ABSTRACT
In Commonwealth jurisdictions, the reflective loss doctrine bars shareholders from recovering damages that overlap with the company’s own losses. In this article, I locate the doctrine’s theoretical foundations in liquidation protection – the rules that shield corporate assets from unilateral withdrawals, thereby facilitating capital lock-in and long-term investment. Although these rules offer clear benefits, they also carry costs, including the risk of controller opportunism. Drawing on a Law & Economics framework, I argue that, while the question of how best to tailor the rule to manage these trade-offs depends on empirical considerations, the notion that shareholders have voluntarily subordinated their claims to those of the company provides a robust response to these considerations, and in turn offers a strong justification for the existence of the doctrine. Nevertheless, I propose that factors such as the derivative action regime and conflict-of-interest constraints can help refine the rule’s application. I also examine whether creditors should face a similar bar on overlapping losses, focusing on whether they voluntarily subordinate their claims in a manner analogous to shareholders. By engaging with recent legal developments, including Sevilleja v Marex Financial Ltd [2020] UKSC 31, I aim to provide a nuanced perspective on how liquidation protection shapes incentives under evolving reflective loss rules.
Khoo, Kenneth, Reflecting on Reflective Loss (March 21, 2025).
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