In this recent judgment, the Court of Appeal considered whether the maxim ex turpi causa non oritur actio (“ex turpi causa”) precluded a company in liquidation from recovering compensation from its former directors who were alleged to have defrauded the company.

Background

Bilta (UK) Ltd (“Bilta”), now in liquidation, traded in carbon credits (“EUA”). Between 22 April 2009 and 21 July 2009 Bilta bought over 5,700,000 EUAs from overseas traders such as Jetivia S.A. (“Jetivia”). Given that the traders were carrying on business outside of the UK, the supplies to Bilta were treated as zero rated for tax purposes. Bilta sold the EUA on the UK market to persons registered for VAT, for a price less before VAT than the amount Bilta had paid its overseas traders. On the instructions of Bilta’s directors, the payments received by Bilta were transferred to Jetivia and other third parties located outside of the UK (the “Conspiracy”) and as a result of this arrangement Bilta was unable to meet its VAT liability, which amounted to £38,733,444 for the three months it had traded. When the Conspiracy was discovered, Joint Liquidators were appointed and Bilta was compulsorily wound up.

The Appeal

Bilta brought proceedings for conspiracy and dishonest assistance against various parties alleged to have participated in the Conspiracy, including Jetivia, Bilta’s former directors, Mr. Nazir and Mr. Chopra and Bilta’s only shareholder, Mr. Chopra. The liquidators also brought separate proceedings for fraudulent trading pursuant to section 213 of the Insolvency Act 1986 (the “IA 1986”). Jetivia, a Swiss company and its sole director, Mr. Urs Brunschweiler, a French resident (the “Appellants”) challenged an order of the Chancellor of the High Court which refused an application brought by the Appellants for a summary dismissal or striking out of the claims brought against them. The Appellants appealed the Chancellor’s decision on the basis that Bilta’s claim should be dismissed or struck out owing to the maxim ex turpi causa. The liquidator’s separate claim pursuant to section 213 of the IA 1986 was also challenged by the Appellants on jurisdictional grounds.

Ex turpi causa

In a much quoted passage, ex turpi causa was defined by Lord Mansfield CJ in Holman v. Johnson (1775) 1 Cowp 341 as the principle that: “No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act”. The first issue considered by the Court of Appeal was whether it was wrong to refuse to dismiss or strike out Bilta’s claim against the Appellants on the grounds of ex turpi causa. It was because Bilta’s two directors and sole shareholder were effectively the orchestrators of the Conspiracy that the Appellants’ sought to show that allowing Bilta’s claim against them would assist the company in benefitting from what was, in reality, its own wrong doing.

In order to engage the ex turpi causa rule the Court of Appeal considered it first necessary to attribute to Bilta the unlawful conduct of Mr. Nazir and Mr. Chopra. The Court of Appeal refused to do so and instead applied the principle laid down in Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250 that the law will not attribute the fraud or unlawful conduct of the director to the company when the company itself is the intended victim of that conduct. The alternative would be to allow a defendant director the ability to defeat a claim brought against him by the company he has defrauded by relying on his own breach of fiduciary duty to that company. The Appellants’ were therefore unsuccessful in their bid to have the conduct of Mr. Nazir and Mr. Chopra attributed to Bilta itself, since Bilta was considered the primary victim of the Conspiracy.

Stone & Rolls

The Court of Appeal analysed the ‘sole actor’ exception established by the House of Lords in Stone Rolls Ltd v. Moore Stephens [2009] 1 AC 1391. The principle of ex turpi causa in this instance defeated a claim brought by a company against its former auditors for failing to detect the dishonest conduct of the company’s sole director and shareholder, Mr. Stojevic. This was owing to the fact Mr. Stojevic was in reality the “sole will and mind and beneficial owner” of the claimant company.

The Court of Appeal refused to apply the ‘sole actor’ exception here, making the distinction between an auditor failing to notify a company of its fraudulent activity and a conspiracy against a company by its directors and those who dishonestly assisted them in that enterprise. It was material to the court’s decision that the directors in Bilta owed a fiduciary duty to the company and a further duty to its creditors pursuant to section 172 of the Companies Act 2006. Pattern LJ contrasted this with Stone & Rolls which concerned a firm of auditors that owed no fiduciary duty to the company and no duty whatsoever to the company’s creditors. The Court of Appeal therefore found that the decision in Stone & Rolls should be confined to the facts in that case and should not be an established feature of English Law for all purposes.

The Appellants’ jurisdictional challenge to the liquidators’ claim brought pursuant to section 213 of the IA 1986 was also rejected by the Court of Appeal. Pattern LJ also found that section 213 of the IA 1986 should be construed to have extra-territorial effect in the same way that section 238 of the IA 1986 was found to have extra-territorial effect in Re Paramount Airways Ltd (No. 2) [1993] Ch. 223.

Commentary

Bilta has been welcomed for clarifying the extent to which the ‘sole actor’ exception applies. It is now clear that a claim brought by a company in liquidation against its fraudulent directors will not be barred by the principle of ex turpi causa, regardless of the number of directors or shareholders behind the company and their individual participation in the fraud.

For further information, please contact Georgina Squire or the Partner with whom you usually deal.