201509 CM September

Creditors, particularly the tax authorities
(HMRC) and consequently we taxpayers,
are the victims. In the Bilta case a
company was liable to account for output
tax in excess of £38 million, and HMRC
presented a winding-up petition. The
company was compulsorily wound up. The
liquidators through the company brought
proceedings against various defendants,
including two former directors, a French
company, and others. They alleged that
the two former directors with others had
caused the now liquidated company to
enter various transactions relating to the
European Emissions Trading Scheme. The
liquidators asserted that those transactions
amounted to carousel frauds.
The defendants resisted the claims
firstly on the basis of a Latin maxim, ‘ex
turpi causa non oritur actio’. This means
that an action does not arise from a
dishonourable cause, such as from a
contract founded on immoral consideration.
The defendants alleged that the company
itself had participated in the fraud, so it
could not bring an action against them.
There was also section 213 of the
Insolvency Act 1986 concerning fraudulent
trading. In such circumstances a court
may declare that ‘any persons who were
knowingly parties’ to the carrying on of the
business which had the intent to defraud
creditors of the company, or ‘creditors of
any other person’, or ‘for any fraudulent
purpose’ are liable to make ‘such
contributions (if any) to the company’s
assets as the court thinks proper,’
IMMORAL AND ILLEGAL ACTS
Lord Sumption JSC turned for guidance
to the judgment of Lord Mansfield which
he gave one July just over 240 years ago
(Holman v Johnson [1775] 1 Cowp 341).
‘The plaintiff who was resident at, and an
inhabitant of, Dunkirk, together with his
partner, a native of that place, sold and
delivered a quantity of tea, for the price of
which the action was brought, to the order
of the defendant, knowing it was intended
to be smuggled by him into England.’ The
sellers were not parties to the smuggling
scheme, and contended that the contract
was complete when the tea was delivered
at Dunkirk.
Lord Mansfield pointed out, ‘No court
will lend its aid to a man who founds his
cause of action upon an immoral or an
illegal act’ (ex turpi causa non oritur actio).
The contract was completed in Dunkirk,
so that, in Lord Mansfield’s opinion, ‘the
vendors of these goods are not guilty of any
offence, nor have they transgressed against
the provision of any Act of Parliament.’
Thus ended the Trinity law term of 1775.
The Judges of the Supreme Court were
more up to date, when they considered the
ruling of their predecessors in the House
of Lords in Moore Stephens v Stone &
Rolls Ltd [2009] AC 1391. The owner and
director of a company had siphoned away
its assets, and had falsified the accounts.
A Czech bank discovered what was going
on, so it sued both the director and the
company. The latter went into liquidation
and the director had no funds despite his
earlier actions.
The creditors therefore claimed that
the auditors were liable, and the company
sued the firm in negligence. The auditors
countered that the company was not
a victim but was a tool of the fraudster
and aware of the fraud. They raised that
defence of ex turpi causa non oritur action,
and a majority of the Law Lords agreed that
the defence should succeed.
In the Bilta case the Judges of the
Supreme Court referred to that case,
and Lord Neuberger referred to ‘the
confusing nature of the decision.’ Peter
Watts suggested in an article in the Law
Quarterly Review (Audit contracts and
turpitude – (2010) 125 LQR at page 20)
that ‘the majority reached the correct
conclusion.’ The auditors were only to
concern themselves with the shareholders,
and the only beneficial shareholder was ‘the
source of the fraud’ and ‘caught by the ex
turpi rule.’ Peter Watts concluded, ‘It was
unnecessary and wrong in this context to
treat the company itself as a fraudster.’
VICTIM OF WRONG DOING
He noted that the application of the maxim
depends on the context, and this was
emphasised in the Bilta case. In most
situations the law of agency would attribute
the minds and acts of the directors to a
company. Where, for example, a company
had been the victim of wrongdoing by its
directors, that wrongdoing could not be
attributed to the company as a defence
against a claim brought against the
company by its liquidators. In the context
of the Bilta case the company was a victim
of the directors’ wrongdoings, so it could
not be used as a defence against its claims
against them. The judges of the Supreme
Court also agreed with the earlier ruling
of the Court of Appeal that Section 213
of the Insolvency Act furthermore had an
extraterritorial effect, and could be invoked
against the defendants too.
This is a sensible decision, and Chao
Hick Tin JA of the Singapore Court of
Appeal commented on the earlier Court
of Appeal decision in Ho Kang Peng v
Scintronix Corp Ltd [2014] SGCA 22 ‘that
where a company makes a claim against
a director premised on the latter’s breach
of duty, the company is a victim, and the
law will not allow the enforcement of that
duty to be compromised by the director’s
reliance on his own wrongdoing.’
Quite right! HMRC could not have
avoided its status of creditor in the Bilta
case, but credit managers should be wary
of some companies claiming to be involved
in carbon-credit trading.
The recognised standard in credit management
www.cicm.com September 2015 29