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JUDGMENT
Jetivia SA and another (Appellants) v Bilta (UK)
Limited (in liquidation) and others (Respondents)
before
Lord Neuberger, President
Lord Mance
Lord Clarke
Lord Sumption
Lord Carnwath
Lord Toulson
Lord Hodge
JUDGMENT GIVEN ON
22 April 2015
Heard on 14 and 15 October 2014
Appellants Respondents
Alan Maclean QC Christopher Parker QC
Colin West Rebecca Page
(Instructed by
MacFarlanes LLP
)
(Instructed by Gateley
LLP
)
Intervener
Michael Gibbon QC
(Instructed by Howes
Percival LLP
)
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LORD NEUBERGER: (with whom Lord Clarke and Lord Carnwath agree)
Introductory
1. The facts giving rise to this appeal can be shortly summarised, although they
are more fully set out in the judgments of Lord Sumption at paras 56-59 and
of Lords Toulson and Hodge at paras 113-116 below.
2. Bilta (UK) Ltd is an English company which was compulsorily wound up in
November 2009 pursuant to a petition presented by HMRC. Bilta’s
liquidators then brought proceedings against, inter alia, its two former
directors, Mr Chopra, who was also its sole shareholder, and Mr Nazir; and
Jetivia SA, a Swiss company and its chief executive, Mr Brunschweiler, who
is resident in France (“the four defendants”).
3. The pleaded claim alleges that the four defendants were parties to an unlawful
means conspiracy to injure Bilta by a fraudulent scheme, which involved
Messrs Chopra and Nazir breaching their fiduciary duties as directors, and
Jetivia and Mr Brunschweiler (“the appellants”) dishonestly assisting them
in doing so. The liquidators claim (i) through Bilta, (a) damages in tort from
each of the four defendants, (b) compensation based on constructive trust
from the appellants, and (ii) directly from each of the four defendants, a
contribution under section 213 of the Insolvency Act 1986.
4. The case against the four defendants is based on the contention that between
April and July 2009, Messrs Chopra and Nazir caused Bilta to enter into a
series of transactions relating to European Emissions Trading Scheme
Allowances with various parties, including Jetivia, and that those transactions
constituted what are known as carousel frauds. The effect of the transactions
was that they generated (i) an obligation on Bilta to account to HMRC for
output VAT and (ii) an obligation on HMRC to pay a slightly lower sum by
way of input VAT to another company. While the input VAT was paid by
HMRC, it was inherent in the fraud that Bilta would always be insolvent and
unable to pay the output VAT to HMRC. The amount of output VAT for
which Bilta consequently remains liable is said to be in excess of £38m.
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The application to strike out
5. The appellants applied to strike out Bilta’s claim against them on the ground
that (i) Bilta could not maintain the proceedings in view of the principle ex
turpi causa non oritur actio, or, to put it another way, the appellants were
bound to defeat the claims against them on the basis of an illegality defence,
and (ii) in so far as the claims were based on section 213, it could not be
invoked against the appellants as it does not have extra-territorial effect. The
application was dismissed by Sir Andrew Morritt C, whose decision was
upheld by the Court of Appeal. The appellants now appeal to the Supreme
Court.
6. In common with all members of the court, I consider that this appeal should
be dismissed because the Court of Appeal were right to hold that (i) illegality
cannot be raised by Jetivia or Mr Brunschweiler as a defence against Bilta’s
claim because the wrongful activity of Bilta’s directors and shareholder
cannot be attributed to Bilta in these proceedings, and (ii) section 213 of the
Insolvency Act 1986 has extra-territorial effect.
Attribution
7. So far as attribution is concerned, it appears to me that what Lord Sumption
says in his paras 65-78 and 82-97 is effectively the same in its effect to what
Lords Toulson and Hodge say in their paras 182-209. Both judgments reach
the conclusion which may, I think be stated in the following proposition.
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, and even though the wrong-doing or
knowledge of the directors may be attributed to the company in many other
types of proceedings.
8. It appears to me that this is the conclusion reached by Lord Sumption and
Lords Toulson and Hodge as a result of the illuminating discussions in their
respective judgments – in paras 65-78 and 82-95 and paras 182-209.
9. Particularly given the full discussion in those passages, I do not think that it
would be sensible for me to say much more on the topic. However, I would
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suggest that the expression “the fraud exception” be abandoned, as it is
certainly not limited to cases of fraud – see per Lord Sumption at para 71 and
Lords Toulson and Hodge at para 181. Indeed, it seems to me that it is not so
much an exception to a general rule as part of a general rule. There are judicial
observations which tend to support the notion that it is, as Lord Sumption
says in his para 86, an exception to the agency-based rules of attribution,
which is based on public policy – or common sense, rationality and justice,
according to the judicial observations quoted in paras 72, 73, 74, 78 and 85
of Lord Sumption’s judgment. However, I agree with Lord Mance’s analysis
at paras 37-44 of his judgment, that the question is simply an open one:
whether or not it is appropriate to attribute an action by, or a state of mind of,
a company director or agent to the company or the agent’s principal in
relation to a particular claim against the company or the principal must
depend on the nature and factual context of the claim in question.
Section 213 of the 1986 Act
10. I agree with Lord Sumption and Lords Toulson and Hodge for the reasons
they give in paras 107-110 and 210-218 that section 213 of the 1986 Act has
extra-territorial effect, at least to the extent of applying to individuals and
corporations resident outside the United Kingdom.
The matters in dispute
11. There are some issues on which Lord Sumption and Lords Toulson and
Hodge differ. In that connection, I think that there are three areas of
disagreement to which it is right to refer, and, taking them in the order in
which it is most convenient to discuss them, they are as follows.
12. First, there is disagreement as to the basis upon which a defence based on
illegality, or ex turpi causa, is to be approached – compare Lord Sumption at
paras 60-63 and 98-100 with Lords Toulson and Hodge at paras 170-174.
Secondly, Lords Toulson and Hodge would also dismiss this appeal on the
attribution issue on the ground of statutory policy (see their paras 122-130),
whereas Lord Sumption would not (see his paras 98-102). Thirdly, there are
differences between Lord Sumption and Lords Toulson and Hodge as to the
proper interpretation of two cases, namely Stone & Rolls Ltd v Moore
Stephens [2009] UKHL 39, [2009] 1 AC 1391 (see Lord Sumption at paras
79-81 and Lords Toulson and Hodge at paras 134-155), and Safeway
Foodstores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 841 (see
Lord Sumption at para 83 and Lords Toulson and Hodge at paras 156-162).
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The proper approach to the illegality defence
13. First, then, there is the proper approach which should be adopted to a defence
of illegality. This is a difficult and important topic on which, as the two main
judgments in this case show, there can be strongly held differing views, and
it is probably accurate to describe the debate on the topic as involving
something of a spectrum of views. The debate can be seen as epitomising the
familiar tension between the need for principle, clarity and certainty in the
law with the equally important desire to achieve a fair and appropriate result
in each case.
14. In these proceedings, Lord Sumption considers that the law is stated in the
judgments in the House of Lords in Tinsley v Milligan [1994] 1 AC 340,
which he followed and developed (with the agreement of three of the four
other members of the court, including myself and Lord Clarke) in Les
Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2014] 3 WLR 1257. He
distinguishes the judgment of Lord Wilson in Hounga v Allen [2014] UKSC
47, [2014] 1 WLR 2889 as involving no departure from Tinsley v Milligan,
but as turning on its own context in which “a competing public policy
required that damages should be available even to a person who was privy to
her own trafficking” (para 47). By contrast Lord Toulson (who dissented
from that approach in Les Laboratoires) and Lord Hodge favour the approach
adopted by the majority of the Court of Appeal in Tinsley and treat that of
Lord Wilson in para 42ff of Hounga as supporting that approach.
15. In my view, while the proper approach to the defence of illegality needs to
be addressed by this court (certainly with a panel of seven and conceivably
with a panel of nine Justices) as soon as appropriately possible, this is not the
case in which it should be decided. We have had no real argument on the
topic: this case is concerned with attribution, and that is the issue on which
the arguments have correctly focussed. Further, in this case, as in the two
recent Supreme Court decisions of Les Laboratoires and Hounga, the
outcome is the same irrespective of the correct approach to the illegality
defence.
16. It would, in my view, be unwise to seek to decide such a difficult and
controversial question in a case where it is not determinative of the outcome
and where there has been little if any argument on the topic. In Les
Laboratoires, the majority did opine on the proper approach not because it
was necessary to decide the appeal, but because they considered that the
Court of Appeal (who had reached the same actual decision) had adopted an
approach which was inconsistent with Tinsley. Similarly in Hounga, as Lord
Sumption has shown in para 99, it may well not have been necessary to
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consider the proper approach to the illegality defence, but it nonetheless
remains the fact that it was the subject of argument, and that Lord Wilson did
express a view on the point, and two of the four other members of the court
agreed with his judgment.
17. Les Laboratoires provides a basis for saying that the approach in Tinsley has
recently been reaffirmed by this court and that it would be inappropriate for
this court to visit the point again. However, it was not argued in Les
Laboratoires that Tinsley was wrongly decided, and, as Lord Toulson pointed
out in his judgment, the majority decision was reached without addressing
the reasoning in Hounga. Lord Sumption is right to say that, unless and until
this court refuses to follow Tinsley, it is at the very least difficult to say that
the law is as flexible as Lords Toulson and Hodge suggest in their judgment,
but (i) in the light of what the majority said in Hounga at paras 42-43, there
is room for argument that this Court has refused to follow Tinsley, and (ii) in
the light of the Law Commission report, the subsequent decisions of the Court
of Appeal, and decisions of other common law courts, it appears to me to be
appropriate for this court to address this difficult and controversial issue –
but only after having heard and read full argument on the topic.
The role of statutory policy in this case
18. As well as dismissing this appeal on the attribution issue on the same grounds
as Lord Sumption, Lords Toulson and Hodge would also dismiss the appeal
on the grounds of statutory policy. They suggest that it would make a
nonsense of the statutory duty contained in section 172(3) of the Companies
Act 2006 (and explained by them in their paras 125-127), if directors against
whom a claim was brought under that provision could rely on the ex turpi
causa or illegality defence. That defence would be based on the proposition,
relied on by the appellants in this case, that, as the directors in question (here
the first and second defendants, Mr Nazir and Mr Chopra) were, between
them, the sole directors and shareholders of Bilta, their illegal actions must
be attributed to the company, and so the defence can run.
19. I agree with Lords Toulson and Hodge that this argument cannot be correct.
Apart from any other reason, it seems to me that Lord Mance must be right
in saying in his para 47 that, at least in this connection, the 2006 Act restates
duties which were part of the common law. It also appears to me to follow
that, if Lords Toulson and Hodge are right about the proper approach to the
illegality principle, then their reasoning in paras 128-130 would be correct.
However, I would not go further than that, because, as I have already
indicated, this is not an appropriate case in which this court should decide
conclusively (in so far as the issue can ever be decided conclusively) on the
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right approach to the illegality principle. It is unnecessary to decide the right
approach even in order to determine whether the illegality defence can be run
in relation to the section 172(3) claim in the present case.
20. That is, of course, because it is clear, for the very reasons given by Lord
Toulson and Lord Hodge in paras 126-130 that a claim against directors
under section 172(3) cannot be defeated by the directors invoking the defence
of ex turpi causa. It is clear from “the language of the rule ([as] it is in a
statute) and its content and policy” that the “act (or knowledge or state of
mind) was for this purpose [not] intended to count as the act etc of the
company”, to quote and apply the test laid down by Lord Hoffmann in
Meridian Global Funds Management Asia Ltd v Securities Commission
[1995] 2 AC 500, 507, set out by Lord Sumption at the end of his para 67.
The proper analysis of Stone & Rolls and of Safeway Foodstores
21. In para 3.32 of the Report referred to above, the Law Commission observed
that “[i]t is difficult to anticipate what precedent, if any, Stone & Rolls will
set regarding the illegality defence”, explaining that, in their view at any rate,
“there was no majority reasoning” with the members of the committee
“reaching different conclusions on how the defence should be applied”. The
confusing nature of the decision has been commented on in a number of
articles (see eg Halpern Stone & Rolls Ltd v Moore Stephens: An
Unnecessary Tangle (2010) 73 MLR 487, Watts, Audit Contracts and
Turpitude (2010) 126 LQR 14 and Illegality and agency law: authorising
illegal action [2011] JBL 213, Ferran, Corporate Attribution and Directing
Mind and Will (2011) 127 LQR 239, Watson, Conceptual Confusion:
Organs, Agents and Identity in the English Courts (2011) 23 Sing Ac Law Jo
762).
22. These critics have been joined by Lord Walker himself, who was of course a
member of the majority in Stone & Rolls. In the course of his illuminating
judgment in Moulin Global Eyecare Trading Ltd (in liquidation) v
Commissioner of Inland Revenue [2014] HKCFA 22, (2014) 17 HKCFAR
218, he described the decision in Stone & Rolls as a “controversial exception”
to a general rule and referred to its facts as “extreme and exceptional” – see
para 133. In para 106, he rightly added that the judgment of Patten LJ in the
Court of Appeal in the present case had “achieved a welcome clarification of
the law in this area”. Casting further doubt on the decision in Stone & Rolls,
in para 101 of Moulin Global Lord Walker recanted part of his reasoning in
the House of Lords.
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23. It seems to me that the view that it is very hard to seek to derive much in the
way of reliable principle from the decision of the House of Lords in Stone &
Rolls is vindicated by the fact that, in their judgments in this case, Lord
Sumption and Lords Toulson and Hodge have reached rather different
conclusions as to the effect of the majority judgments.
24. Particularly given the difference between them as to the ratio decidendi of
Lord Phillips’s opinion, and subject to what I say in the next four paragraphs,
I am of the view that, so far as it is to be regarded as strictly binding authority,
Stone & Rolls is best treated as a case which solely decided that the Court of
Appeal was right to conclude that, on the facts of the particular case, the
illegality defence succeeded and that the claim should be struck out. I believe
that this largely reflects the views of both Lord Sumption (see his para 81)
and Lords Toulson and Hodge (see their para 152-154).
25. But it would be unsatisfactory for us to leave the case without attempting to
provide some further guidance as to its effect, in so far as we fairly can. For
that purpose I welcome Lord Sumption’s enumeration of the three
propositions which he suggests in his para 80 can be derived from Stone &
Rolls. With the exception of the first, I agree with what he says about them,
although even the second and third propositions are supported by only three
of the judgments at least one of which is by no means in harmony with the
other two.
26. Subject to that, I agree that the second and third of the propositions which
Lord Sumption identifies in his para 80 can be extracted from three of the
judgments in Stone & Rolls. Those propositions concern the circumstances
in which an illegality defence can be run against a company when its directing
mind and will have fraudulently caused loss to a third party and it is relying
on the fraud in a claim against a third party. The second proposition, with
which I agree, is that the defence is not available where there are innocent
shareholders (or, it appears, directors). The third proposition, with which I
also agree, is that the defence is available, albeit only on some occasions (not
in this case, but in Stone & Rolls itself) where there are no innocent
shareholders or directors.
27. I need say no more about the second proposition, which appears to me to be
clearly well-founded. As to the third proposition, I agree with Lords Toulson
and Hodge that it appears to be supported (at least in relation to a company
in sound financial health at the relevant time) by the reasoning in the clear
judgment of Hobhouse J in Berg, Sons & Co Ltd v Mervyn Hampton Adams
[2002] Lloyd’s Rep PN 41, which was referred to with approval and quoted
from in Stone & Rolls by Lord Phillips (at paras 77-79) and Lord Walker (at
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paras 150, 158-161), and indeed by Lord Mance, dissenting (at paras 258-
260).
28. However, I note that Lord Mance suggests that it should be an open question
whether the third proposition would apply to preclude a claim against
auditors where, at the relevant audit date, the company concerned was in or
near insolvency. While it appears that the third proposition, as extracted from
three judgments in Stone & Rolls, would so apply, I have come to the
conclusion that, on this appeal at least, we should not purport definitively to
confirm that it has that effect. I am of the view that we ought not shut the
point out, in the light of (a) our conclusion that attribution is highly contextspecific (see para 9 above), (b) Lord Walker’s change of mind (see para 22
above), (c) the fact that the three judgments in Stone & Rolls which support
the third proposition) are not in harmony (in the passages cited at the end of
para 27 above), and (d) the fact that the third proposition is in any event not
an absolute rule (see the end of para 26 above).
29. I cannot agree that the first proposition identified by Lord Sumption, namely
that the illegality defence is only available where the company is directly, as
opposed to vicariously, responsible for the illegality, can be derived from
Stone & Rolls (whether or not the proposition is correct in law, which I would
leave entirely open, although I see its attraction). I agree that, in paras 27-28,
Lord Phillips accepted that the illegality defence is available against a
company only where it was directly, as opposed to vicariously, responsible
for it, albeit that that was ultimately an obiter conclusion. More importantly,
I do not think that Lord Walker accepted that proposition at paras 132-133:
he merely identified an issue as to whether the company was “primarily …
liable for the fraud practised on KB, or was merely vicariously liable for the
fraud of Mr Stojevic”, but as he then went on to accept that the Court of
Appeal “was clearly right in holding that” the company “was primarily …
liable”, he did not have to address the point in question.
30. Subject to these points, the time has come in my view for us to hold that the
decision in Stone & Rolls should, as Lord Denning MR graphically put it in
relation to another case in In re King [1963] Ch 459, 483, be “put on one side
and marked ‘not to be looked at again’”. Without disrespect to the thinking
and research that went into the reasoning of the five Law Lords in that case,
and although persuasive points and observations may be found from each of
the individual opinions, it is not in the interests of the future clarity of the law
for it to be treated as authoritative or of assistance save as already indicated.
31. I turn, finally, to Safeway Foodstores. Lord Sumption has accurately
summarised the effect of the decision in his para 83. Lords Toulson and
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Hodge deal with it a little more fully and much more critically in their paras
157-162. I would take a great deal of persuading that the Court of Appeal did
not arrive at the correct conclusion in that case. However, I do not believe
that it would be right on this appeal to express a concluded opinion as to
whether the case was rightly decided, and, if so, whether the reasoning of the
majority or of Pill LJ was correct. It is unnecessary to reach any such
conclusion and the points were not argued in detail before us: indeed, they
were hardly addressed at all.
LORD MANCE:
32. The respondent, Bilta (UK) Ltd (“Bilta”), claims damages from the
appellants for losses suffered through its involvement in a carousel fraud on
the Revenue. The defendants in the proceedings include Bilta’s two directors,
Mr Chopra who was also its sole shareholder and Mr Nazir, as well as a Swiss
company, Jetivia SA (“Jetivia”), and Jetivia’s chief executive, Mr
Brunschweiler. Jetivia and Mr Brunschweiler are the appellants in this
appeal. The scheme involved the purchase of carbon credits by Bilta from
sources outside the United Kingdom (so not subject to VAT), followed by
their resale (mostly at a loss, if one takes the basic resale price excluding
VAT) to UK companies registered for VAT, and the remission of the
proceeds to Jetivia and other offshore companies. Inevitably, the scheme
rendered Bilta at all material times insolvent, it cannot meet its liabilities to
the Revenue and the present claim is brought by liquidators, for the ultimate
benefit no doubt of the Revenue as Bilta’s creditors.
33. The appellants’ defence is that Bilta was through its directors and shareholder
party to illegality which precludes it pursuing its claim. I have read with great
benefit the judgments prepared by Lords Toulson and Hodge, by Lord
Sumption and by Lord Neuberger. Neither they, nor I understand any other
member of the Court, consider that the defence can succeed, and I agree that
it cannot. But there are some differences in reasoning, particularly regarding
the general approach to be adopted to illegality. Save perhaps for a slight
difference of view (in para 52 below) regarding Safeway Stores Ltd v Twigger
[2010] EWCA Civ 1472, [2011] 2 AER 814, I agree on all points in substance
with Lord Neuberger.
34. This is not, in my view, the occasion on which to embark on any reexamination either of the House of Lords’ decision in Tinsley v Milligan
[1994] 1 AC 340 or of the Supreme Court’s recent decisions in Hounga v
Allen [2014] UKSC 47; [2014] 1 WLR 2889 and Les Laboratoires Servier v
Apotex Inc [2014] UKSC 55; [2014] 3 WLR 1257. There was no challenge
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to or detailed examination of any of these decisions. I agree however that
these cases and their inter-relationship merit further examination by this court
whenever the opportunity arises.
35. The present appeal raises the question whether a company can pursue its
directors and sole shareholder for breaches of duty towards the company
depriving it of its assets. Lord Toulson and Lord Hodge consider that the
straightforward answer to the question is that that it would deprive the duties
which the shareholder-directors owed Bilta of all content, if the defence of
illegality were open to the appellants. But they consider that, if analysed in
terms of attribution, the case is not one where the shareholder-directors’ acts
and state of mind can or should be attributed to Bilta. More generally, they
favour a policy-based approach to illegality, but I will not examine that
possibility, in view of what I have said in para 34.
36. Lord Sumption in contrast sees the case as turning on rules of attribution,
which he views as applying “regardless of the nature of the claim or the
parties involved” (para 86) and amongst which he identifies a rule that the
acts and state of mind of a directing mind and will be attributed to a company.
But he qualifies the effect of his analysis by reference to a policy-based
“breach of duty exception” which covers the present case in order “to avoid,
injustice and absurdity”, as Lord Walker put it in a passage in Moulin Global
Eyecare Trading Ltd v The Commissioner of Inland (Hong Kong Final Court
of Appeal) FACV (No 5 of 2013), which Lord Sumption quotes in para 85.
Later in his judgment however in para 92, he modifies this approach by
describing it as no more than a “valuable tool of analysis”.
37. In common, as I see it, with Lords Neuberger, Toulson and Hodge, and for
reasons which I set out in paras 39-44 below, I do not think it appropriate to
analyse the present case as one of prima facie attribution, which is then
negatived under a breach of duty exception. As Lord Sumption’s judgment
demonstrates, it would, however, make no difference to the outcome in this
case, if the matter were to be so analysed, though the plethora of difficult
authority to which such an analysis has given rise, far from proving its value,
argues for what is to my mind a simpler and more principled analysis.
38. One way or another, it is certainly unjust and absurd to suggest that the
answer to a claim for breach of a director’s (or any employee’s) duty could
lie in attributing to the company the very misconduct by which the director
or employee has damaged it. A company has its own separate legal
personality and interests. Duties are owed to it by those officers who
constitute its directing mind and will, similarly to the way in which they are
owed by other more ordinary employees or agents. All the shareholders of a
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solvent company acting unanimously may in certain circumstances (which
need not here be considered, since it is not suggested that they may apply) be
able to authorise what might otherwise be misconduct towards the company.
But even the shareholders of a company which is insolvent or facing
insolvency cannot do this to the prejudice of its creditors, and the company’s
officers owe a particular duty to safeguard the interest of such creditors.
There is no basis for regarding the various statutory remedies available to a
liquidator against defaulting officers as making this duty or its enforcement
redundant.
