Greenwashing dispute risks – International perspectives

Fuelled by the global spread of ESG and climate-related disclosure obligations and coupled with pressures from increasingly ESG-driven stakeholders, businesses are saying more than ever about their environmental and social performance. These statements might be product-specific, relate to investment strategy or corporate governance. Such statements might be seen as good marketing, positive for a company’s reputation and may well reflect a laudable transparency or ambition. But what are the potential legal consequences if these statements are attacked as inaccurate, unsubstantiated, misleading or false (ie, “greenwashing”)?

This article in our series on climate disputes explores the increasing risks for a business in making environmental or social claims, focusing on the UK, Australia and the US.

To follow the rest of this series, please subscribe to our ESG Notes blog or see our Climate Disputes Hub.

High Court strikes out novel bid to bring securities class action using CPR 19.8 representative action as “opt-in” procedure

The High Court has refused to allow a securities class action to proceed as a representative action under CPR 19.8, finding that any claims should be pursued as ordinary multi-party proceedings with the investors as claimants: Wirral Council v Indivior PLC [2023] EWHC 3114 (Comm).

CPR 19.8 allows a claim to be brought by (or against) a party as representative of any other persons with the “same interest” in the claim. It is ordinarily seen as an “opt-out” procedure, as there is no requirement to identify the represented parties or join them to the action but any judgment will be binding on them. In this case, unusually, the representative claimant sought to use CPR 19.8 as an “opt-in” procedure on behalf of investors who agreed to funding arrangements and were identified to the defendants. More specifically, it wished to adopt the “bifurcated process” envisaged by Lord Leggatt in the Supreme Court’s landmark decision in Lloyd v Google [2021] UKSC 50 (considered in our blog post here), which allows a representative action to proceed in order to decide issues that are truly common to the represented class, leaving any individual issues to be dealt with later.

Accordingly, the claim sought declarations on “defendant-side” issues only, such as whether the defendants had published untrue or misleading statements to the market, and did not include “claimant-side” issues such as standing to sue, reliance, causation and quantum. In fact, that was the advantage of the procedure, so far as the representative claimant and the investors were concerned: if allowed to proceed, the burden would fall squarely on the defendants to deal with defendant-side issues, and the investors could avoid spending time and money developing their case on the claimant-side issues until the later stage.

The court, however, rejected the claimants’ attempt to tie its hands in that way. The question of how to manage the claims, including which issues should be progressed at which stage, was for the judge managing the claims to consider by reference to the court’s overriding objective of dealing with cases justly and at proportionate cost. It would be unfair and unjust, and contrary to the overriding objective, to allow the representative proceedings to oust the court’s jurisdiction to case manage the claims from the start.

This decision is good news for defendants as it suggests claimants will not be permitted to use the CPR 19.8 representative action procedure to gain tactical advantages as to how a securities class action (or other action) will be managed, and in particular to place the whole burden on the defendant for the initial stage. The proper split of issues, and how the burdens of the litigation should be shared between the parties, will in every case be for the court to consider in exercising its case management powers.


Wirral Council, as administering authority of Merseyside Pension Fund, issued representative proceedings under CPR 19.8, in effect seeking to use that mechanism to bring a securities class actions against the defendants pursuant to ss.90 and 90A and Schedule 10A of the Financial Services and Markets Act 2000 (FSMA). The claims related to an alleged scheme for the fraudulent marketing of its opioid addiction drug “Suboxone”, in order to switch the market from a version that was losing patent protection to an alternative version that would be less susceptible to generic competition, which had led to a federal indictment brought against the defendants by the US Department of Justice.

The claimant alleged that the defendants’ failure to disclose information about the scheme meant that its published information had (for the purposes of s.90A) contained untrue or misleading statements relating to the securities, and/or dishonest omissions of information that should have been disclosed, to the knowledge of persons discharging managerial responsibility (PDMRs) within the defendants. In relation to one of the defendants, there was also a claim for prospectus liability under s.90 based on essentially the same facts.

The claimant sought to try the above issues, the so-called “defendant-side issues”, which were not dependent on any facts particular to any individual investor, using the representative action procedure. Accordingly, the claim sought declarations as to the existence of untrue or misleading statements or dishonest omissions, and as to PDMR knowledge/dishonesty. It did not include as part of the representative proceedings any “claimant-side issues”, such as standing to sue, reliance, causation and quantum.

The proceedings were brought on an “opt-in” basis, because the represented class of investors was defined to include only those who signed up to a costs sharing and governance agreement and whose identities were made known to the defendants’ solicitors by a specified date.

The defendants applied to strike out the representative proceedings, or for an order that Wirral could not act as a representative claimant for the investors as represented persons. They argued that representative proceedings were not the appropriate procedure for the claims, and that they should be brought in the usual way as multi-party proceedings with the investors as claimants.

In fact, multi-party claim forms had been issued against both defendants by most of the institutional investors who were included in the CPR 19.8 action, alleging the same causes of action under FSMA. Those proceedings were stayed pending resolution of the applications. The multi-party proceedings did not, however, include the retail investors who were included in the representative action, as the litigation funders backing both sets of proceedings would not agree to fund them for the multi-party action.


The High Court (Mr Justice Michael Green) granted the defendants’ applications and struck out the proceedings.

The management of securities claims

The judge started by looking at how securities claims under s.90A and Schedule 10A FSMA have to date been managed by the court, noting that the case management issues that commonly arise include: (i) whether there should be a split trial: (ii) if so, what split; and (iii) whether and to what extent progress should be made on the deferred issues in the meantime, eg by requiring the provision of further information, disclosure or witness evidence.

