Claim No: HC11C02930
Neutral Citation Number : [2012] EWHC 1971 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Rolls Building,
Royal Courts of Justice 
London EC4A 1NL

Monday 16 July 2012

MR EDWARD BARTLEY JONES QC
(sitting as a Deputy High Court Judge)
- - - - - - - - - - - - - - - - - -
BETWEEN

	(1) INTERNATIONAL LEISURE LIMITED
(2) CITIBID SECURITIES LIMITED	Claimants	
	and		
	[(1) FIRST NATIONAL TRUSTEE COMPANY UK LIMITED
(2) FIRST NATIONAL TRUSTEE COMPANY LIMITED]
(3) MAIDMENT JUDD (sued as a firm)
(4) ANTHONY KENT	

Defendants	
- - - - - - - - - - - - - - - - - -
- - - - - - - - - - - - - - - - - -

Mr Richard Fowler (instructed by Clarion of Elizabeth House, 13-19 Queen Street, Leeds, LSI 2TW) for the Claimants
Mr Ulick Staunton (instructed by Weightmans LLP of Second Floor, 6 New Street Square, New Fetter Lane, London, EC4A 3BF) for the Third and Fourth Defendants
- - - - - - - - - - - - - - - - - -
JUDGMENT

Introduction:
1.	This appeal raises, yet again, issues as to the ambit and limits of the rule against reflective loss as discussed in Johnson v Gore Wood & Co [2002] 2 AC 1. On this occasion the issue is whether the rule debars a secured creditor of a company who has suffered loss (as the result of breaches of duties owed both to the secured creditor and the company by a defendant) from recovering that loss because the company is also entitled to recover that loss. As argument developed on the appeal a subsidiary issue arose as to the effect of the crystallisation of a floating charge under a debenture. The subsidiary argument was advanced that the rule against reflective loss could not possibly be engaged because only the debenture holder (to the exclusion of the company) possessed the cause of action to sue for the loss.
2.	The appeal is against a decision of District Judge Giles made on 27 July 2011. The District Judge struck out the claims of a debenture holder on the basis that the losses it claimed were merely reflective of the losses suffered by the company and, hence, offended against the rule against reflective loss. Whatever my decision it is impossible not to feel sympathy for the District Judge. As will be seen the problem was presented to him in stark form granted the way in which simultaneous claims for apparently the same loss had been mounted by both the debenture holder and the company and granted the way in which those simultaneous claims were pleaded. The District Judge had only some thirty minutes to consider the papers before the hearing and had to dispose of matters during the course of a two hour hearing. Unlike me he had no time whatsoever to reflect before making his decision. And he heard submissions far less detailed than those deployed before me.
3.	The issue before me is of some importance. There is considerable force in the submission of Mr Fowler (who appears for the debenture holder) that if this appeal were to fail then the undoubted duties owed by an administrative receiver to his appointing debenture holder would be deprived of all meaningful effect and would be enforceable by the debenture holder only in the most limited of circumstances.
The Basic Facts:
4.	International Leisure Limited (“ILL”) operated the business of a leisure resort, initially providing short-term lettings of holiday accommodation (and various ancillary services) from Brockwood Hall, Millom, Cumbria. Brockwood Hall consisted of approximately 26 acres of land and contained 32 holiday lodges. In 1997 ILL began, also, to operate a business selling timeshare lettings at Brockwood Hall.
5.	Citibid Securities Limited (“Citibid”) provided funding to ILL. By a Debenture and Legal Mortgage dated 23 August 1991 (“the debenture”) ILL provided security to Citibid for all monies due from ILL to Citibid. By the debenture ILL charged (a) all its freehold and leasehold properties (including Brockwood Hall) by way of legal mortgage (b) all its future freehold and leasehold property by way of fixed charge (c) all its present and future book debts by way of fixed charge (d) its chattels by way of fixed charge and (e) all its other undertaking and assets by way of floating charge to secure repayment of all moneys due from ILL to Citibid.
6.	The business of ILL did not, ultimately, prosper and as at 7 October 2003 ILL owed Citibid £3,872,047 which was secured by the debenture. It is, I think, common ground that this debt has always substantially exceeded the realisable value of ILL’s assets.