39. Rules of attribution are as relevant to individuals as to companies. An
individual may him- or herself do the relevant act or possess the relevant state
of mind. Equally there are many contexts in which an individual will be
attributed with the actions or state of mind of another, whether an agent or,
in some circumstances, an independent contractor. But in relation to
companies there is the particular problem that a company is an artificial
construct, and can only act through natural persons. It has no actual mind,
despite the law’s persistent anthropomorphism – as to which see the
references by Lord Hoffmann in Meridian Global Funds Management Asia
Ltd v Securities Commission [1995] 2 AC 500, 507A and 509G-H to the
absence of any “ding an sich”, and by Professor Eilis Ferran in Corporate
Attribution and the Directing Mind and Will (2011) 127 LQR 239, 239-240
to the distracting effect of references to a company’s “brain and nerve centre”
or “hands”.
40. As Lord Hoffmann pointed out in Meridian Global at pp 506-507, the courts’
task in all such situations is to identify the appropriate rules of attribution,
using for example general rules like those governing estoppel and ostensible
authority in contract and vicarious liability in tort. It is well-recognised that
a company may as a result of such rules have imputed to it the conduct of an
ordinary employee, and this is so also in the context of illegality. By
acquiescing in the overloading of the hauliers’ lorries in Ashmore, Benson,
Pease & Co Ltd v A V Dawson Ltd [1973] 1 WLR 828 the consignors’
assistant transport manager and his assistant made the haulage contract
unenforceable at the instance of the consignors, who were unable to recover
when a lorry toppled over damaging the goods being carried. But it is not
always appropriate to apply general rules of agency to answer questions of
attribution, and this is particularly true in a statutory context. Particular
statutory provisions may indicate that a particular act or state of mind should
only be attributed when undertaken or held by a company’s “directing mind
and will”: see eg Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd
[1915] AC 705 and Tesco Supermarkets Ltd v Nattrass [1972] AC 153, cited
in Meridian Global at pp 507-509. In contrast in Meridian Global itself the
company was for criminal purposes attributed with the conduct and
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knowledge of the senior portfolio manager who, without knowledge of the
board or managing director, had entered into the relevant transaction of which
the company had failed to give notice as required by the legislation.
41. As Lord Hoffmann made clear in Meridian Global, the key to any question
of attribution is ultimately always to be found in considerations of context
and purpose. The question is: whose act or knowledge or state of mind is for
the purpose of the relevant rule to count as the act, knowledge or state of
mind of the company? Lord Walker said recently in Moulin Global, para 41
that: “One of the fundamental points to be taken from Meridian is the
importance of context in any problem of attribution”. Even when no statute
is involved, some courts have suggested that a distinction between the acts
and state of mind of, on the one hand, a company’s directing mind and will
or “alter ego” and, on the other, an ordinary employee or agent may be
relevant in the context of third party relationships. This is academically
controversial: see Professor Peter Watts, The company’s alter ego – an
impostor in private law (2000) LQR 525; Campbell and Armour,
Demystifiying the civil liability of corporate agents (2003) CLJ 290. Any
such distinction cannot in any event override the need for attention to the
context and purpose in and for which attribution is invoked or disclaimed.
42. Where the relevant rule consists in the duties owed by an officer to the
company which he or she serves, then, whether such duties are statutory or
common law, the acts, knowledge and states of mind of the company must
necessarily be separated from those of its officer. The purpose of the rule
itself means that the company cannot be identified with its officers. It is selfevidently impossible that the officer should be able to argue that the company
either committed or knew about the breach of duty, simply because the officer
committed or knew about it. This is so even though the officer is the directing
mind and will of the company. The same clearly also applies even if the
officer is also the sole shareholder of a company in or facing insolvency. Any
other conclusion would ignore the separate legal identity of the company,
empty the concept of duty of content and enable the company’s affairs to be
conducted in fraud of creditors.
43. At the same time, however, if the officer’s breach of duty has led to the
company incurring loss in the form of payments to or liability towards third
parties, the company must be able as part of its cause of action against its
officer to rely on the fact that, in that respect, its officer’s acts and state of
mind were and are attributable to the company, causing it to make such
payments or incur such liability. In other words, it can rely on attribution for
one purpose, but disclaim attribution for another. The rules of attribution for
the purpose of establishing or negating vicarious liability to third parties
Page 14
differ, necessarily, from the rules governing the direct relationship inter se of
the principal and agent.
44. It follows that I would, like Lords Toulson and Hodge (para 191), endorse
the observations of Professors Peter Watts and Francis Reynolds QC as
editors of Bowstead & Reynolds on Agency 19th ed, (2010) para 8-213, in
relation to the argument that a principal should be attributed with the state of
mind of his agent who has defrauded him, so as to relieve either the agent or
a third party who had knowingly assisted in the fraud:
“Such arguments by defendants, though hazarded from time to
time, are plainly without merit. However, in such situations
imputation has no reason to operate. The rules of imputation do
not exist in a state of nature, such that some reason has to be
found to disapply them. Whether knowledge is imputed in law
turns on the question to be addressed.”
The same point is made in rephrased terms in their 20th ed (2014), para 8-
213:
“The simple point is that, were the principal deemed to possess
the agent’s knowledge of his own breaches of duty, and thereby
to have condoned them, the principal could never successfully
vindicate his rights. … [T]here is no need for an exception as
such. The putative defence that the exception is used to rebut is
premised on the fallacy that the principal is prima facie deemed
to know at all times and for all purposes that which his agents
know. As observed already, imputation never operated in such
a way. Before imputation occurs, there needs to be some
purpose for deeming the principal to know what the agent
knows. There is none in this type of case.”
45. The breach of duty exception has been more plausibly deployed in situations
where the issue is the legal effect of relations between the company and a
third party. For example, in J C Houghton & Co v Nothard, Lowe and Wills
[1928] AC 1, the issue was whether the knowledge of the directors of the
latter company should be attributed to it, with the effect that the latter
company could and should be treated as estopped from denying that it had
consented to a particular arrangement with a third party company. However,
the arrangement was one that was against the company’s interests and for the
benefit of the third party company which the directors also controlled and
which was in financial difficulties. In the words of Viscount Dunedin, both
Page 15
common sense and authority in the form of In re Hampshire Land Co [1896]
2 Ch 743 led to the conclusion that, although “It may be assumed that the
knowledge of directors is in ordinary circumstances the knowledge of the
company”, that cannot be so if the knowledge of an infringement of the
company’s rights is “only brought home to the man who himself was the
artificer of such infringement” (pp 14-15). Even in this context it may be
questioned whether an analysis involving prima facie imputation subject to
exception is necessary or fruitful: see Professor Peter Watts’ critique in
Imputed knowledge in agency law – excising the fraud exception (2001) LQR
300, 316 et seq. Since it leads to a right result and involves a different context
to the present, I need however say no more about that here.
46. With regard to Stone & Rolls Ltd v Moore Stephens [2009] 1 AC 1391 I do
not propose to say very much. The potential qualification on the application
of the maxim ex turpi causa, which the majority accepted in the case of a
company with innocent shareholders indicates that they too must ultimately
have regarded context as having at least some relevance to attribution, and
Lord Walker has in Moulin now explicitly withdrawn from the position that
attribution operates independently of context: see paras 41 and 101. More
fundamentally, the context in which issues of attribution arose in Stone &
Rolls was different from the present. The company’s claim was against its
auditors rather than against an officer. Lord Phillips at least in the majority
clearly saw that as important, in particular in the light of what he viewed as
the scope of an auditor’s duty. I remain of the view, which I expressed in para
265 in Stone & Rolls, that this ought to have been the central issue in that
case, not a preliminary issue about ex turpi causa into which the majority
view, that the claim even though pursued for the benefit of the company’s
creditors should fail, was in the event fitted. I note that Professor Eilis Ferran
takes a similar view in her article, cited at para 39 above, at p 251; see also
the statement by Professor Peter Watts, Audit contracts and turpitude (2010)
LQR 126, that “Ultimately, what divided the judges in Stone & Rolls was
determining the classes of innocent parties whose interests the contract of
audit is designed to protect” (p 14).
47. I say nothing of course about the correct answer to a question addressed in
terms of what an auditor’s duty would or should have been. However, so far
as concerns the nature and enforceability of a company’s claim for
misconduct by its directing mind and sole shareholder, I remain of the views
expressed in paras 224-225 in Stone & Rolls:
“224. … [B]efore the House Mr Sumption’s submission was
that S & R could only claim against Mr Stojevic on a narrow
basis for abstraction of its moneys (a proprietary claim like that
mentioned by O’Connor LJ in Caparo …: see para 214 above);
Page 16
and that any claim against him for damages for breach of duty
as an officer would be barred by the maxim ex turpi causa
because it would involve pleading S & R’s fraud on the banks.
I do not accept this submission. It would mean that, if one
element of Mr Stojevic’s fraud on the banks had involved
persuading the banks to pay the funds direct into an account
represented as being S & R’s but in fact Mr Stojevic’s, S & R
could not sue Mr Stojevic. Mr Stojevic’s common law duty as
a director to S & R was to conduct its affairs honestly and
properly. Section 172(1) of the Companies Act 2006 now states
the duty, in terms expressly based on common law rules and
equitable principles (see section 170(3)), as being to ‘act in the
way he considers, in good faith, would be most likely to
promote the success of the company for the benefit of its
members as a whole’ – a duty made expressly ‘subject to any
enactment or rule of law requiring directors, in certain
circumstances, to consider or act in the interests of creditors of
the company’: see section 172(3). Section 212 of the
Insolvency Act 1986 provides a summary remedy available in
the course of winding up against anyone who is or has been an
officer of the company in respect of, inter alia, ‘any
misfeasance or breach of any fiduciary or other duty in relation
to the company’. (This is in addition to the specific remedies
that apply in circumstances of fraudulent or wrongful trading
under sections 213 and 214.)
225. As between S & R and Mr Stojevic, Mr Stojevic’s fraud
on the banks was and is just as objectionable as the later
abstraction of moneys to which it was designed to lead. In
holding a director responsible in such a case, a company is as a
separate legal entity enforcing duties owed to it by the director.
It is not acting inconsistently, or asking the court to act
inconsistently, with the law. It is a remarkable proposition, that
the directing mind of a company can commit the company to a
scheme of fraud and then avoid liability in damages if the
company would have to plead and rely on this scheme to
establish such liability. …”
48. Like Lord Neuberger, I would not endorse Lord Sumption’s suggestion
(paras 79 and 80) that Stone & Rolls establishes an apparently general and
context-unspecific distinction between personal and vicarious liability as
central to the application of the illegality defence. Outside the statutory
sphere, where such a distinction originated and has been found useful, there
is very little authority for any such distinction, and there is certainly none for
Page 17
its application as a key to a resolution of issues of attribution in the context
of illegality. Its origin in that context lies in a concession by counsel (Mr
Jonathan Sumption QC), no doubt tactically well-judged, in Stone & Rolls (p
1443B-C). The only member of the House who referred to this concession as
a requirement, along with turpitude, of an ex turpi causa defence was Lord
Phillips, but he did so expressly on the basis that (para 24):
“Those … are valid qualifications to the defence of ex turpi
causa in the context in which it is raised on this appeal. They
are not, however, of general application to the defence of ex
turpi causa.”
49. As I have already noted in para 40 above, with reference to Ashmore, Benson,
it is not the law that the ordinary principles of attribution are replaced in the
case of a company, any more than they are in the case of an individual, by
some general principle that the only relevant conduct or state of mind is that
of someone who is or can be treated as an alter ego or directing mind and will
of the relevant company or individual. In his article Audit contracts and
turpitude, to which I have referred in para 46 above, at p 17, Professor Watts
says this about the way in which the concept of directing mind and will
entered the debate in Stone & Rolls:
“Their Lordships were drawn into recognising the mind-andwill concept by Mr Sumption QC’s concession on the auditor’s
behalf … that a claimant cannot be caught by the ex turpi causa
rule except as a result of his own conduct, ‘not conduct for
which he is vicariously liable or which is otherwise attributed
to him under principles of the law of agency’. This is simply
wrong. Generally speaking, the ex turpi causa rule will
preclude a principal from taking advantage of an agent’s illegal
acts (see eg Apthorp v Nevill (1907) 23 TLR 575 for a human
principal, and Ashmore, Benson Pease & Co Ltd v AV Dawson
Ltd [1973] 1 WLR 828 CA for a company). Nonetheless, as we
have noted, context is important with the ex turpi rule, and in
the case of contracts designed to deal with the risks of agents’
dishonesty (such as audit and insurance contracts) the law looks
to where guilt really lies.”
50. With regard to the three points for which Lord Sumption suggests in para 80
that Stone & Rolls is authority, it follows from what I have said in paras 48-
49 that I do not agree that the case is authority for the first point, viz that the
illegality defence is only available to a company where it is “directly” as
opposed to vicariously responsible for the illegality. As Professor Watts says,
Page 18
there are no doubt some limited contexts in which this may be the appropriate
analysis, but there is no such general rule. I agree with Lord Sumption’s
second point, viz that the House rejected the auditor’s argument that merely
because Mr Stojevic was the company’s mind and will and sole owner, his
conduct and state of mind should be attributed to Stone & Rolls in relation to
its claim against its auditors. I have already pointed out in para 46 above that
the majority was thereby at least accepting that context must have some
relevance. The third point appears a factually correct representation of the
outcome of Stone & Rolls, though the present appeal does not raise the
correctness in law of that outcome, which may one day fall for
reconsideration.
51. I turn to a defence of circuity of action which the appellants suggest arises on
this appeal. The claim against Jetivia and Mr Brunschweiler is that they
dishonestly assisted Mr Chopra’s and Mr Nazir’s breaches of duty towards
Bilta, or were co-conspirators with Mr Chopra and Mr Nazir. On the face of
it, Jetivia and Mr Brunschweiler cannot raise a defence of illegality if Mr
Chopra and Mr Nazir cannot. The suggestion is that Jetivia could have a
defence of circuity of action. This is, I understand, on the basis that any
liability on its part arose from a conspiracy between Bilta, through Mr Chopra
and Mr Nazir, and Mr Brunschweiler. Apart from this being unpleaded, I
cannot, at present at least, see how a company (here Jetivia) which is through
its director or other agent held liable to another company (here Bilta) for
dishonestly assisting or conspiring with the latter company’s directors or
agents to cause loss to the latter company can then turn round and say that it
has been damaged by the former company by the very liability which it has
incurred to the former company. That would turn the law governing dishonest
assistance and conspiracy on its head.
52. I sympathise with the views expressed by Lords Toulson and Hodge in paras
156-162 regarding the Court of Appeal decision in Safeway Stores Ltd v
Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 814, but any decision
about its correctness must be for another day, after full argument.
53. For the reasons given by Lords Sumption, Toulson and Hodge and again in
agreement with Lord Neuberger, I consider that section 213 of the Insolvency
Act 1986 has extra-territorial effect, and do not regard any reference to the
Court of Justice as necessary.
54. It follows that I also would dismiss the appeal.
Page 19
LORD SUMPTION:
55. The main issue on this appeal is the scope of the rule of public policy ex turpi
causa non oritur actio. “No court will lend its aid to a man who founds his
cause of action on an immoral or an illegal act”: Holman v Johnson (1775) 1
Cowp 34l, 343 (Lord Mansfield CJ). It is convenient to call this the illegality
defence, although the label is not entirely accurate for it also applies to a very
limited category of acts which are immoral without being illegal.
The proceedings
56. Bilta (UK) Ltd is an English company which was ordered to be wound up by
the High Court on 29 November 2009 on the application of Her Majesty’s
Revenue and Customs. Before that order was made, its sole directors were
Mr Chopra and Mr Nazir. Mr Chopra was also Bilta’s sole shareholder.
57. The present proceedings were brought by Bilta (through its liquidators)
against the two former directors and a Swiss company, Jetivia SA, together
with Jetivia’s chief executive Mr Brunschweiler. There are other defendants
also, but for present purposes they can be ignored. The appeal arises out of a
preliminary issue on the pleadings as between Bilta on the one hand and
Jetivia and Mr Brunschweiler on the other. In summary, Bilta’s pleaded
allegation is that between April and July 2009 the two directors caused Bilta
to engage in fraudulent trading in carbon credits (European Emissions
Trading Scheme Allowances) recorded on the Danish Emission Trading
Registry. The fraud was very simple. At the relevant time carbon credits
traded between parties both of whom were in the United Kingdom were
treated as taxable supplies subject to VAT at the standard rate of 15%, but if
either the buyer or the seller of the credit was outside the United Kingdom,
the sale was not subject to VAT. Bilta bought carbon credits free of VAT
from Jetivia. It resold them back-to-back to UK companies registered for
VAT. In most cases, the onsale price of the credits net of VAT was artificially
fixed at a level marginally below Bilta’s purchase price, thus enabling Bilta’s
UK buyer to sell them on at a small profit. The proceeds of Bilta’s sales,
together with the VAT thereon, were paid either to Bilta and then on to
Jetivia, or directly by the UK buyers to Jetivia or an offshore company called
THG. Since Bilta had no other business and no assets other than the cash
generated by its sales, the result was to make the company insolvent and to
generate a liability on Bilta’s part to account to HMRC which it was unable
to satisfy.
Page 20
58. As against the directors, Bilta’s claim is that in breach of their fiduciary duties
they organised and participated in a conspiracy to
“defraud and injure [Bilta] … by trading in carbon credits and
dealing with the proceeds therefrom in such a way as to deprive
[Bilta] of its ability to meet its VAT obligations on such trades,
namely to pass the money (which would otherwise have been
available to [Bilta] to meet such liability) to accounts offshore,
including accounts of Jetivia …” (Amended Particulars of
Claim, para. 14(a))
As against Jetivia and Mr Brunschweiler, the allegation is that they were (i)
liable as parties to the same conspiracy (ii) accountable as constructive
trustees on the footing of knowing assistance in the dishonest diversion of
book-debts due to Bilta. Jetivia, but not Mr Brunschweiler, is also said to be
liable to account on the footing of knowing receipt of the proceeds of those
book-debts. As against all parties, there is in addition a claim for fraudulent
trading under section 213 of the Insolvency Act 1986.
59. The victim identified in the pleading is Bilta. It is not in terms pleaded that it
was any part of the object of the scheme to defraud HMRC. Patten LJ in the
Court of Appeal considered that the case had to be decided without regard to
the possibility that HMRC were a victim. But that, with respect, seems
unrealistic. In Everet v Williams (1725), the famous case in which two
highwaymen sought an account of their partnership profits, they did not plead
the nature of their business. But that did not prevent the court from looking
through the gaps and circumlocutions to the substance of the transaction: see
(1893) 9 LQR 197. The substance of the transactions in issue on this appeal,
if the pleaded facts are true, is a fraud on HMRC, who will be the real losers.
The pleadings describe a classic “missing trader” fraud. Whether it was
technically a carousel fraud (in which the trader sells to a connected entity,
arranges for the latter to obtain a VAT refund, then pays away the VAT
collected and disappears) or the simpler so-called “acquisition fraud” where
he simply disappears without accounting for VAT, does not matter. The
common feature of both is the intention of the fraudster to collect VAT and
disappear before it can be accounted for, and this is the aspect of the scheme
which founds the pleaded case of conspiracy. The dishonesty alleged against
the directors consists wholly in their having removed assets of Bilta which
would otherwise have been available to pay creditors, in particular HMRC.
Page 21
The illegality defence
60. Although it begs many questions, the most succinct and authoritative
statement of the law remains that of Lord Mansfield CJ in Holman v Johnson
(1775) 1 Cowp 34l, 343:
“No court will lend its aid to a man who founds his cause of
action on an immoral or an illegal act. If, from the plaintiff’s
own stating or otherwise, the cause of action appears to arise
ex turpi causa, or the transgression of a positive law of this
country, there the court says that he has no right to be assisted.
It is upon that ground the court goes; not for the sake of the
defendant, but because they will not lend their aid to such a
plaintiff. So if the plaintiff and defendant were to change sides,
and the defendant was to bring his action against the plaintiff,
the latter would then have the advantage of it; for where both
are equally in fault, potior est conditio defendentis.”
Thus stated, the law of illegality is a vindication of the public interest as
against the legal rights of the parties. The policy is one of judicial abstention,
by which the judicial power of the state is withheld where its exercise in
accordance with ordinary rules of private law would give effect to advantages
derived from an illegal act.
61. In the two centuries which followed Lord Mansfield’s apparently simple
proposition, it was among the most heavily litigated rules of common law,
and by the end of the twentieth century it had become encrusted with an
incoherent mass of inconsistent authority. The main reason for this was the
unfortunate tendency of the common law to fragmentation, as judges
examined each case in its own factual and legal context without regard to
broader legal principle. By the time that the illegality defence came before
the Court of Appeal in Euro-Diam Ltd v Bathurst [1990] 1 QB 1, the law of
illegality had generated a mass of sub-rules, each appropriate to its own
context, a state of affairs which necessarily gave rise to difficulty when the
law had to be applied to situations which were either new or not classifiable
according to existing categories. The Court of Appeal resolved this problem
by treating the whole body of authority as illustrative of a process which was
essentially discretionary in nature. Kerr LJ, delivering the only reasoned
judgment, expressed that principle at p 35 by saying that the test was whether
“in all the circumstances it would be an affront to the public
conscience to grant the plaintiff the relief which he seeks
Page 22
because the court would thereby appear to assist or encourage
the plaintiff in his illegal conduct or to encourage others in
similar acts.”
That question, he suggested, needed to be approached “pragmatically and
with caution, depending on the circumstances”. This view of the law was
unanimously rejected by the House of Lords four years later in Tinsley v
Milligan [1994] 1 AC 340. Lord Goff of Chievely, delivering the leading
judgment on this point, said that it
“would constitute a revolution in this branch of the law, under
which what is in effect a discretion would become vested in the
court to deal with the matter by the process of a balancing
operation, in place of a system of rules ultimately derived from
the principle of public policy enunciated by Lord Mansfield CJ
in Holman v Johnson.” (p 363B).
62. The Law Commission struggled valiantly with the issue in the early years of
this century, and at one point proposed a structured statutory discretion of the
kind which has been adopted in New Zealand. It abandoned this proposal in
the expectation that the courts would reintroduce a measure of the flexibility
which Tinsley v Milligan had rejected. But Tinsley v Milligan is binding
authority, subject to review in this court, and in the twenty years since it was
decided, the highest court has never been invited to overrule it. In those
circumstances, the law has moved in a different direction, accepting that the
illegality defence depends on a rule of law which applies regardless of the
equities of any particular case but seeking to rationalise an area that has
generated a perplexing mass of inconsistent case-law. In its recent decision
in Les Laboratoires Servier v Apotex Inc [2014] UKSC 55; [2014] 3 WLR
1257 at paras 19-20, this court reaffirmed the principle that the illegality
defence is based on a rule of law on which the court is required to act, if
necessary of its own motion, in every case to which it applies. It is not a
discretionary power on which the court is merely entitled to act, nor is it
dependent upon a judicial value judgment about the balance of the equities
in each case: In the light of the rejection of the public conscience test, it is
incumbent on the courts to devise principled answers which are no wider than
is necessary to give effect to the policy stated by Lord Mansfield and are
certain enough to be predictable in their application.
