England and Wales High Court (Chancery Division) Decisions

“Thirdly, to what transaction does the duty of care extend? It extends, I think, only to those transactions for which the accountants knew their accounts were to be required. For instance in the present case it extends to the original investment of £2,000 which the plaintiff made in reliance on the accounts, because the accountants knew that the accounts were required for his guidance in making that investment; but it does not extend to the subsequent £200 which he made after he had been two months with the company. This distinction, that the duty only extends to the very transaction in mind at the time, is implicit in the decided cases… It will be noticed that I have confined the duty to cases where the accountant prepares his accounts and makes his report for the guidance of the very person in the very transaction in question. That is sufficient for the decision of this case. I can well understand that it will be going too far to make an accountant liable for any person in the land who chooses to rely on the accounts for matters of business, for that would expose him to a “liability in an indeterminate amount for an indeterminate time to an indeterminate class”: see Ultramares Corporation v Touche, per Cardozo CJ… My conclusion is that a duty to use care in statement is recognised by English law, and that its recognition does not create any dangerous precedent when it is remembered that it is limited in respect of the persons by whom and to whom it is owed and the transactions to which it applies.”

“I do not think that such a relationship [resulting in a duty of care] should be found to exist unless, at least, the maker of the statement was, or ought to have been, aware that his advice or information would in fact be made available to and be relied on by a particular person or class of persons for the purposes of a particular transaction or type of transaction. I would especially emphasise that to my mind it does not seem reasonable to attribute an assumption of responsibility unless the maker of the statement ought in all the circumstances, both in preparing himself for what he says and in saying it, to have directed his mind, and to have been able to direct his mind, to some particular and specific purpose for which he was aware that his advice or information would be relied on. In many situations that purpose will be obvious. But the annual accounts of a company can be relied on in all sorts of ways and for many purposes”

“The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. … I should expect to find that the “limit or control mechanism…. imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence” rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the "proximity" between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter on that transaction or upon a transaction of that kind”.

“It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. “The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it:” see Sutherland Shire Council v Heyman 60 ALR 1,48, per Brennan J. Assuming for the purpose of the argument that the relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds. As a purchaser of additional shares in reliance on the auditor’s report, he stands in no different position from any other investing member of the public to whom the auditor owes no duty.”

“What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice (“the adviser”) and the recipient who acts in reliance upon it ("the advisee”) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment.”

“The cases show that before a plaintiff can recover compensation for financial loss caused by negligent misstatement his claim must meet a number of conditions. Among these are three particularly relevant here. The statement (whether in the form of advice, an expression of opinion, a certificate or a factual statement) must be plaintiff - specific: that is, it must be given to the actual plaintiff or to a member of a group, identifiable at the time the statement is made, to which the actual plaintiff belongs. Secondly, the statement must be purpose- specific: the statement was must be made for the very purpose for which the actual plaintiff has used it. Thirdly, and perhaps overlapping with the second condition, the statement must be transaction - specific: the statement must be made with reference to the very transaction into which the plaintiff has entered in reliance on it”

“The distinction between the set of facts which it was held in Morgan Crucible v Hill Samuel... would suffice to establish a duty of care owed by auditors from those facts which it was held in the Caparo Industries case... would not have this effect is inevitably a fine one. In my judgment that distinction may be expressed as follows. Mere foreseeability that a potential bidder may rely on the audited accounts does not impose on the auditor a duty of care to the bidder, but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditor, and intends that the bidder should so rely, the auditor will be under a duty of care to the bidder for the breach of which he may be liable.”

“It will be seen that the statement of claim does not plead that BGM knew that Hillsdown would rely on the audited accounts for the purpose of making further loans, nor that BGM intended that Hillsdown should so rely.

The deputy judge said that in his view the situation pleaded was indistinguishable from that contemplated in Caparo… and which was before Millett J in Al Saudi Bank... He set out the argument advanced to him by Mr Bennett, for the plaintiffs, that BGM knew that the purpose of the acquisition by Hillsdown of the first tranche of shares was the advancement of the business of Galoo and Gamine, that loans and advances were likely to be made, and that as auditors they would know in any particular year that loans had been made in the preceding years. He therefore argued that one of the purposes of auditing the accounts was the vouching of the fact that the companies were solvent.

