The rule against recovery by shareholders of losses classed as reflective of those of the company in which the shares are held was applied. This was to deny the Claimant in Webster the opportunity to amend his claim increasing his losses from the original £1.9 million to over £30 million.

The leading case on reflective loss is Johnson v Gore Wood & Co. At 35F to 36B Bingham LJ set out the position of shareholders as follows:

"1. Where a company suffers loss as caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of the shareholder suing in that capacity.  A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss. Even if the company, acting through its constitutional organs, has declined or failed to make good that loss…et seq."

The rule preserves the corporate entity of the company as a legal person, separate and distinct from the shareholders’ position, without allowing any blurring of the different entities and capacities.  However, the position as set out in Johnson v Gore Wood does have an exception in the decision of the Court of Appeal in Giles v Rhind.  In that case, the company in administrative receivership was stifled in its action to recover losses from a wrongdoing director. So the Court permitted an exception to the rule against reflective loss by allowing a shareholder to pursue a claim against the wrongdoer, even though the claim was for reflective loss. 

The exception to the rule is, however, according to Webster, strictly confined to the situation where by reason of the wrong done to it, the company is unable to pursue its claim.

Webster was a claim against a firm of solicitors arising from the solicitors’ failure to serve a Claim Form in time. The damages were the loss of a chance to pursue a claim against a different firm of solicitors who had been involved in advising the Claimant in respect of investments made by the Claimant in one company in 1993/1994.

The Claimant sought permission to amend the pleadings and increase the quantum of the claim from £1.9 million to over £30 million. The amendments included claims made by a company owned and controlled by the Claimant and a pension fund in respect of which the Claimant was a trustee along with one other corporate trustee and the Claimant was sole beneficiary.

The Claimant’s company had been wound up and was presumed to have been struck off the register.  The losses claimed included sums invested in a project directly by the Claimant, by his company and his pension fund, loss of profit by the company on five property deals and loss of income claimed by the Claimant as a result of loss of employment by his company and increased indebtedness of the company to the bank.

The Defendant argued successfully that all of the claims made by the company were incurred by the company and not the Claimant and were not losses which fell within the Giles v Rhind exception.  The Court found that the losses claimed as suffered by the company were losses in respect of which the company could sue. In fact, the company had, at one point in the preceding years, sought to make allegations against the Claimant. However, those allegations had not been pursued, probably because of the insolvency of the company. This was insufficient to bring those losses within the exception to the rule, as the Judgment makes clear that the company could have brought an action by its liquidator, or an assignment of its cause of action could have been taken by the Claimant. Additionally, the Claimant’s claim for increased indebtedness to the bank arising from a personal guarantee provided to the bank in respect of the company’s indebtedness to the bank, the Court found that this was reflective of the company’s loss and was not recoverable by the Claimant.  Giles v Rhind was confined to its limited and unusual facts.

Similarly, the claim for losses suffered by the Claimant’s pension fund both in respect of direct investments and in respect of the diminution in the value of the pension fund was a claim that ought to be brought by the pension fund and that requirement could not be sidestepped in these circumstances.  Further, the Claimant’s claim for loss of pension was only a reflection of the loss which the pension fund itself ought to pursue.

The only head of loss allowed to remain was the Claimant’s loss of income by employment from the company. This claim arose out of an allegation of a duty of care owed to the Claimant personally, and so did not engage the issues of capacity to sue in the way that the other amendments had done. For that reason, the amendment was allowed to stand, and would be subject to the usual test, in respect of which, the hardest hurdle to overcome would be to show that the loss claimed was not too remote.

The Claimant’s attempt to increase the exception to the rule against reflective loss was firmly rejected.  The exception found in Giles v Rhind has been confined to its particular facts allowing a degree of certainty to remain in this area.