UK Supreme Court significantly curbs the reflective loss principle in landmark judgment

29 October 2020

Marex Financial Ltd v Sevilleja [2020] UKSC 31

In Marex Financial Ltd v Sevilleja, the UK Supreme Court restated the reflective loss principle, overruling several authorities which had expanded its reach. The majority’s decision distinguishes between the following two types of cases:

• 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 on 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. 
• 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.

The first kind of case continues to be barred by the rule in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 while in all other cases, including cases involving non-shareholders, recovery is permissible in principle, although it may be necessary to avoid double recovery.

Facts

The defendant, Sevilleja, owned and controlled two companies (“Companies”) incorporated in the British Virgin Islands (“BVI”). The plaintiff, Marex Financial Ltd (“Marex”), obtained a judgment against the Companies for over US$5.5 million, plus £1.65 million in costs. Marex alleged that Sevilleja thereafter procured the offshore transfer of over US$9.5 million from the Companies’ London accounts into his personal control such that Marex was unable to recover on its judgment debt and costs.

Subsequently, Sevilleja placed the Companies into liquidation in the BVI with their alleged debts exceeding US$30 million, but Marex alleged that the liquidation process was effectively on hold with the liquidator failing to investigate submitted claims, locate Marex’s missing funds, or issue proceedings against Sevilleja.

In the proceedings, Marex sought damages from Sevilleja in tort for, among other things, having induced or procured the violation of its rights under the High Court’s judgment and orders. Sevilleja applied to set aside the service of the writ on the basis that Marex did not have a good arguable claim as the claim was barred by the reflective loss principle. On appeal, the English Court of Appeal upheld Sevilleja’s contention that Marex’s claim in this respect was barred by the “reflective loss” principle. Marex appealed to the UK Supreme Court.

Judgment

The Supreme Court unanimously allowed the appeal. Lord Reed gave the leading judgment, with which Lady Black and Lord Lloyd-Jones agreed. Lord Hodge gave a separate judgment agreeing with the reasoning of Lord Reed. Lord Sales delivered a separate judgment, with which Lady Hale and Lord Kitchin agreed, allowing the appeal on a wider basis.

Majority view in Marex Financial

The Majority observed on the “reflective loss” principle that a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, is not in the eyes of the law damage which is separate and distinct from the damage suffered by the company, and is therefore not recoverable. Where there is no recoverable loss, it follows that the shareholder cannot bring a claim, whether or not the company’s cause of action is pursued.

The Majority observed that Lord Millett’s judgment in Prudential treated the “reflective loss” principle as a wider principle of the law of damages, based on the avoidance of double recovery. This led to the expansion of the supposed “reflective loss” principle beyond the narrow ambit of the rule in Prudential.

The Majority reviewed and overruled the subsequent cases in which the “reflective loss” principle as explained by Lord Millett had developed and distinguished between the following cases:

• 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 on 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. 
• 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. 

The first kind of case is barred by the rule in Prudential, whether or not the company recovers its loss in full, as the shareholder has no legal or equitable interest in the company’s assets. The law does not regard the shareholder as suffering a loss as being separate and distinct from the company’s loss.

In the second kind of case, recovery is permissible in principle, although it might be necessary to avoid double recovery. The Majority found that the relationship between a creditor and the company is not analogous to that between a shareholder and the company. Even where the company’s loss results in the creditor also suffering a loss, he does not suffer the loss in the capacity of a shareholder. How double recovery should be avoided when the risk of it arises would depend on the circumstances.

Minority view in Marex Financial

The Minority held that Marex’s appeal should be allowed, but for different reasons from those of the Majority. The Minority held that where a shareholder has a valid cause of action against the third party defendant in respect of a different loss which he has in fact suffered, it is not open to a court to rule it out as a matter of judicial fiat. Instead, the issue of importance was the avoidance of double recovery in relation to both shareholder and creditor claims.

The Minority held that although there is some relationship between the loss suffered by a company and the loss suffered by a shareholder, they are not the same. Hence, the Minority was of the view that a shareholder ought not to be prevented from pursuing a valid personal cause of action as double recovery can be prevented by other means.

Comment

The principle of reflective loss has been accepted in Singapore in various decisions (see for example the recent Court of Appeal decision in Suying Design Pte Ltd v Ng Kian Huan Edmund and other appeals [2020] 2 SLR 221 where the court observed “here the minority shareholder’s loss is merely a reflection of the loss suffered by the company which would be made good if the company were able to and did enforce its rights, the proper party to recover that loss is the company and not the shareholder”). The earlier Singapore Court of Appeal decision in Townsing Henry George v Jenton Overseas Investment Pte Ltd (in liquidation) [2007] 2 SLR(R) 597), which held that the “no reflective loss” rule was a variant of the proper plaintiff rule, was specifically mentioned in the judgment of the UK Supreme Court and the Minority observed that the “proper plaintiff rule” did not support the reflective loss principle insofar as it is sought to be applied in relation to a different loss suffered by a shareholder in relation to which he has his own cause of action. It remains an open issue whether the Singapore courts will adopt the UK Supreme Court’s approach.