Landmark Supreme Court Decision Narrows The "Reflective Loss" Principle

• Published date: 08 September 2020
• Subject Matter: Corporate/Commercial Law, Corporate and Company Law, Shareholders
• Law Firm: Clyde & Co
• Author: Ms Anna Shaw and Stuart Maleno

On 15 July 2020, the Supreme Court handed down judgment in this landmark case on reflective loss, limiting the scope of the supposed rule against recovery of reflective loss and confirming that the reflective loss principle does not apply to claims by creditors. In doing so, the Supreme Court overturned the Court of Appeal's decision and allowed the creditor to pursue the entirety of its claim.

Facts

Mr Sevilleja owned and controlled two companies in the BVI (the "Companies"). Marex claimed against the Companies for various sums due in contract and obtained judgment in its favour from the Commercial Court, in July 2013, for $5.5 million, plus costs later agreed at '1.65 million.

However, in the days between a confidential draft of the judgment being provided to the parties and that judgment being handed down with orders for payment, Mr Sevilleja took steps to "asset-strip" more than $9.5 million from the Companies' accounts. In breach of his duties to the Companies, Mr Sevilleja procured transfers into offshore accounts in his personal control, leaving the Companies with assets of just $4,000.

The Companies, facing liabilities of more than $30 million, were placed into voluntary liquidation in the BVI by Mr Sevilleja later that year. Save for Marex, all other creditors were connected to Mr Sevilleja. Marex alleged that the liquidators declined to investigate its claims or to commence proceedings by the Companies against Mr Sevilleja.

Marex therefore sought to claim against Mr Sevilleja directly. Marex commenced proceedings against Mr Sevilleja seeking damages in tort for having violated Marex's rights pursuant to the Commercial Court judgment and intentionally causing Marex to suffer loss by unlawful means.

Mr Sevilleja responded by seeking to set aside an order permitting Marex to serve of out the jurisdiction on the basis, among others, that Marex did not have a good arguable case against him because Marex was seeking to recover reflective loss.

At first instance, it was held that there was a good arguable case that the claim was not precluded by the reflective loss principle. However, the Court of Appeal held that the reflective loss principle applied to the significant majority of Marex's claim.

The "reflective loss" principle

The Supreme Court considered the case law over the last forty years from which the supposed "reflective loss" principle had been derived (and, in its view, expanded), together with the principles of company law that it was...