In the recent High Court decision in Bilta (UK) Ltd (In liquidation) and others v Nazir and others  EWHC (Ch), the court considered the application of the legal doctrine of ‘ex turpi causa non oritur actio’ in the context of fraud.
Ex turpi causa, otherwise known as the ‘illegality defence’, states that a claimant is unable to pursue a cause of action against a defendant where the claimant seeks to rely on their own acts of illegality. In short, where a party seeks to found a civil claim on an illegal act in which it was involved, as a matter of public policy the court will not lend support to that claim.
The principle has found some amusing applications – recently preventing a burglar from suing his accomplice for the negligent driving of a getaway van, from which he fell and sustained injury in the course of stealing some ladders – but applies equally to all kinds of illegality. The Bilta case concerned a large-scale fraud on HMRC.
The Bilta Case
Bilta (UK) Limited was a company that had traded carbon credits at the Danish emissions trading agency. In summary, purchases were made by Bilta from traders outside the UK; these were zero rated for VAT purposes. However, sales subsequently made to VAT registered UK persons should have been standard rated for VAT purposes, but were (deliberately) not properly treated as such. Indeed, it was alleged by the liquidators that Bilta was simply a vehicle for a fraud being conducted by those in control of it.
In the course of its trades, Bilta accrued a VAT liability to HMRC of some £38 million. However, the way the transactions were structured meant Bilta never had any significant assets of its own, and Bilta was quickly forced into liquidation.
The liquidators of the company then commenced proceedings (both in Bilta’s name and in their own right) to recover the missing £38 million from Bilta’s directors, sole shareholder and other third parties implicated in the wrongdoing. The claim alleged a conspiracy to injure and defraud Bilta, and that all of the defendants were knowingly parties to the carrying on of the business of Bilta with intent to defraud the creditors of Bilta (most notably HMRC). Specifically, the liquidators alleged that these entities had conspired to injure and defraud Bilta in carrying on the business in a way that, as the directors knew, precluded the company from being able to meet its VAT payment obligations.
Two of the Defendants – a Swiss company called Jetivia, and its sole director – applied to dismiss the claim by way of Summary Judgment. They submitted that the claim was barred by the ex turpi causa principle. In short, it was argued that Bilta should be considered a ‘one man company’, such that the fraudulent acts of its directors would be attributed to Bilta itself and so, applying the ex turpi causa principle, Bilta would not be able to rely on its own illegal actions – the fraud – to bring a cause of action against the defendants.
The Chancellor of the High Court dismissed the Defendants’ application, noting that Bilta itself was not alleged to be a party to, or a beneficiary of, the conspiracy. On the contrary, Bilta was in fact the victim of the fraud, and the conspiracy clearly involved denuding Bilta of its assets so that it would be unable to meet its obligations to HMRC.
Furthermore under section 172(3) of the Companies Act 2006, Bilta’s directors owed a duty not only to Bilta but also to the company’s current and future creditors where the company is or may be insolvent. The Court considered that, with the trades structured as they were, the very essence of the fraud was that Bilta had always been insolvent.
The claim was therefore not barred by the principle of ex turpi causa.
This case is interesting in that it limits the application of the ex turpi causa defence in instances of fraud.
This decision will particularly be welcomed by liquidators, as it permits the recover money from fraudulent directors using the company as a vehicle for fraud. Conversely, directors should be under no illusions about their ability to hide behind corporate vehicles when acting dishonestly – although it is probably fair to say that the ex turpi causa argument in the Bilta case arose at the instigation of the lawyers acting for the defendants, rather than as a fundamental part of the directors’ plan at the outset!
Following the 2009 decision in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm), there had been some debate that, in circumstances of true ‘one man companies’ in particular, there was some risk fraudulent activities perpetrated by the sole director would be attributed to the company and any claim brought by the company (acting by its liquidators) would therefore be barred on the ex turpi causa principle. The Bilta decision has now confirmed that is not the case.