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Memery Crystal wins landmark judgment in unanimous Supreme Court ruling

16/07/2020

At a glance

In a landmark decision handed down yesterday (15 July 2020), the Supreme Court unanimously decided 7-0 that the reflective loss rule does not bar claims made by unsecured creditors. This decision significantly narrowed the scope of the so-called rule against the recovery of reflective loss.

Sevilleja v Marex Financial Limited [2020] UKSC 31

The rule, which has existed since the 1981 decision in Prudential Assurance v Newman Industries (No 2) [1982] 1 Ch 204, prevents claims by shareholders of a company for loss suffered as a consequence of a defendant’s wrongdoing against the company. It was subsequently broadened, including by the House of Lords 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.

In the present case, Marex Financial Limited (“Marex”) claims that Mr Sevilleja stripped two companies ultimately owned and controlled by him of their assets so that they were unable to pay their judgment debts to Marex. The companies are now in liquidation in the BVI. Marex sued Mr Sevilleja on the basis of unlawful means conspiracy and for knowingly inducing and procuring the companies to act in wrongful violation of Marex’s legal rights. Mr Sevilleja challenged jurisdiction contending, amongst other things, that the rule against the recovery of reflective loss barred Marex from showing a completed cause of action in tort.

Mr Justice Knowles at first instance dismissed Mr Sevilleja’s challenge to the jurisdiction of the English Court (Marex Financial Ltd v Sevilleja [2017] EWHC 918 (Comm)). The Court of Appeal allowed Mr Sevilleja’s appeal holding that (1) the rule against the recovery of reflective loss applied to claims by unsecured creditors who are not shareholders of the relevant company (an issue which until then remained undecided as a matter of English law) and (2) the exception to the rule against reflective loss recognised in Giles v Rhind [2003] Ch 618 was a narrow one and did not assist Marex (Marex Financial Ltd v Sevilleja [2018] EWCA Civ 1468). Nevertheless, the Court of Appeal recognised the significance of the issues and gave Marex permission to appeal to the Supreme Court.

The Supreme Court was asked to consider (1) whether the rule against reflective loss applied to unsecured creditors who are not shareholders of the relevant company, and (2) whether there was any flexibility or discretion for a court to allow proceedings claiming for losses which are prima facie within the rule where there would otherwise be injustice to the claimant as a result of his inability to sue.

Seven Justices of the Supreme Court heard the appeal confirming the importance of the issues involved.

The Supreme Court unanimously allowed Marex’s appeal and held that Prudential did not establish a principle of the law of damages against the recovery of reflective loss and that Lord Millett’s judgment in Johnson v Gore Wood should not be followed. All 7 justices agreed that Marex’s claims as an unsecured creditor are not barred by the so-called rule against the recovery of reflective loss.

However, the members of the Court disagreed as to the reasons for that conclusion and expressed different views as to whether a shareholder can recover damages for the diminution in value of its shareholder in a company or for the loss of distributions which the company would have paid to it in circumstances where a wrong has been done both to the company and to the shareholder. Given the division of opinion as to how far the rule should be limited or indeed abolished entirely as regards shareholders, this decision is unlikely to be the last word on the matter.

The Memery Crystal team advising Marex was led by the head of dispute resolution and partner, Mark Whelan, along with solicitor, Elisabeth Wagner, trainee solicitor, George Jackson and paralegal, Florence Sandberg.

Mark commented: “We are very pleased that our client’s appeal was unanimously allowed by the Supreme Court in the landmark judgment handed down today [Marex Financial Ltd v Sevilleja [2020] UKSC 31]. The Supreme Court’s eagerly anticipated decision has significantly narrowed the scope of the principle that “reflective loss” is irrecoverable. That principle is now limited to claims by shareholders and excludes claims by creditors, such as our client’s claim in this litigation.”

Memery Crystal instructed George Bompas QC from 4 Stone Buildings and Sophie Weber from One Essex Court.

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