7.	On 7 October 2003 Citibid, in exercise of its powers under the debenture, appointed Mr Anthony Kent (“Mr Kent”) as administrative receiver of ILL. At all material times Mr Kent was a partner in the firm of Maidment Judd. Mr Kent resigned his appointment as administrative receiver on 25 May 2007.
8.	Mr Kent’s administrative receivership was, in part at least, funded by Citibid (in the sense the Citibid provided funding to enable Mr Kent to continue to trade the business of ILL). Citibid was dissatisfied with the manner in which Mr Kent conducted the administrative receivership. I must stress, immediately, that as this is a strike out application the complaints made against Mr Kent by each of Citibid and ILL are no more than mere allegations. They have not been tested at trial nor has Mr Kent’s response thereto been articulated before me.
9.	On 15 October 2009 Citibid commenced proceedings in the Chancery Division, Leeds District Registry (Claim Number 9LS30789). There were four defendants. The first two defendants were First National Trustee Company UK Limited and First National Trustee Company Limited. These defendants were said to be liable to account to Citibid for certain timeshare payments. Mr Kent was joined as fourth defendant and the essence of the claim against him was for professional negligence for breach of duties owed by him as administrative receiver to Citibid as debenture holder. Maidment Judd were joined as third defendant on the basis that Mr Kent was a partner in Maidment Judd and, hence, Maidment Judd were liable for his defaults. As it happens the claims of Citibid (and for that matter ILL) against First National Trustee Company UK Limited and First National Trustee Company Limited were settled by a Consent Order dated 22 March 2011 and I need not refer to these two defendants further.
10.	It seems to me that, on the basis of the authorities to which I shall refer which establish that the primary duty of an administrative receiver is owed to the debenture holder, there was nothing surprising in the form and content of the proceedings as issued by Citibid. What was, perhaps, more surprising was that on the very same day ILL commenced its own proceedings in the Chancery Division, Leeds District Registry (Claim Number 9LS30788) against the same four defendants. The relief sought by ILL against Mr Kent and Maidment Judd broadly mirrored the relief sought in the Citibid proceedings and was based on breaches of duty which broadly mirrored the breaches of duty alleged in the Citibid proceedings. This was surprising because (1) it would seem extremely unlikely that any recovery by ILL as against Mr Kent and Maidment Judd would be sufficient (even when added to all other recoveries made) to satisfy the sums due under Citibid’s debenture and (2) there could not, of course, be double recovery. The same solicitors acted for ILL and Citibid - which would again seem surprising if there were to be any competition between ILL and Citibid as to the entitlement to any damages recovered.
11.	By Order of District Judge Flanagan made in both proceedings on 24 November 2010 it was directed that both claims should be “consolidated” and heard together, with Claim Number 9LS30788 as the “lead” claim. There are, perhaps, some problems with this Order. True “consolidation” would have created but one action - an action in which the two claimants would have to be represented by the same solicitors and counsel and where, in principle, there ought to be no conflict as between the interests of the two claimants. But, at this stage, each of ILL and Citibid appeared, simultaneously, to be seeking to recover the same loss for the same breaches of duty and, so, there was a potential conflict between them. Equally, were Claim Number 9LS30788 the lead claim then the lead claim would have been that of ILL and not that of Citibid. Further it is difficult to see why, had there been true consolidation, there could have been a “lead” claim.
12.	I have not seen the original Particulars of Claim in either of the two actions. However, on 20 April 2011 Mr Kent and Maidment Judd served Defences (which I have not seen). They also indicated in a letter dated 20 April 2011 from their solicitors that Citibid’s claims were for reflective loss and, thus, liable to be struck out. Following correspondence in which this was denied by the solicitors acting for Citibid and ILL, Mr Kent and Maidment Judd issued an Application Notice on 27 May 2011 seeking an order striking out Citibid’s claims. It is to be noted that this Application Notice did not (and this was in accordance with the logic of the position of Mr Kent and Maidment Judd) seek to strike out the claims of ILL. The Application Notice also sought security for costs and an order that the claims be transferred to London.