He referred to a number of cases in which there was to be a split trial but, before the first trial, the claimants had been ordered to take material steps in relation to issues that were to be dealt with at the second trial, such as claimant sampling on the issue of reliance, disclosure from sample claimants and clarification of individual cases. He referred to the decision of Falk J in Various Claimants v G4S Ltd [2022] EWHC 1742 (Ch), in which she emphasised that some progression of the claimants’ case was needed to facilitate settlement discussions, reduce the gap between trials and “try to ensure an appropriate balance and fairness in the burden between the parties”.

Lloyd v Google and the bifurcated process

Michael Green J noted that the “same interest” threshold requirement had been met in the present case and therefore the claimant had been entitled to bring the representative action under CPR 19.8, but the court nonetheless had a discretion whether to allow the proceedings to continue. This was clear from Lord Leggatt’s decision in Lloyd v Google. There was no presumption in favour of the representative action.

Similarly, while Lord Leggatt’s comments in Lloyd v Google suggested that a bifurcated procedure using CPR 19.8 could be appropriate in some cases, the claimant in that case was not seeking bifurcation and so the comments were obiter (though deserving of the highest respect). The represented class in Lloyd v Google was estimated to be more than four million people, and it was clear that the only way the claim could realistically be brought was by an “opt-out” representative action. It was in that context that Lord Leggatt commented, “it is better to go as far as possible towards justice than to deny it altogether”.

Michael Green J noted that, in Lloyd v Google, the Supreme Court was “advocating for greater use of the representative action, principally where it would provide access to justice that would not otherwise be available to that class of claimants”. Lord Leggatt dealt in passing with bifurcation as a potential solution where individual damages claims could not be tried in the representative action, but did not explain how bifurcation would work in practice and made it clear each case would need to be decided by reference to the overriding objective.

The court’s exercise of discretion

Michael Green J said he was not deciding, in these applications, how securities claims in general should be brought. He was deciding how the court’s discretion should be exercised in the particular claims in question.

While Lloyd v Google might be seen as encouraging the use of representative actions, the judge did not think Lord Leggatt would have contemplated that his judgment would be used to oust the court’s ability to case manage these sorts of claims from the start. Bifurcation was not intended as the reason for using a representative action in the first place. It could be used to enable a representative action to proceed, particularly where it was necessary to provide access to justice for those whose proceedings could not otherwise be brought (though that was not to say claimants would necessarily have to show they could not bring the claims in any other way) – eg where there was a very large number of claimants with claims that were too small to bring individually.

Here, the representative proceedings could not be looked at in isolation. The claims had to be looked at as effectively one set of proceedings all the way through to the potential recovery of compensation for the represented investors, since that was the only point of the action. To say that the court need only consider how the issues raised in the CPR 19.8 claim should be tried would be “shutting one’s eyes to reality”.

The judge commented that the claimant’s position seemed “quite extraordinary”. The case law showed how judges in these cases carefully balanced all the competing interests in deciding how the cases should be managed, including what split was appropriate and to what extent the issues for the later stage should be progressed before the first trial. The claimant’s position, in contrast, was that the investors should be able to decide, unilaterally, to bifurcate the proceedings as they like. Lloyd v Google did not give them that entitlement, and the court could not further the overriding objective by depriving itself of the ability to apply the overriding objective in case managing the claims.

Further, the existence of the multi-party proceedings that had been issued in parallel showed that institutional investors had not been deterred from pursuing their claims by the way that securities cases are managed in this jurisdiction. While they might prefer not to incur cost and effort preparing their cases until after the first trial, that was contrary to how litigation is normally conducted in this jurisdiction and would mean the proceedings would not be concluded expeditiously. As the case law made clear, “claimants must properly plead and particularise their cases from the beginning and it should not be as simple as subscribing to litigation without any risk or cost being incurred”. Although the position of retail investors was different, the court did not accept that they could only seek redress through the representative proceedings, even if the current funders would not support their claims in the multi-party proceedings. There was no evidence that they would not be able to obtain their own funding and issue their own proceedings, which could then be consolidated or at least managed together with the multi-party proceedings.

Accordingly, the court exercised its discretion against the continuation of the representative proceedings. If the claimants wished to proceed with the multi-party proceedings, those proceedings could be managed in the normal way so as to further the overriding objective. The claimants could argue for the same split of issues, with no progress on claimant-side issues in the meantime, and it would be up to the judge managing the case to decide whether that was appropriate. But it would be “unfair and unjust, and contrary to the overriding objective” to allow the representative proceedings to oust the court’s jurisdiction to case manage the claims from the start.

Rupert Lewis
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Company not ordered to disclose privileged documents to shareholders in context of late application in securities class action

In an oral judgment delivered at the end of a one-day hearing, the High Court has refused an application by the claimants in a securities class action for disclosure of privileged documents by the defendant company: Various Claimants v G4S PLC [2023] EWHC 2863 (Ch).

The decision considers the boundaries of the so-called “shareholder principle”, ie that a company cannot assert privilege against its shareholders unless the documents were produced for the dominant purpose of litigation between the company and its shareholders. The decision will be of particular interest to banks and listed issuers facing disclosure applications by claimants seeking to rely on the shareholder principle in order to obtain access to a wider pool of documents in securities class actions.

