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The Supreme Court’s examination of an illegality defence and the extra-territorial application of section 213 of the Insolvency Act 1986 (IA 1986) is considered by Christopher Parker QC, of Maitland Chambers, who appeared for the respondents in Jetivia SA v Bilta.
Jetivia SA and another v Bilta (UK) Ltd and others  UKSC 23,  All ER (D) 149 (Apr)
The liquidators of a UK company had issued proceedings against its directors as well as against a Swiss company and its chief executive. The liquidators alleged that the defendants had perpetrated a fraudulent conspiracy to cause the UK company to enter into a VAT fraud and that in doing so the directors had breached their fiduciary duty while the other two defendants had dishonestly assisted them. Those latter two defendants applied to strike out the claim against them because the UK company, having been involved in fraud, was barred by the principle of ex turpi causa non oritur actio and because they could not be required to pay a contribution to it under IA 1986, s 213 since they were based outside the UK. The High Court refused the applications and the Court of Appeal dismissed their appeal. The Supreme Court, also dismissing their appeal, held that illegality could not be raised as a defence in the circumstances and IA 1986, s 213 had extra-territorial effect.
The two issues were:
Jetivia and Mr Brunschweiler argued that their position was the same as that of the defendant auditors in Stone & Rolls Ltd v Moore Stephens  UKHL 39,  All ER (D) 330 (Jul) where, on a preliminary issue, the House of Lords had held that an insolvent one-man company which had suffered a loss as a result of its having been involved in a fraud was debarred by the principle of ex turpi causa from recovering that loss from its auditors for negligently failing to detect the fraud.
Bilta contended that Stone & Rolls (if rightly decided) was distinguishable since the only pleaded fraud in this case was the fraud on Bilta whereas Stone & Rolls was concerned with a fraud on a third party, and company directors who had been fraudulent could not rely on their own fraud, even where the company was a one-man company, in order to contend that the action of the company against them was based on the company committing a fraud. Those who dishonestly assisted them were in the same position.
On the IA 1986, s 213 issue, Jetivia and Mr Brunschweiler argued that the statutory presumption against extra-territoriality applied and there was nothing in IA 1986, s 213 to rebut it.
Bilta contended that the statutory insolvency scheme applied globally and that modern trading took place across borders. Accordingly, any such presumption was rebutted. In any case, the court had jurisdiction over Jetivia and Mr Brunschweiler pursuant to article 3(1) of Council Regulation (EC) 1346/2000.
The Supreme Court agreed with Bilta and held unanimously that Stone & Rolls was distinguishable and that IA 1986, s 213 had extra-territorial effect, but did not consider it necessary to rule with respect to Bilta’s reliance on the Regulation.
Ever since Stone & Rolls, claims by companies against dishonest directors have been bedevilled by defences of ex turpi causa based on that case. This decision holds that such defences are misconceived.
The dismissal of the challenge to IA 1986, s 213 confirmed the long-standing practice of the courts of this jurisdiction to treat the provision as applying extra-territorially in reliance on the decision of the Court of Appeal on IA 1986, s 238 in Re Paramount Airways Ltd (in administration)  Ch 223,  3 All ER 1.
The decision demonstrates the importance of remembering that judgments of the court are not statutes, and precedents are always, to some degree at least, fact-sensitive. While a case may fall within a principle as enunciated in a judgment, a consideration of the facts of the particular case may show that the principle was being too broadly stated.
Christopher Parker QC appeared for the respondents in this case.
Interviewed by Robert Matthews.
The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.
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First published on LexisPSL Restructuring and Insolvency
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