13.	Granted the order of District Judge Flanagan, ILL and Citibid produced Amended Particulars of Claim which were said to replace “in their entirety by substitution” the original Particulars of Claim of Citibid and ILL. These Amended Particulars of Claim are helpful in the sense that they combine within one document the claims of both ILL and Citibid. Whilst the Application Notice was directed at the original Particulars of Claim nevertheless at the time when the Application Notice came on for hearing before District Judge Giles all parties very sensibly accepted that the strike out application should be tested against the Amended Particulars of Claim, even though the Amended Particulars of Claim were still, at that point, in draft form. There was no contest by Mr Kent and Maidment Judd to the form of the Amended Particulars of Claim save that they maintained their strike out application against that part of the Amended Particulars of Claim which contained Citibid’s claims. This led to the somewhat strange, but perfectly understandable, situation whereby the Amended Particulars of Claim in their entirety were served on, and bear date, 5 August 2011 whereas part thereof had already been struck out.
14.	On 27 July 2011 District Judge Giles struck out Citibid’s claims as advanced in the Amended Particulars of Claim. He indicated that Mr Staunton (who appeared for Mr Kent and Maidment Judd) had satisfied him from the authorities that the reflective loss principle was not limited to claims by shareholders but that it extended further and included claims by creditors. He accepted Mr Staunton’s submission that what was important was not the nature, or source, of the duties owed to ILL and Citibid but, rather, the nature of the loss which was claimed. He indicated that Mr Fowler (acting for Citibid and ILL) had been unable to identify losses suffered by Citibid which were separate from, or not reflective of, those suffered by ILL. Accordingly, he found that Citibid’s claims offended against the reflective loss rule.
15.	District Judge Giles refused permission to appeal and made ancillary costs orders. He also ordered transfer of the action (or actions) to the Chancery Division in London. The security for costs application he adjourned because of absence of time to a case management conference to be held in London.
16.	On 19 December 2011 David Richards J granted the application of Citibid for permission to appeal. It is that appeal which has come on for hearing before me.
The Amended Particulars of Claim:
17.	The starting point must be to analyse how the respective claims of Citibid and ILL are formulated in the Amended Particulars of Claim. In Johnson Lord Bingham emphasised, at 36C, the necessity for the issue to be tested by “close scrutiny” of the pleadings at the strike-out stage. The object, as he indicated, is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible and whether the loss claimed is “merely a reflection of the loss suffered by the company”. He also emphasised that, at the strike-out stage, any reasonable doubt must be resolved in favour of the claimant.
18.	Paragraph 12 of the Amended Particulars of Claim contains a summary of the duties said to have been owed by Mr Kent (and, hence, Maidment Judd - it will be sufficient for the future, I think, if I refer simply to Mr Kent) to Citibid. These are said to be:-
(i)	a contractual duty to use reasonable skill and care in carrying out his functions as administrative receiver and in seeking to realise the charged assets of ILL in satisfaction of the debenture (and also in satisfaction of a further Chattels Mortgage dated 2 December 2002 - the Chattels Mortgage appears to add nothing to the issues);
(ii)	similar duties of care in tort and/or in equity;
(iii)	fiduciary duties in relation to the realisation of the charged assets of ILL in satisfaction of the debts secured by the debenture and the Chattels Mortgage;
(iv)	statutory duties - including a duty pursuant to rule 3.32 of the Insolvency Rules 1986 to send abstracts of his receipts and payments to Citibid.
19.	Specific examples of the application of those duties are then set out in paragraph 13. For example, paragraph 13(i) identified a duty, at the start of the appointment, to formulate a proper and reasonable plan for the conduct of the appointment.
20.	Paragraph 14 identifies the duties owed by Mr Kent to ILL. There is no plea (as there was in paragraph 12(i)) to a contractual duty of care. However, paragraph 14(i) identifies a duty in equity to use reasonable skill and care and all due diligence in carrying out his functions as administrative receiver, both in seeking to realise the assets of ILL in satisfaction of Citibid’s security and in conducting ILL’s business. Paragraph 14(ii) pleads fiduciary duties in relation to the realisation of the charged assets of ILL which appears to be identical to the fiduciary duties pleaded in paragraph 12(iii). Paragraph 14(ii) does also add a fiduciary duty in respect of the conduct of ILL’s business but that may well be subsumed, in any event, in the general fiduciary duty pleaded in paragraph 12(iii). Paragraph 14(iii) pleads statutory duties identical to those in paragraph 12(iv).
