First decision on reflective loss after Marex

Broadcasting Investment Group Ltd & Ors v Smith & Ors [2020] EWHC 2501 (Ch) (“Broadcasting”), is 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 (“Marex”) earlier this year. In Broadcasting, the High Court followed the Supreme Court’s judgment and emphasised their narrowed scope of the rule.

In short, the reflective loss principle prevents shareholders from bringing a claim based on any fall in the value of their shares or distributions, as a result of loss sustained by the company, and where the company has a cause of action against the same wrongdoer. In Marex, the Supreme Court confirmed the reflective loss principle must be interpreted narrowly and should not extend to prevent claims brought by e.g. creditors[1].


The dispute in Broadcasting relates to the development of a start-up company in the technology sector. In October 2012, an oral joint venture agreement (the “Agreement”) was allegedly entered into by the claimants, Mr Smith, Mr Finch and certain other parties. Under the terms of the Agreement, the parties intended (among other things) to set up a joint venture vehicle called Simple Stream Group plc (“SSG plc”), and that Mr Smith’s shares in two existing software companies would be transferred to SSG plc.

SSG plc was subsequently formed and its shareholders were Mr Smith, Mr Finch and the first claimant, Broadcasting Investment Group Limited (“BIGL”). When the relevant shares were not transferred to SSG plc, SSG plc subsequently entered creditors’ voluntary liquidation.

BIGL brought a claim against Mr Smith and Mr Finch (and others) based on a breach of the Agreement, claiming:

  • specific performance regarding the transfer of shares to SSG plc; and
  • damages in lieu of specific performance.

Furthermore, BIGL claimed that it suffered loss due to the consequential diminution in the value of its shareholding in SSG plc and loss of dividend income from SSG plc.

In a game of Russian dolls, VIIL (does VIIL need a definition?), the second claimant was the majority shareholder of BIGL and the third claimant Mr Burgess was, in turn, the majority shareholder of VIIL. Mr Burgess brought parallel claims to those brought by BIGL, on the basis that both BIGL and Mr Burgess personally were alleged to be parties to, and therefore prima facie entitled to enforce, the Agreement.

Mr Smith applied for a strike out / reverse summary judgment on the basis that the claims of BIGL and Mr Burgess were barred by the rule against reflective loss, as recently clarified by the Supreme Court in Marex.


The application for a strike out / summary judgment had been adjourned pending the determination of the appeal to the Supreme Court in Marex, which the court noted had clarified the law governing the reflective loss principle and made the task of considering the application at hand considerably more straightforward.

The court acknowledged that – strictly speaking – the application of the reflective loss principle to claims by shareholders was not a matter for decision in Marex, because the question before the Supreme Court considered the specific position of a creditor who was not a shareholder. Nevertheless, all members of the Supreme Court in Marex made it clear that it was necessary for them to review the scope of the principle in its entirety in order to decide whether it should be extended to creditors. It followed that the reasoning of the majority in Marex represents the law which must now be applied to all attempts to rely on the principle of reflective loss, whether the claims are by shareholders or others.

Did SSG plc have a concurrent claim with the claimant?

The court’s starting position was to determine whether SSG plc (theoretically) had a cause of action arising out of the Agreement. The court stated that, if SSG plc did not have such a claim, then the application should fail.

In response to this preliminary question, the court found that SSG plc had a contractual claim to enforce the Agreement per s.1(1)(b) of the Contracts (Rights of Third Parties) Act 1999 (1999 Act) (the “Act”), which provides that a person who is not a party to a contract may in his/her own right enforce a term of the contract if “the term purports to confer a benefit” on that person.

One of the terms of the Agreement pleaded by the claimants, provided that the shares to be transferred to SSG plc would be held by the company beneficially, which in the court’s view, appeared ostensibly to confer an advantage on SSG plc for the purpose of s1(1)(b) the Act. This analysis was unaffected by the fact that the Agreement in question was oral rather than written, and the court found on the facts nothing to suggest that the parties did not intend the term in question to be enforceable by SSG plc. As a result, SSG plc did have a concurrent claim with the client.

Scope of the rule in Prudential / the reflective loss principle

The Supreme Court in Marex confirmed that the rule in Prudential Assurance Co v Newman Industries Ltd [1982] Ch. 204 (“Prudential”) is that a shareholder cannot (as a general rule) bring an action against a wrongdoer to recover damages “or secure other relief” for an injury done to the company. However, it does not preclude a creditor, or a shareholder claiming to have suffered losses (and losses distinct from those of the company), from pursuing the wrongdoer independently from the company. This is because in such cases the relevant loss is not related to the value of the company’s assets.

