In Jetivia SA & Anor v Bilta (UK) Limited (in liquidation) & Ors [2015] UKSC 23 (date of judgment: 22 April 2015), the UK Supreme Court confirmed that section 213 of the Insolvency Act 1986 (equivalent to section 275 of the Companies (Winding-up and Miscellaneous Provisions) Ordinance) has extra-territorial effect.  Hence a third party who knowingly assists delinquent directors to carry out the company’s business with intent to defraud creditors cannot escape liability by arguing that he is not domiciled in the United Kingdom.

Background

Bilta (UK) Limited (“Bilta”) was an English company which was compulsorily wound up pursuant to a petition presented by HM Revenue & Customs (“HMRC”).  Jetivia SA (“Jetivia”), a Swiss company, entered into transactions with Bilta relating to the European Emissions Trading Scheme Allowances (commonly known as “carbon credits”). 

Bilta (through its Liquidators) brought proceedings against its two directors (the “Directors”),  Jetivia and its chief executive (the “Appellants”) that they were parties to an unlawful means conspiracy to injure Bilta by the fraudulent scheme, which involved the Directors breaching their fiduciary duties and the Appellants dishonestly assisting them in doing so. 

The scheme involved the purchase of carbon credits by Bilta free of VAT from Jetivia, followed by a resale to other UK companies registered for VAT, and the remission of the proceeds to Jetivia and other offshore companies.  As Bilta had no assets other than the cash generated by the sale, the scheme rendered Bilta insolvent and unable to meet its liabilities to the HMRC, which eventually petitioned to wind up Bilta.

The Liquidators claimed (a) damages in tort from the Directors and Appellants, (b) compensation based on constructive trust from the Appellants, and (c) a contribution from the Directors and Appellants under section 213 of the Insolvency Act 1986 (“Section 213”).

The Appellants argued that Bilta’s claim should be struck out because the doctrine of ex turpi causa non oritur actio (also known as the “defence of illegality”) barred Bilta from suing the Directors as a means of recovering Bilta’s loss by virtue of the criminal nature of Bilta’s conduct while under the Directors’ control.  The Appellants also argued that Section 213 does not have extra-territorial effect. 

Liability under Section 213

Section 213 provides that a liquidator can apply to court to seek contribution from any persons who were knowingly parties to the carrying on of the company’s business with intent to defraud creditors.

As between Bilta and the Directors, Bilta claimed compensation for breach of fiduciary duty, damages for unlawful means conspiracy and a contribution under Section 213.  Bilta alleged that the Directors were in breach of their duties by causing Bilta to conduct its business in a manner calculated to prevent it from meeting its obligation to account to HMRC for VAT.

Against the Appellants, Bilta’s pleaded case focused on the injury done to it rather than to HMRC.  It alleged that the Appellants were parties to a conspiracy to defraud and injure Bilta by depriving it of the money needed to pay its VAT liabilities and thereby rendering it insolvent.  The conspirators, i.e. the Appellants, knew that their fraudulent scheme involved the breach by the Directors of their fiduciary duties as directors of Bilta.  Thus, it was argued that the Appellants were liable under Section 213 for assisting the Directors to carry on Bilta’s business with intent to defraud creditors.

The Supreme Court held that, as the claim against the Appellants was that they were parties to the Directors’ misfeasance, they were in no different position from the Directors.  It is also noteworthy that Bilta’s claim against Jetivia for an account on the footing of knowing receipt was based on the allegation of participation in the Directors’ misfeasance – Bilta argued that Jetivia had knowledge (through its chief executive) that the proceeds of the sales represented Bilta’s assets which the Directors had caused to be paid to Jetivia.  Accordingly, Bilta contended that the Appellants ought to be accountable as constructive trustees by virtue of knowing assistance in the dishonest diversion of book-debts due to Bilta.

Defence of Illegality

The Appellants sought to rely on the defence of illegality, which was based on the notion that a claimant cannot succeed on a claim which is tainted by his own illegal acts.  The Appellants argued that since Bilta (before it was wound-up) perpetuated the fraud with the Appellants, it could not turn around to sue the Appellants as if it were the victim of such fraud.

Generally, directors are described as the “directing mind and will” of a company.  Therefore, their acts and state of mind can be attributed to the company by virtue of the law of agency.  However, the doctrine of attribution is subject to limitations, for instance, where a claim is initiated by a company against its director for his breach of duty, the director cannot exonerate himself by attributing liability to the company.  As in this case, since Bilta was being used by the Directors as a vehicle to commit fraud on a third party which caused loss to Bilta, the Supreme Court held that it would be inappropriate to attribute the fraud committed by the Directors to Bilta.

Extra-territorial effect of Section 213

The Appellants further argued that the reference to “any persons” under Section 213 should only mean persons in the United Kingdom and therefore Section 213 should have no application to Jetivia (which was a Swiss company) or its chief executive (who was domiciled in France).  This argument was described as misconceived and the Supreme Court held that Section 213 does have extra-territorial effect. 

The context of Section 213 is the winding up of a company registered in the United Kingdom, however, the effect of such a winding-up order is worldwide.  Section 213 provides a remedy against any person who has knowingly become a party to the carrying on of that company’s business with a fraudulent purpose.  Many British companies, including Bilta, trade internationally.  Moreover, the ease of modern travel means that people who have committed fraud in the United Kingdom, through the medium of a company, can readily abscond abroad.  Thus, it would seriously handicap the efficient winding-up of a company if the jurisdiction of the court responsible for the winding-up of an insolvent company could not extend to people and corporate bodies resident overseas who had been involved in the carrying on of the company’s business.

In light of the above, the Supreme Court held that a contribution could be sought from Jetivia and its chief executive pursuant to Section 213.

 

For enquiries, please contact our Litigation & Dispute Resolution Department:

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Important: The law and procedure on this subject are very specialised and complicated. This article is just a very general outline for reference and cannot be relied upon as legal advice in any individual case. If any advice or assistance is needed, please contact our solicitors.

Published by ONC Lawyers © 2015