Companies caught up in wrongdoing by reasons of the acts of their directors or agents may suffer losses themselves in the form of liabilities incurred to creditors. If such companies subsequently go into liquidation, their liquidators will seek to recover as much as possible for the creditors. The liquidators may try to do so by means of claims against the directors or agents themselves and claims against third parties who owed duties to the company.
Defendants often seek to defend such claims by relying on the ex turpi causa (illegality) defence, on the basis that the company was guilty of the wrongdoing – because the acts and knowledge of its directors or agents are to be attributed to it – and cannot be allowed to rely on its own wrong. “No court will lend its aid to a man who founds his cause of action on an immoral or an illegal act”, as it was put in the 18th century case of Holman and Johnson (1775) 1 Cowp 341.
The defence was considered recently by the English Supreme Court in Jetivia SA v Bilta UK Ltd (in liquidation) UKSC 23, though the decision leaves open a number of important questions.
The company in liquidation (Bilta) had been used as a vehicle in a carousel fraud, and Bilta incurred significant liabilities to HM Revenue & Customs. Bilta’s liquidators brought proceedings against former directors of Bilta (who caused it to participate in the carousel fraud) and other persons (Jetivia and its chief executive) said to have conspired with, and dishonestly assisted, the former directors. Jetivia argued that the illegality defence was engaged, because the acts and knowledge of Bilta’s former directors were to be attributed to Bilta.
The Supreme Court was unanimous in its decision that the illegality defence failed, because the wrongful activity of the former directors was not to be attributed to Bilta in the context. However, the members of the Court were not unanimous in their reasoning.
Three main scenarios considered by the judges were: (i) a claim by a third party against the company; (ii) a claim by the company against the wrongdoing director, agent, employee or their associates; and (iii) a claim by the company against a third party.
In the first case the liability will generally be attributed to the company and often the company will be vicariously liable without any need for the director’s knowledge to be attributed to it. In the second case (i.e. the facts of Bilta itself) attribution will not be made save where the shareholders of the company have validly ratified the wrongful conduct. All of the members of the Court considered that it would be absurd to prevent the company (and through it innocent creditors or shareholders) from being able to pursue those persons who have caused the wrongful activity. What was left open was what happens in the third case, and the judges who considered that scenario took different approaches.
One type of claim against a third party that is perhaps most likely to be encountered is a claim against the company’s auditors for failing to uncover the wrongdoing. That scenario was considered in Stone & Rolls Ltd v Moore Stephens UKHL 39, which held that the auditors concerned did not owe a duty to creditors of the insolvent company and that the company in that case was unable to pursue a claim against the auditors because of the illegality defence. However, that decision has received much criticism and in Jetivia the Supreme Court held that the Stone & Rolls decision should be confined to its own facts, such that it affords no guidance now on how attribution would operate in the third scenario. That is an area which remains to be explored in future case law.
The desire not to provide those who misuse companies with a defence, based on their own wrongful conduct to a claim by the company, which underlies the judgments of all members of the Supreme Court in Jetivia, would doubtless be shared by the BVI court. The BVI court would therefore also be likely to reject the defence in a similar context.