The judge noted that the principle had been recognised in many authorities, including the Court of Appeal’s decision in Woodhouse and Co (Ltd) v Woodhouse [1914] 30 TLR 559, and in Hollander on Documentary Evidence which states that the rule is so well established that it is now probably only the Supreme Court that could overturn it. Accordingly, the judge said, “as a lowly first instance judge, and even though I have my doubts as to the justification now for such a principle”, he could not say that the principle did not exist or should be got rid of.

Ultimately the judge declined to order disclosure on case management grounds, given the real practical difficulties caused by the lateness of the application and the fact that, on the judge’s conclusions, only a small proportion of the claimants would be entitled to see the defendant’s privileged documents. He considered that it would be impossible to manage a trial where privileged documents were deployed by certain claimants and could not be disclosed to others, particularly as the claimants had the same solicitors and counsel. And it was too close to trial to separate out the claimants into different trials to protect privilege.

He did however express his views on a number of points as to the application of the shareholder principle which are unclear in the case law, including that the principle should apply only to registered shareholders, rather those who hold shares through the CREST securities depository or the broad class of those with “interests in securities” sufficient to bring a securities class action under s.90A and Sch.10A of the Financial Services and Markets Act 2000 (FSMA).

For more information, please see our Litigation blog post.

ESG disclosure investigations – Are you ready?

Listed companies across various sectors and industries are grappling with how to manage and disclose ESG issues, particularly relating to climate. These issues include:

  • Accounting for carbon and other greenhouse gas (GHG) emissions of their business, suppliers and value chain partners.
  • Considering the downstream effects of their products and services.
  • Integrating energy transition plans and climate targets into their business strategy.
  • Deciding how best to communicate these plans and targets and their progress in relation to them, to all their stakeholders – shareholders, consumers, employees, lenders, investors and the wider public.

This communication of ESG targets and performance is attracting considerable interest from regulators tasked with managing and enforcing increasing levels of mandatory disclosures on ESG factors, climate change and GHG emissions. This has changed regulators’ approach to greenwashing and enforcement in relation to sustainability claims and regulatory investigations into ESG disclosures are rising globally.

This article in our series on climate disputes explores how the proliferation of ESG and climate-related disclosure requirements has focused regulatory minds on enforcement in relation to sustainability claims and how investigations in the area are on the rise globally.

To follow the rest of this series, please subscribe to our ESG Notes blog or see our Climate Disputes Hub.

Court of Appeal rejects second major attempt at a climate-related derivative action

In July 2023, the Court of Appeal dismissed an application by members of a pension scheme to bring a derivative action against the directors of the scheme’s trustee company. The court also made it clear that derivative actions are not appropriate when direct challenges are available: McGaughey & Anor v Universities Superannuation Scheme Limited [2023] EWCA Civ 873.

This decision will be of interest to financial institutions as, when taken together with ClientEarth v Shell (see see our blog post here), it confirms that the courts of England and Wales remain wary of challenging reasonably made decisions of company directors.

So, while derivative actions may continue to be brought as a disruptive tactic by activist shareholders, there is likewise continued judicial reluctance to second-guess corporate decision-making. The courts are aware that climate risks are just one of the many risks which executives consider when deciding on strategy. In the absence of evidence of egregious disregard for climate risks, the courts seem unwilling to find that directors have the balance wrong.

For more information, please see our ESG blog post.

For a deeper analysis of emerging shareholder litigation related to climate change, see this article in our series on climate disputes: Global perspectives on climate disputes – A recent history of shareholder claims.

Global perspectives on climate disputes – A recent history of shareholder claims

Recent years have shown a rise in activist shareholders striving to shape corporate conduct around ESG matters, particularly climate change. Institutional investors are increasingly backing such initiatives, driven by the need to showcase their ESG commitments, fulfil investment strategies and reduce risk associated with their investment labels.

In England and Wales, shareholder activism has traditionally taken the form of shareholder resolutions during general meetings. However, investors are now expanding the climate agenda beyond such forums and looking to the courts to put pressure on large corporates.

This article in our series on climate disputes, looks at emerging shareholder claims related to climate change in the courts of England and Wales and provides an international perspective by briefly considering the position in the US and Australia, two other key jurisdictions.

To follow the rest of this series, please see our Climate Disputes Hub.

Rupert Lewis
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High Court refuses permission to continue derivative claim against bank as an alleged shadow director

The High Court has refused permission for a derivative claim to be continued against a bank (as an alleged shadow director), brought by the shareholders of an AIM-listed company which had been transferred to the bank’s loan management unit: Ryan & Anor v HSBC UK Bank Plc & Anor [2023] EWHC 1066 (Ch).

This is an example of permission to continue a derivative action being refused at the second permission stage mandated by the Companies Act 2006 (the Act), and is a helpful illustration of the factors the court will consider when determining whether to grant permission at a substantive hearing. For a recent case in which permission was refused at the first stage, under section 261 of the Act, you can read our analysis of the ClientEarth litigation against the directors of Shell here.

In summary, the bank had made various loans to the company, which subsequently faced cash flow difficulties and was transferred to the bank’s loan management unit. Thereafter, the company’s AIM listing was suspended and it went into administration, due to (on the claimants’ case) the bank’s “overarching plan” to take control of the business and run it for the bank’s own benefit. The claimants were shareholders in the company and asserted that the bank had acted as a shadow director of the company, allowing them to bring a derivative action against the bank under the Act.

