Jetivia SA and another v Bilta (UK) Limited (in liquidation) and others

Where a company suffers loss through wrongdoing by its directors, their conduct and knowledge are not attributed to the company so as to defeat its claim against them or third parties who participated in their breach of duty. This applies even where the wrongdoers were the company’s only directors and shareholders. Attribution depends on the purpose and context of the rule in issue.

A claim enforcing directors’ duties to an insolvent company for the protection of creditors cannot be defeated by the wrongdoers’ illegality defence. Section 213 of the Insolvency Act 1986 has extraterritorial effect and may apply to persons and corporations resident outside the United Kingdom.

Bilta (UK) Ltd traded in carbon credits through transactions alleged to form a VAT carousel fraud. Its two directors allegedly caused it to incur more than £38m in VAT liability while diverting the proceeds needed to meet that liability. After Bilta entered compulsory liquidation, the company and its liquidators sued the directors, Jetivia SA and Jetivia’s chief executive for conspiracy, breach of fiduciary duty, dishonest assistance, knowing receipt and fraudulent trading under section 213 of the Insolvency Act 1986.

Jetivia and its chief executive sought summary dismissal or strike-out. They argued that the directors’ illegality was attributable to Bilta and barred its claims, and that section 213 did not extend to defendants resident abroad. Sir Andrew Morritt, Chancellor of the High Court, rejected both arguments. The Court of Appeal dismissed the appeal in [2013] EWCA Civ 968.

The Supreme Court considered whether the illegality defence could defeat Bilta’s claims against its directors and their alleged accessories, and whether section 213 had extraterritorial effect.

1. Appeal dismissed unanimously. The directors’ wrongdoing and knowledge could not be attributed to Bilta for the purpose of allowing the directors, or third parties alleged to have participated in their wrongdoing, to defeat claims brought in Bilta’s name for the loss caused by that wrongdoing. The rule applies even where the wrongdoers were the company’s only directors and shareholders. Lord Neuberger, with whom Lord Clarke and Lord Carnwath agreed, stated the common conclusion reached by Lord Sumption and by Lord Toulson and Lord Hodge. Lord Mance reached the same conclusion.

2. Attribution is purpose- and context-specific. The relevant question is whose act, knowledge or state of mind the rule in issue intends to count as the company’s. A director’s conduct may be attributed to the company in a claim by an injured third party, yet not attributed in a claim by the company against that director. Describing non-attribution as a “fraud exception” is misleading: it is neither confined to fraud nor best understood as an exception to universal attribution.

3. A director or employee cannot rely on knowledge of his own breach to nullify the duty owed to the company. The same applies to alleged co-conspirators, dishonest assisters and knowing recipients whose liability rests on participation in that breach. Whether Bilta ultimately proved conspiracy or recoverable loss remained for trial; the pleaded claims were not barred at the strike-out stage.

4. Lord Toulson and Lord Hodge also relied on statutory policy. Their reasoning was accepted in substance by Lord Neuberger, Lord Clarke, Lord Carnwath and Lord Mance. Sections 172(3) and 180(5) of the Companies Act 2006 would be undermined if directors of an insolvent company could use their control and illegality to defeat a liquidator’s claim enforcing their duty to consider creditors’ interests.

5. The court declined to resolve the wider controversy over the general test for illegality because it was not determinative and had not been fully argued. Lord Sumption favoured a rule-based approach, while Lord Toulson and Lord Hodge favoured an assessment of the policies supporting and opposing the defence. The majority treated Stone & Rolls Ltd v Moore Stephens as authoritative only for its result on its own facts. It supplied no wider binding ratio and should not otherwise be treated as authoritative or helpful, save for the limited propositions identified in the judgments.

6. Section 213 of the Insolvency Act 1986 has extraterritorial effect. Its reference to “any persons” can extend to persons and corporations resident abroad. Restricting the provision to domestic defendants would frustrate the effective winding up of British companies engaged in international business. Questions of sufficient connection and discretionary relief remain for the trial court.

1. United Kingdom Supreme Court: Dismissed the appeal unanimously. It affirmed that illegality did not bar Bilta’s pleaded claims and that section 213 of the Insolvency Act 1986 has extraterritorial effect.
2. Court of Appeal: Dismissed the appellants’ appeal on 31 July 2013: [2013] EWCA Civ 968.
3. High Court: Sir Andrew Morritt, Chancellor of the High Court, dismissed the application for summary dismissal or strike-out on 30 July 2012.