Bilta (UK) Ltd v Nazir (No 2)

The Supreme Court dismissed the appellants’ appeal. The court held that the defendants could not rely on the illegality principle (ex turpi causa) to defeat a claim brought by a company’s liquidators against its former directors and their alleged accessories, because the wrongful conduct of the directors which injured the company cannot be attributed to the company so as to bar the company’s claim against those directors or their accomplices.

In addition, the court held that section 213 of the Insolvency Act 1986 (fraudulent trading) can have extra‑territorial effect and may be invoked against persons and corporations resident outside the United Kingdom. The court left open wider reform of the illegality defence and declined to resolve the general competing approaches to that doctrine in a case where attribution and section 213 were determinative.

Background and parties. Bilta (UK) Ltd, an English company, was compulsorily wound up after allegedly taking part in a VAT carousel scheme. The liquidators sued Bilta’s two former directors for breaches of fiduciary duty and alleged that Jetivia SA (a Swiss company) and its director Mr Brunschweiler dishonestly assisted the directors or were party to an unlawful means conspiracy. The pleaded remedies included damages, equitable compensation (constructive trust/knowing receipt/knowing assistance) and contributions under section 213 Insolvency Act 1986.

Procedural posture. The appellants applied to strike out the claims on grounds of illegality and that section 213 did not have extra‑territorial effect. The Chancellor dismissed that application; the Court of Appeal ([2013] EWCA Civ 968) upheld the decision; the appellants appealed to the Supreme Court.

Relief sought. Dismissal/strike out of the liquidators’ claims (illegality defence; no extraterritorial operation of s213).

Issues framed by the court.

• whether the illegality defence (ex turpi causa) could be run by Jetivia and Mr Brunschweiler to defeat Bilta’s claims brought by its liquidators;
• how and when the acts or state of mind of company directors are attributed to a company for the purpose of an illegality defence and related doctrines (the so‑called fraud/"breach of duty" exception to attribution); and
• whether section 213 of the Insolvency Act 1986 has extra‑territorial effect.

Court’s reasoning (concise). The court emphasised that questions of attribution are context‑specific. It upheld the view that where a company sues its directors for breach of duties owed to the company (including duties to protect creditors where insolvency is pleaded), the directors cannot defeat that claim by attributing their own wrongdoing to the company; to allow that would render the directors’ duties unenforceable and would be contrary to statutory and common‑law policy (see Companies Act 2006 s.172(3)). The court therefore rejected the illegality strike‑out in this context. On section 213, the court agreed with the courts below that the statutory power to require contributions is not confined to domestic persons and may be exercised in appropriate cases against persons abroad, having regard to the nature of modern cross‑border commerce and longstanding insolvency practice.

Ancillary points. The court declined to decide, and expressed that this was not the appropriate case to resolve, broader and controversial questions about the general test or reform of the illegality defence (including the relative roles of Tinsley v Milligan, Les Laboratoires and Hounga). It also treated the House of Lords’ decision in Stone & Rolls with caution and limited weight.

The appeal is dismissed. The Supreme Court held that (i) the illegality defence could not be invoked by Jetivia SA or Mr Brunschweiler to defeat Bilta’s liquidators’ claims because the directors’ wrongdoing that harmed the company is not to be attributed to the company as a bar to its claim against those directors or their accomplices (the breach‑of‑duty/fraud exception to attribution applies in this context); and (ii) section 213 of the Insolvency Act 1986 has extra‑territorial effect so as to permit contribution claims against persons and corporations resident outside the United Kingdom in appropriate circumstances.

Application to strike out dismissed by Chancellor Sir Andrew Morritt; decision upheld by the Court of Appeal ([2013] EWCA Civ 968); appeal to the Supreme Court dismissed ([2015] UKSC 23).