Australian court decision provides much-needed clarity on claims for misleading and deceptive conduct
Despite the simplicity of Lord Mansfield's statement, made in 1775, that "no court will lend its aid to a man who founds his cause of action on an immoral or an illegal act", it has been, in the words of Lord Sumption, among the most heavily litigated rules of common law, "encrusted with an incoherent mass of inconsistent authority".
The most recent attempt to unravel that inconsistency, Jetvia SA and another v Bilta (UK) Ltd (in liquidation) and others (2015), ended last week in the UK's Supreme Court.
The respondent, Bilta, claimed damages against its two former directors and the appellants (Swiss company Jetiva SA and its French chief executive) for the losses it suffered as a result of a fraudulent VAT scheme, in which Bilta purchased VAT-free carbon credits outside of the UK for VAT-applicable resale within the UK. The proceeds of Bilta's sales, including the VAT, were paid to Jetivia SA either by Bilta itself or directly by the UK buyers. Bilta had no other business or income and so was unable to meet its liabilities to HM Revenue & Customs.
Bilta went into liquidation and subsequently alleged against the appellants conspiracy to defraud, dishonest assistance of Bilta's directors in the breach of their fiduciary duties and the fraudulent trading provisions of the Insolvency Act 1986 (although outside the scope of this article, interestingly the Supreme Court found the Insolvency Act applied extra-territorially).
The appellants argued the (illegal) acts and knowledge of Bilta's directors were attributable to Bilta, so as to taint Bilta's claim and prevent it from proceeding.
The appellants sought to rely on the debated decision in Stone & Rolls Ltd (in liquidation) v Moore Stephens (2009), in which the illegality defence was made out by auditors against a company that was created for the sole purpose of defrauding banks. Having been unsuccessful at both the first instance and on appeal, the appellants also failed in the Supreme Court.
While there were differences in the approaches taken by the seven justices, the conclusion was where a company has been the victim of wrongdoing by its directors or of which its directors had notice, that wrongdoing or knowledge cannot be attributed to the company and the directors may not argue the company's claim against them is founded in such wrongdoing so as to trigger the illegality defence.
The decision ends the long-running dispute for Bilta, which may now proceed with its claim, but issues remain as to the proper approach to the illegality defence. Lord Neuberger has indicated this should be addressed by the Supreme Court another time. It is therefore clear we have not yet heard the last of the illegality defence, in particular (following Lord Sumption's remarks) regarding the scope of an auditor's duty vis-à-vis the illegality defence, given an auditor sued by the company would not usually be involved in the director's breaches or ever hold commensurate duties.
In the meantime Lord Neuberger has provided some comfort to claimants in Bilta's position with his final comments on Stone & Rolls, which should now be "put on one side and marked 'not to be looked at again'".
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