Published on July 20, 2020
Sevilleja (Respondent) v Marex Financial Ltd (Appellant) – Reflective Loss: a “will o’ the wisp” ensnared

On 15 July 2020, the Supreme Court allowed the appeal in Marex v Sevilleja UKSC 2018/0178, in the process providing much needed definition to the ethereal principle of reflective loss which, in recent years, has expanded amorphously and generated both unnecessary litigation and unjust outcomes. On reaching a verdict, the seven Judges were unanimous in concluding that the principle had been expanded too greatly and would cause injustice if applied to Marex’s situation.

The judgment is available here

Whilst unanimous as to the decision that the rule against reflective loss should not extend to creditors, the Court was nevertheless divided as to how the risk of double recovery should be dealt with where more than one remedy is available to companies and their shareholders. The majority (Lord Reed, Lady Black, Lord Lloyd-Jones and Lord Hodge) held that the rule should be limited to shareholder claims with Lord Sales (for the minority, including Lady Hale and Lord Kitchin) questioning whether the principle should endure at all.

The decision is of huge significance, with wide reaching implications for fraud litigation, in particular, and for insolvency claims where creditors’ claims against fraudsters, which to date have had to be brought by the liquidator of the company, can now be brought by creditors directly.

The facts

Mr Sevilleja, the respondent, owned and controlled two companies (the ‘Companies‘) incorporated in the BVI. The appellant, Marex Financial Ltd (‘Marex‘) brought proceedings against the Companies for outstanding sums due under contract between Marex as broker and the Companies as clients, in respect of forex trading. The Companies were the principle trading vehicles of Mr Sevilleja. At first instance, in July 2013 before Field J, Marex obtained judgment for over $5.5 million, plus substantial costs of over $1.5 million. Field J gave the parties a confidential draft of his judgment six days before it was due to be handed down. On receipt of the draft, it is alleged that Mr Sevilleja procured the offshore transfer of over $9.5 million from the Companies’ accounts in London to his personal control. This depleted the Companies’ assets and meant that Marex could not receive payment of its judgment debt and costs.

In December 2013, Mr Sevilleja placed the Companies into liquidation in the BVI, with alleged debts exceeding $30 million. Marex was the only non-insider creditor. 

Marex then commenced proceedings in the English Courts, seeking damages from Mr Sevilleja in tort for inducing or procuring the violation of its rights under Field J’s judgment and orders, and intentionally causing it to suffer loss by unlawful means. Marex claimed:

  1. the judgment debt, interests and costs, reduced by an amount Marex recovered in proceedings in the US; and
  2. costs incurred by Marex in its attempts to obtain payment.

Mr Sevilleja argued that Marex’s claim under (1) above was barred by the reflective loss principle, in other words, that Marex, as a creditor, was barred from claiming because its loss simply reflected the loss suffered by the Companies which had concurrent claims against him (but which were in fact not pursuing these claims as they were now under the control of liquidators paid for by Mr Sevilleja).

At first instance, Knowles J held that the rule against reflective loss did not bar the claims of a non-shareholding creditor. The court’s decision turned on the view that the torts of knowing inducement and unlawful means had a principled part to play in allowing the claimant to hold the shareholder to account in the case, as here, of deliberate asset-stripping.

Overturning the decision at first instance, the Court of Appeal held that the rule against reflective loss applied to Marex’s claims against Mr Sevilleja, even though Marex was a creditor and not a shareholder of the Companies. In an important (further) extension to the rule, the Court of Appeal held that the reflective loss rule applied to claims by all unsecured creditors of a company where the loss claimed is a reflection of the loss suffered by the company as a consequence of the wrongdoing of the defendant. Marex’s claim at (1) above was therefore barred. Its claim for the costs incurred seeking to enforce the judgment of Field J in various jurisdictions survived as a distinct personal loss not reflective of the Companies’ loss. Marex appealed to the Supreme Court in respect of its losses at (1).

