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England and Wales Court of Appeal (Civil Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Jetivia SA & Anor v Bilta (UK) Ltd & Ors  EWCA Civ 968 (31 July 2013)
Cite as:  1 All ER 168,  1 BCLC 302,  WLR(D) 333,  1 All ER (Comm) 176,  1 CH 52,  STC 2298,  BCC 655,  EWCA Civ 968,  3 WLR 1167,  Lloyd's Rep FC 620,  STI 2677,  CH 52,  1 Lloyd's Rep 113,  Ch 52
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
Sir Andrew Morritt
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE RIMER
LORD JUSTICE PATTEN
| (1) Jetivia S.A.
(2) URS BRUNSCHWEILER
6th and 7th Defendants
|- and -
|(1) Bilta (Uk) Limited (in liquidation)
(2) KEVIN JOHN HELLARD (liquidator of Bilta (UK) Ltd)
(3) DAVID ANTHONY INGRAM (liquidator of Bilta (UK) Ltd)
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Christopher Parker QC and Rebecca Page (instructed by Gateley LLP) for the Respondents
Crown Copyright ©
Lord Justice Patten :
The pleaded claim
"14. (a) During at least the period 22 April 2009 to 21 July 2009 a conspiracy existed to defraud and injure a company (and thereby to engage in fraudulent trading with an intention to defraud and injure that company) by trading in carbon credits and dealing with the proceeds therefrom in such a way as to deprive that company of its ability to meet its VAT obligations on such trades namely to pass the money (which would otherwise have been available to that company to meet such liability) to accounts off-shore, including accounts of Jetivia and THG ("the Conspiracy").
(b) As the conspirators knew, the fraudulent scheme involved breaches of fiduciary duty by a director or directors of such company.
(c) Bilta was the defrauded company. This claim concerns Bilta's purchase and sale of EUAs between 22 April 2009 and 21 July 2009.
(d) The parties to the conspiracy included Mr Brunschweiler and Jetivia, and Mr Shafiq and THG.
(e) It is not known on what date or dates the conspiracy was formed."
"15. (1)(a) Mr Brunschweiler and Jetivia agreed to supply Bilta with EUAs, and to enter into documentation which showed Jetivia as having supplied Bilta even though in a number of cases the EUAs had been transferred direct to a First Line Buffer (see paragraph 22(8) below), for onward sale, knowing that Bilta would not be paying the VAT due on its onward sales.
(2) Bilta would then sell the EUAs on (or, where Bilta had not itself received the EUAs, produce paperwork showing the EUAs to have been sold on) at a price inclusive of VAT. In at least 46 cases Bilta sold the EUAs at a price which was less (net of VAT) than it had paid. Bilta sold to companies that had no legitimate use for the EUAs and whose role was to sell on the EUAs for a small profit ("the First Line Buffers"), which they were only able to do because Bilta had sold for a price net of VAT less than it had paid, (save that on at least 25 occasions Pan 1 immediately sold on at a loss – see Schedule 1). The First Line Buffers were not engaged in legitimate trading but were dishonestly participating in the fraudulent scheme.
(3) The First Line Buffers would themselves often sell on to companies that had no legitimate use for the EUAs and whose role was to sell on the EUAs for a small profit ("the Second Line Buffers") (which they were only able to do because Bilta had sold for a price net of VAT less than it had paid). (Sometimes the First Line Buffers would sell onto the Second Line Buffers at a loss). The Second Line Buffers were not engaged in legitimate trading but were dishonestly participating in the fraudulent scheme.
(4) The money payable to Bilta by its purchasers (inclusive of the VAT element) would almost all be paid by the purchasers either (a) to Bilta and then paid by Bilta to Jetivia or (b) directly to Jetivia or to THG, or (c) to offshore accounts the account-holders of which have yet to be identified.
(5) Jetivia and THG's participation in the fraudulent scheme was not limited to transactions in which Bilta actually acquired EUAs from Jetivia and THG:
(a) In a good number of transactions Jetivia and THG entered into paperwork with Bilta which showed that Bilta had acquired and sold on EUAs from Jetivia and THG which EUAs the Registry showed as being transferred from THG and Jetivia directly to Bilta's purchaser or through a different intermediary company before transfer to Bilta's purchaser (see paragraph 22(8) below).
(b) Jetivia and THG would receive payments directly from the First Line Buffers depriving Bilta of the means of meeting its VAT liabilities.
(6) The First Line Buffers included Pan 1…. The aforementioned First Line Buffers' participation in the fraudulent scheme was not limited to transactions in which EUAs were actually transferred at the Registry. In a good number of transactions the aforementioned First Line Buffers produced paperwork for the sale or purchase of EUAs when no transfer of EUAs was made at the Registry.
(7) The design and effect of the fraudulent scheme was to render Bilta insolvent and unable to discharge its VAT liability.
(8) The First Line Buffers and the Second Line Buffers (and the directors of each) knowingly participated in the fraudulent scheme and were parties to the Conspiracy.
16.(1) Bilta and the First and Second Line Buffers were able to fund a significant number of deals worth many millions of Euros despite having very poor credit rating and asset bases.
(2) The parties were able to carry out multiple deals on one day, with all parties being able to immediately source a supplier and customer despite their limited, and even nonexistent experience in this particular sector.
(3) The pricing of the deals did not accord with legitimate trading.
17. According to the Registry:
(1) In May 2009 Bilta was supplied 624,000 EUAs by Jetivia and 334,000 EUAs by THG (using the account of Mr Shafiq) in 22 transactions.
(2) In June 2009 Bilta was supplied with 5,139,569 EUAs by Jetivia, THG (using the account of Mr Shafiq), Pan 1, GW Deals and IEG in 100 transactions.
18. Between 22 April and 21 July 2009, in 259 transactions Bilta's paperwork showed it as having sold EUAs back-to-back ("the Sales") to four First Line Buffers being (i) Pan 1; (ii) GW Deals; (iii) AHM; and (iv) Ambron. The First Line Buffers were registered under VATA 1994. 113 of the Sales by Bilta were recorded at the Registry as having transferred the EUAs to the respective transferee. Each of the Sales, being a supply or invoice issued in respect of a supply by Bilta (as a trader registered for VAT in the United Kingdom) to a purchaser, also registered for VAT in the United Kingdom, was subject to VAT at 15%.