The deputy judge said of that argument:

“Those matters as it seems to me, go to foreseeability and only foreseeability and they do not establish the degree of proximity that is, on the authorities, required. At the end of the day it seems to me that it is not shown to be pleaded that any particular loan was made in reliance upon a particular set of accounts or that the defendants promulgated any set of accounts for the purpose of any specific loan or indeed for the purpose of loans at all, and the mere fact of the knowledge that loans would or might be made is not sufficient to create that degree of proximity. Accordingly, the cause of action in respect of the loans is in my judgment obviously unsustainable”

On this issue also I agree with the deputy judge. As I have said, the statement of claim does not plead the facts which in Morgan Crucible… were held to be those necessary in order to establish a duty of care, namely that the auditor knew that the intending lender would rely on the accounts approved by the auditors for the purpose of deciding whether to make the loans or increase loans already made and intended that the intending lender should so rely. In other words I agree with the deputy judge that the statement of claim does not set out facts which establish a duty of care in this respect on the principles derived from Caparo…”

BSL’s CLAIM (including as assignee of BSLL’s claim) for loss of the amounts advanced by BSL and BSLL pursuant to the Dollar Funding and for the value of the BSL Group, consequent on D&T’s 1992 audit.

“318…. D&T carried out the audits identified above and made their audit reports and their reports on internal controls for the purposes of:

(1) Providing assurances to the Plaintiffs that the accounts audited showed a true and fair view;

(2) Providing an assurance to the Plaintiffs that the accounts audited were not materially misstated due to material fraud or irregularities or significant and continuing weaknesses in internal control;

(3) Complying with the statutory and regulatory requirements pleaded at paragraphs 43-49 above;

320... D&T knew, or ought to have known, that Barings Plc would rely, for the purposes pleaded at paragraph 318 above and for the purpose of determining the amounts of dividends and bonuses, upon their respective audits as identified in paragraph 319 above and upon the audit reports and reports on internal controls made by them in relation to those audits, and Barings Plc did so rely.

322… D&T knew, or ought to have known, that BSL would rely, in the manner pleaded in paragraph 320 above, upon their respective audits as identified in paragraph 321 above and upon the audit reports and reports on internal controls made by them in relation to those audits, and BSL did so rely.”

“335 Further, in reliance upon the audits and reports of C&L in respect of the Barings Group, BSL and Barings Plc and the audit and reports of D&T in respect of BFS’s accounts for the periods ended 31st December 1993, the plaintiffs decided to declare and to pay dividends to their shareholders and profit-related bonuses to their management and employees and to the management and employees of their groups. If C&L and D&T had carried out their duties as pleaded above, smaller sums would have been paid by way of dividends and bonuses. The plaintiffs claim as damages the difference between the amounts paid as dividends and bonuses and the sums which would have been paid if C&L and D&T had not been negligent…”

“Where the plaintiff requires an audit to be carried out so that credit can be extended or an investment made, a court will probably have little difficulty in finding that the plaintiff relied on the audit. But that is the type of case where a duty of care will probably arise under the principles laid down in San Sebastian. Where the plaintiff has made no such demand or request but merely relies on the audit, as the plaintiff in this case did, determining the issue of reliance is likely to be very difficult. An annual audit report is out of date, so far as the business of the client is concerned, when it is published. The report gives merely a picture of the business on a particular date, which may be from 6 to 10 weeks or more before the audit is published. By publication date, the details of the business will have changed even if the fundamentals of the business have not. The gap between financial reality and the financial position represented by the audit increases as each week goes by.”

“Furthermore, there would only be a limited period of time within which it would be reasonably foreseeable that a bank or discount house would rely upon a given set of audited accounts. By the time of the completion of the audit, over six months had already elapsed since the end of the year covered by these accounts. It would not be reasonably foreseen that these accounts would still be relied upon by any banker acting in the ordinary course of business as a basis for assessing the then creditworthiness of Berg after the passage of more than 15 months from the end of the period covered by the accounts. By that time the information contained in the audited accounts would be so out of date that it would not reasonably be foreseen as the basis for a business judgment concerning the extension of credit to Berg or the discounting of bills.”

