Sevilleja v Marex Financial Ltd [2020] UKSC 31

Marex obtained judgment against two companies controlled by Mr Sevilleja, who then stripped their assets to prevent payment. Marex sued Mr Sevilleja personally for economic torts. The Supreme Court clarified that the reflective loss principle only prevents shareholders claiming for diminution in share value reflecting company losses, and does not bar creditors from pursuing their own claims.

Facts

Marex Financial Ltd obtained judgment against two BVI companies, Creative Finance Ltd and Cosmorex Ltd, for over US$5.5m plus costs. Following circulation of the draft judgment, Mr Sevilleja, who owned and controlled the companies, allegedly transferred over US$9.5m from the companies’ London accounts offshore, rendering them unable to pay Marex. The companies were subsequently placed into insolvent liquidation in the BVI with Mr Sevilleja and associated entities claiming debts exceeding US$30m. Marex was the only non-insider creditor. The liquidator took no steps to investigate or pursue claims against Mr Sevilleja.

Procedural History

Marex brought proceedings against Mr Sevilleja personally for inducing violation of its rights under the judgment and for intentionally causing loss by unlawful means. Mr Sevilleja applied to set aside permission for service out of jurisdiction, arguing that Marex’s claimed losses were ‘reflective’ of the companies’ losses and therefore irrecoverable. Knowles J dismissed this application. The Court of Appeal allowed Mr Sevilleja’s appeal, holding the reflective loss principle applied to creditors.

Issues

The key issues were: (1) whether the ‘no reflective loss rule’ applies to claims by company creditors where their claims are as unsecured creditors rather than shareholders; and (2) whether any exception exists permitting claims for losses otherwise within the reflective loss rule where injustice would result.

Judgment

Majority Reasoning (Lord Reed, with Lady Black and Lord Lloyd-Jones agreeing)

Lord Reed extensively analysed the origins and rationale of the reflective loss principle, tracing it to Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204. He emphasised that the rule in Prudential was a specific rule of company law:

“a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, is not in the eyes of the law damage which is separate and distinct from the damage suffered by the company, and is therefore not recoverable.”

Lord Reed explained the rule’s foundation in the principle from Foss v Harbottle:

“When the shareholder acquires a share he accepts the fact that the value of his investment follows the fortunes of the company and that he can only exercise his influence over the fortunes of the company by the exercise of his voting rights in general meeting.”

Critically, Lord Reed held that the expansion of this principle in Johnson v Gore Wood & Co [2002] 2 AC 1, particularly through Lord Millett’s reasoning treating avoidance of double recovery as sufficient justification, was wrong and should not be followed. The principle should remain confined to shareholders claiming for diminution in share value or distributions.

“The rule in Prudential is limited 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 Hodge’s Concurrence

Lord Hodge agreed, emphasising the rule’s foundation in company law principles:

“the laws refusal to recognise the diminution in value of a shareholding or the reduction or loss of a distribution, which is the consequence of the company suffering loss as a result of wrongdoing against it, as being separate and distinct from the company’s loss is a principled development of company law.”

Minority Reasoning (Lord Sales, with Lady Hale and Lord Kitchin agreeing)

Lord Sales reached the same result but through different reasoning. He considered the Prudential reasoning fundamentally flawed because it incorrectly equated shareholder losses with company losses:

“the loss suffered by the shareholder is not the same as the loss suffered by the company. There is no necessary, direct correlation between the two.”

Lord Sales would not have endorsed the reflective loss principle even for shareholders, preferring procedural solutions to manage concurrent claims and avoid double recovery.

Implications

This decision significantly narrows the reflective loss principle, confining it strictly to shareholder claims for diminution in share value or lost distributions where the company has a concurrent cause of action. The principle does not extend to creditors, employees, or others claiming in capacities other than as shareholders. The decisions in Giles v Rhind, Perry v Day, and Gardner v Parker were overruled as wrongly decided. The case provides important clarification of company law principles regarding the relationship between companies and their shareholders, while confirming that ordinary creditors retain their full rights to pursue tortfeasors who have caused them loss.

Verdict: Appeal allowed. The reflective loss principle does not apply to claims by creditors who are not shareholders. Marex was permitted to pursue its entire claim against Mr Sevilleja.

Source: Sevilleja v Marex Financial Ltd [2020] UKSC 31