Scottish Court of Session Decisions

OUTER HOUSE, COURT OF SESSION [2009] CSOH 158
CA202/08	OPINION OF LORD GLENNIE in the cause (FIRST) ALISTAIR CAMPBELL McLEOD and (SECOND) GARFIELD LESLIE COLLINS Pursuers; against BARRY LEE ROONEY Defender: ­­­­­­­­­­­­­­­­­________________

Pursuers: Dean of Faculty, Lindsay; Anderson Strathern

Defender: Cormack; McGrigors LLP

27 November 2009

Introduction

[1] This action concerns the purchase by the defender of the pursuers' majority shareholding in Visimetrics (UK) Limited ("the company"). At the time of the sale, the pursuers were both shareholders and directors of the company. The defender was employed by the company in a senior position. The pursuers contend that the actions of the defender leading up to his purchase of their shares were in breach of duties of honesty, fidelity and confidentiality owed by him to the company; and were designed to depress the value of the company and force the pursuers to sell their shares to him at a significant undervalue. They sue for damages for the delict of intentionally causing loss by unlawful means.

[2] The case was appointed to debate on the defender's plea-in-law to the relevancy of the action. The arguments at debate raise questions of some interest arising out of the Opinions in the House of Lords in OBG Limited v Allan [2008] 1 AC 1 on one aspect of the law relating to the delict of causing loss by unlawful means; and also as to the rule against reflective loss and the so-called exception to that rule identified in Giles v Rhind [2003] CH 618.

The facts averred by the pursuer

[3] The debate proceeds on the basis that the facts averred in the summons are to be taken pro veritate. They may or may not be established by evidence should the case go further. The assumed facts are these. The company's business is in computer related activities. The pursuers owned, between them, 33,333 shares out of the 58,333 paid up shares in the company. The other shareholders were Mr and Mrs Quayle and Mr Turner. The pursuers and Mr Quayle were the directors of the company. As Operations Manager since May 2003, and latterly as General Manager, the defender was responsible for arranging and negotiating the purchase of materials and the manufacture by others of the company's products. Before the defender's appointment, the company had two manufacturers for its products, Torch and NKC. The defender sourced a third manufacturer, Renfrewshire Electronics Limited ("REL"), which in due course became the sole manufacturer of the company's products.

[4] In June 2004 the company launched a new product known as FASTAR. Recognising that this would require further investment, they sought to raise additional capital. The defender himself offered to invest approximately £207,000, and a Mr Howie, a part of the company's management team, offered to invest just over £50,000. As a result of the offer from the defender and Mr Howie, the company did not seek additional outside investment. The company began to suffer from cash flow problems. At the beginning of September 2004, the company's bankers, the Royal Bank of Scotland, threatened to withdraw the company's overdraft with effect from the end of the month, though a few days later, following negotiation to which the defender was made party, they agreed to extend the overdraft to the end of October.

[5] On 17 September 2004 the defender and Mr Howie withdrew their offer of investment in the company. Instead, the defender offered to purchase the entire shareholding of the company for £100,000 and promised additional investment of £500,000. The defender informed REL of the company's financial difficulties. As a result, on 23 September 2004 REL suspended production of the company's products and submitted invoices of approximately £370,000, thereby making it impossible for the company to continue trading and exploring other possible sources of finance and investment. On the same day, the defender made an increased offer of £120,000 for the entire shareholding of the company which, in the circumstances, the pursuers had no option but to accept. Through a company known as WSA, in which the defender and his wife owned between them all the shares, the entire share capital of the company was acquired by or on behalf of the defender for that sum; and the defender and Mr Howie became directors in place of the pursuers and Mr Quayle. Once the defender had gained control of the company, REL resumed production of the company's products, cancelled the invoices totalling £370,000 and agreed to defer payment of a sum of £213,000 otherwise due.

[6] The pursuers' case against the pursuers is encapsulated in Articles 5-11 of condescendence. It is convenient to quote at length from those articles.

"5. After WSA had purchased their shares the pursuers became aware for the first time that after the date of his appointment as Operations Manager of the company the defender intended to cause loss to the two pursuers and the other shareholders of the company's shares and to do so by unlawful means directed at the company which would be actionable by the company. He intended to acquire the whole or a part of the business which the company was pursuing at the expense of those owning the business, being the shareholders of the company. He intended to reduce the company's profitability and so enable him to acquire the pursuers' shares in whole or in part at an undervalue. The defender intended to and did defraud the company and thereby damaged it financially in terms of its profitability and value and so led to the company being pressurised financially in terms of its cash flow and value.

