Supreme Court grants APPG permission for unprecedented intervention on reflective loss rule

The Supreme Court has granted permission to Trowers & Hamlins LLP, acting for the APPG on Fair Business Banking, to intervene in the hearing of Marex Financial Ltd v Carlos Sevilleja Garcia on 8th May 2019. The intervention will allow the court to take account of the APPG’s experience and the public policy considerations underpinning the rule against reflective loss. It is the first APPG to intervene in a Supreme Court Case.

The rule against reflective loss presents an obstacle to accessing justice for the directors and shareholders of insolvent businesses as it acts as an exclusionary rule, preventing business owners from pursuing their own personal claims for losses resulting from a company’s losses when it goes into insolvency. Crucially, the APPG’s intervention seeks to draw the Supreme Courts attention to the practical problems for shareholders, creditors and guarantors to pursue a company’s legitimate claims against creditor misconduct after the company has been made insolvent.

This means that even when the misconduct of the creditor—such as the mis-sale of an IRHP or the treatment of businesses such as those in RBS GRG—has caused the insolvency, the bank receives the benefit of the insolvency and the shareholders, directors and other creditors lose everything through no fault of their own.

What is common in the cases raised to the APPG is that it is extremely difficult, in practice, for the owners of the business to intervene in the company’s insolvency to ensure that the Insolvency Practitioner (IP) pursues the company’s claim against the creditor, particularly when the IP has been appointed by the same creditor. They often settle with the bank for a low value and they may also be reluctant to grant the assignment of the cause of action to the directors and shareholders.The APPG seeks to draw to the courts’ attention the public policy implications of applying the rule against reflective loss in such a way that adds further limitations to the rights of actions for shareholders. The APPG will submit that the rule should not be expressed in such wide terms that the owner of a small business will always be bound by an IP’s decision in an insolvency and will be unable to obtain further redress against the wrongdoing for unsettled losses.

Kevin Hollinrake MP, Co-Chair of the APPG on Fair Business Banking, said: “We are delighted the Supreme Court have allowed us to make this unprecedented intervention. The mechanisms in place for the directors and shareholders of insolvent businesses to obtain redress and receive compensation for creditor misconduct are unsatisfactory. We hope to establish that the rule against reflective loss must not restrict the rights of these individuals to bring a claim, and must not restrict them from accessing justice when their business has been taken from them through the misconduct of their bank.”

Ned Beale, a litigation partner in Trowers leading the legal team for intervention, states: “It is unprecedented for the APPG or, as far as we are aware, any All-Party Parliamentary Group, to intervene in litigation. However, the difficulties that the rule against reflective loss causes business owners and victims of fraud are serious and widespread. The Marex appeal is a unique opportunity to shape the law to address them.”

Ned Beale and Rebecca Lawrence of Trowers’ London commercial disputes team are acting for the APPG, instructing Peter Knox QC, Richard Samuel and Chloe Shuffrey of 3 Hare Court and Simon Reevell and Amit Karia of Thomas More Chambers.

About the rule on reflective loss:

The principle of reflective loss, which rules that a cause of action vesting in a company should be pursued by the company and not by its shareholders, was established in Prudential Assurance v Newman (No 2) [1982]. The logic behind the rule is that the company has the most direct cause of action, rather than the shareholders who are one step removed, it avoids a multiplicity of actions and a win by the company should cure the loss to all the shareholders.

However, the rule against shareholders having no right of action as the action is vested in the company may be problematic when the directors do not wish the company to sue themselves. It was recently described as “a curiosity of company law” whose “tentacles have spread alarmingly, rather like some ghastly legal Japanese knotweed” promising “to distort large areas of the ordinary law of obligations unless drastic steps are taken to prune it.” Tettenborn, (2019) L.Q.R. 135(Apr), 182-186 and in a similar vein, Mitchell (2004) 120 L.Q.R. 457 at 479).

The Rule was subsequently expanded in Johnson v Gore Wood [2002] 2 AC 1, to bar any claims by a shareholder, whether in his capacity as shareholder, employee or creditor, where the loss claimed is in effect the same loss as suffered by the company. In Sevilleja v Marex Financial [2018], the Court of Appeal took the principle a step further. The Court of Appeal ruled that the reflective loss principle creates a bar not only on shareholders suing but also to unsecured creditors. In this case it stopped a creditor bringing a claim for loss caused by the abstraction of money from the company. The Court of Appeal reasoned that there was no logical distinction for a bar to creditors from suing if they had one share if creditors who had no shares could sue freely. Now the bar applies to all creditors.

One exception to the reflective loss principle was set out in a case called Giles v Rhind; that case said that the rule does not apply in a case where, by reason of the wrong done to it, the company is unable to pursue its claim against the wrongdoer. In Sevilleja v Marex Financial [2018] the Court of Appeal rejected the argument that the Giles v Rhind exception applied and importantly, said that the exception applies in only very limited circumstances where the wrongdoing of the defendant has been directly causative of the impossibility the company faces in bringing the claim. The impossibility had to be legal rather than factual. Thus, the mere fact that a company had been rendered too poor to sue by the wrongdoing did not mean the company should not be the party bringing the proceedings.

The Court of Appeal’s decision adds an extra hurdle for creditors to bring claims against dishonest directors. They would need to go to the extra expense of putting the company into liquidation and the added cost of funding liquidators to pursue a claim (assuming they could persuade the liquidator to take on the litigation). It would also add an extra hurdle for a shareholder of an insolvent company to bring a claim against a creditor for misconduct.

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