Case No: A3/2012/2318
Neutral Citation Number: [2013] EWCA Civ 968
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Sir Andrew Morritt
HC09CO3502

Royal Courts of Justice
Strand, London, WC2A 2LL

Date: Wednesday 31st July 2013
Before :

THE MASTER OF THE ROLLS
LORD JUSTICE RIMER
and
LORD JUSTICE PATTEN
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Between :

	(1) Jetivia S.A.
(2) URS BRUNSCHWEILER	Appellants/
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)
	Respondents/Claimants	
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(Transcript of the Handed Down Judgment of
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Alan Maclean QC and Colin West (instructed by Macfarlanes LLP) for the Appellants
Christopher Parker QC and Rebecca Page (instructed by Gateley LLP) for the Respondents
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Judgment
Lord Justice Patten : 
Introduction
1.	This is an appeal by the sixth and seventh defendants, Jetivia S.A. (“Jetivia”) and Mr Urs Brunschweiler (“Mr Brunschweiler”), against an order of the Chancellor of the High Court dismissing their applications for the summary dismissal or striking out of the claims against them in this action.  The appeal is brought with the leave of the Chancellor. 
2.	The claimants are Bilta (UK) Ltd (“Bilta”) which is now in liquidation together with Mr Hellard and Mr Ingram who are the joint liquidators of the company.  Bilta seeks damages and equitable compensation from the appellants and the other defendants for conspiracy and dishonest assistance.  The liquidators have separate claims for fraudulent trading under s.213 of the Insolvency Act 1986 (“IA 1986”).  The appellants’ applications relate to both types of claim but are based on different grounds.  The appellants contend that Bilta’s own claim should be dismissed or struck out on the grounds of public policy based on the ex turpi causa non oritur actio principle.  The s.213 claim is challenged on the basis that the court has no jurisdiction over the appellants in respect of the claim.  Jetivia is a Swiss company and Mr Brunschweiler, who is resident in France, is its sole director.  This is ultimately a question of statutory construction in relation to s.213.
3.	Much of the factual background is not in dispute but, in relation to the conspiracy and dishonest assistance claims, there is an issue between the parties as to whether the pleaded conspiracy represents an accurate statement of what the various defendants were engaged upon.  Bilta’s pleaded case is that the object of the alleged conspiracy was to defraud and injure the company by depriving it of the money necessary to meet its VAT liabilities incurred from its trading in carbon credits.  The appellants contend that this is only a partial account of the allegedly fraudulent scheme and that, looked at overall, it is obvious that the intended victim of the fraud which the appellants are said to have participated in must have been HM Revenue and Customs who were deprived of the VAT which was due to them. 
4.	The difference between these two versions of the conspiracy is relevant on one view to the application of the ex turpi causa principle.  The Chancellor decided the case on the basis of the fraudulent scheme as set out in the amended particulars of claim which he accepted went no further than the position contended for by the claimants.  But, for reasons which I will come to later in this judgment, I am not convinced that the difference in the identity of the alleged victim of the conspiracy (Bilta or HMRC) can or should materially affect the outcome of the appellants’ applications. 
The facts
5.	I can start with what is common ground.  Bilta is a company incorporated in England which is registered for the purposes of VAT.  The first and second defendants, Mr Nazir and Mr Chopra, were its only directors and Mr Chopra owned all the issued shares.  Between 22nd April and 21st July 2009 Bilta traded in European Emissions Trading Scheme Allowances (“EUAs”) which are more commonly known as carbon credits.  Until 31st July 2009 EUAs were treated as taxable supplies under the VAT Act 1994 and were standard-rated.  Since that date they have been zero rated. 
6.	EUAs are traded on the Danish Emissions Trading Registry.  According to its own records, Bilta bought and sold more than 5.7m EUAs in the three month period between April and July for some €294m.  Because the sales to Bilta were from traders like Jetivia carrying on business outside the UK, these supplies were zero rated.  The EUAs were then sold on back-to-back to UK-based traders such as the third defendant, Pan 1 Limited, who were registered for VAT.  These were taxable supplies at the standard rate and Bilta thereby incurred liabilities to VAT in excess of €44m. 
7.	The price payable to Bilta by Pan 1 Limited and the other purchasers was in each case less before VAT than the amount paid by Bilta to Jetivia and the other non-UK suppliers and, on the instructions of Bilta’s directors, was paid to Jetivia or some other third party located outside the UK.  In some cases there were further sales on of the EUAs to other UK traders with, again, similar instructions for the price to be paid to an external third party.  As a consequence, Bilta made no profit on the transactions and was unable to pay the VAT which it owed because it never received or retained the proceeds of sale.  Its liability for VAT on the transactions amounts to £38,733,444.
8.	On 29th September 2009 Mr Hellard and Mr Ingram were appointed provisional liquidators of Bilta and commenced the company’s claim against the appellants and the other defendants.  Bilta was wound up compulsorily on 25th November 2009 and on 13th October 2011 the proceedings were amended to include the claims by the liquidators under s.213. 
The pleaded claim
9.	The allegation of conspiracy is pleaded in paragraph 14 of the amended particulars of claim (“APC”) as follows:
“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.”
