Months of anticipation culminated in a successful result for the Liquidators of Bilta (UK) Limited (in liquidation) on 22 April 2015 in a pivotal fraud case, whereby the Supreme Court unanimously dismissed an appeal involving the ‘illegality defence’, in the case of Jetivia SA and another v Bilta (UK) Ltd (in liquidation) and others  UKSC 23.
The Supreme Court upholding the decision of the Court of Appeal confirmed:
- Directors cannot rely on their own illegal actions to defend a claim for breach of directors’ duties by using the company as a ‘shield’, attributing their wrongful acts to the company in question
- The defence of illegality is not available to other parties who assist the directors with defrauding a company or other similar culpable acts
- Section 213 Insolvency Act 1986 (“IA 1986”) (which deals with fraudulent trading) has extra-territorial effect
Facts and background
Bilta and its Liquidators brought claims against nine Defendants, including 4 directors of Bilta. Claims against the directors centered around breach of fiduciary duties, dishonesty and conspiracy to defraud the company. Bilta raised a further claim against other parties, including a Swiss company, Jetivia SA and its director, for dishonesty in assisting Bilta’s directors in their wrongdoing. Additionally, the Liquidators brought claims against Bilta’s directors and the director of Jetivia SA for Fraudulent Trading under s.213 IA 1986.
The Liquidators claimed that Bilta’s directors through their Fraudulent Trading of carbon credits (European Emissions Allowances) breached their directors’ duties and in so doing rendered Bilta insolvent and unable to meet its VAT liabilities which amounted to circa £38 million.
Point in consideration
In summary, the Supreme Court was required to consider the application of the defence of illegality, the relevance of the directors’ acts and knowledge and when they could be attributed to the company and whether s.213 IA 1986 applied to anyone in the world or whether its application was confined to the UK.
Jetivia and the other Defendants argued that the Liquidators’ claims should fail as Bilta was fixed with the knowledge of its directors. They claimed that it would logically follow that if the claims against the company’s directors failed then any claims for conspiracy, dishonest assistance and receiving in knowledge would also fail.
A Defence was raised to the Fraudulent Trading claim under s.213 IA 1986 in that it could not apply to Jetivia and its director, as Jetivia was a Swiss company and the director a Swiss national living in France – they argued s.213 IA 1986 only applied to Defendants resident in the UK.
The Supreme Court dismissed the appeals and confirmed the Court of Appeal’s decision.
Illegality could not be raised as a Defence against Bilta’s claim as the wrongful activity of Bilta’s directors and shareholder could not be attributed to Bilta in these proceedings, especially as Bilta had been a vehicle for tax evasion. Lords Toulson and Hodge commented that were illegality to succeed as a Defence it would be inconsistent with public policy which requires directors to have regard to the interests of the creditors of a company.
The judgment confirms that the applicability of s.213 of the IA 1986 has extra-territorial effect and it is not confined to those resident in the UK.
Good news for Liquidators as the case offers clarity and certainty on two counts.
1. Directors cannot hide behind the corporate veil to provide protection from claims arising as a result of their wrongdoing against the company.
2. The Fraudulent Trading provisions contained within the IA 1986 apply extra-territorially to Defendants outside the jurisdiction.
The Supreme Court did acknowledge that there was a need for a proper approach and due consideration to be given to the “illegality defence”, however this was not the case to test this defence; we therefore await a case which is appropriate to put this question to the test….