Hong Kong Court of Appeal Elucidates the Law on Reflective Loss
In Power Securities Co Ltd v Sin Kwok Lam [2023] HKCA 594, a judgment handed down on 21 April 2023, the Court of Appeal dismissed two appeals (heard together) after thorough analyses of the applicability of the bar against reflective loss to a former shareholder.
The Court examined the recent cases of (1) Sevilleja v Marex Financial Ltd [2021] AC 39, in which the UK Supreme Court held that the reflective loss rule is a principle of company law having its roots in the proper plaintiff rule in Foss v Harbottle, and not a procedural rule concerned only with the avoidance of double recovery; and (2) Primeo Fund (in official liquidation) v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22, in which the Privy Council held (amongst other things) that the relevant time to assess whether the rule against reflective loss applies is when the alleged loss is suffered, not the timing of the bringing of a claim.
The Court of Final Appeal (“CFA”) had in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 (a case also involving members of Temple Chambers) and Basab Inc v Superb Glory Holdings Ltd (2017) 20 HKCFAR 384 pronounced on the reflective loss rule, referring to the avoidance of double recovery. In this regard, the Court of Appeal considered themselves bound by those decisions. That said, as the CFA held that a shareholder cannot claim for loss which was merely reflective of the loss suffered by the company is a “matter of principle”, the fact that the reflective loss rule was justified by the avoidance of double recovery did not turn the principle into a mere procedural rule.
Applying the principles to the facts, as the Court found that the diminution in the value of the shares must have crystallised before the former shareholder sold his shares, the nature of his loss was reflective. The subsequent sale of those shares did not alter this nature of the loss, because in selling his shares, the shareholder was only liquidating or quantifying the loss which he had suffered. The fact that the claim was brought only after the sale of shares did not make any difference. Hence, the claim was barred by the rule and the judge was right to strike out the claim.
The Court therefore dismissed the appeals.
From Temple Chambers, Victor Joffe (now Victor Joffe SC), instructed by Jones Day, acted for the 1st defendant (by original action); Bonnie Cheng, instructed by Gallant, acted for the 2nd defendant (by counterclaim); Jin Pao SC and Victor Lui, instructed by King & Wood Mallesons, acted for the 3rd defendant (by counterclaim).
For the full judgment, please view here.