UK: Rule Against Reflective Loss Found To Limit Claims By Unsecured Creditors As Well As Shareholders

Last Updated: 25 October 2018
Article by David Collins, Richard Barham and Candice Chapman

A recent decision by the Court of Appeal has found that claims by an unsecured creditor (who was not also a shareholder) against a shareholder alleged to have been dishonestly asset-stripping the company failed because they were caught by the rule against reflective loss.


Previous case law has established that a shareholder cannot bring a claim for loss where such loss is in effect the same as that suffered by the company itself as a result of the defendant's wrongdoing.  This is because the shareholder's loss (such as a diminution in value of its shares or dividend amounts) is said simply to "reflect" the company's own loss, and it should be the company that brings the claim.  One exception to the rule (in Giles v. Rhind [2002] EWCA Civ 1428) provides that the rule will not apply where the wrongdoing means that the company is itself unable to pursue an action against the wrongdoer (for example because the wrongdoer controls the company).

Subsequent decisions have further established that the rule also applies to prevent claims by a shareholder in his capacity as an employee, but judicial uncertainty has remained as to whether the rule applies to prevent claims by unsecured creditors who are not also shareholders.

The Court of Appeal has now held that drawing a distinction between a creditor with one share and a creditor with no shares would be illogical and unprincipled; therefore the rule should prevent claims for reflective loss by all creditors, whether or not they are also shareholders in the company. Moreover, the Giles v Rhind exception was held to be narrow and could only apply where the wrongdoing directly caused the company's inability to pursue an action.


Marex Financial Limited (Marex), a foreign exchange broker, obtained judgment in the English court in 2013 for US$5 million against two client companies registered in the BVI (Companies) which were trading vehicles controlled by the appellant, Mr Carlos Sevilleja Garcia (Mr Sevilleja).  A draft judgment was released but, when Marex applied for a freezing order, it was revealed that the Companies held only a nominal amount of cash. Marex claimed that Mr Sevilleja had dishonestly asset-stripped US$9.5 million from the English bank accounts of the Companies for his own benefit, thereby committing the torts of (a) knowingly inducing and procuring two companies of which Marex claimed he was the ultimate beneficial owner to act in wrongful violation of Marex's rights under the judgment it had obtained; and (b) intentionally causing loss to Marex by unlawful means. The Companies subsequently went into liquidation.

On a jurisdiction challenge by Mr Sevilleja, at first instance the Commercial Court was satisfied that the rule against reflective loss should not prevent Marex from bringing a tortious cause of action along these lines. Mr Sevilleja appealed to the Court of Appeal in respect of the reflective loss decision.


The Court of Appeal reversed this decision, holding that the rule against reflective loss did apply to Marex's claims, even though Marex was just a creditor and not a shareholder of the Companies.  Moreover, Marex could not rely on the Giles v Rhind exception. In particular:

  1. There were now four justifications for the rule against reflective loss:
    a. the need to avoid double recovery by the claimant and the company from the defendant;
    b. causation, in the sense that if the company chooses not to claim against the wrongdoer, the loss to the claimant is caused by the company's decision, not by the defendant's wrongdoing;
    c. the public policy of avoiding conflicts of interest: if the claimant had a separate cause of action it would discourage the company from making settlements; and
    d. the need to preserve company autonomy and avoid prejudice to minority shareholders and other creditors.
  2. Drawing a distinction between shareholder creditors and non-shareholder creditors would be artificial and anomalous: the rule should therefore apply to claims by all creditors, whether or not they are also shareholders in the company.
  3. If the liquidator was to pursue the company's claims against the wrongdoer, if successful any damages received would be available for distribution to the general pool of creditors (a successful claim by Marex alone would otherwise be to the prejudice of other creditors).
  4. The possible application of the Giles v. Rhind exception still had to be considered, but the exception is narrowly drawn and did not apply in this case. The exception only applies where as a consequence of the wrongdoer's actions, the company no longer has a cause of action and it is legally (not merely factually) impossible to bring a claim in its own name (or in its name by a third party). Here there was no evidence of anything preventing a claim against Mr Sevilleja by the Companies' liquidator, or anything preventing Marex from taking an assignment of the Companies' claims against Mr Sevilleja – to that extent it was noted that Marex would not necessarily be left without a remedy.


The decision has clarified the scope of the rule against reflective loss but its consequences may be less clear to assess and will depend on the specific facts each time.  On the one hand, creditors may be concerned that it will be more difficult to take action (even in tort) against wrongdoers (including shareholders who might be asset-stripping) where their loss is deemed to be simply reflective of loss suffered by the company.  On the other hand, in an insolvency context the application of the rule to non-shareholder creditors may serve to protect the wider body of a company's creditors by ensuring that the company's liquidator brings the action against the wrongdoer - thereby (if successful) replenishing the pool of company assets available for distribution to the general body of creditors.

Garcia v. Marex Financial Ltd [2018] EWCA Civ 1468

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