Major Supreme Court Ruling Extends The Rights to Compensation of Shareholders/ Creditors

A perfect storm for the justice system is about to be made even worse. For over 40 years, a principle of law, as defined by the courts, denied the ability of shareholders owed monies by the company, or suffering under personal guarantees, as well as creditors, to claim compensation for the actions of third parties, such as liquidators and banks, that had caused damage to the company. This barrier to justice has now been lifted by the Supreme Court in the case of Marex Financial Ltd v Sevilleja,

Previously under the principle of 'reflective loss', those owed monies by the company including shareholders could not sue for losses arising from someone else's failings such as the liquidator not attempting to rectify the wrongdoings of directors.

That was based on the argument that it was for the company itself to decide whether to bring legal action over damage caused by the fault or failings of third parties. If damage had been done by lenders, then the shareholders had to try to persuade the liquidator or administrator to pursue action. However, that was often a tough task given many insolvency practitioners are instructed by the very financial institution causing the problem. If they took that action, what chance would there be that they would be instructed in other cases?

This major change in the law would have led to an increase in disputes even before the Covid-19 pandemic. We now face an increasing number of companies taking insolvency action. Add to that the fact that the courts, despite the opening of Nightingale courts and extended sitting times, will have to face a significant backlog of cases thus delaying the progress of litigation, there is all the more reason for mediators to be ready to assist this perfect storm of litigation.