Reflective Loss Reframed – Sevilleja v Marex Financial Ltd  UKSC 31
It has long been understood that a company is legally distinct from its shareholders. Many are glad this is the case, especially when it protects business owners from liability for company debts. But the principle can have some unexpected consequences. What happens, for instance, if a company suffers a loss as the result of a wrongdoing by some third party? Can both the company and its shareholders issue a claim against the culprit?
The usual answer is no – where a company suffers a loss it is for the company to issue the claim. This is a principle known as “reflective loss” and is often true even if the intended defendant’s conduct also involved the commission of a wrong against a shareholder, or if the company refuses to bring proceedings for whatever reason. This can mean minority shareholders lose out as they do not have the power to bring a claim themselves (though in certain circumstances they can issue a derivative claim, which they can use to force the company to initiate proceedings).
Whenever a shareholder wants to bring a claim for a loss suffered by the company, it’s usually because the value of their shareholding has been diminished, or because they are no longer receiving dividends because the assets of the company have been reduced. In this circumstance the reflective loss rule makes sense, as the shareholder’s loss could be adequately remedied by damages received by the company, and allowing both company and shareholder to claim may mean that the shareholder is compensated twice for the same loss.
However, in recent years the courts have expanded the reflective loss principle to apply to a host of other claims and claimants. By the time the case of Sevilleja v Marex Financial Ltd reached the Court of Appeal the rule had expanded so widely that even unsecured creditors of a company were prevented from bringing a claim against a defendant who had purposefully stripped assets from the company to prevent the creditors recovering their money. The Court of Appeal held that it was for the company to reclaim the stripped assets, not the creditors.
This very expansive reading of the reflective loss rule poses many problems. For example, insolvent companies are often taken out of the control of director/shareholders and placed under the management of insolvency practitioners. During the aftermath of the credit crunch, many insolvent companies had potential claims in contract and tort against banks who miss-sold financial products such as interest rate hedges and swaps. However, because the insolvency practitioners were often appointed by the banks against whom the claims would be made they would simply refuse to issue claims, and so the shareholders and other unsecured creditors of the companies would lose out.
When Sevilleja v Marex Financial Ltd came before the Supreme Court the justices allowed a rare intervention to hear submissions from the All Party Parliamentary Group on Fair Business Banking. The APPG drew the court’s attention to the way the expansive reflective loss rule had prevented shareholders, creditors and guarantors from pursuing legitimate claims against lenders after a company had been made insolvent.
The Supreme Court has now pruned back reflective loss, a principle which had been likened to a “ghastly legal Japanese knotweed.” Following their unanimous decision to overturn the Court of Appeal, the reflective loss rule once again applies only to prevent shareholders from bringing a claim in respect of a reduction in the value of their shares (or the payment of dividends) as a result of an actionable loss suffered by their company.
This means that other claimants (including shareholders who have a right to bring a claim for some reason which has nothing to do with their shareholding) may issue a claim in their own right, even if a company also has a right to bring a claim for the same loss.
This Supreme Court judgement is certainly to be welcomed, as it confines the rule against reflective loss to its original narrow scope, and so raises the possibility of a greater number of potential claimants who may seek compensation where both they and a limited company have suffered loss as a result of wrongdoing.