In mid-July 2020, in Marex Financial Ltd v Sevilleja  UKSC 31, the United Kingdom Supreme Court delivered an important decision on what is called the “reflective loss” principle in company law. This controversial principle says that where a company suffers loss as a result of a wrong, a shareholder cannot bring proceedings for the diminution in the value of its shares resulting from the wrong even if, for some reason, the shareholder had its own cause of action against the wrongdoer along with the company.
The Supreme Court unanimously held that this rule does not extend beyond shareholders to catch a creditor of a company that has a cause of action against the wrongdoer despite the company having a connected cause of action against the wrongdoer. The simple facts of the case concerned an alleged conspiracy by the controller of the relevant company, Mr Sevilleja and others, to strip the company of its assets purely to defeat the legitimate debt claims of the claimant against the company. This is a common fact pattern, and the Supreme Court has now countenanced a direct claim by a creditor against the controllers in such a situation.
Three of the seven judges in the Supreme Court (Lord Sales with whom Lady Hale and Lord Kitchin agreed) would have gone further to reject the whole reflective loss principle, so that even a shareholder who has its own cause of action arising out of the same facts would be able to sue the wrongdoer. Lord Sales quoted extensively and with approval from the judgment of Thomas J for the New Zealand Court of Appeal in Christensen v Scott  1 NZLR 273 at 280, a case which rejected the reflective loss principle. One should disclose that the Judge also quoted with approval from an article of mine on the subject: P Watts “The Shareholder as Co-Promisee” (2001) 117 LQR 388.
The strength of reasoning in Lord Sales’s judgment, coupled with the leading New Zealand case being against the reflective loss principle, suggest to me that a New Zealand court might adopt the minority view in Marex when the issue next arises here. The difficulty with the majority view is finding an explanation for why a shareholder who indubitably does have an independent cause of action that parallels the company’s should forgo its remedies. Two quotes (in reverse order, at  and ) from Lord Sales’s judgment warrant repetition here:
It is true that adoption of the rule of law identified by Lord Reed and Lord Hodge [the majority judgments] would eliminate the need for debate about the interaction of the company’s cause of action and the shareholder’s cause of action, and in that way would reduce complexity. Bright line rules have that effect. But the rule only achieves this by deeming that the shareholder has suffered no loss, when in fact he has, and deeming that the shareholder does not have a cause of action, when according to ordinary common law principles he should have.
If [the claimant] is a shareholder with a personal cause of action, nothing in the articles of association constitutes a promise by him that he will not act to vindicate his own personal rights against a defendant against whom the company also has its own cause of action; and there is no other obligation to that effect arising out of his membership of the company.
This is not to say that concurrent liability of a wrongdoer to both company and shareholder and/or creditors is not without its difficulties. One part of the answer to the prospect of unjustifiable double liability in the wrongdoer is for the courts to be alive to the question whether on the facts before them the shareholder or creditor really does have a separate cause of action. In this regard, New Zealand tort law is highly problematic insofar as it recognises negligence liability for pure economic loss much more readily than in England or Australia (and the United States for that matter, but less so Canada). The egregious New Zealand approach leads to concurrency of causes of action in different parties; the one who has a contract action, and a host of others who do not, but are permitted to sue in tort.
The unanimous holding in Marex itself is also not without its difficulties on this score, although so far its result seems to have been universally applauded. Hence, all seven judges upheld a tort cause of action in the company’s sole external creditor on the basis that the defendant director had conspired to spirit away the company’s assets, making the creditor’s judgment against the company worthless. This may seem a worthy claim, but what if the director was acting to defeat a whole raft of creditors? Do we really want every individual creditor bringing its own suit against the director, when one by the liquidator would do? In Marex the liquidator of the company was out of the jurisdiction and had been appointed by Mr Servilleja, who may have had personal assets in London. Pragmatically, there was merit in the creditor being able to sue in London.
Another point about Marex is that the creditor was claiming the full value of its judgment debt of US$5.5 million plus costs from Mr Sevilleja (see ), when the company was said also to owe US$30 million to Mr Sevilleja and entities controlled by him (see ). A number of explanations for the scope of Marex’s claim are possible. Perhaps Marex was claiming that, were it not for the Mr Sevilleja’s actions, it would have been able to enforce its judgment in full before the debtor companies were put into liquidation. Otherwise, Marex may have been arguing that the insider-debt was not genuine, or that the company law of the debtors’ home jurisdiction (the British Virgin Islands) allowed for subordination of insider debt. The fact remains that prima facie Marex’s loss from its economic-tort causes of action was only the loss of dividend that it would have received in the liquidation of the debtors, not the face value of the debts owed it.
On any basis, however, the result of the unanimous decision in Marex exposed Mr Sevilleja to double liability. So, Marex’s tort claim could not, prima facie, deprive the debtor company, through the liquidator, of its right to recover the full value of the assets misappropriated by Mr Sevilleja. Lord Reed, for the majority, did not address this issue. However, Lord Sales perceived (at ) that the solution to this problem would be that once Mr Sevilleja had paid Marex, he would be entitled to be subrogated to Marex’s right to prove in the liquidation of the debtor companies. This is one of the ways in which the common law deals with overlapping-loss claims.
One should say that subrogation is far preferable to Lord Sales’s other solution, which was to contemplate a direct unjust enrichment claim by Mr Sevilleja against his own company for having reduced its debt exposure to Marex. For this, Lord Sales relied on Moule v Garrett (1872) LR 7 Ex 101 (see ). Moule has been around too long to be overruled but it is, it is submitted, a highly anomalous restitutionary claim, permitting leap-frogging down a chain of contracts using an amorphous concept of unjust enrichment.
Returning to general principle, one can note that where the overlapping claims are both contractual, it will usually be possible to solve the problems of double liability by construction of the promises. The court may conclude that one promise is subordinate to, or becomes superseded by, the other. One common situation arises where a professional is retained to advise a client but then finds that the client wishes to form a company to carry out the transaction. It may then be that, once the company is formed, the professional’s responsibility is implicitly undertaken only in favour the company. It is simpler, of course, if the contracts expressly spell out how double liability is to be avoided. But it should not altogether be ruled out that a promisor may not only have accepted a double liability, but may also have contemplated double recovery.