Tracking the Reflective Loss Rule and Its Implications in Various Jurisdictions

By Aryan Sharma and Sakshi Agarwal, Students at Institute of Law (Nirma University)


The Reflective loss rule bars or disables the claim brought by shareholders for any personal loss suffered by him due to diminution in the market value of his shares or diminution in dividend because of “loss” in the company, or diminution in value of net assets of the company, and such claim is barred because the “loss” is merely “reflective” of the loss suffered by the company. The origin of this rule can be traced to the case of Foss v. Harbottle, wherein the UK Court of Chancery held that whenever an actionable wrong is done to the company, then only the company can bring a claim as a “proper plaintiff”.

The provisions concerning the claim by shareholders and creditors is only specified in Section 241 to 246 of Companies Act, 2013 (“the Companies Act”) and Insolvency and Bankruptcy Code, 2016 (“IBC”). In India and various common law jurisdiction, there is no concept of reflective loss rule adopted which creates a problem for the cases involving trans-border jurisdiction. Hence this article ventures into the analysis of the grey area regarding the application of this rule in various common law jurisdictions, and especially throws some light in the Indian context.

Evolution of Reflective Loss Rule

The principle of reflective loss rule was first established in the case of Prudential Assurance Co Ltd v. Newman Industries ltd.,wherein it was held by the courts in the UK that the cause of action only lies with the company and not with its shareholders. Furthermore, in the case of Jonson v. Gore wood, the UK House of Lords held that the fraudulent actions of the wrongdoer jeopardizes the position of the company, without effecting the shares of its shareholders.

The case of Prudential had interpreted the reflective loss rule such that most of the claims by shareholders and creditors got barred. However this position was then changed in the case of Sevilleja Garcia v. Marex Financial Limited, where the UK Supreme Court narrowed the scope only to the shareholder’s claim and not the creditors, as the claims brought by creditors are entirely different from the claim of shareholders. This was observed as the company is considered to be the alter ego of its shareholder, but not the creditors.

Objectives of Reflective Loss Rule

The significant reason for barring shareholders’ claim as opined by the English courts, is to avoid ‘double recovery’,[1] as such “wrongdoers should compensate for the actual harm cost and not more.” The logic also follows that if the company receives compensation, then the value of shares will also increase, hence compensating the shareholders.

Another aspect for considering such rule is the “risk of double jeopardy for the wrongdoer”, meaning that the wrongdoer will have to compensate for the same wrong twice which is prevented by the application of the reflective loss rule.

The Marex Judgment laid down three considerations that justified the application of the rule. Firstly, the need to avoid double recovery; secondly, if the company chooses not to claim against the wrongdoer, then the loss caused to shareholders is by the company; thirdly, it involves the matter concerning public policy, to avoid discouraging the company from making settlements and also to preserve “company’s autonomy” and “avoid prejudice to minority shareholders.”

Implications of the Reflective Loss Rule in India

The Reflective loss rule has been adopted by many common law countries in cross-border cases, and particularly in multi-jurisdictional civil fraud cases, the English Law has been applied to determine the issue. The law established in English Courts regarding reflective loss rule was adopted by common law countries such as Australia, Cayman Islands, Hong Kong.

One of the landmark cases which showcases the adoptive scheme of the reflective loss rule in Canada was in the case of Meditrust Healthcare Inc. v. Shoppers Drug Mart,[2] wherein it was held that any shareholder, even if it is a controlling or the sole shareholder, do not have a personal cause of action for a “wrong done to the corporation”.

Further, the Indian courts also have to regard the cases decided by Common Law Courts when there is no clarity amongst the parties as to what the legal position law is, as there may be past cases in Common law Courts pertaining to similar facts with precedential decisions which can be applied to the cases in India and are bound to follow the reasoning of the prior decision of such courts.

Moreover, in India, while the reflective loss rule is yet to be adopted, the ruling in the case of Foss v. Harbottle is majorly followed. It is pertinent to note that in the case of Satya Charan Law v. Rameshwar Prasad Bajoria, the Indian Courts recognized that this rule is “well-settled” and that wrong done to the company should “prima facie be brought by the company itself”. However, there is as such no bar as per reflective loss rule on shareholders.

Under the reflective loss rule, any shareholder (including a minority shareholder) can claim compensation for the loss caused to him due to actions of the directors. However, in India if the minority shareholders are to make the claim, they have to apply to NCLT under Section 241 – 245 of the Companies Act and should have minimum 10% of the shareholding.

In light of the same, the introduction of the, reflective loss rule, would provide more cushion to the shareholders wherein, any shareholder can initiate the action against directors, in case of any mismanagement. In such a case the reflective loss rule and Section 241-245 will be at conflict as even if a member does not have 10% shareholding, he can still file a case against a director. Further, the reflective loss rule, in India, will ease the path of the creditor who is also a shareholder in the company to initiate the action against directors.


The recent developments in the reflective loss rule as in Marex sets a precedent for most common law countries and helps to empower the claims of the shareholders. Nonetheless, when we consider the India’s legal position or any other common law country, there is a reasonable apprehension that this will open the floodgates of litigation and the Courts will also have to be at a lookout that this does not create chaos or misuse to harass the defendants. Hence, the reflective loss, though empowering to the shareholders, yet its adoption will require a very thorough analysis.

[1] H. de Wulf, ‘Direct Shareholder Suits for Damages Based on Reflective Losses’, in S. Grundmann et al., eds., Festschrift fur Klaus J. Hoptzum 70. Geburtstag am 24. August 2010: Unternehmen, Marktund Verantwortung (2010), at p. 1551.

[2]Meditrust Healthcare Inc. v. Shoppers Drug Mart, (2002) CanLII 41710.