognised in law as having an existence distinct from the company’s loss, and is accordingly barred.

The division of the Supreme Court focused on whether or not to reaffirm the “reflective loss” principle as a legal rule which prohibits a shareholder’s claim, which was the view of the majority, or whether it is simply a device to avoid double-recovery (and therefore a question that arises when it comes to the assessment of damages), which was the view of the minority.

Putting the decision in context, the reflective loss rule was one basis (amongst several others) on which the recent shareholder class action against Lloyds and five of its former directors (the Lloyds/HBOS Litigation) was dismissed by Mr Justice Norris (see our blog post on the decision here). The court held that – if the elements of the shareholders’ claim had been proven – any alleged loss suffered by shareholders as a result of a fall in the price of Lloyds shares was reflective of what the company’s loss would have been. Of course, in the securities litigation context, sections 90 and 90A of the Financial Services and Markets Act 2000 (the usual basis of a shareholder class action) provide a statutory exemption to the reflective loss rule.


Mr Sevilleja was the owner and controller of two companies incorporated in the British Virgin Islands, Creative Finance Ltd and Cosmorex Ltd (the Companies), which he used as vehicles for trading in foreign exchange. Marex Financial Ltd (Marex) brought proceedings against the Companies in the Commercial Court for amounts due to it under contracts which it had entered into with them. In July 2013, Marex obtained judgment against the Companies in excess of US$5 million.

Marex alleged that Mr Sevilleja had stripped the Companies of assets, in breach of duties owed to the Companies, to prevent the judgment debt from being satisfied.

The Companies were placed into insolvent voluntary liquidation in the BVI by Mr Sevilleja in December 2013, with alleged debts exceeding US$30 million owed to Mr Sevilleja and others (allegedly persons and entities associated with Mr Sevilleja or controlled by him). Marex claimed to be the only non-insider creditor.

A liquidator was appointed in the BVI, but on Marex’s case, he was effectively in the pocket of Mr Sevilleja and had not taken any steps to investigate the Companies’ missing funds or to investigate the claims submitted to him, including claims submitted by Marex. Nor had he issued any proceedings against Mr Sevilleja.

Marex brought a claim against Mr Sevilleja directly, seeking damages in tort for: (1) inducing or procuring the violation of its rights under the July 2013 judgment; and (2) intentionally causing Marex to suffer loss by unlawful means. Marex sought and obtained an order giving permission for service of proceedings on Mr Sevilleja out of the jurisdiction.

The present appeal arose from Mr Sevilleja’s application to set aside the order to serve out. Mr Sevilleja argued that Marex did not have a good arguable case against him because the losses that Marex was seeking to recover were reflective of loss suffered by the Companies, which had concurrent claims against Mr Sevilleja, and were therefore not open to Marex to claim.

High Court decision

At first instance, the Commercial Court ruled in favour of Marex and held that the so-called rule against “reflective loss” did not bar Marex’s ability to show a completed cause of action in tort. Permission to appeal was granted only in relation to the ruling on reflective loss.

Court of Appeal decision

The Court of Appeal (Lewison, Lindblom and Flaux LJJ) allowed Mr Sevilleja’s appeal (please see our litigation blog post for a summary of the decision).

The question for the Court of Appeal was whether the rule against reflective loss applies to claims by unsecured creditors who are not shareholders of the relevant company. In a unanimous decision, it held that the distinction between shareholder creditors and non-shareholder creditors was artificial and therefore the rule should apply equally to all creditors.

The Court of Appeal also considered the scope of the exception to the rule which applies where the company is unable to pursue a cause of action against the wrongdoer. It confirmed that this exception can only be invoked in limited circumstances, where the defendant’s wrongdoing has been directly causative of the impossibility the company faces in bringing the claim.

Marex appealed to the Supreme Court.

Supreme Court decision

The Supreme Court convened as an enlarged panel with the object of examining the rationale for the so-called “reflective loss” principle and providing greater coherence of the law in this area. In view of the significance of the case, the Supreme Court granted permission to the All Party Parliamentary Group on Fair Business Banking to intervene by oral and written submissions in support of Marex’s appeal.

