Reining in the rule against reflective loss: Sevilleja v Marex Financial Ltd

28 Jul 2020

In a much-anticipated judgment, the Supreme Court in Sevilleja v Marex Financial Ltd unanimously allowed an appeal against a decision which, if it had been allowed to stand, would have denuded the intentional economic torts of much of their practical utility.

The majority’s decision established a bright-line rule, cutting down the scope of the so-called rule against reflective loss and overruling a number of authorities which had expanded its reach significantly over the last few decades.

The majority decided not to abolish the rule but to confine it to narrow circumstances. It is now necessary to distinguish two types of case:

  • Cases where claims are brought by a shareholder in respect of a loss which he or she 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 and in respect of which the company has a cause of action against the same wrongdoer.
  • Cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within the first type of case above, but where the company has a right of action in respect of substantially the same loss.

Only in the first type of case above will a shareholder’s action against a wrongdoer be barred by the rule against reflective loss. In all other cases, which necessarily include all actions by non-shareholders, the bar shall no longer apply.


As Lord Hodge, whose concurring judgment created a 4-3 majority, pointed out at paragraph 95:

“There is no disagreement within the court that the expansion of the so-called “principle” that reflective loss cannot be recovered has had unwelcome and unjustifiable effects on the law”.

The original principle, namely that a shareholder is barred from pursuing an action against a wrongdoer where the shareholder’s loss is “reflective” of a loss suffered by the company, was first laid down almost 40 years ago in Prudential Assurance Co Ltd v Newman Industries Ltd.

However, the rule never stood on stable doctrinal foundations. In a later case (Johnson v Gore Wood & Co), the rule was expanded to bar claims by creditors who also happened to be shareholders, and it was authoritatively said (in Gardner v Parker) that it would similarly bar claims by employees who also happened to be shareholders.

Most significantly, the Court of Appeal in Marex itself held that the rule applied to bar a non-shareholder creditor of a company from pursuing an action against a wrongdoer where the company had a cause of action in respect of the same loss.


The facts of Marex provide a striking illustration as to why the rule in its expanded form could not be allowed to stand.

Mr Sevilleja owned and controlled two companies incorporated in the British Virgin Islands (BVI). Marex brought proceedings against the companies for sums due under contract. At the trial of its claim in the Commercial Court, Marex succeeded in obtaining judgment for over US $5.5 million, plus costs of £1.65 million.

On 19 July 2013, Field J circulated a confidential draft of his judgment which was due to be handed down only six days later. Marex alleged that, from 19 July 2013 itself, Mr Sevilleja procured the transfer of over US $9.5 million from the companies’ UK bank accounts to offshore accounts under his personal control. By August 2013, the amount standing to the credit of the companies’ bank accounts was not even US $5,000. Unsurprisingly, Marex could not enforce its judgment.

In December 2013, Mr Sevilleja put the companies into liquidation in the BVI. Marex alleged that the liquidation was effectively valueless, with the liquidator failing to take steps to locate Marex’s missing funds or to issue proceedings against Mr Sevilleja. Indeed, in parallel proceedings, the US Bankruptcy Court (Southern District of New York) described the liquidation as “the most blatant effort to hinder, delay and defraud a creditor this Court has ever seen” (In Re Creative Finance Ltd (In Liquidation) et al, 13 January 2016 (unreported)).

Marex brought fresh proceedings in England against Mr Sevilleja, seeking damages in tort for both:

  • Inducing or procuring the violation of its rights under Field J’s judgment.
  • Intentionally causing it to suffer loss by unlawful means.
The decisions below

Mr Sevilleja raised a jurisdiction challenge on the basis that there was no good arguable claim against him. As Marex was seeking to recover a loss which was identical to the loss suffered by the companies, and which would be made good if the companies succeeded in any action against Mr Sevilleja (so that its assets were restored to them such that Marex’s judgment could then be enforced), the loss was reflective of the companies’ loss and was therefore barred by the rule.

At first instance, Knowles J rejected this argument, observing (correctly) that, were such claims barred, the intentional economic torts “would be left with little application in situations where… they have a principled part to play” (at paragraph 42).

The Court of Appeal considered itself bound by the state of the authorities to apply the rule to claims brought by creditors of a company, even where those creditors were not shareholders. The judgment of Lewison LJ nevertheless gave the clear impression (at paragraphs 69 and 71) that the state of the law was unsatisfactory and in need of review by the Supreme Court. Indeed, the Court of Appeal gave permission to appeal its own decision.

The Supreme Court’s decision

The Supreme Court was invited to review the state of the law and to clarify the scope of the rule. The leading judgment was given by Lord Reed (with whom Lady Black and Lord Lloyd-Jones agreed); Lord Reed’s judgment was also endorsed by the concurring judgment of Lord Hodge. (The minority judgment was delivered by Lord Sales, with whom Lady Hale and Lord Kitchen agreed.)

In the majority’s analysis, the rule against reflective loss is limited to the narrow situation where a claim is brought by a shareholder in respect of loss which he or she suffers in that capacity alone (that is, by a diminution in the value of his or her shares or a reduction in distributions), which is the consequence of a wrong done to the company and where the company has (or had) a cause of action against the wrongdoer. In such a situation, any personal action by the shareholder against the wrongdoer is absolutely barred. There is no longer any exception to the bar: the case of Giles v Rhind, which recognised an exception where the wrongdoer’s conduct prevented the company from pursuing its own claim, has been overruled.

In all other cases, namely all claims by non-shareholders, and claims pursued by shareholders for other types of loss, the rule no longer applies. It was accepted that this will give rise to the need to avoid double recovery, but the courts will have to resolve such situations by reference to ordinary principles.

The minority in the Supreme Court would have allowed the appeal on broader grounds. The minority questioned the justification for the rule as a whole and doubted whether it should be recognised at all. According to the minority, the governing principle is indeed the avoidance of double recovery, but all Justices of the Supreme Court agreed that this was a problem to be prevented by other means.

While the minority judgment is highly persuasive in its analysis of the case law to date, it is of course only a minority judgment of the apex court: the majority’s decision must be accepted as settling the scope of the doctrine for the foreseeable future.


The implications of the Court of Appeal’s decision were nothing short of astounding. As some have commented, the Court of Appeal’s expansion of the rule had the effect of confining a number of key economic torts to the history books: creditors whose rights against a company had become worthless by the wrongful (and often fraudulent) conduct of a third party had no recourse against the wrongdoer by virtue of the simple fact that the company had, in theory, its own cause of action against the wrongdoer. As Marex itself illustrates, the fact that the company has a cause of action will often be of illusory benefit to the company’s creditors who may be, ultimately, the true victims of the wrong.

The Supreme Court’s decision has confined the principle to the narrow situation in which a shareholder’s claim would, on the majority’s analysis, offend the rule in Foss v Harbottle (that is, that the only person who can seek relief for an injury done to a company, where the company has a cause of action, is the company itself). It is sensible (and relatively uncontroversial) to preclude claims by shareholders against wrongdoers for losses which are only measurable by reference to, say, a diminution in the value of their shares, so long as the company has its own cause of action in respect of the wrong.

Beyond that narrow situation, victims of fraud (in particular, but also other wrongs) have long sought to utilise the economic torts of inducing or procuring a breach of contract and lawful and unlawful means conspiracy, as part of their efforts to recover damages from those who have asset-stripped a corporate vehicle. The Supreme Court’s decision will no doubt come as a great relief to many (not least those whose claims have been stayed pending this judgment) who seek to recover damages for such tortious conduct.


Usman Roohani
July 2020

This article was first published in Practical Law.


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