UK Supreme Court decision on “reflective loss” in company law

In mid-July 2020, 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 jointly with the company. In Marex Financial Ltd v Sevilleja [2020] UKSC 31the Supreme Court unanimously held that this rule does not apply to a creditor of a company that has its own 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 relevant directors in such a situation. Three of the seven judges in the Supreme Court (Lord Sales for himself, Lady Hale and Lord Kitchin) would have gone further to reject the whole reflective loss principle, so that even a shareholder who has its own cause of action for the wrong ( which will not usually be the case) would be able to sue the wrongdoer. In support of his conclusion, Lord Sales had recourse to an article by Peter Watts QC: “The Shareholder as Co-Promisee” (2001) 117 LQR 388.

Peter Watts QC