The “reflective loss” principle and development of the case law

The reflective loss principle has famously been described as being a “will o’ the wisp” in need of clarification (per Arden LJ in Johnson v Gore Wood (No. 2) [2003] EWCA Civ 1728). It has evolved extensively over time, with the policy rationale behind its extensions weakening with each expansion. Lord Reed spent some time in his lead judgment in Marex reviewing the case law to date and the challenges the principle (or “so-called “principle“, as he described it) has presented both legally and commercially.

The origins of the rule lie in Foss v Harbottle (1843) 2 Hare 461, which enshrined in law the principle that the proper claimant in wrongs committed by the company is the company itself.

Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 developed the law such that a diminution in the value of a shareholding, or in distributions to shareholders, which derives from loss suffered by the company as a result of a wrong done to it by the defendant, is not in law damage which is distinct from the damage suffered by the company and, consequently, cannot be recovered. The decision did not apply to losses suffered by a shareholder which were distinct from the company’s loss or where the company had no cause of action. This, Lord Reed described as a “bright line” of company law.

The principle that a shareholder cannot recover loss which is simply reflective of the company’s loss, even though the shareholder’s cause of action is independent of the company’s, was confirmed in Johnson v Gore Wood & Co. [2002] 2 AC 1. Four of the five Judges in Johnson broadly took the approach advocated by Lord Millett in characterising the issue in Prudential as one of the avoidance of double recovery, in doing so treating Prudential as establishing a more general principle of the law of damages against reflective loss. Only Lord Bingham approached the issues in Johnson on a basis consistent with the narrower ratio of Prudential affirmed by the Supreme Court in Marex. Lord Millett’s reasoning in Johnson also included an extension of the principle beyond shareholdings and dividends to “all transactions or putative transactions between the company and its shareholders” (at ¶66H) whether in their capacity as shareholders, employees or creditors.

The rule against reflective loss, cast as a general principle of damages intended to circumvent double recovery as it had by this stage evolved, had the potential to operate unfairly. Where for example, the company was incapable of pursuing its claim due to limitation or a defendant had a good defence to the company’s claim but not to that of the shareholder, the risk of double recovery is largely eliminated.

In Giles v Rhind [2002] 4 All E.R. 977, CA, the Court of Appeal “disapplied” the reflective loss principle where it was the wrongful act of the defendant which had put the company in a position where it could not pursue its claim. Following that (controversial) decision, if the shareholder in those circumstances had a separate cause of action, he could recover damages in full, even for reflective losses. Giles v Rhind was followed in Perry v Day [2004] EWHC 3372 (Ch). Lord Reed was critical of the reasoning in both decisions (see ¶69 to ¶71).

A number of cases during this period following Lord Millett in Johnson had raised the prospect that the rule against reflective loss should extend beyond shareholders’ claims to claims by non-shareholder creditors. In Gardner v Parker [2004] EWCQ Civ 781, Neuberger LJ cited Lord Millett in Johnson and stated obiter that it was hard to see why the rule against reflective loss should not also apply to creditors other than employees. The Court in Gardner held that the reflective loss principle applied to a claim arising from a creditor’s inability to recover a debt owed to it by a company in which the creditor was a shareholder. A number of other cases also applied the reflective loss principle in circumstances where the claimant claimed in his capacity as a creditor of a company, but where he also held shares in that company, and the company had a concurrent claim.

Decision of the Court of Appeal

The Court of Appeal in Sevilleja v Marex [2018] EWCA Civ 1468 sought to clarify the position, holding that the rule against reflective loss applied to Marex’s claims against Mr Sevilleja even though Marex was a creditor and not a shareholder of the Companies. The Court of Appeal also narrowed the exception in Giles v Rhind to the situation where, as a consequence of the actions of the wrongdoer, the company no longer has a cause of action and it is legally impossible for it to bring a claim or for a claim to be brought in its name by a third party. Factual impossibility (because a company had been asset-stripped and forced into liquidation) was not sufficient. Nothing prevented a claim by the liquidator or Marex itself taking an assignment of the Companies’ claims against Mr Sevilleja, so the exception did not apply.

