UK Supreme Court Narrows Reflective Loss Principle

Andrew Tarnowskyj and Mark Giddings

An enlarged panel of the Supreme Court in Sevilleja v Marex Financial Ltd [2020] UKSC 31 (Sevilleja) has considered the scope of the reflective loss principle and the rationale underpinning it. The principle traditionally prevents a shareholder in a company from suing a wrongdoer to recover losses that merely reflect losses sustained by the company, but it has been expanded in recent years to apply to creditors and employees. While affirming the existence of the principle, the Supreme Court has narrowed its scope to confine it to the traditional shareholder context.

The rule against claiming reflective loss was first stated in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (Prudential). The Court of Appeal held that a shareholder cannot bring a claim for the diminution in the value of their shareholding, or a reduction in any distribution, that results from loss caused to the company by a wrongdoer. The rule applies even if the wrongdoer’s conduct also involved the commission of a wrong against the shareholders, and even if no proceedings have been brought by the company.

In Johnson v Gore Wood & Co [2002] 2 AC 1 (Johnson) the House of Lords followed and affirmed Prudential. However, the justification for the rule given by Lord Millet – that it was premised on avoiding double recovery – led to subsequent decisions that expanded the rule to actions brought by a claimant in their capacity as a creditor of a company, in circumstances where the claimant held shares in the company.

The Court of Appeal in Sevilleja went further and held that the rule also applied to a claim brought by an ordinary creditor of a company who was not a shareholder. However, recognising that there was disagreement in the authorities, the Court of Appeal granted leave to appeal to the Supreme Court.

Factual Background

Mr Sevilleja was the owner and controller of two BVI companies used as vehicles for foreign exchange trading. In 2013 Marex obtained judgment in the Commercial Court for US$5.5 million against the companies. Following circulation of a draft judgment, Mr Sevilleja arranged for funds held by the companies to be transferred into his personal control. As a result, the companies were rendered insolvent and unable to satisfy the judgment debt.

In these proceedings Marex sought damages in tort from Mr Sevilleja for inducing or procuring the violation of Marex’s rights under the judgment debt, and intentionally causing loss to Marex by unlawful means. Mr Sevilleja contended that the loss suffered by Marex reflected the loss suffered by the companies and, based on the principle said to have been established by Prudential and Johnson, such loss was not recoverable.

Reasons of the Majority

Lord Reed (with whom Lady Black and Lords Lloyd-Jones and Hodge agreed) reaffirmed the existence of the reflective loss principle, observing that Prudential and Johnson had established a “rule of company law” (at [9]). The basis of that rule was that a shareholder cannot bring proceedings in respect of the company’s loss, since they have no legal or equitable interest in the company’s assets (at [31]). Accordingly, a claim by the shareholder is barred by the rule in Foss v Harbottle (1843) 2 Hare 461 (Foss v Harbottle) that the only person who can seek relief for an injury done to a company is the company itself. Lord Reed considered that the “critical point” is that a shareholder has not suffered a loss that is separate and distinct from the company’s loss, and therefore has no claim to recover it (at [28] and [83]).

Lord Reed held that the rule does not apply to persons other than shareholders of the company (at [9]). His Lordship reasoned that where the company’s loss results in a creditor also suffering a loss, the creditor does not suffer the loss in the capacity of a shareholder. Therefore, the creditor’s pursuit of a claim does not conflict with Foss v Harbottle.

His Lordship rejected Lord Millet’s reasoning in Prudential that the principle was premised on avoiding double recovery. The avoidance of double recovery is a principle of the law of damages. It does not deny the existence of the shareholder’s loss, as the reflective loss principle does, but is premised on the recognition of that loss (at [52]). Further, there is not a “universal and necessary relationship between changes in a company’s net assets and changes in its share value”, meaning that an award of damages restoring the company’s position will not always restore a shareholder’s share value (at [33] and [55]).

Lord Reed identified a series of subsequent cases, most notably Gardner v Parker [2004] 2 BCLC 554, that expanded upon the reasoning of Lord Millet in Johnson to include within the rule’s scope employees and creditors who were not shareholders in the injured company. These cases were wrongly decided and should not be followed. Lord Reed also rejected the exception to the rule against reflective loss established in Giles v Rhind [2003] Ch 618, which purported to permit a shareholder to bring a claim where the actions of the defendant make it impossible for the company to pursue a claim.

Reasons of the Minority

Lord Sales (with whom Lady Hale and Lord Kitchin agreed) agreed that the extension of the reflective loss principle to creditors could not be justified (at [198]). However, his Lordship went further, holding that Prudential did not lay down a “bright line” rule of law, even in respect of shareholders (at [212]). Shareholders should not be automatically barred from bringing a claim just because the company has a concurrent claim.

Lord Sales thought that there were cases where a shareholder does suffer a loss which is different from the loss suffered by the company and that it was not “appropriate to re-characterise the court’s decision [in Prudential] as one laying down a new rule which simply deems that loss suffered by the shareholder to be irrecoverable as a matter of law” (at [118]). Lord Sales considered that the avoidance of double recovery was the better way to deal with claims by shareholders where the company has a concurrent claim.


The reasoning of the majority is likely to receive a mixed reception. For many claimants the narrowing of the scope of the reflective loss principle will be welcomed. It provides certainty in what was, in the words of Lord Sales, fast becoming “some ghastly legal Japanese knotweed … which threaten[ed] to distort large areas of the ordinary law of obligations” (at [121]). It is now clear that the principle is not to be applied to litigants who are bringing claims in their capacity as creditors or employees of the company, rather than as shareholders.

On the other hand, the decision may work an injustice for some shareholders if their losses are deemed to be irrecoverable as a matter of law. There may be situations where the company decides not pursue a claim or decides to compromise a claim for an amount that does not cover the full loss suffered by the shareholder. In such a case the shareholder is left without adequate compensation. For the majority, this is simply the result of the rule in Foss v Harbottle. If the company takes such a decision, then the law provides the shareholder with a number of remedies, including a derivative action, and equitable relief from unfairly prejudicial conduct by the company.

The decision will have ramifications throughout the common law world. Some jurisdictions, such as the Cayman Islands, have disavowed avoidance of double recovery as the sole basis for the reflective loss principle (see our earlier blog post here). However, decisions of courts in Australia (Hodges v Waters (No 7) (2015) 232 FCR 97) and Hong Kong (Waddington Ltd v Thomas [2008] HKCU 1381) have previously endorsed and followed Lord Millett’s approach in Johnson. The Supreme Court’s decision in Sevilleja may lead these jurisdictions to revaluate the basis on which the reflective loss principle is justified.


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