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Regarding Bilta (UK) Ltd (in liquidation) and others v Nazir and others [2013] EWCA Civ, this was a welcome decision from the Court of Appeal - a victory for common sense and a firm limitation of the effects of the oft-quoted case of Stone & Rolls v Moore Stephens.

The Directors of Bilta were pursued by their former Company and its Liquidators for breach of fiduciary duty and for fraudulent trading, and the Appellants in this appeal (who were suppliers to Bilta) were pursued for fraudulent trading under section 213 Insolvency Act 1986 and for dishonest assistance of the directors’ breach of duty. The Liquidators sought compensation of some £38 million in relation to a VAT fraud in the trading of carbon credits. The case had many of the common hallmarks of this type of fraud; Bilta never had the money it would have needed to pay the VAT consequent on the trade; it had an offshore bank account etc.

The Appellants Jetivia and Brunschweiler were 6th & 7th defendants accused of dishonestly assisting the directors in the fraud. They had applied to strike out the claim against them but were refused.

The Appellants had sought to rely on the ex turpi causa principle (“ex turpi causa non oritur actio“) and the Chancellor had refused leave to appeal ([2013] 1 All ER 375) the instant appeal was against that refusal.

Ex turpi causa is a public policy rule explained in Holman v Johnson [1775-1802] All ER Rep 98 by Mansfield CJ as long ago as 1775

“No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise the cause of action appeals to arise ex turpi causa,..... there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant but because they will not lend their aid to such a plaintiff”.

In this case the two directors including the sole shareholder director comprised all of the company officers and direction, and were all complicit in the fraud so the Appellants suggested that that meant that the company by its liquidators could not rely on the wrongdoing under the ex turpi causa principle, as the wrongdoing was attributed to the Company.

However, the court said that the officers were agents of the company. It discussed the cases which concluded that the company was a perpetrator of fraud by its agents’ acts (the liability cases) and contrasted with cases where the company should be considered as victim itself. In cases such as Bilta the court drew a distinction between the company not being able to raise its own wrongdoing as a defence against a third party victim, and the very different circumstances where the Company seeks to recover from the Directors the loss they have caused. The Company is the primary victim and the Court concluded that it mattered not whether the ultimate aim was depriving HMRC of VAT or depriving Bilta of its own profit on the carbon credits – in neither case should the directors or co-conspirators be able to put the company up as a shield.

The court considered Stone & Rolls –v- Moore Stephens [2010] 1 All ER (Comm) 125, which concerned a claim against auditors by the company whose sole director was the fraudulent mind. In that case the victim bank obtained a judgment for deceit against the Company and the director, then the subsequent liquidators of Stone & Rolls sued the auditors who relied on the ex turpi causa principle in their defence. In that case the bank was the victim, the company only a secondary victim. The auditors won.

The Court of Appeal here considered that Stone & Rolls is not applicable to a case in which the breach of duty extends beyond the interest of the fraudsters as shareholders. Here the directors had a duty to creditors under s172 Companies Act 2006, and a director even of a one-man company, they said, can be held liable to account for breaches of fiduciary duty which he commits against the company. The company is a victim even where it is only to the extent of its liability to third parties it must pay as a result of the fraud. The court said it would have so concluded even if the direct target of the fraud had been HMRC. The company was the victim even if its loss was consequential on a loss to a third party. The court concluded that to import the sole actor principle from the USA would fly in the face of the Companies Act ss172 and 239 whose very purpose was to protect the company against unlawful breaches of duty of that kind and which duties apply regardless of whether the company is a one-man band or not.

The final argument proposed by the suppliers was that section 213 was only applicable to persons within the jurisdiction of England & Wales. That was firmly dismissed drawing an analogy with Re Paramount Airways where the scope of section 238 was concluded to be extraterritorial.

Frances Coulson

If you wish to discuss this issue please contact Frances Coulson; Graham McPhie; or Richard Saunders

This is intended for general information only and should not be considered as giving advice in relation to any individual case nor be taken as applying to any particular case. No liability is accepted for any such use of the information contained in this e-alert. Should you wish to instruct us on any detailed matter, please contact Frances Coulson or Graham McPhie


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