A recent Supreme Court decision in Sevilleja v Marex Financial Limited [2020] UKSC 31 has restated the longstanding principle of “reflective loss” in a way that will be of interest even to practitioners who usually do not have to grapple with the intricacies of company law.
INTRODUCTION
The principle regarding what is commonly known as “reflective loss” has developed, through case law, over many years. It can be first seen in the important case of Foss v Harbottle (1843) 2 Hare 461 which held that where loss is caused to a company only the company itself (as opposed to its shareholders) can sue. The principle was then expanded in Prudential Assurance Co Ltd v. Newman Industries Ltd (No 2) [1982] Ch 204 where, in a case in which a shareholder tried to sue two defrauding company directors for diminution in the company’s share value, the court held that his loss only reflected the company’s and he therefore had no cause of action himself (on the basis that the decrease in value was actually a loss to the company).
Since Prudential the principle has been expanded through a line of authorities, for instance to include claims brought by shareholders in their capacity as employees of the company. In such circumstances, and as long as the company itself would have a cause of action, the shareholder’s loss has been treated as a mere reflection of the company’s even if the company itself decides not to exercise its right to sue.
The Supreme Court’s recent decision in Sevilleja v Marex Financial Ltd [2020] UKSC 31 finds the court re-examining the principle in ways that in fact might well assist practitioners in a range of legal disciplines.
THE FACTS
Marex (the Appellant in the Supreme Court case) was the creditor of 2 BVI companies controlled by Mr Sevilleja against which it had obtained judgment in earlier proceedings. Following judgment however, Mr Sevilleja had liquidated the companies, with the allegation being that he had purposely stripped the companies’ assets to avoid meeting the judgment debt.
Marex sought remedy against Mr Sevilleja personally on the basis, amongst other things, that he had intentionally procured the violation of the companies’ rights.
At the first instance hearing before Knowles J, Mr Sevilleja argued that the reflective loss principle meant that only the BVI companies could sue him as the loss was essentially theirs. To allow Marex to sue would be to put them in a better position than a shareholder of the companies who of course, under the principle of reflective loss, would not have been entitled to take action. Knowles J found against Mr Sevilleja and held that the principle did not in fact apply in the circumstances of the case (Marex being an entirely independent third party to the companies).
Round two took the parties to the Court of Appeal where Mr Sevilleja was successful, leaving Marex with the unattractive and costly prospect of pursuing a remedy via the liquidator.
However on appeal to the Supreme Court Marex was successful, with the Court unanimously finding in its favour and essentially agreeing with Knowles J’s first instance decision. In an example of the Court seeking to see that equity is done, it was held that the expansion of the reflective loss principle had had “unwelcome and unjustifiable effects on the law”; that it did not in fact apply to creditors of a company, and that to state otherwise would potentially result in “great injustice”.
The Court expressed regret at the expansion of the principle over the years and distinguished “claims brought by a shareholder in relation to loss which he or she has suffered in the capacity of shareholder, such as a diminution in share value or in distributions, and claims which a shareholder or anyone else may bring in any other capacity, for example as a creditor or employee of the company.” The former remain bound by the reflective loss principle whereas the latter are not.
Whilst the majority of the Supreme Court were in favour of merely tightening the principle, Lord Sales went further and advocated for its wholesale abolition. In his view, steps could be taken to prevent double recovery on the part of the shareholder and active case management would enable any claim brought by the wronged company to proceed alongside that of the shareholder’s. It remains to be seen if Lord Sales’ view will be adopted in future but it will presumably be some time before the Supreme Court is asked to consider the reflective loss principle once again.
WHAT DOES THIS MEAN?
The Supreme Court’s decision at first blush might be thought to be primarily of interest to company law practitioners. However, on closer consideration it can be seen that it in fact has wider application.
The Court has confirmed that creditors have a cause of action against a suspiciously insolvent company. This will be of relevance to anyone advising a client embroiled in litigation against a company, and particularly so once the client obtains judgment against it.
For instance, for personal injury and employment practitioners the Supreme Court’s decision may well provide some reassurance that an uninsured Defendant company is perhaps more likely now to be made to face its liability: if those in control seek to asset-strip and liquidate the company they can still be held to account by a successful Claimant in possession of a money judgment.
It may well be prudent for those advising clients concerned about such asset-stripping and evasion of liability to put any such company on notice at an early stage, that if necessary relief will be sought under the principles set out in Sevilleja. Such a step should, it is to be hoped, deter the potential asset-strippers and perhaps even encourage a pragmatic approach to the litigation and thereby settlement at an earlier stage than might otherwise have been the case.
Rachel Baker is an expert civil law barrister covering a range of matters including Property, Landlord & Tenant, Personal Injury and Commercial cases. She has extensive experience in both the courts and tribunals as well as expertise in the provision of written advice and the drafting of statements of case; witness statements and applications.
