A change in company law offers new comfort to those who fear being deprived of their personal injury damages by wrongful stripping of corporate assets.

A change in company law offers new comfort to those who fear being deprived of their personal injury damages by wrongful stripping of corporate assets.


CategoryNews, Articles Author James Todd QC Date

Personal injury practitioners dutifully scanning their daily Lawtels in July may have omitted to read the Supreme Court decision in Sevilleja v. Marex Financial Limited[i], believing that the reference in the case headline to company law and something called reflective loss was not relevant to their practice. However, on closer inspection they would have seen that this may be a very important decision for anyone bringing a claim against an uninsured corporate defendant where the controlling minds of that company have seen fit to strip it of assets in order either to make it an unattractive target for litigation or to avoid payment of an existing or prospective judgment.

The facts in the case were simple. Marex successfully sued some companies controlled by a Mr Sevilleja. Shortly after the judgment was released in draft – and before Marex was able to obtain a freezing injunction – Mr Sevilleja moved several million dollars out of the companies leaving them unable to pay their dues.

Marex pursued Mr Sevilleja personally, alleging that he had dishonestly asset-stripped the companies in order to prevent them paying the judgment. Two causes of action in tort were relied on. First, knowingly inducing and procuring the companies to act in wrongful violation of Marex’s rights under the judgment. Second, intentionally causing loss to Marex by unlawful means or by unlawful interference with Marex’s economic interests. The unlawfulness here was said to be the breach of fiduciary duty inherent in stripping a company of its assets.

At a hearing before Knowles J, Mr Sevilleja argued that Marex’s claims should not be allowed to proceed as they had no proper basis in law[ii]. He denied the existence of the first of the torts relied on by Marex, and for the purposes of the second, argued that the asset-stripping relied on by Marex was not the kind of unlawful means that the tort required. The judge rejected Mr Sevilleja’s arguments and found that Marex had a good arguable case on both causes of action. However, Mr Sevilleja’s third argument was the one for which the case will forthwith be recorded in textbooks: Mr Sevilleja relied on the company law principle of reflective loss, arguing that even if the two tortious causes of action were available to Marex, the ‘no reflective loss’ principle meant that only the asset-stripped companies could sue for the legal wrong done to them. As a third party, even a third party with a direct financial interest in the companies’ solvency, Marex should be in no better position than a shareholder of an asset-stripped company, whose loss merely reflects the loss suffered by the company, and who is barred from suing by the principle. Recognising the clear justice of the situation, Knowles J rejected that argument too, finding that the reflective loss principle had no application in these circumstances: Marex could go ahead and sue Mr Sevilleja for its losses resulting from his asset-stripping.

Mr Sevilleja took the matter to the Court of Appeal where he was granted permission to appeal only on the reflective loss point[iii]. His appeal was upheld, leaving Marex back at square one: having to pursue convoluted, expensive and doubtful remedies via the liquidator in the insolvency courts. One respected commentator observed that the Court of Appeal’s conclusion meant that the state of the law facilitated ‘some very sharp practice’ by those seeking to avoid creditors [iv].

Onwards to the Supreme Court, who on 15 July 2020 unanimously reversed the decision of the Court of Appeal and reinstated the orders of Knowles J. In a lengthy judgment, the court held that the reflective loss principle did not apply to creditors as well as shareholders, Lord Hodge observing that if the principle were to exclude Marex’s claims that would result in a great injustice. The effect of the decision is that the reflective loss principle should no longer stand in the way of creditors of companies who seek to pursue those who asset-strip to put moneys out of creditors’ reach.

The potential usefulness of the change in law to anyone in possession of a judgment against a suddenly and suspiciously insolvent company is obvious. However, with the removal of the reflective loss bar, the Marex decision may also assist those who worry that uninsured corporate defendants will not be worth powder and shot by the time the case is settled or judgment is given. In the personal injury field, and especially in cases involving construction site accidents, it is not uncommon to find that a corporate defendant lacks the necessary insurance cover for the claim, whether through ignorance, dishonesty, carelessness or failure to comply with policy terms. Sometimes there will be more than one potential defendant but not all have insurance. In that case, the claimant will direct his claim primarily at the insured defendant/s, who will be left to seek contribution from the others. In any of these situations it is not unheard of for the controlling minds of the uninsured defendant to seek to spirit away corporate assets once they realise their exposure. It should now be open to those who have been, or fear that they will be, left out of pocket by such conduct to rely on the tort of intentionally causing loss by unlawful means and to pursue the asset-strippers directly[v].

 

[i] [2020] UKSC 31

[ii] [2017] 4 WLR 105

[iii] [2019] QB 173

[iv] Andrew Tettenborn: ‘Creditors and reflective loss – a bar too far?’ L.Q.R. 2019 135(Apr), 182-186

[v] A full analysis of the components of the tort is to be found in OBG v. Allan [2008] 1 AC 1; and see Clerk & Lindsell Chap 24. An essential first step for anyone seeking to deter such asset-stripping will be to put the company and its controlling minds on notice of the potential for a Marex-type claim as soon as reasonably possible.


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