High Court rejects claim by shareholder to be a private person under section 138D of FSMA
24 March 2016
In this case report, we consider the High Court's decision in Sivagnanam v Barclays Bank Plc  EWHC 3985 (Comm) (4 December 2015).
In this ex tempore decision handed down by Cooke J, the High Court awarded Barclays Bank plc (the Bank) summary judgment in a claim under section 138D of the Financial Services and Markets Act 2000 (FSMA). The claim had been brought by a sole director and shareholder for his loss, as a "private person", from the alleged misselling of certain interest rate hedging products (IRHP) to his company (which had entered into the IRHP).
The court held that the shareholder did not fall within the category of persons the legislation was intended to protect as a matter of interpretation. Therefore even as a "private person", he did not meet the fundamental threshold which was a precursor to enabling him to bring an action for breach of statutory duty. Additionally, given that the company had been able to take action for loss it suffered from the alleged misselling, and had obtained substantial compensation, his loss as a shareholder was irrecoverable due to the rule against reflective loss.
Mr Sivagnanam (the claimant) was the sole shareholder and director of WHL (the Company) at all material times. The Company had entered into three IRHP with the Bank between 2006 and 2008.
In July 2010, the Company and the Bank entered a written compromise agreement. Some five years later, in April 2015, the Company accepted approximately GBP 2.4 million from the Bank through the voluntary redress scheme implemented at the instigation of the FSA (as it then was). That sum was paid "in full and final settlement" by the Company of all complaints, claims and causes of action, including for costs, expenses or damages that may be alleged to arise from or be in any way connected to the sale of the IRHP, however such claims arise.
The claimant then sought to bring a claim in his individual capacity against the Bank pursuant to section 138D of FSMA, on the basis that he suffered loss due to the Bank's contraventions of the FSA's rules, specifically its Conduct of Business sourcebook (COB) or its successor, the Conduct of Business sourcebook (COBS), (as in force at the time of the transactions).
Background: actions for damages
Section 138D of FSMA establishes a right for persons who suffer loss as a result of the breach of FCA or PRA rules to bring an action for damages. More specifically, section 138D(2) provides: "The contravention by an authorised person of a rule made by the FCA is actionable at the suit of a private person who suffers loss as a result of the contravention, subject to the defences and other incidents applying to actions for breach of statutory duty" (emphasis added).
A "private person" is relevantly defined in the Financial Services and Markets Act 2000 (Rights of Action) Regulations (SI 2001/2256), at regulation 3, to include:
• Any individual, unless he suffers the loss in question in the course of carrying on (i) any regulated activity or (ii) any activity which would be a regulated activity apart from any exclusion made by article 72 or article 72A of the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (SI 2001/544) (RAO).
• Any person who is not an individual unless he suffers the loss in question in the course of carrying on business of any kind.
It was agreed that the claimant was a "private person" who was not carrying on a business.
The claimant was not a person whom the legislation was designed to protect
Cooke J focussed on the condition within section 138D(2), emphasising that the availability of an action was subject to the court having regard to "the defences and other incidents" applicable generally to actions for breach of statutory duty.
One such fundamental principle in actions for breach of statutory duty is that the person bringing the claim must fall within a category of persons intended by Parliament, as a matter of interpretation, to be protected by the relevant legislation.
On the facts, each alleged breach of the COB/COBS rules was pleaded by the claimant with reference to the position of the Company only: there had been no claim for breach of a duty owed to him personally in relation to the sale of the IRHP. The only pleading as to his personal position was that the Bank had required him to inject further personal money into the Company, and to provide security in the form of personal guarantees and charges over his personal property. That pleading was not sufficient to amount to a plea of any breach of duty by the Bank towards the claimant as an individual under FSMA or COB/COBS.
Cooke J held that, on those facts, the claimant did not fall within the category of person intended to be protected by FSMA or the relevant FSA COB/COBS rules, and therefore no action under section 138D(2) was open to him. In his view, it was "clear beyond argument" that the relevant FSA rules were designed to protect the customers who constituted private persons within the meaning of section 138D. The right to bring an action under section 138D did not apply to a "different" group of persons (such as the claimant) outside that category, to whom no duty was owed under FSMA or the relevant FSA rules.
