Jetivia SA & Ors v Bilta (UK) Limited (in Liquidation) & Ors  EWCA Civ 968
Stone & Rolls was owned and controlled by a Mr Stojevic who perpetrated a fraud on a Czech bank. On the facts, it was established that Stone & Rolls was effectively an insolvent "one-man company". In that case the auditors successfully applied to strike out the claim on the ground that the claim was barred by the ex turpi causa principle. The auditors' case was that the fraudulent conduct of Mr Stojevic (who was the directing mind and will of the company) was to be attributed to the company so that its reliance on the fraud to found a cause of action in negligence amounted to it relying upon its own wrong. Accordingly, Stone & Rolls could not be considered the victim of the fraud, because the only victim was the Czech bank.
In Jetivia v Bilta, the English Court of Appeal held that the rule in Stone & Rolls did not apply to an action in conspiracy brought by the liquidators of a company against its fraudulent directors and overseas suppliers. Bilta had two directors and was in effect a "one-man company". The directors of Bilta, together with Bilta's overseas suppliers, used Bilta to perpetrate a tax fraud which caused the company to incur substantial VAT liabilities in the course of its trading which in turn deprived Bilta of funds with which to discharge its liabilities. As a result, Bilta was placed into insolvent liquidation and its liquidators brought proceedings against Bilta's directors and the overseas suppliers. The defendants then applied to strike out the claims on the grounds that the claims were barred by the ex turpi causa principle, relying on the House of Lords decision in Stone & Rolls, because the frauds were perpetrated by Bilta's own directors; hence the knowledge of Bilta’s directors was to be attributed to Bilta such that it was unable to bring a claim against other parties to the fraud. It was further argued that the true victim of the fraud was Revenue and Customs who had suffered loss from the fraud in which Bilta was a key participant.
The Court of Appeal rejected this argument and upheld the decision of the lower court in refusing to strike out the claim. It was held that, on the pleadings, Bilta (which had been the vehicle for the VAT fraud) was the intended and only victim of the fraud and that the knowledge of its directors would not be attributed to Bilta where its directors were perpetrating a fraud against it. In the context of a claim against Bilta's directors, Bilta was the victim regardless of whether its loss was consequential on the loss suffered by a third party, namely Revenue and Customs.
Furthermore, the Court of Appeal commented that Stone & Rolls did not apply to a claim as between a company and its directors who were perpetrators of the fraud. Stone & Rolls was a claim against the company's auditors for failing to alert the company to the existence of the fraud and hence the auditors were not parties to the fraud. Also, unlike the directors who clearly owed duties to the company and its creditors, the auditors owed no such fiduciary duties based on what was, in the context of that claim, secondary damage caused to the company by a separate breach of duty on the part of the company's own directors.
This decision is important for directors and their D&O insurers given the Court of Appeal's decision that the illegality defence in Stone & Rolls does not apply to a claim between a company and its director. In terms of claims against auditors, we do not, however, see this decision as eroding the basis on which the Stone & Rolls case was decided.