63. In Les Labratoires Servier, it was pointed out that the illegality defence
commonly raised three questions: (i) what are the “illegal or immoral acts”
which give rise to the defence? (ii) what relationship must those acts have to
the claim? (iii) on what principles should the illegal or immoral acts of an
Page 23
agent be attributed to his principal, especially when the principal is a
company? Les Laboratoires Servier was about the first of the three questions.
It is authority for the proposition that the illegality defence is potentially
engaged by any act of the claimant which is criminal or dishonest or falls into
a limited number of closely analogous categories. It is not disputed that the
acts alleged in this case were of that kind. Various tests have been proposed
for the connection which the law requires between the illegal act and the
claim, but it has not been disputed that any of them would be satisfied on the
facts alleged in this case. It is obvious, and apparent from the pleadings, that
the claim against both the directors and Jetivia is directly founded on the VAT
frauds.
64. The sole question on this part of the appeal is therefore the third. As applied
to the present case, it is whether the dishonesty which engages the illegality
defence is to be attributed to Bilta for the specific purpose of defeating its
claim against the directors and their alleged co-conspirators. The question is
whether the defence is available to defeat an action by a company against the
human agent who caused it to act dishonestly for damages representing the
losses flowing from that dishonesty. The Chancellor of the High Court and
Court of Appeal both held that it was not. While there are dicta in the
judgments below, especially in the Court of Appeal, which range wider than
is really necessary, their essential reason was the same, namely that the agent
was not entitled to attribute his own dishonesty to the company for the
purpose of giving himself immunity from the ordinary legal consequences of
his breach of duty. For reasons which I shall explain below, I think that the
courts below were right about that, and I understand that view to be shared
by every other member of the court.
Attribution
65. English law might have taken the position that a company, being an artificial
legal construct, was mindless. If it had done that, then legal wrongs which
depended on proof of some mental element such as dishonesty or intention
could never be attributed to a company and the present question could not
arise. In the early years of English company law, there were powerful voices
which denied that a tort dependent on proof of a mental element could be
committed by a company. For many years this view was principally
associated with Lord Bramwell, who in a well-known dictum in Abrath v
North Eastern Railway Co [1886] 11 App Cas 247, 250-251, declared that a
fictitious person was “incapable of malice or of motive” even if the whole
body of its directors or shareholders in general meeting approved its acts for
improper reasons. This question was, however, settled as far as English civil
law was concerned by the end of the nineteenth century. As Lord Lindley put
it in Citizens’ Life Assurance Co Ltd v Brown [1904] AC 423, 426, once
Page 24
companies were recognised by the law as legal persons, they were liable to
have the mental states of agents and employees such as dishonesty or malice
attributed to them for the purpose of establishing civil liability. In the criminal
law, the notion that a corporation was incapable of committing an offence
requiring mens rea persisted rather longer. It was asserted in both the first
edition (1909) and the second edition (1933) of Halsbury’s Laws of England.
But it was rejected in a series of decisions in 1944: see Director of Public
Prosecutions v Kent and Sussex Contractors Ltd [1944] KB 146; R v ICR
Haulage Ltd [1944] KB 551; Moore v I Bresler Ltd [1944] 2 All ER 515. It
is now well established that a company can be indicted for conspiracy to
defraud (R v ICR Haulage Ltd [1944] KB 551) or manslaughter before statute
intervened in 2007 (Attorney-General’s Reference (No 2 of 1999) [2000] QB
796), provided that an agent with the relevant state of mind can be sufficiently
identified with it. It cannot be emphasised too strongly that neither in the civil
nor in the criminal context does this involve piercing the corporate veil. It is
simply a recognition of the fact that the law treats a company as thinking
through agents, just as it acts through them.
66. It follows that in principle, the illegality defence applies to companies as it
applies to natural persons. This is the combined effect of the company’s legal
personality and of the attribution to companies of the state of mind of those
agents who for the relevant purpose can be said to think for it. But the
principles can only apply to companies in modified form, for they are
complex associations of natural persons with different interests, different
legal relationships with the company and different degrees of involvement in
its affairs. A natural person and his agent are autonomous in fact as well as
in law. A company is autonomous in law but not in fact. Its decisions are
determined by its human agents, who may use that power for unlawful
purposes. This gives rise to problems which do not arise in the case of
principals who are natural persons.
67. The question what persons are to be so far identified with a company that
their state of mind will be attributed to it does not admit of a single answer.
The leading modern case is Meridian Global Funds Management Asia Ltd v
Securities Commission [1995] 2 AC 500. The primary rule of attribution is
that a company must necessarily have attributed to it the state of mind of its
directing organ under its constitution, ie the board of directors acting as such
or for some purposes the general body of shareholders. Lord Hoffmann,
delivering the advice of the Privy Council, observed that the primary rule of
attribution together with the principles of agency and vicarious liability
would ordinarily suffice to determine the company’s rights and obligations.
However, they would not suffice where the relevant rule of law required that
some state of mind should be that of the company itself. He explained, at p
507:
Page 25
“This will be the case when a rule of law, either expressly or
by implication, excludes attribution on the basis of the general
principles of agency or vicarious liability. For example, a rule
may be stated in language primarily applicable to a natural
person and require some act or state of mind on the part of that
person “himself” as opposed to his servants or agents. This is
generally true of rules of the criminal law, which ordinarily
impose liability only for the actus reus and mens rea of the
defendant himself.”
The directing organ of the company may expressly or implicitly have
delegated the entire conduct of its business to the relevant agent, who is
actually although not constitutionally its “directing mind and will” for all
purposes. This was the situation in the case where the expression “directing
mind and will” was first coined, Lennard’s Carrying Co Ltd v Asiatic
Petroleum Co Ltd [1915] AC 705. Such a person in practice stands in the
same position as the board. The special insight of Lord Hoffmann, echoing
the language of Lord Reid in Tesco Supermarkets Ltd v Nattrass [1972] AC
153, 170, was to perceive that the attribution of the state of mind of an agent
to a corporate principal may also be appropriate where the agent is the
directing mind and will of the company for the purpose of performing the
particular function in question, without necessarily being its directing mind
and will for other purposes.
“This is always a matter of interpretation: given that it was
intended to apply to a company, how was it intended to apply?
Whose act (or knowledge, or state of mind) was for this
purpose intended to count as the act etc. of the company? One
finds the answer to this question by applying the usual canons
of interpretation, taking into account the language of the rule
(if it is a statute) and its content and policy.” (p 507, and see pp
509-511)
68. A modern illustration of the attribution of knowledge to a company on the
basis that its agent was its directing mind and will for all purposes is Royal
Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378, where the Privy Council
was concerned with the knowledge required to make a company liable as a
constructive trustee on the footing of knowing assistance in a dishonest
breach of trust. The defendants were a one-man company, BLT, and the one
man, Mr Tan. At pp 392-393, Lord Nicholls, delivering the advice of the
Board, observed that Mr Tan had known the relevant facts and was therefore
liable. “By the same token, and for good measure, BLT also acted
dishonestly. Mr Tan was the company and his state of mind is to be imputed
to the company”. On the other hand, El Ajou v Dollar Land Holdings Ltd
Page 26
[1994] 2 All ER 685 did not concern a one-man company. The issue was
whether knowledge of the origin of funds received for investment by Dollar
Land Holdings, a public company, could be imputed to it so as to found a
liability to account as a constructive trustee on the footing of knowing receipt.
Lord Hoffmann, delivering the leading judgment of the Court of Appeal and
applying the principles which he would later explain in Meridian Global,
held that the company was fixed with the knowledge of one Mr Ferdman, its
part-time chairman and a non-executive director, because he had acted as its
directing mind and will for the particular purpose of arranging its receipt of
the tainted funds.
69. These refinements can give rise to nice questions of fact. But their application
in a case like the present one is perfectly straightforward. On the pleaded
facts, Mr Chopra and Mr Nazir were the directing organ of Bilta under its
constitution. They constituted the board. Mr Chopra was also the sole
shareholder. As between Bilta and Jetivia it is common ground on the
pleadings that they were the “directing mind and will” of Bilta for all
purposes, and certainly in relation to those of its functions which are relevant
in these proceedings.
70. The search for a test of a company’s direct or “personal” liability has
sometimes been criticised as a distraction or an artificial anthropomorphism,
and it is certainly true that English law might have developed along other
lines. As it is, the distinction between a liability which is direct or “personal”
and one which is merely vicarious is firmly embedded in our law and has had
a considerable influence on the way it has developed in relation to both kinds
of liability. Vicarious liability does not involve any attribution of wrongdoing
to the principal. It is merely a rule of law under which a principal may be held
strictly liable for the wrongdoing of someone else. This is one reason why
the law has been able to impose it as broadly as it has. It extends far more
widely than responsibility under the law of agency: to all acts done within the
course of the agent’s employment, however humble and remote he may be
from the decision-making process, and even if his acts are unknown to the
principal, unauthorised by him and adverse to his interest or contrary to his
express instructions (Lloyd v Grace Smith & Co [1912] AC 716), indeed even
if they are criminal (Lister v Hesley Hall Ltd [2002] 1 AC 215). Personal or
direct liability, on the other hand, has always been fundamental to the
application of rules of law which are founded on culpability as opposed to
mere liability. One example, as Lord Hoffmann pointed out in Meridian
Global, is provided by the rules governing criminal responsibility, which do
not usually recognise vicarious responsibility. Another is the class of
statutory provisions dependent on a company’s personal misconduct, such as
a shipowner’s right to limit his liability for a loss which is not attributable to
his “personal act or omission”: see article 4 of the Convention on Limitation
Page 27
of Liability for Maritime Claims (1976) (Merchant Shipping Act 1995,
Schedule 7, Part I), a principle derived from the nineteenth century Merchant
Shipping Acts of the United Kingdom. A third example is provided by the
illegality defence, which the House of Lords held in Stone & Rolls v Moore
Stephens [2009] 1 AC 1391 to apply only to direct and not to vicarious
responsibility. It is, for example, the reason why public policy precludes
recovery under a liability policy in respect of a criminal act where the
insured’s liability is personal or direct, but not where it is purely vicarious:
Lancashire County Council v Municipal Mutual Insurance Ltd [1997] QB
897, 907. As cases like this illustrate, if the illegality defence were to be
engaged merely by proof of a purely vicarious liability, it would apply
irrespective of any question of attribution, to any case in which the human
wrongdoer was acting within the scope of his employment. This would
extend the scope of the defence far more widely than anything warranted by
the demands of justice or the principle stated by Lord Mansfield. On the
footing that the attribution of culpability is essential to the defence, the
concept of a “directing mind and will” remains valuable. It describes a person
who can be identified with the company either generally or for the relevant
purpose, as distinct from one for whose acts the company is merely
vicariously liable.
The exception: breach of the agent’s duty to the company
71. Bilta’s answer to this, which was accepted by both the judge and the Court
of Appeal, is that the dishonesty of Mr Chopra and Mr Nazir is not to be
attributed to Bilta, because in an action for breach of duty against the
directors there cannot be attributed to the company a fraud which is being
practised against it by its agent, even if it is being practised by a person whose
acts and state of mind would be attributable to it in other contexts. It is
common ground that there is such a principle. It is commonly referred to as
the fraud exception, but it is not limited to fraud. It applies in certain
circumstances to prevent the attribution to a principal of his agent’s
knowledge of his own breach of duty even when the breach falls short of
dishonesty. In the context of the illegality defence, which is mainly concerned
with dishonest or criminal acts, this exception from normal rules of
attribution will normally arise when it is sought to attribute to a principal
knowledge of his agent’s fraud or crime but that is not inherent in the
underlying principle. I shall call it the “breach of duty exception”.
72. The breach of duty exception is commonly referred to as the Hampshire Land
principle, after the judgment of Vaughan Williams J in In re Hampshire Land
[1896] 2 Ch 743. This case did not involve any allegation of fraud. The facts
were that the Hampshire Land Company had borrowed money from a
building society. The borrowing required the authority of the shareholders in
Page 28
general meeting, but their authority, although it was given, was vitiated by
defects in the notice by which it was summoned. The issue was whether a
building society was affected by notice of the irregularity so as to be
prevented from relying on the internal management rule. The contention was
that the building society was on notice because its secretary happened also to
be the secretary of the borrower, and in the latter capacity he knew the facts.
In the course of discussing that question, the judge observed at p 749:
“If Wills had been guilty of a fraud, the personal knowledge of
Wills of the fraud that he had committed on the company would
not have been knowledge of the society of the facts constituting
that fraud; because common sense at once leads one to the
conclusion that it would be impossible to infer that the duty
either of giving or receiving notice will be fulfilled where the
common agent is himself guilty of fraud.”
73. Vaughan Williams J’s dictum was subsequently adopted by two members of
the House of Lords in Houghton & Co v Nothard, Lowe & Wills [1928] AC
1, where the issue was whether a company was bound by an arrangement
adverse to the company’s interest which had been made by two of its directors
for their own benefit and was never approved by the board. It was contended
that the knowledge of the two directors could be attributed to the company
so as to found a case of acquiescence. Viscount Dunedin (at p 14) summarily
rejected the suggestion that the company could be treated as knowing about
a director’s breach of duty by virtue only of the knowledge of the defaulting
director himself:
“My Lords, there can obviously be no acquiescence without
knowledge of the fact as to which acquiescence is said to have
taken place. The person who is sought to be estopped is here a
company, an abstract conception, not a being who has eyes and
ears. The knowledge of the company can only be the
knowledge of persons who are entitled to represent the
company. It may be assumed that the knowledge of directors is
in ordinary circumstances the knowledge of the company. The
knowledge of a mere official like the secretary would only be
the knowledge of the company if the thing of which knowledge
is predicated was a thing within the ordinary domain of the
secretary’s duties. But what if the knowledge of the director is
the knowledge of a director who is himself particeps criminis,
that is, if the knowledge of an infringement of the right of the
company is only brought home to the man who himself was the
artificer of such infringement? Common sense suggests the
answer, but authority is not wanting.”
Page 29
He then cited the dictum of Vaughan Williams J. Lord Sumner agreed,
observing (p 19) that it would be “contrary to justice and common sense to
treat the knowledge of such persons as that of their company, as if one were
to assume that they would make a clean breast of their delinquency”.
74. These dicta are concerned only with the attribution of knowledge. The
argument which they reject is that there is no breach of duty because the
company must be deemed to know the facts and therefore cannot be misled
or must be supposed to have consented. They are not concerned with the
ambit of the illegality defence or the breach of duty exception to it. For the
first full consideration of the exception, one must move forward seven
decades to the decision of the Court of Appeal in Belmont Finance Ltd v
Williams Furniture Ltd [1979] Ch 250, which is the starting point for the
modern law. That case arose out of an elaborate scheme, to which Belmont’s
directors were party, to extract value from Belmont by causing it to buy the
shares of a company called Maximum at a considerable overvalue. This was
a breach of the fiduciary duties of the directors. Their object was to recycle
the profit on the sale of Maximum so that it could be used to fund the purchase
by three companies associated with the directors of Belmont’s own shares.
This was not only a breach of the directors’ fiduciary duty but a criminal
contravention of what was then section 54 of the Companies Act 1948.
Belmont subsequently went into liquidation, and an action was brought in its
name by receivers for damages for breach of duty against the directors who
had authorised the transaction, and for an account on the footing of knowing
receipt against the three companies. The plaintiff was met by the illegality
defence. The judge dismissed the action at the close of the plaintiff’s case on
that ground, holding that the company was a party to the conspiracy. This
was because it must be taken to have known, through its directors, that the
asset was over-valued and that the purpose of the transaction was to fund the
purchase of Belmont’s shares. Reversing the judge, Buckley LJ said (pages
261-262):
“But in my view such knowledge should not be imputed to the
company, for the essence of the arrangement was to deprive the
company improperly of a large part of its assets. As I have said,
the company was a victim of the conspiracy. I think it would
be irrational to treat the directors, who were allegedly parties
to the conspiracy, notionally as having transmitted this
knowledge to the company; and indeed it is a well-recognised
exception from the general rule that a principal is affected by
notice received by his agent that, if the agent is acting in fraud
of his principal and the matter of which he has notice is relevant
to the fraud, that knowledge is not to be imputed to the
principal. So in my opinion the plaintiff company should not
Page 30
be regarded as a party to the conspiracy, on the ground of lack
of the necessary guilty knowledge.”
75. In Attorney-General’s Reference (No 2 of 1982) [1984] 1 QB 624 two men
were charged with theft from a company which they wholly owned and
controlled. The issue was whether, for the purpose of section 2(1)(b) of the
Theft Act 1968, they had appropriated the property of another “in the belief
that [they] would have the other’s consent if the other knew of the
appropriation and the circumstances of it”. The argument was that they must
have had that belief because the company had no other will than theirs, so
that it must be taken to consent to whatever they consented to. This argument
had been accepted by the trial judge but it failed in the Court of Appeal for
two reasons. One turned on the construction of the Theft Act and is of no
present relevance. The other was that the decision in Belmont Finance
“directly contradicts the basis of the defendants’ argument in the present case.
There can be no reason, in our view, why the position in the criminal law
should be any different”.
76. In Brink’s Mat v Noye [1991] 1 Bank LR 68, gold had been stolen from
Brink’s Mat’s warehouse and delivered to a company called Scadlynn to be
melted down, recast and sold. The directors and sole shareholders of
Scadlynn, who were well aware that the gold was stolen, caused the proceeds
to be paid into the company’s bank account and then paid away, thus leaving
it without assets to meet its liabilities to Brink’s Mat. The appeal arose out of
an application by Brink’s Mat to amend the pleadings so as to add a number
of claims against the bank. The proposed amendments proceeded on the basis
that since the payments into Scadlynn’s bank account represented property
to which Brink’s Mat was beneficially entitled, it was entitled to enforce
Scadlynn’s rights against the bank. It was alleged that the bank was liable to
Scadlynn as a constructive trustee on the footing of knowing receipt and that
Brink’s Mat was entitled to enforce that liability for its own benefit. One of
the issues which arose was whether Scadlynn would have been precluded
from advancing a claim against the bank because it had known (through its
directors) about the origin of the gold. Mustill LJ, rejecting this argument,
considered that “the corporate entity named Scadlynn was, however, odd the
notion may seem at first sight, the victim of wrongful arrangements to deprive
it improperly of a large part of its assets”: p 72. Nicholls LJ, agreeing,
observed (p 73):
“On the facts alleged in the proposed amendments, Scadlynn
was at all material times being used by Chappell and Palmer
and others for a fraudulent purpose, viz, to realize the proceeds
of sale of the robbery. But the plaintiff was not implicated in
any such fraudulent purpose. On the contrary, along with the
Page 31
owners of the gold, the plaintiff was the intended victim of the
scheme. Likewise, Scadlynn itself was an intended victim, in
that Scadlynn was being used as a vehicle for committing a
fraud on its creditors and a fraud on those beneficially
interested in property held by Scadlynn. In those circumstances
the fraudulent purposes of those controlling Scadlynn are not
to be imputed to the company itself: see Belmont Finance
Corporation Ltd v Williams Furniture Ltd [1979] Ch 250, per
Buckley LJ at pp 261-262.”
77. Arab Bank v Zurich Insurance [1999] 1 Lloyd’s Rep 262 was a decision of
Rix J arising out of a claim under the Third Parties (Rights against Insurers)
Act 1930 against the liability insurer of a valuer. The valuer was alleged to
have issued fraudulent valuations to induce banks to lend money to third
parties. The valuations had been issued by a Mr Browne, who was the
managing director and also a personal assured. The insurer defended the
claim on the ground that the company was not entitled to indemnity under the
policy because Browne’s dishonesty was attributable to it by virtue of his
knowledge. Rix J thought that Browne would on ordinary principles of
attribution have been treated as the directing mind and will of the valuer for
the relevant purpose (pp 278-279). But he rejected the illegality defence
because it was inconsistent with the terms of the contract of insurance under
which Mr Browne and the company were separately insured each for his own
interest (pp 272-273). It followed that only Mr Browne would be precluded
from recovering. The attribution of his knowledge to the company would be
contrary to the agreement to insure their interests separately. The company’s
liability was therefore purely vicarious. Having made these points, Rix J dealt
briefly (and obiter) at p 282 with the question of attribution. He said that
although Browne’s valuations were frauds on the lending banks, the valuer
itself should be treated as a “secondary victim”, first because Browne’s
frauds exposed it to liability to the banks, and secondly because Browne’s
conduct involved “such a breach of duty to [the valuer] as in justice and
common sense must entail that it is impossible to infer that the knowledge of
his own dishonesty was transferred to [the valuer].” He thought that the
position might well be different in the case of a one-man company.
78. McNicholas Construction Co Ltd v Customs & Excise Commissioners [2000]
STC 553 arose out of a classic VAT fraud against the Customs and Excise.
The fraudsters submitted invoices to McNicholas for VAT in respect of nonexistent goods and services. The company’s site managers, who were in
league with them, procured the VAT to be paid to them. The VAT was then
reclaimed as input tax from the Customs and Excise. The scheme inflicted a
loss on the Customs & Excise but the net financial effect on the company was
neutral. The Customs & Excise claimed statutory penalties on the basis that
Page 32
that the company’s conduct was dishonest. This case was simply about
attribution. The illegality defence did not arise, for McNicholas was claiming
nothing. Dyson J held that as a matter of construction the statute implicitly
fixed the company with the knowledge of those of its employees who handled
its VAT payments, including the site managers. The company argued that
knowledge of the fraud should nevertheless not be imputed to it because it
was a victim of the fraud, which exposed it to statutory penalties. Rejecting
this argument (at paras 55-56), the judge said:
“In my judgment, the tribunal correctly concluded that there
should be attribution in the present case, since the company
could not sensibly be regarded as a victim of the fraud. They
were right to hold that the fraud was “neutral” from the
company’s point of view. The circumstances in which the
exception to the general rule of attribution will apply are where
the person whose acts it is sought to impute to the company
knows or believes that his acts are detrimental to the interests
of the company in a material respect … It follows that, in
judging whether a company is to be regarded as the victim of
the acts of a person, one should consider the effect of the acts
themselves, and not what the position would be if those acts
eventually prove to be ineffective. As the tribunal pointed out,
in Director General of Fair Trading v Pioneer Concrete (UK)
Ltd [1995] 1 AC 456 the company suffered a large fine for
contempt of court on account of the wrongful acts of its
managers. The fact that their wrongful acts caused the company
to suffer a financial penalty in this way did not prevent the acts
and knowledge of the managers from being attributed to it. The
[breach of duty exception] is founded in common sense and
justice. It is obvious good sense and justice that the act of an
employee should not be attributed to the employer company if,
in truth, the act is directed at, and harmful to, the interests of
the company. In the present case the fraud was not aimed at the
company. It was not intended by the participants in the fraud
that the interests of the company should be harmed by their
conduct.”
