Case Comment: Sevilleja v. Marex Financial Ltd [2020] UKSC 31

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Introduction

The UK Supreme Court, made up of seven Justices, recently clarified the position on the concept of reflective loss, which had been troubling many in the profession for a long-time due to its rapid expansion. In doing so, the Supreme Court (“SC”) reconsidered the authorities governing reflective loss, namely Prudential Assurance Co Ltd v. Newman Industries Ltd (No 2) [1982] Ch 204 (“Prudential Assurance”) and Johnson v. Gore Wood & Co [2002] 2 AC 1 (“Johnson”).

Background

Mr. Sevilleja was the owner and controller of two companies incorporated in the British Virgin Islands. The Appellant, Marex, brought proceedings against the two companies owned by Mr. Sevilleja for amounts due under contracts which had been entered into. A trial in April 2013 led to Marex obtaining judgment for 5.5 Million Dollars as well as costs of 1.65 Million Pounds. A confidential draft of Field J’s judgment was handed down on the 19th of July, 2013. Around this time, around 9.5 Million Dollars of the Sevilleja’s companies account were transferred to his personal control. Subsequently, this left around $4,329.48 of company assets. Thus, Marex could not receive any of the payments under the judgment or the costs they were awarded. Furthermore, by doing this, Mr. Sevilleja acted in breach of duties owed to the companies.

By December 2013, the companies were put into insolvent voluntary liquidation in the British Virgin Islands with debts in and around $30 Million. These debts are owed to Mr. Sevilleja himself and other persons which are associated with the companies. Marex was the only creditor which is not associated or connected with Mr. Sevilleja and the other companies. Marex further alleged that the liquidation process was put ‘on hold’. This was due to the liquidator failing to investigate the companies’ missing funds or the claims which have been given to him. Further, the liquidator did not issue any proceedings against Mr. Sevilleja. Therefore, no steps were taken to advance the liquidation.

Claim

Marex sought damages in tort against Mr. Sevilleja inducing a violation of its right under the judgment made in July 2013, as well as, intentionally causing it to suffer loss by unlawful means. The sums claimed by Marex were for the judgment debt, interests and costs awarded by Field J in July 2013, less what Marex recovered in the US proceedings and the costs that were incurred by Marex when trying to obtain payment that he was owed from the judgment. Mr. Sevilleja’s contention, which the court had to consider, was whether Marex’s claim was barred by the reflective loss principle.

Issues on appeal

1) Does the ‘No Reflective Loss Rule’ apply in claims made by company creditors, where their claims are in respect of loss suffered as unsecured creditors, and not solely to claims by shareholders?

2) Whether there is any and if so, what scope for the court to permit proceedings claiming for losses which are prima facie within the No Reflective Loss Rule, where there would otherwise be injustice to the claimant through inability to recover, or practical difficulty in recovering, genuine losses intentionally inflicted on the claimant by the defendant in breach of duty both to the claimant and to a company with which the claimant has a connection, and where the losses are felt by the claimant through the claimant’s connection with the company?

Decision

Lord Reed went through general developments in company law, citing the establishment of the separate legal personality in Salmon v. A Salomon & Co Ltd [1987] AC 22. He then went on to discuss the issues which arose out of Prudential Assurance. Specifically, could a shareholder recover damages for the diminution in the value of their shareholding, which was because of a loss suffered by the company in respect of which the company has its own cause of action. It was held by the Court of Appeal, at the time, that a shareholder could not bring a personal action against the wrongdoer. This stems from the rule laid down in Foss v. Harbottle (1843) 2 Hare 461. Where there has been a wrong done to a company, the proper claimant in the action is the company. Therefore, if the Court of Appeal allowed this contention in Prudential Assurance, it would be circumventing the rule which was laid down in Foss v. Harbottle.

The main ground which meant that Prudential Assurance’s claim was disallowed was because Prudential Assurance (who were a minority shareholder in the company) hadn’t suffered any personal loss. This is because the loss is a reflection of the loss suffered by the company. This was criticized by Lord Reed. Firstly, there was personal loss as there had been a fall in the value of those shares. He then elucidated the reasoning in Prudential Assurance. Essentially, where the company has suffered a loss, and that loss means that the value of shares has dropped, that fall in the value of shares is not something which is recognised in law as being separate and distinct from the loss incurred by the company. The Court of Appeal used a ‘cash box’ example to explain its reasoning. Notwithstanding its simplicity, the point is that the law should not permit a claimant to have ‘double recovery’ in its position as a shareholder and as the company itself. This notion of ‘double recovery’ comes from Lord Millet’s opinion in Johnson. Lord Millet treated the no reflective loss principle as a wider principle of law which was founded on the basis of preventing double recovery.