19. The total invoice value of the Sales as per the invoices issued to the First Line Buffers was in excess of €294,089,290.71 plus VAT in excess of €44,113,993.61. The First Line Buffers immediately sold on the EUAs acquired from Bilta to other purchasers."
"(9) Bilta would often form part of a carousel in which the EUAs would end where they started with everyone profiting from the transactions, save Bilta, and profiting by reason of Bilta's selling on at a loss: see Schedule 7. These transactions were within the second HMRC assessment.
(10) Despite being based in and trading from England, Bilta used a HSBC Hong Kong bank account for these transactions.
(11) Mr Nazir and Mr Chopra failed to file any VAT return in respect of the period 1 April to 31 July 2009 on behalf of Bilta nor have they caused Bilta to account to HMRC for any sum in respect of the VAT charged on the Sales."
"42. At all material times Mr Nazir and Mr Chopra as the directing will and mind of Bilta failed to file any VAT return in respect of the period 1 April to 31 July 2009 on behalf of Bilta nor have they caused Bilta to account to HMRC for any sum in respect of the VAT charged on the Sales.
43. In directing Pan 1 to pay the entirety or substantial part of the purchase price (including that element attributable to VAT) to parties other than Bilta, and in paying over its receipts to third parties without retaining the VAT element for payment to HMRC Mr Nazir and Mr Chopra as the directing will and mind of Bilta were depriving it of funds with which to discharge its liabilities, including its VAT liability in relation to the Sales.
44. At all material times Mr Nazir and Mr Chopra owed fiduciary duties to act in the way they considered in good faith, would be most likely to promote the success of Bilta for the benefit of its members as a whole.
45. Pursuant to and in furtherance of the Conspiracy Mr Nazir and Mr Chopra, in breach of the aforesaid duties, conducted the Company's affairs as set out in paragraphs 11 to 43 above. The dishonest breaches of fiduciary duty were the deliberate arranging of the Company's affairs such that no part of its VAT liabilities would be discharged. The effect of the said trading arrangements as set out was that Bilta incurred VAT liabilities in respect of the Sales in the sum of not less than £38,733,444.04 none of which has been paid to HMRC. Mr Nazir and Mr Chopra failed to apply Bilta's funds for the purpose of discharging its lawful liabilities.
46. Mr Nazir was registered as a director of Bilta from 10 May 2009. Mr Chopra was a registered director of Bilta from 17 April 2008 until 3 July 2009 (he was previously a registered director between 15 February 2006 and 1 July 2007). Mr Chopra continued to act as a director of Bilta after 3 July 2009.
47. Further, Mr Chopra and Mr Nazir conducted the Company's affairs knowing and intending that it would be rendered insolvent and would be unable to meet, or had no reasonable prospect of paying, its liabilities (including its VAT liabilities) and was (alternatively, would become, as a consequence of the above transactions) insolvent.
48. Mr Chopra and Mr Nazir are liable for damages for unlawful means conspiracy and/or to pay compensation pursuant to section 213 Insolvency Act 1986 ("IA 1986") for carrying on Bilta's business with intent to defraud creditors or alternatively for a fraudulent purpose (namely the non-payment of its liability to HMRC for VAT).
49. In particular the Claimants rely on the facts and circumstances pleaded in paragraph 11-41 above.
50. Mr Nazir and/or Mr Chopra are liable to compensate Bilta for breach of fiduciary duty. Further or alternatively by reason of the conspiracy to defraud and injure Bilta and/or as a result of the fraudulent trading Bilta has suffered loss and damage.
PARTICULARS OF LOSS
An amount equal to Bilta's liability for VAT arising from the Company's invoices on the Sales in the sum of £38,733,444.04."
Ex turpi causa
"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."
"It is important to observe that, as Lord Mansfield made clear, the principle is not a principle of justice; it is a principle of policy, whose application is indiscriminate and so can lead to unfair consequences as between the parties to litigation. Moreover the principle allows no room for the exercise of any discretion by the court in favour of one party or the other."
"In my judgment the time has come to decide clearly that the rule is the same whether a plaintiff founds himself on a legal or equitable title: he is entitled to recover if he is not forced to plead or rely on the illegality, even if it emerges that the title on which he relied was acquired in the course of carrying through an illegal transaction."
"(1) A director of a company must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole, and in doing so have regard (amongst other matters) to—
(a) the likely consequences of any decision in the long term,
(b) the interests of the company's employees,
(c) the need to foster the company's business relationships with suppliers, customers and others,
(d) the impact of the company's operations on the community and the environment,
(e) the desirability of the company maintaining a reputation for high standards of business conduct, and
(f) the need to act fairly as between members of the company.
(2) Where or to the extent that the purposes of the company consist of or include purposes other than the benefit of its members, subsection (1) has effect as if the reference to promoting the success of the company for the benefit of its members were to achieving those purposes.
(3) The duty imposed by this section has effect subject to any enactment or rule of law requiring directors, in certain circumstances, to consider or act in the interests of creditors of the company."
"105. The flaw in the 'power equals property' approach is that it ignores the fundamental principle that the only entity with the power to deal with assets held by it is the company. Those who control its affairs – even if the control is in a single individual – act merely as the company's agents. Their agency will include the authority to procure an exercise by the company of its dispositive powers in respect of its property, but those powers are still exclusively the company's own: they are not the agents' powers. When and if the agents act as such, and procure a corporate disposition, the property which immediately before the disposition belonged to the company will become the property of the disponee. Until then, it remains the property of the company and belongs beneficially to no-one else. The judge's point that the agent is automatically the owner of all the company's assets by the mere fact of his authority to procure the company to dispose of them to himself is astonishing and does not begin to pass muster. And why should it? The proposition was simply the fruit of a judicial attempt to shoehorn into section 24(1)(a) assets which manifestly do not fit there. The judge's finding that the husband's mastery of the companies meant that they and their assets were his, and that they were the equivalent of mere nominees or agents for him (see, for example, his paragraph 225), could have been lifted directly from the argument of counsel for the respondents that was rejected in Salomon (see  AC 22, at 28, 29).