The Court of Appeal approved this reasoning in rejecting a somewhat similar
argument in Bank of India v Morris [2005] BCC 739. The facts of this case,
baldly summarised, were that BCCI had placed deposits with Bank of India
on unusual terms as part of a scheme to window-dress its accounts at the yearend. The liquidators of BCCI brought proceedings against Bank of India
under section 213 of the Insolvency Act on the ground that it had been
knowingly party to the carrying on of business by BCCI with intent to
Page 33
defraud. The judge found that the general manager of the Bank of India had
deliberately turned a blind eye to what was going on, and that his knowledge
was attributable to the bank. The bank advanced an argument somewhat
similar to that which had been advanced by McNicholas before Dyson J. The
Court of Appeal rejected it for the same reason, namely that the general
manager’s acts were not targeted at Bank of India: see paras 114-118.
79. This was the state of the authorities when Stone & Rolls v Moore Stephens
[2009] 1 AC 1391 came before the courts. Stone & Rolls was a company
created solely for the purpose of defrauding banks. It never did anything else.
The author of the frauds was a Mr Stojevic, its sole director, manager and
shareholder. The action was brought by the company at the instance of its
liquidators against the auditors on the basis that if they had exercised due skill
and care, they would have discovered that the company had no legitimate
business. The course of frauds against the bank would then have ceased
earlier than it actually did. They claimed the losses said to have been incurred
as the direct result of the company’s course of fraudulent behaviour
continuing for longer than it would otherwise have done. The House of Lords
held that the illegality defence applied and upheld the order of the Court of
Appeal striking out the proceedings. It is a difficult case to analyse, because
it was decided by a majority comprising Lord Phillips, Lord Walker and Lord
Brown and there are significant differences between the reasoning of Lord
Walker (with whom Lord Brown agreed) and Lord Phillips. But the fact that
they differed on critical points does not undermine the authority of their
speeches on those points on which they were agreed.
80. Lord Phillips and Lord Walker were agreed on three points for which the case
is accordingly authority. The first was that the illegality defence is available
against a company only where it was directly, as opposed to vicariously,
responsible for it: see Lord Phillips at paras 27-28. Lord Walker refers to this
at paras 132-133 and must have taken the same view, for if vicarious liability
was enough to engage the illegality defence the attribution of Mr Stojevic’s
knowledge to the company (with which the whole of the rest of his speech is
concerned) would have been irrelevant. This is because the company was
vicariously liable for Mr Stojevic’s defaults whether or not it was treated as
privy to them. Secondly, the majority was agreed in rejecting the primary
argument of the auditors that once it was shown that the directing mind and
will of a company (whether generally or for the relevant purpose) had caused
it to defraud a third party and that the company was relying on that fraud to
found its cause of action, the illegality defence necessarily barred the claim.
Both Lord Phillips (para 63) and Lord Walker (para 173) rejected this
submission as too broad, because it would involve the attribution of the
agent’s dishonesty to the company even if there were innocent directors or
shareholders. Accordingly, both of them regarded it as critical that Stone &
Page 34
Rolls was a “one-man company”, ie a company in which, whether there was
one or more than one controller, there were no innocent directors or
shareholders. Third, Lord Phillips and Lord Walker were agreed that, as
between a “one-man” company and a third party, the latter could raise the
illegality defence on account of the agent’s dishonesty, at any rate where it
was not itself involved in the dishonesty.
81. There are difficulties about treating Stone & Rolls as authority for any wider
principles than these. There are two main reasons for this. The first is that
Lord Phillips and Lord Walker differed in their reasons for holding that the
illegality defence could be taken against a one-man company. Lord Walker
adopted the “sole actor” principle, a label which he derived from the caselaw of the United States, but which he supported by reference to ordinary
principles of English company law. Lord Phillips on the other hand was
guided by the principle that a loss is recoverable only if the relevant duty was
to protect against loss of that kind: South Australia Asset Management
Corporation v York Montague Ltd [1997] AC 191. He regarded this as
expressing a rule of policy, which led him to conclude that Mr Stojevic
constituted the entire constituency whose interests the auditors were bound
to protect. It followed in his opinion that there was no reason not to attribute
his state of mind to the company for the purposes of the illegality defence.
The second reason is that Lord Phillips’s view that it was no part of the
purpose of an audit report to protect the interests of current or prospective
creditors was peculiarly his own. Although Lord Walker agreed with it (see
para 168), the proposition was not part of his reasoning on the impact of
illegality. This has proved more controversial than any other feature of the
reasoning in the case: see, for example, E Ferran, “Corporate attribution and
the directing mind and will” (2011) 127 LQR 239, paras 251-257. The scope
of an auditor’s duty and its relationship to the illegality defence may one day
need to be revisited by this court, but it is not an issue in this appeal.
Application to claims by the company against the defaulting agent
82. The real issue in the present case is a different one. Does the illegality defence
bar a claim by the company against the dishonest agent who procured the
fraud, in the same way as it bars a claim by the company against an honest
outsider who is said to be liable to indemnify them? In Stone & Rolls the
question whether the illegality defence would have been available to Mr
Stojevic to defeat an action by the company did not arise directly, but it was
considered by every member of the committee. Lord Phillips did not express
a concluded view. Lord Walker presumably thought that the company could
not have sued Mr Stojevic, since he regarded them as co-conspirators and
likened their case to an action for an account between highwaymen (paras
187-188). Lord Scott and Lord Mance thought that Mr Stojevic could not
Page 35
have raised the defence against the company. Since then the position as
between the company and its dishonest agent has reached the Court of Appeal
twice, in Safeway Stores Ltd v Twigger [2011] All ER 841, where the
illegality defence succeeded, and in the present case where it failed. The same
question was considered, although it did not arise directly, by the Court of
Final Appeal of Hong Kong in Moulin Global Eyecare Trading Ltd v
Commissioner of Inland Revenue FACV (No 5 of 2013) (decided on 13 March
2014), in which Lord Walker gave the leading judgment.
83. Safeway Stores was an action against a number of directors and senior
employees of a supermarket group who by exchanging pricing information
with competitors had caused the company to contravene section 2 of the
Competition Act 1998. Under section 36 of the Act, the company became
liable to a penalty, provided that the OFT was satisfied that it had committed
the infringement “intentionally or negligently”. Safeway was not a one-man
company, but the statutory scheme had the peculiarity, which was critical to
the reasoning of the Court of Appeal, that the offence was not capable of
being committed by the individuals directly responsible. The Act imposed
the prohibition and the resulting penalty only on the company. It was held
that this required the attribution of the infringement to the company and its
non-attribution to the defendants. On that ground, it was held that to apply
the breach of duty exception so as to allow recovery of the penalty from the
defendants would be inconsistent with the statutory scheme. The decision is
not authority for any proposition applying more generally.
84. In the present case, the Court of Appeal dealt with the question as a matter of
general principle and reached a different conclusion. Patten LJ, delivering the
leading judgment, considered that the answer depended on the duty which
was sought to be enforced and the parties between whom the issue was raised.
In an action against the company by a third party who had been defrauded,
the company was responsible. But it did not follow that the company was to
be treated as responsible for a fraud for the purposes of an action against the
dishonest director. In such an action, the illegality defence cannot be
available, whether the damages claimed arose from the liability which the
company was caused to incur to a third party or from the direct abstraction of
the company’s assets. Patten LJ’s reasoning on these points is encapsulated
in paras 34 and 35 of his judgment:
“34. …attribution of the conduct of an agent so as to create a
personal liability on the part of the company depends very
much on the context in which the issue arises. In what I propose
to refer to as the liability cases like El Ajou, Tan, McNicholas
and Morris, reliance on the consequences to the company of
attributing to it the conduct of its managers or directors is not
Page 36
enough to prevent attribution because, as Mummery LJ pointed
out, it would prevent liability ever being imposed. As between
the company and the defrauded third party, the former is not to
be treated as a victim of the wrongdoing on which the third
party sues but one of the perpetrators. The consequences of
liability are therefore insufficient to prevent the actions of the
agent being treated as those of the company. The interests of
the third party who is the intended victim of the unlawful
conduct take priority over the loss which the company will
suffer through the actions of its own directors.
35. But, in a different context, the position of the company as
victim ought to be paramount. Although the loss caused to the
company by its director’s conduct will be no answer to the
claim against the company by the injured third party, it will and
ought to have very different consequences when the company
seeks to recover from the director the loss which it has suffered
through his actions. In such cases the company will itself be
seeking compensation by an award of damages or equitable
compensation for a breach of the fiduciary duty which the
director or agent owes to the company. As between it and the
director, it is the victim of a legal wrong. To allow the
defendant to defeat that claim by seeking to attribute to the
company the unlawful conduct for which he is responsible so
as to make it the company’s own conduct as well would be to
allow the defaulting director to rely upon his own breach of
duty to defeat the operation of the provisions of sections 172
and 239 of the Companies Act whose very purpose is to protect
the company against unlawful breaches of duty of this kind. For
this purpose and (it should be stressed) in this context, it ought
therefore not to matter whether the loss which the company
seeks to recover arises out of the fraudulent conduct of its
directors towards a third party (as in McNicholas and Morris)
or out of fraudulent conduct directed at the company itself
which the Chancellor accepted was what is alleged in the
present case. There is a breach of fiduciary duty towards the
company in both cases.”
Patten LJ declined to apply the sole actor principle for two reasons. First, he
considered that it had no place in the context of a claim by the company
against the fraudulent director, because it would be inconsistent with the duty
of the directors to have regard to the interests of creditors and to the statutory
restrictions on the ratification of breaches of the duty of directors. Secondly,
he regarded it as having the support of only Lord Walker and Lord Brown in
Page 37
Stone & Rolls and did not accept that it was “now an established feature of
English law for all purposes”.
85. Moulin Global Eyecare Trading Ltd FACV (No 5 of 2013) was an application
for judicial review of the decision of the Hong Kong Commissioner of Inland
Revenue to reject a claim by Moulin for the repayment of tax overpaid in a
previous years of assessment. Repayment had been claimed on the ground
that the company’s profits for the reference year had been fraudulently
inflated by certain of its then directors. The Commissioner contended that no
repayment could be claimed because the dishonesty of the directors was
attributable to the company. In the Court of Final Appeal the claim failed
because neither of the two provisions of the Inland Revenue Ordinance relied
upon applied as a matter of construction. For present purposes, the relevant
provision was section 70A which provided for the reopening of an assessment
on the ground of “error”. Lord Walker, with whom the majority of the court
agreed, held that there was no error because for the purpose of preparing the
company’s tax returns, its directing mind and will consisted of the two
directors who knew the facts and had deliberately falsified them. Their
dishonesty was therefore to be attributed to the company. “A deliberate lie is
not an ‘error’ for the purposes of that section.” Lord Walker considered that
the ordinary rules of attribution should apply unless the breach of duty
exception was engaged. He resiled from the view that he had expressed in
Stone & Rolls (at para 145) that the fraud exception applied generally to any
issue as to a company’s notice, knowledge or complicity. Reviewing the
authorities in the light of the Court of Appeal’s decision in the present case,
he concluded that the breach of duty exception was in fact of limited
application. Its rationale was to prevent the illegality defence from barring a
claim by a company against its own agents. He summarised the proper scope
of the exception as follows, in para 80:
“The situation to which it most squarely applies (and some
would say, the only situation to which it should properly be
applied) is where a director or senior employee of a company
seeks to rely on his own knowledge of his own fraud against
the company as a defence to a claim by the company against
him (or accomplices of his) for compensation for the loss
inflicted by his fraud. The injustice and absurdity of such a
defence is obvious, and for more than a century judges have
had no hesitation in rejecting it.”
It is clear that Lord Walker numbered himself among the “some” who would
say that this was the only situation in which the fraud exception should
properly be applied. At para 106(4) of his summary, he said:
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“The underlying rationale of the fraud exception is to avoid the
injustice and absurdity of directors or employees relying on
their own awareness of their own wrongdoing as a defence to a
claim against them by their own corporate employer.”
And at para. 106(6):
“But the exception does not apply to protect a company where
the issue is whether the company is liable to a third party for
the dishonest conduct of a director or employee.”
86. The problem posed by the authorities is that until the Court of Appeal’s
decision in this case, they have generally treated the imputation of dishonesty
to a company as being governed by tests dependent primarily on the nature
of the company’s relationship with the dishonest agent, the result of which is
then applied universally. This was the point made by Lord Walker in Stone
& Rolls at para 145, from which he resiled in Moulin. The fundamental point
made by the Court of Appeal in this case and the Court of Final Appeal in
Moulin is that, while the basic rules of attribution may apply regardless of the
nature of the claim or the parties involved, the breach of duty exception does
not. I agree with this. It reflects the fact that the rules of attribution are derived
from the law of agency, whereas the fraud exception, like the illegality
defence which it qualifies, is a rule of public policy. Viewed as a question of
public policy, there is a fundamental difference between the case of an agent
relying on his own dishonest performance of his agency to defeat a claim by
his principal for his breach of duty; and that of a third party who is not privy
to the fraud but is sued for negligently failing to prevent the principal from
committing it.
87. There are three situations in which the question of attribution may arise. First,
a third party may sue the company for a wrong such as fraud which involves
a mental element. Secondly, the company may sue either its directors for the
breach of duty involved in causing it to commit that fraud, or third parties
acting in concert with them, or (as in the present case) both. Third, the
company may sue a third party who was not involved in the directors’ breach
of duty for an indemnity against its consequences.
88. In the first situation, the illegality defence does not arise. The company has
no claim which could be barred, but is responding to a claim by the third
party. It will be vicariously liable for any act within the course of the relevant
agent’s employment, and in the great majority of cases no question will arise
of attributing the wrong, as opposed to the liability, to the company. Where
Page 39
the law requires as a condition of liability that that the company should be
personally culpable, as Lord Nicholls appears to have assumed it did in Royal
Brunei Airlines, the sole function of attribution is to fix the company with the
state of mind of certain classes of its agents for the purpose of making it
liable. The same is true in cases like McNicholas, involving statutory civil
penalties for quasi-criminal acts. It is also true of cases like El Ajou where
the relevant act (receipt of the money) was unquestionably done by the
company but the law required as a condition of liability that it should have
been done with knowledge of some matter. This will commonly be the case
with proprietary claims, where vicarious liability is irrelevant.
89. A claim by a company against its directors, on the other hand, is the paradigm
case for the application of the breach of duty exception. An agent owes
fiduciary duties to his principal, which in the case of a director are statutory.
It would be a remarkable paradox if the mere breach of those duties by doing
an illegal act adverse to the company’s interest was enough to make the duty
unenforceable at the suit of the company to whom it is owed. The reason why
it is wrong is that that 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. The
nature of the issue is therefore itself such as to prevent identification. In that
situation it is in reality the dishonest directors who are relying on their own
dishonesty to found a defence. The company’s culpability is wholly derived
from them, which is the very matter of which complaint is made.
90. This would be obvious if the company were suing the agent for a criminal or
dishonest act committed against it where there was no third party involved:
for example where the agent had embezzled the company’s funds and made
off with them. This was the situation before the Court of Appeal in AttorneyGeneral’s Reference (No 2 of 1982) [1984] 1 QB 624, when the notion of
attribution and the inference of consent were alike rejected. The position
would have been no different if consent had been more than an inference, for
example because the fraudsters had procured the company’s express consent
in their capacity as its sole directors or shareholders: see Prest v Prestodel
Resources Ltd [2013] 2 AC 415, 491. As Lord Browne-Wilkinson put it in
Director of Public Prosecutions v Gomez [1993] AC 442, 496-497,
“… it would offend both common sense and justice to hold that
the very control which enables such people to extract the
company’s assets constitutes a defence to a charge of theft from
the company. The question in each case must be whether the
extraction of the property from the company was dishonest, not
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whether the alleged thief has consented to his own
wrongdoing.”
Where the directors simply embezzle the company’s funds the question of
attribution arises but the illegality defence does not. There is no wrongdoing
by the company. But the analysis would be precisely the same if there were.
This was the position in Belmont Finance Ltd v Williams Furniture Ltd
[1979] Ch 250, where the directors’ scheme for abstracting the company’s
assets necessarily involved a criminal contravention by the company of the
Companies Act. The Court of Appeal declined to attribute knowledge of the
conspiracy to the company so as to make it party to the scheme. This was
because the company’s claim was against the directors who had authorised
the transaction. They could not raise the illegality defence by fixing the
company with knowledge of their own plans, for the same reason that the
defendants in Attorney-General’s Reference (No 2 of 1982) could not raise
the defence of consent on that basis. This is so whether the company is a oneman company or not, because the objection to the attribution of the culpable
directors’ state of mind to the company is that they are being sued for abusing
their powers. It is the same objection whether they were one, some or all of
the directors and whether or not they were also shareholders. In Belmont
Finance, it was held on appeal from the judgment after trial that the directors’
knowledge was not to be attributed to Belmont although the transaction was
formally approved by the Board and completed under the company’s seal:
see [1980] 1 All ER 393, 398. If the fraudulent agent cannot raise the defence
of illegality in these circumstances, the same must be true of third parties who
are under an ancillary liability for participating in the fraudulent agent’s
wrong: co-conspirators, aiders and abetters, knowing assisters and receivers,
and so on. That was the basis on which in Belmont Finance it was held that
the companies who sold the Maximum shares at an overvalue and acquired
Belmont’s shares were potentially liable along with the culpable directors of
Belmont.
91. The position is different where the company is suing a third party who was
not involved in the directors’ breach of duty for an indemnity against its
consequences. In the first place, the defendant in that case, although
presumably in breach of his own distinct duty, is not seeking to attribute his
own wrong or state of mind to the company or to rely on his breach of duty
to avoid liability. Secondly, as between the company and the outside world,
there is no principled reason not to identify it with its directing mind in the
ordinary way. For a person, whether natural or corporate, who is culpable of
fraud to say to an innocent but negligent outsider that he should have stopped
him in his dishonest enterprise is as clear a case for the application of the
illegality defence as one could have. Stone & Rolls was a case of just this
kind. Leaving aside the admittedly important question of the scope of an
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auditor’s duty, if the illegality defence had not applied in that case, it could
only have been because (i) the company was treated in point of law as a
mindless automaton, or (ii) the defence could never apply to companies even
in circumstances where it would have applied to natural persons. Neither
proposition is consistent with established principle.
92. The technique of applying the general rules of agency and then an exception
for cases directly founded upon a breach of duty to the company is a valuable
tool of analysis, but it is no more than that. Another way of putting the same
point is to treat it as illustrating the broader point made by Lord Hoffmann in
Meridian Global that the attribution of legal responsibility for the act of an
agent depends on the purpose for which attribution is relevant. Where the
purpose of attribution is to apportion responsibility between a company and
its agents so as to determine their rights and liabilities to each other, the result
will not necessarily be the same as it is in a case where the purpose is to
apportion responsibility between the company and a third party.
93. This makes it unnecessary to address the elusive distinction between primary
and secondary victimhood. That distinction could arise only if the application
of the breach of duty exception depended on where the loss ultimately fell,
or possibly on where the culpable directors intended it to fall. If, however,
the application of the exception depends on the nature of the duty and the
parties as between whom the question arises, the only question is whether the
company has suffered any loss at all.
Application to Bilta
94. As between Bilta and its former directors, the present action is brought to
recover compensation for breach of the duties which they owed to the
company. They are alleged to have broken those duties by causing it to
conduct its business in a manner calculated to prevent it from meeting its
obligation to account to HMRC for VAT. In particular, they are alleged to
have caused the proceeds of the sales to UK purchasers, together with the
VAT charged on them, to be paid out to Jetivia. Those proceeds were either
the property of Bilta (in those cases where they reached Bilta’s accounts), or
were owed to Bilta (in those cases where they were paid by the UK purchasers
directly to Jetivia). In either case, they represented assets of Bilta. Since the
issue thus stated arises directly between the company and its directors, the
fraud exception applies and the illegality defence cannot lie. Whether the
payment out to Jetivia of funds which may represent the fruits of the fraud is
truly a loss may well be a difficult question, but it is a different question
which will have to be examined in the light of all the facts at a trial. It does
not affect the application of the fraud exception.
Page 42
95. Jetivia and Mr Brunschweiler are in no different position from the directors,
since the claim against them is that they were party to the directors’
misfeasance. They are said to have participated in the conspiracy to defraud
Bilta, and to have knowingly assisted the directors’ breach of their fiduciary
duties. The claim against Jetivia for an account on the footing of knowing
receipt is likewise based on an allegation of participation in the directors’
misfeasance, since it is based on that company’s knowledge (through Mr
Brunschweiler) that the receipts represented assets of Bilta which the
directors had caused to be paid to Jetivia in breach of their fiduciary duties.
96. Before leaving these questions I should briefly refer to two further arguments
of the appellants. The first is that if Jetivia is liable to Bilta for conspiring
with Bilta’s directors, then Bilta is liable on the same basis to Jetivia for
conspiring with Mr Brunschweiler against Jetivia. The claim therefore fails
for circuity. The Court of Appeal ignored this ingenious and problematical
argument, and I would do so too. The facts which would be necessary to
found it are not agreed or even pleaded. The second argument is that Bilta
has suffered no loss because they had not been deprived of any assets that
they had legitimately acquired. In the words of Lord Phillips in Stone & Rolls,
at para 5, “if a person starts with nothing and never legitimately acquires
anything, he cannot realistically be said to have suffered any loss”. Lord
Walker (para 171) agreed. These observations were, however, made with
reference to the facts of that case, which had been found in great detail by
Toulson J in parallel proceedings between the defrauded banks and Stone &
Rolls. It is not in my opinion appropriate to examine how far they are
analogous to the facts of the present case at a stage of the proceedings when
those facts are far from clear.
97. For these reasons, which substantially correspond to those of the Court of
Appeal and those expressed by Lord Toulson and Lord Hodge in the second
part of their judgment (on attribution), I would dismiss the appeal on the
illegality defence. So far as that point is concerned, this is enough to decide
the present appeal.
Policy
98. I add to my judgment on this point only because Lord Toulson and Lord
Hodge would also decide the appeal on the ground that the application of the
illegality defence is inconsistent with a statutory policy requiring directors to
have regard to the interests of the creditors of an insolvent or prospectively
insolvent company. Since I am unwilling to follow them down that route, I
should briefly explain why.
Page 43
99. Given that the illegality defence is based on public policy, it is understandable
that policy should have been invoked in a number of academic and judicial
analyses of these problems. It is, however, important to bear in mind the
proper role of policy in the law of illegality, for arguments based upon it can
easily degenerate into the kind of discretionary weighing of the equities
which was rejected in Tinsley v Milligan and Les Laboratoires Servier v
Apotex Inc. The fact that the illegality defence is based on policy does not
entitle a court to reassess the value or relevance of that policy on a case-bycase basis. In a broad sense, any rule of law which imposes civil liability in
respect of a wrong may be described as a reflection of legal policy. It does
not follow that the courts may apply the illegality defence or not according
to the relative importance which they attach to the policy underlying it by
comparison with desirability of allowing an otherwise sound claim to
succeed. This was the essential problem about the reasoning of the Court of
Appeal in Les Laboratoires Servier, which explains why this court felt unable
to adopt that reasoning while arriving at the same result.
