The recent decision of the Supreme Court of the United Kingdom in Jetivia S.A. and Another v Bilta (UK) Limited (in liquidation) and Ors should make it easier to pursue claims against rogue directors. The Supreme Court held that, in instances where a company has suffered as a result of the unlawful behaviour of its directors, that behaviour cannot be attributed to the company to disallow the company, or its liquidators, from raising claims against directors for breach of their duties.
Background
The business of Bilta (UK) Limited ("Bilta") involved the buying and selling carbon credits. Bilta were involved in a 'scheme' wherein they would buy carbon credits from non-UK entities which were not subject to VAT, and then sell them on to UK entities that were VAT registered. The funds realised from the re-sales were deposited with various offshore companies, including Jetivia S.A, a company registered in Switzerland. Re-selling the credits at a loss led to Bilta becoming insolvent, and the company was subsequently wound up by HMRC.
The Facts
The liquidators of Bilta raised proceedings against two former directors of the company on the basis that the directors had breached their fiduciary duties as the 'scheme' amounted to a VAT fraud. The liquidators also raised claims for fraudulent trading in terms of section 213 of the Insolvency Act 1986.
Jetivia and its chief executive ("the Appellants") applied to have the claims struck out on two grounds:
(1) The Illegality defence. Essentially, the Appellants argued that the actions and knowledge of a company's directors are attributable to the company. Therefore, any breaches by the directors of a company are, in effect, acts of the company itself. On that basis, they argued that the company was barred from bringing any claims against the directors which are founded on the company's own illegality.
(2) Section 213 of the 1986 Act allows liquidators to bring claims against those knowingly involved in the fraudulent trading of a company, and to secure a contribution from them to the company's assets. The Appellants argued that section 213 did not have the necessary extra-territorial effect to extend to a company based in Switzerland.
Supreme Court's Decision
The Supreme Court refused the Appellants' application.
(1) The Illegality Defence: The Court held that the illegality defence could not be used to defeat the claims brought by the liquidators as the knowledge and actions of the directors could not be attributed to the company as a defence to the claims. In fact, Lord Neuberger noted in the majority's judgment that it would be "absurd to suggest that the answer to a claim for breach of director's duties (or any employee's duty) could lie in attributing to the company the very misconduct by which the director or employee has damaged it".
This decision effectively overruled the Court's previous decision in the 2009 case of Stone & Rolls Ltd. v Moore Stephens which held that similar claims could not succeed as they relied on the company's own illegal conduct.
(2) Section 213: The Court held that it would manifestly hinder the efficient and effective winding up of companies to limit the scope of section 213 of the 1986 Act to those residing in the United Kingdom. The dispute centred on the words 'any persons' in section 213. The Appellants argued that 'any persons' had to refer to those in the United Kingdom. The court disagreed and held that section 213 did in fact have extra-territorial effect.
Comment
The Supreme Court's decision will certainly be of great interest to insolvency practitioners and creditors of companies in instances where there is evidence of misconduct by directors. The Court's decision will make it much more difficult for directors and company officers to mount an illegality defence in order to escape liability for claims brought against a company which involve allegations of wrongdoing. In addition, the Court's confirmation that section 213 of the 1986 Act has extra-territorial effect will further embolden those seeking orders under that provision against individuals and companies based overseas.
Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