106. That is probably all that needs to be said about the judge's 'power equals property' theory. I shall, however, add a little more. A further reason why the theory does not work is that the judge overlooked that even the one-man in such a company does not have unlimited power to procure the company to deal as he would wish with the company's assets. He may in practice be able to do so, by procuring the payment of its money and the execution of corporate dispositions right, left and centre, all perhaps for nothing in return. But he will not be able to do so lawfully. Even he will be constrained by the capital maintenance provisions which limit such wholesale disposals. He cannot, for example, lawfully procure the making of distributions by the company save out of its distributable profits and, if he does, the distribution will be unlawful and void. I discussed such problems in Inn Spirit Ltd v. Burns and Another  2 BCLC 780, which concerned a one-man corporate group, in which the one-man purported to pay himself a dividend. The one-man is not in a position lawfully to distribute to himself the entirety of his company's assets at any time. To revert to the judge's paragraph 225, there is a 'legal impediment' to wholesale transfers by a company in favour of its one-man controller. Only when the one-man lawfully procures the exercise of the corporate power of disposition in his own favour is it possible to identify which property has ceased to belong to the company and has become his."
"41. The recognition of a jurisdiction such as the judge sought to exercise in this case would cut across the statutory schemes of company and insolvency law. These include elaborate provisions regulating the repayment of capital to shareholders and other forms of reduction of capital, and for the recovery in an insolvency of improper dispositions of the company's assets. These schemes are essential for the protection of those dealing with a company, particularly where it is a trading company like PRL and Vermont. The effect of the judge's order in this case was to make the wife a secured creditor. It is no answer to say, as occasionally has been said in cases about ancillary financial relief, that the court will allow for known creditors. The truth is that in the case of a trading company incurring and discharging large liabilities in the ordinary course of business, a court of family jurisdiction is not in a position to conduct the kind of notional liquidation attended by detailed internal investigation and wide publicity which would be necessary to establish what its liabilities are. In the present case, the difficulty is aggravated by the fact that the last financial statements, which are not obviously unreliable, are more than five years old. To some extent that is the fault of the husband and his companies, but that is unlikely to be much comfort to unsatisfied creditors with no knowledge of the state of the shareholder's marriage or the proceedings in the Family Division. It is clear from the judge's findings of fact that this particular husband made free with the company's assets as if they were his own. That was within his power, in the sense that there was no one to stop him. But, as the judge observed, he never stopped to think whether he had any right to act in this way, and in law, he had none. The sole shareholder or the whole body of shareholders may approve a foolish or negligent decision in the ordinary course of business, at least where the company is solvent: Multinational Gas & Petrochemical Co v Multinational Gas & Petrochemical Services Ltd  Ch 258. But not even they can validly consent to their own appropriation of the company's assets for purposes which are not the company's: Belmont Finance Corpn Ltd v Williams Furniture Ltd  Ch 250, 261 (Buckley LJ), Attorney-General's Reference (No 2 of 1982)  QB 624, Director of Public Prosecutions v Gomez  AC 442, 496-497 (Lord Browne-Wilkinson). Mr Prest is of course not the first person to ignore the separate personality of his company and pillage its assets, and he will certainly not be the last. But for the court to deploy its authority to authorise the appropriation of the company's assets to satisfy a personal liability of its shareholder to his wife, in circumstances where the company has not only not consented to that course but vigorously opposed it, would, as it seems to me, be an even more remarkable break with principle.
42. It may be said, as the judge in effect did say, that the way in which the affairs of this company were conducted meant that the corporate veil had no reality. The problem about this is that if, as the judge thought, the property of a company is property to which its sole shareholder is "entitled, either in possession or reversion", then that will be so even in a case where the sole shareholder scrupulously respects the separate personality of the company and the requirements of the Companies Acts, and even in a case where none of the exceptional circumstances that may justify piercing the corporate veil applies. This is a proposition which can be justified only by asserting that the corporate veil does not matter where the husband is in sole control of the company. But that is plainly not the law."
"There is in fact no such thing as the company as such, no 'ding an sich', only the applicable rules. To say that a company cannot do something means only that there is no one whose doing of that act would, under the applicable rules of attribution, count as an act of the company. The company's primary rules of attribution together with the general principles of agency, vicarious liability and so forth are usually sufficient to enable one to determine its rights and obligations. In exceptional cases, however, they will not provide an answer. This will be the case when a rule of law, either expressly or by implication, excludes attribution on the basis of the general principles of agency or vicarious liability. For example, a rule may be stated in language primarily applicable to a natural person and require some act or state of mind on the part of that person 'himself', as opposed to his servants or agents. This is generally true of rules of the criminal law, which ordinarily impose liability only for the actus reus and mens rea of the defendant himself. How is such a rule to be applied to a company? One possibility is that the court may come to the conclusion that the rule was not intended to apply to companies at all; for example, a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of attribution, ie if the act giving rise to liability was specifically authorised by a resolution of the board or an unanimous agreement of the shareholders. But there will be many cases in which neither of these solutions is satisfactory; in which the court considers that the law was intended to apply to companies and that, although it excludes ordinary vicarious liability, insistence on the primary rules of attribution would in practice defeat that intention. In such a case, the court must fashion a special rule of attribution for the particular substantive rule. This is always a matter of interpretation: given that it was intended to apply to a company, how was it intended to apply? Whose act (or knowledge, or state of mind) was for this purpose intended to count as the act etc of the company? One finds the answer to this question by applying the usual canons of interpretation, taking into account the language of the rule (if it is a statute) and its content and policy."