100. The illegality defence is based on the subordination of private rights and
liabilities to certain interests belonging to the public sphere. The underlying
rationale, as I sought to explain in Les Laboratoires Servier, at paras 23 and
25, is that the rights of private parties to remedies in private law may be
overridden if the claims based on them are founded on “acts which are
contrary to the public law of the state and engage the public interest”. These
are acts which engage what in French and other civil law systems would be
categorised as interests belonging to the ordre public or, as a writer has put
it, “that part of law that is not at the free disposition of private individuals”
(R de Lange, “The European Public Order”, Erasmus Law Review 3 (2007),
11). This is why a judge, as a public officer, may be required to take a point
on illegality of his own motion, contrary to the ordinary adversarial practice
of the English courts. And it is why ordinary private wrongs, sounding in tort
or contract, do not give rise to the illegality defence.
101. Courts normally examine the policy rationale of a rule of law in order to
discover what the rule is, not in order to decide whether they approve of its
application in a particular case. The scope for conflict between competing
public policies is therefore limited. It is, however, implicit in the reasoning
in Les Laboratoires Servier that there is one situation in which an
examination of competing policies may be required, and that is where a
competing public policy (as opposed to a competing legal interest) requires
the imposition of civil liability notwithstanding that the claim is founded on
illegal acts. A good example is a claim for damages for breach of EU or
national competition law, which may in certain circumstances succeed
notwithstanding that it is founded on a contract or other act which is unlawful:
Case C-453/99 ECR I-6314 Crehan v Courage Ltd at paras 34, 36; Crehan v
Page 44
Inntrepreneur Pub Co CPC [2004] 2 CLC 803 at paras 149-153. This was
because the correction by an award of damages of the economic effects of the
breach of public competition law is required in order to give effect to its
purpose.
102. More recently, a somewhat similar question came before this court in a very
different context in Hounga v Allen [2014] UKSC 47. This was a claim for
unlawful discrimination in relation to the claimant’s dismissal. Eighteen
months before her dismissal, Ms Hounga’s employer had conspired with her
to bring her into the United Kingdom under a false identity and had arranged
for her to receive a visitor’s visa for six months. The factual basis on which
the appeal was argued was that “by dismissing her Mrs Allen discriminated
against Miss Hounga in that on racial grounds, namely on ground of
nationality, she treated Miss Hounga less favourably than she would have
treated others”: see para 3. It was contended that in these circumstances the
claim was barred because it was founded on the illegal conspiracy. There was
no doubt that the relevant illegality constituted turpitude and no issue about
attribution. The question was whether the employee’s unlawful entry into the
United Kingdom was sufficiently connected to her dismissal. Because Ms
Hounga had no right to work in the United Kingdom, her contract of
employment was illegal and unenforceable. But she had a distinct cause of
action for the statutory tort of discrimination: see paras 24-25. To make good
that cause of action Ms Hounga did not rely, and did not need to rely on the
circumstances in which she had entered into the United Kingdom, either by
way of pleading or by way of evidence. They were in reality no more than
background facts. The reliance test, which had been adopted in Tinsley v
Milligan, is the narrowest test of connection which is consistent with the
existence of an illegality test at all, and by that test, Ms Hounga would
certainly have been entitled to succeed. But in Cross v Kirkby [2000] EWCA
Civ 426, the Court of Appeal had suggested a wider test of connection,
dependent on whether the illegal act was “inextricably bound up with” the
facts on which the cause of action depended even if it was unnecessary to
rely on it. This would have substantially extended the range of cases in which
the illegality defence could apply. Lord Wilson (with whom Baroness Hale
and Lord Kerr agreed), regarded the question whether the “inextricable
connection” test applied to the facts of that case as the “bigger question”: see
para 41. He answered it by holding that international conventions against
human trafficking required that compensation should be available, so that the
“inextricably bound up” test could not be applied in those circumstances. The
court was not purporting to depart from Tinsley v Milligan without saying so.
It simply recognised the case before it as one in which a competing public
policy required that damages should be available even to a person who was
privy to her own trafficking. Lord Hughes (with whom Lord Carnwath
agreed) did not agree with the majority’s construction of the relevant
conventions, but agreed in the result on the ground that the illegal entry was
Page 45
not sufficiently closely connected with the dismissal. The result was that
although the panel disagreed on the effect of the conventions, so far as the
law of illegality was concerned, there was no inconsistency between their
approaches. On the footing that the conventions required a right of damages
to be available, the illegality defence failed on both grounds. The result of
Hounga v Allen would have been exactly the same even if Ms Hounga had
entered the United Kingdom legally or had done so illegally by her own
unaided efforts (so that no question of trafficking arose) and the Allens had
merely known of and taken advantage of that fact. In its recent decision in R
(on the application of Best) v Chief Land Registrar [2015] EWCA Civ 17,
the Court of Appeal was divided on the significance of Hounga although it
was able to decide the case without reference to it. Arden LJ expressed some
scepticism about its significance as a statement of principle of general
application. It will be apparent from what I have said that I have considerable
sympathy for her approach.
103. In the present case, Lord Toulson and Lord Hodge have suggested that such
a relevant countervailing public policy may be found in the rule requiring the
directors of an actually or potentially insolvent company to have regard to
the interests of creditors. I would prefer to leave this question open for two
reasons.
104. The first is that it is not by any means clear that the duty of directors to have
regard to the interests of creditors does require the imposition of civil liability
notwithstanding the illegality defence. It is true that many of the central
principles and detailed rules of company law are matters of public policy.
They do not simply sound in private law. This is in particular true of those
rules which impose duties for the benefit of third parties, such as creditors,
who are not party to the contract of incorporation. These rules include rules
for the conservation of capital, and for ensuring that companies do not trade
while insolvent. More generally, section 172 of the Companies Act 1972,
which includes among the general duties of directors a duty to “promote the
success of the companies for the benefit of its members as a whole”, treats
the interests of members as corresponding to those of employees, suppliers,
customers and, in certain respects the public at large. The common law goes
further than this, treating the interests of an actually or prospectively
insolvent company as synonymous with those of its creditors: West Mercia
Safetyware v Dodd [1988] BCLC 250. The duty to have regard to the interests
of creditors is not one of the general duties of directors identified in the
statute, but the common law duty is preserved by section 172(3) of the Act,
notwithstanding the directors’ obligation to serve the interests of members.
However, it does not follow that the public policy reflected in these principles
requires the imposition of civil liability on directors notwithstanding the
illegality defence. One reason is that although the general duties of directors
Page 46
have effect notwithstanding any enactment or rule of law, by way of
exception to this the company may in principle validly authorise something
which would otherwise be a breach of those duties: Companies Act 2006,
section 180(4) and (5). Another is that the Companies Acts confer on the
liquidator of a company in the course of winding up a wide range of statutory
powers which enable effect to be given to these principles whether or not an
ordinary civil action is available. These include not only provisions for
misfeasance proceedings against directors and other officers, but provisions
for recovering the dissipated assets of insolvent companies from third parties.
These points were not fully developed in argument, and I do not think that it
is desirable to resolve them on the present appeal. As presently advised, I
cannot accept that sections 172 and 180 are a sufficient answer to Jetivia’s
reliance on the illegality defence.
105. There is, however, a more fundamental reason why I would prefer not to go
down this path in the present case, which is that it is unnecessary and
undesirable. This is a case about attribution. It was approached in that way in
both courts below, and that seems to me to be realistic. The problem about
the policy argument is that it focuses too narrowly on the status of Mr Chopra
and Mr Nazir as directors and on the insolvency of this particular company
given the way in which they caused it to carry on business. In my opinion, it
is perfectly clear that the illegality defence would fail even if these particular
features of the facts were not present, just as in Hounga v Allen, the illegality
defence would have failed even if Ms Hounga had not been trafficked. The
company would be entitled to claim against Mr Chopra and Mr Nazir (and
any collaborator of theirs) for their breach of duty to the company even if
those gentlemen had not been directors but mere agents who happened to be
the company’s directing mind and will for the relevant particular purpose. It
is equally clear that the company would be entitled to claim against them if
it were solvent. I am unwilling to decide this case on a basis which invites
distinctions between different situations which are irrelevant to the principle
that we are applying. I would be extremely reluctant to see the law of
illegality revert to the multiplicity of micro-topics and sub-rules which once
characterised it. I agree with Lord Toulson and Lord Hodge that Occam’s
Razor is a valuable analytical tool, but only if it is correctly understood. Entia
non sunt multiplicanda praeter necessitatem. Do not gratuitously multiply
your postulates.
Insolvency Act 1986, section 213
106. This is a short point and a straightforward one.
107. Section 213 of the Insolvency Act provides:
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“(1) If in the course of the winding up of a company it appears
that any business of the company has been carried on with
intent to defraud creditors of the company or creditors of any
other person, or for any fraudulent purpose, the following has
effect.
(2) The court, on the application of the liquidator may declare
that any persons who were knowingly parties to the carrying on
of the business in the manner above-mentioned are to be liable
to make such contributions (if any) to the company’s assets as
the court thinks proper.”
The appellants’ case is that the provision has no extraterritorial effect and
therefore no application to Jetivia which is domiciled in Switzerland or Mr
Brunschweiler, who is domiciled in France. In effect the submission is that
in subsection (2) “any persons” means only persons in the United Kingdom.
In my opinion this argument is misconceived.
108. Most codes of insolvency law contain provisions empowering the court to
make orders setting aside certain classes of transactions which preceded the
commencement of the liquidation and may have contributed to the
company’s insolvency or depleted the insolvent estate. They will usually be
accompanied by powers to require those responsible to make good the loss
to the estate for the benefit of creditors. Such powers have been part of the
corporate insolvency law of the United Kingdom for many years. In the case
of a company trading internationally, it is difficult to see how such provisions
can achieve their object if their effect is confined to the United Kingdom.
109. The English court, when winding up an English company, claims world-wide
jurisdiction over its assets and their proper distribution. That jurisdiction is
not universally recognised, but it is recognised within the European Union by
articles 3 and 16 of Council Regulation (EC) No 1346/2000. In Schmid v
Hertel [2014] 1 WLR 633, the Court of Justice of the European Union
considered these articles in the context of the jurisdiction of the German
courts to make orders setting aside transactions with a bankrupt. It held not
only that articles 3 and 16 applied to such orders, but that member states must
be treated as having power to make them notwithstanding any limitations
under its domestic law on the territorial application of its courts’ orders.
110. Section 213 is one of a number of discretionary powers conferred by statute
on the English court to require persons to contribute to the deficiency who
have dealt with a company now in liquidation in a manner which has depleted
Page 48
its assets. None of them have any express limits on their territorial
application. Another such provision, section 238, which deals in similar
terms with preferences and transactions at an undervalue, was held by the
Court of Appeal to apply without territorial limitations in In re Paramount
Airways Ltd [1993] Ch 223. Delivering the leading judgment in that case, Sir
Donald Nicholls V-C observed (i) that current patterns of cross-border
business weaken the presumption against extra-territorial effect as applied to
the exercise of the courts’ powers in conducting the liquidation of a United
Kingdom company; (ii) that the absence in the statute of any test for what
would constitute presence in the United Kingdom makes it unlikely that
presence there was intended to be a condition of the exercise of the power;
and (iii) that the absence of a connection with the United Kingdom would be
a factor in the exercise of the discretion to permit service out of the
proceedings as well in the discretion whether to grant the relief, which was
enough to prevent injustice. These considerations appear to me, as they did
to the Chancellor and the Court of Appeal, to be unanswerable and equally
applicable to section 213.
111. I would accordingly dismiss the appeal on this point also.
LORD TOULSON AND LORD HODGE:
112. When the directors of a company involve it in a fraudulent transaction, is the
company barred by the doctrine of illegality from suing them and their
accessories for losses caused by their breach of fiduciary duty? Secondly,
does section 213 of the Insolvency Act 1986 (“IA 1986”), which empowers
a liquidator of a company registered in the United Kingdom to seek financial
contributions from persons involved in the company’s fraudulent trading,
have extra-territorial effect? These questions arise on an appeal by Jetivia SA
(“Jetivia”) and Mr Brunschweiler against the dismissal of their applications
for the summary dismissal or striking out of the claims against them.
113. Bilta (UK) Ltd (“Bilta”), a company incorporated in England, seeks through
its joint liquidators, Mr Hellard and Mr Ingram, to recover damages or
equitable compensation in respect of its alleged loss. As against the directors,
Bilta claims damages for conspiracy or equitable compensation for breach of
fiduciary duty. The conspiracy is alleged to have been an unlawful means
conspiracy, and the unlawful means are the directors’ alleged breach of their
fiduciary duties. As against Jetivia and Mr Brunschweiler, Bilta claims
damages for conspiracy or compensation for dishonest assistance in the
directors’ breach of their fiduciary duties. Since the matter comes before the
court on Jetivia’s and Mr Brunschweiler’s application for the claims against
them to be summarily struck out or dismissed, it is to be assumed for present
Page 49
purposes that the factual allegations made in Bilta’s amended particulars of
claim are capable of proof, and there is no need to repeat the word “alleged”
whenever referring to the defendants’ conduct. The liquidators also pursue a
separate claim for fraudulent trading under section 213 of IA 1986. Jetivia is
a Swiss company and Mr Brunschweiler, who is resident in France, is its sole
director.
114. Bilta had two directors, Mr Nazir and Mr Chopra (“the directors”), who are
the first and second defendants. Mr Chopra owned all the issued shares. Bilta
was registered for the purposes of VAT. Its only trading activity, which took
place between 22 April and 21 July 2009, was trading in European Emissions
Trading Scheme Allowances (“EUAs”), which are commonly known as
carbon credits. EUAs were treated as taxable supplies under the VAT Act
1994 until 31 July 2009. Since then they have been zero-rated. The VAT
status of supplies of the EUAs at the relevant time explains Bilta’s activities.
115. In short, Bilta bought large numbers of EUAs from overseas suppliers,
including Jetivia, free of VAT, and sold them in the UK with VAT to
companies described as “first line buffers”, which immediately sold them on.
The price for which Bilta sold the EUAs was lower before VAT than the price
at which it bought, and Bilta was therefore never going to be in a position to
meet its liabilities to HM Revenue and Customs (“HMRC”). Bilta had
minimal capital and was insolvent virtually from the outset. The money
payable to Bilta, including the VAT due to HMRC, was either paid to Bilta
and paid on by it to its overseas supplier, or was paid by the first line buffer
(or a later company in the chain) directly to Bilta’s supplier, or was otherwise
paid to offshore accounts. At the end of the chain the EUAs would be resold
to a company outside the UK, generating a right to a VAT refund. It is a
familiar kind of carousel or missing trader fraud.
116. Bilta was insolvent throughout the period of its trading in EUAs. In that threemonth period, Bilta sold more than 5.7m EUAs for about £294m. Its liability
for VAT on those transactions amounts to £38,733,444. It did not submit any
VAT returns to HMRC. On the application of HMRC Mr Hellard and Mr
Ingram were appointed provisional liquidators of Bilta on 29 September
2009. They commenced the company’s claim against the defendants who
were its directors and other parties, including the appellants. The company
was compulsorily wound up on 25 November 2009. The proceedings were
amended on 13 October 2011 to include the liquidators’ claims under section
213 of IA 1986.
117. Patten LJ has set out the principal allegations in Bilta’s particulars of claim
in paras 9-14 of his impressive judgment. We can therefore summarise them
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very briefly. Bilta’s pleaded case focuses on the injury done to it rather than
to HMRC. It alleges that the appellants among others were parties to a
conspiracy to defraud and injure it by depriving it of the money needed to
pay its VAT liabilities and thereby rendering it insolvent. The conspirators
knew that their fraudulent scheme involved the breach by Mr Nazir and Mr
Chopra of their fiduciary duties as directors of Bilta. Against its directors
Bilta claims compensation for breach of fiduciary duty, damages for unlawful
means conspiracy and a contribution under section 213 of IA 1986. Against
the appellants Bilta alleges that they were parties to the conspiracy to defraud
it, that they are liable for dishonestly assisting Mr Nazir and Mr Chopra in
the breaches of their fiduciary duties to it and (under section 213) for carrying
on its business with intent to defraud creditors.
118. On 30 July 2012 Sir Andrew Morritt, the Chancellor of the High Court,
dismissed the appellants’ application for summary dismissal of the claims.
He held that the maxim ex turpi causa non oritur actio (no action may be
founded on illegal or immoral conduct) was not available as a defence to
Bilta’s directors or the appellants and that section 213 of IA 1986 had extraterritorial effect. The Court of Appeal (the Master of the Rolls, Rimer and
Patten LJJ) in a judgment dated 31 July 2013 dismissed the appellants’
appeal.
119. The principal issues raised by this appeal in relation to the defence based on
the maxim ex turpi causa are (i) the purpose of that maxim and its application
in relation to Bilta’s claims and (ii) the circumstances in which and
mechanisms by which the knowledge of directors and other persons is
attributed to a legal person such as a registered company. The other issue is
whether section 213 of IA 1986 has extra-territorial effect. We deal with each
in turn.
Illlegality: ex turpi causa non oritur actio
120. At the heart of Bilta’s claims is the allegation that the directors acted in breach
of their fiduciary duties to the company, in concert with others including
Jetivia and its director, Mr Brunschweiler. Although the directors have
played no part in the current proceedings, it is rightly accepted by the parties
to the appeal that in relation to the defence of illegality there is no distinction
to be drawn between the position of Jetivia and Mr Brunschweiler and that
of the directors. The primary question for the court is whether Bilta’s claim
against the directors for breach of fiduciary duty is barred by the doctrine of
illegality. If so, the claim for damages for conspiracy must equally fail, since
the breach of fiduciary duty constitutes the unlawful means on which Bilta
relies. And the converse also applies.
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121. The appellants argue that Bilta’s claims against its directors are barred by
reason of the criminal nature of its conduct under their control. Its function
was to serve as a vehicle for defrauding HMRC, and it is submitted that the
doctrine of illegality bars it from suing the directors who caused its
participation in the scheme, and their co-conspirators, as a means of
recovering the company’s loss for the benefit of the company’s creditors.
122. In any case where the defence of illegality is raised, it is necessary to begin
by considering the nature of the particular claim brought by the particular
claimant and the relationship between the parties. So we start with the nature
of the directors’ duty to Bilta.
123. It is well established that the fiduciary duties of a director of a company which
is insolvent or bordering on insolvency differ from the duties of a company
which is able to meet its liabilities, because in the case of the former the
director’s duty towards the company requires him to have proper regard for
the interest of its creditors and prospective creditors. The principle and the
reasons for it were set out with great clarity by Street CJ in Kinsella v Russell
Kinsela Pty Ltd (in liquidation) (1986) 4 NSWR 722, 730:
“In a solvent company the proprietary interests of the
shareholders entitle them as the general body to be regarded as
the company when questions of the duty of directors arise. If,
as a general body, they authorise or ratify a particular action of
the directors, there can be no challenge to the validity of what
the directors have done. But where a company is insolvent the
interests of the creditors intrude. They become prospectively
entitled, through the mechanism of liquidation, to displace the
power of the shareholders and directors to deal with the
company’s assets. It is in a practical sense their assets and not
the shareholders’ assets that, through the medium of the
company, are under the management of the directors pending
either liquidation, return to solvency, or the imposition of some
alternative administration.”
124. This passage was cited with approval by Dillon LJ in West Mercia Safetywear
v Dodd [1988] BCLC 250, 252-253. The principle now has statutory
recognition in the Companies Act 2006. In Part 10, Chapter 2 of the Act,
concerning the general duties of directors, section 172 provides:
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“(1) A director of a company must act in the way he considers,
in good faith, would be most likely to promote the success of
the company for the benefit of its members as a whole…
…
(3) The duty imposed by this section has effect subject to any
enactment or rule of law requiring directors, in certain
circumstances, to consider or act in the interests of creditors of
the company.”
125. Section 180 (5) provides that the general duties under the Act have effect
(except as otherwise provided or the context otherwise requires)
notwithstanding any enactment or rule of law. A director of an insolvent
company is not directly a fiduciary agent of the creditors and cannot be sued
by an individual creditor for breach of the fiduciary duty owed by the director
to the company (Yukong Line Ltd v Rendsburg Investments Corporation (No
2) [1998] 1 WLR 294).
126. Instead, the protection which the law gives to the creditors of an insolvent
company while it remains under the directors’ management is through the
medium of the directors’ fiduciary duty to the company, whose interests are
not to be treated as synonymous with those of the shareholders but rather as
embracing those of the creditors.
127. Such protection would be empty if it could not be enforced. To give effect to
it, this action is brought by the liquidators in the name of the company to
recover, for the benefit of the creditors, the loss caused to the company by
the directors’ breach of their fiduciary duty.
128. It is argued on behalf of the appellants that it would offend against the
doctrine of illegality for the claim to succeed. It is said that the fact that the
errant directors were in sole control of the company makes it unlawful for the
company to enforce their fiduciary duty towards it. If this were the law, it
would truly deserve Mr Bumble’s epithet – “a ass, a idiot”. For 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.
129. It has been stated many times that the doctrine of illegality has been
developed by the courts on the ground of public policy. The context is always
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important. In the present case the public interest which underlies the duty that
the directors of an insolvent company owe for the protection of the interests
of the company’s creditors, through the instrumentality of the directors’
fiduciary duty to the company, requires axiomatically that the law should not
place obstacles in the way of its enforcement. To allow the directors to escape
liability for breach of their fiduciary duty on the ground that they were in
control of the company would undermine the duty in the very circumstances
in which it is required. It would not promote the integrity and effectiveness
of the law, but would have the reverse effect. The fact that they were in sole
control of the company and in a position to act solely for their own benefit at
the expense of the creditors, makes it more, not less, important that their legal
duty for the protection of the interests of the creditors should be capable of
enforcement by the liquidators on behalf of the company.
130. For that reason in our judgment this appeal falls to be dismissed. The courts
would defeat the very object of the rule of law which we have identified, and
would be acting contrary to the purpose and terms of sections 172(3) and
180(5) of the Companies Act, if they permitted the directors of an insolvent
company to escape responsibility for breach of their fiduciary duty in relation
to the interests of the creditors, by raising a defence of illegality to an action
brought by the liquidators to recover, for the benefit of those creditors, the
loss caused to the company by their breach of fiduciary duty. In everyday
language, the purpose of the inclusion of the creditors’ interests within the
scope of the fiduciary duty of the directors of an insolvent company towards
the company is so that the directors should not be off the hook if they act in
disregard of the creditors’ interests. It would be contradictory, and contrary
to the public interest, if in such circumstances their control of the company
should provide a means for them to be let off the hook on the ground that
their illegality tainted the liquidators’ claim.
131. There would be much to say for ending this judgment at this point, except
that it would be wrong not to identify the principal counter arguments and
show that we have considered them. There is an attendant risk, in going on at
further length, of losing sight of the simple and central point that the defence
of illegality would undermine the rule of law, reinforced by Act of
Parliament, which exists for the protection of those for whose benefit the
action is brought, namely the creditors who have a right to such assets as the
liquidators may recover in the name of the company. We see no need, for
example, to get into the subject of attribution and the Hampshire Land
principle in order to decide the appeal, but in discussing it (as we do below)
we hope by the end to achieve some simplicity and clarity.
132. We turn to the question whether any authorities present an impediment to this
approach and whether they require reconsideration.
