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	England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Stein v Blake & Ors (No2) [1997] EWCA Civ 4002 (13 October 1997) URL: http://www.bailii.org/ew/cases/EWCA/Civ/1997/4002.html Cite as: [1998] 1 BCLC 573, [1998] BCC 316, [1996] AC 243, [1997] EWCA Civ 4002, [1998] 1 All ER 724

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IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(SIR JOHN VINELOTT)

		Royal Courts of Justice Strand London WC2
		13 October 1997

1. LORD JUSTICE MILLETT: This is an application by the first, second and eighth to sixteenth defendants to set aside the leave granted by this Court to the plaintiff to appeal from an order of Sir John Vinelott sitting as a Judge of the Chancery Division, by which he struck out the writ and statement of claim and dismissed the action.
2. The action was originally brought against 18 defendants, but the third to the seventh and the seventeenth defendants are companies which have been dissolved, and the action has been stayed against the eighteenth defendant, which is in compulsory liquidation. Accordingly, if the application to set aside leave to appeal is granted, the action will be at an end.
3. By the action the plaintiff alleges that assets were misappropriated by the first defendant from companies somewhat ineptly defined in the statement of claim, but which have been throughout described as "the old companies", in which the plaintiff and the first defendant were each 50 per cent shareholders and of which the first defendant was sole director; and were transferred to companies under the control of the first defendant. It is not clear to me what part was played by the second to eighteenth defendants, but it may be that they were participants in the alleged misappropriation, or knowing recipients of the assets alleged to have been misappropriated.
4. The plaintiff alleges that he has thereby suffered loss and claims damages and an account and payment (presumably to himself) together, somewhat confusingly, with a declaration that the misappropriated assets are held in trust for the old companies. None of the old companies is a party to the action. With only one exception, they are all in insolvent liquidation. The only cause of action pleaded is a personal cause of action of the plaintiff for loss suffered by him personally. It is not a minority shareholder's action (or as it is sometimes called a derivative action) in which a shareholder brings proceedings on behalf of the company, asserts a cause of action vested in the company, and recovers damages for or obtains restitution to the company. No such action could be brought by the plaintiff on behalf of those old companies which are in liquidation. In their case, the decision whether or not to bring proceedings in the name of the company concerned is a matter exclusively for the liquidator, subject to the directions of the Court, and no-one else.
5. The writ was issued in October 1991. In February 1997 Sir John Vinelott determined as a preliminary issue, the question whether the action was properly constituted. He held it was not and dismissed it. Relying on the decision of this Court in Prudential Assurance Co Ltd v. Newman Industries Ltd (No.2) [1982] Ch 204, he held that the plaintiff, as a shareholder in the old companies, had no independent claim of his own to recover in respect of losses suffered by the old companies as a result of wrongs done to them. Such wrongs, he held, could be redressed only in proceedings brought by or on behalf of the companies which had suffered the loss, and in the latter case the companies must be made parties in order to receive damages or restitution.
6. Sir John Vinelott refused leave to appeal. Leave to appeal was refused by Peter Gibson LJ on 29 May 1997. He described the plaintiff's claim as a claim that the first defendant had caused loss to companies in which the plaintiff was a shareholder, the loss allegedly suffered by the plaintiff being a loss through his shareholding in the companies. He saw no realistic possibility of success were the matter to go to appeal. The plaintiff renewed his application for leave to appeal, and his renewed application was heard ex parte by Aldous and Judge LJJ on 4 July 1997. They granted leave but gave no reasons for doing so.
7. In the plaintiff's skeleton argument in support of his renewed application for leave to appeal, the question for decision was described thus:

"... whether the Plaintiff has standing to make a personal claim for damages, equitable compensation or other relief in consequence of an alleged breach of fiduciary duty by the First Defendant in acquiring the business and assets of companies of which he and the Plaintiff were sole and equal shareholders, and of which the First Defendant was the sole director."

8. It will be observed that in so framing the question the plaintiff did not expressly say that the fiduciary duty in question was owed to the plaintiff rather than to the companies, but I assume that is what was meant. The question, however, remains: whether the plaintiff can recover the loss which he has allegedly sustained by reason of the misappropriation of the business and assets of companies in which he was a shareholder.
9. The plaintiff's skeleton argument identified three grounds of appeal. I will read them:

"(1) The Learned Judge should have concluded that the First Defendant owed the Plaintiff a fiduciary duty of good faith in relation to the First Defendant's acquisition of company assets carried out in the circumstances set out in paragraph 5 below

(2) The alleged breach of that duty by the First Defendant caused loss to the Plaintiff himself; and

(3) The Learned Judge should not have decided the question of the Plaintiff's locus standi as a preliminary issue, without considering all of the relevant facts."