“It is accepted for present purposes that it was KPMG’s duty to warn either the directors or some relevant third party of any fraud or irregularity likely to result in material loss to the company with a reasonable degree of promptitude. Why should that be? The obvious and common-sense answer it is that by so doing the company may be spared such losses.”

“…a distinction may be made between the present case and the Galoo case. We are concerned with losses brought about by fraud or irregularities the risk of which KPMG ought to have apprehended and reported. Albeit in the Galoo case the auditors had failed to detect a fraudulent overstatement of assets going back several years and by continuing to trade the companies were acting fraudulently in that they were insolvent, the auditors were not under a duty to warn against the possibility of losses of the type incurred. However the judge distinguished the Rivaud and Renta transactions on the basis that they were the sort of transactions which were normal for SFL and so the losses arose in the normal course of business, which the judge seemed to be suggesting, implicitly at least, was outside the scope of KPMG’s duty.

We do not agree. There does not seem to us to be a fair distinction to be drawn between the four transactions as pleaded. Each in its own way was fraudulent or irregular. Each in its own way was the kind of transaction against the risk of which KPMG had a duty to warn. The fact that similar irregularities had occurred in the past can hardly be used to narrow the scope of KPMG’s duty towards its client.”

“It will be remembered that counsel for EW submitted that it was necessary for Overseas to plead and prove that EW knew and intended that Overseas would rely on its work and on statements made by it... It seems that at one point at least in his judgment the judge accepted this submission… In support of this submission counsel referred to some passages in the authorities including the following sentence in Lord Oliver’s speech in Caparo where he said at page 654 D:

“To widen the scope of the duty to include loss caused to an individual by reliance upon the accounts for a purpose for which they were not supplied and were not intended would be to extend it beyond the limits which are so far deducible from the decisions of this House.”

But I am quite satisfied that the general trend of the authorities makes it clear that liability will depend not on intention but on the actual or presumed knowledge of the adviser and on the circumstances of the particular case. Indeed elsewhere in his judgment in Caparo, Lord Oliver, having referred to Smith v Bush made it clear that an expressed intention that advice shall not be acted upon by anyone other than the immediate recipient “cannot prevail against actual or presumed knowledge that it is in fact likely to be relied upon in a particular transaction without independent verification”.

“I have read the February 1998 judgment again since the end of submissions made on behalf of the parties. It seems to me that it only expressly deals with the issue of whether, as between Overseas and the EW defendants, a duty of care exists at all. It concentrates on whether an auditor can owe a duty of care to a company to which it had not been appointed auditor. It held, in the special circumstances of this case, that it can. However I can find nothing in the February 1998 judgment which throws light on the issues of the scope of the duty (i.e. the Caparo question), causation or remoteness.”

“In appraising the evidence for this appeal it is no part of our task to reach any final conclusions of fact or law and I have not done so. It suffices to say that there is in my judgment a serious issue to be tried between the parties, and I would dismiss the appeal.”

Plc’s claim for the value of the Plc Group consequent on D&T’s 1993 audit.

“323. As a result of Leeson’s continuing unauthorised and loss-making trading on account 88888 the Barings Group… became insolvent and collapsed on 26th February 1995.

332... The insolvency and collapse of the Barings Group has deprived Barings Plc of the whole value of the group…”

THE JOHNSON v GORE WOOD DEFENCE.

D&T’s claim arising out of the representation letters

The Issue

The Authorities

“1) Where a company suffers loss 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 a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. 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…

2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding...

3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other…

These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential at page 223) the loss claimed is “merely a reflection of the loss suffered by the company.” In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”

“… where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder … the shareholder's loss, insofar as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, though they have not always been faithfully observed.

“It has sometimes been suggested … that Prudential v Newman is authority only for the proposition that a shareholder cannot recover for the company's loss, and is confined to the case where the defendant is not in breach of any duty owed to the shareholder personally. That is not correct. The example of the safe-deposit box makes this clear. It is the whole point of the somewhat strained business of the key. The only reason for this is to demonstrate that the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally.”

“The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder's loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders.

