In the Autumn 2009 edition of our Directors' & Officers' Liability review we drew attention to the strict liability regime applicable to directors of Phoenix companies by virtue of section 216 of the Insolvency Act 1986. In our recent briefing note, we considered the implications of an attempt by Safeways to seek indemnity from its own directors and employees in respect of its liability to pay penalties for breaches of the Competition Act. Now a new decision of the High Court brings these two themes together. It addresses the question as to whether a director in breach of section 216 of the Insolvency Act 1986 is entitled to sue his professional advisers for an indemnity in respect of his loss, including the fine itself.

The facts

On 4 February 2010, the High Court handed down judgment on a strike out application in proceedings brought by Mr Robert Griffin against UHY Hacker Young & Partners, a firm of chartered accountants which operates a turnaround and recovery unit. Mr Griffin's case against Hacker Young is that they failed to advise him that his conduct might contravene section 216 of the Insolvency Act 1986. It will be remembered that this section prohibits directors of companies that have gone into insolvent liquidation from becoming a director or being involved in the management of a company reusing the same or similar name without giving notice to creditors or obtaining the leave of the court.

Mr Griffin was sole director of a company by the name of Saxon Drinks Limited which went into creditors' voluntary liquidation in 2004. He then became involved in the incorporation of a company called Brand Central Limited which took over the marketing of a brand of soft drink formerly sold by Saxon. As a result, he was convicted by Richmond Magistrates Court of the strict liability offence created by section 216(3) of the Insolvency Act and was fined £1,000.

He brought proceedings against Hacker Young not just to recover the penalty but also additional damages said to flow from the allegedly negligent failure to advise. These damages included the loss of a shareholding in an SEC registered investment advisory company which he could not retain due to SEC disclosure rules following his criminal conviction.

Hacker Young denied Mr Griffin's claim. They argued that they did not owe him any duty of care and were not, in any event, negligent. They also argued that even if Mr Griffin's claim was made out, it would be barred on the grounds of the 'ex turpi causa' defence. It was this issue with which the High Court had to grapple on the application of Hacker Young to strike out Mr Griffin's claim.

The issue

The offence under section 216 of the Insolvency Act 1986 is one of strict liability. In other words, the question as to Mr Griffin's state of mind is irrelevant. The Magistrates Court simply had to decide whether in fact Mr Griffin had used a prohibited brand name in contravention of the section or not.

In the High Court, Vos J took as his starting point a translation of the Latin maxim "ex turpi causa non oritur actio" that ... an action cannot arise from a base or disgraceful cause ...'. The judge reviewed many of the same authorities on ex turpi causa as Flaux J had considered in the Safeways case. He concluded that:

"... it may very well be that the level of culpability will depend on the offence relied upon. Certainly, there is a wide spectrum of offences of strict liability, and it is not clear to me that there can or should necessarily be a 'one size fits all' determination."

The judge accepted that it was possible that Mr Griffin could show that he committed the offence 'innocently' such that, when properly viewed, it would not give rise to the ex turpi causa defence. At the other end of the spectrum, Vos J also accepted that Hacker Young might succeed in demonstrating at trial the requisite moral turpitude. He duly noted (among other things) the fact that Mr Griffin accepted that he had lied in a creditors' meeting as to his future intentions with respect to the drinks business. In a nutshell, the judge concluded that whilst Hacker Young were arguing that Mr Griffin deliberately did not comply with the law, Mr Griffin's case was that he wanted to comply with the law but was badly advised and was not even told that what he was doing was an offence.

Given the judge's earlier conclusion as to the uncertainty of the parameters of the ex turpi causa principle, he had little difficulty in dismissing the strike out application on the basis that it was inappropriate to reach a conclusion on such a fact-sensitive issue on assumed facts and without having heard the evidence.

Conclusion

What is clear from both the Safeways and the Hacker Young claims is that the question as to whether the claimant has been sufficiently negligent or otherwise personally at fault to engage the ex turpi causa defence will require a rigorous examination of the evidence. Moreover, it seems that the question as to the necessary ingredients of any given strict liability- or negligence-based criminal offence is no more than a starting point for the necessary enquiry into the surrounding facts. What this means is that, in cases other than those where the criminal offence includes a specific intentional element, there is unlikely to be clarity on the question as to the insurability of fines and penalties for some considerable time.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.