I. Executive Summary
When facing a diminution in the price of their shares or in the amount of distributions accruing from said shares (i.e. dividends), shareholders of a company may wish to bring claims against the party or parties who caused such loss. However, such claims are subject to the “no reflective loss” principle (also known as the “reflective loss principle”). The term stems from the fact that the law treats a shareholder’s loss as “merely reflective” of the company’s loss.
Complications have arisen in this respect, because two separate rationales have been proposed as support for this principle. One rationale is rooted in the specific sphere known as “company law”. Accordingly, where there is a diminution in the value of a shareholding or in distributions to shareholders that are merely the result of a loss suffered by the company arising from a wrong committed by the defendant, the proper party to bring a claim is the company and not the shareholder. This is because the law does not recognise such diminution in value or distributions as a loss suffered by the shareholders personally. The second rationale centres around the prevention of double recovery. Thus, a shareholder may bring a valid personal cause of action against a defendant, and the important issue there is to avoid double recovery. The tension between these two rationales, which was present in different prior cases, had the effect of diluting or undermining the effect and purpose of the reflective loss principle.
Fortunately, the recent case of Miao Weiguo v Tendcare Medical Group Holdings Pte Ltd and another  SGCA 116 has clarified that Singapore’s legal position on the reflective loss principle is based on the first rationale. The Court of Appeal (“CA”) decided that the reflective loss principle exists as a distinct and specific one under company law, and is not merely a particular manifestation of the general prohibition against double recovery. It arises from the unique status of a shareholder in relation to his company. Hence, when a wrong is done to the company which causes the company loss and also results in a diminution in the value of a shareholder’s shares or a reduction in distributions to him, the shareholder will not be able to maintain actions in the capacity of a shareholder for such losses. In doing so, the CA overturned a prior case, Townsing Henry George v Jenton Overseas Investment Pte Ltd (in liquidation)  2 SLR(R) 597 (“Townsing”).
The CA noted that while this position may cause some injustice in some situations, it avoided deconstructing an otherwise coherent and specific principle. This is especially because there remain effective legal mechanisms that would still afford a remedy to innocent parties.
II. Material Facts
Tendcare Medical Group Holdings Pte Ltd (“Tendcare”) was a Singapore investment holding company, which owned and operated hospitals and other medical-related businesses in Hong Kong and the People’s Republic of China (“PRC”). Tendcare brought a lawsuit against Miao Weiguo (“Miao”), the sole director and shareholder of Hui Xiang Group Pte Ltd (“HXG”) and Qian Hui Capital Ltd (“QHC”), for providing dishonest assistance to Tendcare’s director (and also another defendant), Gong Ruizhong (“Gong”), who had also allegedly breached his fiduciary duties to Tendcare for transferring funds out of Tendcare’s corporate group. The dispute at trial centred on the events surrounding Tendcare’s intended initial public offering (“the Tendcare IPO”), which ultimately did not take place.
The High Court (“HC”) found that Gong had breached his fiduciary duties to Tendcare by procuring two transfers of funds out of Tendcare’s account: (i) US$2m to Tendcare’s subsidiary, Tian Jian Hua Xia Medical Group (HK) Limited (“TJHK”), and then to QHC (the “US$2m Transfer”), and (ii) US$4m to TJHK and then to QHC (the “US$4m Transfer”). The HC also found Miao liable for providing dishonest assistance to Gong for these breaches, in part because part of the US$4m was transferred from QHC to Miao’s personal bank account, which money eventually found its way to Gong’s bank accounts. However, the HC did not address Miao’s argument that the reflective loss principle applied to bar Tendcare’s claim.
On appeal, Miao argued that Gong did not breach his fiduciary duties in respect of the US$2m Transfer (which breach was a prerequisite for Miao’s own liability); further, that Miao did not render dishonest assistance to Gong in respect of the US$2m Transfer and US$4m Transfer. He claimed, in part, that the US$2m had been lent by TJHK to QHC under a loan agreement (“US$2m QHC Loan”). For the US$4m Transfer, Miao claimed that the loan agreement in relation to this transfer (“US$4m QHC Loan”) was a sham conceived to get funds to Gong in the PRC for him to purchase hospitals in the country. Alternatively, he argued that the HC should have found that the reflective loss principle operated to preclude Tendcare’s claims. In response, Tendcare contended that the reflective loss principle did not apply, and even if it did, there was no concern over double recovery.
III. Issues on Appeal
The CA addressed two main issues:
(a) Did Miao provide dishonest assistance to Gong?
(b) If so, should Tendcare’s claim be barred by the reflective loss principle?
If Miao did not provide dishonest assistance, the second issue would not arise.
