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michaela_stirling_phIn October, the Court heard applications by a Swiss company Jetivia and its director appealing against decisions to reject its application to strike out claims made against it for conspiracy, dishonest assistance and fraudulent trading. The claims arose from the appellants’ alleged participation with Bilta’s directors and others in a VAT fraud involving carbon credit trading which left Bilta unable to pay debts of over £38m to HMRC. 

This case represents an opportunity for the Court to clarify the scope of the ex turpi causa non oritur actio doctrine – the principle that the Court will not assist a company to recover damages for its own wrong. The appellants assert that the House of Lords decision in Stone and Rolls Ltd v Moore Stephens [1] (in which the liquidators of Stone and Rolls were unable to pursue a claim against the company’s auditors for failure to detect a fraud perpetrated by Stone and Rolls’ sole director and shareholder) applies to the facts in this case thereby preventing Bilta (itself now in liquidation) from making any claim.

The appellants also assert that the liquidators’ claims (which are advanced under section 213 of the Insolvency Act 1986 (fraudulent trading)) are unsustainable on the ground that section 213 does not have extra territorial effect.

Background

Bilta had two directors, Mr Nazir and Mr Chopra, with Mr Chopra as the sole shareholder. Between 22 April and 21 July 2009 Bilta  purchased carbon credits from traders (including Jetivia) located outside the UK, which were zero rated for VAT purposes, and sold these at no profit (and frequently at a loss) to VAT registered suppliers within the UK, charging VAT. Proceeds from these sales, including the VAT element, were diverted offshore to Jetivia and other third parties. This so-called “third party payment” structure is a common feature of missing trader intra-Community (“MTIC”) VAT fraud. Bilta was unable to pay the VAT when it fell due and in September 2009 it entered provisional liquidation on the petition of HMRC.

Bilta and its liquidators commenced proceedings against Bilta’s directors, the appellants and other alleged co-conspirators in the fraud. The appellants applied for the claims against them to be struck out or summarily dismissed on the grounds that they were either a) (with respect to Bilta’s claims) precluded by the ex turpi causa doctrine (relying for these purposes on the decision in Stone and Rolls), or b) (with respect to the liquidators’ claim) bound to fail because section 213 does not have extra territorial effect.

Case History

The appellants’ application was dismissed at first instance and on appeal. At first instance and in the Court of Appeal, the appellants submitted that in respect of Bilta’s claims, the Court was bound by the decision of the House of Lords in Stone and Rolls – in which the House of Lords attributed knowledge of a director’s fraud to a one-person company, creating an exception to the rule in Re Hampshire Land Co (No.2)[2] and allowing the company’s auditors to resist the company’s claim in negligence on the basis of ex turpi causa.

In relation to the Liquidators’ claims, the appellants argued that section 213 does not have extra territorial effect but accepted that the only relevant decision on this (Re Paramount Airways [3]) was a decision of the Court of Appeal which had found that similar wording (albeit in a different section of the Insolvency Act) did have extra territorial effect.

The Court of Appeal decided that the decisions in Re Hampshire Land and Belmont Finance v Williams [4] applied and that fraud or other unlawful conduct by a director against a company is not to be attributed to that company when the company is itself the intended victim of the fraud. Patten LJ (who gave the lead judgment) stated that where a company makes a claim for losses suffered by it as a result of the conduct of a fraudulent director, it does not matter if the company was the intended primary or secondary victim of the fraud. If the company has suffered loss due to a director’s fraud upon it then that director’s ‘guilty mind’ will not be attributed to the company in a claim against those whose breach of duty has caused the loss.

The Court of Appeal also found that section 213 of the Insolvency Act does have extra-territorial effect and there was no basis on which to distinguish the decision in Re Paramount Airways.

Comment

The Supreme Court’s decision in Jetivia will be one of the most important decisions in insolvency for many years. If the Supreme Court upholds the appeal, the impact on proceedings brought by administrators and liquidators against fraudulent directors will be significant. Additionally, any decision which denies the extra-territorial reach of the Insolvency Act will have serious implications for office holders who are ever more frequently trying to make recoveries for the benefit of creditors in relation to businesses which have a global reach.

 

 

[1] [2009] UKHL 39, [2009] 1 A.C. 1391

[2] [1896] 2 Ch. 743

[3] [1993] Ch. 223

[4] [1979] Ch. 250