The principle of reflective loss was established in the case of Prudential Assurance Co Limited v Newman Industries Limited (No. 2)  Ch 204.
The rule states that a shareholder in a company cannot recover damages for any diminution in their share value as a consequence of a loss sustained by the company in which the company has its own cause of action against the same wrongdoer. The loss suffered by the shareholder is merely a reflection of the loss suffered by the company.
Over time, this basic principle has been expanded to bar claims by creditors and employees who also happen to be shareholders.
The Court of Appeal in Marex expanded the principle of reflective loss even further by applying a bar to a non-shareholder creditor of a company from pursuing an action against the wrongdoer where the company itself had a cause of action in respect of the same loss. If this decision had stood, its effect would have meant that any creditors whose rights against a company had become worthless by the wrongful conduct of a third party had no recourse against that wrongdoer by virtue of the simple fact that the company had its own cause of action. If the company had no desire or, in most cases, no means by which to pursue the wrongdoer then creditors would suffer as a result.
The facts are relatively straightforward. Mr Sevilleja owned and controlled two companies incorporated in the BVI. Marex brought proceedings against the companies for sums due under contract and was awarded judgment in excess of $5.5 US plus costs of £1.65million.
Following the circulation of a draft confidential judgement, Mr Sevilleja transferred in excess of $9.5million US from the companies’ UK bank accounts to offshore accounts under his personal control thus putting those funds outside of Marex’s reach and making enforcement of the judgment against the companies impossible.
Mr Sevilleja later put the companies into liquidation in the BVI and the liquidator failed to take the necessary steps to locate the funds that had been transferred into Mr Sevilleja’s own offshore accounts.
Marex brought further proceedings in England against Mr Sevilleja seeking damages in tort for both inducing or procuring the violation of its rights under the judgment made in the first set of proceedings and for intentionally causing Marex to suffer loss by unlawful means.
The decisions below
Mr Sevileja challenged the claim on the basis that Marex was seeking to recover a loss reflective of that suffered by the companies and which would have been made good had the companies successfully pursued Mr Sevilleja for the return of those funds. This argument was rejected at first instance. However, the Court of Appeal considered itself bound by the doctrine of reflective loss not being recoverable by a creditor of a company even if that creditor was not itself a shareholder.
The Court of Appeal was aware that the state of the law in respect of reflective loss was unsatisfactory and, accordingly, gave permission to appeal its own decision to the Supreme Court.
The Supreme Court Decision
The Supreme Court unanimously decided to overturn the Court of Appeal albeit there was no consensus on the question of how far the Court should go in limiting the principle of reflective loss. This led to a 4:3 split. The majority decided to retain the reflective loss principle but limited it to the narrow situation whereby a claim is brought by a shareholder in respect of a loss which they have suffered in that capacity alone which is the consequence of a wrong done to the company and where the company has, or had, a cause of action against the wrongdoer itself. There is no longer any exception to the rule.
This decision has helped clarify a particularly difficult area of law and has limited the ever-expanding principle.
For more information, please find contact Elliot Nathan or a member of our dispute resolution team.
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