The Supreme Court unanimously concluded that Marex’s appeal should be allowed. There was no disagreement within the court that the expansion of the so-called “reflective loss” principle was an unwelcome development of the law, and in the context of the present case would result in a great injustice. However, there was a clear division on the nature and effect of the “reflective loss” principle, with Lord Reed giving the majority judgment (with whom Lady Black, Lord Lloyd-Jones and Lord Hodge agreed) and a minority judgment given by Lord Sales (with whom Lady Hale and Lord Kitchin agreed).

Majority decision

The majority reaffirmed the rule in Prudential (often referred to as the “reflective loss” principle), as a rule of company law which, when it applies, prohibits a claim being brought by shareholders for the loss of value in their shareholding.

Lord Reed referred back to the origins of the reflective loss principle, in the case of Prudential, 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. Prudential’s personal claim was disallowed on the ground that it had not suffered any loss distinct from its loss of value in its shareholding, with the following reasoning from the High Court:

“…what [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.”

Lord Reed noted that this has been treated in subsequent cases as establishing the principle of “reflective loss” (most notably in Johnson v Gore Wood & Co [2002] 2 AC 1).

In an important clarification of the scope of this principle, Lord Reed confirmed as follows:

“…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.”

Lord Reed said that it is necessary to distinguish between:

  1. Cases where claims are brought by a shareholder in respect of loss which he/she 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; and
  2. Cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss.

In cases of the first kind, Lord Reed said that the shareholder cannot bring proceedings in respect of the company’s loss, since he or she has no legal or equitable interest in the company’s assets. It is only the company that has a cause of action in respect of its loss under the rule in Foss v Harbottle. He said that the position is different in cases of the second kind, which would include claims (like Marex’s claim) brought by creditors of the company. This is because there is no correlation between the value of the company’s assets/profits and the loss which that party has suffered.

The majority therefore confirmed that the rule established in Prudential applies to cases of the first kind, but not the second. In doing so, Lord Reed and Lord Hodge emphasised the following key aspects of the rule:

  1. Rule of company law

Lord Reed said that the decision in Prudential established a rule of company law, which applies specifically to companies and their shareholders in particular circumstances. It has no wider ambit.

He noted that this rule is necessary in order to avoid the circumvention of the company law rule in Foss v Harbottle, which provides 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.

The judgment of Lord Hodge echoed Lord Reed’s statement that the rule in Prudential was a principled development of company law which should be maintained. In particular, he explained that the rule upholds the default position of equality among shareholders in their participation in the company’s enterprise: each shareholder’s investment “follows the fortunes of the company”; it maintains the rights of the majority of the shareholders; and it preserves the interests of the company’s creditors by maintaining the priority of their claims over those of the shareholders in the event of a winding up.

However, in the opinion of Lord Hodge, the principle should not be applied in other contexts, given the particular characteristics of a shareholding (and the rights and protections provided to shareholders), which justify the law’s refusal to recognise a diminution of value claim. The problems and uncertainties that have emerged in the law have arisen because the principle of reflective loss has broken from its moorings in company law.

  1. Distinct from double recovery principles

Lord Reed stated, categorically, that the avoidance of double recovery is not in itself a satisfactory explanation of the rule in Prudential.

Lord Reed noted the general position that, while two different persons can have concurrent rights of recovery based on different causes of action in respect of the same debt, the court will not allow double recovery (The Halcyon Skies [1977] QB 14, 32). This principle has its roots in the law of damages, and so it does not prevent the claims in themselves, but rather leaves the court to determine how to avoid double recovery in situations where the issue properly arises. For example, by giving priority to the cause of action held by one person with the claim of the other excluded so far as necessary (The Liverpool (No 2) [1963] P 64); or by subrogation (Gould v Vaggelas [1984] HCA 68); or the imposition on one claimant of an obligation to account to the other out of the damages it has received (O’Sullivan v Williams [1992] 3 All ER 385).

He said that Lord Millett in Johnson had incorrectly treated the avoidance of double recovery as sufficient to justify the decision in Prudential, which paved the way for the expansion of the reflective loss principle beyond the narrow ambit of the rule in Prudential. Lord Millett’s approach has in fact led in some cases, subsequent to Johnson, to a circumvention of the rule in Foss v Harbottle. For example, in Peak Hotels and Resorts Ltd v Tarek Investments Ltd [2015] EWHC 3048 (Ch), the court considered it arguable that the “reflective loss” principle – as explained by Lord Millett in Johnson – did not bar a claim for injunctive relief, even though the proceedings were brought 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. This was because the relief sought was not in damages and so there could be no danger of double recovery.

