Aggrieved shareholders and settlements

In Latin American Investments Ltd v Maroil [2017] EWHC 1254 (Comm) Mr Justice Teare issued and then continued a freezing injunction against the defendant shipping companies. This had been applied for by shareholders unhappy about the terms of settlement agreements entered into by the companies in question.

The claimant was one of three shareholders in joint venture companies ("the JVCs") which owned two VLCCs. The first defendant was another of the shareholders and the second defendant ("D2") was the disponent owner of the VLCCs. D2 let the vessels out to a company called PDVSA under contracts of affreightment but D2's rights under the COAs were assigned to the JVCs.

The difficult question was whether the claim fell foul of the "reflective loss" principle. This rule means that a shareholder cannot sue in respect of a diminution in the value of its shareholding where that merely reflects the loss suffered by the company: if a company suffers loss caused by a breach of duty owed to it, only the company may sue.

Disputes arose under the COA and were settled by the defendants for some US$30m. However, the claimant contended that the claims should not have been settled for less than US$89m. The claimant also claimed that it had not received its share of a sum paid under a Commission Agreement relating to the settlement, amounting to US$10m. The first defendant had, at the same time as the JVCs' claims were being settled, settled its own claim against PDVSA, giving rise to an allegation of conflict of interest.

The claimant issued proceedings seeking payment of sums to the JVCs, either by way of specific performance of various obligations under Shareholder Agreements between the parties, or by way of damages.

The difficult question was whether the claim fell foul of the "reflective loss" principle. This rule means that a shareholder cannot sue in respect of a diminution in the value of its shareholding where that merely reflects the loss suffered by the company: if a company suffers loss caused by a breach of duty owed to it, only the company may sue. The shareholder can, however, sue in certain circumstances. For example, where the shareholder suffers a "separate and distinct" loss arising out of a duty owed to the shareholder itself rather than the company.

The claimant had its own cause of action under the shareholders' agreements, but the loss suffered by the claimant was reflective of the JVC's losses. The claimant nonetheless contended that the reflective loss principle does not debar a shareholder with a cause of action from seeking a remedy which requires property or payments to be restored to the company itself (in this case, specific performance requiring sums to be paid to the JVCs).

The reflective loss rule exists for a number of reasons. Principally these are to respect the company's autonomy; prevent prejudice to the company's creditors; and to ensure that a shareholder does not receive compensation for a loss suffered by others. Mr Justice Teare thought that there was a good arguable case that both the remedies of specific performance and damages sought would not contravene any of these principles because the payments would be made to the JVCs.

This decision is interesting since there was no clear authority either supporting or ruling against the claimant's case. Because at this stage it is only a question of whether or not an injunction should be granted the matter was only decided on the basis of a "good arguable case". There has been no full trial of the point yet. If upheld, though, at some future date this provides an interesting route for shareholders who feel that the controlling interests of a company have entered into unauthorised or illegitimate settlement agreements.

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