Nectrus Ltd v UCP plc [2021] EWCA Civ 57

Nectrus sought to reopen a refusal of permission to appeal under CPR 52.30, arguing the rule against reflective loss should bar UCP's claim as an ex-shareholder. The Court of Appeal dismissed the application, holding the Supreme Court in Marex had limited the rule to current shareholders only, and Nectrus had not been denied natural justice.

Facts

UCP and its subsidiary Candor engaged Nectrus to provide investment management advice under an Investment Management Agreement (IMA). Nectrus caused investments to be made with entities that resulted in substantial losses known as ‘Stranded Deposits’. When Brookfield acquired Candor from UCP, the purchase price was reduced by approximately £15.8 million to reflect these unrecovered deposits. UCP subsequently sued Nectrus for breach of the IMA, claiming damages equivalent to the discount from the sale price.

Procedural History

Sir Michael Burton found Nectrus liable for breach of the IMA. At the quantum stage, Nectrus raised the rule against reflective loss as a defence. The judge rejected this, distinguishing the Court of Appeal’s decision in Marex v Sevilleja and holding that UCP, as an ex-shareholder, was not precluded from claiming. Nectrus sought permission to appeal, which was granted on a contingent basis pending the Supreme Court’s judgment in Marex.

Issues

The central issue was whether the Court of Appeal should reopen Flaux LJ’s refusal of permission to appeal under CPR 52.30, following the Supreme Court’s judgment in Marex v Sevilleja. Nectrus argued that the rule against reflective loss should apply to ex-shareholders who had crystallised their loss by selling shares at an undervalue.

Judgment

Lord Justice Flaux dismissed the application to reopen the refusal of permission to appeal. He held that there had been no breach of natural justice, as Nectrus had been given an opportunity to make submissions through correspondence but had not requested further time before the determination was made.

“The jurisdiction can only be properly invoked where it is demonstrated that the integrity of the earlier litigation process, whether at trial or at the first appeal, has been critically undermined.”

On the substantive question, Flaux LJ held that the Supreme Court in Marex had clearly limited the rule against reflective loss to current shareholders, not ex-shareholders. He quoted Lord Reed at [89]:

“The rule in Prudential is limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way.”

The Court found that UCP’s claim was a free-standing breach of contract claim for loss suffered when it ceased to be a shareholder, not a claim made in the capacity of shareholder. The rationale of the rule in Foss v Harbottle, which underpins the reflective loss principle, simply does not apply to ex-shareholders.

Delay

Additionally, the application was not made promptly. Nectrus took nearly two months to issue the CPR 52.30 application despite clear directions, which weighed heavily against allowing the application.

Implications

This decision confirms that following the Supreme Court’s judgment in Marex v Sevilleja, the rule against reflective loss is strictly confined to claims by current shareholders in their capacity as shareholders. Ex-shareholders with crystallised losses from share sales are not barred by the rule. The case also reinforces the very high threshold for reopening appeals under CPR 52.30, emphasising that the integrity of the litigation process must be critically undermined for the jurisdiction to be engaged.

Verdict: The application under CPR 52.30 to reopen the refusal of permission to appeal was dismissed.

Source: Nectrus Ltd v UCP plc [2021] EWCA Civ 57