Barrier Lifted For Creditors Recovering Third Party-Inflicted Losses

Following a landmark ruling from the UK Supreme Court, it is now easier for creditors to bring claims directly against asset-stripping shareholders and other third party wrongdoers.

Reflective loss claims

Where a third party commits a wrong against a company and causes it to suffer a loss, the ‘reflective loss’ rule bars the business’ shareholders – who will have seen a reduction in the value of their interest – from bringing a claim directly against the wrongdoer.

Over time, several cases have expanded the rule, leading to a lack of clarity and blocking claims not just by shareholders, but also by other types of claims and claimants, such as employees and creditors.

However, a judgment by the Supreme Court in the case of Sevilleja v Marex Financial Ltd [2020] UKSC 3 has narrowed the scope of reflective loss and now, a claim by a company’s creditor against a third party will not be barred where it reflects loss suffered by the business, even if the creditor is also a shareholder.

Comment

For far too many years, our Dispute Resolution team have had to advise clients that the principles of reflective loss not only sought to protect against double recovery, but effectively stifled them from obtaining justice and recompense.

After the Supreme Court’s ruling, true reflective loss principles will, rightfully, continue to exist. But in those cases where the doctrine has been extended too far, creditors and lenders can now have comfort that their genuine claims will not be stifled by what had, perhaps, become an unfair law.

Fundamentally, the judgment restates the rule on reflective loss that was established in 1982 – lifting a barrier to creditors recovering losses from third parties that have inflicted damage on their company.

Before this ruling, creditors who knew a third party had caused them significant financial difficulties just had to accept what had happened. They couldn’t sue for damages even if it was clear the third party had committed a wrongdoing.

Now the law is clear, individuals outside of their shareholder capacity, such as creditors, have a right to bring a case against those whose actions have wrongfully diminished a company’s financial position – finally, giving them a way of getting justice.

Provided the limitation period has not expired, those who had previously been told their cases were unable to be brought forward may also now be able to make a claim against the third party that has committed the wrongdoing.

This ruling is particularly pertinent in the present economic climate, where many companies are facing significant financial pressures, and it will be welcomed by many in the industry.