Sevilleja v Marex Financial Ltd

A shareholder cannot recover a diminution in share value or distributions which merely results from actionable loss suffered by the company. Such loss is not legally separate from the company’s loss, even where the company does not pursue its claim.

This rule is confined to losses suffered in the capacity of shareholder. It does not bar claims by creditors or other persons with independent causes of action. Concurrent claims should be addressed under ordinary principles, including the rule against double recovery. Neither that rule nor the pari passu principle automatically gives the company priority over another claimant’s direct claim against the wrongdoer.

Marex Financial Ltd obtained judgments against two companies controlled by Mr Sevilleja. Marex alleged that Mr Sevilleja then stripped the companies of their assets to prevent enforcement, rendering them insolvent. Marex claimed damages against him for procuring the violation of its judgment rights and intentionally causing loss by unlawful means.

Knowles J dismissed an application to set aside permission for service outside the jurisdiction: [2017] EWHC 918 (Comm); [2017] 4 WLR 105. The Court of Appeal held that the reflective-loss principle barred about 90% of Marex’s claim: [2018] EWCA Civ 1468; [2019] QB 173.

The central questions were whether the rule against recovery of reflective loss extends to an ordinary creditor which is not a shareholder and whether an exception applies where the wrongdoer has prevented the company from pursuing its own claim.

1. Appeal allowed unanimously. Marex was entitled to pursue the entirety of its claim against Mr Sevilleja.

2. Lord Reed, with whom Lady Black and Lord Lloyd-Jones agreed, delivered the principal judgment. Lord Hodge agreed and supplied the fourth vote for the majority’s treatment of shareholder claims. The rule established by Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 is a narrow rule of company law. A shareholder cannot recover for a diminution in the value of shares, or in distributions received as shareholder, which merely results from actionable loss suffered by the company. The loss is not recognised as separate and distinct from the company’s loss. The rule applies whether or not the company pursues its cause of action.

3. The rule is explained by the nature of a share and the principle in Foss v Harbottle. A shareholder has no proprietary interest in the company’s assets and entrusts the management of the company’s claims to its constitutional organs. The rule does not extend to distinct losses suffered by a shareholder or to circumstances in which the company has no cause of action.

4. The rule does not apply to creditors or employees merely because the company has a concurrent claim. A creditor does not suffer loss in the capacity of shareholder, and its direct action does not conflict with Foss v Harbottle. Lord Bingham’s approach in Johnson v Gore Wood & Co [2002] 2 AC 1 was reaffirmed. The broader reasoning in the other speeches, particularly Lord Millett’s reasoning extending the principle to creditor and employee claims, should not be followed.

5. Concurrent claims are governed by ordinary principles. The law must prevent double recovery, but that concern does not extinguish an otherwise valid cause of action. The appropriate solution depends on the circumstances and may involve procedural controls, priority, accounting or subrogation. The pari passu principle governs distribution of an insolvent company’s assets; it does not give the company automatic priority over another claimant’s rights against a third-party wrongdoer.

6. The majority further concluded that there is no exception of the kind recognised in Giles v Rhind [2002] EWCA Civ 1428. That decision, Perry v Day and the relevant creditor reasoning in Gardner v Parker were wrongly decided.

7. Lord Sales, with whom Lady Hale and Lord Kitchin agreed, concurred in allowing the appeal but would have gone further. In their view, the reflective-loss rule should not bar even a shareholder’s genuinely independent cause of action for distinct personal loss. Any overlap should instead be managed through proof of loss, procedural controls and remedies such as subrogation.

• United Kingdom Supreme Court: The court unanimously allowed Marex’s appeal: [2020] UKSC 31. Marex was permitted to pursue its entire claim.
• Court of Appeal: The court allowed Mr Sevilleja’s appeal and held that the reflective-loss principle barred about 90% of Marex’s claim: [2018] EWCA Civ 1468; [2019] QB 173.
• Commercial Court: Knowles J dismissed Mr Sevilleja’s application to set aside permission for service outside the jurisdiction, holding that Marex had a good arguable case that its claim was not barred: [2017] EWHC 918 (Comm); [2017] 4 WLR 105.