Marex, a judgment creditor of two companies controlled by Mr Sevilleja, alleged that he had moved their assets beyond reach so that its judgment could not be paid, and sued him personally in tort. The Supreme Court held that this claim was not barred by the rule against reflective loss. That rule prevents a shareholder from recovering a fall in the value of shares, or a loss of distributions, which merely reflects a loss the company itself can sue for. It does not prevent an ordinary creditor from pursuing a personal claim.
How the claim arose
For these proceedings the facts had to be taken as Marex alleged them. Mr Sevilleja disputed them, and the Supreme Court did not find that they were true.
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Marex had obtained a substantial judgment against two companies controlled by Mr Sevilleja. It alleged that after seeing the draft judgment he moved assets beyond the reach of enforcement. He disputed the allegations. Their truth had not been tried.
The companies entered insolvent liquidation. Marex said the company claims were not being pursued and sought to sue as a creditor for loss that it had suffered itself.
Marex sued him for inducing or procuring a violation of its rights under the judgment, and for intentionally causing loss by unlawful means. It claimed the judgment debt, interest and costs, less a sum recovered in separate United States proceedings, and its costs of trying to obtain payment. He conceded that those last costs fell outside the reflective-loss principle.
He applied to set aside permission to serve the claim outside the jurisdiction, arguing that Marex had no good arguable case because its loss merely reflected loss for which the companies had concurrent claims. Knowles J rejected that argument. The Court of Appeal held that the principle applied to about 90 per cent of the claim, leaving Marex able to pursue only the 10 per cent conceded not to be reflective. Permission to serve out was not itself set aside.
The supposed reflective-loss rule
The agreed issues were whether the rule applies to a creditor who is not suing as a shareholder, and whether a claim prima facie within the rule may still proceed where the defendant’s wrongdoing makes recovery through the company impossible or impracticable.
Ordinarily, if conduct breaches duties owed to two people, each may sue. Where payment to one would in practice also remedy the other’s loss, the court prevents double recovery, or double proof in an insolvency, by an appropriate order. It does not generally extinguish one claim in advance.
Company law contains a narrow exception, drawn from Prudential Assurance Co Ltd v Newman Industries Ltd (No 2). A share is not a portion of the company’s assets and gives the shareholder no interest in them. It is a right to participate on the terms of the articles. Where a wrong to the company causes a fall in share value, or a reduction in distributions, which is merely the result of the company’s own actionable loss, the law does not treat that as a separate loss of the shareholder. Only the company may seek relief for an injury to itself. That is the rule in Foss v Harbottle. A personal action would undermine it, even if the company does not sue, settles for less than a shareholder thinks proper, or cannot afford proceedings. Minority shareholders instead have company-law remedies, including a derivative claim, unfair-prejudice relief and, in a proper case, a just and equitable winding up.
In Johnson v Gore Wood & Co the House of Lords purported to follow Prudential. Lord Bingham’s statement was consistent with that narrow rule and was confined to claims brought as a shareholder. Lord Millett justified the bar more widely, by double recovery and protection of creditors, and later cases extended it to shareholders claiming as creditors and then to creditors generally. The Court of Appeal applied that expanded principle to Marex. Lord Reed, with whom Lady Black and Lord Lloyd-Jones agreed, described the legal basis and scope of this wider principle as controversial.
Why the majority confined the rule to shareholders
Lord Reed held that avoiding double recovery cannot itself explain Prudential. A company’s loss does not always produce an equivalent fall in share value, particularly where shares are valued by the market. The distinctive reason is the shareholder’s relationship with the company. The investor accepts that the value of the investment follows the company’s fortunes, and that the company’s own claim is controlled by its constitutional organs, ultimately a majority of the members. A clear rule also avoids difficult disputes about causation, the value of the company’s right of action, and double recovery, possibly in competing proceedings.
A creditor is in a different position. There is no equivalent relationship between the company’s assets and a debt. Creditors suffer no loss from a reduction in those assets while the company is solvent. Even in insolvency, recovery depends on security, priority and the conduct of the liquidation. A creditor who sues the wrongdoer is not suing for the company’s injury, so Foss v Harbottle is not engaged.
Concurrent claims by company and creditor do not automatically create double recovery. If that risk arises, it is dealt with in the ordinary way. The company’s claim need not go first. The pari passu principle requires the company’s assets to be shared rateably among ordinary creditors. It does not give the company a preferential claim against the wrongdoer. If he cannot pay everyone, his own insolvency regime applies.
That reasoning also rejected the exception in Giles v Rhind, where a shareholder’s claim was allowed to proceed because the defendant’s wrongdoing had left the company unable to continue its action. A wrongdoer’s escape from liability to one person is not a reason to make him pay another who has suffered no recoverable loss. Where those in control improperly prevent the company from suing, the remedy is a derivative action. Giles v Rhind, Perry v Day and Gardner v Parker were wrongly decided. The rule covers only a shareholder’s claim that actionable loss to the company has diminished the value of the shares, or the distributions received as shareholder.
Lord Hodge agreed. He treated the rule as part of company law, not a free-standing rule of damages. It avoids a race between shareholders, maintains equality among them, respects majority decision-making, and preserves creditors’ priority over shareholders on a winding up. Although case management and subrogation might give some protection, he would not abandon the bright line drawn in Prudential and affirmed by Lord Bingham in Johnson.
A different route to the same result
Lord Sales, with whom Lady Hale and Lord Kitchin agreed, would also have allowed the appeal, but not because a shareholder’s reflective loss is deemed nonexistent. In his view Prudential wrongly treated the absence of a separate loss as a universal conclusion rather than a question of fact. Share value may reflect expected profits and market sentiment, and a shareholder may have an independent cause of action and a genuinely different loss. Double recovery and prejudice to others should then be managed on the evidence, for example by joinder, a stay, giving credit, or subrogation. He would not follow Johnson so far as it barred such a shareholder claim. Even if that bar survived, it could not apply to Marex: a creditor has not agreed to follow the company’s fortunes. If Mr Sevilleja paid Marex in respect of the companies’ debt, he could be subrogated to Marex’s rights against them, or given a right of reimbursement, so that the debt was not paid twice.
What remains open
Because Marex claimed as a creditor, the shareholder rule did not apply and no exception arose. The Court was not addressed on double recovery on these facts. No claim had yet been brought for the companies, and Marex said that the other alleged debts were not genuine and that the liquidation was part of a scheme to defeat its judgment. Lord Reed left any such issue, including subrogation, for later consideration if it arose.
Verdict: The Court unanimously allowed Marex’s appeal. The majority confined the reflective-loss rule to a shareholder’s claim for diminution in share value or distributions reflecting a loss for which the company can sue. Marex claimed as a creditor and could proceed. Liability remained untried.