Thomas J. [in Christensen v. Scott] acknowledged that double recovery could not be permitted, but thought that the problem did not arise where the company had settled its claim. He considered that it would be sufficient to make an allowance for the amount paid to the liquidator. With respect, I cannot accept this either. As Hobhouse L.J. observed in Gerber (at p. 471), if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. By parity of reasoning, the same applies if the company settles for less than it might have done. Shareholders (and creditors) who are aggrieved by the liquidator’s proposals are not without a remedy; they can have recourse to the Companies Court, or sue the liquidator for negligence.

But there is more to it than causation. The disallowance of the shareholder's claim in respect of reflective loss is driven by policy considerations. In my opinion, these preclude the shareholder from going behind the settlement of the company's claim. If he were allowed to do so then, if the company's action were brought by its directors, they would be placed in a position where their interest conflicted with their duty; while if it were brought by the liquidator, it would make it difficult for him to settle the action and would effectively take the conduct of the litigation out of his hands. The present case is a fortiori; Mr. Johnson cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another.

Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. …

The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.”

“38. It will thus be seen from the speeches in Johnson v Gore Wood that, where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company's loss, there is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company's money box and the theft of the company's money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance if the company's claim is not pursued or there is some defence to the company's claim, the shareholder can pursue his claim. The company's claim, if it exists, will always trump that of the shareholder.

39. Accordingly the court has no discretion. The claim cannot be entertained….

41. However, it is apparent that there are limits to the application of the no reflective loss principle. The principal limit is that the no reflective loss principle does not apply where the company has no claim and hence the only duty is the duty owed to the shareholder (Lord Bingham's proposition (2)). Likewise it does not apply where the loss which the shareholder suffers is additional to and different from that which the company suffers and a duty is also owed to the shareholder: see Lord Bingham's proposition (3)…There may well be other limits.

42. Accordingly the Court must consider carefully such issues as whether the defendant owed a duty to the company as well as the shareholder, and whether, if both the company and the shareholder have a cause of action, the loss which they can claim is the same. In some cases these issues may not be difficult to determine, but it is difficult here because the companies are not parties to these proceedings and because Mr Day was closely identified with the companies. Mr Hughes accepted that the onus of proof was on the defendant in this respect. In these circumstances the Court must, as Lord Bingham indicated, scrutinise the facts with care and consider whether the loss would have been made good if TL (or any other company in the TL group) had enforced any action which it may have had against Mr Cook.”

“(5) Was a duty owed to TL from the inception of this arrangement and if so how did it arise?

(6) If no duty was originally owed, did a separate duty arise from the giving of the cross guarantee in December? How did that duty arise?

(7) How does Johnson v Gore Wood apply in those circumstances and can Mr Day assert pursuant to Lord Bingham's third proposition that he has suffered a loss "separate and distinct from that suffered by the company".”

“It is difficult to see why, in a case such as this, those considerations should apply. For good reason or ill, SHF (by then in administrative receivership) chose to discontinue its claims against Mr Rhind and the other defendants and undertook not to raise them again. Even if he could, SHF’s liquidator has not sought to question that decision. To allow Mr Giles to claim for the losses which he says he has suffered involves no double recovery, for there has been no recovery thus far and, given SHF’s undertaking not thereafter to pursue its claims, there can be no double recovery in the future. In any event, any new claim by the company would be barred by limitation as it is well over six years since the events giving rise to any claim. By parity of reasoning there can be no question of any recovery by Mr Giles operating to the prejudice of SHF’s creditors.”

Is BSL’s Claim for The Dollar Funding Reflective Loss?

“Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends … and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds…

The same applies to other payments which the company would have made if it had had the necessary funds, even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.”

Does a defence to the company’s claim oust the rule?

i) D&T deny that they were negligent.

ii) In their defence and counterclaim, D&T argue that BFS must give credit for the sums advanced by other group companies, which would extinguish BFS’ claim, and

iii) If D&T are correct, Jones’ representation letters give D&T a complete defence to BFS’ claim for negligence.

“if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. By parity of reasoning, the same applies if the company settles for less than it might have done.”

