Supreme Court rules on corporate attribution and directors' duties

The Supreme Court has unanimously refused to accept that defendants to fraud-type claims by a company can rely on their own wrongdoing to escape liability.

Handing down its long-awaited judgment in Jetivia SA and another v Bilta (UK) Limited (in liquidation) and others [2015] UKSC 23, the Supreme Court ended the debate over whether a director of an insolvent company in breach of duty can rely on the much-criticised decision in Stone & Rolls Limited v Moore Stephens.

The decision confirms that where an insolvent company has been a victim of wrongdoing by its directors, the directors - and those who assisted them - cannot run an illegality defence by claiming their wrongdoing is attributed to the company. Moreover, the fraudulent trading provisions of the Insolvency Act 1986 apply extra-territorially.

'Unlawful means conspiracy'

Bilta was compulsorily wound up in November 2009 following a petition by HMRC. The company's liquidators then brought proceedings against its two former directors and against the Swiss company Jetivia, together with its chief executive.

The claim alleged that the appellants and directors were parties to an 'unlawful means conspiracy' to injure Bilta by a fraudulent scheme, which involved the directors breaching their fiduciary duties, and the appellants dishonestly assisting them.

The directors supposedly caused Bilta to enter into a series of transactions relating to European Emissions Trading Scheme Allowances with various parties, including Jetivia, and that those transactions constituted a 'carousel fraud'.

The liquidators claimed, through Bilta, for damages in tort from each of the four defendants, compensation based on constructive trust from the appellants, and directly from each of the four defendants, a contribution under section 213 of the Insolvency Act 1986.

The appellants applied to strike out Bilta's claim as they were bound to defeat the claims against them on the basis of a defence of illegality and, in relation to the section 213 claim, that it could not be invoked against the appellants as the section did not have extraterritorial effect.

In essence, the appellants' argument was that Bilta's claims against its directors were barred by reason of the criminal nature of the company's conduct while under their control. Allegedly, Bilta's function was to serve as a vehicle to defraud HMRC. Therefore the doctrine of illegality bars Bilta from suing the directors as a means of recovering the company's loss for the benefit of the company's creditors.

Directing mind

In his judgment, Lord Mance said: 'It is certainly unjust and absurd to suggest that the answer to a claim for breach of a director's (or any employee's) duty could lie in attributing to the company the very misconduct by which the director or employee has damaged it. A company has its own separate legal personality and interests. Duties are owed to it by those officers who constitute its directing mind and will, similarly to the way in which they are owed by other more ordinary employees or agents…There is no basis for regarding the various statutory remedies available to a liquidator against defaulting officers as making this duty or its enforcement redundant.'

The judgments from the Supreme Court suggest a difference in interpretation of the House of Lords' decision in Stone & Rolls and what propositions can be drawn from it. Lord Neuberger said that Stone & Rolls is best treated as a case which solely decided that the Court of Appeal was right to conclude, on the facts of that particular case that the illegality defence succeeded. He concluded that subject to these points, 'should be put on one side and marked 'not to be looked at again'.

The real losers

Richard Healey, a partner in Gateley's corporate recovery team who acted for the respondents, welcomed the judgment: 'The claims which liquidators bring against fraudulent company directors and their accomplices, often represent the principal source of recoveries for a company's creditors in the event of an insolvency.

'Had the Supreme Court held that a director could avoid liability to a company for loss it suffered at his hands, on the basis that the company was fixed with the knowledge of the directors' wrongdoing, the real losers would have been the creditors. The judgment represents a win for our clients but also a broader category of victims who suffer loss at the hands of fraudulent directors.'

Sigh of relief

Fiona Simpson, a partner and civil law fraud specialist at Kingsley Napley, commented: 'Today's judgment confirms that where a company is a victim of a fraud or dishonest act committed by its directors (in breach of their fiduciary duties), the directors are not able to attribute their unlawful conduct to the company. This decision is of crucial importance to the creditors and shareholders of companies where the directors have been up to no good.

'In this claim brought by a company and its liquidators against fraudulent directors and their co-conspirators, the defendants argued that the company could not rely on its own illegal acts in making a claim. Such a defence is not permissible the Supreme Court has ruled. The acts of a fraudulent director are not to be treated as the acts of the innocent company.

'Insolvency practitioners will be breathing a sigh of relief at today's decision and the fact that it has not removed one of the well-used tools in their armoury to recover losses for creditors and shareholders.'

John van der Luit-Drummond is deputy editor for Solicitors Journal
john.vanderluit@solicitorsjournal.co.uk | @JvdLD