04:59 PM Shriram Jayakumar (Associate, Baker McKenzie Wong & Leow)

    When will the reflection show: Sevilleja v Marex Financial Ltd [2020] UKSC 31



    When a defendant has wronged a company, the Reflective Loss Principle bars a shareholder of the company from bringing a personal action against the defendant to recover a reduction in the value of his shares. Such a factual matrix arose in the English Court of Appeal’s decision in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204 (“Prudential”), which is widely regarded as the locus classicus of the Reflective Loss Principle.

    However, post-Prudential case law has revealed that the doctrinal basis for the Reflective Loss Principle is unclear and this has resulted in controversial extensions of the principle to bar even employment- or creditor-based claims by shareholders against a company wronged by a defendant. Accordingly, as some commentators have noted, a deceptively straightforward principle of damages has turned into a “ghastly legal Japanese knotweed”.

    In Sevilleja v Marex Financial Ltd [2020] UKSC 31 (“Sevilleja”), the UK Supreme Court provided much-needed clarity on the Reflective Loss Principle, even if not all debates on the principle’s application were unanimously resolved. While the Court was unified in holding that the Reflective Loss Principle does not apply to a claim by a non-shareholder creditor, the Justices expressed two different views on the limits of this principle, which could affect shareholder claims for diminutions in share value or in distributions, in a future case.

    Background to the Reflective Loss Principle

    The original justification for the Reflective Loss Principle, as stated in Prudential, is that, insofar as it is claimed that the company’s loss has had a knock-on effect on share value, such diminution in share value is merely “reflective” of the company’s loss resulting from the defendant’s wrongdoing.

    As subsequent case law has demonstrated, this justification raises more questions than it answers.

    First, what is meant by a diminution in share value being “reflective” of a company’s loss? Does it mean such diminution can never be considered a loss sustained by the shareholder? Or does it mean that such diminution can be considered a personal loss to the shareholder but, due to concerns of double recovery where the company has a concurrent cause of action, a claim for such diminution should not be allowed?

    Second, is there a broader prohibition against any personal claim for any loss that is “reflective” of a company’s loss? Aside from claims for diminutions in share value, could shareholders’ claims in their capacities as employees or creditors also be barred? This appears to be the position taken by some English decisions, including Johnson v Gore Wood & Co [2002] AC 1 (“Johnson”), which prohibited claims by shareholders in their capacities as employees for lost salary and pension contributions; and Gardner v Parker [2004] BCLC 554 (“Gardner”), which prohibited claims by shareholders in their capacity as creditors for the loss of ability to recover loans made to the company.

    Facts of Sevilleja

    In 2013, the appellant, Marex Financial Ltd (“Marex”) had obtained a judgment against two BVI companies (the “Companies”) from the English Commercial Court (the “Judgment”). Marex was a creditor of the Companies but not a shareholder. The Companies were owned and controlled by the current respondent, Sevilleja.

    Shortly after the draft judgment had been circulated but before the actual judgment had been handed down, Sevilleja allegedly started procuring the offshore transfer of millions of dollars from the Companies into his personal control, thereby depleting the Companies’ assets and preventing Marex from receiving the payment of its judgment debt and costs.

    Marex was not a shareholder in the Companies and so, there was no question of seeking diminutions in share value from Sevilleja. Instead, as a creditor, Marex sought tortious damages from Sevilleja for, inter alia, inducing or procuring the violation of Marex’s rights under the Judgment.

    Sevilleja responded that the Reflective Loss Principle barred Marex’s creditor-based claim as such a claim for tortious damages was “reflective” of the loss sustained by the Companies. Sevilleja was likely seeking to rely on the broader conception of the Reflective Loss Principle espoused in Johnson and Gardner, instead of the limited context of diminutions in share value which had been propounded in Prudential.

    The English Court of Appeal held in favour of Sevilleja. The Court was cognisant of its earlier decision in Gardner and reasoned that, if a creditor who has a sole share in a company is barred by the Reflective Loss Principle from making a claim against the defendant (as was the case in Johnson), then the same bar should apply even to creditors who are not shareholders at all, such as Marex.

