Supreme Court considers whether a company which is a victim of fraud by its directors can sue those directors/the ex turpi causa defence

The Court of Appeal decision in this case was reported in Weekly Update 30/13. The directors of Bilta perpetrated a VAT fraud which left Bilta owing HMRC over £38 million. Bilta was wound up and its liquidators sought to claim against the former directors. The directors in turn raised the ex turpi causadefence (which is a public policy principle that prevents a claimant from using the court to benefit from his own illegal conduct). The directors' argument was rejected at first instance and the Court of Appeal dismissed the appeal from that decision. The Supreme Court has now unanimously dismissed the directors' further appeal.

Although the Supreme Court's decision was unanimous, differing reasons for the decision were advanced by the Lords.

Lords Neuberger, Clarke and Carnwath held that illegality could not be raised as a defence because the wrongful activity of Bilta's directors cannot be attributed to Bilta in these proceedings. They disapproved of the expression "the fraud exception"(ie in an action for breach of duty against the directors there cannot be attributed to the company a fraud which is being practised against it by its agent, even if it is being practised by a person whose acts and state of mind would be attributable to it in other contexts). Instead they (and Lord Mance) saw the question as an open one: whether or not it is appropriate to attribute the act of a director to the company in relation to a particular claim.

Lord Sumption held that prima facie there was attribution, regardless of the nature of the claim, but that a breach of duty exception applied (he noted that this is commonly referred to as the fraud exception, but said that it was not limited to fraud).

Lords Toulson and Hodge based their decision on the question whether the illegality defence would deprive the duties owed by the directors to the company of all content (but did not believe that the directors' acts could be attributed to Bilta either).

COMMENT: As in the House of Lords case of Stone & Rolls v Moore Stephens (see Weekly Update 28/09), there was disagreement here as to the precise rationale for the court's decision. (In Stone Rolls, the House of Lords allowed the ex turpi causa defence where a claim was being brought against a third party by the company, rather than against the fraudulent directors themselves). These two decision therefore lead to the sense that the courts will look at the overall justice of each case in order to determine whether the defence should be allowed. In this case, it was plainly unjust to bar a claim by the victim of the fraud (ie the company) against the very perpetrators of that fraud by attributing the fraudulent acts to the company.