Facts
- Marex Financial Ltd was a creditor of two companies owned and controlled by Mr. Sevilleja.
- Marex alleged that Mr. Sevilleja removed company assets to prevent payment of debts owed to Marex.
- Mr. Sevilleja’s control over the companies prevented them from bringing proceedings against him for the asset removal.
- Marex initiated proceedings against Mr. Sevilleja directly to recover its losses as a creditor.
- The matter before the Supreme Court was whether Marex, as a creditor, could sue Mr. Sevilleja directly, given the companies themselves were unable to act due to his control.
Issues
- Whether the rule in Foss v Harbottle, which normally restricts derivative actions to the company itself, barred Marex, a creditor, from suing Mr. Sevilleja directly for losses caused by asset removal.
- Whether the principle of reflective loss, which prevents shareholders from bringing claims for losses paralleling company losses, applied to Marex’s claim as a creditor.
Decision
- The Supreme Court dismissed Mr. Sevilleja’s appeal.
- It held that the rule in Foss v Harbottle only restricts shareholder claims, not claims by creditors.
- The Court found that creditors such as Marex are not barred from bringing direct actions against third parties whose conduct harms both the company and the creditor’s ability to recover debts.
- It held that the principle of reflective loss, which bars shareholders’ parallel claims, does not extend to creditors’ claims like those of Marex.
- The Court clarified that wrongdoers could not escape liability by using their control over the company to prevent corporate action.
Legal Principles
- The rule in Foss v Harbottle comprises the proper plaintiff principle (only the company may sue for wrongs against it) and the majority rule principle (corporate decisions are made by majority shareholders).
- Exceptions permit shareholders to claim in cases such as fraud, ultra vires acts, or when necessary consents have not been obtained.
- The rule in Foss v Harbottle applies only to claims by shareholders, not creditors.
- The reflective loss principle applies solely to losses suffered by shareholders that mirror company losses, not to losses suffered by creditors.
- The separate legal identity of the company is maintained, but wrongdoers cannot use company control to avoid liability.
Conclusion
The Supreme Court confirmed that the Foss v Harbottle rule does not bar creditor claims against wrongdoers and clarified that the reflective loss rule applies only to shareholders, not creditors, thereby protecting creditors’ rights while upholding the core principles relevant to shareholder actions.