By this stage, many commentators were expressing concern that the reflective loss principle had simply been extended too far. As Lord Reed stated (at ¶77):

“The supposed “reflective loss” principle has been treated as being based primarily on the avoidance of double recovery and the protection of a company’s unsecured creditors, and as being applicable in all situations where there are concurrent claims and one of the claimants is a company.”

It was primarily this concern, coupled with the uncertainty and concomitant volume of litigation that the authorities had generated, which formed the basis for the approach taken by the Supreme Court.

Decision of the Supreme Court

The parties agreed on the two issues to be determined in the appeal:

  1. Whether the rule against recovery of reflective loss applies in the case of claims by company creditors where their claims are in respect of loss suffered as unsecured creditors, and not solely claims by shareholders; and
  2. Whether there is any, and if so what, scope for the court to permit proceedings claiming for losses which are prima facie within the rule against reflective loss, where there would otherwise be injustice to the claimant through inability to recover, or practical difficulty in recovering, genuine losses intentionally inflicted on the claimant by the defendant in breach of duty both to the claimant and to a company with which the claimant has a connection, and where the losses are felt by the claimant through the claimant’s connection with the company.

In giving the lead judgment, Lord Reed made clear (at ¶79) the need to distinguish:

(1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss.”

The first kind of case is barred by the rule in Prudential, regardless of whether the company recovers its loss in full (see ¶80 to ¶83). In the second kind of case, recovery is permissible in principle, although it may be necessary to avoid double recovery (see ¶84 to ¶88). In light of that, Lord Reed held that the reasoning in Johnson (other than that of Lord Bingham) was to be departed from and earlier decisions such as Giles v RhindGardner v Parker and Perry v Day were wrongly decided.

The “bright line” of company law laid down in Prudential as set out above, prevented a shareholder suing because such loss “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.” The unique position held by a shareholder, as reflected in the rule in Foss v Harbottle, was expressed by Lord Reed as a “critical” part of the justification for the rule against reflective loss, one which the more generalised objective of preventing double recovery overlooked. As Lord Reed explained, “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 (as well as Lady Black and Lord Lloyd-Jones) agreed with Lord Reed’s reasoning and noted that the panel had been unanimous in their view that the reflective loss principle has been expanded too greatly and would cause injustice if applied to the situation in which Marex found itself. Lord Sales for the minority agreed that Marex’s appeal should be allowed, but his reasons differed from those of the majority. He maintained the view that the governing principle is indeed the avoidance of double recovery, but went further, questioning the justification for the reflective loss principle at all (see ¶194) in circumstances where double recovery can be avoided by other means (see ¶149 to ¶155). On any basis, Lord Sales considered that the principle should not be extended to a case involving loss suffered by a creditor of the company. Double recovery in those circumstances could be circumvented by affording the wrongdoer a right of subrogation to the extent he pays the creditor sums in respect of the debt owed by the company (see ¶198 to ¶205).


Lord Reed (at ¶77 of the majority judgment) quoted Professor Andrew Tettenborn, who had warned in 2019 that the reflective loss doctrine “promises to distort large areas of the ordinary law of obligations” (‘Creditors and Reflective Loss: A Bar too Far?’). He went on to express the view that the Court of Appeal’s decision in Marex “confirmed that threat“, adding that the extension of the principle to pure creditors “has the potential to have a significant impact on the law and on commercial life.”

It is to be hoped that Arden LJ’s wish, in Johnson v Gore Wood (No. 2) [2003] EWCA 1728 [at ¶162], that “the current will o’ the wisp character of the no reflective loss principle will be clarified before long” has come to fruition. Notwithstanding the potential for further debate arising out of the dissenting judgments, the Court was unanimous that the principle has been extended too far and needs to be reined in. The clarity and simplicity of the decision is to be welcomed by practitioners. What remains to be seen is whether, in the longer term, the principle survives at all. 

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