"This doctrine, sometimes known as the alter ego doctrine, has been developed, with no divergence of approach, in both criminal and civil jurisdictions, the authorities in each being cited indifferently in the other. A company having no mind or will of its own, the need for it arises because the criminal law often requires mens rea as a constituent of the crime, and the civil law intention or knowledge as an ingredient of the cause of action or defence. In the oft-quoted words of Viscount Haldane LC in Lennards Carrying Co Ltd v Asiatic Petroleum Co Ltd  AC 705 at 713, [1914–15] All ER Rep 280 at 283:
'My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will must consequently be sought in the person of somebody who for some purposes may be called an agent, but who is really the directing mind and will of the corporation, the very ego and centre of the personality of the corporation.'
The doctrine attributes to the company the mind and will of the natural person or persons who manage and control its actions. At that point, in the words of Millett J ( 3 All ER 717 at 740): 'Their minds are its mind; their intention its intention; their knowledge its knowledge.' It is important to emphasise that management and control is not something to be considered generally or in the round. It is necessary to identify the natural person or persons having management and control in relation to the act or omission in point. This was well put by Eveleigh J in delivering the judgment of the Criminal Division of this court in R v Andrews Weatherfoil Ltd  1 All ER 65 at 70,  1 WLR 118 at 124:
'It is necessary to establish whether the natural person or persons in question have the status and authority which in law makes their acts in the matter under consideration the acts of the company so that the natural person is to be treated as the company itself.'"
"I must start by considering the nature of the personality which by a fiction the law attributes to a corporation. A living person has a mind which can have knowledge or intention or be negligent and he has hands to carry out his intentions. A corporation has none of these: it must act through living persons, though not always one or the same person. Then the person who acts is not speaking or acting for the company. He is acting as the company and his mind which directs his acts is the mind of the company. There is no question of the company being vicariously liable. He is not acting as a servant, representative, agent or delegate. He is an embodiment of the company or, one could say, he hears and speaks through the persona of the company, within his appropriate sphere, and his mind is the mind of the company. If it is a guilty mind then that guilt is the guilt of the company. It must be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as the company's servant or agent. In that case any liability of the company can only be a statutory or vicarious liability.
Normally the board of directors, the managing director and perhaps other superior officers of a company carry out the functions of management and speak and act as the company. Their subordinates do not. They carry out orders from above and it can make no difference that they are given some measure of discretion. But the board of directors may delegate some part of their functions of management giving to their delegate full discretion to act independently of instructions from them. I see no difficulty in holding that they have thereby put such a delegate in their place so that within the scope of the delegation he can act as the company. It may not always be easy to draw the line but there are cases in which the line must be drawn. The Lennard's Carrying Co case  AC 705 was one of them."
"Clearly there are some circumstances in which an individual's knowledge of fraud cannot and should not be attributed to a company. The classic case is where the company is itself the target of an agent's or employee's dishonesty. In general, it would not be sensible or realistic to attribute knowledge to the company concerned, if attribution had the effect of defeating the right of the company to recover from a dishonest agent or employee or from a third party. Mr Moss argued that there should be no attribution of knowledge as this was a case in which BoI was the "secondary victim" of Mr Samant. His actions were harmful to the interests of BoI, as he had exposed it to the risk of potential liability for fraudulent trading. We have no hesitation in rejecting that submission. If it were correct, it would never be possible to attribute the knowledge of the individual to a company under s 213. That is contrary to the agreed position that a company is capable of being made liable under s 213. Knowledge of fraud may be attributed to a company even though such attribution may expose it to the risk of liability under s 213."
"On the footing that the directors of the plaintiff company who were present at the board meeting on October 11, 1963, knew that the sale of the Maximum shares was at an inflated value, and that such value was inflated for the purpose of enabling the third, fourth, fifth and sixth defendants to buy the share capital of the plaintiff company, those directors must be taken to have known that the transaction was illegal under section 54.
It may emerge at a trial that the facts are not as alleged in the statement of claim, but if the allegations in the statement of claim are made good, the directors of the plaintiff company must then have known that the transaction was an illegal transaction.
But in my view such knowledge should not be imputed to the company, for the essence of the arrangement was to deprive the company improperly of a large part of its assets. As I have said, the company was a victim of the conspiracy. I think it would be irrational to treat the directors, who were allegedly parties to the conspiracy, notionally as having transmitted this knowledge to the company; and indeed it is a well-recognised exception from the general rule that a principal is affected by notice received by his agent that, if the agent is acting in fraud of his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal.
So in my opinion the plaintiff company should not be regarded as a party to the conspiracy, on the ground of lack of the necessary guilty knowledge."
"because common sense at once leads one to the conclusion that it would be impossible to infer that the duty, either of giving or receiving notice, will be fulfilled where the common agent is himself guilty of fraud."
"55. In my judgment, the tribunal correctly concluded that there should be attribution in the present case, since the company could not sensibly be regarded as a victim of the fraud. They were right to hold that the fraud was 'neutral' from the company's point of view. The circumstances in which the exception to the general rule of attribution will apply are where the person whose acts it is sought to impute to the company knows or believes that his acts are detrimental to the interests of the company in a material respect. This explains, for example, the reference by Viscount Sumner in JC Houghton & Co v Nothard Lowe & Wills Ltd  AC 1, 19 to making 'a clean breast of their delinquency'. It follows that, in judging whether a company is to be regarded as the victim of the acts of a person, one should consider the effect of the acts themselves, and not what the position would be if those acts eventually prove to be ineffective. As the tribunal pointed out, in In re Supply of Ready Mixed Concrete (No 2)  1 AC 456 the company suffered a large fine for contempt of court on account of the wrongful acts of its managers. The fact that their wrongful acts caused the company to suffer a financial penalty in this way did not prevent the acts and knowledge of the managers from being attributed to it.
56. The Hampshire Land principle or exception is founded in common sense and justice. It is obvious good sense and justice that the act of an employee should not be attributed to the employer company if, in truth, the act is directed at, and harmful to, the interests of the company. In the present case, the fraud was not aimed at the company. It was not intended by the participants in the fraud that the interests of the company should be harmed by their conduct. In judging whether the fraud was in fact harmful to the interests of the company, one should not be too ready to find such harm. In my view, the cash flow point made by Mr Purle [leading counsel for the company] comes nowhere near being serious enough to trigger the principle. Looking at the facts of this case from a common sense point of view, there was no VAT fraud or harm to the interests of the company. The tribunal were entitled to reach this conclusion. It was the correct conclusion to reach."
