Attribution of Knowledge: Does it depend on the identity of the victim?
In Jetivia SA & Anor v Bilta (UK) Ltd & Ors, the England and Wales Court of Appeal confirmed and clarified the circumstances in which a director’s knowledge of fraudulent conduct will be attributed to the company. In particular, it explained that a director’s knowledge will not be attributable to the company in the context of a claim made by the company against the director and its associates who engaged in unlawful conduct with negative consequences to the company.
This appeal was brought with leave by Jetivia S.A. and Urs Brunchschweiler from an Order of the Chancellor of the High Court dismissing their applications for the summary dismissal or striking out of the claims against them.
The underlying claim related to allegations of conspiracy and fraudulent trading engaged in by the only two directors of Bilta (UK) Ltd, a company incorporated in England and registered for the purposes of VAT. Bilta traded in European Emissions Trading Scheme Allowances ("EUAs"), and as a result of how the trades were conducted, Bilta earned no profit but incurred VAT liabilities of 38,000,000 pounds. As a result of its lack of profit, Bilta was unable to pay the amount owing and was wound up compulsorily.
Bilta’s liquidators brought a claim on behalf of the company against the Applicants (who were involved in the trading of the EUAs) and the other defendants for conspiracy and dishonest assistance. The liquidators also brought separate claims for fraudulent trading under the Insolvency Act 1986. With respect to the claims of conspiracy and dishonest assistance, the Applicants argued that Bilta’s claim should be dismissed or struck on the grounds of public policy based on the principle of ex turpi causa non oritur actio, which has been explained as follows:
No court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act. If, from the plaintiff's own stating or otherwise, the cause of action appears to arise ex turpi causâ, … there the court says he has no right to be assisted. It is upon that ground the court goes; not for the sake of the defendant, but because they will not lend their aid to such a plaintiff. (Holman v Johnson (1775) 1 Cowp 341.)
Much of the factual background was not in dispute, but Bilta alleged that the object of the conspiracy was to defraud and injure the company, while the Applicants alleged that the intended victim was HM Revenue and Customs who were deprived of the VAT owing to them.
The Chancellor of the High Court dismissed the applications for summary dismissal of the claims against the Applicants.
The Applicants relied on Stone Rolls Ltd v Moore Stephens and argued that Bilta was not the true victim of the conspiracy and that its loss was simply a secondary consequence of the fraudulent scheme it participated in. Therefore, they alleged, Bilta’s claim was founded in its own fraud. In the alternative, the Applicants relied on the decisions of Lord Walker and Lord Brown in Stone Rolls and argued that even if Bilta was the primary victim, the “sole actor” rule provides that where the company is a “one-man company”, there is no innocent participator in the fraud, and thus the company cannot obtain an advantage by claiming that the company is not a fraudster but a secondary victim. After a thorough review of the relevant case law, the Court of Appeal rejected both of these arguments.
Lord Justice Patten explained that in order to engage the principle of ex turpi causa non oritur actio, the Applicants were required to establish that the unlawful conduct of Bilta’s directors and sole shareholder was attributable to Bilta so that the action against the Applicants could be treated as an action between co-conspirators. He went on to explain that, subject to a statute or legal principle providing for an exception, in the context of civil and criminal proceedings brought against a company, the acts and intentions of the directors are usually attributed to the company so as to found corporate liability. Nonetheless, he cautioned that the process of attribution is not automatic.
Lord Justice Patten explained that in situations where a third party is a victim of a company’s fraud, the company cannot rely on the negative consequences to the company to prevent attribution of the conduct of its managers or directors, and therefore the consequences of liability are insufficient to prevent attribution. However, he stated that,
…in a different context, the position of the company as victim ought to be paramount. Although the loss caused to the company by its director's conduct will be no answer to the claim against the company by the injured third party, it will and ought to have very different consequences when the company seeks to recover from the director the loss which it has suffered through his actions. In such cases the company will itself be seeking compensation by an award of damages or equitable compensation for a breach of the fiduciary duty which the director or agent owes to the company.
Lord Justice Patten went on to note that as between the company and its directors, the company is the victim of the legal wrong and the director and its associates must not be able to defeat the company’s claim by attributing to the company the director’s unlawful conduct. He concluded:
To allow the defendant to defeat that claim by seeking to attribute to the company the unlawful conduct for which he is responsible so as to make it the company's own conduct as well would be to allow the defaulting director to rely upon his own breach of duty to defeat the operation of the provisions of ss. 172 and 239 of the Companies Act whose very purpose is to protect the company against unlawful breaches of duty of this kind. For this purpose and (it should be stressed) in this context, it ought therefore not to matter whether the loss which the company seeks to recover arises out of the fraudulent conduct of its directors towards a third party (as in McNicholas and Morris) or out of fraudulent conduct directed at the company itself which the Chancellor accepted was what is alleged in the present case.
Moreover, Lord Justice Patten explained that the principles to be applied when determining whether a company is liable for the acts of its directors and others generally is not limited to a determination of whether the directors wished to keep their knowledge of the bad acts secret from the company.
Finally, Lord Justice Patten determined that the “sole actor” rule is not an established feature of English law.
This case provides a helpful overview on English law relating to when a director’s knowledge will be attributed to the corporation for the purposes of liability. It clarifies that even though a company’s role as the “secondary victim” may cause it to be attributed with its directors’ knowledge when faced with a claim from a third party, its role as the “secondary victim” should not prevent it from bringing a claim against directors and their associates who engaged in fraud to recover for the losses caused to the company. Moreover, it is notable for its holding that the ex turpi causa principle will not prevent a company from bringing a claim against its director(s) even where there is a sole actor behind the company.
Jetivia SA & Anor v Bilta (UK) Ltd & Ors,  EWCA Civ 968
Case No: A3/2012/2318
Decision Date: July 31, 2013
Chancellor of the High Court England and Wales Court of Appeal fraudulent conduct unlawful conduct