According to the Financial Times “…the gap between the number of businesses and babies being created in Britain is shrinking fast. There were 608,000 start-ups in 2015…an increase of almost 5% on 2014. The same year 770,000 British babies were born, an annual drop of 6,000. If corporate Britain continues to spawn with such promiscuous abandon and biological Britain continues to dwindle, we should expect business births to overtake human births by 2020.” (Weekend FT 8/9 April 2017).

The growth in corporate Britain has been fueled by the growth of self-employment and the preference of many erstwhile sole traders to incorporate as limited companies through which to conduct their business. Incorporation provides many perceived benefits over the sole trader, such as limitation of liability and preferential rates of tax. But the benefits may come at a price to those who ignore the fact that the owner of a company is a separate legal entity from the company itself. Lowick Rose v Swynsonis an appeal heard by the Supreme Court which provides a stark reminder that businessmen who treat the company as being synonymous with themselves do so at their own risk.

The detailed facts are at Rose J [3]-[22] ([2014] EWHC 2085 (Ch); [2014] P.N.L.R 27.

In brief, Swynson’s owner, Mr. Hunt, had caused it to advance funds to a company (“EMSL”) to facilitate a management buy-out. The loan was premised on negligent advice given to Swynson by accountants (now Lowick Rose) about EMSL. EMSL entered financial difficulties and a refinancing was organised whereby Mr. Hunt personally advanced loans to EMSL which enabled it to repay its debt to Swynson. However, EMSL was unable to repay Mr. Hunt. Swynson and Mr Hunt sought damages from the accountants in respect of the unpaid debt. Rose J held that although the loan from Swynson to EMSL had been repaid, there was a recoverable loss by Swynson of the value of the loan. In short, the repayment of what would otherwise have been a worthless loan (by Mr. Hunt) was ignored. On the facts, Rose J found the repayment to have been res inter alios acta and therefore irrelevant in law to the question of loss.

The Court of Appeal ([2015] EWCA Civ 629; [2016] 1 WLR 1045) upheld Rose J.

There were three issues for the Supreme Court: (1) res inter alios acta (was the benefit of EMSL’s payment to Swynson collateral and not to be taken into account?); (2) transferred loss (could Swynson recover for Mr. Hunt’s loss?); (3) unjust enrichment (could Mr. Hunt stand in the shoes of Swynson by way of equitablesubrogation?).

As to (1), the fact of repayment meant that there was no loss and that the question of whether the receipt was collateral could not and did not arise.

As to (2), the Court held that the principle cannot apply in circumstances where the engagement in question (the contract between the accountants and Swynson) was not designed to benefit the person who actually suffered the loss; i.e. Mr Hunt.

As to (3), the equitable subrogation of Mr Hunt to Swynson’s claim was not possible where the enrichment of the accountants as a result of the discharge of EMSL’s debt to Swynson – even if at Mr. Hunt’s expense (an issue upon which the Court was not entirely at one) – was not unjust. True, Mr. Hunt had made a mistake in assuming the refinancing would not affect his or Swynson’s claim against the accountants but there was no defective transfer of value and so no part for equitable subrogation to play – Mr. Hunt had wanted EMSL’s debt to Swynson discharged and that was what he got. He also gained personal rights against EMSL as a creditor (albeit unhelpful ones). Because there was no loss to Swynson, there was nothing for Mr Hunt to recover when standing in their shoes.

Issue (1) had provided the basis for decision in the Courts below and received close attention in the Supreme Court. The argument had been put in terms of mitigation, but as the Supreme Court recognised, the refinancing was not an act of mitigation at all. Swynson never suffered a loss to mitigate, because EMSL had repaid the loan. The repayment by EMSL was not collateral at all. It was instead central to the prior question of what loss (if any) had been suffered. It is only if there is a loss that questions of mitigation arise (including whether or not an alleged receipt by the innocent party is collateral and should tbe ignored in the assessment of the damages).

Lord Sumption recognised at [11] that ‘the general rule is that loss which has been avoided is not recoverable as damages, although expense reasonably incurred in avoiding it may be recoverable as costs of mitigation’. His Lordship then noted the exceptions for collateral (res inter alios acta) payments, noting ‘in spite of what the latin tag might lead one to expect, the critical factor is not the source of the benefit in a third party but its character. Broadly speaking, collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss’.

Lord Mance likewise emphasised (at [47]) that what one is concerned with is the ‘intrinsic nature’ of the receipt in question. In Swynson, the ‘intrinsic nature’ of Sywnson’s receipt was a repayment of the loan under and by virtue of which the loss had been incurred. Lord Mance went on at [49] to explain: ‘there is all the difference between a benevolent act which benefits a claimant (here Swynson) collaterally in an amount equivalent to a loss which it has incurred [which would not fall to be taken into account] and satisfaction of the claimant Swynson’s loss, by Mr Hunt’s funding of EMSL to repay Swynson.’ Lord Neuberger made a similar point at [99].

The end result is that the accountants do not have to pay damages because the loss resulting from their negligence was sustained by a third party (Mr Hunt) to whom they owed no duty. This appears to have been an unintended consequence of Mr Hunt’s apparent failure to appreciate the difference in law between himself and his companies. Mr Hunt had no intention of benefiting his former accountants. As he had made clear at the trial before Rose J, as between him and Swynson, little or no consideration was given to who would technically be able to recover from the accountants because, as he was the owner of Swynson, that did not matter.

The Supreme Court allowed the accountants’ appeal. Contrary to what Mr Hunt thought, it did matter who was entitled to recover. It was Swyson who would have been entitled to recover from the accountants because it was Swynson to whom EMSL owed the money and Swynson who would have suffered loss (it was also held by Rose J and not appealed that the accountants did not owe a duty of care to Mr. Hunt, just Swynson, which is why it was Swynson’s loss pursuant to their cause of action with which the appellate courts were concerned). But Swynson had been repaid by EMSL so that there was no actual loss to Swynson. Whether Mr Hunt was out of pocket was irrelevant: he was not Swynson. The fact that he was the owner of Swynson was also, and again contrary to his belief, irrelevant.

As Lord Sumption pointed out “[1] The 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 from themselves. Mr Michael Hunt is not the first businessman to make that mistake, and doubtless he will not be the last.”

The result in Swynson stands as a lesson to the growing ranks of the newly incorporated (and their advisers) to ensure that this distinction is kept in mind at all times.

The argument in Swynson was heard at the same time as the argument in The New Flamenco,

The issue in The New Flamenco is: What is the correct measure of shipowners' damages following acceptance of a charterers' repudiatory breach of charter? In particular, can a "benefit", said to consist in the avoidance of a fall in the capital value of the ship over the unexpired balance of the charter period because of the vessel's sale shortly after the repudiation, be set off against owners' claim to recover loss of earnings for that period?

In The New Flamenco Tom and Will were led by former head of Stone Chambers Steven Gee Q.C. of JHA. The judgment in The New Flamenco is yet to be delivered.