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Reflective loss rule - paired back for the modern age
7th September 2020 • Take 10 • Harneys
00:00:00 00:14:10

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In this episode of our Take10 podcast, Ian Mann is joined by guest speaker Victor Joffe QC of Temple Chambers to discuss the UK Supreme Court case of Sevilleja v Marex Financial Ltd [2020] UKSC 31, a case that looked at whether the rule against reflective loss prevented creditors of a company from claiming directly against a third party for asset-stripping the company.

Key Takeaways:

Sevilleja v Marex – The facts:

  • Mr Sevilleja controlled two BVI companies which were sued by Marex Financial Ltd. In the Court of Appeal, Marex was successful in obtaining a judgment of over US$5 million and costs. A copy of the draft judgment was provided to both parties, prior to the final judgment due to be handed down a few days later. During those days, Mr Sevilleja caused his BVI companies to transfer over US$9.5 million out of their accounts and subsequently put the companies into liquidation, making it impossible for Marex to receive payment on the judgment debt.
  • As a result, Marex brought claims against Mr Sevilleja, seeking damages for violating Marex’s rights in avoiding the judgment and other intentional economic torts.
  • Mr Sevilleja’s defence stated that Marex’s claims were barred by the principle of reflective loss.

Reflective loss:

  • The reflective loss principle states that if a company suffers a loss, only the company can sue in respect of that loss. The shareholders cannot sue in respect of the loss because the loss suffered is not a personal loss, but a reflection of the loss suffered by the company.
  • In Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204, the Court of Appeal held that reflective loss applied to claims brought by shareholders in respect of diminution in the value of their shares, and diminution in the flow of distributions, caused by a wrongdoer who had acted in breach of duty both to the company and to the shareholders.
  • In a number of subsequent cases, Johnson v Gore Wood & Co [2000] UKHL 65 has been relied upon to justify an expansion of the reflective loss principle, particularly due to Lord Millet’s speech. For example, the rule was expanded to apply to shareholders who are creditors (as seen in Gardner v Parker [2004] 2 BCLC 554) and then to apply to creditors who are not shareholders, as seen in the Court of Appeal in Sevilleja v Marex.
  • Ultimately, the Supreme Court in Sevilleja v Marex pairs back the reflective loss rule to its original and limited scope as decided originally in the decision of Prudential - making it clear that reflective loss only applies to diminution in shareholdings and diminution in the flow of distributions. It does not apply any further and there are no exceptions to the rule. It does not prevent creditors of a company from claiming directly against a third party for asset-stripping the company.




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