Sevilleja v Marex: Reflective Loss Restated

• Published date: 30 July 2020
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Shareholders
• Law Firm: 4 New Square Chambers
• Author: Mr David Halpern QC

The Supreme Court's decision in Sevilleja v. Marex Financial Ltd, 15 July 2020, fundamentally restates the doctrine of reflective loss in company law so that:

• A claim by a company's creditor against a third party will not be barred where it reflects loss suffered by the company, even if the creditor is also a shareholder; and
• There is no longer an exception to the doctrine where the wrongdoer has brought about the company's impecuniosity.

The facts of the case are straightforward, at least in outline. Mr Sevilleja owned and controlled two BVI companies. Marex obtained judgments against the companies. Sevilleja allegedly then stripped the companies of their assets, making them insolvent. Marex issued proceedings against him for economic torts, including intentionally causing it to suffer harm by unlawful means. On an application for permission to serve out of the jurisdiction, the judge held that the claim was arguable, but the Court of Appeal reversed him, saying that the doctrine of reflective loss barred Marex's claim as a creditor of the companies for loss which was reflective of the loss caused to the companies by Sevilleja.

The Supreme Court has unanimously held that the claim is not barred by reflective loss, but it reaches this conclusion by two different routes. The majority view (Lord Reed) narrows the doctrine of reflective loss; the minority (Lord Sales) would abolish it.

The rule in Foss v. Harbottle

To begin at the beginning .

The rule in Foss v. Harbottle (1843) 2 Hare 461 is one of the most important, but least understood, rules of company law. It states that, where loss is caused to a company and the company has a cause of action, only the company itself may sue. The rationale is company autonomy. A share is a right of participation in a company on the terms of the company's constitution. The constitution vests the management of the company in the board of directors and the ultimate decision-making power in the general meeting. It is for the constitutional organs of the company to decide whether or not to bring, compromise or abandon litigation against third parties. This would be subverted if a disgruntled shareholder could bring a claim against the wishes of the majority. An exception is made for derivative claims, that is claims which a shareholder may bring for the benefit of the company, e.g. where the wrongdoers have control of the board and the general meeting.

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