Supreme Court decides that reflective loss rule does not bar claims made by unsecured creditors
In what is being described as a landmark decision, on 15 July 2020, the Supreme Court handed down a decision which significantly narrowed the scope of the so-called rule against recovery of reflective loss.
The “reflective loss” Principle
The rule prevents claims by shareholders of a company to recover loss suffered as a result of a defendant’s wrongdoing against the company, and has existed since the 1981 Court of Appeal decision in Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204. The decision, and the rule, was subsequently broadened by the House of Lords in Johnson v Gore Wood [2002] 2 AC 1, to bar any claims made by a shareholder in his other capacities as a shareholder, employee or, importantly, a creditor.
The Supreme Court decision in the recent case of Sevilleja (Respondent) v Marex Financial Ltd (Appellant) (on Appeal) [2020] UKSC 31 found that the reflective loss principle has no application in the case where the claimant is a creditor and not a shareholder.
Background
Marex Financial Ltd (Marex) obtained judgment against two companies incorporated in the British Virgin Islands (the Companies) of which Mr Sevilleja was the owner and controller. Following the circulation of the judgment in draft, Mr Sevilleja stripped the Companies of their assets, thereby rendering them insolvent.
Marex issued proceedings against Mr Sevilleja seeking damages for procuring a violation of its rights under the judgment, and for intentionally causing loss to Marex by unlawful means. Marex obtained permission to serve proceedings on Mr Sevilleja out of the jurisdiction. Mr Sevilleja appealed against the permission, on the grounds that Marex did not have a good arguable case against him because the loss suffered by Marex was irrecoverable due to the reflective loss principle i.e. the loss was suffered by the Companies, not Marex.
In his application, Mr Sevilleja relied upon the principle established by the Court of Appeal in Prudential, that a shareholder cannot bring a claim in respect of a diminution in the value of his shareholding, or a reduction in the distributions which he receives by virtue of his shareholding, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant; even if the defendant’s conduct also involved the commission of a wrong against the shareholder, and even if the company chose not to bring proceedings in respect of the same. Mr Sevilleja also relied on the decision of Lord Millet in Johnson v Gore Wood, which extended the principle in Prudential to cover a much wider range of potential claimants.
Supreme Court Judgment
The Supreme Court determined that the reflective loss rule has no application in the case of Marex’s claim where it is a creditor and not a shareholder.
The judgment, which expands to some 82 pages, involves a careful consideration of the previous law on the principle of reflective loss and as the Supreme Court has now significantly curtailed the principle, which is likely to have an immediate impact in practice.
Whilst the decision of the Supreme Court was unanimous, the judgments varied and there was no consensus on the question of how far the Court should go in refining the reflective loss principle. This led to a 4:3 split. The majority (led by Lord Reed) decided to retain the reflective loss principle as a bright line legal rule, albeit it should be confined to the narrow ambit established in Prudential. The minority (led by Lord Sales) would have been more radical and, in effect, abolished the rule entirely.
Lord Hodge in his judgment concurring with Lord Reed said the expansion of the reflective loss principle “has had unwelcome and unjustifiable effects on the law”, and if it had been applied in this case, “would result in great injustice.”
The removal of this injustice is likely to be welcomed by victims of fraud who seek to recover the loss of assets from a fraudster, although given the dissenting opinions of the Supreme Court Justices, it is likely that this is not he final say on the controversial rule, once described by one academic commentator (Professor Andrew Tettenborn), as being likened to “some ghastly legal Japanese knotweed”.
Our thinking
Peter Smith
Building the Case for Family Business Arbitration in the GCC Region
The GCC has one of the highest concentrations of family businesses anywhere in the world.
Emma Preece
EG quotes Emma Preece on the Picturehouse and BNY Mellon rent arrears cases
“The case is being closely watched by landlords and tenants alike as the impact of the pandemic lives on in the commercial property sector”
Ghassan El Daye
The Business Breakfast interviews Ghassan El Daye on the legal procedures surrounding international extradition
The Business Breakfast interviews Ghassan El Daye on the legal procedures surrounding international extradition
Jason Freedman
Nowhere to go – Recent High Court case highlights roadblock to overcoming director deadlock
Rachel Warren
Financier Worldwide quotes Rachel Warren on the UK’s Economic Crime Act
Evaluating the UK’s Economic Crime Act
Pierre Bydzovsky
Update on FIFA-related proceedings in Switzerland
An update on the TV rights appeal trial for the World Cups and the on-going trial against former FIFA president and former UEFA president.
Stephanie Bonnello
Stephanie Bonnello writes for the Practical Law Dispute Resolution blog on witness evidence
When are witness summaries permitted instead of witness statements and when should material be struck out from a witness statement?
Oliver Auld
Unexplained Wealth Orders & Trustees
Learn about Unexplained Wealth Orders, what they are, who can obtain them and the implications that exist for trustees.
Katy Ackroyd
“Serious irregularity” in arbitration proceedings: section 68 of the Arbitration Act 1996 under the spotlight.
An analysis of an arbitration award set aside by the High Court on grounds that the arbitrator had breached his general duty of fairness.
Simone Sancandi
Sports Arbitration Rules and Roster of Dedicated Arbitrators
The Bahrain Chamber of Disputes Resolution publishes a brand-new set of Sports Arbitration Rules.
Joe Edwards
Donoghue v Stevenson: 90 years on from a snail and a bottle of ginger beer
Sara Sheffield
Developments in the UAE
The rising strength of the United Arab Emirates as a commercial powerhouse has continued as the Covid-19 pandemic recedes.
Sonia Kenawy
Sonia Kenawy writes for New Law Journal on cryptocurrency and security for costs
Sonia Kenawy writes for New Law Journal on cryptocurrency and security for costs
Charlotte Healy
Charlotte Healy and Katie Bewick write for Pharmacy Business on expert determination
Charlotte Healy and Katie Bewick write for Pharmacy Business on expert determination
Charlotte Posnansky
Depp v Heard - will transparency in the English family court increase public confidence or feed the insatiably prurient public appetite?
Hope Wilson
Hope Wilson writes for the EG Legal Q&A on qualifying criteria
Hope Wilson writes for the EG Legal Q&A on qualifying criteria
Katie Bewick
Limitation periods for fraud, concealment or mistake: know your limits
Some recent notable cases have considered the appropriate test to apply when assessing a claimant's knowledge.
Ghassan El Daye
Enforcement of Foreign Judgments 2022 - UAE
Ghassan El Daye and Ahmad El Sayed write for Lexology's Getting The Deal Through on the enforcement of foreign judgments in UAE.
Durra Al Ali
Durra Al Ali and Simon Heatley write about disclosure duties for Thomson Reuters Practical Law
Disclosure duties for clients and their lawyers
Patrick Gearon FCIArb
Dispute Yearbook 2022
Bahrain has played an important role in the development of the international dispute resolution sector.