6. Upon appointment as Operations Manager of the company the defender arranged for the appointment of REL as sole supplier to and manufacturer for the company and further arranged that this arrangement should continue until at least the date of acquisition of the shares of the company by WSA without considering alternative options. As a result of this single sourcing the company became totally dependent upon REL. The defender failed throughout 2004 to give any other suppliers the opportunity to quote to do business with the company and arranged that it remained dependent upon REL. The company's products and requirements could have been met by a number of different suppliers. There was nothing exceptional or unusual about the goods and services provided by REL. After the appointment of REL as the company's sole supplier and manufacturer the defender had regular communications with REL other than on a normal arm's length commercial basis.

7. Between January and September 2004: (i) the defender regularly advised REL of the prices they could charge the company without seeking to achieve the best commercial deal; (ii) the defender regularly suggested higher margins than REL initially sought; (iii) the defender regularly agreed to prices suggested by REL to the company which were above market rate when he knew he could have negotiated more competitive prices with REL or other suppliers or manufacturers; (iv) the defender knowingly encouraged and arranged that REL would supply products and services to the company at inflated gross profit margins which significantly exceeded those which were normal in the trade, being around 15% without drawing these to the attention of the company or seeking alternative quotations from other suppliers or taking any other action ...; and (v) the defender knowingly and regularly agreed to REL failing to pass on to the company any reasonable proportion of the reductions in prices it had to pay its own suppliers. Between 2003 and 2004 the company's gross profit percentage fell from 58.4% to 47.6% and the net assets of the company's fell from £687,000 to £370,000. These falls were due, in part at least, to the unlawful activities of the defender condescended upon.

8. In September 2004 the defender, having encouraged the pursuers and the company to expect that he would invest money in it by purchasing further shares, withdrew from such purchase and at or about the same time the defender passed confidential information to REL as to the company's predicament with the intention that or in the knowledge that REL would (i) issue an invoice for £370,000; and (ii) place a stop on any work for the Company, which it did, in order that the defender could purchase some or all of the shares in the company at an undervalue. The defender made his offer for the shares in the company ... in the knowledge (from discussion he had with REL in breach of his duties as hereinafter condescended upon and whilst still an employee of the company) that REL would immediately agree to lift its hold on company work and withdraw the invoice for £370,000 if he were successful. Alternatively, the defender so acted with the agreement of REL. The defender failed to take any steps to persuade REL to change its position or to alleviate the impact of that position upon the company. The defender advised the first pursuer and ... the company's financial controller, that there was no point in discussing matters with REL as they were fully aware of the company's difficult financial circumstances and were unwilling to negotiate. On or about 22^nd or 23^rd September 2004 REL's general manager ... telephoned the first pursuer and confirmed that REL were not prepared to enter into any negotiations regarding its invoice. Immediately after the defender took control of the company [REL's general manager] not only agreed to cancel the invoice for £370,000 but also agreed improved payment terms which allowed a genuine invoice for £213,000 to be delayed until 25^th October 2004.

9. These actions by the defender were contrary to the duties of honesty, fidelity and confidentiality that he owed to his employer, the company .... The defender had a duty to act bona fide in the best interests of the company .... The defender had a duty not to make secret profits from his transactions with the company's sole manufacturer, REL. The defender knew or ought reasonably to have known that the making of such secret profits would lead to the company being pressurised financially in terms of its cash flow and value. The defender had a duty not to disclose confidential information relating to the company's financial affairs to its sole manufacturer and largest trade creditor, REL. The defender had a duty not to actively encourage REL to issue invoices to the company for stock that it had not ordered. The defender knew or ought reasonably to have known that disclosing such confidential information to REL and encouraging them to issue invoices for stock not ordered, would result in REL suspending manufacturing of the company's products, rendering invoices for immediate payment, making it impossible for the company to continue trading. In each and all of these duties the defender failed and by his failure caused the pursuers to suffer loss and damage. He knew, or ought reasonably to have known that if he failed in respect of the duties incumbent upon him, the loss and damage hereinafter condescended upon would be likely to occur. Had the defender duly performed the duties of honesty, fidelity and confidentiality incumbent upon him, the loss and damage suffered by the pursuers would not have occurred ....

10. As a result of the defender's unlawful actions the pursuers suffered loss and damage. The defender's conduct led to the company being pressurised financially in terms of its cash flow and value, ultimately resulting in the sale of the pursuers' shares in the company at undervalue. If the defender had fulfilled the obligations of honesty, fidelity and confidentiality which were incumbent upon him each share of the company would have had a value of £14.18 and the total value of the first pursuer's shareholding in the company would have been £283,600; and the total value of the second pursuer's shareholding would have been £189,062. As a consequence of the defender's breach of duty the first pursuer received £41,143 for his shareholding when he sold it to WSA, making a loss of £242,457 which is the sum first concluded for. As a consequence of the defender's breach of duty the second pursuer received £27,428 for his shareholding when he sold it to WSA, making a loss of £161,634 which is the sum second concluded for. ... The sums sued for are reasonable estimates of the pursuers' loss and damage."

