Following a number of recent cases relating to the mis-selling of interest rate hedging products, Suresh Sivagnanam v Barclays Bank plc  EWHC 3985 (Comm) is another judgment which is likely to be received favourably by financial institutions.
The mis-selling claim, which was brought against a financial institution by a sole shareholder of a company, has failed at the summary judgment stage. The High Court relied on two grounds to find that the claim had no real prospect of success:
- Section 138D of the Financial Services and Markets Act (“FSMA”) (which provides a basis for bringing a claim for breach of statutory duty) is only intended to protect customers who constitute private persons to whom a duty is owed (i.e. customers of the relevant financial institution); and
- The well established company law principle that a shareholder cannot bring a claim for reflective loss.
The sensible approach of the Court to the interpretation of section 138D FSMA will be welcomed by financial institutions. This is particularly so against a backdrop of various attempts by claimants to widen the scope of this statutory provision by extending the definition of “private persons” to include corporate entities. See our e-bulletin on Thornbridge Limited v Barclays Bank plc  EWHC 3430 (QB), for our most recent discussion of this trend. In that case, the defendant bank successfully argued that the corporate entity was not entitled to claim for breach of section 138D FSMA as it was clearly acting “in the course of carrying on business” and therefore did not qualify as a "private person."
The Claimant was the sole shareholder of a company, “WHL”. WHL had entered into three interest rate hedging products with Barclays Bank (the “Bank”) between 2006 and 2008 (the “IRHPs”).
In 2010, WHL and the Bank entered into a written compromise agreement in respect of the IRHPs. Subsequently, in 2015, there was a further review of the Bank’s past sales of hedging products pursuant to an agreement made with the Financial Services Authority (as it then was). At this time, the Bank and WHL entered into a “full and final settlement” of WHL’s claims. The settlement agreement was signed on behalf of WHL by the Claimant in his capacity as sole director, in accordance with which WHL was paid the sum of over £2 million.
The Claimant then sought to bring a claim under section 138D FSMA for alleged losses he had personally suffered as a result of the Bank’s breach of statutory duties (namely the COB and COBS rules, being the regulatory rules covering the period during which the IRHPs were sold to WHL). The Bank issued an application for strike out or summary judgment.
In a short judgment, the Court granted the Bank’s application for summary judgment, stating it was “entirely satisfied” that there were no realistic prospects of success on the claim and no other compelling reason why the matter should go to trial. The Court set out two principal bases for rejecting the claim as put, which are considered in further detail below.
(a) “Private persons” are persons to whom a duty is owed
The Court considered whether the Claimant was a “private person” within the meaning of section 138D FSMA. It held it was “clear beyond argument” that this provision was only designed to protect customers who constituted private persons to whom a duty was owed (i.e. customers of the Bank). This did not include shareholders of those customers, such as the Claimant.
The Court highlighted a fundamental point in relation to questions of statutory duty - that the person bringing the claim must be a person whom Parliament intended to protect under the provision. The regulatory rules on which the Claimant relied were all specifically aimed at customers of the relevant financial institutions. The point was “made good” simply by reference to the Particulars of Claim. These stated that WHL was a private customer of the Bank within the meaning of COB and later COBS. They went on to allege various breaches of these regulatory rules, all of which were pleaded with reference to the position of WHL, not the Claimant.
The Claimant argued that the Bank had required him to inject further personal money into WHL and to provide further security in the form of personal guarantees and charges over personally owned property. However, the Court found that this was not sufficient to amount to a breach of duty on the part of the Bank under the regulatory rules or FSMA. The Claimant, who chose to invest in a corporate vehicle, could not pierce veil of his own company.
(b) No claim for reflective loss
The Court held that the Claimant’s losses were irrecoverable since they were clearly reflective of WHL’s losses.
The Court reaffirmed the principle that a shareholder of a company cannot sue to recover reflective loss, i.e. loss suffered by the company, which the company could claim for in its own right. Following Gardner v Parker  EWCA Civ 781, the irrecoverable reflective loss is not confined to the individual claimant’s loss of dividends on shares or diminution in value of his shareholding. It further extends to all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds.
The Claimant argued that it had not been established that WHL itself could make its own claim against Barclays. The difficulty which that argument faced was the fact that WHL had reached a settlement with the Bank as part of its voluntary redress procedure. That redress was paid in the sum of nearly £2.4 million and it was “perfectly clear” that the basis of the compensation being made was in respect of any advice that WHL might have had in relation to the sale of the IRHPs. To allow the Claimant to bring this claim would be to permit double recovery.
This decision ought to give comfort to financial and other institutions that operate redress schemes. The Court has sought to place sensible limits on how section 138D FSMA can be used by claimants. The established principle of reflective loss should also discourage shareholders from making similar claims.