Reflective loss on the part of the shareholder was irrecoverable
The second ground on which Cooke J rejected the claim was that it contravened the principle of reflective loss established in Johnson v Gore Wood  UKHL 65: a shareholder of a company cannot sue to recover damages for loss which is merely reflective of loss suffered by the company, where the company can itself put forward a claim for that loss.
The loss a shareholder is unable to recover on the basis of this principle extends to the shareholder's potential loss of dividends, the diminished value of their shareholding, and "all other payments" the shareholder might have obtained from the company had it been in funds. Following Gardner v Parker  EWCA Civ 781, it is "irrelevant" that the duties that the defendant wrongdoer owed to the company and the shareholder might differ, provided that the loss sought to be claimed was merely reflective.
On the facts of this case, the claimant's claim fell foul of the rule against reflective loss: he had simply pleaded that the Company itself had suffered a loss due to its need to pay the IRHP payments and breakage charges. This led the Company to be unable to repay its loans to him, and reduced the value of his shareholding. Cooke J recognised these as, properly speaking, losses of the Company.
Having found the claimant's loss to be merely reflective, in order for the Bank to succeed in relying on the principle to bar the claimant's recovery for that loss, the court was then called upon to consider whether the Company could itself have put forward a claim for its loss. Cooke J recognised that the settlement payment to the Company had not been made on the basis of any specific claim at common law or under FSMA, but nevertheless held that, in practice, it was "perfectly clear" that the Company and the Bank had proceeded on the basis that compensation was paid in respect of any advice that the Company might have had in relation to the sale of the IRHP. In those circumstances, "it cannot lie in the mouth of WHL, nor its sole shareholder and director, the claimant, to say that there was no realistic prospect of success on a claim by WHL against the Bank".
Finally, if additional recovery on the part of the claimant was allowed, there would be an element of double recovery (in breach of the principle of reflective loss) given the GBP 2.4 million already received by the Company.
The judgment is short and, being delivered ex tempore, certain aspects of the argument and reasoning are not fully drawn out in the available written judgment.
Most important is the clear finding that an individual shareholder of a corporate entity transacting with an authorised person will not generally have a right to a personal action under section 138D, if it is unable to show a duty owed to them personally under FSMA or the FCA rules. This is on the basis that, absent such a duty, they will not fall within the category of persons that the statute or FCA rules as a matter of interpretation are intended to protect. Therefore, despite technically being "private persons", any section 138D claims will be barred at a more preliminary hurdle by failing the more fundamental test in actions for breach of statutory duty. In short, it is necessary, but not sufficient, to be such a "private person" to bring an action.
The claimant evidently strongly contested this finding, without success. In particular, Cooke J rejected the argument that section 138D should not be limited in scope to any particular class or category of private person (such as a "customer"), beyond the exemptions set out in the statute itself (for private individuals carrying on a business, and so forth). Rather, once an individual fell outside the scope of the persons intended to be protected by the legislation, Cooke J found it did not matter that he may otherwise be a "private person" within the terms of the statute. Additionally, although not entirely clear from the text of the judgment, the claimant appears to have argued that he may have had a common law claim against the Bank, or that (having regard to the findings on reflective loss) the Company may not have had a claim against the Bank, thereby potentially making his claim proper. Cooke J found that it was "irrelevant" whether either the Company had a claim under FSMA, or whether the claimant had any common law rights against the Bank.
The principle that actions for breach of statutory duty should be limited to the category of person the legislation is designed to protect has been well considered in the context of other statutes. This is a renewed application in the context of financial regulatory law and brings welcome clarification, limiting the ambit of section 138D to those "private persons" owed duties under the relevant legislation and rules.
Equally interesting is the application of the principle of reflective loss in an action for damages under FSMA. Cooke J was understandably in favour of reliance on the principle to bar the claimant's recovery in this particular case, given the GBP 2.4 million already paid to the Company. However, the onus is on the defendant firm to establish the applicability of the principle in the circumstances of each case, including that the relevant company was able to pursue a claim for its loss against the firm, and was not prevented from doing so by reason of the wrong done to it. As such, in order to benefit from the defence, firms may find it useful to include an express acknowledgement to that effect in settlement agreements.
Sivagnanam v Barclays Bank Plc  EWHC 3985 (Comm) (4 December 2015).
This article first appeared on Practical Law and is published with the permission of the publishers.
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