"The McNicholas case  STC 553 shows that, in assessing whether the Hampshire Land principle applies, it is not appropriate to factor into the consideration the adverse consequences to the company when and if the fraud is found out."
Stone & Rolls
" I find it a little surprising that the McNicholas and Bank of India cases emerge as authorities contributing to the jurisprudence on the application of the Hampshire Land principle. They were both concerned with fixing liability on a company at the suit of a third party and a central question in each was whether the relevant statutory policy (respectively the VAT legislation and the insolvency legislation) required the attribution to the company of the acts of its agents, being agents who were not its directing mind and will. Once, as in each case it did, the court held that the applicable policy did require such attribution, I find it difficult to see on what basis it was considered that such attribution could or might be trumped by the Hampshire Land principle, which is primarily concerned not with a company's liabilities to others but rather with its claims against others.
 But, surprising or not, there is no escaping that both in the McNicholas case and in the Bank of India case the court discussed the scope of the Hampshire Land principle. In my judgment both cases support Mr Sumption's submission that the principle will ordinarily only apply in circumstances in which the agents intend to harm the company (the McNicholas case  STC 553, para 56), or it is the target of their acts (the Bank of India case  2 BCLC 328, para 118), and that it is not enough to engage the principle that an agent's acts may result in harm to the company. In the former case it made no difference that the agents' frauds were found out and resulted in material harm to McNicholas in the shape of assessments to tax of more than £1m: see  STC 553, para 1; and in the latter case it made no difference that Mr Samant's actions resulted in BoI being made liable under section 213 to a judgment of over US$80m: see  2 BCLC 328, para 1. In both cases the companies were, in the phrase used in argument, left "holding the baby", just as the company is said to have been here. Both authorities support the view that being a "secondary" victim of this nature is not enough to engage the principle; what counts is the identification of the victim against whom the fraudulent acts are directed. The logic underlying this approach is that it is irrelevant in the present context to take account of the adverse consequences to the fraudster of being a fraudster: those are simply the consequences that the law visits on fraudsters, but they do not, in the present context, make the fraudster a victim. Whilst I recognise the Arab Bank case  1 Lloyd's Rep 262 as pointing in a different direction, I take the view that this court in the Bank of India case preferred and approved the reasoning in the McNicholas case, and in my judgment we should take our lead from the Bank of India case."
" What about the primary and secondary rules on attribution to the company of knowledge and of a guilty mind? They are relevant to whose acts count as acts of the company for the purposes of the substantive rule in question and to fixing it with responsibility for/liability for the fraud of its director or vicarious liability. In my judgment, in this case the knowledge of the fraudulent mastermind and the knowledge of his creature company are identical in targeting the victim bank. It is not a case of a company itself being an innocent victim of deception by one of its officers. This company was party to the fraud, not an innocent victim of it."
" The scope of Moore Stephens's duty is not directly in issue on this appeal. What is in issue is whether ex turpi causa provides a defence to S & R's claim that Moore Stephens was in breach of duty. That is not, however, a question that I have been able to consider in isolation from the question of the scope of Moore Stephens's duty. I have reached the conclusion that all whose interests formed the subject of any duty of care owed by Moore Stephens to S & R, namely the company's sole will and mind and beneficial owner Mr Stojevic, were party to the illegal conduct that forms the basis of the company's claim. In these circumstances I join with Lord Walker and Lord Brown in concluding that ex turpi causa provides a defence."
" My Lords, I would not think it right to hold as a matter of general principle that ex turpi causa does not apply to a claim by a company against its auditors for failing to detect that the company has been operating fraudulently unless it were demonstrated how the difficulties to which I have referred could be resolved. There has been no such demonstration in this case. Thus I am not able to join Lord Scott and Lord Mance in concluding, for the reasons that they have given, that ex turpi causa does not apply to S & R's claim. At the same time, I have not been persuaded by Mr Sumption's primary case that the reliance test, or the principle of public policy that underlies it, would necessarily defeat S & R's claim if S & R were a company with independent shareholders that had been "high-jacked" by Mr Stojevic. In that, at least, I believe that I share common ground with all your Lordships."
" In all these cases there was a company which was the victim of a fraud or serious breach of duty, and the court held that it was not to be prejudiced by the guilty knowledge of an individual officer who could not be expected to disclose his own fault. (The fact that duties were owed to two different companies in the Hampshire Land and Houghton cases is, I think, an irrelevant coincidence). This principle is sometimes referred to in the United States of America as the "adverse interest" exception to the usual rule of imputation (see for instance Rudolph and Tanis, "Invoking In Pari Delicto to Bar Accountant Liability Actions Brought by Trustees and Receivers" (2008) ALI-ABA Study Materials). It is applied, typically, in cases in which the corporate victim is the claimant and the defence seeks to rely on the corporate victim's notice, knowledge or complicity. It will be necessary to consider some recent English cases which do not fit so neatly into the same mould."
"But I can see no reason why the principle should be limited to claims. It is, as I have said, a general principle of agency which can apply to any issue as to a company's notice, knowledge or complicity, whether that issue arises as a matter of claim or defence."
"Second, the adverse interest exception does not apply to cases in which the principal is a corporation and the agent is its sole shareholder. As noted, the adverse interest exception is to a presumption that an agent has discharged the duty of disclosing material facts to the principal.
Under New York law, where the agent is defrauding the principal, such disclosure cannot be presumed because it would defeat—or have defeated—the fraud. However, where the principal and agent are one and the same, the adverse interest exception is itself subject to an exception styled the 'sole actor' rule. This rule imputes the agent's knowledge to the principal notwithstanding the agent's self-dealing because the party that should have been informed was the agent itself albeit in its capacity as principal. Where, as here, a sole shareholder is alleged to have stripped the corporation of assets, the adverse interest exception to the presumption of knowledge cannot apply."