  1. Pragmatic advantages of a bright line legal rule

Lord Reed also emphasised the pragmatic advantages of a clear rule of law that only the company can pursue a right of action in circumstances falling within the precise ambit of the decision in Prudential. He referred to Lord Hutton’s speech in Johnson, saying that the rule in Prudential has the advantage of establishing a clear principle, rather than leaving the protection of shareholders of the company to be given by a judge in the complexities of a trial.

  1. Scope of personal claims by shareholders prohibited

The majority articulated the type of claim that will be prohibited by the rule against “reflective loss”. To fall within the rule, a claim must:

    • be brought by a shareholder;
    • relate only to the diminution in value of shares or in distributions which the shareholder suffers in his or her capacity as a shareholder;
    • result from the company having itself suffered actionable damage; and
    • be brought by the shareholder and the company against the same wrongdoer.

The majority confirmed that, where a shareholder pursues a personal claim against a wrongdoer in another capacity, such as guarantor or creditor of the company, the “reflective loss” rule has no application.

  1. Where the company does not bring a claim

Lord Reed stated that the rule in Prudential will apply even if the company fails to pursue a claim that a shareholder says ought to have been pursued, or compromises its claim for an amount which, in the opinion of a shareholder, is less than its full value.

He said the critical point is that the shareholder has not suffered a loss which is regarded by the law as being separate and distinct from the company’s loss, and therefore has no claim to recover it. It follows that the shareholder cannot bring a claim, whether or not the company’s cause of action is pursued.

Lord Reed justified this approach on the basis that shareholders entrust the management of the company’s right of action to its decision-making organs; and the company’s control over its own cause of action would be compromised, and the rule in Foss v Harbottle could be circumvented, if the shareholder could bring a personal action for a fall in share value (or distribution) consequent on the company’s loss, where the company had a concurrent right of action in respect of its loss.

The same will apply even where the wrongdoer has abused his or her powers as a director of the company so as to prevent the company from bringing a claim under which it could have recovered its loss. Lord Reed noted that shareholders (unlike a creditor or an employee) have a variety of other rights in this scenario, including the right to bring a derivative claim to enforce the company’s rights if the relevant conditions are met, and the right to seek relief in respect of unfairly prejudicial conduct of the company’s affairs.

A derivative action is an exception to the rule in Foss v Harbottle, and whether or not a shareholder can bring such an action depends on whether the relevant conditions are satisfied.

  1. The position of creditors

As will be clear from the above, the majority confirmed that the reflective loss rule does not apply to creditors. This is essentially because the potential concern arising from the rule in Foss v Harbottle is not engaged by claims brought by creditors, as distinct from shareholders.

However, Lord Reed noted that the principle that double recovery should be avoided may well be relevant to creditor claims (although this will not always necessarily be the case: in International Leisure Ltd v First National Trustee Co UK Ltd [2013] Ch 346 the company and a secured creditor had concurrent claims, but the double recovery principle was not engaged).

Lord Reed explained that how the court will address the risk of double recovery in creditor claims will depend on the circumstances, and did not mean that the company’s claim must automatically be given priority to that of the creditor. He also warned that the pari passu principle does not give the company (or its liquidator) a preferential claim on the assets of a wrongdoer, over the claim of any other person with rights against the wrongdoer, even if that claimant is also a creditor of the company. This means that a creditor can enforce his or her own right to recover damages from the wrongdoer concurrently with any action brought by the company. Lord Reed contrasted the situation where an insolvent company has made a recovery from the wrongdoer. In this situation, the proceeds will form part of the insolvent company’s assets available for distribution, where the pari passu principle may restrict the creditor’s receipt of a dividend.

Lord Reed also noted that double recovery arising in connection with creditors’ claims may be avoided by other means, such as subrogation.

In the light of the above, the majority held that the rule in Prudential had no application to the present case, since Marex was not a shareholder. Marex’s appeal was therefore allowed.