The claimants were successful in obtaining permission to continue their claim at the first stage, meaning the court considered there was a prima facie case sufficient that it was not bound to dismiss the claim at the outset. However, permission at the second stage was refused on the basis that no person concerned with promoting the success of the company would seek to continue the claim: the court found that the claim was “weak” and “the only rational decision” would be to refuse permission. The allegation that the bank acted as a shadow director was also found to be “lacking essential core facts”.


The claimants owned or controlled approximately 46% of the second defendant (MCPLC), an AIM-listed company which formed part of a group of companies in a residential development business. The first defendant (the Bank) provided banking facilities to MCPLC.

From January 2015 onwards, the Bank’s loans were in default, and a personal loan was advanced to the claimants to be put into the business. Later that year, MCPLC was transferred into the Bank’s loan management unit and by 2021 had ceased trading. The judgment describes the Bank as MCPLC’s only substantial creditor, being owed more than £20m by MCPLC, in addition to the personal loan owed by the claimants.

The claimants blamed the Bank for the failure of the business and sought permission under section 261 of the Act to bring derivative proceedings on behalf of MCPLC against the Bank. In addition to the derivative claim, the claimants commenced personal claims against the Bank.

MCPLC was restored to the register of companies (having previously been dissolved after the insolvency process concluded) on the claimants’ application for the purposes of the litigation, and the claimants asserted that they would meet any costs arising as a result of the derivative claims being brought (whilst noting that those costs would be incurred in the personal claims in any event).

Derivative claims

Statutory basis

Under section 260(1) of the Act, derivative claims can only be brought by members of a company who are seeking relief on the company’s behalf. In this case, there was no dispute that the claimants were both members of MCPLC.

Section 260(3) provides that the cause of action in a derivative claim must arise from an act involving negligence, default or a breach of duty by a director of that company. The Act specifies that this includes former directors and shadow directors (section 260(5)). The claimants sought to satisfy this requirement by seeking a declaration that the Bank acted as a shadow director of MCPLC once the company was transferred to the Bank’s loan management unit on the basis that, from that point, the Bank took increasing control over the company’s use of its assets, choice of management and business activities.

Permission requirements

Once a derivative claim has been brought, the claimant must apply for the court’s permission to continue it. This is broken down into two stages.

The first stage is based on the documents filed by the claimant: the court must refuse permission to bring a derivative claim if the documents do not demonstrate a prima facie case for granting permission. The claimants in this case passed the first stage, and their application for permission was not refused.

If a claimant succeeds at the first hurdle, then permission to continue the derivative claim is assessed at a more substantive hearing, at which the potential defendant may play a role, based on the factors set out in section 263 of the Act. The High Court in the present case provided a helpful summary of the authorities on these factors, breaking them down into two further stages, which require the court to place itself in the position of a hypothetical director.

1. Section 263(2)

First, permission must be refused if: (i) the director’s actions have been authorised or ratified (which was not applicable in the present case); or (ii) a person acting in accordance with the directors’ duty contained in section 172 of the Act – the duty to promote the success of the company – would not seek to continue the claim.

The court described the second of these factors as a “mandatory refusal”, and cited Iesini v Westrip Holdings Ltd [2009] EWHC 2526 (Ch), concluding that the court must refuse permission on this basis if it is satisfied that no hypothetical director acting properly could continue the claim. Per Iesini, if some directors would continue the claim, and some would not, then the court must move on to consider the next set of factors. The court also noted that it was unusual to refuse permission on this initial, mandatory basis.

2. Section 263(3)

Second, there are a set of factors contained in section 263(3) of the Act which must be taken into account by the court when determining whether to grant permission.

Notably, one factor is the importance that the same hypothetical director, who acts in accordance with the duty to promote the success of the company, would attach to continuing the claim.

The other factors include whether:

  • the claimant is acting in good faith in seeking to continue the claim;
  • the underlying act of the director is likely to be ratified or authorised;
  • the company has decided not to pursue the claim; and
  • the member could pursue the cause of action in their own right instead.

The most relevant in the present case was the first: assuming some directors would choose to continue this claim against the Bank, how much importance would those directors attach to the claim?


The High Court refused to grant permission on the section 263(2) factors, concluding that “no person concerned to promote the success of MCPLC would seek to continue this proposed claim”. This was ultimately based on a preliminary assessment of the merits of the claim, with the key reasons being:

  • The anecdotal evidence relied upon by the claimants to support their allegation that the Bank was driven by an ulterior motive would be borne in mind by the notional director, but the notional director would have an open mind, and would be encouraged to focus on the actual circumstances of the case.
  • The claimants’ assertion of the Bank’s illegitimate intentions ignored the more likely possibility that the Bank was merely protecting its own risk, whilst wanting to support the business as far as it could. The notional director would have this in mind, as well as the temptation of making such assertions.
  • The notional director would recognise the inconsistency of the Bank’s alleged behaviour with the actual outcome: the Bank had been left with irrecoverable debt, as the only remaining substantial creditor. Indeed, the court noted that as a creditor, the Bank was entitled to look to its own interests.

The court noted that the parties held differing views on the nature of the merits test which should be applied, and whilst those differences did not impact the court’s decision, it criticised the claimants’ submissions that a weaker case may be strengthened by a large potential recovery.

The court then went on to consider the section 263(3) factors, in the event that it was incorrect in respect of section 263(2), and determined that the poor merits of the claim would also lead to low importance being attached to the claim by a hypothetical director.

