Bilta (UK) Ltd v Nazir [2015] UKSC 23

Bilta’s liquidators sued its former directors and their co-conspirators for losses caused by a VAT carousel fraud. The directors had breached their fiduciary duties by causing Bilta to participate in fraudulent transactions. The Supreme Court held that the illegality defence was not available to the defendants because attributing the directors’ wrongdoing to the company would undermine their statutory duties to creditors.

Facts

Bilta (UK) Ltd was an English company wound up in November 2009 following a petition by HMRC. Its liquidators brought proceedings against its two former directors (Mr Chopra and Mr Nazir), and against Jetivia SA (a Swiss company) and Mr Brunschweiler (Jetivia’s chief executive), alleging they were parties to an unlawful means conspiracy to defraud and injure Bilta. The alleged scheme involved trading in carbon credits (European Emissions Trading Scheme Allowances) in what is known as a carousel fraud. Bilta purchased carbon credits from overseas suppliers free of VAT, sold them in the UK with VAT, but the proceeds were paid offshore, leaving Bilta unable to meet its VAT obligations to HMRC, which exceeded £38 million.

Issues

Primary Issue

Whether the doctrine of illegality (ex turpi causa non oritur actio) barred Bilta’s claims against its directors and their alleged co-conspirators for breach of fiduciary duty.

Secondary Issues

Whether section 213 of the Insolvency Act 1986 (fraudulent trading) has extra-territorial effect, enabling claims against foreign defendants.

Judgment

The Supreme Court unanimously dismissed the appeal. The Court held that the illegality defence was not available to the defendants.

On Illegality and Attribution

The Court held that the wrongful activity of Bilta’s directors could not be attributed to Bilta for the purpose of defeating the company’s claim against them. Lord Neuberger stated:

Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrong-doing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company’s liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrong-doing, even where the directors were the only directors and shareholders of the company.

Lords Toulson and Hodge emphasised that the fiduciary duties of directors of an insolvent company extend to protecting the interests of creditors:

It would make a nonsense of the principle which the law has developed for the protection of the creditors of an insolvent company by requiring the directors to act in good faith with proper regard for their interests.

Lord Sumption explained that the breach of duty exception applies because:

The theory which identifies the state of mind of the company with that of its controlling directors cannot apply when the issue is whether those directors are liable to the company. The duty of which they are in breach exists for the protection of the company against the directors.

On Section 213 of the Insolvency Act 1986

The Court held that section 213 has extra-territorial effect. Lord Sumption stated that the English court, when winding up an English company, claims worldwide jurisdiction over its assets and their proper distribution, and that modern patterns of cross-border business weaken any presumption against extra-territorial effect.

On Stone & Rolls

The Court effectively limited the precedential value of Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39. Lord Neuberger concluded:

the time has come in my view for us to hold that the decision in Stone & Rolls should… be ‘put on one side and marked not to be looked at again’.

Implications

This decision clarifies that directors who breach their fiduciary duties to a company cannot rely on the illegality defence by attributing their own wrongdoing to the company. The judgment confirms that attribution is context-specific: whether an agent’s conduct is attributed to a company depends on the nature of the claim and the parties involved. The decision reinforces the protection afforded to creditors of insolvent companies through directors’ fiduciary duties under section 172(3) of the Companies Act 2006. It also confirms that insolvency provisions such as section 213 of the Insolvency Act 1986 can be applied extra-territorially against foreign defendants who participated in fraudulent trading by a UK company.

Verdict: Appeal dismissed. The illegality defence was not available to the appellants, and section 213 of the Insolvency Act 1986 has extra-territorial effect.

Source: Bilta (UK) Ltd v Nazir [2015] UKSC 23