Reflective loss: MPs have intervened in the Marex Supreme Court appeal

The All Party Parliamentary Group on Fair Business Banking has, through its intervention, attempted to reshape the rule against reflective loss

An attempt has been made to persuade the Supreme Court to re-frame the rule against reflective loss so that it allows shareholders in certain circumstances to make a claim against a creditor whose misconduct allegedly caused the insolvency of the company.

Principles

The rule against reflective loss means that where a company suffers loss as a result of a breach of duty owed to it, only the company can sue. A shareholder can only claim for the diminution in value of their shareholding where the company has no cause of action.

In Garcia v Marex, the Court of Appeal decided that the rule should be extended to encompass unsecured creditors who are not shareholders. Marex had argued that it should be allowed to pursue a tortious claim against Mr Garcia for allegedly stripping two BVI companies of assets so that they were unable to satisfy a judgment against them obtained by Marex. The Court of Appeal held that this was a loss reflective of that suffered by the company. The claim had to be pursued by the company. To allow otherwise would potentially prejudice other unsecured creditors and would subvert the pari passu principle which provides that in the event of insolvency, the company’s assets should be distributed rateably.

Recent developments

The Supreme Court heard an appeal in the case on 8 May and while doing so allowed the All Party Parliamentary Group on Fair Business Banking to intervene. This is the first time an APPG has intervened in a Supreme Court case.

The Group believes that the rule is being used to prevent the former owners of insolvent businesses who have allegedly suffered loss at the hands of their creditors from pursuing claims against those creditors. Its press release announcing the intervention states “the APPG …. 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."

What this means

Not surprisingly given its remit, the APPG clearly has banks in mind when it speaks of creditors. To reinforce this, its press release provides examples “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.”

It highlights what it describes as an issue common in the cases which have been referred to it namely the “extreme difficulty” experienced by business owners in ensuring that an insolvency practitioner pursues claims against a creditor especially where the IP has been appointed by that creditor. To deal with this issue, the APPG suggested a re-framing of the rule which, it said “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. We await the Court’s judgment to see whether it is willing or able to change the rule in such a way or whether legislation will be necessary.

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