21.	Paragraph 15 then pleads (as did paragraph 13 for Citibid) specific examples of the application of these duties as far as ILL is concerned. The only meaningful distinctions between paragraphs 13 and 15 are as follows
(1)	paragraph 13(ii) identifies a specific duty on Mr Kent to Citibid (not repeated in paragraph 15) to make a reasoned, proper decision as to whether the best realisation of assets of ILL in satisfaction of its debt to Citibid would be obtained by (a) a sale of ILL’s assets for cash or (b) a sale of those assets to another company in consideration of shares pursuant to section 110 of the Insolvency Act 1986 or (c) by ILL continuing to trade or (d) otherwise howsoever;
(2)	the duty to seek appropriate specialist advice in relation to the value of ILL’s assets (and/or in relation to the likely risks and profits obtainable by ILL continuing to trade) is formulated by reference to the likely risks and profits obtainable “for the benefit of Citibid” in paragraph 13(iii) but these words were omitted where the like duty is pleaded in paragraph 15(ii);
(3)	the duty identified in paragraph 13(vi) which is said to have been owed to Citibid to review the performance of ILL’s business frequently and continuously and to consider whether or not ILL should have continued to trade and, if so, on what terms is not specifically repeated in the list of specific duties owed to ILL under paragraph 15;
(4)	various duties said to be owed to Citibid in paragraph 13 to provide information, to render full and final accurate accounts and to deliver up on demand all books and papers are said in paragraph 15 to be owed to ILL;
(5)	paragraph 13(xi) identifies a duty to pay promptly to Citibid all assets of ILL (from profits resulting from ILL’s continuing to trade) towards the satisfaction of Citibid’s security. Paragraph 15(ix) identifies a similar duty to ILL but only save and to the extent that the assets of ILL had not been utilised towards the satisfaction of Citibid’s security or used for other proper purposes during the course of the appointment.
22.	Mr Kent’s alleged breaches of duty are identified in paragraph 25. What he is there said to have done wrong is identified as being in breach both of (1) the pleaded duties as owed to Citibid and (2) the pleaded duties as owed to ILL. No attempt is made to suggest that certain breaches are a breach only of duty to Citibid (or ILL as the case may be).
23.	Loss is addressed in paragraphs 26 and 27. Paragraphs 26 contains the details of Citibid’s loss, paragraph 27 the details of ILL’s loss. The Particulars given under paragraphs 26 and 27 compare as follows
(1)	paragraph 26(1) alleges that but for Mr Kent’s breaches of duty the assets of ILL would have been realised in satisfaction, alternatively in part satisfaction, of Citibid’s security. Citibid’s loss is said accordingly to be the amount which ILL owed to it and which has not been paid. This is mirrored in paragraph 27(1) which alleges, in similar terms, that ILL has lost such sum as Mr Kent would have realised in discharge or partial discharge of Citibid’s security but for his breaches of duty;
(2)	paragraph 26(2) contains an alternative plea to paragraph 26(1). It claims Citibid’s loss of the money which could have been paid to it, but for Mr Kent’s breaches, as the loss of a chance. This is not mirrored in paragraph 27. Rather, paragraph 27(2) contains a plea that ILL has suffered significant loss by reason of the manner in which Mr Kent conducted the business. Such loss, it is said, is to be calculated by reference to (i) the assets of ILL over which Mr Kent failed to retain any adequate control such that they were dissipated by companies or individuals acting as his agents and (ii) the profits which Mr Kent ought reasonably to have realised from ILL’s business had he conducted it properly and with due diligence. Granted the way in which the breaches are formulated, it is difficult to see what paragraph 27(2) adds to paragraph 27(1);
(3)	No specific allegation is made in paragraph 27(1) that had it not been for Mr Kent’s breaches not only would there have been sufficient money available to satisfy Citibid’s security but, also, there would have been a surplus over to be paid out to ILL. The facts would seem to render that extremely unlikely but a very charitable interpretation might suggest that such an allegation was inherent in paragraph 27(2);
(4)	paragraph 26(3) contains a specific plea of loss suffered by Citibid which is not repeated as a head of loss by ILL. In paragraph 26(3) it is alleged that Mr Kent’s own abstract of receipts and payments showed that he was holding a balance of £353,234.98 to which Citibid was entitled under the terms of the debenture and that Mr Kent has failed to pay that money to Citibid.