The pursuers go on to aver that the company is now disabled from pursuing any claim against the defender, because the defender now controls the company. In support of their conclusion for payment, the pursuers' first plea-in-law states that they have suffered loss "by reason of the defender's intention to cause them loss by unlawful means and his subsequent unlawful actions as condescended upon" and are therefore entitled to reparation from him for that loss.

Submissions for the defenders

[7] On behalf of the defender, Mr Cormack took two main points as to the relevancy of the pursuers' averments. His primary position was that, although the pursuers had made averments about the defender's alleged breach of obligations owed to the company, they had not relevantly averred a cause of action in delict actionable at the suit of the pursuers. His secondary argument was that, in any event, the pursuers' action was barred by the rule against reflective loss. He submitted that his first and second pleas-in-law (respectively title to sue and relevancy) should be sustained and the action dismissed.

[8] Mr Cormack sought to place his first argument in the context. Until the pursuers voluntarily sold their shares in the company to WSA, an entity controlled by the defender and his wife, the pursuers were majority shareholders in the company and, being two out of the three directors, controlled a majority on the board of the company. The defender did not become a director until after the sale of the shares. Before that he was the Operations Manager and then the General Manager of the company and owed duties to the company. The pursuers now accepted that the defender did not owe any duties to them as shareholders (an averment to this effect in the summons was deleted by amendment at the beginning of the debate). As members of the company, the pursuers had the very great benefit of limited liability. The company was a separate legal personality and those involved in the company, such as the pursuers, had a measure of protection in the event of claims against the company or in the case of insolvency. Another consequence of incorporation, however, was the rule in Foss v Harbottle. Any cause of action for breach of a contract with a company, or for a delict causing damage to a company, lay with the company. There was no separate cause of action vesting in the shareholders in respect of such wrong. In any action, the company was the proper pursuer. The general scheme to which people signed up when they became shareholders in a company was well summarised in Prudential Assurance Co Limited v Newman Industries Limited [1982] 1 Ch 204 at p.210D-F, 222G-223E and 223H-224D. The shares were "merely a right of participation in the company on the terms of the Articles of association". A variety of rights and remedies were available to shareholders in a company, such as the possibility of bringing a derivative action or an unfair prejudice petition under Section 994 of the Companies Act 2006. But the law did not vest a personal cause of action in shareholders in respect of wrongs done to a company. The company, and not the shareholders, would be the proper pursuer In this action, by bringing an action in delict against an employee of the company who was alleged to have done no more than breach his contract of employment with the company, the pursuers sought to subvert that scheme.

[9] The pursuers' case was that the defender was liable to them in delict for intentionally causing loss by unlawful means. That delict was the same as the English tort of the same name. The essential elements of the tort were considered by the House of Lords in OBG Limited v Allan [2008] 1 AC 1. In Global Resources Group v McKay 2009 SLT 104, Lord Hodge summarised the requirements of the tort as explained by the House of Lords:

"The components of the delict of causing loss by unlawful means are (a) an intention [on the part of the defender, A] to cause economic harm to C [the pursuer] and (b) the use of unlawful means in relation to B [a third party] which affect B's freedom to deal with or honour his contract with C."

Lord Hodge went on to amplify the position as follows:

"In relation to (a), the relevant intention to cause loss can exist either where A wishes to inflict loss on C or where C's loss is a means by which A attains some further end such as his own economic advantage. It is not sufficient that harm to C is a foreseeable consequence of A's actions. Thus the subcontractor who breaks his contract with the main contractor does not by that breach alone incur liability in delict to the employer for economic loss when the main contractor's breach of his contract with the employer is merely a known or foreseeable consequence of the subcontractor's breach. In relation to (b), it is necessary that B has a right of legal redress against A for his use of the unlawful means if he has suffered loss thereby or that he would have been so entitled if he suffered loss. .."

Although, in the circumstances of that case, those remarks were probably obiter, counsel were agreed that they correctly summarised the law relating to the delict of intentionally causing loss by unlawful means.

[10] Mr Cormack submitted that it was necessary in this case for the pursuers to aver (i) an intention on the part of the defender to cause economic harm to the pursuers, (ii) the use by him of unlawful means in relation to the company which affected the company's freedom to deal with or honour its contract with the pursuers. There was no issue, for present purposes, with (i). Nor was there any issue with the first part of (ii). The necessary intention was averred, as were the unlawful means, namely a breach by the defender of his duties as an employee of the company. But to bring themselves within the requirements of the delict, the pursuers had to be able to aver that the unlawful means affected the company's freedom to deal with them. That element was lacking in the present case. The pursuers' real complaint was that they were hampered in their ability to deal with potential purchasers of their shares, which were worth less because of the defender's action in depressing the value of the company. That was a complaint about the relationship between the pursuers and potential purchasers of the shares, not about the relationship between the pursuers and the company. The pursuers as shareholders (until they sold their shares) had the same right of participation in the company represented by those shares as they had always had. The transfer of shares took place between the transferor and the transferee of the shares and did not involve the company. The case was therefore irrelevant and should be dismissed.

