Summary

An illegality defence could not bar a claim brought by the liquidators of a company which had been the vehicle for a VAT fraud, against its former directors and overseas suppliers who were alleged to have been involved in the fraud. The conduct of the directors could not be attributed to the company where there was a claim against the directors for a breach of their duties. Further, the Insolvency Act 1986 s.213had extra-territorial effect.

Facts

The appellants (J), a Swiss company and its chief executive, appealed against a decision ([2013] EWCA Civ 968, [2014] Ch.52)) dismissing their application to strike out the claims of the respondents, an English company (B) and its liquidators.

B was alleged to have been the vehicle for a VAT carousel fraud after having entered into a series of transactions relating to carbon credits with various parties, including J. B went into liquidation and its liquidators brought claims against B's former directors and against J, alleging that they had been parties to an unlawful means conspiracy which had involved the directors breaching their fiduciary duties and J dishonestly assisting them. The liquidators sought contributions from J and the former directors under the Insolvency Act 1986 s.213. J applied to strike out the claim, arguing that it was precluded by an illegality defence and that s.213 could not be invoked because it did not have extra-territorial effect. The Court of Appeal rejected those arguments. The issues were (i) the purpose and scope of the illegality defence; (ii) the circumstances in which the knowledge of directors and other persons should be attributed to a legal person such as a company; (iii) whether s.213 had extra-territorial effect.

Held

HELD: (Lords Sumption, Toulson and Hodge dissenting on the purpose and scope of the illegality defence) (1) The purpose and scope of the defence of illegality needed to be addressed by the Supreme Court as soon as possible, but it was not appropriate to do so in the instant case because the issue was not determinative of the outcome and there had been no real argument on the topic (see paras 15-17 of judgment). (2) (Lords Sumption, Toulson and Hodge dissenting on the principles to be derived from Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39, [2009] 1 A.C. 1391) Where a company had been the victim of wrongdoing by its directors, or of which the directors had notice, then the wrongdoing or knowledge of the directors could not be attributed to the company as a defence to a claim brought against the directors by the company's liquidator. It was unjust and absurd to suggest that the answer to a claim for breach of a director or employee's duty could lie in attributing to the company the very misconduct by which the director or employee had damaged it. A company had its own separate legal personality and interests and the company could not be identified with its officers. That was so even though the officer was the directing mind and will of the company. At the same time, however, if the officer's breach of duty had led to the company incurring loss in the form of payments to or liability towards third parties, as part of its cause of action against its officer the company had to be able to rely on the fact that, in that respect, its officer's acts and state of mind were attributable to the company, causing it to make such payments or incur such liability. Whether it was appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or agent's principal had to depend on the nature and factual context of the claim. The company could rely on attribution for one purpose, but disclaim it for another (paras 7, 9, 38, 41-43, 180-181, 183, 202-209). Two principles could be extracted from the decision in Stone & Rolls. The first was that an illegality defence was not available against a company when there were innocent shareholders and directors. The second was that the defence was sometimes available when there were no innocent shareholders or directors. Subject to those points, it was not in the interests of the future clarity of the law for that decision to be treated as authoritative or of assistance, Stone & Rolls not applied (paras 21-30, 48-50). (3) Section 213 had extra-territorial effect. Its context was the winding-up of a company registered in Great Britain, but the effect of such a winding-up order was worldwide. In the case of a company trading internationally, and in an increasingly globalised economy, it was difficult to see how the provisions of s.213 could achieve their object if their effect was confined to the UK. The section contained no express limits on its territorial application. Further, s.238, which dealt in similar terms with preferences and transactions at an undervalue, had been held to apply without territorial limitations, Paramount Airways Ltd (No.2), Re [1993] Ch. 223 applied (paras 10, 53, 108-110, 213-214). (4) (Per Lords Toulson and Hodge) The doctrine of illegality had been developed on the ground of public policy and depended on the nature of the particular claim. It was always important to consider context (paras 126-130). (5) (Per Lord Sumption) The illegality defence was based on a rule of law on which the court was required to act, if necessary of its own motion, in every case to which it applied. It was not a discretionary power and it was not dependent on a judicial value judgment in each case (para.62).

Appeal dismissed