Lord Reed stated that there was a requirement to differentiate between the two situations. :(1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in 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, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss”. Number (1) is barred by the rule laid down in Prudential Assurance for reasons noted above. In the latter, recovery is permissible. However, ‘double recovery’ should be prevented. Since the rule was laid down in Prudential Assurance, there has been an unwanted expansion of the rule. For example, in Giles v. Rhind [2003] Ch 618, the Claimant was a company director and shareholder in the company. He brought his cause of action personally as the company’s action for damages had been discontinued due to its inability to find security for costs due to the defendant’s wrongdoing causing the impecuniosity. The terms on which the action was discontinued meant that the company could no longer bring a claim in the future in relation to this. The Court of Appeal allowed the claim to go to trial as it considered it would be unjust not to do so. Thus, concluding that the reflective loss principle did not apply in this situation. Indeed, this seems like a fair response to an unfortunate situation. However, as Lord Reed notes, this has expanded the rule too far and does not abide by the rule laid down in Prudential Assurance. Simply, the shareholder has not suffered a recoverable loss and he therefore doesn’t have a claim for damages. This applies regardless of the reasons why the company failed to pursue its cause of action.

Given the unsatisfactory results of this decision, as well as those in Johnson, Perry Perry v. Day [2004] EWHC 3372 (Ch) and Gardner v. Parker [2004] EWCA Civ 781, the SC held that these authorities should be departed from. Except for that of the reasoning of Lord Bingham in Johnson.

Nonetheless, the interesting decision which the court had to make was whether the principle derived from Prudential Assurance applied to the situation of Marex, who was a creditor. This was a novel situation, which the court had to adjudicate upon. The Court of Appeal in this case stated that the reflective loss principle did apply to claims against creditors. However, this was reversed by the SC. They decided that the rule has no application to Marex’s claim as he is a creditor and not a shareholder.

Lord Hodge agreed with the decision of Lord Reed and noted that the rule has had ‘unwelcome and unjustifiable effects on the law and that if the facts alleged by Marex are established in this case, the exclusion of the bulk of the claim would result in great injustice’. He further noted that the ruling in Prudential Assurance is a bright line legal rule and is well established, having been adopted in other common law jurisdictions as well. Hence, it should not be departed from now.

Lord Sales came to the ‘same conclusion’ as Lord Reed, but his reasons for doing so were different. Lord Sales opined that the Court of Appeal did not lay down a rule of law in Prudential Assurance, which meant that a shareholder could not recover the loss. Rather, what the Court of Appeal did was set out the reasoning why the shareholder in that case had suffered no loss. Importantly, Lord Sales stated that the “loss suffered by the shareholder is not the same as the loss suffered by the company”. A shareholder should not be prevented from pursuing a valid cause of action as double recovery can be prevented by other means. For example, through case management. Lord Sales went further and suggested whether the rule should still be recognised at all and that the true reason for the existence of the principle is to prevent double recovery. However, in any event, the rule should not be extended to apply to losses suffered by a creditor of a company.

Comment

This decision means that the principle still exits, but has been severely restricted to cases where the shareholder is seeking to claim the loss. This was a much-anticipated decision which seeks to rectify some of the inadequacies in previous decisions. Although the appeal was allowed, the reasoning differed by 4:3. It would be interesting to see whether the no reflective loss principle will be looked at again and whether its existence is still needed. Nonetheless, this a welcome decision, bringing the law back in line with its original roots from Prudential Assurance.

(This post has been authored by Callum Reid-Hutchings. Callum is a BPTC Student Lord Justice Holker Scholar. He is set to join the prestigious Cambridge University for his LLM programme, having obtained a first class degree in law from Swansea University)

Cite as: Callum Reid-Hutchings, ‘Case Comment: Sevilleja v. Marex Financial Ltd.’ (The Contemporary Law Forum, 21 August 2020) <https://tclf.in/2020/09/02/case-comment-sevilleja-v-marex-financial-ltd-2020-uksc-31/> date of access.

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