[11] If, contrary to his primary submission, the pursuers had an arguable cause of action in the delict of causing economic loss by unlawful means, then it was necessary to consider the second ground of attack on the relevancy of the pursuers' claim. This was on the basis of the rule against reflective loss, i.e. the rule that a shareholder cannot sue for loss suffered by him if that loss is only a reflection of the loss suffered by the company. In support of the general rule, Mr Cormack took me to the decision of the House of Lords in Johnson v Gore Wood & Co. [2002] 2 AC 1 and, in particular, to the Opinion of Lord Bingham of Cornhill at p.35E-36C, with which the other members of the Court agreed, and that of Lord Millett at 61G-62G.. Under reference to Giles v Rhind [2003] Ch 618, Mr Cormack explained that there was a so-called exception to the rule against recovery for reflective loss, which was this: that there were no reasons of principle or policy which prevented a shareholder recovering damages in such a case where the wrong done to the company has made it impossible for the company to pursue its own remedy against the wrongdoer. But this had no application here. The company was not disabled from pursing the claim. It was true that the defender was in control of the company, but this did not mean that the company could never sue to recover damages from the defender in respect of wrongs committed by him to the company. The minority shareholders could start a derivative action. If the company went into liquidation, the liquidator could sue. Mr Cormack also referred to the decision of the Court of Appeal in Gardner v Parker [2005] BCC. 46, at paras.54-58. Only where the company was actually disabled from suing was the risk of double recovery avoided. The action should be dismissed on this ground too.

Submissions for the pursuers

[12] For the pursuers, the Dean of Faculty emphasised that the question was one of relevancy. He referred to the well known test in Jamieson v Jamieson 1952 SC (HL) 44: the action should only be dismissed if it was bound to fail even if the pursuers proved everything that they offered to prove. The present action did not fall into that category.

[13] By way of general introduction, the Dean of Faculty emphasised, under reference to the opinion of Lord Millett in Johnson v Gore Wood & Co. at p.62A-B, that a share in a company was the expression of a proprietary relationship between the shareholder and the company. The company was at liberty, subject to the Articles of Association and the requirement of solvency, to declare a dividend for the benefit of shareholders and/or to pay out capital by means of redeeming shares in whole or in part. It was obvious, therefore, that the company's liberty of action in relation to its shareholders depended to a material extent upon its capital and income; and the value of its shares reflected this, in that that value was linked to the likely dividend stream and the underlying capital value of the company. The value of his investment followed the fortunes of the company: see Prudential Assurance v Newman Industries at p.224B-C. A party who wrongfully diminished the capital and income of a company necessarily compromised the company's liberty of action in relation to its shareholders. The defender deliberately intended to bring about a situation where he could acquire the shareholdings at a fire sale valuation. He did that by acting unlawfully in breach of duty owed to the company, thereby reducing the company's capital and income, and reducing the value of the shares. By this means he succeeded in acquiring the pursuers' shareholding at an undervalue.

[14] Turning to the first point at issue in the debate, the Dean of Faculty accepted as accurate the summary of the law by Lord Hodge in Global Resources Group v Mackay. The pursuers had relevantly pled that the defender had the necessary intention and that he used unlawful means. The unlawful means consisted of his acting in breach of duty to the company. The question at issue was whether the defender's use of unlawful means in relation to the company affected the company's freedom to deal with the pursuers as shareholders. That this was an essential requirement of the delict was made clear by Lord Hoffman in OBG Limited v Allan, especially at para.51. The case put forward by the pursuers satisfied this test. The defender's breach of duty towards the company interfered with the company's freedom of action in relation to its shareholders. By reducing the profitability of the company in the manner averred in the summons, the defender was interfering with the relationship between the company and its shareholders in the sense of its ability to make a distribution to its shareholders. The examples given by Lord Hoffman at paras.47 and 48 were in point. There was no substantial difference between acting unlawfully towards an employer with the intent that he dismiss his employee and acting in a similar manner with the intent that the employer would be unable, because of financial constraints, to retain his services.

