Directors cannot blame corporate wrongdoing on their company, Supreme Court rules

Directors cannot blame corporate wrongdoing on their company, Supreme Court rules

Supreme Court judgment provides comfort to insolvency practitioners and creditors

DIRECTORS who commit crimes in the name of their company cannot attribute their unlawful conduct to the business to escape liability, the Supreme Court has ruled.

In a unanimous decision that will provide comfort to insolvency practitioners and creditors, the Supreme Court confirmed that where an insolvent company has been the victim of a fraud or dishonest act committed by its directors, the acts of the directors cannot be treated as the acts of the innocent company.

Handing down its long-awaited judgment in Jetivia SA and another v Bilta (UK) Ltd and others, seven Supreme Court judges dismissed the appeal by Swiss transportation company Jetivia and its chief executive to strike out claims against them on the basis of a defence of illegality – a legal doctrine which states that a plaintiff will be unable to pursue legal remedy if it arises in connection with his own illegal act.

Bilta was compulsory wound up in November 2009 following a petition by HMRC. Liquidators at Grant Thornton then brought proceedings against its two former directors, Jetivia and its chief executive.

The claim alleged that Bilta’s directors were parties to an “unlawful means conspiracy” to injure Bilta through a VAT ‘carousel fraud’ scheme involving carbon credits and that the appellants had dishonestly helped them.

Through Bilta, the liquidators claimed damages from all four defendants, compensation based on constructive trust from the appellants, and a contribution under section 213 of the Insolvency Act 19

The appellants argued that Bilta’s claim should be struck out because of the criminal nature of Bilta’s conduct while under their control. Bilta’s function was allegedly to serve as a vehicle for defrauding HMRC, and the appellants argued that the doctrine of illegality barred Bilta from suing the directors as a means of recovering the company’s loss for the benefit of the company’s creditors.

In its judgment, the Supreme Court ruled that it was “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”.

It also ruled that section 213 of the Insolvency Act 1986 has extra-territorial effect, and could be invoked against the appellants.

Fiona Simpson, a partner and civil law fraud specialist at law firm Kingsley Napley, said insolvency practitioners will be “breathing a sigh of relief” at the 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.”

According to Susan Rosser, partner at Mayer Brown, there were several technical legal issues raised by the case on which the Supreme Court judges were not fully in agreement, including “the nature of the illegality defence” and the “proper interpretation” of the judgment decision in Stone & Rolls Limited v Moore Stephen, which “remain open to debate and further challenge”.

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