The High Court has recently declined to strike out a claim brought by former shareholders against a former director and a supplier, ruling that a fraud-driven assessment of damages in prior litigation could provide a sufficient legal basis for a personal cause of action.
Facts:
The case concerns a complex dispute involving the affairs of Centec International Ltd., a company that was incorporated in 1994, and which specialises in the purification and resale of mixed fuels. For much of its history, the company was owned by John and Jean Blundell, but following the death of Mr. Blundell in 2017, Jean Blundell became the sole shareholder. In March 2019, she sold her entire shareholding to BIP Chemical Holdings Ltd. (BIP) for £1.4m. Prior to this sale, the company was managed by a team that included the first defendant, a Mr. Lucian Davies, who had been exploring a management buy-out that ultimately collapsed due to a significant downturn in the company’s financial performance.
During the sale process to BIP, the purchaser relied on management accounts from May 2018, which did not reflect a duly revised and far lower profit forecast. The share purchase agreement (SPA) included warranties from Mrs. Blundell regarding the financial health of the company and the absence of any abnormal or onerous arrangements. After completion, BIP discovered that the company’s financial position was far worse than warranted and initiated litigation against Mrs. Blundell for breach of warranty and fraud. In a 2021 judgement, a High Court Judge found that while there was no fraud on Mrs. Blundell’s part, she had breached both the accounts warranty and the abnormal arrangement warranty. Specifically, the Judge found that Centec had been systematically defrauded by Refuels Ltd. in conspiracy with its director, Mr. Davies, through an arrangement in which the company was overcharged for fuel and the excess profits were split. This resulted in Mrs. Blundell being ordered to pay significant damages, interest, and costs totalling over £1.6m.
Following this judgement, Centec assigned its potential causes of action against the alleged conspirators to Mrs. Blundell and her son, Mr. Christopher Blundell. The current proceedings were subsequently issued in September 2023, with the Blundells acting both as assignees of the company’s claims and, in Mrs. Blundell’s case, pursuing a personal claim to recover the losses she incurred in the BIP litigation.
Decision:
In a significant procedural victory for the claimants, the High Court has largely dismissed an application for summary judgement and strike out, permitting the majority of their claims to proceed to a full trial.
Regarding the defendants’ argument that the claimants had failed to obtain critical documents from Centec, the Court acknowledged a likely breach of the “best endeavours” order. However, the Judge reasoned that striking out the claim—the most severe sanction available—would be entirely disproportionate. He noted that, as the litigation had been partially stayed by a consent order and also because the defendants had not explicitly raised this ground in their original application notice, the claimants had not been given a fair opportunity to respond to the threat of a strike out.
The Judge found that the “reflective loss” principle—which prevents shareholders from claiming for a drop in share value that the company itself could sue for—might not apply here. He reasoned that this case is atypical as Mrs. Blundell is not suing for the value of shares she currently holds; rather, she is suing for the specific damages and legal costs she was ordered to pay to a third party after the shares were sold. The Court found a real prospect that these costs, particularly interest and legal fees from the BIP litigation, do not constitute reflective loss.
Implications:
Traditionally, directors owe their fiduciary duties to the company as a corporate entity and not to individual shareholders. However, this case reinforces the “special circumstances” exception. By allowing the first claimant to amend her claim to allege a personal fiduciary duty owed to her by the director, the Court signalled that in small, family-owned companies, the relationship of trust and the direct involvement of directors in share sales can create a personal legal bond. This serves as a warning to directors of private companies that they may be held personally liable to outgoing shareholders if they conceal fraudulent arrangements that may adversely impact the sale price.
The judgement provides an important nuance to the “reflective loss” principle established in Sevilleja v Marex Financial Ltd. Usually, if a company is defrauded, only the company can sue, and a shareholder cannot sue for the resulting fall in share value. The Court’s reasoning here, however, suggests that when a shareholder has already sold their shares and is subsequently sued by the purchaser for breaches caused by a director’s fraud, the losses (such as court-ordered damages and legal costs) may be distinct from the company’s loss. This potentially opens a narrow door for former shareholders to recover “consequential” litigation losses that are not merely a reflection of the company’s own financial deficits.
