On 11 April 2017, the Supreme Court handed down judgment in Lowick Rose LLP (in liquidation) v Swynson Limited. The case considers when a benefit received by a claimant makes good its loss, and when it is treated as a “collateral payment” i.e. a benefit which arises independently of the circumstances giving rise to a loss.

The Court of Appeal’s decision was a controversial one. The claimant, Swynson, recovered from its reporting accountants, Lowick Rose, losses flowing from a negligent due diligence report in circumstances where the loan advanced on the strength of the report had in fact been repaid through a refinancing.

The Court of Appeal’s decision put to one side the corporate structure involved, essentially for policy reasons. It treated the repayment of the loan as having no impact on Swynson’s claim against the accountants since the funds had come from Swynson’s beneficial owner (who had separately provided the funds for the refinancing).

Helpfully, the Supreme Court has overturned the Court of Appeal judgment. It has stressed the importance of normal principles of recovery of loss and the accounting for benefits. Lord Sumption noted that justice, reasonableness and public policy “are not a licence for discarding those principles and deciding each case on what may be regarded as its broader commercial merits.” The short point, he said, was that the repayment of the loans could not be treated as discharging them as between lender and borrower, but not as between lender and its reporting accountant.

Issues concerning the proper treatment of benefits accruing a claimant can crop up in a wide variety of circumstances. It is an issue we have considered recently in trading loss audit claims where there is an argument that a subsequent rights issue (which would not have occurred but for the continued trading) reduces the claimable loss.

The Supreme Court’s decision is important for claimants and defendants alike. There is a further Supreme Court decision on this topic, Fulton Shipping, which is expected shortly. We previously wrote an article on the Court of Appeal decision in Fulton Shipping.

The background

Swynson was controlled and beneficially owned by Michael Hunt. In October 2006, Swynson lent £15m to a company called Evo Medical Solutions Limited (“EMSL“) to enable a management buy-out of another company, Evo. In advancing the loan, Swynson relied on a due diligence report prepared by firm of accountants, Hurst, Morrison Thomson (“HMT“) (HMT later changed its name to Lowick Rose LLP).

In July 2007, Evo was at risk of collapse without a substantial cash injection. To protect the original investment, Mr Hunt caused Swynson to lend a further £1.75m to EMSL. Swynson later made a further loan of £3m to prop up EMSL in June 2008, as part of a larger transaction through which Mr Hunt gained 85% of the equity in EMSL.

Later in 2008, the 2006 and 2007 loans were refinanced when EMSL and Mr Hunt entered into a loan agreement whereby Mr Hunt made available to EMSL over £18 million on the basis the funds would be used to repay Swynson, leaving only the 2008 loan outstanding.

In 2012, Swynson commenced proceedings against HMT seeking to recover the full amount of the 2006, 2007 and 2008 loans, despite having received repayment of the earlier loans. It was common ground that HMT’s report had been prepared negligently, and so the only issue to be determined was damages. HMT argued that that it could only be liable for the amount of the 2008 loan because EMSL had repaid the 2006 and 2007 loans.

At first instance, Rose J held that that repayment was collateral to the loss caused by HMT’s breach of duty and did not extinguish Swynson’s loss in respect of the 2006 and 2007 loans.

The Court of Appeal (by a majority) agreed with Rose J. The court considered that had Mr Hunt given the amounts of the 2006 and 2007 loans to Swynson (so that Swynson could balance its books) no one could sensibly suggest that any such payment should have any effect on the damages recoverable from the negligent adviser. To hold that a different result should occur merely because the payment was made through EMSL would be a triumph of form over substance.

The Supreme Court judgment

The Supreme Court unanimously allowed HMT’s appeal. Lord Sumption opened the leading judgment with a concise précis of the issue:

“[t]he distinct legal personality of companies has been a fundamental feature of English commercial law for a century and a half, but that has never stopped businessmen from treating their companies as indistinguishable as themselves. Mr Hunt is not the first businessman to make that mistake, and doubtless he will not be the last.”

Three issues were argued before the Supreme Court:

  • Whether judge at first instance was right to find that repayment was collateral to the loss caused by HMT’s breach of duty and did not extinguish Swynson’s loss in respect of the 2006 and 2007 loans;
  • Whether Swynson was entitled to recover on the principle of transferred loss; and

The Supreme Court found against Swynson on each of the issues.

The payment made by Mr Hunt to EMSL through the refinancing, and the payment made by EMSL to Swynson to pay off the 2006 and 2007 loans, could not be regarded as collateral since they were not independent of the circumstances giving rise to the loss. Lord Sumption gave the following reasons:

  • First, the transaction discharged the very liability whose existence represented Swynson’s loss;
  • Secondly, the money Mr Hunt lent to EMSL in December 2008 was not an indirect payment to Swynson, even though it ultimately reached them. Mr Hunt’s agreement to make that loan and the earlier agreements of Swynson to lend money to EMSL were distinct transactions between different parties, each made for valuable consideration; and
  • Thirdly, the consequences of refinancing could not be recoverable as the cost of mitigation, because the loan to EMSL was not an act of Swynson and was not attributable to HMT’s breach of duty.

The argument on transferred loss – that Swynson could sue for Mr Hunt’s loss - did not arise since it was no part of the accountants’ engagement to benefit Mr Hunt; it was common ground that they owed him no duty.

As to the final point, HMT was not unjustly enriched by Mr Hunt’s indirect repayment of the loan to Swynson. The law of unjust enrichment was about correcting defective transactions; but here, the transactions achieved what they intended to do, namely repayment of the loans.

There is little doubt that Mr Hunt made a mistake in failing to appreciate that the repayment of the Swynson loans meant that those same sums could not be recovered from the accountants. But repayment meant that Swynson’s loss had been avoided.

The judgment seems to us a helpful one: the legal form of transactions is important and cannot readily be trumped by broad policy arguments. As Lord Neuberger commented, “[t]he fact that a transaction could have been differently arranged does not mean that it must have the same consequences as if it had been differently arranged.”