Jetivia S.A. & Ors v Bilta (UK) Ltd & Ors (2013)
The Court of Appeal upheld a decision that a claim by a company in liquidation, which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers alleged to have been involved in the fraud, was not precluded by the principle of ex turpi causa or the decision in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm)  UKHL 39,  1 A.C. 1391.
The appellants (J), a Swiss company and its director, appealed against a decision ( EWHC 2163 (Ch)) to dismiss their application for the claims of the respondent English company (B) and its liquidators to be summarily dismissed.
B had traded in the purchase and sale of European emissions trading scheme allowances on the Danish emissions trading registry 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. Revenue and Customs raised VAT assessments of £38 million which B could not pay. B went into liquidation and brought proceedings against J and the other defendants, including both of its own directors and its sole shareholder, for conspiracy and dishonest assistance. B's liquidators claimed that the defendants were liable for fraudulent trading under the Insolvency Act 1986 s.213. J applied unsuccessfully to dismiss B's claim summarily on the basis of ex turpi causa. The judge also refused to summarily dismiss the liquidators' claim on the basis that s.213 had no extra-territorial effect. The issues were whether the judge erred in (i) refusing to dismiss B's claims on the basis of ex turpi causa; (ii) deciding that the English court had jurisdiction in respect of the s.213 claim.
J submitted that B's claim was precluded by ex turpi causa and the decision in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm)  UKHL 39,  1 A.C. 1391 because the frauds of B's controllers were to be attributed to it. They argued that the principle in Hampshire Land Co (No.2), Re  2 Ch. 743 only applied to prevent attribution of the directors' fraud to B if B could properly be regarded as the victim of that fraud, but the true victim was Revenue and Customs who had suffered loss from a carousel fraud in which B was alleged to be a key participant. Alternatively, they argued that the sole actor exception applied because the Hampshire Land principle could have no application to a one-man company such as B where both ownership and control were vested in the fraudsters.
(1) The court was bound by the decisions in Belmont Finance Corp Ltd v Williams Furniture Ltd  Ch. 250 and Attorney General's Reference (No.2 of 1982), Re  Q.B. 624 to hold that even a director of a one-man company could be held liable to account for breaches of fiduciary duty which he committed against the company, Belmont and Attorney-General's Reference (No 2 of 1982) followed. The fact that a fraudulent director was the directing mind and will of a company had never been regarded as an answer to a claim by a company against its directors for a breach of duty committed against it, Stone & Rolls considered. In that context, the company was to be treated as the victim even though the loss which it suffered from the breach might be the compensation which it had to pay to a third party who had been damaged by the fraud. Although loss of that kind might be insufficient to prevent attribution under the Belmont/Hampshire Land principles when what was at issue was the company's own liability to a third party, there was no reason why it should have the same effect when the company was the claimant and the fraudulent directors and their associates were the defendants, Hampshire Land applied. Nothing that was said in McNicholas Construction Co Ltd v Customs and Excise Commissioners  S.T.C. 553 or Morris v Bank of India  EWCA Civ 693,  B.C.C. 739 suggested otherwise, McNicholas and Morris considered. Taking the pleaded conspiracy as it stood, B was the intended and only victim, and the Belmont principles applied to the claim, Belmont followed. In the context of a claim against B's directors and J for breach of fiduciary duty, B was the victim regardless of whether its loss was consequential on that to a third party, namely Revenue and Customs. Further, in the context of a claim by a company against its fraudulent directors, the sole actor rule had no place and would directly contradict the protection given to creditors under the Companies Act 2006 s.172 and s.239, which applied regardless of whether the company was a one-man company or one in which there were innocent directors and shareholders. The court was not bound by Stone & Rolls to apply the sole actor exception: the issue on that appeal concerned a claim by the company against its auditors who were not party to the fraud but were negligent in not alerting the company to its existence, and it was therefore readily distinguishable from the instant case, Stone & Rolls distinguished (see paras 75-77, 79, 81 of judgment). (2) There were no grounds for distinguishing between s.213 and s.238 in terms of whether Parliament intended them to have extra-territorial effect. Both sections used the same unqualified language, namely "any person", and the reasoning in Paramount Airways Ltd (No.2), Re  Ch. 223 applied with equal force to s.213, Paramount Airways applied (para.90).