As for the claimants’ suggestion that they should be granted permission on the basis that a notional director of MCPLC would be bound to bring the claim as MCPLC had nothing to lose in the circumstances, this was rejected. The court pointed out that the section 263(3) factors required there to be some positive reason for a director to seek to continue proceedings.

Lastly, the court addressed the remaining statutory factors briefly, noting that there was no suggestion of bad faith against the claimants, they would not properly have an alternative remedy for the claims, and there was no relevance in the company not having decided to pursue the claim itself (given it had no directors).

The Bank as a shadow director

The Bank disputed this allegation, submitting that it was entitled to impose conditions on its support of MCPLC without becoming a shadow director, and that the claimants’ allegations were based on an unjustified assumption that everything was done at the bidding of the Bank.

The court referred to the conclusions of Lewison J in Ultraframe (UK) Ltd v Fielding [2005] EWHC 1638 (Ch) that strong positions of influence taken by creditors over debtors do not equate to shadow directorships: “a creditor […] is entitled to protect [its] own interests as a creditor without necessarily becoming a shadow director”.

It declined to conclude that the Bank had acted as a shadow director, stressing that the allegation by the claimants “lacked essential core facts”.

The claimants’ funding promise

The claimants had not provided any evidence of their assets to support their promise to fund the derivative claim. This was justified, said the claimants, on the grounds that any such evidence would have a collateral benefit to the Bank in the personal claims because (the court presumed) it would give the Bank an unfair advantage in any settlement discussions or enforcement proceedings. However, the Bank argued that if the claimants’ promise was to be relevant, then it needed to be substantiated by evidence, relying on Hughes v Burley [2021] EWHC 104 (Ch).

The court declined to determine this issue, on the basis that: (i) permission was being refused on the merits; and (ii) MCPLC had no assets capable of being depleted by the litigation in any event.

Andrew Cooke
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Class Actions in England and Wales podcast series: Episode 5 – Shareholder class actions

In this podcast, Rupert LewisSimon Clarke and Gregg Rowan discuss shareholder class actions, which give rise to significant risks for corporate clients. The podcast looks at why these claims have become more prevalent in the English courts in recent years, and the mechanisms for bringing such claims and how these differ from US-style class actions. It discusses the main legal bases for such claims and some of the key battlegrounds that tend to arise.

The presenters are all authors of Class Actions in England and Wales, a textbook authored by Herbert Smith Freehills lawyers and published by Sweet & Maxwell. This is the fifth in our series of podcasts to mark the launch of the second edition of this leading textbook. Future editions will look at other topics of interest relating to class actions or areas where we expect to see growth.

To listen to the podcast, please see our Litigation Notes blog.

Our podcast is also available on iTunesSpotify and SoundCloud and can be accessed on all devices. You can subscribe and be notified of all future episodes.

Court of Appeal confirms reflective loss rule will bar claims of former shareholders of a dissolved company because the principle must be determined at time of alleged loss

The Court of Appeal has upheld a decision of the High Court to strike out a claim by the former shareholders of a dissolved company against an investor on the basis that all the losses claimed were barred by the reflective loss principle: Burnford & Ors v Automobile Association Developments Ltd [2022] EWCA Civ 1943.

As a reminder, the Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31 confirmed that the reflective loss principle is a bright line legal rule, which prevents only 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, in respect of which the company has a cause of action against the same wrongdoer (see our blog post).

In the present case, the Court of Appeal agreed with the High Court that although the company had been dissolved, the claimants’ claim fell within the ambit of the reflective loss principle. The decision puts the time at which the reflective loss rule falls to be assessed beyond doubt: it is the time when the claimant suffered the alleged loss and not at the time proceedings were brought.

This timing point has been the subject of uncertainty following the decision of Flaux LJ (as he then was) in Nectrus Ltd v UCP plc [2021] EWCA Civ 57. Sitting as a single judge of the Court of Appeal, Flaux LJ refused permission to appeal in Nectrus and in doing so held that the claim of an ex-shareholder was not barred by the reflective loss principle, finding that the rule should be assessed when the claim is made. Although the Board of the Privy Council in Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22 found that Nectrus was wrongly decided, the High Court in the present case considered that it was bound by the decision (albeit distinguishing the present case from Nectrus on the facts). On appeal, the Court of Appeal took the opportunity to set the record straight, confirming that the Privy Council’s decision in Primeo is the correct view.

We consider the decision in more detail below.


The claimants were former shareholders in a company called Motoriety (UK) Ltd (Motoriety), whose business was the exploitation of two software-based products for the motoring industry. In 2015, Motoriety wished to expand its customer base and entered into negotiations with Automobile Association plc (better known as “the AA”), on the basis that the AA could invest in the company. Motoriety and the claimants subsequently entered into an investment agreement with the defendant subsidiary company of the AA. The defendant agreed to subscribe for 50% of the share capital of Motoriety and the defendant had a call option for the remaining 50% of Motoriety for consideration produced by a formula contained in the agreement. On the same day, Motoriety granted the defendant a licence to use its software and associated intellectual property rights. In 2017, Motoriety went into administration and was bought from its administrators by another company in the AA group.

The claimants subsequently brought a claim against the defendant for fraudulent or negligent misrepresentation and/or for breach of contract. The claimants alleged that they had entered into the investment agreement and the licence agreement in reliance on false representations by the defendant. The claimants also alleged that the defendant breached implied terms of the investment agreement by pursuing a course of conduct that undermined the basis of the arrangements between the claimants, Motoriety and the defendant. The claimants alleged that this led to Motoriety going into administration. The claimants also pleaded an alternative breach of contract claim that, had it not been for the defendant’s breach of contract, the defendant would have exercised the call option and paid the consideration due.