[15] As to the second point, the rule against reflective loss, the Dean of Faculty at first appeared to accept that the loss here was properly to be regarded as reflective loss, i.e. a loss which was reflective of the diminution in the value of the company; and further, that if the company were to sue the defender for his breach of contact and recover the full measure of its loss arising from that breach, that would not only restore the finances of the company but also the value of the pursuers' shareholding. On further reflection he modified his position. He submitted that there were cases where the shareholders' loss arose out of the loss suffered by the company but was not the same loss. Examples were to be found in Johnson v Gore Wood & Co. In some cases, part of the claim might be barred by the rule and the other part not barred. If the pursuers, as shareholders, had remained members of the company, their case would be covered by the rule against reflective loss. If both they and the company were entitled to sue, there would be a risk of double jeopardy and double recovery. The rule prevented that, by recognising that if the company sued and recovered damages, the position of the shareholder would be corrected. They would suffer no loss. And if the company did not sue, the shareholders' loss would be caused not by the wrongdoer's breach but by the decision of the company not to sue. But the position here was different. As a direct consequence of the defender's wrongful actings, the pursuers ceased to be shareholders. Furthermore, the defender took control of the company. Accordingly, although their loss was, in one sense, reflective of the loss suffered by the company, they should not be debarred from pursuing the claim. If the company was to sue the defender, the fruits of that litigation would not enure for the benefit of the pursuers. That consideration must "trump" the risk of double jeopardy, which risk, if it existed, was a consequence of the defenders own unlawful actings. The Dean of Faculty emphasised that Lord Bingham's summary in Johnson v Gore Wood & Co were not to be taken as comprehensive: see per Lord Cooke of Thorndon in that case at p.43C, and see also Giles v Rhind at para.70. Mr Cormack's argument sought to treat Lord Bingham's analysis as prescriptive and to treat Giles v Rhind as an exception to that rule. In truth, however, the decision in Giles v Rhind was simply an application on its facts of the overall rule against the recovery of reflective loss subject to the considerations spelt out in that case.

[16] The Dean of Faculty submitted that the facts of Giles v Rhind were no more extreme than those presently before the Court. The defender in this case not only acquired control of the company but also acquired the pursuers' shareholding. So the relevant question was: can the company bring an action which could in any way compensate the pursuers for the wrong they complain of? The answer was plainly: No, because any action by the company would enure for the benefit of the present shareholders and not for the benefit of the pursuers. Even if the company went into liquidation, any action brought by the liquidator would not enure for the benefit of the pursuers. A party suffering loss should not arbitrarily be denied compensation. Here there was no risk of double jeopardy or double recovery. In any event, the prospect of any action being taken by the company against the defender was theoretical but not realistic. There was no risk of an action by other shareholders and the company was not insolvent. Accordingly, a proof before answer should be allowed, leaving all pleas standing.

Discussion

[17] I consider first whether the pursuer has pled a relevant claim in delict for deliberately causing loss to the pursuer by unlawful means. Although it is sometimes convenient to divide the ingredients of the delict into only two elements, there are, to my mind, really three matters which the pursuer has to aver and, in due course, prove. These are: (a) that the defender had the intention to cause economic harm to the pursuer; (b) that the defender used acted unlawfully in relation to a third party; and (c) that such unlawful action affected that third party's freedom to deal with the pursuer. There was no dispute between the parties that proof of all three matters was essential. The important matter for present purposes is (c). The discussion at debate proceeded upon the basis that that the pursuer had made averments sufficient to satisfy (a) and (b), i.e. that the defender had the intention to cause the pursuers economic harm (by depressing the value of the shares and purchasing them from the pursuers at an undervalue) and, further, that the defender achieved this by the use of unlawful means in relation to the company (by disclosing confidential information to REL and inducing REL to suspend production). It is not, therefore, necessary for me to consider these aspects. The question here is whether the pursuers have averred a relevant case that the defender's use of unlawful means in relation to the company has affected the company's freedom to deal with the pursuers.

[18] All the members of the House of Lords in OBJ Limited v Allan agreed that it was a requirement of the tort that the damage to the pursuer be caused through the instrumentality of a third party. As I have said, there was no dispute between the parties that this was an essential element. It is, however, worth looking in slightly more detail at the reason for this. Lord Hoffman's view, explained at paras.46-47, was that this aspect (striking through others) was the essence of the tort; and he drew attention to the importance of it in a number of other passages: see in particular at paras.44, 51, 53 and 55. Intention and unlawful means were the limiting factors. Lord Nicholls of Birkenhead differed from Lord Hoffman in his analysis of what constituted unlawful means, but agreed (at para.152) that:

"in the classical 'three-party' form of this tort the defendant seeks to injure the claimant's business through the instrumentality of a third party. By this means, as Lord Lindley said, the claimant is 'wrongfully and intentionally struck at through others, and is thereby damnified': Quinn v Leatham [1901] AC 495, 535

Again, at para.159 he stressed that:

"the function of the tort is to provide a remedy where the claimant is harmed through the instrumentality of a third party."

On the issue on which Lord Nicholls and Lord Hoffman had differed (what constituted "unlawful means"), Lord Walker of Gestingthorpe agreed with Lord Hoffmann, though adding the comment that this was unlikely to be the last word on this difficult and important area of the law. He was concerned to emphasise the importance of

"the control mechanism needed in order to stop the notion of unlawful means getting out of hand ..."

