The liquidators of the appellant, MGET, sought to recover from the Commissioner of Inland Revenue tax paid on fraudulently inflated profits under the Inland Revenue Ordinance. MGET relied on two provisions of the Ordinance. Section 64 allowed a taxpayer to object to an assessment within one month, but an extension could be granted if the taxpayer had been prevented by a “reasonable cause” from making a timely objection. Section 70A allowed the Commissioner to correct an assessment upon the taxpayer’s application if the tax paid was excessive by reason of an error or omission. Did the directors’ fraud amount to a reasonable cause or an error?
The judgment contains a valuable restatement of the principles of attribution of knowledge and conduct of a company’s directors or employees to the company. Lord Walker, who delivered one of the majority judgments in Stone & Rolls v Moore Stephens [2009] 1 AC 1391, found the Court of Appeal’s “most illuminating” decision in Bilta v Nazir (No 2) [2014] Ch 52 to be a “welcome clarification” of the law. In considering when the ‘fraud exception’ to the attribution of knowledge applied, he held the nature of the claim to be of central importance. Where a company was the defendant to a claim by a third party for loss caused to that third party by the misconduct of a director or employee, the company could not rely on the exception to avoid liability; but where a company claimed against a director, employee or accomplice for loss caused to the company by the misconduct of that person, the fraud exception would operate and the company could pursue the claim without being fixed with its director’s or agent’s knowledge.
In so doing Lord Walker accepted that he had been “wrong” in Stone & Rolls to regard the ‘fraud exception’ to be of general application regardless of the nature of the proceedings; indeed he held that the nature of the proceedings was “crucial” to whether the exception applied. The ‘fraud exception’ should be confined, he found, to barring unmeritorious defences to claims by corporate employers against dishonest directors, employees and accomplices.
A majority of the court agreed with Lord Walker that, on this basis, there were no grounds for the fraud exception to apply to MGET’s claim against the Commissioner. Accordingly under s.64, it had chosen not to object, rather than been prevented from objecting; and under s.70A MGET was to be attributed with the knowledge that its returns were false when submitted, which could not be an error.
Stone & Rolls may be confined to its facts, and Bilta the better English authority on ex turpi causa and attribution in company law. A company will generally be imputed with all the knowledge and actions of its agents and directors. When a company is making a claim, an exception to this rule will apply only when the company is itself pursuing agents, directors or accomplices who caused it loss.
