BL-2025-000377 - [2025] EWHC 2976 (Ch)

A leading authority is the decision of the Supreme Court in Marex Financial Ltd v Sevilleja [2020] UKSC 31, [2021] AC 39, where the majority (Lord Reed PSC (with whom Lady Black and Lord Lloyd-Jones JJSC agreed) and Lord Hodge DPSC), approved the application of the rule so far as a claim for reflective loss by a shareholder is concerned, whilst disapproving the extension of the rule to other categories of claimant such as the claimant in that case, a creditor of the company who had brought a claim in that capacity, and thus reversing the decision of the Court of Appeal.

As identified by Lord Reed PSC at [24], the issue as to the recovery of reflective loss by a shareholder first arose in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204. At [39] in Marex, Lord Reed PSC summarised what Prudential had decided, as follows:

“ … a diminution in the value of a shareholding or in distributions to shareholders, which is merely the result of a loss suffered by the company in consequence of a wrong done to it by the defendant, is not in the eyes of the law damage which is separate and distinct from the damage suffered by the company, and is therefore not recoverable. Where there is no recoverable loss, it follows that the shareholder cannot bring a claim, whether or not the company’s cause of action is pursued. The decision had no application to losses suffered by a shareholder which were distinct from the company’s loss or to situations where the company had no cause of action.”

At [27], Lord Reed PSC referred to the Court of Appeal in Prudential having explained its reasoning as follows at p. 223:

At [28], Lord Reed PSC explained that this means that where a company suffers actionable loss, and that loss results in a fall in the value of its shares (or in its distributions), the fall in share value (or in distributions) is not a loss which the law recognises as being separate and distinct from the loss sustained by the company. Consequently, it does not give rise to an independent claim to damages on the part of shareholders.

At [31], Lord Reed PSC considered the nature of a share, and the attributes that rendered it valuable. As he identified, a share is not a proportional part of the company’s assets, and nor does it confer in the shareholder any legal or equitable interest in the company’s assets. As was made clear in Prudential, a share is a right of participation in the company in the terms of the articles of association, which normally confer, amongst other things, a right to participate in the distributions which the company makes out of its profits, and a right to share in its surplus assets in the event of a winding up.

At [37], Lord Reed PSC observed that, as the Court of Appeal had identified in Prudential, to allow a shareholder to pursue, in addition to the ability of the company to sue, a personal action would subvert the rule in Foss v Harbottle (1843) 2 Hare 461. He identified that the Court of Appeal had said in Prudential at p. 224 that the effect of the rule in Foss v Harbottle was that: “[the shareholder] accepts the fact that the value of his investment follows the fortunes of the company.” Further, Lord Reed PSC referred to the practical difficulties that might result from the subversion of the rule in Foss v Harbottle where, for example, the company’s management wanted to compromise the company’s claim but were prevented from doing so by the shareholder’s refusal to enter into a settlement with the wrongdoer.

Having gone on to explain why the courts had taken a wrong turn by extending the rule against reflective loss to others than shareholders, Lord Reed PSC returned, at [79] et seq, to provide a summary as to where the rule did and did not apply. At [79], he said this:

“Summarising the discussion to this point, it is necessary to distinguish between (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.”

Lord Reed PSC then explained at [83] that the critical point in respect of the first category of cases was that the shareholder had not suffered a loss which was regarded by the law as being separate and distinct from the company’s loss, and therefore they had no claim to recover it. He then observed that a shareholder (unlike a creditor or an employee) did, however, have a variety of other rights which may be relevant in a context of this kind, including the right to bring a derivative claim to enforce the company’s rights if the relevant conditions were met, and the right to seek relief in respect of unfairly prejudicial conduct of the company’s affairs.

Lord Hodge DPSC, in a separate judgement, agreed with Lord Reed PSC. I note that at [98], Lord Hodge DPSC said, agreeing with Lord Reed JSC, that the rule against the recovery of reflective loss:

“… relates only to the diminution in value of shares or in distributions which the shareholder suffers in his capacity as a shareholder as a result of the company having itself suffered actual damage. Where the shareholder pursues a personal claim against a wrongdoer in another capacity, such as guarantor or creditor of the company, the exclusion has no application.”