    Findings of the UK Supreme Court

    The UK Supreme Court overturned the English Court of Appeal’s decision. As the Court was of one mind that the Reflective Loss Principle did not apply to a non-shareholder creditor like Marex, this was sufficient to grant the appeal. In doing so, the UK Supreme Court also overturned the findings on this principle in Gardner, Perry v Day [2004] EWHC 3372 (“Perry”) and Giles v Rhind [2002] EWCA Civ 1428 (“Giles”).

    But two different views were expressed on the residual scope of the Reflective Loss Principle. In brief, the majority held that the Reflective Loss Principle still has a limited applicability, while the minority disputed that it should apply at all.

    Majority View

    Lord Reed (with whom Lady Black, Lord Lloyd-Jones and Lord Hodge agreed, and with Lord Hodge delivering a concurring judgment) held that the Reflective Loss Principle only applies in cases where claims for diminution in share value or in distributions are brought by shareholders, where such diminutions result from wrongs committed against the company and in respect of which the company can maintain its own action.

    The majority found that there is some applicability for the Reflective Loss Principle because, on the authority of Prudential, the law of damages simply does not recognise a head of claim for diminution in share value or in distributions. As Lord Reed noted, “[t]he critical point is that the shareholder has not suffered a loss which is regarded by the law as being separate and distinct from the company’s loss, and therefore has no claim to recover it”.

    Minority View

    Lord Sales (with whom Lady Hale and Lord Kitchin agreed) went one step further and held that the Reflective Loss Principle should not operate at all, that is, even in the narrow category of cases identified by the majority. The minority disagreed that the Reflective Loss Principle suggests that a diminution in share value is indistinct from the loss suffered by a company from a defendant’s wrongdoing. Lord Sales explained that the loss sustained by a shareholder in respect of such diminution could factually differ from the loss sustained by the company. Relatedly, the minority did not think that Prudential laid down a free-standing rule; instead, the ruling was specific to the facts of the case. Lord Sales reached this interpretation on the basis that, in Prudential, it was common ground that there was nothing to suggest that the plaintiff-shareholder had suffered any loss in share value in the subject company which was different from the part of the company’s own loss which was proportionate to the plaintiff’s shareholding. He also found that the plaintiff “was never concerned to recover in the personal action, but was only interested in it as a means of circumventing the rule in Foss v Harbottle [as defined below]”.

    In rejecting this basis for the Reflective Loss Principle i.e. that the shareholder suffers no loss that is separate and distinct from the company’s loss, Lord Sales found that the principle’s true basis lay in the need to avoid double-recovery and drew guidance from Johnson in this regard. Accordingly, insofar as the concern is over double recovery, this could be addressed in other ways rather than imposing a bar like the Reflective Loss Principle.


    It is contended here that the majority view is correct.

    What Prudential stood for

     Prudential did stand for the proposition that diminutions in share value and in distributions are irrecoverable by shareholders for wrongs committed against the company.

    With respect, the minority’s restrictive reading of Prudential is irreconcilable with the express pronouncements of the English Court of Appeal in that case.  In Prudential, the plaintiff (“Prudential”) was a 3%-shareholder in the defendant (“Newman”). Prudential had argued that Newman’s directors had given it misleading advice in order to obtain approval of the purchase of certain assets, which were ultimately at an overvalue. Prudential brought two actions against Newman’s directors -- a derivative action (in respect of the purchase itself) and a personal claim (in respect of the allegedly misleading advice). The English Court of Appeal held that the personal claim was misconceived because, where a diminution in share value is being claimed, the shareholder’s “only ‘loss’ is through the company, in the diminution in the value of the net assets of the company, in which he has (say) a 3% shareholding”. The Court in Prudential also went on to elaborate, through the oft-cited “cash box” example, that “the deceit practised on the plaintiff [shareholder] causes the plaintiff no loss which is separate and distinct from the loss to the company”.

