The principle of reflective loss is generally regarded as having been established in the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204. Reflective loss is the loss suffered by a shareholder as a result of a breach of duty owed to the company and breach of a duty owed to a shareholder;` but the shareholder’s loss can be made good if the company enforces its rights against the wrongdoer for its loss. The so-called rule against reflective loss says that it is the company and not its shareholders which has the right to recover what is in reality the company’s loss. Lord Bingham explained the rule in Johnson v Gore Wood [2002] 2 AC 1:
“Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder’s shareholding where that merely reflects the loss suffered by the company.”
The scope of the rule is the subject of the Supreme Court’s recent judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31. The issue for the court was whether the rule against reflective loss prevented a creditor of a company from bringing a claim directly against a third party who had stripped the company of substantial assets.
The facts of the case are simple. Mr Sevilleja owned and controlled two BVI companies. Marex Financial Ltd brought proceedings against the companies and obtained judgment for some $5.5 million plus substantial costs. After receiving a confidential draft of the judgment in the case and before it was handed down Mr Sevilleja transferred over $9.5 million of the companies’ money to personal accounts, leaving them with insufficient funds to satisfy the judgment. He then put the companies into liquidation. Marex was the only creditor not connected to Mr Sevilleja.
Marex responded with proceedings in the English courts against Sevilleja himself, claiming damages in tort for the loss it had suffered. Sevilleja took the reflective loss point. At first instance the judge held that Marex had a good arguable case that its claims were not precluded by the rule. However, the Court of Appeal held that the reflective loss principle barred most of it.
The Supreme Court, in a lengthy restatement of the law on reflective loss, came down on Marex’s side, holding unanimously that a claim by a company’s creditor against a third party was not barred where it reflected loss suffered by the company. Although the decision was unanimous, it was arrived at by two different routes. The majority view of the court, expressed by Lord Reed, narrows the doctrine of reflective loss; the minority view, led by Lord Sales, would appear to indicate that the rule should be scrapped.
Lord Reed found that on a proper interpretation of Prudential and Johnson the rule against reflective loss was a company law principle, not a wider principle of the law of damages. His examination of the authorities on the subject resulted in a distinction between “(1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, 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, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss” In the first kind of case, the shareholder is precluded by the rule from making a claim. In the second kind, recovery is, in principle, possible.
Lord Sales reached the same result but by different and more radical reasoning. In his view, earlier authority such as Prudential, did not lay down a rule that excluded a shareholder’s recovery where, on the facts, the loss was different from that of the company. The court in Prudential had set out why it thought a shareholder in such a case had suffered no separate loss, but that analysis, in his view, was not sustainable. He approached the issue on the footing that the governing principle was the avoidance of double recovery; but that, he thought, could be prevented by other means, which in turn gives rise to the question whether the reflective loss principle should still be recognised in law. (He also criticised the use of the word “reflective” as being unhelpful.)
The Supreme Court’s restatement of the law will be welcomed by creditors in the position that Marex found itself. Some will welcome it as a simplification of a complex legal area. Only time will tell, however, whether the result of the two differing approaches adopted by the court will add to the difficulty in applying the principle in practice in the future.
