In Allianz Global Investors GmbH & Ors v Barclays Bank PLC & Ors(1), the Court of Appeal allowed an appeal by the plaintiff funds (the Funds) and quashed the defenses of the defendant banks (the Banks) that the losses suffered by the Funds had been avoided or passed on when redeemed by their investors.

The Court of Appeal held that the appropriate claimants at all times were the Funds, both before and after any redemption, whether structured as a corporation, trust or partnership. Redemptions by investors also did not avoid the loss of the Sub-Funds, as they constituted a collateral benefit and are therefore not treated as offsetting the loss of the Sub-Funds.

Facts

The appeal stemmed from claims by more than 170 plaintiff funds for damages resulting from alleged “illegal and anti-competitive manipulation of foreign exchange (FX) markets” by the banks. The claims related to the breach of the legal obligation of Article 101 TFEU²and Section 2 of the Competition Act 1998. The funds were made up of companies, trusts and partnerships.

The banks denied liability and argued, in the alternative, that liability would be avoided or transferred to the extent that an investor redeemed their investment in a Fund at a lower net asset value than would otherwise have been the case.

The Funds requested that this argument be struck out on the basis that it disclosed no reasonable grounds to defend the claim. The Funds argued that the appropriate claimant at all times was the investment fund – whether structured as a corporation, trust or partnership and regardless of redemptions.

The decision of the Court of Appeal

The Court of Appeal reversed the trial judge’s decision that:

• the general principles preventing current shareholders/beneficiaries/limited partners from suing for damages to the assets of the company/trust/partnership, did not prevent former shareholders, assigns or limited partners from suing for damages. redemption of their investment, where they had a separate cause of action;
• Article 101 TFEU and Article 2 of the Competition Act 1998 gave rise to a legal duty towards all individuals – including current/former shareholders, beneficiaries and partners; and

redemption of an investment at a lower net asset value crystallized the investor’s loss, giving rise to a separate right of claim against the banks – so it was arguable that the Funds had passed on those losses to the redeemed investor and that the Funds could therefore no longer claim these losses from the banks.

Companies

A shareholder cannot claim losses on the value of his shares, or distributions of his shares, resulting from damage to a company’s assets. These losses are not separate and distinct from the loss suffered by the company, and only the company is entitled to claim its loss. This is called the rule against claiming “loss of reflection”.³

At trial, the defendants successfully argued that this rule did not apply to former shareholders when redeeming their shares at a lower net asset value.

However, between the first instance and the Court of Appeal hearings, the Privy Council in Primeo Fund (in Official Liquidation) v Bank of Bermuda (Cayman) Ltd⁴ rejected the argument that the rule against claiming for thought loss did not apply to former shareholders who had sold their shares.

The banks sought to argue that the situation was different for investors who redeemed their shares, as this involved a payment by the Fund company to the investor, rather than shares being sold to a third party. The Court of Appeal rejected this distinction and held that the rule against reflecting loss extended to investors who redeemed their shares.

The Court of Appeal also considered the practical impact that the banks’ position might have on the quantification of corporate claims and the “chilling effect” it might have on the settlement of claims in circumstances where a shareholder could acquire a new independent right of claim against the same third party when redeeming his shares.

Trusts

The Court of Appeal upheld the principle that the trustee, not the beneficiary, of a trust has the right to sue for damages to the property of the trust⁵.

Accordingly, the Court of Appeal held that the legal obligation under Article 101 TFEU and Section 2 of the Competition Act 1998 was owed to the trustee of the funds, not the beneficiaries. The beneficiaries suffered no separate loss from the Fund at the time of the breach. The redemption of the beneficiary’s interest in the trust did not result in a separate loss.

Accordingly, the Court of Appeal held that any cause of action for damages to the trust belongs to the Trustee of the Fund and remains with the Fund upon redemption.

Partnerships

The Court of Appeal has taken a similar approach to partnerships:

• confirming principle in Certain Limited Partners in Henderson PFI Secondary Fund II LLP v Henderson⁶ that only the general partner can take legal action in the event of damage to a corporate asset;
• Whereas the legal obligation under Article 101 TFEU and Section 2 of the Competition Act 1998 is owed to the partnership and not to each limited partner; and
• rejecting the banks’ argument that a former limited partner suffered a separate loss and acquired its own stand-alone cause of action upon redemption.

Collateral advantage

Arguments before the trial judge focused on the issue of considered loss and the right to sue for redemption. However, the Court of Appeal emphasized that this does not determine whether the losses of the Funds were avoided or mitigated by the redemption.

The practical implications of this question were significant. If losses of the Funds were avoided on redemption:

• any claim for damages brought by a corporation, trust or partnership would potentially require investigation and assessment of each change in share capital, or beneficial interest or partnership, from the date at which the damage was suffered until judgment;
• in circumstances where investors do not acquire a right of claim upon redemption, banks would then potentially avoid liability for such losses; and
• many corporations, trustees or partnerships petitioners would likely have been overcompensated in the past.

The Court of Appeal held that the redemptions did not avoid or mitigate the losses of the Funds, as they constituted an ancillary benefit (or res inter alios acta). Apply the principles of Swynson Ltd v Lowick Rose LLP⁷ the Court of Appeal held that any benefit the Funds derived from redemptions at a lower net asset value arose independently of the loss of the Funds caused by the manipulation of exchange rates. Redemption rights were governed by separate agreements between the Funds and their investors regarding the constitutional and capital provisions of the Fund, which were entirely separate from foreign exchange transactions between the Funds and the banks.

Comment

The approach of the Court of Appeal is to be commended for avoiding the practical difficulties, costs and risks that could have arisen as a result of the approach advocated by the banks – in particular with regard to the quantification and/or the settlement of claims by corporations, trusts or partnerships, and the possible proliferation of separate claims by shareholders, beneficiaries and partners. For investors, the Court of Appeals ruling means that potential redemptions will need to be carefully considered, as it could leave the investor out of pocket when the fund has a valid claim against a third party.