No refuge for rogue directors

Rogue directors cannot attribute their unlawful actions to their company, the Supreme Court has held in a landmark decision that will benefit creditors and shareholders.

Jetivia SA and Another v Bilta (UK) Limited and Ors [2015] UKSC 23 is “of crucial importance to the creditors and shareholders of companies where the directors have been up to no good,” according to Fiona Simpson, partner and civil law fraud specialist at Kingsley Napley.

Bilta was compulsorily wound up in 2009. Its liquidators brought proceedings against two former directors and a Swiss company and its chief executive, alleging that they were party to a conspiracy to injure Bilta by a carousel fraud involving European Emissions Trading Scheme Allowances. Under this scheme, the transactions were arranged so as to cause Bilta to be liable for output VAT and HMRC to pay a lower sum of VAT to another company. HMRC would then pay the input VAT but Bilta would be insolvent and therefore unable to pay the output VAT.

The justices upheld the Court of Appeal’s ruling that the wrongful activity of Bilta’s directors and shareholder cannot be attributed to Bilta in these proceedings, therefore the illegality defence fell.

According to the Supreme Court judgment, Bilta was said to be liable for more than £38m in output VAT.

Fiona says: “This judgment confirms that where a company is a victim of a fraud or dishonest act committed by its directors (in breach of their fiduciary duties), the directors are not able to attribute their unlawful conduct to the company.

“This decision is of crucial importance to the creditors and shareholders of companies where the directors have been up to no good. In this claim brought by a company and its liquidators against fraudulent directors and their co-conspirators, the defendants argued that the company could not rely on its own illegal acts in making a claim.  

“Such a defence is not permissible, the Supreme Court has ruled.  The acts of a fraudulent director are not to be treated as the acts of the innocent company. Insolvency practitioners will be breathing a sigh of relief at today’s decision and the fact that it has not removed one of the well-used tools in their armoury to recover losses for creditors and shareholders.”