Minority decision

Lord Sales delivered the minority judgment. By contrast to the majority, in his opinion, the Court of Appeal in Prudential did not lay down a rule of law and (in any event) such a rule was not correct as a matter of principle. Whilst the rule would produce simplicity, this would be at the cost of serious injustice to a shareholder who (apart from the rule) has a good cause of action and has suffered loss which is real and is different from any loss suffered by the company.

In his view, the court in Prudential simply set out reasoning why it thought the shareholder in such a case in fact suffered no loss. However, he believed that that reasoning could not be supported, because in most cases shareholders suffer a loss which is different from the loss suffered by the company. In Lord Sales’ view, the whole premise of the “reflective loss” principle is flawed because it assumes correspondence between the losses suffered by company and shareholder. By contrast, in the real world, even if the company is successful (some time later) in recovering its loss, the shareholder whose shares were reduced in value by the wrong will not be restored to the position it would have been in but for the defendant’s wrongdoing. Whilst, as a matter of basic justice, the defendants should not be liable twice for the same loss, the correct approach to that issue would be to carefully assess whether the loss is indeed the same and if (and only if) it is the same, to be reflected in the calculation of each claimants’ loss.

In Lord Sales’ view, even if the “reflective loss” principle was appropriate in respect of shareholder claims, it could not be justified as a principle to exclude otherwise valid claims made by a person who is a creditor of the company. Accordingly, the minority also allowed Marex’s appeal.

Harry Edwards
Harry Edwards
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Ceri Morgan
Ceri Morgan
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Lloyds/HBOS Litigation: Consequentials Judgment

Mr Justice Norris has now handed down judgment following the consequentials hearing in the landmark Lloyds/HBOS Litigation: Sharp & Ors v Blank & Ors [2020] EWHC 1870 (Ch). Norris J resoundingly refused permission to appeal the judgment on liability and made a number of interesting findings on the adverse costs position of the claimants, and the litigation funders who backed the claim, following their failure.

The findings are split into two main parts:

  1. Costs
  2. Permission to Appeal


Should the costs award be determined by reference to overall success?

The court considered whether, in light of the outcome of the case, there was any reason for departing from the general rule that costs are to be determined by reference to overall success.

The claimants argued that they should only be required to pay 60% of the defendants’ costs on the basis that they “succeeded” on two issues; namely that the defendant Directors were in breach of a duty of care in respect of two issues which the judge had held ought to have been disclosed. The claimants submitted that the defendants should have conceded the case on the disclosure duty and that, had they done so, costs would have been saved.

The court firmly rejected these arguments however. Norris J said that “there is no reason in principle why a party who succeeds in establishing one element of his cause of action but fails to establish the others should be regarded as partially successful”. Given the breadth of the attack made by the claimants against Lloyds and its Directors (which included both allegations of a number of disclosure defects and also an allegation that the recommendation given to shareholders to vote in favour of the acquisition was made negligently), their degree of success was in fact small. Moreover, the claimants failed to establish that the breaches were causative of any loss, or indeed that any loss was suffered. Even the points on which they were successful were finely balanced.

In singling out an issue for separate treatment by way of costs the court held that it must look for “some objective ground (other than failure itself) which alongside failure distinguishes it from other issues and causes the general rule to be disapplied”. Such a distinctive ground may include:

  1. the comparative weakness of an argument (even if not unreasonably maintained);
  2. the necessity for particular evidence relevant only to that issue; or
  3. extensive and intensive legal argument directed to that issue which gives it an especial significance in the costs context.

The court held that such a factor is missing in this case. As such, the general rule was found to apply, and costs will follow the event.

The liability of litigation funders to cover costs

Therium, the claimants’ litigation funder, accepted in principle that it was liable to pay costs awarded against the claimants. However, it submitted that it should be liable only

  1. to the extent that the Claimants did not satisfy the adverse order; and
  2. to the extent of the funding that Therium actually provided (i.e. subject to “the Arkin cap”: see Arkin v Borchard Lines Ltd [2005] 1 WLR 3055).

In an order which reflects the realities of the litigation funder’s role in group litigation such as this, the court found that Therium’s liability ought to be joint and several with the claimants’ own.

The court considered the recent Court of Appeal decision in Davey v Money [2020] 1 WLR 1751 on the application of the Arkin cap, noting that it “is not a binding rule, but simply guidance given to individual judges, who retain a complete discretion in relation to third party costs orders”, but ultimately withheld from making a decision regarding the application of the Arkin cap to this case at this stage given that the interim payment which he ordered was below what would have been the Arkin cap in this case.

