3.3.12.3 Reflective loss and the unfür prejudice remedy

As appears from case law, the availability of a derivative claim does not bar application of the unfür prejudice remedy.1 As has been put by Hoffmann LJ (as he then was):

A controversial development is that some courts have allowed petitioners to seek relief under the unfür prejudice remedy by means of an order for financial compensation (in contrast to a buy-out order), despite the availability of a statutory derivative action. The relief can be sought against members, former members and directors who are involved in the diversion of the company's assets or can even be sought against third parties, when they have knowingly received or improperly assisted in the wrongful diversion.3

In the decision of Atlasview Ltd v Brightview Ltd, the respondents argued that financial compensation for reflective loss could not be recovered under s. 994.4 The High Court Deputy Judge, Jonathan Crow, explicitly took the view that the Prudential principle does not apply to the court's powers under the unfür prejudice remedy. He argued that stripping out the company's assets is repeatedly held as a successful ground for unfür prejudice petitions and that, thus, the authorities seem to exclude application of the no reflective loss principle under the unfür prejudice remedy.

Moreover, the High Court Deputy Judge held that the scope of the unfür prejudice remedy includes conduct such as the diversion of company's assets, since the section, amongst other things, regards conduct that affects the interests of its members generally. Jonathan Crow J adduced that application of S. 994 would be more practical than starling a derivative action. If the court would require the shareholder to bring a derivative action, which will be aimed at the entire loss of the company, then a large part of the sum recovered would ultimately benefit the defendants in their capacity as majority shareholder.

In Atlasview Ltd v Brightview Ltd, it was even held by the court that a petitioner could claim financial compensation for unfürly prejudicial conduct without the buy-out of his shares. The judge held that if compensation is awarded outside the context of a buy-out order, the court has to consider that no double recovery will be obtained, first by means of compensation to the shareholder and second by means of compensation to the company itself:

Therefore, by means of the unfür prejudice remedy, the petitioner may obtain personal relief for what is in effect a wrong done to the company. By way of making the respondent pay financial compensation for unfürly prejudicial conduct of the company, the corporate veil is lifted.6

In addition, in Gross v Rackind, as described in § 3.3.5.3, the Court of Appeal held that onder certain circumstances the affürs of a subsidiary company can also form part of the affürs of the parent company. This way of interpreting the company's affürs has as a result that a member of the parent company may complain about conduct in the subsidiary in which the parent company is a member. When courts allow compensation to the shareholders in this situation, in fact loss reflecting reflective loss (double reflective loss?) is granted. How the laffer situation should be resolved from a judicial point of view is not yet clear, as the Court of Appeal in the case concerned decided on the issue of striking out the case and did not examine the case on its full merits.

The ability of courts to reward personal relief for wrongs done to the company has been criticized by Hirt.7 As he put forward, personal relief, either sec by means of financial compensation or even by means of a buy-out order at a price that (pardy) includes financial compensation, may cause difficulties.8Initially, the company will not be affected by the financial compensation paid by the respondent, usually the majority shareholder. The personal remedy does not preclude the company from recovering its own loss.

As Hirt points out, difficulties may arise, because a buy-out order including financial compensation deteriorates the financial position of the party ordered to purchase the shares. There is a possibility that a potential claim of the company itself may not be recovered. If the company goes bankrupt, the deterioration of the potential claim may affect the position of creditors. A liquidator of the company may not be able to succeed in claiming damages, which may have the result that not all debts of the company are paid. The result may be that the minority shareholder is paid compensation for a wrong done to the company, whereas the creditors of the company will receive nothing. This particular problem is also indicated by Alcock, who submits that: