The Limits Of Shareholder Claims: Reflective Loss And Third-Party Rights After Dekel vs RE Capital Administrators

The High Court's decision in Dekel v RE Capital Administrators Ltd (formerly Kaydan Accounting Ltd) [2025] EWHC 2976 (Ch) is an important reminder of the limits on shareholder claims and the risks of imprecise contractual drafting. First, the reflective loss principle, which prevents shareholders from claiming for losses that merely reflect losses suffered by the company; and secondly, the need for clear drafting when conferring third party rights under the Contracts (Rights of Third Parties) Act 1999.

Our commercial disputes lawyers take a look at the decision and highlight the key lessons for shareholders and businesses alike.

The law of reflective loss

The principle of reflective loss prevents shareholders from recovering losses that merely reflect a loss suffered by the company, such as a fall in the value of their shares. This remains the case even where the wrongdoing is directed partly at the shareholder, and regardless of whether the company itself has pursued a claim (Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204).

Subsequent case law has extended the scope of the rule in Prudential beyond shareholders acting strictly in that capacity. It has also been applied to exclude claims brought by individuals in their capacity as creditors or employees, including circumstances where the claim is advanced solely in the capacity of a creditor.

More recently though, in Marex Financial Ltd v Sevilleja [2020] UKSC 31 the UK Supreme Court disapproved of this extension and clarified that the rule against recovery of reflective loss relates only to claims for loss suffered in the capacity of a shareholder.

What happened in Dekel v RE Capital Administrators Ltd?

The case concerned a failed property redevelopment project in Central London. The investment vehicle (CLL BVI) raised £21,077,660 from investors, including £4 million from the Claimant, who received four million "Participating Shares" in CLL BVI in return.

CLL BVI appointed the first defendant to manage the project pursuant to a management agreement (the Management Agreement). Clause 20.1.2 of the Management Agreement gave enforcement rights under the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act) to parties who had "provided finance" in connection with the project. The Management Agreement was subsequently assigned to the second defendant.

After the project failed, the Claimant lost his investment in CLL BVI and later brought proceedings against the Defendants. The Claimant alleged that they had breached the Management Agreement by failing to perform the services required of them, relying on section 1 of the 1999 Act and clause 20.1.2 of the Management Agreement as the basis for a right to sue. The Defendants applied to strike out the proceedings brought against them on three grounds:

1. The Claimant was not entitled to enforce the terms of the Management Agreement under the 1999 Act because he had not "provided finance" within the meaning of the clause;
2. the Claimant's alleged loss was reflective of CLL BVI's loss and so barred by the reflective loss principle; and
3. the second defendant was never bound by the Management Agreement because it took an assignment of its benefit, but not its burdens.

High Court Decision

1. The reflective loss principle

Cawson J granted the Defendants' application and held that "the defendants are entitled to have the claim struck out and/or to summary judgement with the result that the claim is dismissed". The court dealt first with reflective loss, assuming for that purpose that the Claimant could rely on clause 20.1.2 of the Management Agreement.

The Court applied the rule in Prudential Assurance Co Ltd v Newman Industries Ltd, as approved by the Supreme Court in Marex Financial Ltd v Sevilleja. A diminution in the value of shares, or in distributions to shareholders, which merely results from loss suffered by the company in consequence of a wrong done to it by the defendant, is not regarded by law as damage separate and distinct from the damage suffered by the company and is therefore not recoverable.

On the facts, the Claimant had subscribed for shares and was registered as a member of CLL BVI. His capital contribution could not be withdrawn from CLL BVI except by redemption of his Participating Shares, and the articles gave "Participating Shareholders" rights to dividends and surplus assets. The court therefore held that any loss of return of the Claimant's investment is what he would have received as a shareholder in CLL BVI had the project been successful and that was reflective of any loss suffered by CLL BVI itself.

This determination was sufficient to dispose of the claim. Nonetheless, the court went on to consider the defendants' other grounds of challenge.

2. The Contracts (Rights of Third Parties) Act 1999 claim

The Court also rejected the Claimant's argument that section 1 of the 1999 Act gave him a separate and distinct cause of action to that of CLL BVI to enforce the terms of the Management Agreement. Section 1(5) of the 1999 Act did not assist the Claimant because, even if the Claimant had been treated as a party to the Management Agreement, he would still have been seeking to recover a loss suffered in his capacity as shareholder, that was reflective of the loss suffered by CLL BVI, and not loss sustained in some other capacity such as creditor or employee.

The Court went on to conclude that clause 20.1.2 of the Management Agreement did not, on its proper interpretation, apply to the Claimant on the basis that he was not a party that "provided finance" within the meaning of that clause – rather, he invested in CLL BVI, the vehicle which in turn provided finance for the project. Consequently, the Court did not consider that the Claimant was able to rely upon section 1 of the 1999 Act so as to enforce the terms of the Management Agreement in his own right.

3. Whether the second defendant was bound by the Management Agreement

Finally, the court considered that the Claimant had a real prospect of establishing that there had been a novation, not merely an assignment of the benefit of the Management Agreement, such that the second defendant was bound by it. Given its findings on the other two grounds though, this did not assist the Claimant.

Why this decision matters

This decision illustrates that investors who receive shares in return for their investment may face real difficulties in bringing claims where they suffer a fall in the value of their shares or distributions, which reflects loss suffered by the company. The result may be different where a shareholder sues in another capacity, but the court found that the Claimant's claim was not such a case.

The decision also demonstrates the importance of precise drafting when conferring third party rights under the 1999 Act. Broad wording such as "provided finance" will be construed objectively and in context, and may not extend to shareholders unless the agreement makes that intention clear.

Key takeaways

• Investors who receive shares in a project vehicle should be aware that personal claims may be barred by the reflective loss rule where the loss is suffered in their capacity as shareholders. In those circumstances, the claim may need to be pursued by the company itself, or through an available derivative route if the relevant conditions are met.
• Drafting of third party rights clauses requires precision. If a Management Agreement or similar document is intended to confer enforcement rights on shareholders or equity investors, that class should be identified expressly and the scope of the recoverable loss should be considered carefully.

Read the original article on GowlingWLG.com