Reflecting On Losses

Most lawyers practising in common law jurisdictions will be familiar with the rule in Foss v. Harbottle (1843) 2 Hare 461. The rule provides that the proper plaintiff in an action for a loss suffered through a wrong done to a company will normally be the company itself, not its shareholders. This rule, which forms part of Jersey law, is often referred to as the reflective loss principle.

A number of exceptions have been developed by the courts in relation to the reflective loss principle but those exceptions are limited in their effect. The starting point is, therefore, that a shareholder cannot generally sue for a loss suffered by the company even though the effect of this might have been to reduce the value of the shares owned by that shareholder.

In the recent case of Freeman v. Ansbacher Trustees (Jersey) Limited [2009] JRC003, the Royal Court was required to consider the application of the reflective loss principle in the case of a company which was a wholly owned asset of a Jersey discretionary trust (the "Trust"). The court was asked to consider this issue in the context of an application by the trustee, Ansbacher, to strike out the plaintiffs' pleaded case. The plaintiffs in this case were beneficiaries of the Trust. The strike out application was brought on a number of bases, including that the pleaded case offended the reflective loss principle. This was the first time the Royal Court had been called upon to consider this issue.

Conventional Discretionary Settlement

The facts in Freeman v. Ansbacher can be stated relatively shortly. Ansbacher had been appointed as the original trustee of the Trust which had been established in 1978. The Trust was a conventional discretionary settlement. In common with many trusts, trading and investment activities on behalf of the Trust were undertaken principally through a company which was a wholly owned asset of the Trust.

In this case the company was a Jersey registered company called S.D. & R. Trading Limited ("SDR"). The beneficiaries were asserting various breaches of trust on the part of Ansbacher which had allegedly resulted in losses to SDR and, through the interest of the Trust in SDR, to the assets of the Trust. In essence, the claim was that there had been a failure on the part of Ansbacher as trustee to ensure that its employees (who were directors of SDR) managed the investments of SDR prudently.

Ansbacher's strike out application proceeded on the basis that because the losses which...