A. Did Miao provide dishonest assistance?
For there to be dishonest assistance, there are four requirements. First, there must exist a trust or fiduciary obligation; second, there must be a breach of trust or a fiduciary obligation; third, assistance must have been rendered for the breach; and fourth, the assistance must have been dishonest. Regarding the final aspect, the defendant must have had knowledge of the irregular shortcomings of the transaction, where ordinary honest people would consider it to be a breach of standards of honest conduct if he failed to adequately query them.
It was not disputed that, as its director, Gong owed fiduciary duties to Tendcare. Further, for Miao to be liable for providing dishonest assistance for Gong’s breach of fiduciary duties, Gong must also first have breached his fiduciary duties. Although Miao did not dispute that Gong’s procuring of the US$4m Transfer breached his fiduciary duties, Miao argued that Gong’s procuring of the US$2m Transfer did not breach his fiduciary duties.
US$2m Transfer. The CA held that Gong did breach his fiduciary duties by procuring the US$2m Transfer. This transfer amounted to a breach as it was contrary to Tendcare’s interests. The transfer also prevented Tendcare from recovering the funds.
However, the CA found it significant that the HC’s findings that Miao was not a party to the fraudulent trading scheme were not disputed on appeal. Tendcare could not prove that any amount was dishonestly retained by Miao. Tendcare also could not show that he was aware of the scheme or that certain other transfers (apart from the US$2m Transfer and US$4m Transfer) were not applied for their intended purpose. In other words, he was not kept apprised of the important matters relating to the Tendcare IPO that would have made him a party to the scheme. Further, the more reasonable inference from his falling out with others involved in the Tendcare IPO was that he was acting in opportunistic self-interest, and that certain agreements
that Tendcare and HXG had entered into were not just tools to siphon money. Finally, his mere involvement in a transfer was not sufficient to prove liability.
The CA found that even if parts of the US$2m Transfer may have raised questions, it had not been shown that Miao knew or believed that the US$2m QHC Loan was not genuine. First, he had testified that the US$2m was needed for QHC’s operations and expenses. This was consistent with the fact that it had not been shown that the US$2m flowed to Gong or his associates, and there was no evidence that any of the US$2m was retained by QHC or Miao. Second, there was no evidence that Miao had been approached to help Gong to transfer money out of Tendcare’s corporate group when the underlying US$2m loan was entered into. Third, the loan documentation itself suggested that the US$2m loan was a genuine one that was to be repaid. This is because the loan documentation consisted of both an initial loan agreement and a subsequent loan extension agreement, and it would not be clear what purpose the loan extension agreement would have served if the loan agreement was not genuine. Given the state of Miao’s knowledge, it was not possible to conclude that his participation in the transaction would offend ordinary standards of honesty. The CA therefore reversed the HC’s finding of Miao’s liability in relation to the US$2m Transfer.
US$4m Transfer. The CA affirmed that Miao was indeed liable for providing dishonest assistance to Gong in relation to the US$4m Transfer. First, it was common ground that Miao did not consider the US$4m QHC Loan to be a genuine loan agreement. Miao must have known that this US$4m was not for the business of Tendcare’s corporate group or the expenses of the IPO. Although Miao claimed he believed the moneys were being transferred into the PRC so that Tendcare could purchase hospitals, this was incredible as there were likely (other) proper channels for transfers of funds into the PRC. There was no explanation for why there was a need to circumvent fund transfer restrictions in the PRC. Furthermore, Miao was told that the transfers were for moneys to be sent to Gong’s personal bank account, rather than for the purchase of hospitals. In totality, the use of the sham loan agreement, Miao’s knowledge of the transfers, and the subsequent transfer of funds into companies related to Gong, meant that Miao knew that Tendcare’s moneys were being transferred for no legitimate purpose relating to its IPO.
Further: Miao had willingly let QHC’s and his own bank accounts be used for transferring significant sums of money, despite the absence of any apparently legitimate purpose for the transaction. A sham loan agreement was also
used to disguise the transaction. These were strongly suggestive of impropriety and offended ordinary standards of honesty.
B. Should Tendcare's claim be barred by the reflective loss principle
The CA first began with a summary of the relevant company law principles, and then discussed the historical development of the reflective loss principle, before finally determining the proper basis for the principle in Singapore.
(1) Relevant company law principles
A fundamental principle of modern company law is that a company is a distinct legal person that bears its own rights and liabilities. One implication is that a shareholder owns no interest in any of the company’s assets, simply through holding shares in the company. Another is that shareholders are not allowed to sue (or be sued) on behalf of the company. As such, company law is an area with its own particular set of problems and solutions that need to be borne in mind when the question of reflective loss is addressed.
