Home Information Cases Bilta (UK) Ltd v Muhannad Nazir & 8 Ors (2012)

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Bilta (UK) Ltd v Muhannad Nazir & 8 Ors (2012)

Summary

A claim by a company in liquidation, which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers among others was not barred by the principle of ex turpi causa and the decision in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39, [2009] 1 A.C. 1391. Since the company had been insolvent at the material times the directors owed duties to the creditors and the ratio decidendi of Stone & Rolls was not applicable to cases in which the claim was based on a breach of duty the scope of which encompassed persons or interests other than the fraudsters in corporate form.

Facts

The applicants, a Swiss company (J) and its sole director (D), applied for the claim against them by an English company (B) and its liquidators for conspiracy and fraudulent trading to be summarily dismissed.

B had traded in the purchase and sale of European emissions trading scheme allowances on the Danish emissions trading agency and was said to have been part of a VAT fraud. The purchases were from traders carrying on business outside the United Kingdom, including J, and were therefore zero-rated for VAT purposes. The sales were to VAT registered persons in the UK and were standard rated. B was unable to pay the VAT due on its supplies because it had made no profit and the proceeds of its sales had been paid away to the overseas traders. Revenue and Customs raised VAT assessments of £38 million which B could not pay. B went into liquidation and the liquidators brought proceedings alleging that the defendants, including J, D and B's directors and sole shareholder, were liable for conspiracy and fraudulent trading under the Insolvency Act 1986 s.213. J and D applied to dismiss the claim against them on the grounds that it was precluded by the maxim ex turpi causa non oritur actio, it had to fail so far as it was brought under s.213 because that section had no extraterritorial effect, and it constituted impermissible enforcement of a foreign revenue debt.

J and D submitted that the claim was barred by the principle of ex turpi causa and the decision in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39, [2009] 1 A.C. 1391 since the frauds of B's controllers were to be attributed to it and it relied on those frauds in the claim against them. B argued that it was the victim of the fraud and not the villain, and that the duty breached was that of the directors, and not of the auditors as in Stone & Rolls, which extended in the circumstances to the interests of creditors.

Held

(1) In circumstances where a company was or was likely to become insolvent the requirement to consider and act in the interests of creditors was imposed on the directors. As B never had any assets of its own of any substance, but entered into commitments of considerable value, that duty was operative on its directors at all material times. The conspiracy alleged subjected the directors to the duty imposed by the Companies Act 2006 s.172(3) and involved its infringement by them with, as alleged, the active, knowing and fraudulent participation of J and D, amongst others. Thus the present and future creditors of B were within the scope of the directors' duty. J and D were one step removed from the directors, but if the defence of ex turpi causa was not available to the directors it could not be available to those who fraudulently conspired with them to breach their duties. The ratio decidendi of Stone & Rolls was not applicable to cases in which the claim was based on a breach of duty the scope of which encompassed persons or interests other than the fraudsters in corporate form, Stone & Rolls distinguished. Therefore B's claim against J and D should not be dismissed on the ground of ex turpi causa (see paras 32-38 of judgment). (2) The Insolvency Act 1986 s.213 had extraterritorial effect, International Tin Council, Re [1987] Ch. 419 considered, Paramount Airways Ltd (No.2), Re [1993] Ch. 223 applied. If a company was involved in trade across state boundaries and that trade was designed to defraud its creditors there was no reason to confine the operation of the section to those within the jurisdiction. The section conferred a discretion on the court and was directed to recovering assets, wherever they might be, or compensation for the benefit of all the creditors of the company in liquidation whether resident in the United Kingdom or elsewhere (paras 42-44). (3) The claim was not the enforcement directly or indirectly of a revenue debt. Even if it was a revenue claim, the claim was of Revenue and Customs and not of a foreign state and no question of comity arose (para.47).

Application refused

Chancery Division
Sir Andrew Morritt (Chancellor)
Judgment date
30 July 2012
References

​LTL 30/7/2012 : [2012] EWHC 2163 (Ch)

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