Could we see a change to the rule against reflective loss?

The Supreme Court recently granted the All-Party Parliamentary Group (APPG) on Fair Business Banking, permission to intervene in the Supreme Court hearing of Carlos Sevilleja Garcia v Marex Financial Ltd [2018] EWCA Civ 1468 (Marex) in May 2019, concerning the rule against reflective loss.

Where a company suffers loss due to one party’s wrongdoing, shareholders suffer indirectly because their loss is reflective of the company’s. The current position of the courts on the rule against reflective loss in essence means that these shareholders cannot bring a claim against that party and the company must sue instead. This rule meant that even employees or creditors could not claim, where the loss is effectively a loss suffered by the company. The Marex case sought to widen the scope of the rule even further and the APPG then argued that a party should not be able to benefit from their wrongdoing (ie dishonest conduct).

In allowing the intervention, the APPG was able to put forward the public policy arguments relating to the obstructive nature of the current rule against reflective loss for the personal claims of directors and shareholders of insolvent businesses. While it is not clear whether the Supreme Court agrees with APPG’s arguments, it has raised questions whether this could lead to a review of the current rule against reflective loss.

Sinéad Lester, partner in our litigation team, discusses in an article for the Financial Director, the potential changes to the law which could see shareholders and small business owners having the ability to take direct legal action against parties they blame for causing them losses when their companies fall into insolvency.