Court Of Appeal Confirms Reflective Loss Rule Will Bar Claims Of Former Shareholders Of A Dissolved Company Because The Principle Must Be Determined At Time Of Alleged Loss

Published date28 November 2022
Subject MatterCorporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Contracts and Commercial Law, Trials & Appeals & Compensation, Shareholders
Law FirmHerbert Smith Freehills
AuthorMr Julian Copeman, Ceri Morgan, Nihar Lovell and Claire Nicholas

The Court of Appeal has upheld a decision of the High Court to strike out a claim by the former shareholders of a dissolved company against an investor on the basis that all the losses claimed were barred by the reflective loss principle: Burnford & Ors v Automobile Association Developments Ltd [2022] EWCA Civ 1943.

As a reminder, the Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31 confirmed that the reflective loss principle is a bright line legal rule, which prevents only shareholders from bringing a claim based on any fall in the value of their shares or 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 (see our blog post).

In the present case, the Court of Appeal agreed with the High Court that although the company had been dissolved, the claimants' claim fell within the ambit of the reflective loss principle. The decision puts the time at which the reflective loss rule falls to be assessed beyond doubt: it is the time when the claimant suffered the alleged loss and not at the time proceedings were brought.

This timing point has been the subject of uncertainty following the decision of Flaux LJ (as he then was) in Nectrus Ltd v UCP plc [2021] EWCA Civ 57. Sitting as a single judge of the Court of Appeal, Flaux LJ refused permission to appeal in Nectrus and in doing so held that the claim of an ex-shareholder was not barred by the reflective loss principle, finding that the rule should be assessed when the claim is made. Although the Board of the Privy Council in Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22 found that Nectrus was wrongly decided, the High Court in the present case considered that it was bound by the decision (albeit distinguishing the present case from Nectrus on the facts). On appeal, the Court of Appeal took the opportunity to set the record straight, confirming that the Privy Council's decision in Primeo is the correct view.

We consider the decision in more detail below.


The claimants were former shareholders in a company called Motoriety (UK) Ltd (Motoriety), whose business was the exploitation of two software-based products for the motoring industry. In 2015, Motoriety wished to expand its customer base and entered into negotiations with Automobile Association plc (better known as "the AA"), on the basis that the AA could invest in the company. Motoriety and the claimants subsequently entered into an investment agreement with the defendant subsidiary company of the AA. The defendant agreed to subscribe for 50% of the share capital of Motoriety and the defendant had a call option for the remaining 50% of Motoriety for consideration produced by a formula contained in the agreement. On the same day, Motoriety granted the defendant a licence to use its software and associated intellectual property rights. In 2017, Motoriety went into administration and was bought from its administrators by another company in the AA group.

The claimants subsequently brought a claim against the defendant for fraudulent or negligent misrepresentation and/or for breach of contract. The claimants alleged that they had entered into the...

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