Garcia v Marex Financial Ltd [2018] EWCA Civ 1468


The Court of Appeal has for the first time applied the rule against reflective loss to claims by creditors. The rule had in the past only been used to prevent claims by shareholders against directors, where the losses claimed by the shareholders reflected those suffered by the company.

Garcia (G) was the director (and majority shareholder) of two BVI companies (the Companies) which he used for foreign exchange trading, and against which Marex, a broker, obtained  judgment in 2016 for more than $5m. Immediately after that judgment, and before Marex obtained a freezing order over the Companies' assets, G, resident out of the jurisdiction, allegedly dishonestly stripped the Companies of assets. Marex began a personal claim against G, which it had to ask the court for permission to serve out of the jurisdiction. This was G's appeal against Marex's successful application for permission to serve him out of the jurisdiction. The appeal concerned the judge's finding that the rule against reflective loss should not bar Marex from claiming losses that were also suffered by the Companies. G argued that he was only answerable to his Companies for what he had done.

Court of Appeal applies the rule against reflective loss

The judge at first instance had refused to apply the reflective loss principle, on the basis that it would mean that the torts of knowingly inducing a company to act in wrongful violation of the rights of judgment creditors would be left with little application where, in his view, they had a principled part to play. The Court of Appeal disagreed, saying that the judge's analysis couldn't be justified as a matter of law. The reflective loss rule should apply to creditors in the same way as it had applied for many years to claims by shareholders where the company was the proper claimant.  It held: "it is difficult to see why a claim by a creditor who has one share in a company should be barred by the rule…whereas a claim by a creditor who is not a shareholder, is not". There were four justifications, which they said could be derived from previous cases, for the rule:

  • the need to avoid double recovery by a claimant, from both a director and his company
  • the creditors' loss is strictly caused by the company's decision not to bring a claim, not by the director's wrongdoing
  • there is a public policy in avoiding conflicts of interest: if a claimant had a separate right to claim that might prevent directors settling claims brought by companies on the basis that shareholders might also have claims
  • the need to preserve company autonomy and to avoid prejudice to minority shareholders and other creditors.

Limited exception to the rule against reflective loss

The only exception to the rule against the recovery of reflective loss, known as the Giles v Rhind exception (where the company has been unable itself to pursue the wrongdoer) should not apply in this case, the Court of Appeal held. The exception should apply only in where the wrongdoing of the defendant has been "directly causative of the impossibility the company faces in bringing the claim". A company's lack of funds won't suffice.  The impossibility must be a legal one, not dependant only on the facts. Otherwise it would risk becoming the rule: a company will often have no funds with which to bring the claim, where they have been depleted by the wrongdoer, but funds could always be injected by a third party, to enable the claim to be brought by the company.

Comment

The Court's desire for legal certainty, and to align the position of creditors with those of shareholders, may be seen by some as unfair to judgment creditors, whose rights have been violated by directors. That is how the judge at first instance saw it. But an unsecured judgment creditor, who fears that a judgment debtor company will be deprived of assets by a rogue director/shareholder may be able to obtain a freezing order from the court to preserve assets for enforcement. In this case a freezing order had been obtained by Marex against the Companies, but not until three weeks after judgment, by which time assets had been moved.

Garcia v Marex Financial Ltd [2018] EWCA Civ 1468

Click here for our article on the first instance decision in 2017

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Kate Menin

Kate Menin

Principal Knowledge Lawyer, Dispute Resolution
London

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