24.	From the above analysis it is crystal clear that, with the exception of the sum of £353,234, the loss said to have been suffered by Citibid is identical, up to the total sum secured by the debenture, to the loss suffered by ILL. And that loss is said to have been suffered as a result of breaches of broadly identical duties owed by Mr Kent to (1) Citibid and (2) ILL. If ILL makes an independent claim at all, it can only be for the amount of loss and damage which exceeds the sums necessary to satisfy the debts secured by the debenture. And identifying such a plea by ILL requires a very charitable interpretation of the Amended Particulars of Claim.
25.	As to Citibid’s claim for the £353,234 there is much force in Mr Staunton’s submission that this was ILL’s money, albeit as secured by the debenture, and that, therefore, there appears to be no logic (granted the manner in which the Amended Particulars of Claim have been formulated) for this sum not also being claimed, in the alternative, as recoverable loss by ILL in paragraph 27.
26.	It is against this background easy to understand how the District Judge came to the conclusion which he did. He was persuaded, perfectly understandably, that each of Citibid and ILL were pursuing the same loss and that such loss was the loss of ILL. He was not faced, and I am not faced, with a pleading which, for example, alleged that certain duties were owed only to Citibid and that only Citibid could suffer loss through breach of those duties. Nor was he faced with a pleading which alleged that in the event of a specific duty (initially alleged to be owed to both Citibid and ILL) being found to be owed only to Citibid then only Citibid could have suffered loss through breach of that particular duty. I am unimpressed on the pleadings, therefore, by Mr Fowler’s submissions on behalf of Citibid that Citibid could have suffered some loss which ILL has not suffered or that Citibid and ILL should be allowed to continue their claims in tandem against the off chance that part of ILL’s claims might, at trial, fail when Citibid’s claims do not (or vice versa). In any event, as Lord Millett indicated in Johnson (at 62F) the issue whether a claim is barred because it is for reflective loss is an issue of principle, not discretion. If Citibid’s claims breach, as Mr Staunton submits, the no reflective loss rule then I must strike them out. I cannot simply exercise some form of case management discretion and allow both claims to muddle on to trial in tandem, confident as I would be that the trial judge would prevent double recovery and award any damages to the correct claimant.
27.	Accordingly, on these pleadings I must grapple directly with the question whether the no reflective loss rule extends to claims by debenture holders in circumstances such as the present.
Duties
28.	It is unnecessary for the purposes of this appeal to examine in any detail the ambit and source of the undoubted duties owed by an administrative receiver to the appointing debenture holder. The important point is that all the authorities stress that the primary duty is to the debenture holder and not to the company. Thus Jenkins LJ said in In re B. Johnson & Co (Builders) Ltd [1955] Ch. 634 at 661 - 663:-
The primary duty of the receiver is to the debenture holders and not to the company. He is receiver and manager of the property of the company for the debenture holders, not manager of the company. The company is entitled to any surplus of assets remaining after the debenture debt has been discharged, and is entitled to proper accounts. But the whole purpose of the receiver and manager’s appointment would obviously be stultified if the company could claim that a receiver and manager owes it any duty comparable to the duty owed to a company by its own directors or managers.
In determining whether a receiver and manager for the debenture holders of a company has broken any duty owed by him to the company, regard must be had to the fact that he is a receiver and manager - that is to say, a receiver, with ancillary powers of management - for the debenture holders, and not simply a person appointed to manage the company’s affairs for the benefit of the company... ”.
In the same case Lord Evershed MR said at 644
"In such a case as the present, at any rate, it is quite plain that a person appointed as receiver and manager is concerned, not for the benefit of the company but for the benefit of the mortgagee bank, to realise the security: that is the whole purpose of his appointment; and the powers which are conferred on him and which I have to some extent recited are (as counsel for the receiver observed, and I think fairly observed) really ancillary to the main purpose of the appointment, which is the realisation by the mortgagee of the security ...”
29.	The above passage from the judgment of Jenkins LJ was cited with approval by Lord Templeman delivering the judgment of the Privy Council in Downsview Nominees Ltd v. First City Corporation Ltd [1993] AC 295 at 313B - 314C. The primacy of the duty as owed to the debenture holder was again emphasised by Sir Richard Scott V- C in Medforth v. Blake [2000] Ch. 86 at 102G.
