The rule against reflective loss limps on: Sevilleja v Marex in the Supreme Court
Published: Thursday 16 July 2020
Case summary by Elizabeth Houghton.
The Supreme Court recently handed down its long-awaited decision in Sevilleja v Marex  UKSC 31. A seven-member panel of the Court unanimously held that the rule prohibiting reflective loss is limited to shareholders, and does not extend to creditors. A minority of the Court questioned whether the rule should exist at all.
The facts of Marex
Mr Sevilleja was the owner and controller of two BVI Companies (“the Companies”) which he used as vehicles for forex trading. Marex obtained judgments in the Commercial Court from Field J against the Companies for US$5.5m and costs of £1.65m. After a confidential draft of Field J’s judgment was provided to the parties, Sevilleja boldly procured the transfer of US$9.5m from the Companies’ London accounts to accounts in his control. The object of the transfers was to defeat payment of the Field J judgment. In procuring the transfers Sevilleja acted in breach of his duties to the Companies. The Companies were placed into liquidation in the BVI. The liquidator did not take any steps to investigate the missing funds or Marex’s claims. Marex accordingly brought claims in tort against Sevilleja personally in England for (1) inducing or procuring a violation of its (Marex’s) rights and (2) intentionally causing loss by unlawful means.
Marex claimed the amount of the Field J judgment debt and consequential costs (90% of its claim), and costs incurred in related US proceedings (the remaining 10%).
The US Bankruptcy Court, Southern District of New York (in the related proceedings) described Sevilleja’s actions as “the most blatant effort to hinder, delay and defraud a creditor this Court has ever seen”.
Marex obtained an order for permission to serve proceedings out of the jurisdiction on Sevilleja. Sevilleja applied to set aside that order on the basis that Marex did not have good claim against him, because Marex was seeking to recover reflective losses which had been suffered by the Companies, of which Marex was a creditor. Knowles J held that Marex had a good arguable case that its claims were not precluded as reflective loss. However, on appeal, the Court of Appeal held that the reflective loss principle barred 90% of Marex’s claim, and so it could pursue its claim only in relation to the remaining 10%.
Supreme Court Judgment
In the Supreme Court, Lord Reed gave the lead judgment with Lady Black and Lord Lloyd-Jones agreeing, and Lord Hodge also agreeing but delivering a separate judgment. Lord Sales delivered a separate judgment (with Lady Hale and Lord Kitchin agreeing). The Court unanimously agreed that Marex’s appeal should be allowed.
The principle of reflective loss was established in the case of Prudential Assurance Co Ltd v Newman Industries Ltd (No 2)  Ch 204 and expanded by Lord Millett in Johnson v Gore Wood & Co  2 AC 1.
Prudential decided that a shareholder may not bring a claim for the diminution in value of its shareholding which results from a loss suffered by the company as a consequence of a wrong done by the defendant. That prohibition operated even if the defendant’s conduct also involved the commission of a wrong against the shareholder, and even if no proceedings had been brought by the company.
The key question for the Supreme Court was whether the rule against reflective loss applied to creditors of a company. The answer to that question was a resounding and unanimous “no”.
The bigger question, which appeared to trouble the Court and which accounts for the bulk of the judgment, was to what extent the rule against reflective loss should remain (if at all) in relation to shareholders. Three dense judgments were delivered by Lord Reed, Lord Hodge (agreeing with Lord Reid) and Lord Sales.
Lord Reed, Lady Black, Lord Lloyd-Jones and Lord Hodge (the majority) held that the rule against reflective loss as set out in Prudential and explained by Lord Bingham in Johnson remained good law. That is, there is a “bright line rule” which prevents a shareholder, in his capacity as a shareholder, from bringing a claim for loss suffered by the company, which results in a loss to his shareholding. In such a case, the Court said, it is not right to say that the shareholder has not suffered loss; he plainly has. However, the majority said, he has not suffered loss which the law regards as separate and distinct from the company’s loss. The company alone is the true claimant.
Lord Reed explained that the rationale for the rule was primarily based in a proper understanding of the relationship between a shareholder and the assets of a company. Namely, that a share does not represent a proportionate part of the company’s assets, nor does it confer any legal or equitable rights to the company’s assets. A loss to the company does not necessarily result in a direct and equal loss to the shareholder (a point which Lord Sales was also at pains to make). Lord Reed stated that a share could only be viewed as a right of participation in the company. If a company recovers its loss against a defendant that may or may not compensate the shareholder for the loss of value to his shares. However, if it does not (and there is no other impropriety by the management of the company) the shareholder has no separate or additional claim for relief.
Lord Hodge added that the problems and uncertainties which have arisen surrounding reflective loss have emerged because the principle of has broken from its moorings in company law.
The Court was unanimous that concerns about double recovery alone could not justify the existence of the rule.
The majority repeatedly emphasised that the rule only applies to a shareholder who brings a claim qua shareholder for a reduction in the value of his shareholding. It does not apply to a shareholder who has a separate and distinct claim in another capacity eg. as a creditor, or as an employee. Lord Sales agreed that the rule should not extend to shareholders who have a separate and distinct claim in another capacity (and much of his judgment is devoted to analysing such examples). However, Lord Sales also went further and said that the reflective loss principle is a “flimsy” one, and doubted whether it should apply to shareholders at all where they could show a separate cause of action from the company. Lord Sales did not explain which pure shareholder claims should be regarded as separate and distinct to a concurrent company claim.
Lord Sales regarded the rule set out by the majority as a “crude bright line” to exclude shareholders’ claims. He favoured an approach which would permit such a claim in principle, with concerns about double recovery and concurrent claims to be dealt with through case management.
The majority held that Lord Millett’s speech in Johnson represented a wrong turn, and the later authorities of Giles v Rhind, Perry v Day and Gardner v Parker were wrongly decided.
Ramifications of the decision
The importance of the decision cannot be overstated. The Supreme Court has overturned nearly 20 years of decisions which had expanded and restated the rule against reflective loss. This area of the law was previously notable for its complexity and for sometimes producing perplexing results.
For example, the patchy expansion of the rule beyond its company law origins meant that fraud claimants, who were not shareholders, were in the odd position of having to rebut reflective loss arguments simply because a corporate structure was involved in the fraud, rather than only individuals.
In that sense, the decision is a win for simplicity and clarity. It is now clear where the “bright line” is, and this should make life easier for practitioners.
The finer points of distinction between the judgments of Lord Reed and Lord Sales will nonetheless provide for fruitful discussion. It may be that in practice there is almost no difference between the two. Alternatively, those different approaches may reveal deeper divisions, such as; the understanding of shareholders’ rights, and the extent to which procedural and case management solutions should be favoured over “bright line” legal rules.
The full judgment can be accessed here.