The claimants sought damages for losses incurred as a result of the fraudulent/negligent misrepresentation and/or breach of contract. On the claimants’ misrepresentation claim, losses were claimed on the basis that, had the alleged misrepresentations not been made, the claimants and Motoriety would not have done the deal with the defendant, but would have entered into a venture with a third party company and the value of the claimants’ shareholdings would have increased accordingly. Similarly, in relation to the original breach of contract claim, the claimants claimed that if the contract had been properly performed, Motoriety would have thrived and the value of the claimants’ shareholdings would have increased. Alternatively, had it not been for the defendant’s breach of contract, the defendant would have exercised its call option, so that the claimants would have been entitled to the consideration provided for by that option. Three of the claimants also claimed for the loss of their initial investments in Motoriety.

The defendant denied the claim and brought an application to strike out the claim or for reverse summary judgment on the basis that all the losses claimed by the claimants were barred by the reflective loss principle.

High Court decision

The High Court found in favour of the defendant and granted its application to strike out the claim. The High Court’s reasoning is discussed in our previous blog post here.

In summary, the High Court found that the claimants’ claims satisfied all of the conditions (set out in Marex) needed for a claim to be barred by the reflective loss rule. The claimants’ alleged losses were entirely derived from the claimed losses of Motoriety and were not separate and distinct losses. If Motoriety was restored to the register, the loss would still be in the company.

The claimants appealed.

Court of Appeal decision

The Court of Appeal upheld the High Court’s decision to strike out the claim on the basis that all the losses claimed were barred by the reflective loss principle.

The key issues which may be of interest to financial institutions are set out below.

Grounds of appeal

Two of the claimants’ grounds of appeal related to the applicability of the reflective loss principle. The first ground was that the issue was not suitable for summary determination because it raised fact-sensitive questions and the relevant law is uncertain and developing. The second ground was that the claimants’ claims were not in any event barred by the reflective loss principle.

The “reflective loss” principle

The Court of Appeal drew the following points from its review of the authorities, in particular Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, Johnson v Gore Wood & Co [2000] UKHL 65, Marex, Primeo, Allianz Global Investors GmbH v Barclay Bank plc [2002] EWCA Civ 353, and Nectrus:

  1. The reflective loss principle applies where a shareholder brings a claim “in respect of loss which he 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” (Marex at paragraph 79);
  2. A shareholder cannot escape the reflective loss principle merely by showing that he has an independent cause of action against the defendant. He must also have suffered separate and distinct loss, and the law does not regard a reduction in the value of shares or distributions which is a knock-on effect of loss suffered by the company as separate and distinct;
  3. There need be no exact correlation between the shareholder’s loss and the company’s for the reflective loss principle to be applicable. The reflective loss principle can apply “where recovery by the company might not … fully replenish the value of its shares” (see Marex at paragraph 42). Equally, the company’s loss can exceed the fall in the value of its shares;
  4. The reflective loss principle will not be in point if, although the shareholder’s loss is a consequence of loss sustained by the company, the company has no cause of action against the defendant in respect of its loss;
  5. Nor will the “reflective loss” principle apply to a claim which is not brought as a shareholder but rather as, say, a creditor or an employee;
  6. The Court has no discretion in the application of the reflective loss principle, which is a rule of substantive law;
  7. The applicability of the reflective loss principle is to be determined by reference to the circumstances when the shareholder suffered the alleged loss, not those when the claim was issued (as confirmed in Primeo).

Although not emphasised in the judgment, proposition (7) had been the subject of uncertainty following the decision of Flaux LJ (as he then was) in Nectrus. Sitting as a single judge of the Court of Appeal, Flaux LJ refused permission to appeal and in doing so held that the claim of an ex-shareholder was not barred by the reflective loss principle, finding that the rule should be assessed when the claim is made. In Primeo, the Board of the Privy Council found that Nectrus was wrongly decided, confirming that the rule falls to be assessed as at the point in time when a claimant suffers loss and not at the time proceedings are brought (see our blog post).

Notwithstanding the decision in Primeo, the High Court in the present case considered that it was bound by Flaux LJ’s decision in Nectrus, albeit the High Court considered that the present case was distinguishable on the facts from Nectrus. However, in the context of the present appeal, the court said that two further decisions of the Court of Appeal indicated that Primeo was the “correct view”, namely Allianz and a subsequent decision in the Nectrus litigation: UCP plc v Nectrus Limited [2022] EWCA Civ 949 (granting Nectrus’ application to reopen Flaux LJ’s decision and granting Nectrus permission to appeal).

Suitability for summary determination

The Court of Appeal was not persuaded that the reflective loss issue was unsuitable for summary determination on the basis that the law is uncertain and developing.

The Court of Appeal underlined that the reflective loss principle had recently been considered in depth by the Supreme Court in Marex, where its existence and scope were confirmed. Also, while the principle had been the subject of debate in a number of subsequent cases, the points aired in those cases did not give rise to any legal uncertainty relevant to the present case. The Court of Appeal went on to emphasise that it is also not the case that the court should not entertain a strike out or summary judgment application wherever an undecided question can be discerned in the relevant area of law.

The misrepresentation claim

The Court of Appeal found that the misrepresentation claim was wholly barred by the reflective loss principle and the High Court was right to strike it out. The applicability of the principle did not depend on any factual disputes.

