• In Allianz Global Investors v Barclays Bank et al. [2022] EWCA Civ 353, the English Court of Appeal considered the question of whether, if a fund has a recoverable loss, it is capable of being reduced by reason of redemption payments struck at the lower NAV.
• After all, the NAV reflects the profit or loss suffered by a fund and, once it is struck, that is the value used to pay out redeeming investors.
• Notwithstanding, the court ruled that the benefit to the fund should be characterised in law as a collateral benefit, which the law treats as not making good a claimant’s loss.
• It remains to be seen whether the decision will be appealed to the Supreme Court.

Background

Various claimant funds (the “Funds”) brought claims against Barclays Bank and other banks (the “Banks”) for damages in connection with the alleged manipulation of the FX markets to the claimants’ detriment between 2003 and 2013. The Banks argued, inter alia, that the Funds avoided or “passed on” losses incurred to the extent that investors in the Funds subsequently redeemed or withdrew their investment at a net asset value (“NAV”) which was lower than it would have been but for the alleged infringements.

Reflective loss

• By way of strike out application, the Funds had contended, inter alia, that to the extent that an investor suffers a diminution in the value of its investment by virtue of the alleged wrong committed against a Fund, the investor does not have standing to sue for such diminution by virtue of the rule against reflective loss applying to shareholders of companies (and similar principles where the funds were trusts and partnerships).
• The Banks initially argued that the reflective loss principle does not apply to former shareholders, beneficiaries or partners. The judge at first instance, Sir Nigel Teare, made an order dismissing the Funds’ application.
• On the Funds’ appeal, the Banks modified their arguments following the decision in Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22. Primeo had decided that a shareholder who suffers a loss in the form of a diminution of value of its shareholding which is not recoverable as a result of the application of the reflective loss rule cannot later convert that loss into one which is recoverable simply by selling its shareholding.
• The Banks attempted to distinguish Primeo on the basis that a redemption affects the company’s balance sheet, while a sale does not. The Court of Appeal rejected the attempt to distinguish Primeo.
• The Court of Appeal also considered that issues as to reflective loss and title to sue were not directly relevant to the issue of whether the Funds’ losses have been reduced by reason of the fact that they paid less to investors who redeemed their investments.

Collateral benefit

• The general rule is that loss which has been avoided is not recoverable as damages. An exception is for collateral payments, which the law treats as not making good the claimant’s loss.
• On the question of whether the offsetting redemptions could operate to reduce the alleged recoverable loss, the court ruled that the benefit to the fund should be characterised in law as a collateral benefit.
• In establishing whether a benefit is collateral, the critical factor is whether is arises independently of the circumstances giving rise to the loss: Swynson Ltd v Lowick Rose LLP [2017] UKSC 32.
• Philips LJ considered that the redemption transactions were collateral because redemptions are usually the product of pre-existing rights and are entirely independent of the wrongdoings. Further, the court reasoned, redemptions are not entered in the course of a fund’s investment businesses, let alone consequent on (or by way of mitigation of) the alleged wrongdoing.
• It appears that policy considerations also guided the court, as the ultimate conclusion of the Banks’ argument must be that a Fund cannot itself suffer any recoverable loss because that loss will inevitably, in the end, be avoided when the assets are distributed.
• The Court of Appeal was also concerned that acceding to the Banks’ argument would require a negation of the corporate entity doctrine, treating losses as suffered by the ultimate investors rather than by the entity which has been established as the vehicle for the investments.

Discussion

• There may be circumstances in which a loss at investment portfolio level and an investor redemption are causally and transactionally connected. Notwithstanding that a redemption or withdrawal right attaches to the investment, it is the timing and motivation for exercise that affects its nature. For example, sustained losses reported in a NAV statement may trigger a return of capital by the fund itself through mandatory redemptions. This may be distinguishable from a redemption initiated by an investor. Similarly, an investor may submit a redemption request precisely because of a loss, even if recoverable in the future. This happened a lot in 2008 where funds has exposure to Lehman.
• The ‘corporate entity’ also warrants further consideration. The tension here is between the undoubted legal substance of the company and the economic substance whereby losses at fund level are ultimately for investors. In Re Polly Peck International plc [1996] BCC 486, not cited in argument, the issue was whether or not to disregard the corporate personality of an offshore subsidiary used to issue bonds in the capital markets and then on-lend the proceeds to the parent. Jurisprudence on corporate personality has developed since then, but the important point is that the judge favoured legal substance over economic substance.
• The object of the exercise here is different. It is not to establish whether the corporate personality should be disregarded. The object is simply to establish whether debits and credits are causally and transactionally linked. In much the same way as a tracing exercise is not necessarily frustrated when tracing through an overdrawn account, this exercise should not require that the exercise is frustrated when it encounters a corporate veil. 
• This is an important case for funds offering liquidity through redemptions or withdrawals. None of these points were made by the Banks which instead argued a point which was “not directly relevant”. It remains to be seen whether the decision will be appealed to the Supreme Court and, if so, what arguments will be made.

If you wish to discuss this topic in more detail, please contact your relationship partner or Dan Harris at daniel.harris@chanceryadvisors.com.

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