30.	Indeed, the fact that the primary duty of the receiver is to try to bring about a situation in which the secured debt can be repaid underpinned the very decisions in Downsview and Medforth. These two cases were concerned with the extent of the duty owed to the mortgagor (or subsequent incumbrancers). The fact that the primary duty was to the debenture holder and was to seek to recover the secured debt coloured, and qualified, the nature of the duties owed to the mortgagor. It was thought, as a result of Downsview, that the ambit of the duties owed to the mortgagor and subsequent incumbrancers was limited comprising merely (i) a duty to act in good faith in the context of obtaining repayment for the debenture holder and (ii) a duty to take due care to obtain a proper price when selling the charged assets. Medforth established that the duties are capable of being wider than this albeit that the issue is to a degree fact sensitive and none of the duties as owed to the mortgagor can restrict the primary duty of the receiver to protect, and act in the best interests of, his appointor (even if that causes damage to the company). Thus the receiver remains entitled to look to the secular interests of the debenture holder, even if that causes damage to the mortgagor, without being in any breach of duty to the mortgagor (so long as the receiver acts in good faith).
31.	It follows from this that so long as the receiver acts in good faith it is unlikely that the duties he owes to the mortgagor (in this case ILL) will be wider in ambit than those which he owes to the debenture holder. It will be an unusual set of circumstances where breach of duty owed to the mortgagor does not also constitute breach of duty owed to the debenture holder. Conversely, the set of circumstances where a particular breach is a breach of duty owed to the debenture holder but not a breach of duty owed to the mortgagor will not be unusual.
32.	What is crystal clear is that the administrative receiver owes no duties whatsoever to the company’s unsecured creditors. See, for example, Lathia v. Dronsfield Bros Ltd ri9871 BCLC 321.
Reflective Loss - Submissions
33.	Mr Staunton’s submissions on behalf of Mr Kent can be briefly summarised as follows
(1)	on the way in which the claims have been pleaded any loss suffered by Citibid has also been suffered by ILL. That loss ought, primarily, to be categorised as ILL’s loss ;
(2)	therefore Citibid’s claims are for loss primarily suffered by ILL and the rule against reflective loss bars Citibid from making claims to ILL’s loss ;
(3)	the fact that Citibid is a secured creditor makes no difference. The decision of the Court of Appeal in Gardner v. Parker [2004] EWCA Civ 781 extended the rule against reflective loss to encompass unsecured creditors and there is no logic in not extending it further to secured creditors. The mere fact that the debenture gives Citibid a security interest is irrelevant. That security interest is a charge on the assets of ILL. That charge, he says, is no different from the interest which the holding of shares gives a shareholder in a company or the interest in a company given to an unsecured creditor by his cause of action for the debt;
(4)	the key is to look not at the nature, and source, of the duties owed but at the nature of the loss. Looking at the loss claimed by both Citibid and ILL it is crystal clear that the loss is that of ILL (over which Citibid merely had security). Mr Staunton refers me to what Lord Bingham had to say at 35F in Johnson
“A claim will not lie by a shareholder to make good a loss which would be made good if the company’s assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss”;
(5)	the proper analysis here, Mr Staunton says, is that the action is one to replenish ILL’s assets as lost through Mr Kent’s alleged defaults. Mr Staunton also refers me to what Lord Millett had to say in Johnson at 66C:-
“The test is not whether the company could have made a claim in respect of the loss in question ; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder’s loss is franked by that of the company. If so, such reflective loss is recoverable by the company and not by the shareholders”.
(6)	to the extent that Citibid looks at any depletion in the value of its security this has been caused, solely, by loss suffered by ILL - namely the depletion in the value of the assets of ILL through Mr Kent’s alleged breach of duty.
34.	Granted the conclusions to which I have come I need not set out Mr Fowler’s submissions in detail. He does, however, emphasise that if Mr Staunton were right then any debenture holder suing a receiver for breaches of duty owed primarily to that debenture holder would be liable to have its claim struck out as offending against the no reflective loss rule if the company also had a cause of action for the loss suffered by the debenture holder. That, he says, is a strange conclusion and one which would stultify the duties as primarily owed to the debenture holder. Only if the company sued for its loss could the debenture holder indirectly recover its loss (a proposition from which Mr Staunton did not shrink in his submissions, he accepting that the logical corollary of his position is that if, for example, a company had been dissolved it would be necessary to resurrect the company so that the company, rather than the debenture holder, could sue for the loss). This, Mr Fowler says, is entirely inconsistent with all the authorities which establish the nature and extent of the primary duties owed to the debenture holder. It is surprising that these authorities have developed in the way in which they have if there was always such a fatal flaw in the debenture holder’s cause of action as identified by Mr Staunton.
