The rule against reflective loss bars claims against wrongdoers by shareholders of a company (for instance for the diminution in the value of their shareholding) where the shareholder's loss is merely reflective of the loss of the company.
The principle (first established some forty years ago in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2))1 was expanded in subsequent cases to bar claims by shareholders who were also creditors of the company,2 shareholders in their capacity as employees of the company3 and, most recently to non-shareholder creditors of a company.4 On Wednesday 15 July, the Supreme Court reversed this expansionist trend, unanimously reversing the Court of Appeal's decision in Marex and rolling back the law considerably from where it had stood before this case. This is welcome news for creditors of insolvent companies who may wish to pursue claims against errant directors or others who were associated with a company.
The Facts in Marex
Mr Sevilleja utilised two BVI companies (the "Companies") as trading vehicles to carry on foreign exchange trading. Marex, a foreign exchange broker, successfully sued the Companies for amounts due under contracts and obtained a judgment in its favour in excess of US$5 million. It also obtained a freezing order against the Companies. After the parties had received a confidential draft of the judgment, but before the judgment was publicly handed down, Mr Sevilleja allegedly procured the transfer of more than US$9.5 million from the Companies' London bank accounts and placed the Companies into insolvent liquidation. Although the Companies allegedly had debts in excess of US$30 million, Marex was the only creditor of the Companies not connected to Mr Sevilleja and a US Court described the liquidations as "the most blatant effort to hinder and defraud a creditor" it had ever seen. Marex brought fresh proceedings in England against Mr Sevilleja claiming damages for (i) knowingly inducing and procuring the Companies to act in violation of Marex's rights under the judgment and (ii) intentionally causing loss to Marex by unlawful means.
First Instance Decision & Court of Appeal Decisions
Mr Sevilleja (who was not resident in England) sought to challenge the jurisdiction of the English Court arguing that Marex did not have a good arguable case against him because the losses it was seeking to recover were reflective of the loss suffered by the Companies (which had concurrent claims against him) and it was therefore not open to Marex to claim for the same loss. At first instance, the Court rejected this argument observing that if the position was as Mr Sevilleja contended, claims of the type Marex wanted to pursue (known as "economic torts") would be left with little application in situations in which the Judge thought they had an important role to play.
Mr Sevilleja successfully appealed to the Court of Appeal which accepted that the "no reflective loss" principle applied to creditors of a company, even where they were not also shareholders. For details of the Court of Appeal's reasoning see our OnPoint English Court of Appeal Clarifies the Ambit of the Rule Against Reflective Loss. The practical impact of the Court of Appeal's decision (had it stood) would have been to prevent Marex pursuing 90% of the losses suffered. Unsurprisingly, with the stakes high, Marex appealed to the Supreme Court.
Decision of the Supreme Court
The Supreme Court was invited to revisit the law in this area and sat as a seven member panel in order to do so. The Court's decision to reverse the Court of Appeal's ruling in Marex was unanimous. The leading judgment was given by Lord Reed.5 He held that the "no reflective loss principle" should be strictly limited to cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, i.e. in the form of a diminution in share value or in distribution, which is the consequence of loss sustained by the company in respect of which the company has a cause of action against the same wrongdoer. In all other cases (e.g. where claims were pursued by shareholders for other types of loss and for all claims by non-shareholders) the principle had no justification and would no longer apply. A minority of the Justices (for whom Lord Sales produced a judgment) would in fact have abolished the reflective loss principle altogether and allowed the law to deal with the risk of "double recovery" against the wrongdoer in other ways.
The Supreme Court's judgment is welcome news for creditors of insolvent companies. It has significantly narrowed the scope of the "no reflective loss" principle and limited it to claims by shareholders arising from the value of their shares or of the distributions they receive as shareholders being diminished, as a result of actionable loss suffered by their company. Other claims, whether by a shareholder or by anyone else (including creditors), are in principle permissible - although it will be necessary to avoid double recovery. The ruling revives the role economic torts play as a weapon in the armoury of creditors seeking redress in the face of fraud and other wrongdoing.
How Dechert can help
At Dechert we are available to help advise creditors, shareholders and companies on the current scope of the "reflective loss principle" and in relation to any claims that they may have or may be faced with in light of the Supreme Court's decision.
1  Ch. 204.
2) Johnson v Gore Wood  2 AC 1.
3) Gardner v Parker  EWCA Civ 781.
4) Sevilleja v Marex  EWHC Civ 1468.5) Lady Black and Lord Lloyd-Jones agreed with Lord Reed. Lord Hodge gave a separate judgment agreeing with Lord Reed and Lord Sales delivered a separate judgment (with which Lady Hale and Lord Kitchin agreed) allowing the appeal on a wider basis.
Originally published July 17, 2020.
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