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Supreme Court judgement confirms the complexity of "reflective loss"

The Supreme Court’s judgement this year on the principle of “reflective loss” highlighted the complexity of the issue and will have a significant impact on future of claims against directors and officers and their insurers.

The Sevilleja v Marex Financial Ltd (2020) case allowed the principle to be revisited and the Supreme Court confirmed that the principle against reflective loss is “limited to claims by shareholders that, as a result of actionable loss suffered by their company, the value of their shares, or of the distributions they receive as shareholders, has been diminished. Other claims, whether by shareholders or anyone else, should be dealt with in the ordinary way”.

Marex sought damages from Sevilleja who relied on the principle of reflective loss to defend the claim. Sevilleja argued that because Marex was seeking to recover losses which were identical to those suffered by the two companies involved- two liquidated British Virgin Islands companies- and which would be made good if the companies succeeded in any action against him, the loss was reflective of the companies’ loss and as a result barred.

The Court of Appeal found in favour of Sevilleja and found that not only did the principle of reflective loss apply to shareholders, but also to creditors, even if creditors were not a shareholder.

However, Marex was given permission to appeal to the Supreme Court and the Justices were unanimous that the rule against reflective loss should not apply in this case. Marex’s appeal was therefore allowed and it was able to recover from Sevilleja. Significantly, the Justices reached their decision by alternative routes and were split 4:3 in their reasoning.

The reflective loss principle has often been a way to limit circumstances where a third party seeks to recover personally for losses suffered by a company. The decision will be welcomed by potential claimants and while the general principle of double recovery remains, this judgment paves the way for non-shareholders to pursue further avenues of recovery.

The judgement should serve as a warning to company directors to ensure they are proactively complying with their fiduciary duties as the impact of COVID-19 and the government’s shutdown measures are leading to an increase in insolvencies triggering creditor and third party claims to recover their losses.

W Denis Insurance Brokers has a dedicated ProFin team, based in London, which specialises in Management Liability, D&O Liability, Securities Liability. To discuss this further with an expert at W Denis, please make arrangements via and on 0113 2439812

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