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Landmark ruling on rule against recovery of reflective loss

Marex Financial Ltd v Sevilleja [2020] UKSC 31, 15 July 2020

The Supreme Court has significantly narrowed the scope of the rule against the recovery of “reflective loss”. The rule now only applies to a claim by a shareholder that the value of shares, or of the distributions received as a shareholder, have been diminished by reason of actionable loss suffered by the company. The rule no longer applies to claims by creditors (whether they are also shareholders or not). The ruling will be welcomed by creditors.

The rule against recovery of reflective loss – a reminder

A shareholder cannot bring a claim for a loss suffered by the company, for example damages based on the diminution in the market value of shares or a likely diminution in dividend.   A shareholder’s loss is said to be merely a “reflection” of the loss suffered by the company, and the company (or its liquidator) is the proper claimant: Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204.  A notable exception to the rule was developed in Giles v Rhind [2003] Ch 618: the rule will not apply where the alleged wrongdoing means the company is unable to pursue the wrongdoer.

Several cases since Prudential have raised the possibility that the rule against reflective loss should extend beyond shareholders’ claims.  In Johnson v Gore Wood [2002] 2 AC 1, Lord Millett commented that the rule applied to claims brought by the claimant shareholder in his capacity as employee, rather than his capacity as shareholder.  In Garner v Parker [2004] EWCA Civ 781, Neuberger LJ stated obiter that it was hard to see why the rule against reflective loss should not also apply to creditors other than employees. 

Creditor tries to sue asset-stripper

In Marex v Sevilleja, the defendant allegedly asset-stripped two BVI companies ultimately owned and controlled by him so that they were unable to pay their judgment debt to Marex. The BVI companies are now in liquidation.

Marex started English court proceedings against the defendant to claim its judgment debt, interest and costs as damages.  Marex’s tort claims were that the defendant had knowingly induced and/or procured the BVI companies to act in wrongful violation of Marex’s rights under the judgment and that he had intentionally caused loss by unlawful means.  The defendant argued, inter alia, that the rule against reflective loss barred Marex’s claims.

At first instance, the court held that the rule against reflective loss did not bar the claims of a non-shareholding creditor such as Marex.  The court’s decision turned on the view that the torts of knowing inducement and unlawful means had a principled part to play in allowing a claimant to hold a defendant to account in the case of deliberate asset-stripping. 

Court of Appeal – rule bars claims by creditors

Overturning the decision at first instance, the Court of Appeal held that the rule against the recovery of reflective loss applied to Marex’s claims against the defendant, even though Marex was a creditor and not a shareholder of the BVI companies.  The Court of Appeal considered that seeking to distinguish between the position of shareholder creditors and non-shareholder creditors was artificial and anomalous, and therefore the rule against the recovery of reflective loss should apply equally to non-shareholder creditors. The rule therefore barred Marex’s claim against the defendant. 

Supreme Court – reframes and narrows the rule against recovery of reflective loss

The Supreme Court disagreed with the Court of Appeal.  All seven members of the Supreme Court agreed that the rule does not bar claims by unsecured creditors of a company.  The court was however divided on the reasoning, and split on whether any such rule should exist at all.

Majority - A bright-line rule of company law with no exceptions

The majority judgment was given by Lord Reed, with whom Lady Black, Lord Hodge and Lord Lloyd-Jones agreed.  They all thought that the rule should be retained as a ‘bright-line’ rule of company law but its ambit confined to Prudential, i.e. to only bar claims by a shareholder in respect of loss suffered in that capacity for the diminished value of their shareholding or for the loss of distributions which the company would have paid to them in circumstances where an actionable wrong has been done both to the company and to the shareholder, even if the company does not pursue its own cause of action.   The rule does not apply to other types of losses suffered by a shareholder or any claims by a non-shareholder, or to situations where the company has no cause of action.

They criticised the decision in Johnson v Gore Wood (except for Lord Brown-Wilkinson), and overruled the exception in Giles v Rhind.  In their view there is no room for any exceptions to the rule, nor judicial discretion.

Minority – abolish the no reflective loss rule

Led by Lord Sales (with whom Lady Hale and Lord Kitchin agreed), the minority disagreed.  They held in effect that there was no reflective loss rule as a principle of the law of damages or a rule of company law. They rejected the ‘legal fiction’ that a shareholder’s loss is equal to a company’s loss.   In their view, a shareholder’s loss may be different.  A share is a piece of property, the market value of which depends on the estimation of the future business prospects of the company and not just its net asset position.  A recovery by the company may not eliminate a shareholder’s loss. Instead of having a rule, they advocated approaching claims on a case by case basis, using expert evidence on share valuation and using procedural devices to manage the risk of concurrent claims by a shareholder and a company.


The controversial earlier Court of Appeal decision had potentially increased the difficulties for creditors seeking to hold shareholders accountable for asset-stripping a defendant company. 

The Supreme Court ruling has confined the scope of the rule to within its original limits in Prudential, applying only to certain types of claims by shareholders  - i.e. claims for a diminution in the value of their shareholding or reduction in distributions by virtue of such shareholding where there are concurrent actionable claims by the shareholder and the company, regardless of whether the company pursues any claims.

Over time the rule had expanded to bar claims not just by a shareholder, as shareholder, but also to other types of claims and claimants, e.g. employees and creditors.  The extension of the principle to such cases, the Supreme Court held, “has the potential to have a significant impact on the law and on commercial life”. The Supreme Court has halted that expansion.

The finding that the rule does not apply to creditors will be welcomed by finance parties and judgment creditors, regardless of the fact that the judges were divided on the precise reason why it doesn’t apply. The majority found that the rule did not apply to a creditor as it only applies to certain types of claims by shareholders.  The minority found that the rule does not apply as there should not be a rule at all.  

For conflicts of law enthusiasts, the majority classified the application of the rule as a question of company law, which is a departure from the previous approach of considering it as a question of procedural law.  This categorisation will impact the conflicts of law analysis in claims with cross-border elements.

The facts of this case reinforce the importance of planning beyond a substantive dispute to the risks, costs and ease of enforcement.  Creditors or claimants who suspect that asset-stripping is likely should consider early strategies to pre-empt such wrongdoing.