    Why the Foss v Harbottle considerations are valid grounds to uphold the Reflective Loss Principle in respect of claims for diminutions in share value or in distributions

    Prudential was also correct in standing for this proposition  i.e. that diminutions in share value and in distributions are irrecoverable by shareholders for wrongs committed against the company. This is because Prudential was building on the rule in Foss v Harbottle (1843) 67 ER 189. The first limb of the Foss v Harbottle rule is perhaps more ubiquitous with questions of standing, and provides that the proper plaintiff in an action in respect of a wrong alleged to be done to a corporation is, prima facie, the corporation itself and not the shareholder. But the second limb, which is less often cited and yet spells out the trite dichotomy between shareholding and management, is that the management of a company’s affairs is entrusted to the decision-making organs established by the company’s articles of association, subject to certain remedies available at law such as the commencement of a derivative action or equitable relief from unfairly prejudicial conduct.

    The effect of Foss v Harbottle is that the shareholder is taken to have accepted that the value of his investment follows the fortunes of the company and there is thus a “unity of economic interests which bind a shareholder and his company” (see Townsing v Jenton Overseas Investment Pte Ltd [2007] 2 SLR(R) 597). The manner in which Prudential applied Foss v Harbottle proved that, when wrongs are committed against a company, diminutions in share value or distributions are not recognised in law as recoverable losses since they merely “reflect” the loss of the company.

    Where Prudential perhaps erred is in suggesting that the shareholder “does not suffer any personal loss”. With respect, such a view is untenable. Even the majority in Sevilleja does not dispute the basic tenet that the corporate loss of a company is distinct from the personal loss of the shareholder in the form of diminutions in share value. Indeed, “although a shareholder can have no insurable interest in the assets of the company, he certainly does have an insurable interest in the value of his shares in the company” (P Koh, “The Shareholder’s Personal Claim: Allowing Recovery for Reflective Loss (2011) SAcLJ 863 at [9]).

    Rather, the law does not allow for the recovery of the shareholder’s personal loss, given his acceptance that his personal fortunes are intertwined with the company’s fortunes. To this end, the majority’s view in Sevilleja underlines the importance of the second limb of Foss v Harbottle – that is, shareholders entrust management decisions to the board. If a company chooses not to pursue an action against the defendant in respect of the latter’s wrongdoing, but the shareholder insists that it is availed of a personal action against the defendant for a diminution in share value, then the shareholder would essentially be thwarting the company’s efforts to compromise the claim (for whatever corporate reasons it may have), thereby subverting the second limb of Foss v Harbottle. The Foss v Harbottle rule, as such, does not merely refer to the company being the proper claimant for corporate losses but, as noted by the Singapore Court of Appeal in Townsing, also “seeks to ensure that wrongs against a company are effectively and fairly disposed of by regulating the category of persons who can recover what is effectively the company’s loss” (emphasis added).

    Moreover, the pragmatic considerations identified by the majority in Sevilleja -- chiefly, that a personal action by the shareholders for diminutions in share value or in distributions should not be allowed to subvert a management decision of the company to not pursue a claim against the defendant - are valid. As Townsing recognised, “[t]he various and diverse interest groups that are potentially affected when a wrong is suffered by a company create the need to ensure that these losses are remedied in an orderly manner, ie, through the company as the claimant”.

    It is thus sensible to state that, where a defendant commits a wrong against a company, the shareholder’s personal action for diminutions in share value or in distributions is deemed franked by the company’s claim (see Johnson at 66).

    Future of the Reflective Loss Principle - a loss of flexibility?

    As explained above, the central justification for the majority view in Sevilleja is that, insofar as diminutions in share value or in distributions are concerned, the fortunes of the shareholder should follow the fortunes of the company; accordingly, and in line with Foss v Harbottle, only the company should be allowed to bring a claim in respect of such diminutions.

    But what happens if, hypothetically, a company gives an undertaking that it will not pursue an action against the defendant for losses which the diminutions in share value “reflect” (and assuming there are no other creditors)? This hypothetical was considered in Townsing, which noted that there is “no principle of law that would have prevented the court from accepting [the undertaking] since it would ensure that there would be no double recovery or prejudice to other shareholders or creditors in allowing [the plaintiff shareholder] to proceed with its claim”.

    At first blush, there is an intuitive appeal to such flexibility in dis-applying the Reflective Loss Principle. If we accept that shareholders can suffer a personal loss through the diminutions in share value or in distributions, for wrongs committed against the company (as the majority in Sevilleja accepted), and if there is no risk of violating Foss v Harbottle given that the company accedes to foregoing its claim entirely, then “practical justice” (as referred to in the minority view in Sevilleja) dictates that the shareholder should be free to pursue recovery of its loss.