He gave the example of the potential liability, if there were no adequate control mechanism, of a pizza delivery business being held liable to a competitor if, to the detriment of the competitor, it obtained more business because its drivers regularly exceeded the speed limit and jumped red lights. Rejecting Lord Nicholls' wider test of unlawful means, combined with reliance on the notion of "instrumentality" (or, as I understand it in this context, direct causation) as the appropriate control mechanism, Lord Walker said this (at para.269):

"... The test of instrumentality does not fit happily with cases like RCA Corpn v Pollard, since there is no doubt that the bootlegger's acts were the direct cause of the plaintiff's economic loss. The control mechanism must be found, it seems to me, in the nature of the disruption caused, as between the third party and the claimant, by the defendant's wrong (and not in the closeness of the causal connection between the defendant's wrong and the claimant's loss)."

I refer to RCA Corpn v Pollard below. He added (at para.270) that he did not see Lord Hoffmann's proposed test as a narrow or rigid one:

"On the contrary, that test ... of whether the defendant's wrong interferes with the freedom of a third party to deal with the claimant, if taken out of context, might be regarded as so flexible as to be of limited utility. But in practice it does not lack context. The authorities demonstrate its application in relation to a wide variety of economic relationships. I would favour a fairly cautious incremental approach to its extension to any category not found in the existing authorities."

Baroness Hale (at para.306) described the torts of inducing breach of contract and causing loss by unlawful means as having a common thread of

"striking through a third party who might otherwise be doing business with your target"

whether by buying his goods, hiring his barges or working for him or whatever. The legal policy underlying the restriction was the desire to limit the expansion of liability in this area. Accordingly, the tort was limited to one of

"committing an actionable....wrong against the third party inhibiting his freedom to trade with the target".

Lord Brown of Eaton-Under-Heywood, at para.320, said that liability for the tort of causing loss by unlawful means arises

"where the defendant, generally to advance his own purposes, intentionally injures the claimant's economic interests by unlawfully interfering with a third party's freedom to deal with him."

It is clear from these passages, and from the review of the case law underpinning the tort of causing loss by unlawful means, that the essential aspect is that the loss is caused to the claimant through a third party on whom the defender has unlawfully acted. That is the control mechanism. The enquiry focuses on the nature of the disruption caused as between the third party and the claimant rather than on the directness of the causative link between the defenders wrong and the claimant's loss.

[19] To understand what is contemplated by that requirement, it is useful to have regard to some of the older cases discussed by Lord Hoffmann at paras.6 and 7 and used by him to illustrate the application of the tort. In Garret v Taylor (1620) Cro Jac 567, the defendant was held liable because he drove away customers of the plaintiffs by threats. In Tarleton v M'Gawley (1794) Peake 270, the master of a ship anchored off the coast of West Africa was held liable for depriving a rival British ship of trade by using his cannon to drive away a canoe which was approaching that ship from the shore. Another example is given by Lord Hoffmann at para.7 by reference to JT Stratford & Son Limited v Lindley [1965] AC 269, 324, where Lord Reid said that the action of the respondents in calling a strike and thereby making it practically impossible for the appellants to do any business with the barge hirers would be tortious if unlawful means were employed. In each such case the party against whom the unlawful conduct is directed is, by that unlawful conduct, hindered in his dealings with the plaintiff. It goes without saying, and it is apparent from the cases as well as from the summary set out by Lord Hodge in Global Resources Group v McKay, that the unlawful conduct directed towards the third party may consist of a breach of contract; and the interference with the third party's freedom of action in his dealings with the pursuer is not limited to physical difficulty - it may be, for example, that the third party is, by the unlawful means, deprived of the resources to continue to do business with the pursuer.

[20] Later in his Opinion Lord Hoffman gave illustrations of cases falling the other side of the line. In para.52, he discussed RCA Corp v Pollard [1983] Ch 135. There, the plaintiff company had the exclusive right to exploit records made by Elvis Presley. The defendant sold bootleg records made at Elvis Presley concerts without his consent, conduct which made his action unlawful in relation to the Presley estate. The Court of Appeal held that this did not give the plaintiffs a cause of action, since the unlawful conduct of the defendant vis a vis the Presley estate did not prevent the Presley estate doing any act affecting the plaintiffs. The bootlegger's conduct "merely potentially reduces the profits which [the plaintiffs] make as a result of the performance by Mr Presley's executors of their contractual obligations": per Oliver L.J at p.153. Lord Hoffmann summarised the position in para.53 by saying: "The wrongful act did not interfere with the estate's liberty of action in relation to the plaintiff". A similar example is given in para.54 under reference to the case of Isaac Oren v Red Box Toy Factory Limited [1999] FSR 785; and see also the reference in para.55 to Lonrho Limited v Shell Petroleum Co Limited (No. 2) [1982] AC 173. Indeed, in Douglas v Hello! Ltd (No 3), which was one of the three cases before the House of Lords in the conjoined hearing in OBJ Limited v. Allan, the claim under this head would have failed for precisely this reason: see per Lord Hoffman at para.129.

