In this recent case, the Court of Appeal decided that where fraud was perpetrated by a director (Jetivia) of a company (Bilta), the fraud could not be attributed to that company where the company was used as a ‘vehicle’ of the fraud. Bilta was able to recover
losses they had suffered as a result of the fraud, even though the director was the sole director and shareholder of the company.
In this case, the company was used as a vehicle for VAT carousel fraud, resulting in serious liability for unpaid VAT. The fraud of the sole director caused the company to purchase certain tradable rights abroad, where no VAT was chargeable. The rights were
subsequently sold. Although VAT was properly chargeable on the sales, the sale price was less than the acquisition cost plus VAT. The sale price was then paid directly to the original seller abroad. As a result, Bilta could not pay the VAT when it became
The Court ruled in favour of Bilta, and said the director could not rely on the maxim ‘ex turpi causa non aritur actio’ (a claim cannot be made based on one’s own illegal act) to defeat the claim. Further, it was ruled that Section 213 of the Insolvency Act
1986, which directs that any persons who knowingly used company’s business for fraudulent behaviour was to contribute to the company’s assets, was said to not apply in this jurisdiction.
It was Bilta’s case that the fraud’s objective was to defraud and injure the company by depriving it of the ability to meet its VAT liabilities. However, Jetivia contended that the real victim was HM Revenue and Customs, and Bilta’s claim ought to be dismissed
on the grounds of the ex turpi causa maxim and public policy.
However, the Court decided that the main purpose of the conspiracy was to deprive Bilta, as it caused it to become insolvent from the moment it entered into the trading transactions. Furthermore, it was the directors’ duty to consider the creditor’s interest,
recently supported by Prest v Preston  3 WLR 1.
The Court said attribution of an agent’s conduct on a company was not automatic, but depends on the specific circumstances. In this situation, the position of the company as a victim was said to be paramount. The need for compensation arose directly out of
a breach of fiduciary duty the director owed to the company. Therefore, between the company and director in this situation, the company was the direct victim of a legal wrong.
In addition, the court decided that to allow the defendant to defeat the claim by attributing its unlawful conduct to the company would allow him to rely on his own breach of duty to defeat sections 172 and 239 of the Companies Act 2006. This would defeat
the very purpose, being to protect companies against unlawful breaches of this kind. The Court also relied on the Hampshire Land  2 Ch. 743 principle, which set out a fundamental rule that the law would not attribute the fraud of a director to the company
when it itself was the intended victim. In addition, where the fraud damaged the company and was the subject matter of the action, the damage should be considered primary rather and secondary and the company should be considered as the direct victim of the
breach. The Court was bound by Belmont Finance Corp Ltd v Williams Furniture Ltd  Ch. 250 and Re Attorney General’s Reference (No.2 of 1982)  Q.B. 624 in deciding that even a director of a one-man company could be held liable to account for breaches
of fiduciary duty which he committed against the company.
This case serves as a reminder to sole directors and shareholders of companies to steer clear of fraudulent activity, not only for public policy reasons and to avoid claims from directly affected parties such as the HMRC, but to avoid claims from their own
company. Directors and shareholders will not be allowed to rely on technicalities and maxims such as the ex turpi causa rule to defend such claims.
Should you have any concerns regarding your existing contracts, or seek guidance and advice in relation to drafting new commercial contracts please contact
Stephen Foster, Head of Corporate at firstname.lastname@example.org or by telephoning 0161 833 9211.
The information and opinions contained in this article are not intended to be comprehensive or to provide legal advice. No responsibility for article’s accuracy or correctness is assumed by Berg or any of its partners or employees. Professional legal advice
should be obtained before taking, or refraining from taking, any action as a result of the contents of this article.