Share it

Part 2 of the Case Comment on Jetivia SA & Anor v Bilta (UK) Ltd & Ors [2015] UKSC 23

Part 1 is available here.

The proper analysis of Stone & Rolls

The Justices were required to consider whether the decision in Moore Stephens v Stone & Rolls Ltd [2009] UKHL 39 applied to the facts of Bilta. Stone & Rolls Ltd has been a debated and much criticised authority, not least because of the significant differences between the reasoning of the majority who argued it.

Stone & Rolls was a company created solely for the purposes of defrauding banks. In Stone & Rolls Ltd, a negligence action was brought by the company through its liquidators against the auditors on the basis that if they had exercised due skill and care, they would have discovered that the company had no legitimate business and the course of frauds against the bank would then have ceased earlier than it actually did. The House of Lords held that the illegality defence applied.

The Justices all agreed that Stone Rolls Ltd did not allow a director to run an illegality defence against a claim by the company for breach of statutory duty. The case could be distinguished in that it involved negligence (rather than a breach of statutory duty) and a third party (rather than the officers of the company). However, as further evidence of the confusion surrounding the case, the Justices reached different conclusions as to Stone & Rolls Ltd’s application: “the view that it is very hard to seek to derive much in the way of reliable principle from the decision of the House of Lords in Stone & Rolls is vindicated by the fact that, in their judgments in this case, Lord Sumption and Lords Toulson and Hodge have reached rather different conclusions as to the effect of the majority judgments” (Neuberger, at para 23).

Lord Toulson and Lord Hodgen concluded that Stone & Rolls Ltd should be regarded as a case which has no majority ratio decidendi, standing as authority for the point which it decided, namely that on the facts of that case no claim lay against the auditors, but nothing more.

In contrast, Lord Sumption considered Stone & Rolls Ltd to be authority for three principal points (although he noted the difficulties with treating the case as authority for any wider principles than these):

  1. that the illegality defence is available against a company only where it was directly as opposed to vicariously responsible for it;
  2. the defence is not available where there are innocent shareholders (or directors); and
  3. the defence is available, albeit only on some occasions, where there are no innocent shareholders or directors;

Lord Neuberger and Lord Mance agreed with the second and third of these propositions, although considered that it should not be definitively decided whether the third of these propositions would apply to preclude a claim against auditors where, at the relevant audit date, the company concerned was in or near insolvency.

Neither Lord Neuberger nor Lord Mance agreed with Lord Sumption’s first proposition, that Stone & Rolls Ltd establishes an apparently general and context-unspecific distinction between personal and vicarious liability as central to the application of the illegality defence. They considered there to be no authority for this distinction as a key to a resolution of issues of attribution in the context of illegality.

Ultimately, the Justices agreed that Stone & Rolls should be limited to its facts. As Lord Neuberger noted: Stone & Rolls Ltd is best treated as a case which solely decided that the Court of Appeal was right to concede that, on the facts of the particular case, the illegality defence succeeded and that the claim would be struck out;  the time had come to hold that the decision in Stone & Rolls Ltd be put on one side and not looked at again: “it is not in the interests of the future clarity of the law for it to be treated as authoritative or as assistance save as already indicated” (para 20).

Section 213

The Supreme Court held that s 213 has extra-territorial effect at least to the extent of applying to individuals and corporations resident outside the UK.

S 213 is one of a number of discretionary powers conferred by statute on the English court to require persons to contribute to the deficiency who have dealt with a company now in liquidation in a manner which has depleted its assets, with no express limits on their territorial application. It provides as follows:

(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following t.

(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.

Another such provision, s 238 (which empowers the court to make orders against any person to reverse transactions at an undervalue), was held by the Court of Appeal to apply without territorial limitations in In re Paramount Airways Ltd [1993] Ch 223. In this case, Sir Donald Nicholls V-C observed: (i) that current patterns of cross-border business weaken the  conducting the liquidation of a United Kingdom company; (ii) that the absence in the statute of any test for what would constitute presence in the United Kingdom makes it unlikely that presence there was intended to be a condition of the exercise of the power; and (iii) that the absence of a connection with the United Kingdom would be a factor in the exercise of the discretion to permit service out of the proceedings as well in the discretion whether to grant the relief, which was enough to prevent injustice (para. 110).

The Justices held these considerations to be equally applicable to s 213. As HMRC was keen to note in its written intervention “[t]here is frequently an international dimension to contemporary fraud. The ease of modern travel means that people who have committed fraud in this country through the medium of a company (or otherwise) can readily abscond abroad. It would seriously handicap the efficient winding up of a British company in an increasingly globalised economy if the jurisdiction of the court responsible for the winding up of an insolvent company did not extend to people and corporate bodies resident overseas who had been involved in the carrying on of the company’s business” (para 213).