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Reflective loss – Hong Kong Court of Appeal leaves door open to wider application

Posted on 10 May 2023

Key takeaways

The Hong Kong Court of Appeal (“HKCA”) recently revisited the reflective loss rule in light of the recent UK Supreme Court (“UKSC”) decision in Sevilleja v Marex Financial Limited [2020] UKSC 31: Power Securities Co Ltd v Sin Kwok [2023] HKCA 594.

The HKCA held that it remained bound by the decision of the Hong Kong Court of Final Appeal (“HKCFA”) in Waddington Ltd v Chan Chun Hoo (2008) 11 HKCFAR 370 and that where there is a difference between Marex and Waddington it would follow the latter.

The HKCA’s decision means the reflective loss rule under Hong Kong law could differ from English law.  Under English law, the rule is confined to shareholder claims against a third party for loss suffered in their capacity as a shareholder where the company had a claim against the third party for the same loss.  Under Hong Kong law, the rule might also preclude shareholder claims for losses suffered in capacities other than a shareholder, such as a creditor or an employee, and claims by non-shareholders.

It remains to be seen whether the HKCA’s decision will be appealed to the HKCFA and, if so, whether the HKCFA will bring the reflective loss rule in line with Marex.


Under the reflective loss rule, a shareholder’s claim for loss is not recoverable against a third party if this merely reflects the loss suffered by the company, and the company also has a claim against the third party.  A classic example of loss precluded by this rule is where the shareholder seeks to claim loss in the form a diminution in value of their shareholding in the company or a reduction in distributions from the company.
Over the last two decades, the courts have grappled with the scope of this rule. For example, could the rule preclude claims by shareholders who suffered loss not as shareholder but in some other capacity such as creditor or employee? Could the rule preclude claims by non-shareholders?

This depends on the underlying rationale for the rule.  When the rule was first articulated in Prudential Assurance Co Ltd v Newman Industries Ltd (No.2) [1982] Ch 204, the rule was explained as an emanation of the “proper plaintiff” principle in Foss v Harbottle 1883) 2 Hare 461. Under this principle, the only person who can seek relief for an injury done to a company is the company itself.  Applying this rationale, the rule only applied to shareholder claims for losses suffered in their capacity as a shareholder.

However, in the later decision of the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1, the rationale of the rule was stated to be the avoidance of double recovery.  Applying this rationale, the rule arguably applied to apply to shareholder and non-shareholder claims alike.

This uncertainty was resolved under English law by the UKSC in Marex, in which the scope of the reflective loss rule was reviewed in detail, clarified and significantly narrowed.  Marex held that the rationale for the rule was the “proper plaintiff” principle, and not the avoidance of double recovery. As such, on the facts of that case, a creditor’s claim was not precluded by the rule merely because the company had a concurrent claim for the same loss. The Marex formulation of the rule was further clarified by the Board of the Privy Council in Primeo Fund v Bank of Bermuda (Cayman) Ltd [2021] UKPC 22. Marex has widely been seen by commentators as a significant change and welcome simplification to the reflective loss rule. It is also seen to have largely confined the reflective loss rule to shareholder claims.

In the present case, the HKCA considered, amongst other matters, whether to apply the new Marex formulation in Hong Kong notwithstanding the HKCFA’s existing decisions concerning the reflective loss rule (including Waddington and Basab Inc v Superb Glory Holdings Ltd (2017) 20 HKCFAR 384 both of which endorsed the approach of the House of Lords in Johnson).

Court’s Judgment

The case in Power Securities involved a complex procedural history and factual background. The essential question to be determined by the HKCA was whether a former shareholder’s counterclaim and claim against a third party in two High Court proceedings should be struck out or dismissed based on the application of the reflective loss rule. A feature of the shareholder’s claims was that he had sold the shares held in two companies prior to initiation of proceedings and hence it was asserted he could not be “made good” through any action brought by the companies.

The HKCA firstly considered: (a) what the position of common law on reflective loss is following the Marex and Primeo decisions, and (b) whether the HKCA should apply the same.

  1. Following a detailed discussion of Marex, the HKCA concluded that the current position on reflective loss rule under common law as expressed by the majority in Marex is that: (i) it is a rule of substantive law associated with the rule in Foss v Harbottle and concerned the recognition in law of particular type of loss, and (ii) it is not a procedural rule concerned only with the avoidance of double recovery.
  2. The HKCA then considered whether it should apply Marex. The HKCA found that the HKCFA had already pronounced on the reflective loss rule in Hong Kong in the Waddington and Basab decisions (and not simply followed the House of Lords decision in Johnson as a matter of stare decis). Accordingly, the HKCA took the view where there was a difference between Waddington and Marex, it remained bound by Waddington.
  3. The HKCA observed in any event that the decision of the UKSC in Marex to overturn double recovery as one justification for the reflective loss rule only affected claims under the general law of damages (eg by creditors) and not shareholder claims which were barred essentially by the rule in Foss v Harbottle.

    Applying Waddington and other Hong Kong authorities to the facts of the case, the HKCA found:
  4. The diminution in the value of relevant shares claimed by the shareholder had crystalised before the sale of the shares. The nature of such loss was clearly a reflective loss.
  5. The fact that the shareholder made his claim/s after he sold the relevant shares did not make a difference.  Waddington held that the reflective loss rule was a matter of principle and not a procedural rule. Therefore, the bar applied at the time of when the cause of action accrued. The HKCA observed that the decision in Primeo supported this view.
  6. The HKCA concluded that the judge below was accordingly right to have struck out the claim and counterclaim of the shareholder.