Bilta case highlights the limits of ex turpi causa

The case of Bilta (UK) Ltd (in liquidation) and others v Nazir and others [2013] EWCA Civ 968, [2013] All ER (D) 390 (Jul), a Court of Appeal decision, marks a line in the sand on the application of the so-called ‘illegality defence’.

What happened?

The liquidators of the claimant company issued proceedings against its directors and third party companies alleging that the defendants had perpetrated a fraudulent conspiracy which had amounted to a breach of fiduciary duty on the part of the directors dishonestly assisted by the other defendants. Two defendant companies applied to strike out the claim against them on the grounds that the company was barred by the principle of ex turpi causa non oritur actio. The High Court dismissed the applications. The Court of Appeal, Civil Division, upheld that decision on the grounds that the fact that the fraudulent director was the directing mind and will of the company had never been regarded as an answer to a claim by the company against the directors for a breach of duty committed against the company.

What is the significance of this decision?

This is a welcome decision from the Court of Appeal—a victory for common sense and a firm limitation of the effects of the oft quoted case of Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39,[2010] 1 All ER (Comm) 125.

What were the key facts of the case?

The directors of Bilta were pursued by their former company and its liquidators for breach of fiduciary duty and for fraudulent trading.The appellants in this appeal (who were suppliers to Bilta) were pursued for fraudulent trading under the Insolvency Act 1986, s 213 (IA 1986) and for dishonest assistance of the directors’ breach of duty. The liquidators sought compensation of some £38m in relation to a VAT fraud in the trading of carbon credits. The case had many of the common hallmarks of this type of fraud—Bilta never had the money it would have needed to pay the VAT consequent on the trade, it had an offshore bank account etc.

The appellants Jetivia and Brunschweiler were the sixth & seventh defendants accused of dishonestly assisting the directors in the fraud. They had applied to strike out the claim against them but were refused.

The appellants had sought to rely on the ex turpi causa principle (‘ex turpi causa non oritur actio’) and the Chancellor had refused leave to appeal (Bilta (UK) Ltd (in liq) v Nazir [2012] EWHC 2163 (Ch), [2013] 1 All ER 375) the instant appeal was against that refusal.

How did the court approach ex turpi causa in this case?

Ex turpi causa is a public policy rule explained in Holman v Johnson [1775-1802] All ER Rep 98 by Mansfield CJ as long ago as 1775:

‘No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff’s own stating or otherwise the cause of action appeals to arise ex turpi causa, […] there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant but because they will not lend their aid to such a plaintiff.’

In this case the two directors including the sole shareholder director comprised all of the company officers and direction, and were all complicit in the fraud. The appellants suggested this meant that the company by its liquidators could not rely on the wrongdoing under the ex turpi causa principle, as the wrongdoing was attributed to the company.

However the court said the officers were agents of the company. It discussed the cases which concluded the company was a perpetrator of fraud by its agents’ acts (the liability cases) and contrasted with cases where the company should be considered as victim itself. In cases such as Bilta the court drew a distinction between the company not being able to raise its own wrongdoing as a defence against a third party victim, and the very different circumstances where the company seeks to recover from the directors the loss they have caused. The company is the primary victim and the court concluded it did not matter whether the ultimate aim was depriving HMRC of VAT or depriving Bilta of its own profit on the carbon credits—in neither case should the directors or co-conspirators be able to put the company up as a shield.

The court considered Stone & Rolls , which concerned a claim against auditors by the company whose sole director was the fraudulent mind. In that case the victim bank obtained judgment for deceit against the company and the director. The subsequent liquidators of Stone & Rolls sued the auditors who relied on the ex turpi causa principle in their defence. In that case the bank was the victim the company only a secondary victim. The auditors won.

The Court of Appeal here considered that Stone & Rolls is not applicable to a case in which the breach of duty extends beyond the interest of the fraudsters as shareholders. Here the directors had a duty to creditors under the Companies Act 2006, s 172 (CA 2006). The court said a director (even of a one man company) can be held liable to account for breaches of fiduciary duty which he commits against the company. The company is a victim even where it is only to the extent of its liability to third parties it must pay as a result of the fraud. The court said it would have come to this conclusion even if the direct target of the fraud had been HMRC. The company was the victim even if its loss was consequential on a loss to a third party. The court concluded that to import the sole actor principle from the USA would fly in the face of CA 2006, ss 172 and 239 whose very purpose was to protect the company against unlawful breaches of duty of that kind and which duties apply regardless of whether the company is a one man band or not.

The final argument proposed by the suppliers was that IA 1986, s 213 was only applicable to persons within the jurisdiction of England & Wales. That was firmly dismissed drawing analogy with Re Paramount Airways Ltd [1992] 3 All ER 1 where the scope of IA 1986, s 238 was concluded to be extra territorial.

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