The decision, handed down this week in Sevilleja v Marex Financial [2020] UKSC 31, clarifies the principle that reflective loss cannot be recovered (the principle derives from a 1982 ruling that shareholders cannot claim for loss of value of shares or dividends because that loss is a reflection of the loss suffered by the company rather than a personal loss). The upshot of Sevilleja is that business owners who provide loans or personal guarantees for the benefit of a company will retain their individual legal rights against wrongdoing by third parties. Moreover, their rights will not be damaged by the actions of any insolvency practitioners appointed if the company goes into administration.
The court held the rule against reflective loss continues to apply to claims made by shareholders for loss of value in the shares themselves.
The circumstances were that Marex accused Sevilleja of asset-stripping two companies in the British Virgin Islands so that they were unable to pay their debt to Marex. Sevilleja countered that the rule against reflective loss barred Marex from claiming directly against him. The issue before the court was whether creditors of a company are barred from claiming directly against a third party for asset-stripping the company. The Supreme Court held they were not.
Ned Beale, partner at Trowers & Hamlins, acted for the All Party Parliamentary Group on Fair Business Banking's (APPG) intervention in this case―the first time MPs have ever intervened in the Supreme Court.
‘In recent years the rule against reflective loss had imposed substantial legal barriers to victims of fraud and wrongdoing connected to their companies obtaining justice,’ Beale said.
‘It is a difficult area, as evidenced by the panel of seven Justices, the 14-month gap between hearing and decision (to my knowledge, one of the longest such gaps), the lengthy judgments, and the divided court, show the complexity of the law around reflective loss. The judgment substantially modifies the rule to restrict it only to shareholders, which is excellent news for creditors and guarantors.
‘We were pleased that fairness concerns raised by the APPG on Fair Business Banking's intervention seem to be reflected in the judgment. The rule still applies to shareholders, but some situations involving shareholders are not directly addressed. A number of ongoing cases will be affected by the decision, and so we are likely to see first instance courts applying it over the next 12 months.’
Kevin Hollinrake MP, Co-Chair of the APPG, said the judgment was ‘an important step forward for business owners. While we remain concerned about the position of shareholders who lose the value of their businesses when they enter insolvency, we welcome the Supreme Court's narrower application of the rule’.
