Will Christopher, partner and civil fraud specialist at Kingsley Napley, explains how a recent decision by the Supreme Court will be a great relief to liquidators and creditors of insolvent companies where directors are under suspicion.
| Will Christopher|
partner and civil fraud specialist, Kingsley Napley
The case of Jetivia v Bilta (2015) concerned a classic alleged VAT carousel fraud where Bilta purchased carbon credits from a Swiss company, Jetivia. The credits were zero-rated for UK VAT because the sales to Bilta were from traders doing business outside the UK.
Bilta then sold the carbon credits to UK traders incurring a VAT liability. However, the sales net of VAT were for less than the price paid to Jetivia, rendering Bilta insolvent and unable to pay its VAT liability to HMRC. The buyers were able to sell the carbon credits for a profit as a result.
When Bilta was placed into liquidation, (it was unable to pay HMRC debts of some £38m), the liquidators started proceedings in the name of the company against the Bilta directors – one of whom was the sole shareholder. Proceedings also began against the co-conspirators (Jetivia and its director) in the alleged fraudulent scheme. They were accused of dishonestly assisting in the breaches of fi duciary duty on the part of the directors.
The co-conspirators made applications for summary judgment, on the basis that the ‘illegality defence’ applied. They claimed that, as Bilta was also involved in the alleged scheme, the liquidators could not rely on its own illegal acts to bring a claim. This application was refused at first instance and by the Court of Appeal.
The illegality defence
Much of the argument focussed on whether the directors’ alleged acts could be attributed to the company (Bilta), so as to make it a co-conspirator, and make available the illegality defence. On this question, Lord Neuberger summarised the Supreme Court’s decision.
He said: “Where a company has been the victim of wrongdoing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company’s liquidator.”
This applies where liquidators bring a claim against the directors, in the name of the liquidated company, due to losses suffered because of the directors’ wrongdoing. This also applies, as Lord Neuberger said, “even where the directors were the only directors and shareholders of the company and even though the knowledge of the directors may be attributed to the company in many other types of proceedings.”
Due to this conclusion, the question of whether the illegality defence was available didn’t arise.
Stone & Rolls
Regarding the illegality defence, there were helpful remarks during the case on the analysis of Stone & Rolls v Moore Stephens  UKHL 39. The majority of the justices concluded that Stone & Rolls should only be authority in that, save for certain limited principles, on the facts of that case, the Court of Appeal was right to find that the illegality defence succeeded.
These principles were that the illegality defence is not available where there are innocent shareholders or directors, and that the defence is available, albeit only on certain facts, where there are no innocent shareholders or directors. Apart from this Lord Neuberger, quoting Lord Denning, said Stone & Rolls “should be put on one side and marked ‘not to be looked at again’”.
Does s213 have extraterritorial effect?
The Supreme Court dealt with this part of the appeal in short order. The appellants (Jeitivia and its director), based in Switzerland and France respectively, contended that the liquidators could not bring claims against them under s213 of the Insolvency Act 1986 for fraudulent trading, as it did not have extra-territorial effect.
In effect they submitted that the words in the section that say the court can make declarations against “any persons”, meant only persons in the UK. The Supreme Court held, unanimously, that s213 does have extraterritorial effect, consistent with the English courts’ worldwide jurisdiction over the assets of the company and their proper distribution, and in common with s238, which the Court of Appeal has previously decided does have extraterritorial effect (In Paramount Airways Ltd (1993) Ch 223).
This judgment will be welcomed by liquidators and creditors of insolvent firms because it hasn’t removed a well-used tool in their armoury to recover losses for creditors and shareholders. It has clarified the law in relation to attribution of unlawful acts.
The trial continues.
Posted on 29th May 2015 by Fred Crawley
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