In Latin American Investments Ltd v Maroil Trading Inc and another, the High Court ordered the continuation of a freezing injunction after deciding that a shareholder’s claim for specific performance and payment of damages to two joint venture companies did not infringe the “reflective loss” principle, which precludes a shareholder from recovering loss that reflects the loss sustained by the company.
Oceanic Trans Shipping Est (“OTS”), the Part 20 Claimant, was a shareholder in two joint venture companies (the “JV Companies”), along with the claimant in the main action, and the first defendant, Maroil Trading Inc (“MTI”). The JV Companies owned two oil ships that were made available to the Second Defendant, Sea Pioneer Shipping Corporation (“SPSC”), under the terms of two shareholders’ agreements.
SPSC had entered into a contract for affreightment (“COA”) and assigned its rights in the COA to the JV Companies. The JV Companies became involved in a dispute with the counterparty to the COA. MTI and SPSC settled the disputes without involving OTS, and OTS alleged that the settlement sum was substantially less than that which the claim ought to have been settled for. OTS brought a Part 20 claim against MTI and SPSC to recover the undervalue of the settlement sum, plus its share of a sum paid under a commission agreement relating to the settlement. The remedy sought by OTS was an order to compel MTI and SPSC to pay the amounts claimed to the JV Companies.
The key issue before the court was whether OTS’s claim infringed the “reflective loss” principle in Johnson v Gore Wood  2 AC 1, which does not allow a shareholder to recover loss that merely reflects the loss suffered by the company.
The reflective loss principle
The court repeated the various propositions underpinning the reflective loss principle set out in Johnson, including the proposition that “where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity… to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company”.
The court found that OTS had its own cause of action against MTI and SPSC under the terms of the shareholders’ agreements. However, that would not be sufficient to enable OTS to sue for damages unless its loss was separate and distinct from the loss suffered by the JV Companies. OTS did not appear to dispute that the loss it claimed to have suffered reflected the loss of the JV Companies, but its position was that there is a good arguable case that the reflective loss principle does not prevent a shareholder with its own cause of action from seeking a remedy which requires payments to be restored to the company.
Did the remedy claimed by OTS breach the reflective loss principle?
The remedy that OTS had sought was an order for specific performance, which would require MTI and SPSC to restore the payments to the JV Companies. Noting that an order for specific performance is an order to enforce a contractual obligation by way of a mandatory injunction, the court applied another case in which it had been decided that an injunction to retransfer shares to a company did not breach the reflective loss principle (Peak Hotels and Resorts Limited v Tarek Investments Limited and others  EWHC 3048 (Ch)). Just as that injunction had not infringed the reflective loss principle, the court considered that an order for specific performance of obligations owed to the JV Companies did not appear to fall foul of the principle either.
Was the remedy for specific performance?
The court then had to consider whether the remedy sought by OTS was in truth a remedy of specific performance. What OTS had actually sought was (1) a commission payment of $10m to the JV Companies, and (2) payment of equitable compensation and/or damages to the JV Companies in respect of the undervalue at which MTI and SPSC had settled the disputes under the COA. The court considered that the latter appeared to constitute an order for damages, not specific performance. Nevertheless, the court found that the remedy of damages should also be available to OTS if it did not breach the reflective loss principle.
It was decided that neither remedy sought by OTS appeared to breach the reflective loss principle, because in each case: (1) the orders were consistent with the principle of company autonomy (because the orders were for the payments to be made to the JV Companies, rather than OTS, the shareholder); (2) the orders do not prejudice the creditors of the JV Companies (because the payments would be made to them); and (3) the orders do not enable OTS to recover compensation for a loss suffered by the JV Companies (because the compensation is payable to the JV Companies).
Although freezing injunctions can only be made in support of anticipated money judgments, the court held that the orders for the payment of sums by MTI and SPSC to the JV Companies appeared to be money judgments for the purposes of freezing injunction relief, even though they did not require any sum to be paid to OTS.
The court held that there was a good arguable case that OTS’s pleaded case and the remedies it sought were not caught by the reflective loss principle, and the court ordered the freezing injunction to continue until trial.