10. It is plain from that formulation that the plaintiff was asserting a personal claim arising from a breach of fiduciary duty owed to him personally and resulting in loss suffered by him personally. I have no doubt that circumstances may exist in which such a duty arises and where breach of such a duty results in such loss. The question, however, is whether any such circumstances are pleaded in the present case.
11. The plaintiff's skeleton argument devoted much space to the submission that on what were said to be the very unusual circumstances of the present case, the first defendant did owe a fiduciary duty to the plaintiff personally. But that is not the problem. The problem is that the only conduct relied upon as constituting a breach of that duty, however it is described and in whatever detail it is set out, is nevertheless the misappropriation of assets belonging to the old companies, so that the only loss suffered by the plaintiff consists of the diminution in the value of his shareholding by reason of the misappropriation of the assets of the companies in which those shares subsist. Such loss would be fully remedied by the restitution of the value of the misappropriated assets to the companies. It is not alleged that the plaintiff has been induced or compelled to dispose of his shares in the companies at an undervalue by reason of the diminution in value of their assets; he still has them. If the plaintiff were allowed to recover for the diminution in the value of his shares, and the old companies for the misappropriation of their assets, the plaintiff would have double recovery.
12. All the cases relied upon by the plaintiff in his skeleton argument are cases where the alleged loss was suffered directly by the shareholder. In all those cases he was induced or compelled to dispose of his shares at an undervalue. In such a case the shareholder suffers a loss which is distinct from, and independent of, the loss suffered by the company. Even if the company recovers in respect of the wrong done to it, this will not benefit the shareholder who has disposed of his shares, but rather the purchaser who acquired them, who may or may not be the wrong doer or an associate of his.
13. In the present case, the plaintiff does not plead any loss which is not reflected in the loss suffered by the old companies. In my judgment, the case is indistinguishable from the decision of this Court in Prudential Assurance Co Ltd v. Newman Industries Ltd (No.2) to which I have referred and on which the Judge relied.
14. At page 222 in the judgment of the Court, the following passage appears in relation to the individual claim of the shareholder:

"But what he 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. The shareholder does not suffer any personal loss. His only 'loss' is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent, shareholding. The plaintiff's shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his right of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company."

15. The Court gave this graphic illustration:

"A simple illustration will prove the logic of this approach. Suppose that the sole asset of a company is a cash box containing £100,000. The company has an issued share capital of 100 shares, of which 99 are held by the plaintiff. The plaintiff holds the key of the cash box. The defendant by a fraudulent misrepresentation persuades the plaintiff to part with the key. The defendant then robs the company of all its money. The effect of the fraud and the subsequent robbery, assuming that the defendant successfully flees with his plunder, is (i) to denude the company of all its assets; and (ii) to reduce the sale value of the plaintiff's shares from a figure approaching £100,000 to nil. There are two wrongs, the deceit practised on the plaintiff and the robbery of the company. But the deceit on the plaintiff causes the plaintiff no loss which is separate and distinct from the loss to the company. The deceit was merely a step in the robbery. The plaintiff obviously cannot recover personally some £100,000 damages in addition to the £100,000 damages recoverable by the company."

16. In the plaintiff's skeleton argument, the plaintiff attempted to distinguish that case by saying that the plaintiff was deprived of the ability to sell his shares in the old companies at their fair value (which the first defendant would have had to pay had he acquired the shares under the pre-emption provisions of the Companies' articles) because the first defendant, in breach of his fiduciary duty and the companies' articles, purchased the companies' assets at an undervalue. That, it is submitted, caused a direct and quantifiable loss to the plaintiff, who was "deprived of the opportunity to realise his shares at their true value". That expression is taken from the judgment of this Court in Heron International v. Lord Grade [1983] BCLC 244 pages 262 to 263. In that case the Court of Appeal recognised that breach of directors' fiduciary duties may cause loss to the shareholders because "they are deprived of the opportunity of realising their shares to greater advantage": see per Lawton LJ at page 262, where he added:

"Foss v. Harbottle has nothing whatever to do with a shareholder's right of action for a direct loss caused to his own pocket as distinct from a loss caused to the coffers of a company in which he holds shares."