The Court of Appeal highlighted that it was evident that if the allegations of misrepresentation were well-founded, Motoriety would itself have (or have had) a cause of action against the defendant in respect of them. There were multiple references in the particulars of claim to Motoriety having relied on all the alleged representations implying that they had been made to it as well as to the claimants. The Court of Appeal also considered that the loss of the claimants’ share value was a knock-on effect of loss suffered by Motoriety for which it would itself have (or have had) a cause of action and hence was not separate and distinct. The Court of Appeal concluded that, as per Marex, the claim is in this respect one relating to loss which the claimants would have suffered as shareholders “in the form of a diminution in share value…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”. It was thus barred by the reflective loss principle.

The breach of contract claim

The Court of Appeal found that the breach of contract claim was also barred in its entirety by the reflective loss principle and the High Court was right to strike it out.

The Court of Appeal said that any good faith obligations would have been owed to Motoriety as well as the claimants. The Court of Appeal could not see that the terms the claimants alleged would have been implied solely in favour of the claimants. If the terms were implied in the investment agreement, they would surely have been implied in favour of all the defendant’s counterparties, including Motoriety, the more so since they related to the conduct of the business which Motoriety was conducting. The Court of Appeal therefore considered that if the claimants had a contractual cause of action in respect of the matters they alleged, so would Motoriety. That being so, the claimants’ claim would be barred by the reflective loss principle unless they were alleging separate and distinct loss.

The Court of Appeal then noted that the loss of the claimants’ share value did not constitute a separate and distinct loss and the position was similar to the corresponding head of claim for misrepresentation. The loss in share value would be reflective of loss sustained by Motoriety in respect of which it would itself have (or have had) a cause of action against the defendant.

The Court of Appeal also considered that the reflective loss principle applied to the loss of the consideration from the call option the claimants claimed the defendant would have exercised. This loss related to what the claimants’ shares would have fetched if sold to the defendant following its exercise of the call option. The claimants’ allegation was that the defendant’s alleged breaches of contract meant that the claimants would not be paid anything for their shares and that reflected the fact that the breaches had brought about Motoriety’s failure such that there was no longer any prospect of either earnings or distributions. The loss claimed represented one way of measuring loss of share value. If the claimants’ case was correct, breaches of contract by the defendant caused Motoriety to fail and, in consequence, rendered the claimants’ shares worthless, both in the sense that they lost any value in the general market and in the sense that there was no longer any prospect of selling them to the defendant pursuant to the option. The Court of Appeal concluded that the claimants were therefore claiming in respect of loss “in the form of diminution in share value…which is the consequence of loss sustained by [Motoriety], in respect of which the company has [(or had]] a cause of action against [AAD]”. Further, there may or not be a precise correlation between the claimants’ loss and Motoriety’s, but no such correlation was required for the reflective loss principle to apply.

Accordingly, for all the reasons above, the Court of Appeal found in favour of the defendant and dismissed the claimants’ appeal.

Julian Copeman
Julian Copeman
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Ceri Morgan
Ceri Morgan
Professional Support Consultant
+44 20 7466 2948
Nihar Lovell
Nihar Lovell
Professional Support Lawyer
+44 20 7466 2529
Claire Nicholas
Claire Nicholas
Senior Associate
+44 20 7466 2058

ESG Updates – The Bank of England Climate Biennial Exploratory Scenario

The Bank of England (BoE) has published the results of the Climate Biennial Exploratory Scenario (CBES), which explores the financial risks posed by climate change for the largest banks and insurers operating in the UK. In line with the findings of other central bank stress tests across the globe, the CBES found that while the financial system might be adequately capitalised to absorb the shocks of climate change scenarios, the sector would suffer losses across each scenario, with the greatest quantifiable losses suffered in a No Action and Late Action scenario. This reaffirms the BoE’s drive to an early and orderly transition to a net-zero economy.

  • In June 2021 the BoE launched the CBES, seeking to explore and better understand the financial risks posed by climate change to the UK financial system, and to ensure that real change is effected to help with systemic resilience.
  • Following the submission of participants’ initial responses in October 2021, we looked at the CBES in the context of other central bank initiatives and stress tests across the globe, to understand the scope of the CBES as part of our November 2021 Global Banking Review, which focussed heavily on the issues facing financial institutions in connection with Climate Change.
  • Just over six months later the BoE has published the results of the CBES, and we consider here what it has learnt, where will the focus fall, and what will come next?

Summary of key findings – Banks

The climate risks captured in the CBES scenarios are likely to create a drag on the profitability of both UK banks and insurers. Loss projections varied across participating firms and the three different climate scenarios but equated to an annual drag on profits of around 10-15% on average. Projections suggested (unsurprisingly) that the overall costs will be lowest in scenarios with early, well-managed actions to transition to a net-zero economy.

However, the CBES found that there was substantial uncertainty as to the magnitude of climate risks. The figures identified in the BoE report were heavily caveated to allow for various acknowledged limitations, with this, its first CBES, including:

  • The banks’ projections were focused on credit risk, and did not yet fully take into account possible impacts resulting from market risk;
  • The data used to populate responses from firms was incomplete and inconsistent in its approach – for example, loss estimates on the same corporate customers differed substantially in participating firms’ responses;
  • The ‘No Action’ scenario would likely incur losses past the time horizon selected for the CBES projections, and as such projections for this scenario were likely partial; and
  • The BoE acknowledged the limitations of the fixed balance sheet approach adopted for the CBES.

