Marex - new routes for company stakeholders to claim?

Summary

In Sevilleja v Marex Financial Ltd, the Supreme Court has unanimously held that a creditor of a company can sue its director for stripping assets from the company to prevent enforcement of a judgment debt. This is despite the fact that the company itself would have a claim against the director.

Of the seven Justices, four held that the fact the claimant was a creditor and not a shareholder was significant, while three held that even shareholders might be entitled to claim in circumstances where the company had a parallel claim. This may encourage shareholders of companies that have failed due to wrongdoing to pursue claims directly against those responsible.

"Reflective loss"

Previously the English courts have not allowed a fall in the value of a company due to wrongdoing against it to be actionable by parties other than the company. This was to prevent "double recovery" of that loss and the concept became known as the "reflective loss" principle. It has sometimes caused shareholders and creditors of a company to find themselves without a remedy, where those in charge of the company, most often insolvency practitioners, are unable or unwilling to pursue those responsible.

In Marex, Mr Sevilleja owned and controlled two BVI companies, against which Marex secured a judgment worth over $7m. Mr Sevilleja transferred all value out of the companies immediately after receiving the judgment in draft, leaving them in insolvent liquidation. The liquidators have not pursued any claim against him. The Court of Appeal held that Marex could not bring a claim against Mr Sevilleja because it represented a reflective loss.

The Supreme Court analysed previous decisions on reflective loss and held that several were wrongly decided. In particular, the House of Lords case of Johnson v Gore Wood has now been overturned. Lord Millett's judgment in Johnson greatly expanded the scope of reflective loss by detaching it from the simple concept that if a company suffers a loss and its share price falls, shareholders have not suffered a separate loss to the company. The Supreme Court has now strongly restored that connection, finding that in other situations the avoidance of double-recovery can be achieved through numerous means without resorting to the principle of reflective loss.

The position of shareholders

Marex was a creditor of Mr Sevilleja's companies, not a shareholder. All the Justices in the case held that the principle of reflective loss did not prevent Marex from pursuing Mr Sevilleja, even though his companies would have rights of action against him for the same sums.

However, on the question of whether a shareholder could ever have an action in parallel to the company for a breach of duty to the company, the Justices were less united.

The majority of fourheld that, as a principle of company law, where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. A shareholder does not suffer a separate loss to the company due to a fall in its share price. However, they held that a shareholder may sue in respect of a loss to a company where the company has no cause of action to recover that loss. Where the duty breached is owed separately to the company and the shareholder, both may sue independently and the court will take steps to avoid double recovery, such as ordering one claimant to account for any prior recovery by the other.

The remaining three Justices would have gone further. They saw no need for the reflective loss principle in company law, finding that double recovery between a company and its shareholders could be avoided through other means. Lord Sales reasoned that a share is valued by more than just the net assets of the company and that its value as an item of property is separate to a mere proportion of the company's net worth. However, this tantalising prospect for shareholders was the dissenting view, though only by one in a four to three decision. Lord Hodge, in his judgment for the majority, held that the rule against shareholders suing for a loss for which the company has a right of action was "a bright line" in English law that had stood for almost 39 years and should not be overturned.

Future developments

This decision will inevitably encourage parties affected by companies getting into financial difficulty to consider their options for redress. Shareholders whose loss is limited to the diminution of the share price caused by a breach of a duty owed only to the company will still be prevented from bringing a claim. But those shareholders who can show a duty was also owed to them will no longer be faced with the argument that their claim is barred by the fact that the company also has a right of action on the same basis.

We expect a growth in the number of situations in which shareholders will now argue that a third party, particularly a professional service provider, owes a duty to shareholders as well as the company. We also anticipate greater activism by individual creditors in insolvency situations where they disagree with the approach taken to claims by the insolvency practitioner. Where the breach of a duty owed to a company causes loss to the company's creditors, those creditors will no longer have to contend with issues of reflective loss.