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133. Mr Alan Maclean QC’s primary submission was that it follows from the
decision of the House of Lords in Stone & Rolls Ltd v Moore Stephens [2009]
UKHL 39, [2009] 1 AC 1391 that Bilta’s claims are barred by the doctrine
of illegality by reason of its being a “one-man company” which engaged in
deliberate fraud.
134. Stone & Rolls has been a much debated and much criticised case. A lot of the
criticism stems from the fact that there were five judgments running to nearly
100 pages, the judges were divided three to two, and differing reasons were
given by the majority. The claim was by a company in liquidation against the
firm of chartered accountants, who had acted as its auditors, for negligence
and breach of contract in failing to detect and report that the company’s
business consisted mainly of defrauding banks (by obtaining credit through
presenting false documents purportedly relating to commodity trading which
was fictitious). The company was under the complete control of a Mr
Stojevic. When the bank which was the principal victim discovered the fraud
it sued the company and Mr Stojevic and obtained judgment for over $90m.
The judgment was unpaid, the company was put into liquidation and it
brought proceedings through the liquidators against the accountants for the
benefit of the creditors. Negligence was admitted, but the accountants applied
successfully to strike out the action on the ground of illegality. The shares in
the company were held by an Isle of Man company, whose shareholders were
nominee companies acting under a trust. In the proceedings brought by the
bank Mr Stojevic was evasive about the beneficial interest behind the trust,
although he acknowledged that he had a beneficial interest in the company,
and there was no evidence to suggest that any innocent person had a share in
it. All but one of the House of Lords (Lord Scott) proceeded on the basis that
the company was Mr Stojevic’s company in the fullest sense.
135. The opinions of the majority (Lords Phillips, Walker and Brown), although
differently expressed in various ways, have in common that they identified
two features which were critical to their analysis. One concerned the scope
of the accountants’ duty. The other was the fact that no one who had any part
in the ownership or management of the company was unaware of the fraud
which the accountants failed to detect and report. Put shortly, the majority (in
disagreement with Lord Mance) held that the accountants owed no
contractual or tortious duty of care in respect of the interests of the creditors,
notwithstanding that the company’s solvency depended on the fraud being
undetected. Their sole duty was to report to the company the matters which
the directors and shareholders ought to know for the purpose of making
informed decisions. If those people were already aware of and complicit in
the fraud, that fact provided a complete barrier to the claim. Lord Phillips was
explicit that the case turned critically on whether the auditor’s duty extended
to protecting those for whose benefit the claim was brought. He also observed
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that one fundamental proposition appeared to him to underlie the reasoning
of Lord Walker and Lord Brown – that the duty owed by an auditor to the
company was for the benefit of the interests of the shareholders, but not those
of the creditors – and that here lay the critical point of difference of opinion
between them and Lord Mance (para 68).
136. While it would shorten this judgment considerably if we were to say simply
that the present case is plainly distinguishable from Stone & Rolls on its facts,
since this case concerns directors who unquestionably owed duties for the
protection of the interests of the creditors (unlike the auditor, according to the
opinions of the majority in Stone & Rolls), the case has caused so much
difficulty that it would be wrong for us to leave it there. It is therefore
necessary to analyse the judgments in closer detail before expressing our final
view about its status.
137. Lord Phillips summarised his conclusions (para 18) before developing his
analysis. He said that those for whose benefit the claim was brought (the
creditors) fell outside the scope of any duty owed by the accountants; and
that the sole person for whose benefit the accountants’ duty was owed (Mr
Stojevic, who owned and ran the company) was himself the person
responsible for the fraud. In those circumstances he said that ex turpi causa
afforded a defence.
138. Lord Phillips made some comments about the law of illegality and the
decision of the House of Lords in Tinsley v Milligan [1994] 1 AC 340. He
rejected the idea that Tinsley v Milligan laid down a universal test of ex turpi
causa. It was concerned with the effect of illegality on title to property. It
established that once title had passed, it could not be attacked on the basis
that it passed pursuant to an illegal transaction. If title could be asserted
without reliance on the illegality, the defendant could not rely on illegality to
defeat the title (para 21). But he did not believe that it was right to proceed
generally on the basis that the reliance test could automatically be applied as
a rule of thumb, because it was necessary to consider the policy underlying
the ex turpi causa maxim in order to decide whether the defence was bound
to defeat the claim (para 25).
139. Lord Phillips said that the underlying policy in relation to contractual
obligations could be divided into two principles: the court will not enforce a
contract which is expressly or impliedly forbidden by statute or is entered
into with the intention of committing an illegal act; and the court will not
assist a claimant to recover a benefit from his own wrongdoing. In the instant
case the claim is not brought for the benefit of the shareholder/directors, but
for the benefit of the defrauded creditors for whose benefit the relevant duty
Page 56
was owed. Whereas in Stone & Rolls no such duty was owed for the benefit
of the creditors, in this case it was. On Lord Phillips’ analysis of Tinsley v
Milligan there is no inconsistency between that decision and the reasons
which we have given for dismissing this appeal.
140. Lord Phillips considered the consequences of the primary argument advanced
by the accountants in a case where the company carried on a legitimate
business and had honest shareholders, but the person who was in charge of
running it (“its directing mind and will”) involved it in fraudulent trading,
which its auditors negligently failed to discover and report. In such
circumstances any claim by the company for the benefit of the shareholders,
whose interests the auditors should have protected, would according to the
accountants’ argument be barred by the very wrongdoing which the auditors’
negligence had allowed to occur (paras 29-30). Lord Phillips did not accept
that if Stone & Rolls had been a company with independent shareholders,
which had been “high-jacked” by Mr Stojevic, its claim would necessarily
have been defeated by reason of the reliance test or the underlying principle
of public policy (para 63).
141. Lord Phillips considered that where a company’s complaint was that its
directing mind and will had infected it with turpitude, if ex turpi causa was
not to apply, “the reason should simply be that the public policy underlying
it does not require its application” (para 60). That would be a very easy
conclusion where all the shareholders were innocent (para 61). He considered
that the situation would be more problematic if some shareholders were
innocent and some were not, but it was not necessary for the court to solve
that problem in the case of Stone & Rolls, because it had no innocent
shareholders. In short, whether ex turpi causa applied was dependent on
identifying the underlying public policy and on identifying for whose benefit
the action was being brought.
142. In Stone & Rolls (as in the present case) there was a good deal of argument
about “attribution” and the application of the so-called Hampshire Land
principle (In re Hampshire Land Co [1896] 2 Ch 743), but in a passage which
is important to Lord Phillips’ analysis he said that the real issue was not
whether the fraud should be attributed to the company but whether ex turpi
causa should defeat the company’s claim for breach of the auditor’s duty,
and that this depended critically on whether the scope of the auditor’s duty
extended to protecting those for whose benefit the claim was brought (para
67).
143. Lord Phillips proceeded to examine that issue and he concluded that the
accountants owed no duty for the protection of the company’s creditors.
Page 57
(That, of course, places them in stark contrast with the directors of an
insolvent company.) In examining that question Lord Phillips cited with
approval the decision of Hobhouse J in Berg, Sons & Co Ltd v Mervyn
Hampton Adams (1992) [2002] Lloyd’s Rep PN 41. That was also a claim by
a company in liquidation, brought for the benefit of its creditors (banks and
discount houses), against a firm of chartered accountants which had acted as
the company’s auditors. The company operated under the sole control of a
Mr Golechha, who was the beneficial owner of its entire share capital. The
accountants were found to have acted with lack of proper skill in accepting
too readily assurances given to them by Mr Golechha about the recoverability
of certain debts owed to the company. The judge found that the auditors ought
to have qualified the company’s accounts. At the relevant time the company
was not insolvent, but it was accepted (as indeed the accountants had said in
a letter to Mr Golechha) that it was foreseeable that the company’s bankers
and discount houses with whom it did business might place some reliance on
its audited accounts. The company asserted, but did not prove, that Mr
Golechha’s conduct had been fraudulent. The claim failed on various
grounds, including reasons directly comparable to the position in Stone &
Rolls.
144. Lord Phillips quoted (paras 78 and 79) the following passages from
Hobhouse J’s judgment:
“It follows [from the decision of the House of Lords in Caparo
Industries Plc v Dickman [1990] 2 AC 605] that the purpose of
the statutory audit is to provide a mechanism to enable those
having a proprietary interest in the company or being
concerned with its management or control to have access to
accurate financial information about the company. Provided
that those persons have that information, the statutory purpose
is exhausted. What those persons do with the information is a
matter for them and falls outside the scope of the statutory
purpose. In the present case the first plaintiffs have based their
case not upon any lack of information on the part of Mr
Golechha but rather upon the opportunity that the possession of
the auditor’s certificate is said to have given for the company
to continue to carry on business and to borrow money from
third parties. Such matters do not fall within the scope of the
duty of the statutory auditor.”
…
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“However one identifies the company, whether it is the head
management, or the company in general meeting, it was not
misled and no fraud was practised on it. This is a simple and
unsurprising consequence of the fact that every physical
manifestation of the company Berg was Mr Golechha himself.
Any company must in the last resort, if it is to allege that it was
fraudulently misled, be able to point to some natural person
who was misled by the fraud. This the plaintiffs cannot do.”
145. Lord Phillips observed that this comment demonstrated that Hampshire Land
had no application to the facts of that case, but that it also had wider
implications (para 80). It supported the proposition that the law could not
rationally hold the auditor liable when the entire shareholder body and the
entire management was embodied in a single individual who knew
everything because he had done everything. The passages set out above
correspond with and support the twin factors to which we have referred (para
26) as central to the reasoning of the majority – the limited nature of the
auditors’ duty, and the knowledge of everyone involved in the ownership and
management of the company about the matters which the auditors failed to
discover and report to them. Lord Phillips returned to those points at the end
of his judgment (para 86).
146. Lord Walker concluded that he would apply what he referred to as the “sole
actor” principle to a claim made against its former auditors by a company in
liquidation, where the company was a one-man company engaged in fraud,
and the auditors were accused of negligence in failing to call a halt to the
fraud (para 168). He defined what he meant by a one-man company, by
reference to what Hobhouse J had said in Berg v Adams, as “a company which
has no individual concerned in its management and ownership other than
those who are, or must (because of their reckless indifference) be taken to be,
aware of the fraud or breach of duty with which the court is concerned” (para
161). He cited Berg v Adams as a clear case of a one-man company, which
did not involve fraud, but in which every physical manifestation of the
company was Mr Golechha himself who knew all about the irrecoverable
loans; and there is a clear echo of Hobhouse J’s judgment in Lord Walker’s
explanation for rejecting Stone & Rolls’ claim (para 168). He said that any
duty of care owed by the auditors was to the company as a whole, not to
current or prospective creditors, and that there was no protection which the
auditors could give to the company if the only human embodiment of the
company knew all about its fraudulent activities.
147. Lord Walker’s judgment was a great deal more detailed than that summary,
because he considered the various arguments advanced by the company, but
his critical reasoning was that the auditors were in a very different position
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from the company’s directors (para 190), their duty of care was limited in the
way that he identified, and the company’s sole actor knew all that was to be
known.
148. Lord Brown agreed with Lord Walker. He said that the claim against the
accountants ran diametrically counter to the principles established in Caparo
and was difficult to reconcile with Hobhouse J’s decision in Berg v Adams
(para 202). In that case (see para 144 above) Hobhouse J had said that the
claim against the accountants was based on the opportunity which possession
of the auditor’s certificate was said to have given for the company to continue
to carry on business and borrow money, but such matters did not fall within
the scope of the auditor’s duty. Similarly, said Lord Brown, the assumed
negligence of the accountants had enabled the company to continue to carry
on business, in this case stealing rather than borrowing from third parties.
149. What divided the minority (Lords Scott and Mance) from the majority is that
they took a different view about the classes of parties in respect of whose
interests the auditors owed a duty of care. They both regarded the insolvency
of the company as critical, but Lord Mance set out his reasoning more fully.
He held that just as a director’s fiduciary duty to a company which is
insolvent or bordering on insolvency embraces a duty to the company’s
creditors, a parallel principle applied to the auditor, so that the duty of care
owed by an auditor to such a company embraced a duty to have regard to the
interests of the creditors. He distinguished Berg v Adams because in that case
the company was solvent at each audit date (paras 260 and 265). He said that
the fact that Stone & Rolls was insolvent at each audit date was critical. He
defined the issue as being whether the auditors’ duty to the company
extended, like the directors’, beyond the protection of the interests of
shareholders in a situation where the auditors ought to have detected the
company’s insolvency. He observed that the centrality of this issue may have
been obscured by the spread of argument over other issues (para 265). He
considered that it was not inconsistent with Caparo to hold that the company
was entitled to pursue a claim against the auditors for loss resulting from its
breach of its duty in failing to detect that the company was subject to a
continuing fraudulent scheme in circumstances in which it was insolvent
(paras 269-271).
150. Lord Scott emphasised the public policy foundation of the doctrine of
illegality. For this reason he differentiated between an action for damages for
breach of the auditors’ duty of care brought by a solvent company and a
similar action brought by an insolvent company. If the company had
remained solvent, an action against the auditors which would have enabled
Mr Stojevic to benefit from any damages would have offended the ex turpi
causa rule. But the company was insolvent and there was no possibility of
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Mr Stojevic benefitting from any damages recoverable from the accountants.
There was therefore no public policy reason to bar an action against the
auditors based on their breach of duty. “The wielding of a rule of public
policy” he said, “in circumstances where public policy is not engaged
constitutes, in my respectful opinion, bad jurisprudence” (paras 119-122).
151. Critics of Stone & Rolls for being over long and diffuse have a fair point, and
commentators and practitioners have found the case difficult. Lord Walker
himself commented in Moulin Global Eyecare Trading Ltd (in liquidation) v
The Commissioner of Inland Revenue, HKFCA, final Appeal (No 5 of 2013)
(Civil), 13 March 2014, that it is difficult to extract a clear ratio from the
speeches of the majority, and he praised the Court of Appeal in the present
case for achieving a welcome clarification of the law (paras 100 and 106).
We have endeavoured to apply Occam’s razor in concentrating on the critical
features of the case: the scope of the auditors’ duty and the inability of the
company to show that anyone who had any part in the ownership or
management of the company was misled by the auditors’ negligence, which
was a prerequisite for the company’s claim to succeed.
152. Much of the difficulty of Stone & Rolls is that the treatment of the issues was
more roundabout, for example with much discussion of principles of
attribution. We have already referred to the fact that Lord Phillips considered
that the real issue was not about attribution, but about the scope of the
auditors’ duty, and to Lord Mance’s comment that the centrality of this issue
had been obscured by the spread of argument over other issues. The centrality
of the point was further emphasised by the parallel with Berg v Adams which
each of the majority drew in their judgments. That parallel had nothing to do
with the fraudulent nature of Stone & Rolls’ business. The restricted nature
of the auditors’ duty and the knowledge of those in charge of the company
had the same significance whether the nature of the business was fraudulent
(Stone & Rolls) or not (Berg v Adams). Likewise, Lord Mance’s ground for
distinguishing Berg v Adams had nothing to do with whether the business
was lawful or fraudulent. Lord Mance distinguished Hobhouse J’s decision
because the insolvency of Stone & Rolls at the time of the statutory audits
made all the difference in his view to the scope of the auditors’ duty. We are
not of course concerned in this case to revisit the point of disagreement
between Lord Mance and the majority on that question. The finding that all
whose interests were the subject of the auditors’ duty of care knew the facts
which the auditors failed to detect was dispositive. The conclusion of the
majority that the claim was therefore barred by illegality may be seen as a
reflection upon the illegal nature of the conduct as a matter of fact and
perhaps a perceived need to bring their conclusion within the scope of the
issues as argued, but it was not the illegality which on a proper analysis of
their reasoning drove the conclusion. As Lord Phillips observed, the
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fundamental proposition which underlay the reasoning of Lord Walker, Lord
Brown and himself was that the auditors owed no duty for the benefit of those
for whose benefit the claim was brought. It necessarily followed that the
claim should be struck out.
153. Lord Sumption analyses the case differently. There is no disguising the fact
that serious difficulties arise from the different ways in which the majority
expressed themselves. The Law Commission in its report on The Illegality
Defence (2010) Law Com 320, commented at para 3(32):
“It is difficult to anticipate what precedent, if any, Stone &
Rolls will set regarding the illegality defence. Though there
was a majority verdict, there was no majority reasoning, with
all their Lordships reaching different conclusions on how the
defence should be applied.”
154. We conclude that Stone & Rolls should be regarded as a case which has no
majority ratio decidendi. It stands as authority for the point which it decided,
namely that on the facts of that case no claim lay against the auditors, but
nothing more.
155. Stone & Rolls in any event does not support Mr Maclean’s primary
submission that in the present case Bilta’s claims are barred because it was a
one-man company. The duty of the directors was significantly different from
the duty of the statutory auditors, and Stone & Rolls’ attempt to compare the
two was rejected by the majority (see, for example, Lord Walker at para 190),
although it found favour with Lord Mance. The fact that Stone & Rolls was a
one-man company was relevant because it meant that the company was
unable to point to anyone involved in the ownership or management of the
company who was adversely affected by the accountants’ failure to discover
what that one man had concealed from it. But it does not follow that the
person in charge of a one-man company can never be liable for any form of
wrongdoing towards the company. As Lord Mance pointed out in Stone &
Rolls (para 230), the controller of a one-man company who dishonestly strips
its assets is guilty of theft from the company (Attorney-General’s Reference
(No 2 of 1982) [1984] QB 624). If the majority had agreed with Lord Mance’s
view as to the scope of the auditors’ duty, it is plain from their reasoning that
they would not have struck out the action, albeit that it was a one-man
company and its activities were fraudulent. They saw the claim as an attempt
to get around Caparo, whereas Lord Mance saw no conflict with Caparo.
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156. Mr Maclean also relied on the decision of the Court of Appeal in Safeway
Stores Ltd v Twigger [2010] EWCA Civ 1472, [2011] 2 All ER 841. The
issue was whether a company could recover the amount of financial penalties
imposed on it by the Office of Fair Trading, for anti-competitive activity in
contravention of the Competition Act 1998, from the directors or employees
who were responsible for the illegal activity in breach of their contractual and
fiduciary duties to the company. The court held that the claim was barred by
the illegality principle.
157. The leading judgment was given by Longmore LJ. His reasoning was as
follows:
i) The company’s liability to the OFT was not a vicarious liability for the
wrongful conduct of its directors or employees, because the
Competition Act did not impose any liability on the directors or
employees for which the company could be held vicariously
responsible. The liability under the Act was imposed on the company
itself, which acted (as any company must) through agents.
ii) The liability was therefore the “personal” liability of the company, so
that its claim against the directors and employees was based on its own
wrongdoing.
iii) Its claim was therefore barred by illegality.
iv) It was not open to the company to argue that it was a victim of the
directors’ and employees’ misconduct, and to rely on the Hampshire
Land principle, because the statutory scheme imposed responsibility
on the company.
v) It was unnecessary to consider the position if the company’s liability
had been strict, because the OFT could only impose a penalty under
the Competition Act if the infringement had been committed
intentionally or negligently by the company.
158. If that reasoning is sound, it would support Mr Maclean’s argument that the
doctrine of illegality should apply in the present case, although this would
have nothing to do with Bilta being a one-man company.
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159. We disagree with the reasoning. We have been greatly helped by the analysis
provided by Professor Watts in a characteristically lucid article, Illegality and
agency law: authorising illegal action [2011] JBL 213.
160. Safeway’s direct liability (or “personal” liability in the words of the Court of
Appeal) under the Competition Act arose through the acts of its directors and
employees as its agents, but should the company therefore be denied the right
to hold its errant directors and employees to account? We agree with
Professor Watts’ proposition that
“… it simply does not follow that because under the law of
agency a principal becomes directly a party to an illegal
agreement as a result of its agents’ acts, it is thereby to be
deprived of its rights under separate contracts, not otherwise
illegal, with its employees and other agents to act in its interests
and to exercise due care and skill. Indeed, it would not follow
even if the 1998 Act were found to have invoked some sui juris
concept of direct liability other than the law of agency.
In the absence of some countervailing policy reason, it is not
just for someone who falls foul of a statute by reason of the acts
of its employees or other agents to add to its burdens and
disabilities by depriving it of any recourse against those
employees or other agents.”
161. Unless there are special circumstances, the innocent shareholders should not
be made to suffer twice. The reasoning in Safeway, if taken to its logical
conclusion, would also mean that the company could not lawfully dismiss the
errant employees or directors; for to rely on their misconduct would be to rely
on its own misconduct, as Professor Watts has observed. It might be argued
that unfair dismissal is different, but that could only be on public policy
grounds.
162. Reference to public policy takes us to the only basis on which we consider
that the decision of the Court of Appeal in Safeway may have been justified.
Pill LJ considered that the policy of the Competition Act would be
undermined if undertakings were able to pass on their liability to their
employees. That may have been a sound reason for striking out Safeway’s
claims, and we express no view as to the merits of the decision. We accept
that there may be circumstances where the nature of a statutory code, and the
need to ensure its effectiveness, may provide a policy reason for not
permitting a company to pursue a claim of the kind brought in Safeway.
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163. In Bowman v Secular Society Ltd [1917] AC 406 the House of Lords
established the principle that the illegality of a company’s objects does not
make its existence invalid in law. Put broadly, a company has the same power
to act illegally as an individual. Lord Parker of Waddington also stated at
439:
“[I]f the directors of the society applied its funds for an illegal
object, they would be guilty of misfeasance and liable to
replace the money, even if the object for which the money had
been applied were expressly authorised by the memorandum.”
164. That is a generalisation. It would be harsh on directors if the law were to
impose strict liability, and to do so would exceed the general duties of
directors set out in the Companies Act. But the reasoning of Longmore LJ
would negate the company’s right of recourse against the director who acted
in breach of his fiduciary duty if his conduct as its agent was such as to give
rise to a direct liability of the company to a third party. That would be
inconsistent with the dictum of Lord Parker and contrary to ordinary
principles of agency. As we have said, where the liability arises under a
statute, there may in some circumstances be cause to conclude that the
statutory scheme would be undermined by allowing the principal to enforce
its ordinary right of recourse against its agent, but that would be a departure
from ordinary rules of agency based on the specific nature of the statutory
scheme and the requirements of public policy arising from it.
165. Brink’s Mat Ltd v Noye [1991] 1 Bank LR 68 provides an illustration of the
application of Lord Parker’s dictum. The proceeds of the theft of gold bullion
from a warehouse owned by the plaintiffs were laundered through the bank
account of a company called Scadlynn Ltd with Barclays Bank. The directors
and sole shareholders of Scadlynn were signatories of the account and drew
cheques on it for cash totalling nearly £8m over four months. The plaintiffs
sought to enforce rights which Scadlynn was said to possess against the bank
in consequence of the payments out of its account. The issue before the Court
of Appeal (Mustill and Nicholls LJJ and Sir Roualeyn Cumming-Bruce) was
whether the pleading should be permitted. This raised the question, among
others, whether it was open to Scadlynn to sue the bank in respect of
withdrawals made or authorised by the company’s sole directors and
shareholders. The court held that there was no reason why Scadlynn, which
was being put into compulsory liquidation, should be prevented from
enforcing such a claim for the benefit of the creditors who would look to the
assets for the satisfaction of their debts. Nicholls LJ described the existence
of the directors’ fiduciary duties to the company as a means by which the law
sought to protect the company’s creditors. In that context, Mustill LJ rightly
described Scadlyn as being an intended victim of arrangements intended
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dishonestly to deprive it of a large part of its assets and Nicholls LJ agreed
with him.
