318 May 2017 Butterworths Journal of International Banking and Financial Law

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Cases Analysis

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.

COMMENTIssue (i) had provided the basis for the 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. It was entirely different from, say, a disappointed seller who mitigates the lost sale by selling to a third party. Here it was as if the original buyer had paid for the goods. 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 therefore be 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:

“ ... 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. In his words at the trial before Rose J:

“It should be obvious from what I have said … that there was no intention on my part or Swynson’s part to relieve HMT from any liability due to the refinancing exercise. As far as I was concerned the claim against HMT remained unaffected by this refinancing and was of no concern of theirs. As between me and Swynson the consideration of who technically would be entitled to recover the money from HMT did not matter as I was the owner of Swynson, but it was implicitly understood that the recovery would be held pro-rata according to the unpaid lending advanced.”

The Supreme Court allowed the accountants’ appeal. Contrary to what Mr Hunt thought, it did matter “who technically would be entitled to recover the money”: because Swynson had been repaid by EMSL there was no loss to Swynson. Whether Mr Hunt was out of pocket was irrelevant because 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. n