Bilta (UK) Ltd (in Liquidation) v Nazir
| Jurisdiction | England & Wales |
| Judge | Lord Neuberger,Lord Clarke,Lord Carnwath,Lord Mance,Lord Sumption,Lord Toulson,Lord Hodge |
| Judgment Date | 22 April 2015 |
| Neutral Citation | [2015] UKSC 23 |
| Court | Supreme Court |
| Date | 22 April 2015 |
[2015] UKSC 23
Lord Neuberger, President
Lord Mance
Lord Clarke
Lord Sumption
Lord Carnwath
Lord Toulson
Lord Hodge
Appellants
Alan Maclean QC Colin West
(Instructed by MacFarlanes LLP)
Respondents
Christopher Parker QC Rebecca Page
(Instructed by Gateley LLP)
Intervener
Michael Gibbon QC
(Instructed by Howes Percival LLP)
Heard on 14 and 15 October 2014
(with whom Lord Clarke and Lord Carnwath agree)
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.
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").
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.
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.
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.
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.
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.
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.
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 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.
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.
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.
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).
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.
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.
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.
It would, in my view, be unwise to seek to decide such a difficult and controversial question in a case where it is not...
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