- within Food, Drugs, Healthcare and Life Sciences topic(s)
- in United Kingdom
An individual who invested indirectly in a property development project through intermediate companies was unable to claim directly under the project management agreement due to the rule against reflective loss.
The High Court's judgment will be of interest to anyone looking to invest in a project by taking an equity participation in a corporate structure, or deciding whether to structure their investment via equity or debt.
What happened?
Dekel v RE Capital Administrators Ltd and others [2025] EWHC 2976 (Ch) concerned a corporate structure established to invest in and redevelop a property in central London.
The property was acquired by a UK company (UKCo), which was in turn wholly owned by a company incorporated in the British Virgin Islands (BVICo).
The claimant – Mr Dekel – along with several other individuals, invested money in the project by subscribing for shares in BVICo.
BVICo then used part of those subscription proceeds to subscribe for shares in UKCo. BVICo lent the remainder of the subscription proceeds to a company incorporated in Luxembourg (LuxCo), which then lent those and other monies to UKCo. UKCo used both the subscription proceeds received from BVICo and the loan from LuxCo to fund the project.
BVICo appointed a project manager in connection with the development. The project management agreement was made between BVICo and the project manager, but it explicitly allowed certain third parties to enforce it under the Contracts (Rights of Third Parties) Act 1999 (the 1999 Act). This included any person who had "provided finance" in connection with the property and/or the project.
The project was unsuccessful. Mr Dekel attempted to claim against the project manager for breach of the project management agreement, claiming that it had not performed its obligations with the care and skill to be expected of a suitably qualified and experienced manager.
The project manager resisted Mr Dekel's claim, arguing (among other things) that:
- Mr Dekel had not "provided finance" for the property or project, but rather had simply subscribed for shares in BVICo (and that the project had, in fact, been financed by UKCo); and
- in any case, Mr Dekel was prevented from claiming by virtue of the "rule against reflective loss" (see box What is the rule against reflective loss? below).
What is the rule against reflective loss?
It is a fundamental tenet of English law that a company is a legal person separate from its shareholders, and that, where a company and its shareholders suffer a wrong, each of them is entitled to bring their own claim. However, this is modified by the "rule against reflective loss".
This rule (also known as the rule in Prudential) applies where both a shareholder of a company and the company itself have suffered loss and so both have a claim against the same third party (the common wrongdoer) in respect of the same wrongdoing.
In those circumstances, the shareholder is not permitted to claim against that third party for any diminution of the value of their shareholding in the company, or for any loss of distributions (e.g. dividends), which is "merely the result of a loss suffered by the company" – so-called "reflective loss". Instead, the right to claim damages lies with the company itself.
This principle was comprehensively summarised by the Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31, in which the court confirmed that it is a substantive rule of law and not merely a procedural device to prevent double recovery. This means that the shareholder cannot claim for reflective loss even if the company itself declines to claim, potentially leaving the shareholder completely uncompensated. In the Supreme Court's words, by taking shares, the shareholder has chosen to "follow the fortunes" of the company.
The rule does not prevent a shareholder from recovering loss in other circumstances in other capacities, such as where the shareholder has their own personal claim as a creditor.
What did the court say?
The court agreed with the project manager.
The judge found that any loss Mr Dekel may have suffered was clearly incurred in his capacity as a shareholder of BVICo, and not as some kind of creditor or financier of the project.
The project investment memorandum had spoken of Mr Dekel subscribing for shares in BVICo. That is what Mr Dekel in fact did, he was registered as a shareholder in BVICo's register of members, and he was unable to withdraw his capital from BVICo except in certain pre-defined circumstances. These all bore the hallmarks of an equity investment.
If Mr Dekel suffered a loss under the project management agreement, it would be reflected in the return he would receive on his shares in BVICo as a result of loss of dividends and distributions or on the redemption of his shares.
Accordingly, any loss suffered by Mr Dekel would be entirely reflective of loss suffered by BVICo, and so Mr Dekel would be unable to recover it. The right of action lay instead with BVICo.
Mr Dekel ran an interesting argument to the effect that the 1999 Act preserved his right of claim in spite of the rule against reflective loss. This argument was unsuccessful, but it is an interesting approach and one about which you can read more in the judgment.
The judge also found that Mr Dekel had not "provided finance" for the property or the project. As a result, even if the rule against reflective loss had not applied, he would not have been able to bring a claim under the project management agreement by virtue of the 1999 Act.
The court rejected Mr Dekel's argument that the words "provide finance" should be given an ordinary meaning of providing money, which Mr Dekel had done (albeit indirectly) through his subscription for shares in BVICo.
The judge said it had not been envisaged that Mr Dekel would be repaid his money with some kind of return, but rather that he would receive dividends on his shares in BVICo if the project were a success. It would have been an odd conclusion from a commercial perspective to find that every participating shareholder in BVICo (of which there were 18) had been a financier of the project and, hence, had a direct right to claim against the project manager.
What does this mean for me?
This is a fairly straightforward application of the rule against reflective loss, but it does re-emphasise some important practical points for a person who holds, or who is considering taking, shares in a corporate structure and who may want to bring direct claims against other transaction parties.
- Is the investor's potential loss likely to manifest itself simply as a drop in the value of their shares or as a loss of potential dividends? If so, it will be important to examine whether the loss is merely "reflective". If it is, it will not be recoverable.
- Could the investor's cause of action have arisen before they became a shareholder? If so, the investor may have their own personal right of claim (in which case the rule will not apply).
- Will any loss suffered by the investor arise in consequence of a loss to the company? If so, it may not be recoverable, even if it exceeds any loss suffered by the company.
- If any loss is likely to be merely "reflective", are there other options open to the investor? Do they have any alternative rights of claim against the third party that would not be barred as reflective loss? For example, do they have the benefit of a separate indemnity or covenant to pay, which could be enforceable as a debt?
- If the investor has not yet taken shares, can it negotiate a direct right of action against other transaction parties in some way? (This will not always circumvent the rule against reflective loss, but it might establish a separate, parallel claim.) Can an investor provide funds and obtain a return in some other way, such as by lending money to the project in question?
- If the investor has already taken shares, do they have any power to require the company's directors to take action against a third party? If the directors refuse to do so or they settle for too low an amount, can the investor bring a derivative claim on behalf of the company against its directors for breach of their duty to the company, or even a personal claim for unfair prejudice?
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
