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Fraudulent Trading and Dishonest Directors

Dishonest Directors and Their Associates Have an Escape Route from Liability for Fraud Closed Off by the Supreme Court

The Supreme Court of the United Kingdom (with a panel of seven judges) handed down judgment on 22 April 2015 in the case of Jetivia SA and anther (Appellants) v Bilta (UK) Limited (In Liquidation) (‘Bilta’) and others (Respondents) [2015 UKSC 23]. Jetivia is a Swiss company.

The Claim

The case arose out of an alleged Missing Trader Intra-Community VAT fraud relating to a series of transactions relating to European Emissions Trading Scheme Allowances or ‘carbon credits’.

The liquidators said that the VAT fraud caused in excess of £38m of losses to the company and its main creditor HMRC. In doing so the directors involved were said to have breached their fiduciary duties as directors with the fraudulent trading scheme, with their associates dishonestly assisting them in doing so.

The liquidators claimed through Bilta: (1) damages in tort; (2) compensation based on constructive trust and (3) directly from each of the four defendants, a contribution under section 213 of the Insolvency Act 1986 (the ‘Act’) for alleged fraudulent trading.

Fraudulent Trading

By way of reminder section 213 of the Act states:

“(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.” (Emphasis added).

The Defence

The Appellants applied to strike out Bilta’s claim on two bases: (1) the defence of illegality; and (2) that section 213 of the Act does not have extra territorial effect (that is outside of England and Wales).

The defence of illegality was advanced on the basis that the claims against the directors were barred by reason of the criminal nature of Bilta’s conduct while under their control. It was argued that Bilta’s function was to act as a vehicle for defrauding HMRC and that illegality prevented Bilta from suing its directors as a means of recovering Bilta’s loss for the benefit of Bilta’s creditors. It was thus argued, inter alia, that the courts cannot allow, as a matter of public policy, Bilta to benefit from its own wrong.

The Decision

The Supreme Court unanimously dismissed the appeals of Jetivia and Jetivia’s Chief Executive.

The Reasoning

The Supreme Court held that in respect of the defence of illegality that it was inappropriate to attribute to the company the fraud to which the alleged breach of duty relates. The directors could not rely upon their own breach of duty to defeat the operation of the Companies Act where the provisions were intended to protect the company.

Another way of putting it is that it was found that the fiduciary duties of a director of a company which is insolvent, requires the directors to have proper regard for the interests of creditors. Such a protection would be empty if not enforced. To allow the directors to escape liability for breach of their own fiduciary duty, when they were in control of the company would undermine the duty in the very circumstances in which it is required.

Section 213 of the Act was held to have extra-territorial effect. This was because of the increasingly globalised economy and the handicap to the efficient winding up of a British company if the Court were to find otherwise.

NDP’s Views on this Fraudulent Trading Case

The reader of the article might think (as we do) it very odd that it has taken the highest Court in the land to rule that directors who use their company (or who allow their company to be used) for fraudulent activity (with their associates dishonestly assisting them in doing so), cannot when ‘caught doing so’, hide behind the company to try and defend their position.

Nevertheless, the legal position is now clear.

This case shows that a claim for fraudulent trading can follow you as a director to wherever in the world you are. A claim for fraudulent trading is in our experience quite a rare claim to face as the burden of proof is high.

Further, the defence of illegality is not now going to assist directors where they allege that the company in liquidation (of which they were directors and to which they owed fiduciary duties) that is bringing a claim against them was the vehicle for a fraud and thereby the company was seeking recompense for its own (by attribution) fraud.

This case is a useful reminder of the onerous extent of a director’s fiduciary duties and quite how far those duties extend.

If as a director you are facing a claim brought by a liquidator for fraudulent trading or indeed any other form of claim, then please contact us or ‘phone us on 0121 200 7040 without delay and take advice. It is inevitably the case that the sooner that you come and see us the more likely it is that we can help. Please speak to us today for a no obligation chat.

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