"In particular I would apply the "sole actor" principle to a claim made against its former auditors by a company in liquidation, where the company was a one-man company engaged in fraud, and the auditors are accused of negligence in failing to call a halt to that fraud. Here I return to Mr Brindle's point (para 132 above) about the need to decide any question of attribution by reference to its context. Looking at the context, I cannot accept his submission that a claim against auditors is a context in which S & R should not be treated as primarily (or directly) liable for its fraud against KB, and so disabled by the ex turpi causa principle. Mr Sumption conceded, in line with the pleadings, that the auditors did owe a duty of care to S & R, although Mummery LJ (with whom, as with Rimer LJ, Keene LJ agreed) considered, ante, p 1435, para 115, that "the firm did not owe a duty of care to the company, which was a fraudster in the total grip of another fraudster". On the assumption that the auditors did owe a duty of care to S & R, it was a duty owed to that company as a whole, not to individual shareholders, or potential shareholders, or current or prospective creditors, as this House decided in Caparo Industries plc v Dickman  2 AC 605. If the only human embodiment of the company already knew all about its fraudulent activities, there was realistically no protection that its auditors could give it. In Caparo this House approved the decision of Millett J in Al Saudi Banque v Clarke Pixley  Ch 313, the facts of which were comparable to those of the present case."
" However it is unnecessary to speculate further about the commercial terms on which gangs of robbers or fraudsters might be expected to organise their criminal activities. There is in my opinion a clearer and firmer basis on which to determine what (if any) significance to give to the notion of a company being the secondary victim of the fraud (aimed at a third party) of one or more of its directors. It is necessary to keep well in mind why the law makes an exception (the adverse interest rule) for a company which is a primary victim (like the Belmont company, which was manipulated into buying Maximum at a gross overvaluation). The company is not fixed with its directors' fraudulent intentions because that would be unjust to its innocent participators (honest directors who were deceived, and shareholders who were cheated); the guilty are presumed not to pass on their guilty knowledge to the innocent. But if the company is itself primarily (or directly) liable because of the "sole actor" rule, there is ex hypothesi no innocent participator, and no one who does not already share (or must by his reckless indifference be taken as sharing) the guilty knowledge. That is consistent with the analysis by Rix J in Arab Bank  1 Lloyd's Rep 262. In that case Mr Browne was not the directing mind of JDW, which was not a one-man company; Rix J accepted that the position might have been different if it had been.
 I would therefore limit my ground of decision in this appeal to the proposition that one or more individuals who for fraudulent purposes run a one-man company (in the sense described above) cannot obtain an advantage by claiming that the company is not a fraudster, but a secondary victim. McNicholas  STC 553 and Bank of India  2 BCLC 328 may be best analysed as depending on a special rule of attribution required by the scheme of the legislation relating to VAT or fraudulent trading (as the case may be). It is not necessary to the disposal of this appeal, or prudent, to address every situation that may be described as involving a secondary victim."
" For this reason I find the concept of the "sole actor" exception to the adverse interest exception (the Hampshire Land principle) a somewhat puzzling one. Why is it necessary to except from an exception a category of case which cannot logically fall into the exception in the first place? Assuming, however, that there is scope for such an exception to the Hampshire Land principle, then the need for it seems to me compelling and as good a statement of it as any is to be found in In re The Mediators Inc; The Mediators Inc v Manney (1997) 105 F 3d 822 already fully set out at para 163 of Lord Walker's opinion.
 It is on this basis and this basis alone—the one-man company or sole actor basis—that I would uphold the Court of Appeal's judgment that S & R is in no different or better position than Mr Stojevic himself to resist the ex turpi causa defence (and the liquidator of S & R in no better position than either of them)."
" The ex turpi causa rule is a procedural rule based on public policy. The perpetrators of illegality, a fortiori of dishonest illegality, ought not to be allowed to benefit from their reprehensible conduct. If S & R had remained a solvent company, an action against Moore Stephens that would have enabled Mr Stojevic to benefit from any damages that were recovered would have offended the ex turpi causa rule. Take the case of a solvent company that under the direction of its managing director engages in an unlawful and, in the event, loss making activity that could and should have been prevented by a timely report made by its auditors. Let it be supposed the managing director is also a shareholder and that he and the auditors are together sued for negligent breach of duty. I know of no authority that would bar such an action on ex turpi causa grounds. The action, assuming it succeeded against both defendants, could be expected, via contribution proceedings, to leave the delinquent managing director with no benefit from any damages recovered from the auditors. And why, if that were so, should public policy require the auditors to be relieved of liability for their breach of duty?
 In a case, such as the present, where the company is insolvent and will stay so whatever damages are recoverable from the auditors, the need to ensure that the delinquent director does not benefit from the damages does not present a problem. There is no possibility of Mr Stojevic benefiting from any damages recoverable from Moore Stephens. So, I repeat, why should the ex turpi causa rule, a rule based on public policy, bar an action against the auditors based on their breach of duty?"
" There are, however, cases, sometimes referred to as "sole actor" cases, where the company has no human embodiment other than the fraudster and where, therefore, there is no one in the company for the fraudster to deceive, no one in the company to whom "a clean breast of … delinquency" could be made. In these "one actor" cases, it is said, the Hampshire Land Co rule can have no sensible application. The knowledge of the fraudster simply is the knowledge of the company. An example of this proposition in action is Royal Brunei Airlines Sdn Bhd v Tan  2 AC 378. This was a case in which the issue was whether the company, BLT, had been guilty of fraud or dishonesty in relation to money it held in trust for the plaintiff airline. The company had become insolvent and the airline sued its controlling director, Mr Tan, on the ground that he had knowingly assisted in the dissipation by BLT of the money. Lord Nicholls of Birkenhead said, at p 393:
"The defendant accepted that he knowingly assisted in that breach of trust. In other words, he caused or permitted his company to apply the money in a way he knew was not authorised by the trust of which the company was trustee. Set out in these bald terms, the defendant's conduct was dishonest. By the same token, and for good measure, BLT also acted dishonestly. The defendant was the company, and his state of mind is to be imputed to the company."