“Risk-free” shareholder litigation

The judgment acknowledges that this may have been a case in which many of the claimant shareholders thought that they were “litigating risk-free”. However the judgment makes clear that this was “most unfortunately” not the case:

  1. the ATE insurance cover which was meant to protect the claimants from cost risk fell short of the defendants’ costs;
  2. the level of ATE insurance cover which had been put in place was affected by the insolvency of some of the insurers;
  3. the claimants had failed to cover the risk that interest would be awarded on the defendants’ costs (see further below); and
  4. pursuant to the Group Litigation Order, the court held the claimants severally liable for any costs awarded to the defendants.

Interim costs

The court awarded interim costs comprising of (a) 50% of the incurred costs identified in the cost budget; 90% of the budgeted costs; and (c) VAT thereon. In making this finding the court followed MacInnes v Gross [2017] 4 WLR 49 which held that:

  1. the approved costs budget almost always provided the starting point for assessing a payment on account, because the costs management process had established it to be a reasonable and proportionate sum; and
  2. a discount of 10% was the maximum deduction appropriate in a case where there is was an approved costs budget.

Interest on costs

The court considered whether it should award interest on pre-judgment costs. The claimants argued that it should not because the Defendants did not signal an intention to claim pre-judgment interest on costs at any time when costs budgets were under consideration, and a possible claim for interest was not factored in to the level of ATE cover obtained.

However, the court found in favour of the defendants noting that “it was ultimately for the Claimants to decide against what risks to insure and what risks to bear themselves. A claim for pre-judgment interest on costs is commonplace, and it was for the Claimants to decide whether any protective measures were required, not for the Defendants to call for them”.

Permission to Appeal

The court resoundingly rejected the claimants’ application for permission to appeal the judgment. In doing so, the court clarified findings made in the judgment handed down on 15 November 2019. Given that the court had found there to be two breaches of disclosure duties, but that those breaches were not causative of any loss, in order to successfully appeal the judgment, the claimants would need to overturn the court’s findings on both causation and loss, findings which the defendants alleged were factual, as opposed to legal.

In its November 2019 judgment the court held that the existence of both the repo facility entered into between Lloyds and HBOS (the Repo), and the Emergency Liquidity Assistance (ELA) facility being drawn upon by HBOS ought to have been disclosed. The judge also formulated hypothetical disclosures which in his view would have met the disclosure requirements. Those hypothetical disclosures did not contain details of the features of the Repo and ELA. The claimants contended that the court’s conclusions in that respect were wrong as a matter of law, and that the details ought to have been disclosed. The claimants then argued that the court’s findings in relation to causation were dependent upon its conclusions regarding the limited nature of the disclosures, and were therefore flawed.

The court accepted that the actual disclosures which could have been made in relation to the Repo and ELA may have been different to the hypothetical disclosures it had formulated in its judgment in November 2019, but did not accept that the conclusions it had reached were “plainly wrong” (which is the test that the defendants submitted to be the correct threshold for re-assessments by the Court of Appeal of intensely complex mixtures of fact and law).

However, more importantly, the court made clear that the findings it had reached regarding the causative effects of disclosure of each of the repo facility and ELA were not dependent upon the precise nature of the disclosure which was made: “The evidence assembled by the Claimants and the case put to the Defendants related to “detailed disclosure”: and my conclusion rests on an analysis of that evidence”.

The claimants also argued that the judgment did not consider whether the Repo or ELA constituted material contracts pursuant to the Listing Rules. The court clarified that it did not consider that a breach of the Listing Rules can found any claim for damages by an individual against a listed company or the directors of a listed company.

The claimants also sought permission to appeal on the basis that the court erred in law in holding that they had failed to make out a case on loss. However, the court explained in this judgment that the claimants’ loss case was built around their “recommendation case”, which was a part of the case in which the claimants had failed to establish there had been a breach (a conclusion which the claimants were not seeking to appeal). The court did not consider that the claimants had provided it with evidence establishing losses arising solely from disclosure breaches.