166. Mr Maclean submitted that there was no scope for applying the Hampshire
Land principle (so as not to attribute the directors’ conduct to Bilta because
they were acting in fraud of the company) in the circumstances that Bilta is a
one-man company and in any event that Bilta’s role in the fraud was that of
villain and not victim. The argument proceeds on the false premise that
Bilta’s role must be characterised in the same way both as between Bilta and
HMRC and as between the company and its directors; and that the attribution
of the fraud to the company for the first purpose applies equally when
considering the second. We do not consider the question of attribution to be
the real issue in this case. The real issue is simpler: whether it is contrary to
public policy that the company, through the liquidators, should enforce for
the benefit of its creditors the duty which the directors owed for the protection
of the creditors’ interests as part of their fiduciary duty to the company. In
this respect we echo Lord Phillips’ observation in Stone & Rolls (para 67)
that the real issue was not whether the fraud should be attributed to the
company, but whether ex turpi causa should defeat the company’s claim for
breach of the auditors’ duty. This, as he said, depends critically on whether
the scope of that duty extends to protecting those for whose benefit the claim
was brought. The answer to that question in the present case is clear. The
directors’ fiduciary duty to the company did extend to protecting the interests
of those for whose benefit the claim is brought. However, because the issue
of attribution loomed large in the course of argument (as it did in Stone &
Rolls), and because the topic has caused a fair amount of confusion, we
address it below in the hope of providing some clarification.
167. Mr Maclean further submitted that Bilta’s claims fall within the illegality
principle because the claims are inextricably linked with, and it is relying on,
its own dishonest actions. The flaw in this argument is that when a company
is insolvent or on the border of insolvency its interests are not equated solely
with the proprietary interests of its owners. Company law requires that the
interests of creditors receive proper consideration by the shareholders and
directors. Although the creditors are not shareholders, as creditors they are
recognised at that point as having a form of stakeholding in, or being a
constituency of, the company which is under the management of the
directors, and their interests are to be protected at law through the directors’
fiduciary duty to the company, which encompasses proper regard for the
creditors’ interests. It is therefore misleading to say that when the company,
through the liquidators, brings an action against the directors for breach of
that duty, the company (whose interests ex hypothesi include the interests of
those for whose benefit the duty is owed and the action is brought) is claiming
in respect of “its” dishonest actions.
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168. The argument about reliance harks back to Tinsley v Milligan. We have
referred (at para 138) to Lord Phillips’ treatment of that case in Stone & Rolls
and to his statement that whether ex turpi causa should apply should depend
on whether the public policy underlying it required its application. Tinsley v
Milligan sparked a debate which has continued ever since then. This is not
surprising because the judges in that case themselves considered the law to
be very unsatisfactory, but they were of the opinion that it was beyond
judicial reform, although it was based on public interest and was a common
law doctrine. Lord Goff referred to the New Zealand Illegal Contracts Act
1970, which provides that the court may deal with an illegal contract
“howsoever as the court in its discretion thinks just”. He suggested that there
should be a full inquiry, and said that he would be more than happy if a new
system could be evolved which was satisfactory in its effect and capable of
avoiding indiscriminate results.
169. The Law Commission studied the subject over many years with wide
consultation. It did not recommend that the court should have an open ended
discretion. However, it agreed with the great majority of consultees and
commentators that the law was in an unsatisfactory state if, in the words of
Lord Browne-Wilkinson in Tinsley v Milligan, “The effect of illegality is not
substantive but procedural”. The objections were well expressed by McHugh
J in the High Court of Australia in Nelson v Nelson (1995) 184 CLR 538, 609
(and many others have written or spoken in similar vein):
“The [reliance] rule has no regard to the legal and equitable
rights of the parties, the merits of the case, the effect of the
transaction in undermining the policy of the relevant legislation
or the question whether the sanctions imposed by the
legislation sufficiently protect the purpose of the legislation.
Regard is had only to the procedural issue; and it is that issue
and not the policy of the legislation or the merits of the parties
which determines the outcome. Basing the grant of legal
remedies on an essentially procedural criterion which has
nothing to do with the equitable positions of the parties or the
policy of the legislation is unsatisfactory, particularly when
implementing a doctrine which is founded on public policy.”
The Law Commission did not recommend that the solution should be
statutory. Its reason or primary reason was not the difficulty of obtaining
Parliamentary time for law reform, although that has been a serious problem.
Its study of various possible legislative models did not result in it finding an
altogether satisfactory version, but there also appeared to the Commission to
be signs of fresh judicial thinking since Tinsley v Milligan. It considered that
judicial reform was the best way forward and it made recommendations to
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that end. The Commission suggested that it was within the power of the
courts to develop the law in a way which was neither simply discretionary
nor arbitrary and indiscriminate, but which had regard to the underlying
public policies, and its recommendations were intended to assist the courts in
that direction.
170. In Gray v Thames Trains Ltd [2009] AC 1339, para 30, Lord Hoffmann said
that the doctrine is founded not on a single rationale but number of policy
objectives. His observation was echoed by Lord Phillips in Stone & Rolls (at
para 25). We have given our reasons for saying that application of the
doctrine in the present context would undermine the purpose and relevant
provisions of the Companies Act for the protection of the creditors of
insolvent companies through the duty imposed on the directors towards the
company.
171. There may be cases which are less clear cut where there are public policy
arguments which pull in opposite directions. Hounga v Allen [2014] UKSC
47, [2014] 1 WLR 2889 was such a case. The claimant was a victim of
unlawful discrimination occurring within the context of a contract of
employment, which was contrary to the terms on which the claimant had been
permitted to enter the United Kingdom. Lord Wilson, giving the judgment of
the majority, adopted Lord Phillips’ statement in Stone & Rolls that the
reliance test was not to be applied automatically but that it was necessary to
consider the policy underlying ex turpi causa in order to decide whether it
should defeat the claim. He referred next to the test of inextricable link and
said that he would conclude that the link was missing. But he did not consider
that to be the determining question for reasons which he set out in the critical
part of his judgment under the heading “Public policy”. He said (para 42):
“The defence of illegality rests upon the foundation of public
policy … ‘Rules which rest upon the foundation of public
policy, not being rules which belong to the fixed or customary
law, are capable, on proper occasion, of expansion or
modification’: Maxim Nordenfelt Guns and Ammunition Co v
Nordenfelt [1893] 1 Ch 630, 661 (Bowen LJ). So it is
necessary, first, to ask ‘What is the aspect of public policy
which founds the defence?’ and, second, to ask ‘But is there
another aspect of public policy to which application of the
defence would run counter?’”
172. Lord Wilson examined what, if any, considerations of public policy
underlying the doctrine of illegality, in particular the importance of
preserving the integrity of the legal system (highlighted by McLachlin J in
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Hall v Hebert [1993] 2 SCR 159), militated in favour of applying the defence
to defeat Miss Hounga’s claim, and he judged them scarcely to exist. He
considered next the second question which he had posed in para 42. He
concluded that there was an important aspect of public policy to which
application of the defence would run counter, namely the protection of
victims of trafficking, about which the United Kingdom was party to a
European Convention. Lord Wilson described as fanciful the idea that an
award of compensation to the claimant would give the appearance of
encouraging others to enter into illegal contracts of employment, whereas its
refusal might engender a belief among employers that they could
discriminate against such employees with impunity (para 44), and he said that
to uphold the defence of illegality would run strikingly counter to the
prominent strain of current public policy against trafficking and in favour of
protection of its victims (para 52). He concluded his judgment by saying:
“The public policy in support of the application of that defence,
to the extent that it exists at all, should give way to the public
policy to which its application is an affront.”
173. Lord Sumption says that the illegality defence is not dependent on a judicial
value judgment about the balance of the equities in each case, and he cites
Tinsley v Milligan and Les Laboratoires Servier v Apotex Inc [2014] UKSC
55 [2014] 3 WLR 1257. In Tinsley v Milligan the House of Lords disapproved
the “public conscience” test which had been developed by the Court of
Appeal. But that decision did not preclude this court from adopting the
approach in Hounga v Allen set out above at para 129 above. Lord Wilson’s
statement was one of principle. It was made after a review of the authorities
in which Lord Wilson referred to the rejection of the public conscience test
in Tinsley v Milligan (para 28). Lord Wilson’s statement was part of the ratio
decidendi in Hounga v Allen because it formed the foundation for the
conclusion in the final paragraph of the judgment, to which we have referred
at para 174. It is not the court’s practice consciously to depart from an earlier
decision of the House of Lords or Supreme Court without saying so. No
member of the court in Les Laboratoires Servier suggested that the court’s
approach in Hounga v Allen had been wrong. The issue in Les Laboratoires
Servier was whether the doctrine of illegality should be expanded beyond the
reach of previous authorities to include a tort of strict liability. The decision
is not inconsistent with ratio of Hounga v Allen. Some of the dicta are in a
different direction from Hounga v Allen but that is not a sufficient reason to
conclude that the majority consciously meant to disapprove the approach in
Hounga v Allen. Since the hearing of the appeal, the Court of Appeal has
considered Hounga v Allen and Les Laboratoires Servier in R (on the
application of Best) v Chief Land Registrar [2015] EWCA Civ 17. Sales LJ,
with whom McCombe LJ agreed, analysed them at paras 51 to 61 and
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adopted the analytical framework of Lord Wilson in weighing the
considerations of public policy in favour of and against applying the ex turpi
causa defence in the particular circumstances. He did not consider Les
Laboratoires Servier to be incompatible with that approach and he applied
Lord Wilson’s guidance at para 70 and following. Arden LJ dissociated
herself from the reliance on Hounga v Allen by the majority (paras 111 to
112). The analysis of Sales LJ accords with our views.
174. The Law Commission’s report has been considered in some detail by the
Court of Appeal on two occasions, Les Laboratoires Servier and Parkingeye
Ltd v Somerfield Stores Ltd [2013] 1 QB 840. In a chapter in “English and
European Perspectives on Contract and Commercial Law: Essays in honour
of Hugh Beale”, Professor Andrew Burrows, writing before the decision of
this court in Les Laboratoires Servier commended these decisions as an
example of the work of the Commission helping to influence judicial law
reform. The report has not so far been considered in any detail by this court,
nor has this court been invited to review the decision in Tinsley v Milligan.
The differences between Lord Sumption and us suggest to us that there is a
pressing need for both. In any future review the court would undoubtedly
wish to examine the law in other countries and particularly the judgments of
the High Court of Australia in Nelson v Nelson, all of which merit reading.
Conspiracy
175. For the reasons explained we have concentrated on the claim against the
directors for breach of fiduciary duty, which the appellants are said
dishonestly to have assisted. It is difficult to see that the claim for conspiracy
adds anything. Mr Maclean argued that the real conspiracy was to injure
HMRC and that it is artificial to regard there as having been a conspiracy
against Bilta, when it was in truth nothing more than a vehicle for defrauding
HMRC. It may be that Bilta will fail to establish the conspiracy alleged, but
the merits of that argument are not fit for determination on a summary
application. Bilta has a triable case, and the only issue before the court is
whether it must fail for illegality. In that respect the appellants are on no
stronger ground in relation to conspiracy than in relation to the breach of
fiduciary duty relied on as the unlawful means. It is perhaps worth observing
that in Berg Sons & Co Ltd v Adams Hobhouse J noted that there was no
allegation of conspiracy by the accountants and Mr Golechha to defraud the
company (p 1066), implying that this would have made a potential difference.
In this case there is an allegation of conspiracy between the directors and
others to defraud the company. It does not alter the analysis to say that the
aim of the dishonest director shareholders was to make a dishonest profit for
themselves and their accomplices at the expense of HMRC, for this itself
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involved a breach of fiduciary duty towards Bilta (representing the interests
of its creditors) and the intentional causation of loss to Bilta.
Loss
176. Mr Maclean submitted that Bilta suffered no loss since it began life with
negligible assets and never acquired any lawful assets, so it had none to lose.
He relied on an obiter dictum of Lord Phillips to similar effect in Stone &
Rolls (para 5), but Lord Mance observed (para 231) that to cause a deficit to
a company making it insolvent is to cause it loss. Lord Phillips described his
own remark as an initial impression and it was no part of his reasoning.
177. In Brink’s Mat Ltd v Noye one of the arguments advanced by the bank was
that Scalynn suffered no loss because it never had any property of its own
and held the proceeds of the bullion on trust. The argument was dismissed.
Nicholls LJ observed that a director was as much in breach of fiduciary duties
which he owed to the company if he misappropriated property of which the
company was a trustee as if he misappropriated property belonging
beneficially to the company.
178. A company’s profit and loss account and its balance sheet may be positive or
negative. When the directors caused Bilta to incur VAT liabilities, and
simultaneously caused it to misapply money which should have been paid to
HMRC, leaving the company with large liabilities and no means of paying
them, the directors caused it to suffer a recognisable form of loss.
Circuity
179. The appellants also submit that if Bilta is entitled to a remedy against Jetivia
because it conspired with Bilta’s directors, so also is Jetivia entitled to claim
against Bilta for conspiring with Mr Brunschweiler against it. There is, it is
submitted, circuity of action. In our view Jetivia will be liable only if it is
established that it knowingly assisted in the fraud against Bilta, which would
result from Mr Brunschweiler’s knowledge and actions being attributed to it.
We discuss attribution below. If the fraud against HMRC was designed to
benefit Jetivia and the other overseas suppliers, we see no reason why there
should not be such attribution and doubt if Jetivia would have a claim against
Bilta. But, as Lord Sumption states, the facts relevant to this issue have not
been pleaded.
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Attribution
180. The issue of attribution arises in the context that Mr Nazir and Mr Chopra
were the only directors of the company and Mr Chopra was its sole
shareholder. Bilta in its amended particulars of claim (at para 42) referred to
them as its “directing mind and will”. While there is a role in our law for the
concept of the directing mind and will of a company, it is important to analyse
that role and in particular to avoid the dangers of ascribing human attributes
to a non-natural person such as a company.
181. In most circumstances the acts and state of mind of its directors and agents
can be attributed to a company by applying the rules of the law of agency. It
has become common to speak of “the Hampshire Land principle” or the
“fraud exception” as the exception to an otherwise general rule that
attribution occurs. It is our view that “the fraud exception” is not confined to
fraud but is simply an instance of a wider principle that whether an act or a
state of mind is to be attributed to a company depends upon the context in
which the question arises. “The fraud exception”, applied to prevent an agent
from pleading his own breach of duty in order to bar his principal’s claim
against him, is the classic example of non-attribution. But it is not the only
one.
182. We set out our conclusions on the importance of context to the process of
attribution in paragraphs 202–209 below. Before then, we examine the case
law which has led us to those conclusions.
183. The starting point in an analysis of attribution is the recognition of the
separate personality of the company, which the House of Lords recognised
long ago in Salomon v Salomon & Co Ltd [1897] AC 22 and which this court
recently confirmed in Prest v Petrodel Resources Ltd [2013] 2 AC 415. A
company, the creation of law, is, in Lord Halsbury’s words (Salomon at p
33), “a real thing” and has a legal existence even if it is controlled by one
person. Because the company is not a natural person it can operate only by
the acts of its officers, employees and agents. In Aberdeen Railway Co v
Blaikie Brothers (1854) 1 Macq 461, 471, Lord Cranworth LC stated:
“The directors are a body to whom is delegated the duty of
managing the general affairs of the company. A corporate body
can act only by agents.”
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Similar statements about the necessity of agency can be found in Ferguson v
Wilson (1866) LR 2 Ch App 77 (Cairns LJ at p 89) and Citizen’s Life
Assurance Co Ltd v Brown [1904] AC 423, (Lord Lindley at p 426).
184. While a company cannot act but through the agency of others, it can incur
obligations and have rights; and directors, including a sole director who is
also the sole shareholder of a company, owe it the general duties set out in
sections 171 to 177 of the Companies Act 2006. The company can also incur
liability to a third party because the law holds it responsible for the tortious
acts and omissions of an employee.
185. Lord Diplock stated the principles in a contractual context in Photo
Production Ltd v Securicor Transport Ltd [1980] AC 827, 848:
“My Lords, it is characteristic of commercial contracts, nearly
all of which today are entered into not by natural legal persons,
but by fictitious ones, ie companies, that the parties promise to
one another that something will be done. … Such a contract is
the source of primary legal obligations upon each party to it to
procure that whatever he has promised will be done is done …
Where what is promised will be done involves the doing of a
physical act, performance of the promise necessitates procuring
a natural person to do it; but the legal relationship between the
promisor and the natural person by whom the act is done,
whether it is that of master and servant, or principal and agent,
or of parties to an independent sub-contract, is generally
irrelevant. If that person fails to do it in the manner in which
the promisor has promised to procure it to be done, as, for
instance, with reasonable skill and care, the promisor has failed
to fulfil his own primary obligation. This is to be distinguished
from ‘vicarious liability’ – a legal concept which does depend
upon the existence of a particular legal relationship between the
natural person by whom a tortious act was done and the person
sought to be made vicariously liable for it. In the interests of
clarity the expression should, in my view, be confined to
liability for tort.”
186. Such vicarious liability is indirect liability; it does not involve the attribution
of the employee’s act to the company. It entails holding that the employee
has committed a breach of a tortious duty owed by himself, and that the
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company as his employer is additionally answerable for the employee’s
tortious act or omission.
187. A company can incur direct liability in at least three circumstances. First, the
provisions of company legislation, a company’s constitution (its articles of
association, including provisions of a company’s memorandum of
association now deemed to be provisions of its articles by section 28 of the
Companies Act 2006 (“the 2006 Act”)) and the non-statutory rules of
company law provide that certain acts of its board of directors are treated as
the acts of the company. For example, in the Companies (Model Articles)
Regulations 2008 (SI 2008/3229) Schedule 3, article 3 provides that
“[s]ubject to the articles, the directors are responsible for the management of
the company’s business, for which purpose they may exercise all the powers
of the company”. Similarly, certain resolutions of the shareholders in general
meeting are treated as the acts of the company. Further, the non-statutory
“consent principle”, that shareholders who have a right to vote may by
unanimous agreement bind the company in a matter in which they had power
to do so by passing a resolution at a general meeting (In re Duomatic Ltd
[1969] 2 Ch 365), is preserved by section 281(6) of the 2006 Act.
188. Secondly, a company can also incur direct liability through the transactions
of agents within the scope of their agency (actual or apparent). Thus, when
an agent commits his or her company to a contract, the company incurs direct
liabilities (and acquires rights) as a party to the contract under ordinary
principles of the law of agency.
189. Thirdly, a statute or subordinate legislation or a regulatory body’s code or
rules of the common law or equity may impose liabilities or confer rights on
a company. For example, a company as a legal entity is owed by its directors
the general duties set out in sections 171 to 176 of the Companies Act even
when the controlling director is also the sole shareholder.
190. In Meridian Global Funds Management Asia Ltd v Securities Commission
[1995] 2 AC 500, Lord Hoffmann (at p 506) pointed out that it is a necessary
part of corporate personality that there should be rules by which acts are
attributed to the company. First, he identified the “primary rules of
attribution” from company law, which is the first of the direct forms of
liability which we describe above. He then referred to the general principles
of agency and vicarious liability which in most circumstances determine a
company’s rights and obligations (p 507B). He recognised that there was a
third category where, exceptionally, a rule of law expressly or impliedly
excludes attribution on the basis of those general principles. For this third
category, which is relevant to the third form of direct liability (above), he
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stated: “the court must fashion a special rule of attribution for the particular
substantive rule”. He described the fashioning of that special rule of
attribution in these terms (p 507E-F):
“This is always a matter of interpretation: given that it is
intended to apply to a company, how is it intended to apply?
Whose act (or knowledge or state of mind) was for this purpose
intended to count as the act etc. of the company? One finds the
answer to this question by applying the usual canons of
interpretation, taking into account the language of the rule (if it
is a statute) and its content and policy.”
191. The relevance of the context in which the question is asked – “Is X’s conduct
or state of mind to be treated as the conduct or state of mind of the company
for the purpose in hand?” – is not limited to Lord Hoffmann’s third category.
The legal context, ie the nature and subject matter of the relevant rule and
duty, is always relevant to that question. In Bowstead & Reynolds on Agency
(20th ed 2014) Professor Peter Watts and Professor Francis Reynolds stated
(at para 8-213):
“Before imputation occurs there needs to be some purpose for
deeming the principal to know what the agent knows.”
In the 19th ed the learned editors made the same point in the same paragraph
thus:
“The rules of imputation do not exist in a state of nature, such
that some reason must be found to disapply them. Whether
knowledge is imputed in law turns on the question to be
addressed.”
We agree; an analysis of the relevant case law supports that view in relation
to each category of rules of attribution. We turn first to the special rules of
attribution which Lord Hoffmann saw as providing the answer in exceptional
cases when the other rules did not determine the company’s rights and
obligations.
192. Thus, in Lennard’s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915] AC
705, the Merchant Shipping Act 1894 excluded the liability of a ship-owner
for loss or damage if it occurred “without his actual fault or privity”. That
phrase prevented the ship-owner incurring such liability vicariously. The
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House of Lords treated the fault of Mr J M Lennard, who was a director of
another company which managed the ship, was registered in the ship’s
register as the manager, and was also a director of the ship-owning company,
as the fault of the latter company. Both Viscount Haldane LC and Lord
Dunedin, who gave the only substantive speeches in the case saw the question
as one of statutory construction which depended on the particular facts of the
case. In Tesco Supermarkets Ltd v Nattrass [1972] AC 153, the supermarket
company was charged with an offence under the Trade Descriptions Act
1968. It pleaded a defence under section 24 of the Act namely (a) that the
commission of the offence was due to the act or default of another person, in
this case the manager of the store at which the misleading representations as
to price had occurred, and (b) that it had taken all reasonable precautions to
avoid the commission of such an offence. The House of Lords upheld that
defence. Like the Divisional Court, the House of Lords treated the store
manager as “another person” for the purpose of section 24 of the Act and
focused on the question whether the task of taking reasonable precautions
was that of the board of the company or was delegated to its store managers.
It construed the statutory defence as allowing an employer who was
personally blameless to escape liability and held that in this case the board of
directors had not delegated their management functions to the shop managers.
As a result Tesco established the statutory defence.
193. As in each case the court is engaged in the interpretation of a particular statute
and in its application to particular facts, other statutory provisions have given
rise to different approaches. Thus in Tesco Stores Ltd v Brent London
Borough Council [1993] 1 WLR 1037 the Divisional Court was concerned
with the offence in section 11 of the Video Recordings Act 1984 of supplying
a video recording to a person under the age specified in the classification
certificate. The court rejected Tesco’s statutory defence that it had neither
known nor had reasonable grounds to believe that the purchaser was under
18. It distinguished Tesco Supermarkets Ltd v Nattrass, holding that the
knowledge or information that the section 11(2) defence addressed was that
of the employee who supplied the video film to the purchaser and not that of
the company’s senior management.
