A Fresh Glance At Reflective Loss And Shareholder Remedies

Published date27 July 2020
Subject MatterCorporate/Commercial Law, Corporate and Company Law, Directors and Officers, Shareholders
Law FirmCollas Crill
AuthorMr Simon Hurry and Alex Wileman-Smith

This is an update of our article of 19 June 2019 to advise that the reflective loss rule no longer applies to claims by creditors following the Supreme Court's ruling on 15 July 2020 to reverse the Court of Appeal's decision on the cited Marex case.


Acquiring shares in a company is inevitably accompanied by a degree of risk. Volatile markets can often drastically impact upon the value of a company's shares, leaving shareholders elated or, alternatively, sorely disappointed.

Another reason for the fluctuation in value of a company's shares is the actions and decisions of management, i.e. the directors. For example, shareholders suffer financial loss in circumstances where a director has breached his or her fiduciary duties and caused loss to a company, thereby spiralling its share value downwards and reducing dividends.

In these circumstances shareholders will often want to know what tools are available to them to try and recover compensation for their loss. The subtle distinction between what is the company's loss and what is the shareholder's loss can often cause confusion. Enter the rule of reflective loss.

The rule of reflective loss

The rule of reflective loss emerged in the early 1980s in the case of Prudential Assurance v Newman Industries (No. 2) [1982] 1 Ch 204, and prevents claims by shareholders where their loss merely reflects the loss suffered by the company.

Where a company suffers a loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. It follows that a shareholder is generally not able to bring a claim in respect of that loss as it belongs to the company. The rule was helpfully explained in Prudential as follows:

'.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 shareholder does not suffer any personal loss. His only "loss" is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3 per cent. shareholding. 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 right of participation are not directly affected by the wrongdoing. The plaintiff still holds...

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