Garcia v Marex Financial Ltd

The rule against reflective loss is not confined to shareholders or claims framed as diminution in share value. It bars a creditor, including an unsecured creditor who is not a shareholder, from recovering loss which is in substance the company’s loss, including a debt made irrecoverable by depletion of company assets.

The narrow Giles v Rhind exception applies only where the defendant’s wrongdoing directly causes a legal impossibility preventing the company, or a third party, from pursuing the company’s claim. Mere factual impecuniosity is insufficient.

Marex had obtained judgment against two companies in excess of US$5 million. It alleged that Mr Sevilleja dishonestly removed approximately US$9.5 million from the companies, preventing them from satisfying the judgment, and sued him in tort for the judgment debt, interest, costs and enforcement expenses.

Knowles J held that Marex had the better of the argument that the rule against reflective loss did not bar its tort claims and permitted service out of the jurisdiction: [2017] EWHC 918 (Comm). Permission to appeal was limited to the reflective-loss issue. The central questions were whether the rule applied to an unsecured non-shareholder creditor and whether the Giles v Rhind exception applied.

The appeal was allowed on the reflective-loss issue. Flaux LJ gave the leading judgment, with Lewison and Lindblom LJJ agreeing.

1. Scope of the rule. The rule is concerned with the loss claimed, not the form of the cause of action. It therefore applies to tort claims as well as claims in contract or equity. The reasoning in Gardner v Parker [2004] EWCA Civ 781 was part of its ratio and could not be reconciled with the contrary approach taken below. The rule applies to a creditor’s claim where the loss is the same as the company’s loss and would be made good by restoring the company’s assets.
2. Non-shareholder creditors. The rule is supported by avoiding double recovery, causation, conflicts affecting settlement and litigation, company autonomy, protection of minority shareholders and creditors, and the pari passu principle in an insolvency. There was no principled distinction between a shareholder creditor and an otherwise identical creditor without shares.
3. Giles v Rhind exception. The exception is narrow. The defendant’s wrongdoing must be directly causative of a legal impossibility or disability preventing the company from pursuing its claim, with no viable route for a claim to be brought in its name. Funding litigation, replacing or funding a liquidator, or taking an assignment of the company’s claim defeated the argument that pursuit was impossible. The exception therefore did not apply.
4. Orders. Marex’s claims for the judgment debt, interest and related costs were barred by the rule and were to be struck out. The separate claim for costs incurred in enforcing the judgment was outside the permitted appeal issue; permission to serve that claim out of the jurisdiction stood. Lewison LJ added that the Court of Appeal could not recast binding authority, and Lindblom LJ agreed with both judgments.

1. Court of Appeal (Civil Division) — In [2018] EWCA Civ 1468, the appeal was allowed on the reflective-loss issue. Claims for the judgment debt, interest and related costs were barred; the enforcement-cost claim remained in the proceedings.
2. High Court, Queen’s Bench Division, Commercial Court — Knowles J’s jurisdiction decision in [2017] EWHC 918 (Comm) held that Marex had the better of the argument that the reflective-loss rule did not bar its tort claims and permitted service out of the jurisdiction.