Memery Crystal advise Marex Financial against Carlos Sevilleja Garcia

Background

In 2011, Marex started proceedings against two BVI companies (the “Companies”), which were beneficially owned and controlled by Mr Sevilleja.

Following a fully contested trial on the merits, Marex obtained a substantial money judgment against the Companies. The draft judgment was circulated on 19 July 2013 and the final judgment handed down on 25 July 2013 (the “Judgment”).

In the weeks before the judgment debt became due on 8 August 2013, Marex alleges that Mr Sevilleja procured the dissipation of over US$9.5m out of the Companies’ accounts and into his personal control, in order to “judgment proof” the Companies.

In December 2013, Mr Sevilleja put the Companies into voluntary liquidation.

In August 2016, Marex commenced proceedings in the Commercial Court against Mr Sevilleja for the torts of:

1. inducing and/or procuring the Companies’ violation of Marex’s rights pursuant to the Judgment; and/or
2. causing loss to Marex by unlawful means and/or unlawful interference with Marex’s economic interest.The Commercial Court had to decide whether the Reflective Loss rule applied to Marex’s claims where Marex is an unsecured creditor, not a shareholder, in the Companies.

The Reflective Loss Rule (the “Rule”)

The roots of the Rule lie in Foss v Harbottle ([1843] 2 Hare 461), which provides that the proper claimant in wrongs committed against a company is the company itself.

The Rule is set out in Prudential Assurance v Newman Industries (No. 2) [1982] 1 Ch 204:

“What [the shareholder] cannot do is to recover damages merely because the company in which he is interested has suffered damage. He cannot recover a sum equal to the diminution in the market value of his shares, or equal to the likely diminution in dividend, because such a “loss” is merely a reflection of the loss suffered by the company …The plaintiff’s shares are merely a right of participation in the company on the terms of the articles of association. The shares themselves, his rights of participation, are not directly affected by the wrongdoing. The plaintiff still holds all the shares as his own absolutely unencumbered property. The deceit practised upon the plaintiff does not affect the shares; it merely enables the defendant to rob the company.”

The Rule was expanded in Johnson v Gore Wood [2002] 2 AC 1, to bar any claims by a shareholder, whether in his capacity as shareholder, employee or creditor, where the loss claimed is in effect the same loss as suffered by the company. The court also hinted that it “would be conducive to creditor protection and minority shareholder protection” for the Rule to be broadened to apply to non-shareholder claims. However, this did not fall for decision.

The court in Giles v Rhind [2002] EWCA Civ 1428 formulated an exception to the Rule; namely that where the wrongdoing caused the company’s inability to pursue an action against the wrongdoer, the Rule does not bar any action by a shareholder against the wrongdoer.

In Gardner v Parker [2003] EWCA 1463 (Ch), the court suggested that the Rule would extend beyond claims made by a shareholder, including to claims made by a creditor with no shareholding (although the Claimant in that case was, in fact, a shareholder).

The Proceedings

The Commercial Court decided in favour of Marex that the Rule did not apply. It did not, therefore, need to consider Marex’s alternative argument concerning the application of the exception in Giles v Rhind.

Mr Sevilleja appealed. In a judgment dated 26 June 2018, the Court of Appeal concluded that part of Marex’s claim was barred by the Rule. In doing so, it extracted four considerations from the authorities, said to justify the Rule:

1. the need to avoid double recovery by the claimant and the company from the defendant;
2. causation (if the company chooses not to pursue the wrongdoer, this is said to break the chain of causation);
3. public policy (if a shareholder claimant had a separate right to claim, it could deter the company and counterparties from making settlements); and
4. company autonomy and the need to avoid prejudice to minority shareholders and other creditors.

The Court of Appeal also found that the Giles v Rhind exception did not apply, effectively emasculating the exception to the Rule and leaving it with almost no practical application.

During the course of the hearing, Counsel for Marex submitted that the law had effectively taken a wrong turn when the Courts extended the Rule beyond the original purpose in Prudential. This appeared to resonate with the Court, which granted permission for its judgment to be appealed to the Supreme Court and commented “If the coherent application of the law in the current state of the authorities is wrong, it is for the Supreme Court to put it right.”

We wait with interest to see how the Supreme Court takes on the mantle.