High Court tests newly narrowed scope of the “reflective loss” rule in first decision since the Supreme Court’s judgment in Marex

In the first decision to consider the so-called “reflective loss” principle since the Supreme Court’s judgment in Sevilleja v Marex Financial Ltd [2020] UKSC 31 earlier this year, the High Court has emphasised the newly narrowed scope of the rule: Broadcasting Investment Group Ltd & Ors v Smith & Ors [2020] EWHC 2501 (Ch).

As a reminder, the Supreme Court in Marex confirmed (by a 4-3 majority) that the reflective loss principle is a bright line legal rule, which prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, which is the consequence of loss sustained by the company, where the company has a cause of action against the same wrongdoer. Marex confirmed the narrow ambit of the rule, which should be applied no wider than to shareholders bringing such claims, and specifically does not extend to prevent claims brought by creditors. For a more detailed analysis of the decision in Marex, see our blog post: Untangling, but not killing off, the Japanese knotweed: Supreme Court confirms existence and scope of “reflective loss” rule.

The court in the present case found that the claim brought by the first claimant – a direct shareholder in the company that suffered the relevant loss – was a paradigm example of a claim within the scope of the reflective loss principle, and accordingly struck out the claim. However, it rejected an argument that the reflective loss principle should also bar the claim of the third claimant, who was a “shareholder in a shareholder” in the first claimant.

For more information see this post on our Banking Litigation Notes blog.

Note: This decision has been overturned by the Court of Appeal on the basis that the “reflective loss” principle will not bar the claim of a shareholder, who is also a contractual promisee/beneficiary, in circumstances where the company in which the shares are owned has acquired the right to bring a claim in respect of the same contract against the same wrongdoer pursuant to s.1 of the Contracts (Rights of Third Parties) Act 1999. See this post on our Banking Litigation Notes blog.