The Supreme Court's decision in Sevilleja v Marex  UKSC 31 has reinforced, but limited, the principle against the recovery of reflective loss. Whilst the principle that shareholders cannot claim for losses reflecting those suffered by the company still stands, its restriction to shareholder cases and the overturning of prior judgments helps to provide greater clarity of the rule.
The judgment is significant not only for shareholder litigation, but for other potential litigants, including beneficiaries and trustees. It remains to be seen whether the Courts of other countries will follow suit; offshore jurisdictions have previously considered the English authorities on this issue and a decision from the Supreme Court will certainly be read with interest by them.
Principle against reflective loss
The rule against reflective loss prevents shareholders from claiming for reductions in the value of their shares where the company itself has a concurrent claim for inter-related losses against the defendant. This is because the shareholder's loss is not recognised as separate and distinct from that suffered by the company. It arises from the rule against double recovery, as well as the company law rule that where a wrong has been done to a company, the company is the proper claimant. However, it has subsequently been applied to creditors, and the principle has bred authorities whose legal basis and scope are controversial. There was uncertainty as to what other types of claims the principle would apply to and who could make claims, and this extended to trust litigation where companies frequently form part of the structure and the shares of the company/companies are assets of the trust.
Marex sought tortious damages against Mr. Sevilleja for violating its rights under a 2013 judgment. The appeal concerned Mr. Sevilleja's challenge to Marex's successful application to serve proceedings out of the jurisdiction on the basis that Marex as creditor (not shareholder) had no good arguable case as its loss was reflective. Mr. Sevilleja's argument in this respect was that it was his insolvent companies, not Marex, that had suffered the losses and that they should be claiming instead of Marex. The main issue on appeal was whether the 'no reflective loss' rule applies to claims by company creditors not just shareholders.
While the principle has been upheld, it has been limited to shareholders, ending its application to non-shareholders such as creditors like Marex and overturning certain authorities. However, this conclusion was caveated that the principle's application would be inappropriate where shareholders suffer losses different to those suffered by the company, for instance, where a third party owes duties to a parent and subsidiary.
For shareholders, it is important to understand investment structures and frameworks governing relationships prior to litigation. The rule protects company autonomy and shareholders should consider their control at director and shareholder level and its sufficiency. Commercial interests are also important.
The rule's restriction has removed certain exceptions, including the way shareholders were permitted to continue reflective claims where the company was unable to proceed, the idea being that claims would not be unfairly prevented. Notwithstanding this, where shareholders are able to claim for losses that are genuinely different from those of the company, then they may do so.
In line with the principle's prioritisation of company autonomy, shareholders should consider all available rights and remedies, including derivative action, unfair prejudice petitions, and petitions for winding up on equitable grounds, as well as other equitable relief, such as injunctions.
Companies whose share value is diminished by the actions of a third party should consider shareholder relationships, interests involved, and the contractual framework (especially Articles of Association and Shareholders' Agreements). While shareholder pressure to pursue litigation may create tension, directors must act in the best interests of the company and in accordance with their duties.
Situations where the rule comes into play are often dramatic and companies may need to pursue litigation quickly and actively to protect their own positions while keeping shareholders onside.
Defendants can no longer attempt to use the principle as a shield against claims by non-shareholders, but the general principle will still allow defendants to defeat shareholder claims. Defendants must be cautious, however, as they will not be able to use the principle to prevent claims brought by shareholders that are distinct from those brought by the company, such as pursuant to a contractual right or a tortious duty.
Beneficiaries of trusts
In trust structures, it is commonplace for companies to be held in a trust. The trustees are sometimes the directors of the underlying company or companies.
The rule against reflective loss has been considered by the English Courts in the context of breach of trust claims brought by beneficiaries who, crucially, will not be the shareholders of the underlying company.
The Court, in the case of Walker v Stones , initially decided claims by beneficiaries of a trust (who alleged that the trustees had committed breaches in respect of wrongful diversion of monies which had belonged to companies in which the beneficiaries had an interest) could not bring those claims because of the rule against reflective loss. However, the Court of Appeal reached the opposite decision; an illustration of why clarity was needed in this area. In Shaker v Al-Bedrawi  the Court of Appeal found that the principle did not preclude an action brought by a claimant not as a shareholder but as a beneficiary under the trust against the trustee for an account of profits received, in relation to shares which were the subject of the trust.
Offshore, as the Supreme Court's judgment notes, the principle has been "followed throughout much of the common law world, albeit sometimes on the basis of different reasoning". The Jersey Court considered it in a trust context in Freeman v Ansbacher Trustees (Jersey) Ltd  and concluded it was arguable that it did not apply in situations involving a discretionary trust (here, a discretionary beneficiary sought to reconstitute the trust fund because of the failure of the trustee to supervise the investment of the wholly owned company). In the Guernsey case of Jefcoate v Spread Trustee Company Limited , the Court left open whether the rule was part of Guernsey law.
Whilst the Supreme Court's decision means that the rule against reflective loss continues to apply to shareholders, it no longer applies to non-shareholder claims against third parties, such as those brought by creditors and those between trustees and beneficiaries. The recent Marex decision may also mean that other jurisdictions become more definitive on this legal issue in future.