    As further support for such a view, guidance can be drawn from the exception established by Giles (and followed in Perry) for situations where a company is unable to pursue its claim against a defendant, where such inability was a consequence of the defendant’s wrongdoing. In Giles, this was because the defendant-wrongdoer’s actions had depleted the company’s funds so greatly that the company could not provide the security for costs in that action. In Perry, this was because the defendant-wrongdoer had compromised the claim of the company, in breach of the shareholder’s agreement.

    Similarly, in Hengwell Development Pte Ltd v Thing Chiang Ching [2002] 2 SLR(R) 454, a majority shareholder brought a claim against the executives of a company for diminutions in the value of its shareholding. The Singapore High Court found that the company was unable to prosecute its claims against the executives due to a shareholder deadlock and that, accordingly, “the policy reasons behind the decision in [Johnson] do not apply”.

    Thus, Giles and Hengwell could prima facie suggest that there is a measure of flexibility in the application of the Reflective Loss Principle, such that the principle should not apply where its undergirding policy considerations are not being threatened.

    However, scrutinising the majority opinion in Sevilleja more closely (and to the extent that it is followed in Singapore), it is contended that no such flexibility exists to dis-apply the Reflective Loss Principle. The consequence of the majority view is that shareholders will be barred from claiming diminutions in share value or in distributions in Giles- and Hengwell-type situations, and even in the hypothetical considered in Townsing where the company undertakes not to pursue its action. On precedent, as earlier mentioned, the majority in Sevilleja expressly overruled Giles and Perry. On principle, it is clear that Giles and Hengwell were building on Lord Bingham’s pronouncement in Johnson that, where the company had no cause of action to recover the loss sustained by the defendant’s wrongdoing, the shareholder’s personal claim should be allowed. With respect, it is not appropriate to extend Lord Bingham’s pronouncement to the facts in Giles and Hengwell. The inability of a company to pursue an action for a corporate loss is not the same as the company not having a cause of action against the defendant-wrongdoer to begin with; it only means that, due to practical and/or procedural limitations, the company cannot vindicate itself by commencing a suit against the defendant. Once it is accepted that the company has a cause of action to begin with, then, regardless of the company’s amenability in allowing the shareholder to pick up the fight instead (which may be the case in closely-held family corporations), the trite principle, as established in Prudential and employing Foss v Harbottle, is that the law does not recognise a shareholder having suffered any separate and distinct loss in the diminutions in share value or in distributions. Such a category of loss cannot come into or scurry away from existence depending on the facts of each case.

    A complete bar on shareholders claiming for diminutions in share value or in distributions in respect of wrongs sustained by the company also gives effect to the “regulati[on] [of] the category of persons who can recover what is effectively the company’s loss”, as referred to in Townsing (and as cited earlier). For example, in the hypothetical situation discussed above concerning a company’s undetaking not to sue a defendant, it could be argued that the grant of the undertaking indicates the company’s support of the shareholder’s attempts to recover its personal claim. But if the company made such a decision at a board meeting, it could very well have been a management decision that it would not be in the company’s best interests to mount a claim against the defendant-wrongdoer (where, for example, future commercial tie-ups with the defendant were envisaged) -- and the goals of such a decision would be thwarted by a shareholder’s action against that defendant. A determination of whether to apply or disapply the Reflective Loss Principle may be problematic in such circumstances because it would require the court to decipher the purpose and motive behind a company’s decision not to sue a defendant-wrongdoer.


    The answer as to when the reflection of the company’s loss will show, in a particular claim, may have elicited divided views in the UK Supreme Court. It is contended that the majority view in Sevilleja - in recognising a limited applicability of the Reflective Loss Principle for claims concerning diminutions in share value or in distributions - accords with established company law precedent and principle.

    But with the UK Supreme Court’s robust overturning of several decisions, it is clear when such reflection will not show: when the claimant is not a shareholder to begin with.

    * This blog entry may be cited as Shriram Jayakumar, “When will the reflection show: Sevilleja v Marex Financial Ltd [2020] UKSC 31” (

    ** A PDF version of this blog may be downloaded here

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