Company Law

The limits of the rule against reflective loss

Does the rule against reflective loss apply to claims by unsecured creditors who are not shareholders of the relevant company?

Yes, said that Court of Appeal in Garcia v Marex Financial Ltd [2018] EWCA Civ 1468.

If a company (C) has a claim against a party (A) for losses suffered by C, the rule against reflective loss precludes a shareholder of C from suing A directly for any consequent loss in the value of its shares. The loss to the shareholder merely reflects the loss to C. If C were to recover its own losses from A, the value of the shares would be restored. The rule does not bar a cause of action; merely recovery of a particular type of loss.

In attempting to provide more certainty to this area of law, the Court of Appeal decided that the rule against reflective loss precluded a claim by an unsecured creditor of a company just as much as it did a claim by a shareholder. Flaux LJ noted that it was difficult to see why a claim by a creditor who had one share in a company should be barred whereas a claim by a creditor who was not a shareholder should not.

In Giles v Rhind [2002] EWCA Civ 1428, the Court of Appeal established an exception to the rule, by allowing a shareholder to bring a claim for loss that reflected the loss to the company in circumstances where the company was unable to pursue the claim itself. The Respondent in Garcia v Marex argued that this exception applied, as it alleged that the Appellant had dishonestly stripped two companies of assets, leaving them without funds to pursue a claim against him. The Court of Appeal concluded that this was insufficient to bring it within the exception.

Flaux LJ held that the Giles v Rhind exception was a narrow one, applicable only where the consequence of the defendant’s wrongdoing was that the company no longer had a cause of action and it was legally impossible for it to bring a claim. It did not apply where the company merely lacked the funds to bring a claim due to the defendant’s wrongdoing. If a third party, such as the Respondent, could put the company in funds to enable it to bring a claim, the Giles v Rhind exception did not apply.

The Court of Appeal’s decision has confirmed both a wide ambit for the rule against reflective loss and a narrow ambit for the Giles v Rhind exception. Successful claims for reflective loss are therefore likely to be few and far between in future.


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