“If the shareholder is allowed to recover… then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. … Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

“It is not simply the case that double recovery will not be allowed, so that, for instance if the company's claim is not pursued or there is some defence to the company's claim, the shareholder can pursue his claim. The company's claim, if it exists, will always trump that of the shareholder”,

Mr Aldous submitted that she was clearly intending to summarise the speeches in Johnson v Gore Wood and did not intend to extend the rule. In any event she was in the minority in the Court of Appeal and her comment was obiter.

i) D&T’s function was to report to BSL on accounts put forward by local management, including Jones. Mr Aldous argued that it would be a negation of that function if they could rely on Jones’ reckless neglect of his duties to defeat the claims, not only of BFS, but also of BSL.

This is an unfairness argument of the type which Blackburne J so regretfully rejected in Giles v Rhind and it does not affect the application of the Johnson v Gore Wood rule. In any event, this is a case where ex hypothesi Jones has defrauded D&T. It does not seem to me a criticism of the application of the rule that the company which put Jones in his position should bear the consequences of his fraud, rather than that the auditors whom he defrauded should do so. As Mr Gaisman pointed out, and Mr Aldous conceded, Plc and BSL do not allege that D&T were at fault in not detecting Jones’ fraud. The decisions I have quoted contain much harder cases than this one.

ii) BSL acquired a cause of action on day 1, when D&T reported on the consolidation schedules. D&T acquired its cause of action against BFS on day 2, when the representation letter was signed. BFS did not acquire its cause of action until day 3, when D&T signed the statutory accounts. Mr Aldous argued that it would be extraordinary if on day 3 Johnson v Gore Wood operated to cause BSL to lose its existing cause of action. Indeed just this issue, of how the rule operates where a company acquired a cause of action after the shareholder acquired his, was left undecided by the Court of Appeal in Day v Cook and sent back to the trial judge. Mr Aldous did not shrink from saying that, where the shareholder acquired his cause of action first, that should prevent the application of the rule and any danger of double-recovery should be met by the shareholder giving credit for the company’s recovery.

Mr Aldous conceded in argument that, if there were no defence to BFS’ claim, BSL would be unable to sue. Since, on Mr Aldous’ argument, BSL acquired its claim before BFS did, he concedes that the rule would have just the effect which he describes as extraordinary. In any event, I agree with Mr Gaisman’s submission that, if different labels for causes of action do not affect the application of the rule, nor should the date of accrual of the cause of action, which certainly does not affect the policy underlying the rule. Mr Aldous’ solution of the shareholder giving credit for the company’s recovery is just the principle in Christensen v. Scott which the House of Lords rejected in Johnson v Gore Wood. Finally, I think Mr Aldous mis-characterises the position. BSL would not lose its cause of action, but would be unable to recover this head of loss. The rule would not prevent it enforcing its cause of action to recover other, non-reflective losses.

BONUSES

“The Plaintiffs’ claim under paragraph 335 of the Re-amended Statement of Claim is for overpaid bonuses in 1993 only. The claim is calculated as follows:

(i) The Plaintiffs allocated half of their pre-bonus profits to a bonus pool for distribution by way of bonuses.

(ii) By 31st December 1993 the cumulative losses on account 88888 stood at £24.4m.

(iii) Had D&T and C&L performed a competent audit in 1993…, the Plaintiffs’ pre-bonus profits would have been reduced by £24.4m.

(iv) In consequence, the amount paid out by the Plaintiffs by way of bonuses would have been reduced by £12.2m.”

Johnson v Gore Wood

Inherent Jurisdiction

“Plc was the holding company of the group. A mistaken payment out of £12m inevitably damaged Plc”

and to table an amendment to the Amended Further and Better Particulars I have set out above. This amendment accepted that BSL allocated half its profits to the bonus pool, pleaded that, had D&T performed a competent audit, “the pre-bonus profits of BSL and the Barings Group as a whole would have been reduced by £24.4m”, and added to its previous paragraph (iv) that:

“If and insofar as the bonus payments were borne by BSL rather than by Barings plc, it will be said by Barings plc that such overpayments out by BSL reduced the value of the Barings Group and caused equivalent loss, not exceeding £12.2m, to Barings plc as the parent company of the group.”