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Recent Reflections of the Supreme Court on Reflective Loss

By Bridget Lucas QC

On 15 July 2020, the Supreme Court handed down its landmark judgment in Sevilleja v Marex Financial Ltd providing much needed clarification as to the narrow scope of the principle of “reflective loss”. The reflective loss principle has its judicial origins in the decision in Prudential Assurance Co Ltd v Newman Industries Ltd (No. 3) [1982] Ch 204 which decided 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 which is merely the result of a loss suffered by the company in consequence of a wrong done to the company by the defendant (frequently a director). That is so even if the defendant’s conduct also involved the commission of a wrong against the shareholder. Where it applies, the shareholder’s claim is excluded even if the company does not bring proceedings itself.

In Johnson v Gore Wood & Co [2002] 2 AC 1, the House of Lords considered the reflective loss principle, and its approach led to an extension in its application and effect. Lord Millett in particular advanced justifications for the exclusion of a shareholder’s claim whenever the company had a concurrent claim available to it.  The application of the principle reached its highpoint in the Court of Appeal in Sevilleja v Marex which concluded that the reflective loss principle precluded a claim by Marex, an ordinary unsecured creditor, against a director of the companies even though Marex held no shares in the companies at all.

In a 4: 3 decision, giving the majority judgment of the Supreme Court, Lord Reed has confined the application of the rule in Prudential to “claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished.  Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way”.

Lord Sales, giving the judgment for the minority, took an altogether more radical approach and concluded that a shareholder ought not to be prevented from pursuing a valid personal cause of action.  Any risk of double recovery can be managed by effective case management.

It is not every day that a redline is scored through a raft of previously binding authority on such a fundamental principle. The clarification provided by the Supreme Court was much needed and has returned the reflective loss principle to the narrow bounds envisaged in Prudential. The reflective loss principle has no application to creditor’s claims. Shareholders whose claims for loss can be framed as other than for diminution of share value or distributions consequential on the company’s loss, and separate and distinct from that of the company will not be precluded by the principle from pursuing their claims. The prospect of becoming embroiled in prolonged and expensive, satellite strike-out litigation as to the applicability of the reflective loss principle has receded. Commercial certainty (and common-sense) has been restored.

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