Court of Appeal rejects illegality defence in claim against liquidator

The Court of Appeal has refused to allow a liquidator of a company that was the vehicle for a VAT fraud to rely on the defence of illegality in defending a claim for breach of duty under section 212 of the Insolvency Act 1986: Top Brands Ltd and others v Sharma (as former liquidator of Mama Milla Ltd) [2015] EWCA Civ 1140.

In delivering judgment, the Court of Appeal echoed the plea of the Supreme Court in Jetivia SA v Bilta (UK) Limited [2015] UKSC 23 for clarity as to the proper approach to the defence of illegality (see our previous blog post here), which is currently a matter of great uncertainty. However the court held that, whichever approach was correct, the defence clearly did not apply on the facts of the present case, as there was no need to rely on facts which disclosed illegality in order to bring the claim, and there was no inextricable link between the relief sought and the illegal actions of the company and its directors.

In Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391, the House of Lords held that liquidators were prevented from claiming against a company’s auditors for failing to spot its sole director’s fraud (see post), but the Supreme Court in Jetivia v Bilta concluded that Stone & Rolls should be treated as turning on its own particular facts and not authority for any general principle. The present case is helpful in continuing the trend toward a limited application of the illegality rule, and the Stone & Rolls decision, which is good news for creditors of companies used as a vehicle for fraud. Tom Henderson, a senior associate in our dispute resolution team, considers the decision further below.

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Supreme Court confirms company in liquidation not prevented from claiming against directors on the basis of fraud attributable to the company

The Supreme Court has unanimously upheld a Court of Appeal decision refusing to strike out a claim by a “one-man” company in liquidation, which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers alleged to have been involved in the fraud: Jetivia SA v Bilta (UK) Limited [2015] UKSC 23 (see our post on the Court of Appeal decision here). The Supreme Court's decision confirms that a company in liquidation is not prevented from claiming against its directors on the basis that the fraud of the directors is also attributable to the company.

The decision is welcome in underlining the limited application of the House of Lords ruling in Stone Rolls Ltd v Moore Stephens [2009] 1 AC 1391, in which liquidators were prevented from claiming against a company's auditors for failing to spot its sole director's fraud (see post), and empowering office-holders to pursue claims against fraudulent directors (and their associates) even where all directors and shareholders were involved in the fraud. Tom Henderson, a senior associate in our dispute resolution team, considers the decision further below. Continue reading

Court of Appeal finds company in liquidation not prevented from claiming against directors on basis fraud attributable to company

The Court of Appeal has unanimously upheld an order refusing to strike out a claim by a "one-man" company in liquidation, which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers alleged to have been involved in the fraud. The court held that the claim was not precluded by the public policy principle that a party cannot bring a claim which relies on its own illegal act (known as the "ex turpi causa" principle): Jetivia SA & anor v Bilta (UK) Limited (in liquidation) & ors [2013] EWCA Civ 968

As the claimant company was the victim of the alleged fraud, the law would not attribute to the company the fraud of its directors and prevent it from proceeding with its claim.  The fact that it was a one-person company did not matter: the "sole actor exception" was not an answer to a claim by a company against its fraudulent directors.  

The court distinguished the House of Lords' landmark decision in Stone Rolls Ltd v Moore Stephens [2009] 1 AC 1391 (see post), in which the majority dismissed on ex turpi causa grounds a claim brought by a company's liquidators against its former auditors for failing to detect the fraud of its only director. In the Court of Appeal's view there was a significant difference between, on the one hand, the liability of auditors who were not party to the fraud but were negligent in not alerting the company to the fraud and, on the other, a conspiracy against the company by its directors and others to deprive it of its assets.  Stone & Rolls was "readily distinguishable" on that basis.

This limited application of the House of Lords ruling in Stone & Rolls will be welcomed by office-holders and creditors as it permits a company in liquidation to seek to recover money from fraudulent directors (and their associates) even where all directors were involved in the fraud. Tom Henderson comments further on the decision below.  Continue reading

House of Lords rules on auditors’ liability in fraud case

In a decision handed down just before the end of term, auditors have won an important House of Lords ruling limiting their liability in cases where a "one man" company is used as a vehicle for fraud: Moore Stephens (a firm) v Stone Rolls Limited (in liquidation) [2009] UKHL 39. The law lords dismissed by a majority of three to two a negligence claim brought against an audit firm for failing to detect a massive fraud at Stone & Rolls, a trading company that fell in the late 1990s – holding that the liquidators could not bring a claim for damages when the company itself was responsible for the fraud. Continue reading