(2) Historical development of the reflective loss principle
The CA observed that the reflective loss principle first emerged from the decision of the English Court of Appeal in Prudential Assurance Co Ltd v Newman Industries Ltd and others (No 2)  Ch 204 (“Prudential”). The court there decided that a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by a defendant, is not – in the eyes of the law – damage which is separate and distinct from the damage suffered by the company. Thus, such loss is not recoverable by the shareholders. Where there is no recoverable loss, it follows that the shareholder cannot bring a claim, whether or not the company pursues a cause of action against the defendant. The CA noted that this decision had no application to losses suffered by a shareholder which were distinct from the company’s loss or to situations where the company had no cause of action.
The CA also explained the latest development in this area in Marex Financial Ltd v Sevilleja (All Party Parliamentary Group on Fair Business Banking intervening)  AC 39 (“Marex”). In Marex, the seven members of the UK Supreme Court took two main positions. The majority agreed with the position in Prudential. It stressed that the reflective loss principle was a rule of company law and was limited to shareholders’ claims based on a diminution of the value of shares or distributions they receive as the result of actionable loss suffered by the company. It also accepted that the decline in value of shares may not reflect the loss suffered by the company, and that concerns of double recovery were separate and distinct, which could be deal with by other means. A concurring judgement, which supported the majority view, suggested that the basis of the rule was a principled one concerning the nature of shareholding: the various consequences, such as preventing double recovery and/or a scenario where shareholders competed to claim for priority over creditors in the case of insolvency, were merely salutary consequences of the rule.
In contrast, the minority’s position was that the principle of reflective loss should be abandoned entirely, and all that the court was concerned with was the prevention of double recovery.
The CA then noted that in Singapore, the reflective loss principle was first considered in the case of Townsing. The court in Townsing had found that Townsing had breached his duties as a director to Jenton Overseas Investment Pte Ltd (“Jenton”), and the liquidators of Jenton were attempting to recover the money paid by its wholly-owned subsidiary, NQF Ltd (“NQF”). Since Jenton’s losses mirrored an equivalent loss suffered by NQF, and Jenton’s inability to recover the money paid (whether as dividends or repayment of its loan) was a consequence of the diminution in NQF’s assets, this meant that the reflective loss principle should have barred Jenton’s claim. Nevertheless, the court dismissed Townsing’s appeal and allowed Jenton’s claim. Despite approving the company law basis of the reflective loss principle, the court in Townsing ultimately adopted the position that the policy reason behind the reflective loss principle was the prevention of double recovery. It further suggested that shareholders were prevented from claiming for any loss, whether suffered as a shareholder or in any other capacity, including for “all other payments the shareholder might have obtained if the company had not been deprived of its funds”. However, shareholders could counter this position by establishing that the underlying public policy concerns (i.e., the prevention of double recovery or prejudice to other shareholders or creditors) did not apply.
(3) Proper basis and scope for the reflective loss principle in Singapore
Having considered the history of this rule, the CA stated that the existing jurisprudence in Townsing sat uneasily between two principles, namely: the company law principle, and the policy exception whereby the principle would be disapplied if there were no concerns of double recovery or prejudice to other shareholders or creditors. This left the law in an unstable state. Further, these rationales were fundamentally incompatible, since they dealt with entirely different concepts and wholly different concerns. Thus, the CA chose to depart from the law as stated in Townsing. The only question that remained was how to depart from Townsing.
The CA first acknowledged that preventing double recovery was a general concern throughout the law, as a matter of fairness. However, there were already numerous legal mechanisms for preventing double recovery. In fact, the HC had already accounted for the risk of double recovery in respect of the US$4m Transfer, by adjusting the combinations of parties who were made jointly and severally liable for the various sums.
The CA then agreed with the judges in Marex that double recovery could not explain the contours of the reflective loss principle, as applied in the existing cases. This was because the reflective loss principle had repeatedly been stated to apply even in situations where the company chose not to bring an action, such that there was no risk of double recovery.
The CA further noted that basing the reflective loss principle on the prevention of double recovery may unrealistically assume that there is always an overlap between the loss caused to the company and the loss suffered by the shareholder. Further, the scope of the principle may begin to become uncontrollable and risked undermining the whole law of obligations, at least where companies were involved.
The CA thus chose to affirm the existence of the reflective loss principle as a distinct rule of company law, thereby following the majority in Marex. This was justified by the company law context from which it emerged, specifically in relation to two aspects. First, the proper plaintiff (or party to bring a lawsuit) in a wrong done to the company is generally the company (“proper plaintiff rule”). Second, the management of the company’s affairs is entrusted to the company’s decision-making organs (“corporate management principle”). As explained below, the reflective loss principle prevents these two rules from being undermined, and thereby recognises the “unique position in which a shareholder stands in relation to his company”.