 But the attribution to BLT of Mr Tan's dishonesty for the purposes of the airline's claim against, in effect, BLT and Mr Tan, could not be taken to bar misfeasance proceedings by the liquidator of BLT against Mr Tan or against any other officer of BLT who, in relation to the trust money, "has … been guilty of any misfeasance or breach of any … other duty in relation to" BLT—section 212(1) of the Insolvency Act 1986—assuming, of course, that section 212 or some similar statutory provision were applicable to BLT's insolvent liquidation.
 It is noteworthy that there appears to be no case in which the "sole actor" exception to the Hampshire Land Co rule has been applied so as to bar an action brought by a company against an officer for breaches of duty that have caused, or contributed to, loss to the company as a result of the company engaging in illegal activities. I can easily accept that, for the purposes of an action against the company by an innocent third party, with no notice of any illegality or impropriety by the company in the conduct of its affairs, the state of mind of a "sole actor" could and should be attributed to the company if it were relevant to the cause of action asserted against the company to do so. But it does not follow that that attribution should take place where the action is being brought by the company against an officer or manager who has been in breach of duty to the company.
 It appears that the liquidators of S & R know of no assets of Mr Stojevic that could become the fruits of successful proceedings against him for breach of duty. But suppose that were not so. There can surely be no doubt that the liquidators could issue a misfeasance summons against him under section 212(1)(c) of the Insolvency Act 1986. Could Mr Stojevic, on such a summons, contend that his dishonesty should be attributed to the company that, in breach of his fiduciary duties under the power of attorney, he had turned into his vehicle for fraud? It is long established that section 212, like its statutory predecessors, is procedural and does not create a cause of action where none previously existed—although it is to be noted that section 212(3)(b) confers on the court a judgmental discretion as to the quantum of compensation that would not in an ordinary damages action be applicable. But Mr Stojevic could not, in my opinion, reduce his liability for breach of duty to S & R by attributing to S & R his own dishonesty, praying in aid the "sole actor" exception and the application of the ex turpi causa rule.
" Though not essential to my reasoning, I also consider that the principle established in In re Hampshire Land Co  2 Ch 743, Belmont Finance  Ch 250 and Attorney General's Reference (No 2 of 1982)  QB 624 points towards the same result. It prevents a company being treated as party to a fraud committed by its officers "on" or "against" the company, at least in the context of claims by the company for redress for offences committed against the company: Belmont Finance  Ch 250, 261d-h, per Buckley LJ, and p 271f-g, per Goff LJ, and Attorney General's Reference (No 2 of 1982)  QB 624, 640a-b, per Kerr LJ; and see Edwards Karwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd (1994) 15 ACSR 502, 515-517. Thus, in Belmont Finance the company's directors were party to an illegal conspiracy, "part and parcel" of which was that the company bought shares at an inflated price (p 264a), but their knowledge of this illegality was not imputed to the company and did not bar the company suing them for the conspiracy. The principle has also been applied in the context of a claim or allegation of estoppel against a company, seeking to hold the company responsible for a transaction in fraud of the company, by attributing to it knowledge of the fraud possessed by directors or agents who did not represent or act for the company in the transaction but had knowledge of it which they withheld from the company: JC Houghton & Co v Nothard Lowe & Wills Ltd  AC 1 and Kwei Tek Chao v British Traders and Shippers, etc, Ltd  2 QB 459, 471-472.
 Mr Sumption submits that the principle has no present relevance for two reasons. The first is based on its original rationale: that, since an agent deceiving a company will not disclose his own fraud to the company, the company cannot be imputed with knowledge of or treated as party to the fraud. This rationale, Mr Sumption submits, postulates a company with an "innocent constituency" (other officers and/or shareholders) to whom Mr Stojevic could have disclosed, but from whom he would and did actually conceal, his misdeeds. If the suggestion is that the Hampshire Land principle or the thinking behind it can only apply where a company alleges loss through being deceived, I see no reason why it should be so confined. Whether knowledge should be attributed to a company is irrelevant in contexts like the present, where S & R's claim is not that there were others within the company who relied on misleading statements by Mr Stojevic, but rather that Mr Stojevic's actions were in breach of his duties to S & R and that, had Moore Stephens detected them, no further breaches of duty would have been possible.
 Neither in Belmont Finance nor in Attorney General's Reference (No 2 of 1982) is there any suggestion that the application of the principle in Hampshire Land depends upon there being some innocent constituency within the company to whom knowledge could have been communicated. Moreover, Attorney General's Reference (No 2 of 1982)  QB 624 is direct authority to the contrary. The two defendants were charged with theft, consisting of the abstraction of the assets of companies, of which they were "the sole shareholders and directors" and "the sole will and directing mind": pp 635d-f, 638f-g. They contended that the companies were bound by and had consented to the abstractions precisely because they were its sole shareholders, directors and directing mind and will: pp 634e-f, 638f-h. The Court of Appeal acknowledged the rule of attribution attributing to a solvent company the unanimous decision of all its shareholders (p 640a-d), but roundly rejected its application to circumstances where the sole shareholders, directors and directing minds were acting illegally or dishonestly in relation to the company. The court cited Belmont Finance as "directly contradict[ing] the basis of the defendants' argument": p 641b-c. The defendants' acts and knowledge were thus not to be attributed to the companies—although there was no other innocent constituency within the companies. Another justification for this conclusion may be that the effect of the limitations recognised by Lord Hoffmann in Meridian (para 221 above) is that in such situations there is another innocent constituency with interests in S & R, since it is not open even to a directing mind owning all a company's shares to run riot with the company's assets and affairs in a way which renders or would render a company insolvent to the detriment of its creditors.
