Most serious investors in everything from ships to real estate to businesses act through the medium of ‘tame’ companies. They do this for very good reasons. However, the Supreme Court gave a salutary warning this morning that even the simplest structures of this kind can provide pitfalls for the unwary.
Slightly simplified, in Lowick Rose LLP (in liquidation) v Swynson Ltd [2017] UKSC 32 what happened was this. A wealthy investor H used a wholly-owned special purpose vehicle S Ltd to make a loan of £15 million to EMS Ltd to enable EMS to buy MIA Inc. Due diligence, or rather a lack of it, was provided by accountants HMT, who failed to notice glaring problems with MIA. The trouble quickly surfaced. As a damage limitation exercise H caused S to lend a further £1.75m to EMSL in 2007 and £3m in 2008, H at the same time obtaining a large holding in EMS. Things went from bad to worse, and in 2008 more refinancing was necessary. H personally lent EMS some £19 million, most of which went to pay off EMS’s borrowings from S, with the rest being new money. To no avail: MIA collapsed, and with it the whole house of cards.
H and S sued HMT for losses of some £16 million. At this point an awkwardness arose. HMT was held on the facts to have owed no duty to H. As regards S it admitted negligence, but argued that in so far as S’s loans to EMS had been paid off (by H) the loss was H’s and not S’s. Reversing the Court of Appeal, the Supreme Court decided for HMT. S had indeed suffered no loss. The loan by H to EMS to pay off S was not an unconnected benefit, so as to be regarded as res inter alios acta. Nor could S invoke transferred loss and the rule in Dunlop v Lambert (1839) 2 Cl & F 626; nor yet could H use the doctrine of subrogation to keep the loan from S to EMS alive and claim in the name of S.
A nice windfall for HMT’s professional indemnity insurers, and an unnecessary one. Had H lent the money to S for S to use to refinance EMS, there would have been no problem; H, through S, would have been £16 million to the good. But he hadn’t done that, and that was an end of the matter. As we said above, when using corporate structures any failure to take care to guard your back can be very costly.
Solicitors also note: you are now on notice. Since this decision, unless you take great care in advising on refinancing deals, the SIF is likely to have some less-than-kind words for you too.
In one of the chapters of her book ‘Company Law’ (in the series ‘Palgrave Great Debates in Law’) Lorraine Talbot examines the following proposition: “Shareholders are not the owners of the company because what they own is not the company”. Rather, “their claims are limited to a right to dividend if dividend is declared, a right to vote at general meeting and a right to any residual surplus upon liquidation”. Just for the fun of it, and at the risk of identifying possible differences between concurring judgments (which Lord Neuberger wanted to avoid with regard to a different point) I wondered if it would be possible to discern from the judgments, their Lordships’ stance on the above proposition. Lord Sumption finds Swynson Limited to be “a company controlled and beneficially owned by Mr Hunt”. Lord Neuberger found Mr Hunt to be “the controlling shareholder of Swynson”. I respectfully submit that these statements tend to support the proposition. Lord Mance, on the other hand, found that “Mr Hunt has at all material times owned and controlled ….Swynson Limited”. In the Court of Appeal Lord Justice Longmore found Swynson to be “owned indirectly by Mr Michael Hunt”. And in the High Court, Mrs Justice Rose said “Swynson Limited is a company owned indirectly by Mr Hunt”. But further down “……..the sole owner of a company (assuming that Mr Hunt was the sole direct owner of the shares in Swynson”.
Having started the exercise, I am now not sure if I am able to deduce the judges’ views on the proposition from these statements alone. Sometimes the ratio can be just as elusive. Luckily, nothing turns on this here.
Answers on a postcard please.