Since SSG plc had a concurrent claim to enforce the Agreement, the court considered whether the rule in Prudential, as explained above, barred:

  • the claim brought by BIGL, a shareholder in SSG plc; and/or
  • the claim brought by Mr Burgess, who was not a direct shareholder in SSG plc.

BIGL’s claim was linked to the loss suffered by SSG plc, because the claim was to enforce the Agreement, and Mr Smith’s alleged obligation to transfer shares to SSG plc. As BIGL was a shareholder in SSG plc and its loss was merely reflective of that suffered by SSG plc, this meant that SSG plc and BIGL had concurrent claims against Mr Smith. Consequently, BIGL’s claim was barred by the rule in Prudential.

Regarding Mr Burgess’ claim, he was not a shareholder in SSG plc directly, but the majority shareholder in VIIL, which was the majority shareholder in BIGL, which in turn was a shareholder in SSG plc, therefore Mr Burgess was considered a “third degree” shareholder. As a result, the court held that the rule in Prudential did not operate to bar Mr Burgess’ claim, for the following key reasons:

  • the judgments in Marex made it clear that the rule only bars claims by shareholders in the loss-suffering company;
  • the description of the rule in Marex goes against any incremental extension of the rule to non-shareholders, whatever policy justifications may be advanced for such an extension;
  • a “second degree” or “third degree” shareholder is not, in fact or in law, a shareholder in the relevant company. To blur that distinction would be to ignore the separate legal personality of the companies which form the intervening links in the chain between the claimant and the loss-suffering company. In the present case, none of the limited circumstances applied for the court to “pierce the corporate veil”;
  • the rule in Prudential derives from the legal relationship between a shareholder and the company for which they hold shares in. This reasoning cannot apply to a second degree or third degree shareholder who does not acquire shares in the relevant company and therefore never contracts into the rule so far as it affects recovery of losses by that company.

Interestingly, there does not appear to have been any discussion of the lack of connection between the claim brought by Mr Burgess (where the cause of action was a personal claim for breach of the Agreement to which he was a party), and the loss alleged to have been suffered, which arose separately through his indirect shareholding in SSG plc. As Mr Burgess’ claim is not barred, it will proceed to trial, which may offer the opportunity to consider this issue.


The clarification provided in this ruling is likely to be of particular relevance to those routinely dealing with joint venture companies and special purpose vehicles (“SPV”) incorporated for no other purpose than to act as a holding company. One context in which this frequently happens is where a business floats on a particular stock exchange, or as part of a securitisation. In such circumstances, the SPV created to effect the flotation or securitisation may well not have been incorporated at the time the agreement pursuant to which it is to be set up is concluded. The same is true for the common situation where (as on the facts in this ruling) a joint venture agreement is concluded which provides for an SPV to be set up as the joint venture holding company.

It is now clear that in such circumstances, despite the Supreme Court’s recent limiting of the effect of the rule in Prudential, a shareholder in the SPV will not be able to claim against a party alleged to have caused loss by diluting the SPV’s value. This is the case even though the claim is based on a contract concluded before the SPV was in existence. If the contract “purports to confer a benefit” on the SPV (which, can be the case even if the SPV is nothing more than a holding company or joint venture vehicle), it will have a claim against the wrongdoer which is concurrent with that of the SPV’s shareholders, and the rule in Prudential will apply. This is so even if the claim is for specific performance of the contract rather than for damages.


The above will not preclude claims by shareholders higher up the chain. This is a perhaps a surprising side-effect of the reasoning on which the rule in Prudential was based, namely the fact that shareholders entrust a company with their investments, can exercise their voting rights and therefore must follow the fortunes of whatever the company decided to do, whereas anyone other than a direct shareholder is not in that position. The decision may, in appropriate cases, inspire corporate constructions designed to ensure that there is a “quasi-shareholder” available to sue the wrongdoer, should the SPV (or more likely its liquidators) decide not to take action. Based on this ruling, in appropriate circumstances such a construction may work, but only if the quasi-shareholder has an independent (contractual or tortious) cause of action against the wrongdoer.

The full details of Broadcasting is available here.

For more information, and any guidance or advice on your shareholders agreements and company law, Cleveland & Co External in-house counselTM, your specialist outsourced legal team, are here to help.

[1] For a full review of the case please see: Supreme Court rules on reflective loss.


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