Summary

A secured debenture holder's claim against an administrative receiver it had appointed over a company ought not to have been struck out as its claim did not offend the rule against reflective loss. To strike out such a claim arbitrarily denied a secured creditor fair compensation for any primary loss suffered.

Facts

The appellants (L and C) appealed against a decision of a district judge striking out their claims on the basis that losses claimed offended the rule against reflective loss.

The first appellant (L) operated a leisure resort, providing short-term lettings of holiday accommodation and timeshare lettings. The second appellant lender (C) provided funding to L under the terms of a debenture and legal mortgage. L's business failed, and C appointed the fourth respondent administrative receiver (K). C was dissatisfied with the way in which K conducted the receivership. Both C and L commenced separate proceedings, each claim mirroring the relief sought in the other, and each alleged various breaches of the receiver's duties. A district judge made an order that sought to consolidate the claims, and ordered that L's claim be the lead claim. K, and the third respondent solicitors' firm, successfully applied to strike out C's claim, a district judge holding that C's claims, as a secured debenture holder, offended against the reflective loss rule. The issues were (i) the nature of the primary duty owed by an administrative receiver; (ii) whether the no reflective loss rule extended to cover the claims of a secured creditor; (iii) whether rights to sums payable to L assigned to C meant that C had a vested cause of action that ought not be struck out.

Held

(1) The primary duty owed by an administrative receiver was to the appointing debenture holder and not to the company, B Johnson & Co (Builders) Ltd, Re [1955] Ch. 634 considered. None of the duties owed to a company could restrict the primary duty of a receiver to protect, and act in the best interests of, his appointor, even if that were to cause damage to the company. It followed that so long as a receiver acted in good faith it was unlikely that the duties he owed to a company would be wider in ambit than those he owed to a debenture holder [Downsview Nominees Ltd v First City Corp Ltd [1993] A.C. 295 and Medforth v Blake [2000] Ch. 86 considered. As an administrative receiver's primary duty was to bring about a situation in which the secured debt could be repaid, a receiver owed no duties whatsoever to a company's unsecured creditors (see paras 28-30, 32 of judgment). (2) Nothing required the extension of the no reflective loss rule to cover the position of a secured creditor; a secured creditor's position, such as C's position as debenture holder, was fundamentally distinct from that of a shareholder who sought to sue for loss primarily belonging to and suffered by a company as the primary loss in C's case belonged to C, the legal person to whom an administrative receiver's primary duties were owed, Johnson considered. Furthermore, issues of causation and policy considerations underpinning the no reflexive loss rule were absent in the instant case. Moreover, the court's need to be astute to ensure that a party who had suffered loss was not arbitrarily denied fair compensation mandated that C's claims not be struck out, Johnson applied. The positions of an unsecured creditor and a secured creditor were fundamentally different, Gardner v Parker [2004] EWCA Civ 781, [2005] B.C.C. 46 considered (paras 37-42, 44, 46). (3) Sums due to C under the assignment agreement meant that C had a cause of action in respect of those sums that vested solely in C. Those claims ought not be struck out (para.50).

Appeal allowed