Marex Financial Ltd v Sevilleja

The Supreme Court considered the scope and foundation of the so‑called "reflective loss" principle, as formulated in Prudential Assurance Co Ltd v Newman Industries Ltd and developed in Johnson v Gore Wood & Co. The court held that Prudential establishes a narrow company‑law rule that prevents a shareholder from recovering a diminution in the value of his shares or a reduction in distributions where that diminution is merely the reflection of loss suffered by the company for which the company has a cause of action. The court rejected the extension of that rule beyond shareholders to ordinary creditors and declined to follow subsequent authorities that had applied the reflective‑loss doctrine more widely (including Giles v Rhind, Perry v Day and Gardner v Parker).

The court therefore allowed Marex to pursue its tort claims (based on Lumley v Gye and the unlawful‑means or "OBG" economic tort) against Mr Sevilleja in respect of losses he allegedly caused by stripping the companies’ assets. The judgement emphasised the relevance of Foss v Harbottle and company autonomy to shareholder claims, but held that those considerations do not justify barring distinct claims by creditors or other non‑shareholder claimants. Practical tools (procedural management, subrogation, account and insolvency rules) can address any risk of double recovery.

Background and procedural posture. Marex obtained judgment against two BVI companies controlled by Mr Sevilleja. Marex alleges that after a draft judgment circulated Mr Sevilleja stripped the companies of funds and caused them to be placed into liquidation to defeat Marex’s enforcement. Marex sued Mr Sevilleja in tort (inducing breach of Marex’s judgment rights / unlawful means tort) and sought service out of the jurisdiction. Knowles J in the Commercial Court held Marex had a good arguable case; the Court of Appeal accepted that much of Marex’s claimed loss was barred by the reflective‑loss principle and limited Marex’s claim to heads of loss not deemed reflective. Marex appealed to the Supreme Court. (See [2017] EWHC 918 (Comm); [2018] EWCA Civ 1468.)

Parties and relief sought. Marex (claimant/appellant) sought damages for (1) inducing or procuring breach of its judgment rights (Lumley v Gye type claim) and (2) intentionally causing loss by unlawful means (OBG type economic tort), in amounts representing the judgment debt, interest and costs and associated enforcement costs. Mr Sevilleja (defendant/respondent) argued the reflective‑loss rule barred most of Marex’s claim.

Issues framed by the court. (i) Whether the reflective‑loss rule applies to ordinary creditors (not shareholders) whose losses arise by reason of a company’s being rendered unable to pay; and (ii) whether there is scope for an exception (as suggested in Giles v Rhind) where it would be unjust to bar an otherwise genuine claim because the company’s concurrent right of action cannot or will not be pursued.

Reasoning and holdings on the issues. The court undertook a detailed analysis of Prudential and Johnson. It concluded Prudential should be confined to its narrow company‑law context: it bars shareholder claims for diminution in share value or distributions that are not recognised as separate and distinct from the company’s loss, because allowing such personal claims would subvert the rule in Foss v Harbottle and upset the internal allocation of decision‑making and priorities within a company. However, the court rejected Lord Millett’s broader dicta in Johnson and the extension of the doctrine to creditors and others: there is no principled basis to treat creditors (or other non‑shareholder claimants) as if their loss were necessarily "reflective"; different remedial and procedural mechanisms (including subrogation, accounting, and insolvency rules) can and should be used to prevent double recovery. The Giles v Rhind exception was not required on these facts because the rationale for extending reflective loss to creditors was rejected.

Subsidiary and practical findings. The court emphasised that questions of double recovery remain important but are to be managed by ordinary remedies and procedures rather than by a broad categorical rule. It left open factual questions about double recovery in Marex’s case to be determined, but concluded as a matter of law that Marex may pursue the entirety of its claim against Mr Sevilleja.

Appeal allowed. The Supreme Court held that the "reflective loss" rule as established in Prudential is a narrow company‑law rule confined to shareholder claims for diminution in share value or distributions that merely reflect loss suffered by the company. The court refused to extend that rule to ordinary creditors or to adopt the broader formulations in some speeches in Johnson and subsequent Court of Appeal authorities. Accordingly Marex may pursue its tort claims against Mr Sevilleja; issues of potential double recovery are to be addressed by ordinary remedies and procedures (for example subrogation, account, insolvency rules and case management), not by a categorical bar.

Appeal from the Court of Appeal (allowed the defendant’s appeal in part): [2018] EWCA Civ 1468; on the judge’s decision to permit service out see Knowles J in the Commercial Court: [2017] EWHC 918 (Comm); [2017] 4 WLR 105. The Supreme Court allowed Marex’s appeal and restored its ability to pursue the full claim against Mr Sevilleja: [2020] UKSC 31.