 The second reason advanced by Mr Sumption is that, if the Hampshire Land principle could otherwise apply, the fraud here was committed on the banks, not on S & R. The Court of Appeal agreed with this submission. The company's exposure when it was left "holding the baby" was merely a "secondary exposure" which was not enough to engage the principle: see paras 72-73. In so reasoning, Rimer LJ was influenced by the fact that Mr Stojevic's fraud would be (and was by Toulson J) attributed to S & R itself in the context of any claims by the banks against S & R. This distinction between personal and vicarious liability towards third parties could have been relevant if, for example, S & R had been prosecuted for fraud (see eg Attorney General's Reference (No 2 of 1982)  QB 624, 640a-b) or if (more fancifully) there had been a general banking facility between Komercni Banka and S & R under which the latter's liability depended upon whether it was personally as opposed to vicariously liable for the deception of Komercni Banka. But it is irrelevant in the present context where S & R is seeking recourse from persons who, whatever their status vis-à-vis the company in the eyes of the outside world, owe duties and have committed wrongs towards S & R. The truth behind the Hampshire Land principle as explained in Belmont Finance and Attorney General's Reference (No 2 of 1982) is that such situations are different. They compel by their nature a separation of the interests and states of mind of the company and those owing it duties."
" In Arab Bank plc v Zurich Insurance Co  1 Lloyd's Rep 262, 282-283 Rix J, and in Brink's-Mat Ltd v Noye  1 Bank LR 68 (a case involving a scheme of fraud with analogies to the present) the Court of Appeal considered that a company exposed to third party liability by fraud could be regarded as a victim of the fraud for the purposes of a claim against other persons allegedly in breach of duty to it. In distinguishing between primary and secondary victims, the Court of Appeal in the present case was, however, influenced by reasoning in McNicholas Construction Co Ltd v Customs and Excise Comrs  STC 553 (Dyson J) and in In re Bank of Credit and Commerce International SA (No 15); Morris v Bank of India  2 BCLC 328 (Court of Appeal). Both those cases were (as Rimer LJ noted) concerned with claims against the company by injured third parties, rather than claims by the company against others in breach of duty to it. So it is not clear why the Hampshire Land issue arose at all, and in my view the statements in them are of no assistance in resolving any issue of attribution in the present context."
" The current edition (2007) of Palmer's Company Law Annotated Guide to the Companies Act 2006 states the position, at p 169:
"The scope of the common law duty requiring directors to consider the interests of creditors is more controversial. Cases support a variety of propositions, but the better accepted view is that a duty is owed by directors to the company (and not to the creditors themselves: Kuwait Asia Bank EC v National Mutual Life Nominees Ltd  1 AC 187, 217, PC; Yukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2)  1 WLR 294 [Toulson J]), and this duty requires directors of insolvent or borderline insolvent companies to have regard to the interests of the company's creditors (West Mercia Safetywear Ltd v Dodd  BCLC 250, CA)."
 I agree with this analysis. The Court of Appeal was therefore also correct in West Mercia to hold that directors who know the company to be insolvent owe to the company an enforceable duty to have regard to the interests of the company's creditors. In Yukong Line  1 WLR 294 Toulson J was likewise right to consider that that would be so: p 314f-g. There, as in West Mercia, the directing mind and owner of a company which had incurred a large liability sought to put the company's assets out of the reach of its creditor by transferring them to another of his companies. A claim by the creditor against the director failed on the basis that the director owed no direct fiduciary or other duty towards creditors. His liability was, as in West Mercia, to the company for disregard of the interests of its creditors. Far from undermining the integrity of the common law if such a liability were recognised and enforced, it would undermine the concept of separate corporate identity and the protection for creditors in insolvent situations at which company law aims, if a company were not entitled to claim against its directing mind and sole controlling shareholder in such a situation. The English cases of RBG Resources plc v Rastogi and Brink's-Mat Ltd v Noye and the Canadian case of Oger v Chiefscope Inc (cited above), in all of which the directing minds of the relevant companies were the only shareholders, reach the same conclusion.
 In In re The Mediators Inc; The Mediators Inc v Manney (1997) 105 F 3d 822 (USAC, 2nd Cir), the court held inadmissible a claim by a creditors' committee standing in the company's shoes brought against the company's sole shareholder, chief executive officer and chairman together with its bankers, lawyers and accountants for deliberately devising a scheme, which stripped the company of its assets in order to shield them from liquidation and from the company's creditors, while rendering the company liable for the cost of so doing. The reasoning was that, in a case of a sole shareholder and decision-maker, "whatever decisions he made were, by definition, authorised by, and made on behalf of, the corporation" (p 827) and that the company had "no standing to assert aiding-and-abetting claims against third parties for co-operating in the very misconduct that it had initiated": p 826. This is not English law. But an important element to understanding this rule is that in American law "Where third parties aid and abet a fiduciary's breach of duty to creditors—as is claimed here—the creditors may bring an action in their own right against such parties": p 825.
 In summary, it is no answer in English law to a claim by S & R against Mr Stojevic that Mr Stojevic had, as S & R's sole directing mind and sole shareholder, authorised the scheme of fraud which to his knowledge made the company increasingly insolvent to the detriment of its existing and future creditors. For present purposes it is to be assumed (and in fact it seems clear) that Mr Stojevic must have known that, as a result of his scheme of fraud, S & R was (increasingly) insolvent at each audit date."
The present appeal
"(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned are to be liable to make such contributions (if any) to the company's assets as the court thinks proper."
"Put into the language of today, the general principle being there stated is simply that, unless the contrary is expressly enacted or so plainly implied that the courts must give effect to it, United Kingdom legislation is applicable only to British subjects or to foreigners who by coming to the United Kingdom, whether for a short or a long time, have made themselves subject to British jurisdiction."
"In my view the solution to the question of statutory interpretation raised by this appeal does not lie in retreating to a rigid and indefensible line. Trade takes place increasingly on an international basis. So does fraud. Money is transferred quickly and easily. To meet these changing conditions English courts are more prepared than formerly to grant injunctions in suitable cases against non-residents or foreign nationals in respect of overseas activities. As I see it, the considerations set out above and taken as a whole lead irresistibly to the conclusion that, when considering the expression "any person" in the sections, it is impossible to identify any particular limitation which can be said, with any degree of confidence, to represent the presumed intention of Parliament. What can be seen is that Parliament cannot have intended an implied limitation along the lines of Ex parte Blain, 12 Ch.D. 522. The expression therefore must be left to bear its literal, and natural, meaning: any person."
Lord Justice Rimer :
The Master of the Rolls :