Australia: NSW Court of Appeal considers the reflective loss principle

Judgment was delivered several days ago by the New South Wales Court of Appeal in Central Coast Council v Norcross Pictorial Calendars Pty Ltd [2021] NSWCA 75. The decision is noteworthy because of the discussion it contains of what is often described as the reflective loss principle, also recently considered by the UK Supreme Court in Marex Sevilleja v Marex Financial Ltd (Rev 1) [2020] UKSC 31.

Chief Justice Bathurst (Macfarlan JA and Gleeson JA concurring) stated (paras. [118] - [119]): 

In the present case, neither of the parties contended that the approach of Lord Sales in Marex should be adopted. However ... the Council contended that the exception to the principle, namely that the shareholder could recover for loss to the value of his shares in the company as a result of damage suffered by the company where the shareholder had a cause of action but the company did not ... should not be accepted.

I am unable to agree. There seems to be no reason for the principle to apply to circumstances where the company has no cause of action to recover the loss. This is so regardless of the rationale of the principle. If the purpose is to prevent double recovery, there is no prospect of double recovery where the company has no cause of action. If is as I conceive it, the principle is based on the rule in Foss v Harbottle that only the company can sue for a wrong done to the company, the principle is not outflanked because there is no actionable wrong done to the company, the company having no cause of action. If ... it is associated with the doctrine of maintenance of capital, there is no reduction of capital if a shareholder recovers funds that the company as a matter of law cannot recover. Finally, there is no policy reason not to impose such an exception".