[21] The pursuers' complaint here is that the defender's conduct damaged the company and thereby reduced the value of their shareholding in it. There is no doubt that, if these averments are proved, the defender's unlawful conduct will be shown to have caused the loss of which the pursuers complain. But any such loss will have been caused to the pursuers directly, and not through the company as a third party. The defender's alleged conduct did not restrict the freedom of the company to deal with the pursuers. Until they sold their shares, the pursuers continued to have all the rights of shareholders in their dealings with the company; and the new shareholders thereafter continued to enjoy those same rights. The Dean of Faculty sought to escape from this by suggesting that the defender's conduct interfered with the relationship between the company and its shareholders. I cannot accept that argument. It goes without saying that any reduction in the profitability of the company or in the value of its assets is likely, in a small company such as this, to result in a loss to the shareholders in terms of the value of their shares: see per Lord Millett in Johnson v Gore Wood & Co in a passage to which I refer below. But that loss is not caused by a restriction in the freedom enjoyed by the company in its dealings with its shareholders. It is caused the company, in which the shareholders hold their shares, being worth less. The Dean of Faculty relied on the fact that, by reason of the defender's unlawful conduct, the company was financially weakened and thereby restricted in the dividend which it might declare. He argued that that was sufficient interference in its liberty to deal with its shareholders to found the cause of action in this delict. I would not wish to be taken as saying that that could never be a sufficient basis for a claim in delict. But in this case it is far removed from the reality of the situation. The pursuers do not complain that they have lost because the company would have declared a dividend had it not been damaged by the actions of the defenders. Their claim is based on the fact that they were forced into the position of having to sell at an undervalue because the company was put into financial difficulties. In the circumstances narrated in the summons, that has nothing to do with any inability of the company to declare a dividend.

[22] For these reasons I have come to the conclusion that the pursuers' claim is irrelevant. Lest it be thought that this conclusion leaves a hole which ought to be filled, and allows an alleged such as the defender to escape the consequences of his wrongdoing, I would simply add this: that the averments in the summons to the effect that the defender and REL acted in concert might enable a claim to be formulated under a different delict. No such claim was pled by the pursuers, and the task of the court at debate is always limited to that of considering the relevancy of the claim put forward in the pleadings.

[23] In light of my decision on that point, the second argument put before me, namely that the pursuers claim is barred by the rule against recovery of reflective loss, does not call for a decision. However, I should express my views on it in case the matter proceeds further.

[24] I take as my starting point the analysis by Lords Bingham and Millett in Johnson v Gore Wood & Co. Having referred to a number of authorities on the question, Lord Bingham said this at p.35E-36C:

"These authorities support the following propositions. (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. ..."

He went on to add the following:

"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 Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 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."

The strike-out stage, with which the court was concerned in that case, equiparates to the stage of a debate on relevancy in our procedure. It is clear, therefore, that this point can properly be raised at debate without investigation of all the facts at proof. Lord Millett dealt with the question at p.61G-62G. He said this:

"A company is a legal entity separate and distinct from its shareholders. It has its own assets and liabilities and its own creditors. The company's property belongs to the company and not to its shareholders. If the company has a cause of action, this is a legal chose in action which represents part of its assets. Accordingly, where a company suffers loss as a result of an actionable wrong done to it, the cause of action is vested in the company and the company alone can sue. No action lies at the suit of a shareholder suing as such, though exceptionally he may be permitted to bring a derivative action in right of the company and recover damages on its behalf: see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, 210. Correspondingly, of course, a company's shares are the property of the shareholder and not of the company, and if he suffers loss as a result of an actionable wrong done to him, then prima facie he alone can sue and the company cannot. On the other hand, although a share is an identifiable piece of property which belongs to the shareholder and has an ascertainable value, it also represents a proportionate part of the company's net assets, and if these are depleted the diminution in its assets will be reflected in the diminution in the value of the shares. The correspondence may not be exact, especially in the case of a company whose shares are publicly traded, since their value depends on market sentiment. But in the case of a small private company like this company, the correspondence is exact.

This causes no difficulty where the company has a cause of action and the shareholder has none; or where the shareholder has a cause of action and the company has none .... Where the company suffers loss as a result of a wrong to the shareholder but has no cause of action in respect of its loss, the shareholder can sue and recover damages for his own loss, whether of a capital or income nature, measured by the diminution in the value of his shareholding. He must, of course, show that he has an independent cause of action of his own and that he has suffered personal loss caused by the defendant's actionable wrong. Since the company itself has no cause of action in respect of its loss, its assets are not depleted by the recovery of damages by the shareholder.