17. But Lawton LJ was speaking of the case where, as a result of the breach of the duty of care on the part of directors to advise their shareholders in relation to a prospective takeover bid, the plaintiff (and other shareholders) was induced or compelled to dispose of his shares to a bidder at an under-value. In such a case, no wrong is done to the company. Its assets are not depleted; its coffers remain unaffected. At page 261, Lawton LJ made the relevant distinction as follows:

"It follows from these assumptions that the allegedly reckless decision of the directors, if implemented, will cause losses in two directions. First, ACC [the company in question} will suffer a loss to the extent that its shares in [a subsidiary] are depreciated in value. That is a loss exclusively to the coffers of ACC. It is not a loss to the pockets of the shareholders in ACC, although it might, in theory, cause the market value of ACC shares to fall. No shareholder in ACC could sue the directors for a diminution in the value on that account for the reason given by this court in Prudential Assurance Co Ltd v. Newman Industries Ltd (No 2)..."

18. Lawton LJ then quoted the passage which I have already cited, and continued:

"the other direction in which loss would be suffered is the loss to the pockets of the shareholders because they are deprived of the opportunity of realising their shares to greater advantage. That is a loss suffered exclusively to the pockets of the shareholders, and is in no sense a loss to the coffers of the company, which remain totally unaffected."

Lawton LJ explained:

"Our conclusion on this aspect can be readily demonstrated. Suppose that the Bell takeover goes through as a result of the allegedly reckless decision of the Board of ACC and that, in consequence, the entire shareholding in ACC becomes vested in the Bell Group at a lower takeover price than that available from the Heron Group. The payment of damages by the directors of ACC to ACC would be no compensation whatever to the former shareholders of ACC for the loss which they would have suffered. Only an action by the former shareholders in their own right, and not in right of the company, could compensate them for that loss."

19. The distinction is between (i) loss sustained by a shareholder by a diminution in the value of his shares by reason of the misappropriate of the company's assets, and (ii) loss caused directly to a shareholder who has been induced to part with the shares at an undervalue. The shareholder has a personal cause of action to recover in respect of the second type of loss, but not the first.
20. To compare that to the present case, the situation is clear. The first defendant is alleged to have misappropriated the assets of the old companies. That was a wrong to the old companies which caused loss to them. It may have reduced the value of the plaintiff's shares, but the old companies have a claim to recover the loss, and if they succeed the value of the plaintiff's shares will be fully restored. If, following the misappropriation and its concealment, the first defendant had purchased the plaintiff's shares at a value which reflected the reduced value of the old companies' assets, then he would have committed a separate breach of fiduciary duty which would have caused a distinct loss to the plaintiff quite separate from that suffered by the old companies. If the old companies were thereafter to bring proceedings to recover their misappropriated assets, or their value, the benefit of that recovery would not accrue to the plaintiff but to the first defendant, and the plaintiff would have a personal remedy in respect of that loss. But no such conduct is pleaded.
21. If this action were allowed to proceed and the plaintiff were to recover for the lost value of his shareholding from the first defendant, this would reduce his ability to meet any judgment which might thereafter be obtained by the liquidators, or by any of the old companies which were not in liquidation, to the prejudice of their creditors. The plaintiff would have obtained by a judgment of the Court the very same extraction of value from the old companies at the expense of their creditors that the first defendant is alleged to have obtained by fraud and deceit.
22. In my judgment, this case indicates the distinction which must be made. Directors owe fiduciary duties to their company to preserve and defend its assets and to the shareholders to advise them properly so that they are not induced or compelled to part with their shares at an under-value. No doubt other fiduciary duties are also owed both to the company and to its shareholders. Shareholders may suffer loss in the event of a breach of either duty, but in the first case the loss consists of a diminution of the value of their shares, is fully reflected in the loss suffered by the company, and is fully compensated by restitution to the company. In the second case the company suffers no loss. Its assets are unaffected, though they are changed from physical assets to a chose in action consisting of a claim against the wrongdoers.
23. All that is pleaded in the present case is wrongdoing to the company and loss suffered by the company. The only loss alleged to have been suffered by the plaintiff is reflected in the loss sustained by the company.
24. The judge was plainly right in ruling as he did that the statement of claim should be struck out. The question is covered by authority, and any appeal would be hopeless. I consider that leave to appeal ought not to have been granted. It is impossible to be certain what considerations influenced the two Lords Justices who granted leave, but having read the skeleton argument which was submitted on behalf of the plaintiff, I suspect that they were misled into thinking that the issue was whether fiduciary duties were owed to the plaintiff as a shareholder rather than whether the plaintiff had alleged that he had suffered any separate and identifiable head of loss, not reflected in the loss suffered by the old companies.
25. Although I am satisfied that the appeal is bound to fail, and that leave to appeal ought not to have been granted, I am not persuaded that this was a proper case in which to apply to set aside leave for reasons which my Lord the Master of the Rolls will shortly give. But we have heard the argument, the point is a short one and can be easily disposed of, and it would only be a waste of time and cause further expense to refuse to set aside leave and leave it to another Court hereafter to hear the appeal itself. Accordingly, I agree that we should set aside leave.
26. LORD JUSTICE MUMMERY: I agree with the judgment of Lord Justice Millett.
27. LORD WOOLF: I also agree with the judgment of Lord Justice Millett, and I agree that it would be appropriate in this case to set aside leave. However, I emphasise that in future a similar application could well not be treated as charitably.
28. The question of setting aside leave has been considered recently by this Court on a number of occasions. In particular, the whole question of leave was the subject of general guidance in the case of Smith v. Cosworth (26 February 1997).
29. In the case of Smith v. Cosworth, the principal judgment having been given, I set out the guidance and indicated that it was because it was thought that the case was an appropriate one for guidance that the Court had sat as a three Judge Court rather than a two Judge Court. I first dealt with the situation as to refusing and giving leave, and also dealt with the question of the reasons given when leave is granted or refused. (The case did not deal with the situation where leave is given on a single ground, and the fact that leave is given on a single ground is made clear by the Court when granting leave).
30. I went on to deal with the question of applying to set aside leave. In paragraph 5 on the judgment I said:

"The heavy onus on a respondent who seeks to set aside leave is dealt with in the judgment of my Lord which has just been given. I would only add that, before making such an application, the respondent must bear in mind that the fact that the appeal has no realistic prospect of success does not necessarily mean that leave should not have been given. The applicant will be required to establish that there was no good reason for giving leave, which may not be the same thing.

In addition, it should be borne in mind prior to making such an application that this court is likely to be very unsympathetic to it being made if it will in effect involve the parties in exactly the same expense as determining the appeal itself, and will not necessarily save the time of the court but risk the court of having to have two hearings when only one would be necessary if there was no application to set aside. It is appreciated that any litigant will feel aggrieved by being faced with delay in waiting to have an appeal heard which has no prospect of success. However, the only consequence of applications such as this having to be heard is to delay the hearings of appeals the determination of which serves some purpose. There are circumstances where an application to set aside leave is fully justified, but the present application does not fall within that category."

31. In this case I can understand that counsel appearing on behalf of the defendant was anxious that there should not be extensive argument on a number of issues which could prolong the appeal. I appreciate also that that was probably influential in this present application being made. However, in my judgment there was a much better course open to the applicant than that which was adopted of applying to set aside. As the judgment of Lord Justice Millett has indicated, the applicant did have a knock-out point, and that point could be dealt with shortly. There was no answer to it. If the appeal was to extend into other areas, then arguments could be developed which would no doubt be of considerable interest to academic lawyers, but they would not have any direct affect on the outcome of the appeal.
32. Naturally Mr Mark wanted to prevent the argument being extended to these other areas. However, if that was the wish, then it is always open to a respondent to an appeal to seek directions from this Court as to the form that the argument should take at the hearing. If it is thought that there is a single issue which would determine an appeal, then the right course to adopt is to communicate in writing to the Court, providing a copy to the other party to the appeal, indicating that view. If the Court accepts that this is the appropriate course, it will give the appropriate directions; either that there should be a split hearing of the appeal, or that at the hearing of the appeal, the argument should in the first instance be limited to a particular issue. That issue can then be isolated and, if it is appropriate, used to determine the appeal. In that way, there would not be the danger of two hearings achieving what one hearing alone could achieve. It would also be an advantage that the appeal, when it came on, would be dealt with efficiently and expeditiously.
33. That was not the course that was adopted on the present application. The present application is the sort of application which, in my judgment, results in a case being dealt with out of order (which is unfair to other parties who are seeking to have their appeals disposed of) and because of this is undesirable.
34. In future, where an application is made to have leave set aside in circumstances where the application should not be made, the parties to the application can expect the Court to refuse to consider the merits as well as the question of whether the application is appropriate. Unless the Court adopts that approach, the problem that arises from applications for leave to set aside being made will persist. The Court must therefore set its face against such applications to set aside.
35. It would do so with reluctance because, as we appreciate today, that if the application is not heard on the merits, this will inevitably result in extra costs being incurred and extra time of the Court being involved. However, it is no use the Court giving guidance of the sort that was given in the case of Smith v. Cosworth if it is not prepared to enforce that guidance by the necessary sanctions when it is appropriate to do so.

ORDER: Application allowed with costs; order nisi against the Legal Aid Board.