Proper plaintiff rule. The reflective loss principle is a corollary of the proper plaintiff rule as it properly situates the shareholder’s loss in the context of the company’s loss. This follows from the unique nature of shares, which gives the shareholder the right to participate in the company. The corporate structure offers a way for shareholders to reap the benefits of a successful business while protecting them from the consequences of debts owed or wrongs done by the company. As a consequence, the shareholder has also joined the fate of his investment to that of the company.
Notably, a shareholder did not have a right to a dividend, nor a right to a particular value of shares. The shares also did not represent a proportionate part of the company’s assets and a shareholder was not entitled to payment upon liquidation unless there was a surplus. What a shareholder ultimately received was subject entirely to the company’s fortunes. Wrongs done to the company were part and parcel of the company’s fortunes, and when the risk of such wrongs eventuated, the shareholder could not be heard to complain about a loss caused to the value of his investment. In so far as the intrinsic value of the shares is concerned, any reduction in the value of the shares is a consequence of the change in the fortunes of the company.
Corporate management principle. The reflective loss principle also ensures that the corporate management principle is maintained. To allow shareholders to claim for diminution in the value of their shareholdings or in the distributions from a company would undermine the corporate management principle, as it would prevent the company from dealing with wrongs done to it as it deems fit. Additionally, such a principle had significant practical benefits arising from its bright line aspect. For example, it avoids the need to answer many questions of the proper valuation of the company and/or the shares and an assessment of the likelihood of the company choosing to bring an action, as well as the likelihood of success in that event.
The CA also rejected the arguments in favour of the minority view. It noted that although the minority view had significant benefits, these benefits did not justify the abandonment of the reflective loss principle. Crucially, it should not be assumed that the shareholder’s private law claims should be kept distinct from the shareholder’s unique status under company law. This is because company law regulates the scope of a shareholder’s rights as well as duties, and so a person who becomes a shareholder cannot take the benefits without also assuming its burden. The scope of shareholder’s remedies was thus necessarily tied to company law principles.
Finally, the CA recognised that there was an exception which permitted reflective losses to still be claimed if the actions of the wrongdoer had disabled the company from pursuing its cause of action against the wrongdoer. The CA suggested that this exception cannot be maintained if the reflective loss principle is one that is concerned with recognising certain heads of losses as separate and distinct from the company’s loss. However, the CA ultimately declined to answer the question on whether this exception remains and left it for another case when it is actually raised.
(4) Application to the facts
In the present case, the CA found that Tendcare’s claim was not made in its capacity as a shareholder of TJHK for the diminution in value of its shares or for the reduction in distributions from TJHK. Rather, Tendcare was claiming against Miao for dishonestly assisting in a wrong done directly to it, and the loss suffered was not reflective as it was the sum of money that it had been prevented from recovering by reason of Gong’s wrong and Miao’s dishonest assistance of that wrong. Accordingly, the reflective loss principle had no application here and did not operate to bar Tendcare’s present claim.
The CA’s decision clarified the legal position on the existence, scope, and basis of the reflective loss principle in Singapore. The mere status of someone being a shareholder should not warrant a blanket prohibition on all claims by that person against another party since the party may be claiming in another capacity for a personal wrong. At the same time, to allow shareholders to always claim in their capacity as shareholders would clearly ignore established company law principles. Such a decision to dispense with the reflective loss principle altogether would likely entail the inadvertent throwing of the legal baby out together with the bathwater.
Written by: Bill Puah Ee Jie, 2nd-year LLB student, Singapore Management University Yong Pung How School of Law.
Edited by: Ong Ee Ing (Senior Lecturer), Singapore Management University Yong Pung How School of Law.
(1) In general, a trust is a legal relationship whereby legal title of property is vested in a trustee, who will be obliged to hold the property on behalf of a beneficiary.
(2) In general, a fiduciary is one who has undertaken to act for or on behalf of another in a matter, in circumstances which give rise to a relationship of trust and confidence. As such, the fiduciary must act in the principal’s interests.
(3) This comprised (a) a Success Fee Agreement for 5.5% of the pre-IPO funding raised; and (b) an IPO Shares Agreement and Retainer Agreement under which HXG agreed to provide assistance concerning the reorganisation of Tendcare’s medical business.
(4) The court could, e.g.: (a) craft remedies at the interlocutory stage; (b) apply the doctrine of issue estoppel and the extended doctrine of res judicata to prevent re-litigation; (c) limit duties in tort when they are already owed to another; (d) enforce the election of alternative remedies; (e) apply the law on agency and the rules relating to the recovery of damages which are premised on the prevention of double recovery; (f) apply the laws of subrogation which have been formulated, in part, to address concerns of double recovery; and (g) require an undertaking from a party when awarding damages to eliminate the risk of double recovery.