35.	It seems to me that this submission of Mr Fowler is more than a mere jury point. It raises issues of principle as to whether, on its true analysis as articulated in Johnson, the no reflective loss rule ought to extend to the claims of a secured creditor.
Reflective Loss - Analysis
36.	In my judgment, the fundamental flaw in Mr Staunton’s submissions is that they overlook the fact that the person primarily entitled to the loss is Citibid. ILL’s loss can be retained by ILL only to the extent that such loss exceeds the sums due under the debenture. And to this needs to be added the fact that the primary duties are owed to Citibid not to ILL.
37.	I can find nothing in Johnson which requires the extension of the no reflective loss principle to circumstances such as the present. The essential reasoning in Johnson is to be found in the speeches of Lord Bingham at 35-36 and Lord Millett at 61-68. As the Court of Appeal indicated in Giles v. Rhind [2003] Ch. 618 these passages require to be read in extenso. And the speeches have to be read against the context of the facts of Johnson (a point made by Waller LJ in Giles at para 22). Thus in Giles the Court of Appeal indicated that the principle did not extend where the wrong done to the company had made it impossible for the company to pursue its own remedy against the wrongdoer.
38.	It seems to me that there is a fundamental distinction to be drawn between the facts and circumstances being discussed by the House of Lords in Johnson and the facts and circumstances of the present case. In Johnson the primary entitlement to the loss was that of the company. The issue was the extent to which, if at all, a shareholder could sue for loss primarily suffered by, and primarily belonging to, the company. I can see nothing in Johnson which would compel me to extend this principle to circumstances such as the present, where the primary entitlement to the loss is that of the debenture holder and the debenture holder is the person to whom the primary duties are owed.
39.	Nor do I see anything in the rationale for the rule against reflective loss, as articulated in Johnson, which would compel me to accept Mr Staunton’s submissions. At 66D - G, Lord Millett identified one reason for the rule as being the issue of causation. Referring to what Hobhouse LJ had said in Gerber Garment Technology Inc v. Lectra Systems Ltd [1997] RPC 443 at 471, Lord Millett indicated that if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company’s decision not to pursue its remedy not by the defendant’s wrongdoing. By a parity of reasoning, he said, the same applies if the company settles for less than it might have done.
40.	I find it difficult to see how issues of causation of this nature are applicable in circumstances such as the present. Citibid, as debenture holder, is choosing to exercising its undoubted remedies - in circumstances where the primary duties are owed to it and it has the primary entitlement to the loss.
41.	Lord Millett went on to say in this passage, however, that there was more to the rationale for the rule than mere issues of causation. The disallowance of a shareholder’s claim in respect of reflective loss was driven by policy considerations. Lord Millett said
"In my opinion, these [policy considerations] preclude the shareholder from going behind the settlement of the company’s claims. If he were allowed to do so then, if the company’s action were brought by its directors, they would be placed in a position where their interest conflicted with their duty ; while if it were brought by the liquidator, it would make it difficult for him to settle the action and would effectively take the conduct of the litigation out of his hands. The present case is a fortiori : Mr Johnson cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another”.
42.	I find it difficult to see how such policy considerations should apply in circumstances such as the present. On the contrary, it seems to me that policy considerations indicate that the rule against reflective loss should not apply to claims by a secured creditor. If the rule did apply then the person who has the benefit of the primary duty, and who has the primary entitlement to the loss, is being disabled from pursuing his claims directly and under his own control. It is difficult, indeed I think impossible, to see what policy consideration would require this.
43.	I derive assistance from what Lord Bingham had to say at 36C
“On the one hand the court must respect the principle of company autonomy, ensure the company’s creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation”.
44.	I fail to see how allowing Citibid’s claims to continue infringes the principle of company autonomy or prejudices the company’s creditors in any way. Nor, in any meaningful way, does allowing Citibid’s claims to continue result in a party recovering compensation for a loss which another party has suffered. But if, as Lord Bingham says, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation then that, in my judgment, mandates that Citibid’s claims as debenture holder should not be struck out.
