Illegality, Insolvency And Fraudulent Directors: Clarity At Last?

The Supreme Court recently handed down its judgment in Jetivia SA and another v Bilta (UK) Ltd (in liquidation) and others [2015] UKSC 23. The Court was unanimous in dismissing the appellants' case that the claimants' claims against them should be struck out on the grounds of illegality and on the basis that section 213 of the Insolvency Act 1986 does not have extra-territorial effect.

Background Bilta was wound-up following its involvement in a VAT carousel fraud which left Bilta with a liability of £38 million to HMRC. Consequently, Bilta's liquidators brought proceedings against its two directors (one of whom was its sole shareholder) and against Jetivia and Jetivia's chief executive. The claims were that the four defendants were parties to an unlawful means conspiracy, which involved the directors of Bilta breaching their fiduciary duties to the company as directors, and against Jetivia and its chief executive for dishonestly assisting them in doing so. Claims were brought for damages against the defendants, and for contributions under section 213 of the Insolvency Act 1986. The appellants sought to strike out Bilta's claim on the basis that:

1. The principle of ex turpi causa or illegality applied - i.e. the principle that a party cannot bring a claim that relies on its own illegal act; and

2. In so far as the claims for contribution were based on section 213 of the Insolvency Act 1986, that section could not be invoked for it does not have extra-territorial effect.

Decision The Supreme Court was unanimous in dismissing the appeal on both points. The Court held that the directors' conduct could not be attributed to Bilta in this case where there was a claim against the directors for a breach of their duties. To do so would deprive the duties owed by a director of all meaning. The Court also found that section 213 did have extra-territorial effect.

Illegality and attribution The illegality defence was based on the notion that the claims were barred as a result of the criminal nature of Bilta's conduct while under the directors' control. In other words, it was necessary to establish that the directors' acts were 'attributed' to those of the company itself, which, if so, would mean that Bilta would effectively be relying on its own illegal acts to bring the claim.

It was argued that because Bilta's function was to serve as a vehicle for defrauding HMRC, the doctrine of illegality prevented Bilta from suing the directors as a means of...