Background facts

Bilta (UK) Ltd was compulsorily wound up in November 2009 pursuant to a petition presented by HMRC. Bilta’s liquidators then brought proceedings against its two former directors and against Jetivia SA (a Swiss third party supplier) as well as Jetivia’s chief executive. The liquidators claimed that the defendants were parties to an “unlawful means conspiracy” to injure Bilta via a fraudulent VAT scheme in respect of trading carbon credits under the European emissions trading scheme allowances. The liquidators alleged that the directors breached their fiduciary duties owed to Bilta and that the other defendants had dishonestly assisted them in doing so.

Accordingly, the liquidator claimed (i) through Bilta, damages in tort from each of the defendants; and (ii) directly, a contribution from each of the defendants under section 213 of the Insolvency Act 1986 (fraudulent trading).

Two of the defendants applied to strike out the liquidator’s claims on the basis of:

  1. the public policy principle that a party cannot bring a claim which relies on its own illegal act (the “illegality defence”); and
  2. in relation to the fraudulent trading claim, that section 213 could not be invoked against them as it does not have extra-territorial effect (the “section 213 defence”).

The High Court dismissed the application and allowed the liquidator’s claims to proceed. The Court of Appeal unanimously affirmed the High Court’s decision.

Supreme Court Decision

  1. The illegality defence

The seven Supreme Court judges dismissed the illegality defence because they said that the wrongdoing of the former directors could not be attributed to Bilta itself. The company, through the liquidator, was therefore not precluded from pursuing its case, they ruled. Summarising the conclusions reached, Lord Neuberger said: "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."

Although all of the Justices agreed on the outcome of the case based on principles of attribution they disagreed on the wider question of the proper approach which should be adopted to a defence of illegality, as well as the proper interpretation and effect of previous authorities including Stone Rolls Ltd v Moore Stephens [2009] 1 AC 1391. Lord Neuberger said “the proper approach to the defence of illegality needs to be addressed by this court as soon as appropriately possible.

  1. The section 213 defence

The Supreme Court unanimously held that s213 Insolvency Act 1986 does have extra-territorial effect. The purpose of the section is to provide a remedy against any person who knowingly becomes party to a company's business with a fraudulent purpose. Bilta was wound up pursuant to a court order. It was held that the effect of such a winding up order is worldwide. The Supreme Court reasoned that to give effect to the efficient winding up of companies in an ever increasingly global market, the jurisdiction of the Court ordering the winding up does extend to persons and corporations overseas which were involved in the company's business.

Notes to Editors:

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