The position is, however, different where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder. In such a case the shareholder's loss, in so far 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. ..."

At page 66C-G Lord Millett went on to explain the twofold justification for this rule. The first was causation: in a case of reflective loss, if the company chooses not to exercise its remedy against the wrongdoer, the loss to the shareholder is caused not by the defendant's wrongdoing but by the company's decision not to pursue its remedy. The second was public policy: because of the potential conflict of interest between the directors (or the liquidator) acting on behalf of the company, and the shareholder suing to recover on the basis of losses suffered by the company, the shareholder should not be allowed to go behind the company's decision as to whether or not to pursue its claim.

[25] I accept that those Opinions are not to be taken as comprehensive or prescriptive. Nonetheless, they provide a clear starting point. The underlying reasons are clear. First, there is the need to avoid the risk of double recovery and (which is the other side of the coin) the risk of double jeopardy. In a case of reflective loss, where the loss suffered by the shareholder is the same as, and arises because of, the damage done to the company, a successful action by the company to recover damages against the wrongdoer will, if judgment is enforced, put the company back in the position it was before the wrongful conduct. In those circumstances, the shareholders' loss is temporary; ultimately, the shareholders will have suffered no loss, because the value of the shareholdings will recover to reflect the restored position of the company. If the company has not yet sued and recovered damages, and the shareholders were allowed to proceed with a claim against the wrongdoer and recover damages representing the diminution in the value of their shares resulting from the damage done to the company, their success would not prevent the company itself later suing the wrongdoer and recovering damages in the like amount. In that case, the wrongdoer would have been held liable twice for the one wrong; and the shareholders would have recovered twice - not only would they have recovered damages from the wrongdoer in their action for the loss of value of their shareholding, but they would in addition have had the value of their shareholding restored to its previous level by reason of the company's recovery of damages. And if the company does not sue, then "the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing": per Lord Millett at p.66E, referring to the observations of Hobhouse L.J. in Gerber Garment Technology Inc v Lectra Systems Limited [1997] RPC 443, 471.

[26] Whether or not it is right to regard Giles v Rhind as an exception to this rule, the importance of that case is that it shows that the court must take account of the reality of the situation. In a case where the company is disabled from pursuing the claim against the wrongdoer, the risk of double recovery is no longer a factor; and if that disability was caused by the action of the wrongdoer, then the problem of causation is readily overcome. It seems to me that the court is required to look at the realities of the situation. In circumstances where the company is not disabled from pursuing the claim, but the effect of the wrongdoer's actions is that he (the wrongdoer) has taken over control of the company, then, although the company is able to sue the wrongdoer, it will not do so because it is under his control. It is unlikely to be an effective answer to this to say that there are other (minority) shareholders who might wish to bring a derivative action. That question might, I accept, be fact sensitive - but I was told by counsel that in this case 90% of the shares in the company are held by WHA, which in turn is owned as to 51% by the defender and as to 49% by his wife. The other shares are held as to 5% each by two employees of the company. None of the shareholders who held shares prior to the alleged wrongdoing is any longer a shareholder of the company. In those circumstances, it is almost inconceivable that the company will take proceedings against the defender, or that any current or future shareholder will seek to force the company to take such proceedings, whether by way of a derivative action or otherwise. I cannot, of course, wholly exclude the possibility that the company may run into financial difficulties and that, in those circumstances, a liquidator might be appointed who might look into the events of September 2004. But that seems highly unlikely, particularly since it is now more than five years after those events took place. So the alleged actions of the wrongdoer have, for all practical purposes, disabled the company from suing.

[27] There is a further consideration. In the present case the pursuers aver that, after the defender had gained control of the company, REL resumed production of the company's products, cancelled the invoices totalling £370,000, and agreed to defer payment of some £213,000 otherwise due to it. This must have had the effect of reversing the damage allegedly done to the company by the defender's conduct. It must therefore be open to question whether the company has in fact suffered any loss, or, at least, whether it has suffered the same loss as the pursuers have suffered. The pursuers' loss was crystallized by the events of September 2004 and the position into which they were then put, forcing them to sell their shares at an undervalue. The subsequent change of position by REL once the defender had taken control of the company may well have made good the damage done to the company by the defender's actions; but it has not, in any way, made good the loss which the pursuers suffered by reason of the temporary financial distress into which the company was put. For that reason, there is unlikely to be any real risk of double recovery, since the company will not have a claim for damages or at least will not have a claim for damages in the same amount as the pursuers claim. Similarly, no problems of causation arise.

[28] I therefore reject the defender's argument that the claim offends against the rule against suing for reflective loss. I would not have dismissed it on this ground.

Disposal

[29] For the reasons set out at paras.[17]-[22] above, I consider that the summons fails to disclose a relevant case in delict against the defender. Accordingly, I shall sustain the second plea in law for the defender and dismiss the action.