194. In Attorney General’s Reference (No 2 of 1982) [1984] 1 QB 624, to which
we referred in para 155 above, the Court of Appeal had to consider whether
a person or persons who through shareholding and directorship had total
control of a company were capable of stealing the property of the company.
This involved, among other things, considering section 2(1)(b) of the Theft
Act 1968 which provides that a person’s appropriation of property is not
regarded as dishonest “if he appropriates the property in the belief that he
would have the other’s consent if the other knew of the appropriation and the
circumstances of it”. The Court of Appeal held that the company could not
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be regarded as “the other” for the purpose of this provision because the mind
and will of the defendants fell to be treated as the mind and will of the
company. The defendants could be charged with theft of the company’s
property and their appropriate defence (if made out) would be that they
appropriated the property in the honest belief that they had the right to deprive
the company of it (section 2(1)(a)). Again, the court approached the question
of attribution as one of statutory construction.
195. In McNicholas Construction Co Ltd v Customs and Excise Commissioners
[2000] STC 553 Dyson J attributed to a main contractor the knowledge of its
site managers that fraudulent invoices for sub-contract labour were being
created, in circumstances in which the main contractor suffered no loss
because it could claim input VAT but evaded income tax. Section 60 of the
Value Added Tax Act 1994 imposes civil penalties on a person who
dishonestly acts or omits to act for the purpose of evading VAT. Dyson J
recorded that it was common ground in that case that the knowledge and
dishonest acts of the site managers could be attributed to the main contractors
only if a special rule of attribution, of which Lord Hoffmann had written in
Meridian, could be applied. He stated (para 44):
“The question in each case is whether attribution is required to
promote the policy of the substantive rule, or (to put it
negatively) whether, if attribution is denied, that policy will be
frustrated.”
He held (paras 48-49) that the statutory policy of discouraging the dishonest
evasion of VAT would be frustrated if the knowledge of the employees of a
company who had to play a part in the making and receiving of supplies, as
well as those involved in its VAT arrangements, were not attributed to the
employing company. Further, as the participants in the fraud had not intended
to harm the interests of their employing company, there was no basis for
excluding such attribution.
196. The Court of Appeal took a similar approach in Morris v Bank of India,
[2005] 2 BCLC 328 which concerned a claim for fraudulent trading under
section 213 of the Insolvency Act 1986. The court upheld Patten J’s finding
that the knowledge, which the general manager of Bank of India’s London
branch had of BCCI’s fraud, was to be attributed to his employers for the
purpose of section 213. In paras 156-162 above we discussed Safeway Stores
Ltd v Twigger. What is relevant for present purposes is that the court in that
case looked to the wording and policy of the relevant statute in order to
determine whether the acts and the intention or negligence underlying those
acts were to be attributed to the company.
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197. It is not only in the field of statute that the court, when deciding whether to
attribute another’s act or state of mind to a company, has regard to the
purpose of the rule of law which is in play. In the different context of a claim
based on knowing receipt of the proceeds of a fraud, the Court of Appeal in
El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 had to consider
whether the knowledge of an agent who was also the director of a company
should be attributed to that company. Mr Ferdman, who was a non-executive
director of Dollar Land, had made the arrangements by which Dollar Land
acquired an interest in assets in which others had invested funds that they had
earlier obtained by fraud. He had acted without the authority of a resolution
by Dollar Land’s board. Because Mr Ferdman managed and controlled the
transactions, the court attributed his knowledge to the company, treating him
as the directing mind and will of the company in relation to those
transactions. The court recognised that different persons could be treated as
the directing mind and will of a company for different purposes (Rose LJ at
p 699h and Hoffmann LJ at p 706e). While a Mr Stern generally managed
Dollar Land, Mr Ferdman was for the purpose of the receipt of the funds the
company’s mind and will, and on that basis his knowledge of the fraud was
attributed to the company. The plaintiff’s alternative basis of attribution on
the ground of agency failed. We see force in the suggestion by the editors of
Bowstead & Reynolds on Agency (at para 8.214) that the rules of agency
could have resulted in imputation of knowledge in that case. But in the event
the court decided otherwise. Thus the only basis on which Mr El Ajou
succeeded was the attribution of Mr Ferdman’s knowledge to the company
based on the concept of a person being a company’s directing mind and will
in relation to a particular transaction. Similarly, although in that case it was
not necessary to do so in order to establish Mr Tan’s accessory liability for
dishonest assistance of a breach of trust, the Judicial Committee of the Privy
Council in Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378 (p 393BC) attributed Mr Tan’s objective dishonesty to the travel agency company
which he controlled.
198. The courts have also had to consider questions of attribution of knowledge or
actions in a contractual context such as that of an insurance policy. In that
context the terms of the insurance policies are relevant and can be decisive
as the court seeks to give effect to the intentions of the parties as expressed
in their contract. In Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd’s
Rep 262 Rix J addressed a professional indemnity policy which covered the
legal liability of both a company which provided estate agency and valuation
services and its directors. The assumed facts included the assertion that one
of the directors, who was the managing director, had made a number of
fraudulent valuations in the company’s name. The plaintiffs obtained
judgments against the company, which went into liquidation, and sought to
enforce them against the insurance company under the Third Parties (Rights
against Insurers) Act 1930. Zurich purported to avoid the policy on the basis
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of the director’s fraud. But the insurance policy included fidelity insurance
which indemnified the company against liabilities resulting from the
fraudulent acts of a director. Because he construed the policy as insuring the
company and its directors as separate insureds, the logic of the policy was
that the guilty knowledge and conduct of a director could not be attributed to
the company for the purpose of giving effect to the insurance contract even
if he were the directing mind and will of the company in relation to the
particular transactions. He referred to Lord Hoffmann’s analysis of a special
rule of attribution which we have quoted in para 190 above, and held that in
the context of the particular contract he was not prepared to find that the
fraudulent director was the directing mind and will of the company (pp 278-
279). In Morris v Bank of India [2005] 2 BCLC 328 the Court of Appeal (at
paras 122-124) explained the Arab Bank case as a case which rested on the
construction of the terms of the insurance contract.
199. In Belmont Finance Corporation Ltd v Williams Furniture Ltd [1979] Ch 250
(“Belmont No 1”), the Court of Appeal considered a claim by the receiver of
an insolvent company (“A”) that its shareholders and directors had
dishonestly conspired to use A’s funds to purchase shares in another company
(“B”) at an excessive price and thereby give unlawful financial assistance to
the shareholders of B to purchase A’s shares. The Court of Appeal held that
the directors’ knowledge that they were effecting an illegal transaction should
not be imputed to A because the object of the conspiracy was improperly to
deprive A of a large part of its assets. Buckley LJ (pp 261-262) explained the
non-attribution on the basis that when an agent, who is acting in fraud of his
principal, has knowledge which is relevant to the fraud, that knowledge is not
imputed to the principal to defeat the company’s claim against the
conspirators (as to which rule see Bowstead & Reynolds on Agency 20th ed
2014 paras 8-207 (article 95 rule 4) and 8-213). When the case returned to
the Court of Appeal after a retrial, (Belmont Finance Corporation Ltd v
Williams Furniture Ltd (No 2) [1980] 1 All ER 393 (“Belmont No 2”)) the
court’s findings made clear that the transaction had been approved by
resolution at a formal board meeting of A and completed at two further board
meetings, including by the sealing by A of the share transfers of B’s issued
share capital (Buckley LJ at p 398G-H). Although the transaction was clearly
subject to what Lord Hoffmann in the Meridian Global Funds case [1995] 2
AC 500 described as the primary rules of attribution, the knowledge which
some of A’s directors (Mr James and Mr Foley) had of the illegal transaction
and their misfeasance was not attributed to A so as to bar its claim but was
attributed to the defendant parent companies of which they were officers.
200. We think that the court would have reached the same conclusion in the
Belmont case if it had approached the question of attribution on the basis that
the board of directors of A was its “directing mind and will” because the
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company was pursuing a claim against, among others, its directors for
conspiracy. Were it otherwise a company could not vindicate its rights
against its directors and those who assisted them or benefited from the
conspiracy. This approach is consistent with the older case of Gluckstein v
Barnes [1900] AC 240, in which the promoters of a company, who also
comprised its entire board of directors, were aware of a secret profit which
they made on the asset which they had sold to the company. The House of
Lords looked at the question of disclosure in the context of the particular
claim. The Earl of Halsbury LC thought that it was absurd to suggest that the
knowledge of those who were hoodwinking the shareholders should be
treated as disclosed to the company (p 247) and Lord Robertson (p 258)
agreed, stating colourfully that “the boardroom was occupied by the enemy”.
201. Finally, in Moulin Global Eyecare Trading Ltd v Commissioner of Inland
Revenue, to which we have referred, the Court of Final Appeal of Hong Kong
was concerned with a claim by way of judicial review by an insolvent
company’s liquidator to be entitled to object out of time to tax assessments
and obtain repayment of the tax paid on the basis that its former management
had fraudulently inflated its profits over several years. The company’s
entitlement to object out of time and also to claim repayment based on error
in its tax returns depended on whether the company was attributed with its
managers’ knowledge of the fraud. The majority of the court held that the
company was to be attributed with the knowledge of its management. In the
leading judgment, which contained an admirable analysis of the law, Lord
Walker of Gestingthorpe NPJ supported an approach to the attribution to a
company of a director’s knowledge in civil cases which had regard to the
factual situation in which they arose and the purpose of the legal rules that
were in play. See his summary (at para 129). He distinguished between:
(i) claims by the company against its directors or employees and their
accomplices for loss which the company suffered as a result of their
wrongdoing, where it was absurd to allow the directors or employees to rely
on their own awareness of their wrongdoing and attribute it to the company
as a defence against its claim, and
(ii) third party claims against a company for loss caused to the third party by
the misconduct of a director or employee, where the dishonesty of the director
or employee would not prevent his act and knowledge being attributed to the
company.
202. It is clear from those cases that a finding that a person is for a specific purpose
the “directing mind and will” of a company, when it is not merely descriptive,
is the product of a process of attribution in which the court seeks to identify
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the purpose of the statutory or common law rule or contractual provision
which might require such attribution in order to give effect to that purpose.
Similarly, when the question of attribution arises in the context of an agency
relationship, the nature of the principal’s or other party’s claim is highly
material as the learned editors of Bowstead and Reynolds discuss at para 8-
213. Even when the primary rules of attribution apply, where the transaction
is approved by the board of directors and completed under company seal as
in Belmont (No 2), the court will not attribute to a company its directors’ or
employees’ knowledge of their own wrongdoing to defeat the company’s
claim against them and their associates. We agree with Lord Walker in
Moulin’s case when (at para 113) having discussed the Court of Appeal’s
judgment in this case he stated:
“the crucial matter of context includes not only the factual and
statutory background, but also the nature of the proceedings in
which the question [of attribution] arises.”
203. In our view, that applies to the knowledge of directors whether one applies
the primary rules of attribution of the company’s constitution (the cases of
Gluckstein v Barnes and Belmont (No 2)), the rules of attribution of agency
(Belmont (No 1)), or the special rules of attribution which Lord Hoffmann
discussed in the Meridian Global Funds case. Where a company’s liability is
only vicarious, it is attributed with responsibility for the act of the other,
usually the employee; but neither the other’s act nor his or her state of mind
is attributed to the company.
204. It is helpful in the civil sphere, to consider the attribution of knowledge to a
company in three different contexts, namely (i) when a third party is pursuing
a claim against the company arising from the misconduct of a director,
employee or agent, (ii) when the company is pursuing a claim against a
director or an employee for breach of duty or breach of contract, and (iii)
when the company is pursuing a claim against a third party.
205. In the first case, where a third party makes a claim against the company, the
rules of agency will normally suffice to attribute to the company not only the
act of the director or employee but also his or her state of mind, where
relevant. In this context, the company is like the absent human owner of a
business who leaves it to his managers to run the business, while he spends
his days on the grouse moors (to borrow Staughton LJ’s colourful metaphor
in PCW Syndicates v PCW Reinsurers [1996] 1 WLR 1136, 1142). Where
the rules of agency do not achieve that result, but the terms of a statute or
contract are construed as imposing a direct liability which requires such
attribution, the court can invoke the concept of the directing mind and will as
Page 81
a special rule of attribution. Thus where the company incurs direct liability
as a result of a wrongful act or omission of another (as in Lennard’s Carrying
Co Ltd v Asiatic Petroleum Co Ltd and McNicholas Construction Co Ltd v
Customs and Excise Comrs) it is deemed a wrongdoer because of those acts
or omissions. If it is only vicariously liable for its employee’s tort, it is
responsible for the act of the other without itself being deemed a wrongdoer
and without the employee’s state of mind being attributed to it.
206. In the second case, where the company pursues a claim against a director or
employee for breach of duty, it would defeat the company’s claim and negate
the director’s or employee’s duty to the company if the act or the state of
mind of the latter were to be attributed to the company and the company were
thereby to be estopped from founding on the wrong. It would also run counter
to sections 171 to 177 of the 2006 Act, which sets out the director’s duties,
for the act and state of mind of the defendant to be attributed to the company.
This is so whether or not the company is insolvent. A company can be
attributed with knowledge of a breach of duty when, acting within its powers
and in accordance with section 239 of the 2006 Act, its members pass a
resolution to ratify the conduct of the director. But, as this court discussed in
Prest v Petrodel Resources Ltd [2013] 2 AC 415, para 41, shareholders of a
solvent company do not have a free hand to treat a company’s assets as their
own. Further, as we have discussed, actual or impending insolvency will
require the directors to consider the interests of the company’s creditors when
exercising their powers. This might prevent them from seeking such
ratification. Similarly, where a company ratifies a breach of duty by an agent
or employee, it must be attributed with the relevant knowledge. But
otherwise, as the courts have recognised since at least Gluckstein v Barnes
[1900] AC 240, it is absurd to attribute knowledge to the company and so
defeat its claim.
207. In the third case, where the company claims against a third party, whether or
not there is attribution of the director’s or employee’s act or state of mind
depends on the nature of the claim. For example, if the company were
claiming under an insurance policy, the knowledge of the board or a director
or employee or agent could readily be attributed to the company in
accordance with the normal rules of agency if there had been a failure to
disclose a material fact. But if the claim by the company, for example for
conspiracy, dishonest assistance or knowing receipt, arose from the
involvement of a third party as an accessory to a breach of fiduciary duty by
a director, there is no good policy reason to attribute to the company the act
or the state of mind of the director who was in breach of his fiduciary duty.
If the company chose not to sue the director who was in breach of his duty,
the third party defendant could seek a contribution from him or her under the
Civil Liability (Contribution) Act 1978. We have set out above why we
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consider that the defence of illegality is not available to a company’s directors
or their associates who are involved in a conspiracy against the company or
otherwise act as accessories to the directors’ breach of duty. Equally, there is
no basis for attributing knowledge of such behaviour to the company to found
an estoppel.
208. In the present case Patten LJ rightly stated that attribution of the conduct of
an agent so as to create liability on the part of the company depends very
much on the context in which the issue arises. He said that as between the
company and the defrauded third party, the company should be treated as a
perpetrator of the fraud; but that in the different context of a claim between
the company and the directors, the defaulting directors should not be able to
rely on their own breach of duty to defeat the operation of the provisions of
the Companies Act in cases where those provisions were intended to protect
the company (paras 34 and 35).
209. We agree. Accordingly, if, contrary to our view, the doctrine of illegality
were insensitive to context and to competing aspects of public policy, the
rules of attribution would achieve the same result and preserve Bilta’s claim.
Insolvency Act 1986 section 213
210. The appellants’ second challenge is that the court’s powers under section 213
of IA 1986 do not extend to people and corporations resident outside any of
the jurisdictions of the United Kingdom.
211. Section 213 of IA 1986 provides:
“(1) If in the course of the winding up of a company it appears
that any business of the company has been carried on with
intent to defraud creditors of the company or creditors of any
other person, or for any fraudulent purpose, the following has
effect.
(2) The court, on the application of the liquidator may declare
that any persons who were knowingly parties to the carrying on
of the business in the manner above-mentioned are to be liable
to make such contributions (if any) to the company’s assets as
the court thinks proper.”
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212. The appellants accept that the English courts have jurisdiction in personam.
Their challenge is to the court’s subject matter jurisdiction as discussed by
Hoffmann J in MacKinnon v Donaldson, Lufkin and Jenrette Securities
Corpn [1986] 1 Ch 482, 493 and Lawrence Collins LJ in Masri v
Consolidated Contractors International (UK) Ltd and Others (No 2) [2008]
2 All ER (Comm) 1099, paras 30 and 31. It relates to whether the court can
regulate the appellants’ conduct abroad. Whether a court has such subject
matter jurisdiction is a question of the construction of the relevant statute. In
the past it was held as a universal principle that a United Kingdom statute
applied only to United Kingdom subjects or foreigners present in and thus
subjecting themselves to a United Kingdom jurisdiction unless the Act
expressly or by necessary implication provided to the contrary (Ex p Blain
(1879) 12 Ch D 522, James LJ at p 526). That principle has evolved into a
question of interpreting the particular statute (Clark v Oceanic Containers
Inc [1983] 2 AC 130, Lord Scarman at p 145, Lord Wilberforce at p 152;
Masri v Consolidated Contractors (UK) Ltd and others (No 4) [2010] 1 AC
90, Lord Mance at para 10; and Cox v Ergo Versicherung [2014] AC 1379,
Lord Sumption at paras 27-29). In Cox Lord Sumption suggested that an
intention to give a statute extra-territorial effect could be implied if the
purpose of the legislation could not effectually be achieved without such
effect (para 29).
213. In our view section 213 has extra-territorial effect. Its context is the winding
up of a company registered in Great Britain. In theory at least the effect of
such a winding up order is worldwide (Stichting Shell Pensioenfonds v Krys
[2015] 2 WLR 289 at paras 34 and 38). The section provides a remedy against
any person who has knowingly become a party to the carrying on of that
company’s business with a fraudulent purpose. The persons against whom
the provision is directed are thus (a) parties to a fraud and (b) involved in the
carrying on of the now-insolvent company’s business. Many British
companies, including Bilta, trade internationally. Modern communications
enable people outside the United Kingdom to exercise control over or involve
themselves in the business of companies operating in this country. Money
and intangible assets can be transferred into and out of a country with ease,
as the occurrence of VAT carousel frauds demonstrates. We accept what
HMRC stated in their written intervention: there is frequently an international
dimension to contemporary fraud. The ease of modern travel means that
people who have committed fraud in this country through the medium of a
company (or otherwise) can readily abscond abroad. It would seriously
handicap the efficient winding up of a British company in an increasingly
globalised economy if the jurisdiction of the court responsible for the winding
up of an insolvent company did not extend to people and corporate bodies
resident overseas who had been involved in the carrying on of the company’s
business.
Page 84
214. In our view the Court of Appeal reached the correct decision in In re
Paramount Airways Ltd [1993] Ch 223, in which it held that the court had
jurisdiction under section 238 of IA 1986 (which empowers the court to make
orders against any person to reverse transactions at an undervalue) to make
an order against a foreigner resident abroad. Sir Donald Nicholls V-C
expressed the view (p 239D-E) that Parliament did not intend to impose any
limitation on the expression “any person” in sections 238 and 239 of IA 1986
and that it must be left to bear its literal, natural meaning. We reach the same
conclusion in relation to the use of that expression in section 213 for
essentially the same reasons. The section, like sections 238 and 239 and also
section 133 (which concerns the public examination of persons responsible
for the formation and running of a British company) share the statutory
context of the winding up of a British company. The Court of Appeal
considered section 133 in In re Seagull Manufacturing Co Ltd [1993] Ch 345.
Peter Gibson J, who produced the leading judgment, expressed the views (a)
that Parliament could not have intended that a person who had been
responsible for the state of affairs of an insolvent British company should
escape liability to be investigated simply because he was not within the
jurisdiction (p 354G-H) and (b) that reasons of international comity would
not prevent the summoning for public examination of a person who had
participated in the running of a British company (p 356E). Hirst LJ said (p
360G-H) that the process of investigating why a company had failed would
be frustrated if a non-resident director were immune from public
examination. Again, that reasoning is in our view both correct and equally
applicable to section 213.
215. The appellants argued that it was wrong that they should be required to
defend themselves against a claim when it would only be after the substantive
hearing that the court could decide whether to exercise its jurisdiction on the
basis that the defendants were sufficiently connected with England. We do
not agree. While the court which hears the claim will have to decide whether
in all the circumstances the appellants are sufficiently connected with
England, we think that the respondents have a good arguable case that they
are. The substance of the section 213 allegation is that the appellants were
party to a conspiracy to defraud Bilta in the context of a wider VAT fraud,
that they were parties to the conduct of Bilta’s business to that end, and that
Jetivia obtained the proceeds of that fraud. If Bilta’s liquidators establish
those allegations after trial, we think it is likely that the court would decide
to exercise its jurisdiction under section 213 of IA 1986 against the
appellants, their foreign residence notwithstanding.
216. Bilta’s liquidators also asserted that the English courts had jurisdiction by
virtue of article 3(1) Council Regulation 1346/2000 on insolvency
proceedings (“the European Insolvency Regulation”). It provides:
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“The courts of the member state within the territory of which
the centre of a debtor’s main interests is situated shall have
jurisdiction to open insolvency proceedings. In the case of a
company or legal person, the place of the registered office shall
be presumed to be the centre of its main interests in the absence
of proof to the contrary.”
217. In Schmid v Hertel (Case C-328/12) [2014] 1 WLR 633, the Court of Justice
of the European Union (“CJEU”) held (a) that article 3(1) conferred
international jurisdiction to hear and determine actions which derive directly
from those proceedings and which are closely connected with them (para 30)
and (b) that the court of the relevant Member State had jurisdiction to hear
and determine an action to set aside a transaction by virtue of insolvency that
is brought against a person who is not resident in the territory of a Member
State (para 39). Thus, Bilta’s liquidators submitted, the European Insolvency
Regulation, so interpreted, conferred jurisdiction against both appellants. On
the other hand, the appellants submitted that the question whether the
territorial reach of section 213 of IA 1986 was worldwide was now governed
by the European Insolvency Regulation, whose natural meaning was that it
related to relationships between Member States and not with third party
states. Mr Maclean said that the decision in Schmid was controversial and
suggested that there should be a reference to the CJEU to determine whether
the section 213 proceedings were covered by the European Insolvency
Regulation.
218. We do not think that it is necessary to rely on the European Insolvency
Regulation as the Court of Justice has interpreted it in Schmid in order to
determine whether there is subject matter jurisdiction against Jetivia. If the
proceedings against Jetivia were not covered by the Regulation, there is a
basis for the exercise of subject matter jurisdiction in our domestic law, as
we have discussed above. There is therefore no need for a reference to the
CJEU.
Conclusion
219. We therefore would dismiss the appeal.