45.	Mr Staunton urges on me that the answer to the problem is to be found in the decision of the Court of Appeal in Gardner. There the rule against reflective loss was extended to a shareholder in his capacity as a creditor of a company and at paragraph 70 Neuberger LJ said this :-
“... the rule against reflective loss is not limited to claims brought by a shareholder in his capacity as such ; it would also apply to him in his capacity as an employee of the company with a right (or even an expectation) of receiving contributions to his pension fund. On that basis, there is no logical reason why it should not apply to a shareholder in his capacity as a creditor of the company expecting repayment of his debt. Indeed, it is hard to see why this rule should not apply to a claim brought by a creditor (or indeed an employee) of the company concerned, even if he is not a shareholder. Whilst it is unnecessary to decide the point, as BDC was a shareholder in Scoutvale, it is hard to see any logical or commercial reason why the rule against reflective loss should apply to a claim brought by a creditor or employee, who happens to be a shareholder, of the company if it does not equally apply to an otherwise identical claim by another creditor or employee who is not a shareholder in the company”.
46.	I can see nothing in the judgment of Neuberger LJ in Gardner (at paras 67-75) which mandates, or even suggests, the conclusion that a claim by a secured creditor attracts the rule against reflective loss. For reasons already given, it seems to me that there are fundamental distinctions between the position of an unsecured creditor and a secured creditor. No duty is owed by the receiver to the unsecured creditor and the unsecured creditor has no primary entitlement to the claimed loss. The unsecured creditor’s prejudice arises only through the depletion of the assets of the company not, as in the present case, where the secured creditor has the primary entitlement to obtain and retain all damages awarded for the breaches of duty.
47.	My conclusion, therefore, is that the rule against reflective loss does not apply to Citibid’s claims as pleaded in this action and, accordingly, the appeal will be allowed.
The Subsidiary Argument
48.	During the course of the hearing before me an issue arose as to whether, either under the terms of the debenture and/or by reason of the crystallisation of the floating charge, ILL had been deprived of its cause of action to sue for the claimed losses with that cause of action being vested solely in Citibid (at least up to the value of the sums secured by the debenture). To the extent that ILL did not have a cause of action (because it was vested in Citibid) there could, of course, be no question of the rule against reflective loss applying. I gave directions for further written submissions on this issue.
49.	Granted the conclusion to which I have come in paragraph 47 above it is unnecessary for me to decide this issue. Having carefully reviewed the detailed written submissions, I would be unwilling to reach a conclusion on the competing positions of Citibid and Mr Kent without hearing further oral submissions. It seems to me that some interesting, and difficult, points are raised. I think it best, therefore, to express no view on this issue. If this matter were to proceed further and my conclusion as identified in paragraph 47 above were found to be wrong, the parties would, no doubt, wish to argue this specific point further.
The 4 pence payments
50.	I have, to date, not identified this issue. Somewhat hidden in the Amended Particulars of Claim is the allegation that certain sums payable to ILL from the sale of timeshare points (at the rate of 4 pence per point - hence “the 4 pence payments”) were, in February 2003, by agreement between Citibid and ILL assigned to Citibid by way of security. Whilst there was no specific plea of loss in respect of the 4 pence payments in paragraph 26 of the Amended Particulars of Claim, it was common ground before me that because of this assignment Citibid’s claims in respect of the 4 pence payments should not be struck out (and the appeal should be allowed to this extent) because the cause of action in respect of these payments was vested solely in Citibid. For this reason also the appeal is allowed so far as the appeal relates to the 4 pence payments. Again in fairness to the District Judge it should be pointed out that it was not argued before him that the strike out application should fail in respect of the 4 pence payments because the entitlement thereto had been assigned by ILL to Citibid.
Conclusion
51.	Accordingly, Citibid’s appeal is allowed.
52.	However, and whilst Mr Kent’s Application Notice did not seek to strike out the claims of ILL, I cannot ignore the logic of my judgment and the fact that ILL would only have entitlement to the loss claimed by it to the extent that such loss exceeded the sums secured by the debenture. That seems an unreal possibility. I am not prepared, in exercise of my case management powers, to allow this action (or these two actions) to stagger on with ILL’s claims formulated as they are at present. I will allow a reasonable interval from circulation of this draft judgment to the date of hand-down for Mr Fowler, and the solicitors for Citibid and ILL to consider, carefully, what amendments they might wish to make to the Amended Particulars of Claim so far as the same address ILL’s claims. But, on hand-down, I will wish to exercise my case management powers, in accordance with any submissions I hear, over ILL’s pleaded claims.