Claims By Insolvent Companies Against Fraudulent Directors

On 22nd April 2015, the Supreme Court of the United Kingdom gave judgment in Jetivia SA v Bilta UK Limited (in liquidation) [2015] UKSC 23. The court's decision deals with the defence of illegality and the attribution of a delinquent director's fraud to the company in the context of an action by the company's liquidators against the director and alleged co-conspirators. Although the decision on the illegality issue was ultimately unanimous, there were some marked differences of approach in the judgments, and this area of the law remains complex, with some unanswered questions. The decision also addresses the extra-territorial effect of section 213 of the Insolvency Act 1986 (the "UK Insolvency Act"). Both aspects of the decision have implications for insolvencies conducted in the British Virgin Islands (the "BVI").

Background

Bilta (UK) Limited ("Bilta") was an English company which was ordered to be wound up upon the petition of Her Majesty's Revenue and Customs ("HMRC"). Bilta's liquidators commenced proceedings against Bilta's two former directors Mr Chopra and Mr Nazir, a Swiss company called Jetivia SA ("Jetivia") and Jetivia's chief executive Mr Brunschweiler. The liquidators alleged that those four defendants were parties to an unlawful means conspiracy, which involved Mr Chopra and Mr Nazir breaching their fiduciary duties to Bilta with the dishonest assistance of Jetivia and Mr Brunschweiler. The conspiracy involved the use of a carousel fraud, whereby Bilta purchased carbon credits from sources outside the UK and resold them, mostly at a loss, to UK companies registered for VAT. The proceeds of the scheme were sent out of the UK to Jetivia and various other offshore companies and Bilta was left without the funds needed to pay the output tax it owed to HMRC. Bilta was effectively insolvent at all material times. The defendants caused loss to Bilta by depriving it of the monies it needed to discharge its liability to HMRC. The liquidators claimed damages in tort, equitable compensation based on constructive trust and a contribution to the estate under section 213 of the UK Insolvency Act for knowing participation in Bilta's fraudulent trading.

Jetivia and Mr Brunschweiler applied to strike out the claims against them. As to the claims for damages and for equitable compensation, they argued that they were bound to defeat those claims on the basis of an illegality defence because those claims were barred by reason of the nature of Bilta's criminal conduct. As to the claim for a contribution to the estate, they argued that section 213 does not have extra-territorial effect.

Jetivia and Mr Brunschweiler were unsuccessful on each argument at first instance before the High Court, on appeal before the Court of Appeal and on further appeal before the Supreme Court. The Supreme Court held unanimously that the illegality defence was not available and that section 213 does have extra-territorial effect. However, different members of the court reached their conclusions as to the illegality defence by different paths. Lord Neuberger (with whom Lords Carnwarth and Clarke, and also - save in one minor respect - Lord Mance, all agreed) held that the illegality defence failed because the wrongful activity of Bilta's directors and shareholder could not be attributed to Bilta in those proceedings, attribution always being context-specific. In the particular context of the case it would absurd to attribute the directors' knowledge and activity to Bilta so as to prevent the company from pursuing those responsible for the fraud. Lords Toulson and Hodge also considered that there should be no attribution in the context, but preferred to base their decision on policy grounds, whereas Lord Sumption held that there should be no attribution, but took a different approach to his consideration of the attribution issue.

Attribution and illegality

The illegality defence was summarised by Lord Mansfield CJ in Holman and Johnson (1775) 1 Cowp 341 at 343 in the following terms (cited by Lord Sumption at [55] and [60]):

"No court will lend its aid to a man who founds his cause of action on an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causa, or the transgression of a positive law of this country, there the court says that 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. So if the plaintiff and defendant were to change sides, and the defendant was to bring his action against the plaintiff, the latter would then have the advantage of it; for where both are equally in fault, potior est conditio defendentis."

Where a defendant raises a defence of illegality against a claimant company, it will often be necessary for the defendant to establish that the acts and the state of mind (such as dishonesty or...