Finally, the court addressed the claimants’ argument that there was a “compelling reason” to grant permission to appeal because the decision sets a standard for disclosure which is too low. However, the court reiterated in its judgment that the test it had set in the November 2019 judgment was “that directors, when considering the materiality of items for disclosure, must not focus only on material supportive of the recommended outcome but ought, when laying out the proposal and in enumerating the risks attendant upon it, to set out in a balanced way material which shareholders might see as indicating disadvantages”, which, it contended, could not be controversial. The court refuted any suggestion that the application of that standard to the extraordinary facts of this case could be seen as setting any standard of wider significance.

Harry Edwards
Harry Edwards
+61 3 9288 1821
Sarah Penfold
Sarah Penfold
Senior Associate
+44 20 7466 2619

Herbert Smith Freehills contributes chapter to The Securities Litigation Review (6th Edition)

Herbert Smith Freehills have contributed the England and Wales chapter of The Securities Litigation Review. Now in its sixth edition, The Securities Litigation Review, edited by William Savitt of Wachtell, Lipton, Rosen & Katz, is a guided introduction to the class action regimes for securities claims in the key jurisdictions across the globe, providing a valuable resource for corporates and financial institutions who might face such claims.

Download Chapter

Reproduced with permission from Law Business Research Ltd.This article was first published in June 2020. For further information please contact

Previous Editions:

5th edition, 2019

4th edition, 2018

3rd edition, 2017

Harry Edwards
Harry Edwards
+61 3 9288 1821
Jon Ford
Jon Ford
Senior Associate
+44 20 7466 2539

Litigation funder fails in attempt to obtain trading data from the London Stock Exchange

Burford Capital, one of the largest litigation funders, has been in the press regularly since the publication of a series of tweets and opinion pieces by Muddy Waters (the US investment firm) which also short-sold Burford shares. These events triggered a period of weakness in Burford’s share price. Burford contended that its share price fell not only as a result of the legitimate short-selling activity, but also that Muddy Waters was implicated in an alleged conspiracy to manipulate the market unlawfully, through “spoofing” or “layering” activity.

A recent judgment in the context of Burford’s high profile campaign to identify the culprits of such trading activity has addressed some novel questions regarding the direct actionability of the Market Abuse Regulation (MAR) by the issuer: Burford v London Stock Exchange [2020] EWHC 1183 (Comm). In doing so, the court has emphasised the role of regulators, rather than private parties, in enforcing the rules around market abuse. The judgment also contains some other snippets of interest for those who follow developments in securities litigation in the UK.

Basis of Burford’s application

To identify those involved in the alleged unlawful market manipulation (and to help support litigation and/or a complaint to the regulators against them), Burford brought an application for Norwich Pharmacal relief against the London Stock Exchange (LSE). The terms of the application sought disclosure of the identity of all parties trading in its shares in the relevant period, with a view to bringing claims against market manipulators for breach of MAR.

In determining whether to grant Norwich Pharmacal relief, the court had to carefully weigh a number of factors, including:

  • the strength of Burford’s case against the market manipulators;
  • the extent to which the order sought would cut across, or would not be required because of, a regulatory regime for investigating and taking action in relation to suspected market manipulation; and
  • the possible impact on the UK as an equity trading venue of the court intervening under the Norwich Pharmacal jurisdiction.

The application was resoundingly dismissed on the basis that Burford was unable to provide any sound evidence to support the suggestion that there had been any inappropriate trading activity. Evidence produced by its expert, which was based on anonymised trading data which was publically available, was comprehensively rejected. The court was entirely persuaded by the evidence from the LSE to the effect that the regulators had analysed the non-public data and found that there was nothing to suggest that the trading activity illustrated any spoofing or layering techniques.

Euro-tort claim

Notwithstanding that the court dismissed the application at the first stage of the analysis, the court went on to analyse whether Burford could have a claim in tort against the alleged market manipulators.

In particular, it considered whether the type of market manipulation alleged by Burford, and prohibited by MAR, would be actionable by Burford as a euro-tort, in the manner recognised in Muñoz (Case C-253/00), concluding that it would not be.

In reaching its conclusion, the court considered Hall v Cable and Wireless plc [2009] EWHC 1793 (Comm). In that case, Teare J held that no personal right of action in tort arose for breach of statutory duty under the sections of the Financial Services and Markets Act 2000 (FSMA) that implemented the provisions of the Market Abuse Directive. As the Market Abuse Directive was enacted through FSMA, Teare J applied English law in reaching his conclusion, rather than Muñoz.

