Introduction
The derivative claim, a key part of company law, lets a shareholder take legal action for harm done to the company. The rule in Foss v Harbottle (1843) 2 Hare 461 states that the company itself must act when wronged. This rule maintains the company’s independence and prevents multiple lawsuits by shareholders. Sevilleja v Marex Financial Ltd [2020] UKSC 31 reaffirms the Foss v Harbottle rule, focusing on situations where a third party causes loss to the company but controls it to prevent legal action.
The Rule in Foss v Harbottle and its Exceptions
The Foss v Harbottle rule has two foundations: the proper plaintiff principle and the majority rule principle. The proper plaintiff principle says the company is the only party that can sue for harm against it. The majority rule principle respects decisions made by most shareholders, stopping individual shareholders from interfering in internal matters. Exceptions let shareholders bring claims in cases like fraud, actions outside legal powers, or when special approval is required.
Sevilleja v Marex: The Facts and the Issue
In Sevilleja v Marex, Marex, a creditor of two companies owned by Mr. Sevilleja, sued him personally. Marex claimed he removed company assets to avoid paying debts. Mr. Sevilleja’s control over the companies prevented them from suing him. The Supreme Court had to decide if Marex, as a creditor, could sue directly for losses caused by Mr. Sevilleja’s actions, given the companies could not act.
The Supreme Court's Decision: Upholding Foss v Harbottle
The Supreme Court rejected Mr. Sevilleja’s appeal. It ruled that Foss v Harbottle does not bar creditors like Marex from suing. The Court explained the rule applies only to shareholder claims, not creditors. Creditors can sue third parties whose actions harm the company and their ability to recover debts. Wrongdoers cannot use company control to escape liability.
Impact of Sevilleja v Marex on Corporate Law
Sevilleja v Marex defines the limits of the Foss v Harbottle rule. It confirms the rule is for shareholder claims, not creditors. This supports the company’s separate legal identity and prevents abuse of control. Creditors can now pursue direct claims against wrongdoers, bypassing derivative action rules.
Reflective Loss Clarified
The Court addressed reflective loss, which stops shareholders from claiming losses that mirror the company’s losses. It ruled this applies only when shareholder losses directly follow company losses. Marex’s losses were separate, not reflective, showing creditor claims differ from shareholder claims.
Conclusion
The Supreme Court in Sevilleja v Marex reaffirms Foss v Harbottle’s role in company law. It distinguishes shareholder and creditor claims, ensuring creditors can act against third parties harming companies they control. This decision clarifies corporate law, protects creditors, and maintains the core principles of Foss v Harbottle for shareholders. It highlights the separation of rights between shareholders and creditors in legal actions.
