The Commercial Court held that where a company had entered into interest rate hedging products with a bank, the company’s sole shareholder and director could not bring a claim for loss said to have been suffered as a private person as a result of breach of the conduct of business rules under s138D Financial Services and Markets Act 2000 (FSMA).

Mr Sivagnanam was the sole shareholder and director of a company (the Company) that had purchased three interest-rate hedging products (the Transactions) from Barclays Bank plc  (Barclays) in 2006, 2007 and 2008. Following a review of the Transactions by the FSA, the Company accepted a full and final settlement of any claim howsoever arising in return for £2.4m. Barclays paid this compensation pursuant to a redress scheme.

Mr Sivagnanam then brought proceedings alleging that as a private person he had suffered loss as a result of Barclays’ contravention of the relevant conduct of business rules within s138D FSMA. The definition of “private person” in reg 3 FSMA (Rights of Action) Regulations 2001  (the Regulations) includes an individual, unless he suffered the loss in question in the course of carrying on a regulated activity, and a person who was not an individual, unless he suffered the loss in question in the course of carrying on business of any kind.

Barclays applied for summary judgment or to strike out the claim, arguing that Mr Sivagnanam was not within the class of persons intended to have a right of action under the relevant statutory provisions; alternatively that the claim was barred as merely reflective of the Company’s loss.

Cooke J granted summary judgment in favour of Barclays. Firstly:

  • every alleged breach of FSMA was clearly pleaded by reference to the position of the Company, which was the client or customer. It was clear that the rules protected customers who were private persons and not their shareholders. No breach of duty towards Mr Sivagnanam was pleaded and no duty was owed to him; the only plea relating to Mr Sivagnanam was that Barclays had required him to inject money into the Company and put up security
  • the court accepted Barclay’s submission that Mr Sivagnanam had to be within the category of person which the rule, as a matter of interpretation, was intended to protect. Mr Sivagnanam was not within that category. It was not necessary to consider whether the Company had a claim under FSMA or whether Mr Sivagnanam had a common law claim
  • furthermore, the conclusion that Mr Sivagnanam had no cause of action because he was not within the class intended to be protected was in accordance with authority under the previous regulatory regime. The claim had no real prospect of success and Barclays was entitled to summary judgment.

Secondly, the court considered the rule against reflective loss:

  • the claim fell foul of the principle that a shareholder cannot recover loss that is merely reflective of a company’s loss if the company could, itself, put forward a claim for that loss. If  a defendant wrongdoer owes duties to both a company and a shareholder, it is irrelevant that the duties owed might be different in content if the loss is merely reflective
  • it was clear from the pleadings that the alleged breaches were in respect of duties owed to the Company, and that it was the Company that had been deprived of moneys which it would have used as shareholders’ funds to pay dividends or repay loans. Therefore, the loss was the Company’s loss which was reflected in a reduced ability to make payments to Mr Sivagnanam or in a reduced value of his interest
  • the Company was not a private person for the purposes of s138D FSMA and it had no common law claim. However, it had received compensation for any rights that it might have had and it could not be said that it had not had a claim with no reasonable prospect of success. That conclusion was consistent with two purposes of the rule against reflective loss: to prevent double recovery and to preserve the autonomy of the Company for the benefit of creditors, employees and shareholders.

This decision reinforces the restrictive approach to the definition of “private person” under the Regulations, holding that the definition does not cover the sole shareholder and director of a company as that is not a category of person which the rule was intended to protect. However, with the appeal of MTR Bailey Trading Ltd v Barclays Bank plc8  pending, and the recent decision in Suremime Ltd v Barclays Bank plc9 (the former on the scope of s138D FSMA as it applies to companies, and the latter on a tortious claim to run parallel to s138D FSMA for corporate claimants – click here for further detail), this is a developing area to watch.