UK Supreme Court Gives Boost To Creditors: Bar On Recovery Of "reflective Loss" Relaxed In Sevilleja V Marex Financial Ltd

• Published date: 30 July 2020
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Corporate and Company Law, Trials & Appeals & Compensation, Shareholders
• Law Firm: Dechert
• Author: Adam Silver, Abdul Azeem S/o Abdul Samad and Julie Witham

Overview

The rule against reflective loss bars claims against wrongdoers by shareholders of a company (for instance for the diminution in the value of their shareholding) where the shareholder's loss is merely reflective of the loss of the company.

The principle (first established some forty years ago in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2))¹ was expanded in subsequent cases to bar claims by shareholders who were also creditors of the company,² shareholders in their capacity as employees of the company³ and, most recently to non-shareholder creditors of a company.⁴ On Wednesday 15 July, the Supreme Court reversed this expansionist trend, unanimously reversing the Court of Appeal's decision in Marex and rolling back the law considerably from where it had stood before this case. This is welcome news for creditors of insolvent companies who may wish to pursue claims against errant directors or others who were associated with a company.

The Facts in Marex

Mr Sevilleja utilised two BVI companies (the "Companies") as trading vehicles to carry on foreign exchange trading. Marex, a foreign exchange broker, successfully sued the Companies for amounts due under contracts and obtained a judgment in its favour in excess of US$5 million. It also obtained a freezing order against the Companies. After the parties had received a confidential draft of the judgment, but before the judgment was publicly handed down, Mr Sevilleja allegedly procured the transfer of more than US$9.5 million from the Companies' London bank accounts and placed the Companies into insolvent liquidation. Although the Companies allegedly had debts in excess of US$30 million, Marex was the only creditor of the Companies not connected to Mr Sevilleja and a US Court described the liquidations as "the most blatant effort to hinder and defraud a creditor" it had ever seen. Marex brought fresh proceedings in England against Mr Sevilleja claiming damages for (i) knowingly inducing and procuring the Companies to act in violation of Marex's rights under the judgment and (ii) intentionally causing loss to Marex by unlawful means.

First Instance Decision & Court of Appeal Decisions

Mr Sevilleja (who was not resident in England) sought to challenge the jurisdiction of the English Court arguing that Marex did not have a good arguable case against him because the losses it was seeking to recover were reflective of the loss suffered by the Companies (which had concurrent claims against him)...