The Supreme Court has held that the illegality defence did not bar a claim by the liquidators of a company used for VAT fraud against its former directors.
The respondent company was alleged to have been the vehicle for VAT carousel fraud in the context of transactions involving EU emissions allowances. After the company went into liquidation, the liquidators brought proceedings against its former directors and the appellant company, contending that the directors had breached their fiduciary duties and that the appellant had dishonestly assisted them. The appellant argued that the claim was precluded by an illegality defence, and that s. 213 of the Insolvency Act 1986 (under which the liquidators sought contributions from the directors and the appellant) did not apply extra-territorially.
The Supreme Court held as follows:
- Lords Neuberger, Clarke, Carnwath, Mance, Toulson and Hodge: the proper approach to the defence of illegality required timely examination by the Supreme Court. However, the present case was not the opportunity to do this since the nature of the defence was not determinative of the outcome here.
- Lords Toulson and Hodge: the doctrine of illegality had been developed by the courts on the ground of public policy. There was a public interest underlying the fiduciary duties owed by the directors of an insolvent company to its creditors. To allow the directors to escape liability (i.e. to be “let off the hook on the ground that their illegality tainted the liquidators’ claim”) because they were in control of the company would undermine those duties.
- Contrast with Lord Sumption, disagreeing with the statutory policy approach above: “the illegality defence is based on a rule of law on which the court is required to act, if necessary of its own motion, in every case to which it applies. It is not a discretionary power on which the court is merely entitled to act, nor is it dependent upon a judicial value judgment about the balance of the equities in each case”
- A company had separate legal personality, though it acted through its directors and agents. Whether their actions could be attributed to the company depended on the particular context. Here, in the context of an alleged breach of directors’ duties (namely using the company to commit fraud and thereby allegedly causing loss to the company), it was inappropriate to attribute to the company the fraud to which the alleged breach of duty related. “[A]s between the company and the defrauded third party, the company should be treated as a perpetrator of the fraud; but … in the different context of a claim between the company and the directors, the defaulting directors should not be able to rely on their own breach of duty to defeat the operation of the provisions of the Companies Act in cases where those provisions were intended to protect the company”.
- S. 213 of the Insolvency Act 1986 had extra-territorial effect. Its context was the winding up of a British company, where the effect of such an order was worldwide. S. 213 provided a remedy against any person who had knowingly become a party to the carrying on of that company’s business with a fraudulent purpose. The persons against whom the provision was directed were (a) parties to a fraud and (b) involved in the carrying on of the (insolvent) company’s business. “It would seriously handicap the efficient winding up of a British company in an increasingly globalised economy if the jurisdiction of the court responsible for the winding up of an insolvent company did not extend to people and corporate bodies resident overseas who had been involved in the carrying on of the company’s business”.
Jetivia SA and anor v Bilta (UK) Ltd (in liquidation) and ors [2015] UKSC 23, 22 April 2015
