Supreme Court reflects on a narrower interpretation of "reflective loss"

The Supreme Court has scaled back the scope of the reflective loss principle which has been expanded over the years. The reflective loss principle essentially prevents a shareholder from bringing a claim against a wrongdoer for the diminution in value of its shares or distributions that results from a loss caused by that wrongdoer to the company itself.

This is a rule of company law designed to prevent the same loss being claimed for twice; any loss claim by a shareholder must be separate and distinct from the damage suffered by the company i.e. "reflective" of the loss caused to the company (see Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204). This principle has been extended over the years to encompass a wider principle on the law of damages to avoid double recovery (see Johnson v Gore Wood & Co [2002] 2 AC 1) which has prevented certain claims by creditors or employees of a company even if they were not shareholders. In order to allow claims that would otherwise be prevented due to the wider reflective loss principle, the court has explored potential exceptions to the rule to largely avoid injustice.  The Supreme Court has now addressed this (Sevilleja v Marex Financial Ltd [2020] UKSC 31) and confirmed that the reflective loss principle is confined to the narrow point of company law thereby restricting the scope of the rule debarring recovery of reflective loss. 

The Supreme Court majority made clear the need to distinguish “(1) cases where claims are brought by a shareholder in respect of loss which he has suffered in that capacity, in the form of a diminution in share value or in distributions, which is the consequence of loss sustained by the company, in respect of which the company has a cause of action against the same wrongdoer, and (2) cases where claims are brought, whether by a shareholder or by anyone else, in respect of loss which does not fall within that description, but where the company has a right of action in respect of substantially the same loss”. The first kind of case is the proper domain of the reflective loss principle laid down in Prudential. According to the analysis of the majority, a shareholder has no legal or equitable interest in the company's assets and it is only the company which has a cause of action in respect of its loss. A shareholder entrusts the decision making of the company to the management of the company and has other remedies, such as unfair prejudice claims or derivative actions (unlike a creditor or an employee) if it didn’t like the actions of the company, for example if the company failed to bring a claim.   In the second kind of case, recovery is permissible in principle (and it certainly was on the facts of Sevilleja), although these types cases might raise issues of double recovery.   

It is interesting that the Supreme Court minority would have gone further and preferred to overturn the reflective loss principle in its entirety and thought that Prudential went too far when it indicated that a shareholder could never recover damages for a fall in value of its shares. The minority indicated that a shareholder might well be able to plead and establish a personal loss that is different from that of the company. The main issue in this case would be one of double recovery and their preference was to deal with these matters with case management powers and procedural tools rather than having a "bright line" rule of debarring claims for reflective loss.

The case has provided much needed clarity on the scope of reflective loss, although given the minority judgment there may be scope in the future for a brave shareholder to overturn the reflective loss principle in its entirety.