In a landmark decision, seven Supreme Court judges have unanimously narrowed the scope of the reflective loss principle first established in Prudential Assurance Co Ltd v Newman Industries Ltd (No 2) [1982] Ch 204.  

The reflective loss rule set out in Prudential provides that a shareholder cannot recover in a personal action any amounts that are reflective of the relevant company’s losses, for example for a diminution in the value of their shares or dividends, as such losses are not separate or distinct from those suffered by the company. This rule has previously been applied beyond claims by shareholders, to other such as creditors. This has now been clarified such that for companies facing current or potential proceedings brought by their creditors, this judgment will be an unwelcome narrowing of the possibility to apply the Prudential rule in their defence. For now, at least, the original restriction limiting shareholder claims has been retained, though the reasoning in the minority judgment in this case might indicate the possibility of further attack in the future.

The current case

Marex Financial Ltd (Marex) obtained judgment against two companies owned and controlled by Mr Sevilleja ('the companies'). Mr Sevilleja allegedly acted to dissipate the Companies’ assets and ultimately to place them into liquidation. Marex pursued Mr Sevilleja directly for the judgment debt, but he successfully resisted this in the Court of Appeal, arguing that Marex’s claim against him was barred by the reflective loss principle. Marex appealed to the Supreme Court.


The Supreme Court unanimously allowed Marex’s appeal and criticised the unwelcome expansion of the reflective loss principle in recent cases. Interestingly though, they handed down three separate judgments.

Lord Reed, in the majority, found that Prudential had established a clear rule of law specifically for claims brought by shareholders who had suffered a diminution in the value of their shares or distributions. The rule had no wider application to other claims and therefore did not apply in the present case where Marex was a creditor of the companies.

By Lord Reed’s reasoning, Prudential is rooted in principles of company law, in particular the rule in Foss v Harbottle (1843) 2 Hare 461, which provides that it is only the company with the cause of action that can pursue that action. Company law provides that shareholders entrust certain of their rights to the decision-making organs of the company but have adequate means to enforce their rights through other means if necessary, for example through minority actions.

Lord Reed criticised authorities which had removed Prudential from this context, in particular those cases following the judgment of Lord Millett in Johnson v Gore Wood & Co [2002] 2 AC 1 which had relied on the wider principle of the rule against double recovery.

For Lord Reed, there is no exception to the rule, even in cases where a company elects not to pursue its right of action or is prevented from doing so by the wrongdoing of the defendant (for example, as in Giles v Rhind [2003] Ch 618 – now overturned).

Lord Sales, in a robust minority judgment, agreed that Prudential did not extend to claims by a creditor and did not therefore support Mr Sevilleja’s position, but he disagreed that Prudential established a legal rule on reflective loss. To his mind, Prudential had been wrongly decided on the basis of the Court’s mistaken approach in equating the losses of the shareholder and company. Lord Sales considered that a shareholder’s and a company’s losses are not always the same and therefore that to pursue a “bright line” legal rule risks overlooking the facts of each case, causing injustice to the parties and provoking continuing legal challenges in the courts.   

Lord Sales concluded his minority judgment by suggesting that the correct approach is for the Court to be guided by the rule against double recovery. He considered however that this could easily be done by procedural means without having to remove a shareholder’s right of action, for example by court management or subrogation of claims.

What next?

Plainly very careful attention to the issues surrounding reflective loss was given by the Supreme Court in this judgment, delivered more than a year after the case was heard. Given that the case focused on whether the reflective loss rule applies to creditors’ claims, there is some debate about the extent to which the Supreme Court’s remarks on the rule, particularly as it applies to shareholders are obiter (and therefore not binding on courts below). Might there, therefore, be scope for another case to come to a differently constituted Supreme Court, particularly given recent and imminent retirements and appointments, when the majority could tip the other way?

It will also be interesting to see how the lower courts implement this decision, in particular in scenarios like that in Giles v Rhind where the shareholder does not have any practical alternative remedy.

Read the full judgment: Sevilleja v Marex Financial Ltd [2020] UKSC 31