Breach of fiduciary duty – directors’ duties – ex turpi causa – illegality – attribution – fraudulent trading and extraterritoriality
Jetivia and Mr Brunschweiler applied to strike out the liquidators claim against them as accessory to the directors’ breach of fiduciary duties in causing Bilta to defraud HMRC by paying all its funds to Jetivia leaving it unable to pay its VAT. The applicants relied on the doctrine of ex turpi causa and contended that section 213 of the Insolvency Act 1986 was of no extraterritorial effect.
On appeal, the Supreme Court unanimously rejected the ex trupi causa defence and held that section 213 had extraterritorial effect. Where a company has been the victim of wrongdoing by its directors, the directors’ knowledge was not to be attributed to the company so as to give the directors a defence to a claim against them by the company’s liquidator, in its name and on behalf of the creditors, for loss suffered by it. This was so, even though the directors were the only directors and shareholders of the company.
Although agreeing in the result, the Justices were divided in their reasoning. Lords Toulson and Hodge did not regard the case as primarily turning on attribution but on statutory policy. It would be contrary to section 172(3) and section 180(5) of the Companies Act 2006 to permit directors to escape liability by being able to rely on a defence of illegality to the liquidators’ claim.
Lord Sumption regarded the illegality defence as a rule of law which was neither discretionary nor context specific. In his view the only question was whether the illegal acts of the agents, the directors, should be attributed their principal, Bilta, the company. He considered that public policy provided an exception to the general rule of attribution so that an agent could not rely on his own dishonesty in performing his agency to defeat a claim by the principal for that breach of duty. The others considered that attribution depended on context and purpose.
This is a case of more judges less certainty. Given the comments made by the Supreme Court regarding the decisions in Tinsley v Milligan [1994] 1 AC 340; Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 and Safeway Foodstores Ltd v Twigger [2011] 2 All ER 841 (CA) the precise ambit of the illegality defence remains unclear.