Despite these, and other limitations, the CBES included a number of interesting observations for market participants:

Quantitative findings – calculating the risk

  • Projected climate risk impacts were highest for banks’ wholesale and mortgage exposures, and projected climate-related consumer credit losses were relatively low.
  • Institutions which relied upon third-party modelling and data without sufficient internal capability to challenge and scrutinise often gave rise to materially lower loss projections than those institutions which had invested in and developed their own internal models. The development of internal models was more established in the insurance than the banking sector.
  • Limitations caused by data gaps and inconsistent data provision from third parties such as clients and counterparties were again noted. In particular, the lack of available data regarding corporates’ current value chain emissions and future transition plans was a common issue affecting firms. The BoE also recommends that banks act to encourage remediation of data limitations and gaps to help firms meet the PRA’s supervisory expectations, as set out in SS3/19. Firms’ efforts in this area will be supported by initiatives currently in train to resolve some of these data gaps.

Qualitative findings – planning ahead

  • Responses to the qualitative secondary part of the CBES, which focused on transition planning, suggested that some banks, in particular, were not considering their transition plans holistically: they were failing to take into account the likelihood of similar management actions from competitors or adjusting for different macro scenarios.
  • Transition plans suggest that banks intend to divest from energy-intensive sectors. The BoE sounded a note of caution in relation to these suggestions and to the idea that capital requirements could be used to target investment towards “green” sectors and away from energy-intensive sectors. The BoE noted the systemic risk inherent in depriving energy-intensive sectors from the funding they would need to transition towards net-zero, and also the economic repercussions of mass divestment from providing finance to carbon-intensive sectors ahead of the expansion of renewable energy supply.
  • Capital adequacy remains at the forefront of the BoE’s mind, but in the context of developing (along with other central banks) Solvency II to better accommodate the nuances of climate change risk, rather than using the BoE’s prudential regulation as a pseudo-governmental arm seeking to drive policy change.
  • While participating firms were making good progress in some aspects of climate risk management, they all had more work to do to improve their climate risk management capabilities.

Climate Litigation Risk 

As part of the CBES, the BoE engaged with members of the London Insurance Market to understand the extent to which existing policies would cover climate-related litigation. Following the trend of increasing climate-related litigation (particularly in the United States, which is ahead of many European jurisdictions in this regard), the BoE wanted to look at the impact of this development in the contentious landscape. The BoE identified seven ‘types’ of climate-related litigation, these are set out in full below:

  • Direct causal contribution: a corporate is found liable for its representative contribution to manmade climate change.
  • Violation of fundamental rights resulting in cessation or reduction of operations: a corporate is prevented from practising carbon-intensive activities that violate fundamental human and dignity rights, this has a significant impact on financial revenues.
  • Greenwashing: a corporate is found to be misleading customers (e.g. false advertising, mislabelling as ‘environmentally friendly’, underreporting disclosures) and must pay out compensation to customers/investors.
  • Misreading the transition: a corporate is sued on the basis that it continued to sell a carbon-intensive product while in knowledge it would become redundant due to government net-zero policy, they must refund and compensate customers.
  • Indirect casual contribution (related to exposure to Utilities sector only): utilities are sued for their indirect contribution to climate change which amplifies physical risks due to inadequate or negligent preparation.
  • Directors’ breach of fiduciary duties (related to cover against asset managers only): investors of an asset manager allege that the entity’s directors have understated the physical and/or transition risk to their assets in their disclosures. Investors seek payment for damages from the directors’ breach of fiduciary duty.
  • Indirect causal contribution (financing): a case is brought against financiers of carbon-intensive activities, as they have contributed indirectly to manmade climate change through financing activities of carbon majors.

                                                  Taken from Table 1 of Box C of the CBES Results

Following engagement with members of the insurance market, the BoE identified that (in aggregate) just under half of the D&O insurance policies currently in place would cover these types of litigation risk; while approximately a quarter of the professional indemnity policies would cover climate related litigation. The respondents noted that this figure may not reflect coverage of the defendant’s own legal costs, which could often be high, particularly where the claims were investor-led.

While the focus of these questions was on the impact to the insurance industry of the developing trend, the analysis should focus the minds of banks and asset managers: have they sufficiently considered their litigation risk? Have they considered whether their policy coverage is adequate? As we move forward, have they budgeted for the increasing cost of Profin and D&O insurance which may arise from developing trends in this area?

What next

  • The BoE’s work on climate scenario analysis, including that done as part of the CBES, provides a key tool supporting firms and policymakers as they navigate uncertainty over future climate policy and climate change, enabling assessment against a range of possible outcomes.
  • As set out in the PRA’s October 2021 Climate Change Adaptation Report, the PRA and the BoE are undertaking further analysis to determine whether changes need to be made to the design, use, or calibration of the regulatory capital frameworks.
  • To support this work on the capital framework, the BoE will host a research conference on the interaction between climate change and capital in Q4 2022, and has already put out a ‘Call for Papers’. The BoE will publish follow-up material on the use of capital, including on the role of any future scenario exercises, informed by the conference and the findings of the CBES.
  • While no future CBES has been announced, it is clear that more work is needed before the BoE and market participants understand the stress that they may soon be under as a result of climate risks.
Simon Clarke
Simon Clarke
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Sousan Gorji
Sousan Gorji
Senior Associate
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Eleanor Dole Sheaf
Eleanor Dole Sheaf
+44 20 7466 7612