English Court of Appeal Clarifies the Ambit of the Rule Against Reflective Loss

July 12, 2018

In the recent decision in Carlos Sevilleja Garcia v Marex Financial Limited,1 the Court of Appeal helpfully summarised the justifications for the English law rule against claims for reflective loss and confirmed that the rule applies equally to unsecured creditors of a company as it does to shareholders. 


  • The rule against reflective loss bars claims against wrongdoers by shareholders of a company where their loss is merely reflective of the loss of the company. For example, a shareholder cannot recover damages for diminution in the value of his shareholding because such loss is merely reflective of the company’s loss to its net assets. The shareholder is treated as having suffered no personal loss – the loss is the company’s to pursue, not the shareholder’s. 
  • The Court confirmed that the rule also applies to claims brought by unsecured creditors of the company, whether or not the creditor is also a shareholder of the company. 
  • The only exception to the rule is where the wrongdoer has directly caused it to be impossible for the company to bring a claim against the wrongdoer (the so called Giles v Rhind exception). 
  • The "impossibility or disability" must be a legal one (i.e., it will not be sufficient to show that by reason of the wrongdoer’s conduct the company has insufficient funds to enable it to pursue a claim against the wrongdoer). 

Overview of the Rule Against Reflective Loss 

The genesis of the rule against reflective loss lies in Prudential Assurance v Newman Industries (No.2),2 in which case the plaintiff, which had a 3.2% shareholding in a company, sued two individual directors in respect of a fraud on the company. The Court of Appeal held that the claim was misconceived and that a shareholder could not recover damages merely because the company in which he was interested had suffered damage. The shareholder did not suffer any personal loss. Rather his only loss was through the company in diminution in the value of the net assets of the company in which he had interest. 

The principle was developed in subsequent case law to bar claims by shareholders who were also creditors of the company. In Johnson v Gore Wood3 it was held that claims by a director and majority shareholder against the company’s solicitors in respect of the diminution in the value of the director’s self-administered pension scheme, in so far as it related to payments the company would have made into the scheme, were not recoverable by reason of the rule against reflective loss. 

Relying on Johnson in the subsequent case of Gardner v Parker,4 Neuberger LJ stated that: 

"the rule against reflective loss is not limited to claims brought by a shareholder in his capacity as such; it would also apply to him in his capacity as an employee of the company with a right (or even an expectation) of receiving contributions to his pension fund. On that basis there is no logical reason why it should not apply to a shareholder in his capacity as a creditor of the company expecting repayment of his debt." 

Neuberger LJ went on to observe, obiter, that it was hard to see why the rule should not apply to a claim brought by a creditor of the company concerned, even if he was not a shareholder; however, it was not necessary to resolve that point on the facts of Gardner, hence the resulting uncertainty. The Court of Appeal has now resolved the issue in Carlos Sevilleja Garcia v Marex Financial Limited5 and provided clarification of the limits of the exception recognised in Giles v Rhind. 

The Facts 

Two BVI companies – Creative Finance Limited and Cosmorex Limited (the "Companies") – were the principal trading vehicles of Mr Sevilleja Garcia. Marex, a foreign exchange broker, brought claims against the Companies and was awarded in excess of US$5 million by a judgment handed down on 26 July 2013. On 14 August 2013 Marex obtained a freezing order against the Companies. In fresh proceedings Marex then alleged that, following the release of the draft judgment in July 2013, Mr Sevilleja Garcia dishonestly took steps to asset-strip the Companies of some US$9.5 million. Marex pursued tortious claims for (i) knowingly inducing and procuring the Companies to act in violation of Marex’s rights under the judgment and (ii) intentionally causing loss to Marex by unlawful means. 

First Instance Decision 

Marex obtained permission to serve the claim out of the jurisdiction. Mr Sevilleja Garcia sought to challenge the jurisdiction of the English court contending, inter alia, that even if Marex had a cause of action against him in tort, the rule against reflective loss barred its ability to show a completed cause of action. At first instance, Knowles J rejected that submission holding that the no reflective loss principle does not apply where a claimant sues a defendant for knowingly inducing and/or procuring a third party to act wrongfully in violation of the claimant’s rights or for intentionally causing loss to the claimant by unlawful means. Were it to be otherwise, Knowles J stated these torts would be left with little application in situations in which the judge considered they had a principled part to play. Mr Sevilleja Garcia appealed. 

Decision of the Court of Appeal 

The lead judgment in the Court of Appeal was given by Flaux LJ. Following a comprehensive review of the authorities, Flaux LJ accepted that there is a four-fold justification for the rule against reflective loss, namely: 

  1. the need to avoid double recovery by the claimant and the company from the defendant; 
  2. causation, in the sense that if the company chooses not to claim against the wrongdoer, the loss to the claimant is caused by the company’s decision not to pursue a claim and not by the defendant’s wrongdoing; 
  3. the public policy of avoiding conflicts of interest, particularly that if the claimant has a separate right to claim it would discourage the company from making settlements; and 
  4. the need to preserve company autonomy and avoid prejudice to minority shareholders and other creditors.

In allowing the appeal, the court held that the distinction between shareholder creditors and non-shareholder creditors was artificial and anomalous. Flaux LJ commented that "it is difficult to see why a claim by a creditor who has one share in a company should be barred by the rule against reflective loss whereas a claim by a creditor who is not a shareholder is not." Such artificiality is illustrated by the example of a creditor who owns shares in a company whose claim is initially barred by the rule but, on this hypothesis, if he were to sell his shares, the rule no longer bars his claim. 

In relation to the ambit of the Giles v Rhind exception, Flaux LJ held that the exception could only apply in limited circumstances where the wrongdoing of the defendant has been directly causative of the impossibility the company faces in bringing a claim. The impossibility or disability must be a legal one and what might be described as a "factual impossibility" (e.g. a lack of sufficient funds to enable the company to pursue proceedings) is insufficient. 

This extension of the rule against reflective loss to claims by unsecured non-shareholder creditors reduces the armoury of claims available to such creditors. That said, shareholders and creditors alike should welcome the Court’s decision for providing clarity to the law and doing away with what Flaux LJ described as the "illogical and unprincipled distinction" between a shareholder creditor with one share, whose claim is barred, and the creditor who has sold his share, whose claim is not barred. 


1) [2018] EWCA Civ 1468
2) [1982] 1 Ch 204
3) [2002] 2 AC 1
4) [2004] EWCA Civ 781
5) [2018] EWCA Civ 1468

Subscribe to Dechert Updates