The FSMA provisions which were considered by Teare J in Hall were replaced by the directly applicable provisions of MAR which were relied upon by Burford. The court did not however consider there to be “any material difference” between the legislative language in FSMA which implemented the Directive and MAR, nor any real reason to think that Muñoz would give a different answer to that given by English law.

The collateral damage arising from making trading data available

There was an interesting discussion in the judgment regarding the collateral damage which might arise if the LSE was required to provide Burford with the trading data which it sought.

The LSE relied upon evidence to the effect that the provision of this information would:

  1. be unprecedented in the context of a UK and European exchange;
  2. result in one market participant having access to information on UK trading data contrary to the principles and protections provided in the legal and regulatory regime; and
  3. serve as a disruption to the UK financial markets and have a detrimental impact on trading securities in the UK, rendering UK markets less favourable when compared to other European and developed country markets who maintain their participants’ confidentiality according to the legal and regulatory regime.

The court found that, in principle, such concerns would not prohibit the court from making an order such as that sought by Burford. The court considered that the concerns expressed by the LSE were only realistic where the markets considered the court to be “trigger-happy to intervene”, whereas, if the court were seen to be willing in principle to intervene, but only where it was “tolerably clear that a powerful claim of wrongdoing had slipped through the regulatory cracks”, then intervention by the court might in fact provide added reassurance about the robustness of UK markets as attractive venues for lawful activity.

Promoters of securities litigation

The judgment also highlights the level of activity of certain participants, which we commonly see seeking to identify, and raise complaints about, potential misconduct in public capital markets.

The court made reference to a letter sent by the UK Shareholders’ Association and Sharesoc to Burford which it had sent in support of Burford’s concerns that the share price had been impacted by inappropriate trading activity. These organisations, formed of individual shareholders, are often vocal in their campaigns about listed shares (especially those on the junior market, AIM) held by their members which have lost value as a result of some allegedly wrongful activities and have been known to agitate for claims to be brought.

The letter asserted that there is “a widespread belief among investors that there is little appetite by regulators to investigate allegations of wrongdoing on the AIM market”. However, the court dismissed this argument and criticised the letter in strident terms, stating that:

The UKSA/ShareSoc letter was transparently partisan and built up to an unwelcome in terrorem conclusion that, unless Burford’s claim succeeded, “the perception of private investors is likely to be that the preference of the authorities is to ignore, rather than investigate, market manipulation”. The thought that the court could and should be trusted to assess the case for itself, independently and impartially, appears not to have occurred to the authors”.

Harry Edwards
Harry Edwards
+61 448 072 588
Sarah Penfold
Sarah Penfold
+44 20 7466 2619

Upcoming webinar – Class actions in England and Wales: Shareholder actions – The Lloyds/HBOS litigation

On Monday 9 December (1-2pm UK time), Harry EdwardsCeri Morgan and Sarah Penfold will deliver a webinar for Herbert Smith Freehills clients and contacts looking at the judgment in the Lloyds/HBOS litigation, Sharp v Blank [2019] EWHC 3078 (Ch), which was handed down by the High Court on 15 November. Herbert Smith Freehills acted for the successful defendants to the action.

This was the first judgment in a shareholder class action in England & Wales and will have important ramifications for listed companies, and their advisers, in the UK. In rejecting the claim brought by a group of shareholders against Lloyds relating to its acquisition of HBOS in 2008, the decision of the High Court provides clarity on some of the most important battlegrounds which arise in shareholder class actions as well as guidance for listed companies and their directors on various key aspects of capital markets and M&A transactions.

This webinar is part of our series of HSF webinars, which are designed to update clients and contacts on the latest developments without having to leave their desks. The webinars can be accessed “live”, with a facility to send in questions by e-mail, or the archived version can be accessed after the event. Please click here to register.

The webinar is a follow-up to our webinar earlier this year discussing shareholder class actions more generally, as part of our series of webinars on class actions in England and Wales. If you would like to access the archived version of that webinar, or other webinars from the class actions series, please click here. Or click here to access our series of short guides on class actions related topics.