10.	Particulars of the fraudulent scheme are then set out in paragraphs 15-19:
“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.
[(b)-(e)]
(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.”
11.	The APC (in paragraphs 20-21) give details of the assessments on Bilta to VAT and the tax due.  In paragraph 22 it alleges that the trading in EUAs by Bilta was not bona fide or legitimate and was undertaken in furtherance of the conspiracy alleged in paragraph 14.  Particulars are given of this allegation by reference to the instructions from Bilta to its purchasers to pay the gross purchase price (including VAT) to third parties outside the UK.  In paragraph 22(9)-(11) it is pleaded:
“(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.”
12.	In paragraph 23 it is alleged that the pattern of trading by Jetivia with or involving Bilta was not bona fide and was, it should be inferred, undertaken in furtherance of the pleaded conspiracy.  Paragraph 24 pleads (and particularises) facts which are relied on as showing that Jetivia’s dealings with Bilta were dishonest and part of a missing trader fraud.  Similar allegations are made in paragraphs 26-41 against the other corporate defendants.
13.	The case against Mr Nazir and Mr Chopra is contained in paragraphs 42-50 of the APC:
“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.”
14.	Finally, in paragraphs 57-64 it is alleged that Jetivia and Mr Brunschweiler were parties to the conspiracy to defraud Bilta and are liable for dishonestly assisting Mr Nazir and Mr Chopra in their breaches of fiduciary duties owed to the company; and for carrying on Bilta’s business with intent to defraud creditors.  It is not suggested that these claims are capable of being determined on a summary basis if the arguments based on the ex turpi causa rule and the scope of s.213 do not succeed.
Ex turpi causa
15.	The first issue therefore to consider is whether the Chancellor was wrong to refuse to dismiss or strike out Bilta’s claims against the appellants on the ground that they were precluded by the application of the ex turpi causa principle.  This is a rule of public policy which was explained by Lord Mansfield CJ in Holman v Johnson (1775) 1 Cowp 341, 343 in the following terms:
“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.”
16.	An issue arises in this case (as in many others where the rule is invoked) as to whether the causes of action relied upon by Bilta are founded on an immoral or illegal act.  But what is not in dispute is the test which the court must apply in order to answer that question.  In Tinsley v Milligan [1992] Ch 310 the Court of Appeal, by a majority, adopted a flexible approach to the operation of the ex turpi causa rule which required it to conduct a balancing exercise between the consequences of granting or refusing relief in the particular case.  This so-called public conscience test was rejected on appeal by the House of Lords.  Lord Goff of Chieveley said [1994] 1 AC 340, 355:
“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.”
17.	There was not unanimity as to the correct test to be applied but the view of the majority was expressed by Lord Browne-Wilkinson (at page 376) in these terms:
“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.”
18.	It is clear from this passage that a distinction is being made between reliance on the illegal act as the basis of the cause of action and (as in Tinsley v Milligan) the enforcement of a property or other legal right which although historically the product of an illegal act or transaction, has an independent existence from it.  Although there have been subsequent dicta in this court suggesting that some causal connection less than the reliance test is sufficient to engage the ex turpi causa rule (see e.g. Cross v Kirby [2000] CA Transcript No. 321 per Beldam LJ), the House of Lords has re-affirmed reliance as the correct test in Stone Rolls Ltd v Moore Stephens [2009] 1 AC 1391 (see Lord Walker of Gestingthorpe at [131], Lord Scott at [96] and Lord Mance at [208]) and neither party to this appeal has suggested that it does not represent a correct statement of the law.  
19.	In what sense then is it contended that Bilta relies upon its own illegal act to found its claim against its directors and their co-conspirators?  The conspiracy pleaded in paragraph 14 of the APC was one to defraud and injure Bilta itself by depriving it of monies to which it was contractually entitled from the sale on of the EUAs.  Such a conspiracy would necessarily involve a breach of fiduciary duty on the part of the directors as well as exposing them and their co-conspirators to a liability in tort.  By dishonestly assisting the directors in their breach of fiduciary duty the appellants are also arguably liable to account in equity for the losses which Bilta has suffered. 
20.	This conventional analysis of the claims available to Bilta against its directors and the appellants is unaffected as a matter of company law by the fact that both its directors were involved in the fraud and that Mr Chopra is the sole shareholder.  In Salomon v A. Salomon & Co Ltd [1897] AC 22 the House of Lords affirmed that the property of even a so-called one man company belongs to the company and not to its director or shareholder and that the only means for a sole shareholder lawfully to extract assets from the company is by a distribution of capital carried out in accordance with what is now s.830 of the Companies Act 2006.  By the same token, the sole director/shareholder owes to the company the fiduciary duties spelt out in s.172 of the Companies Act and cannot use his control of the company to ratify his fraudulent acts against the company particularly where the interests of creditors would be prejudiced: see Companies Act s.239(3) and (7); Franbar Holdings v Patel [2009] 1 BCLC 1; Ultraframe UK v Fielding [2004] R.P.C. 24 at [40].
21.	The importance of protecting the separate rights of even a one-man company to its own property is critical to the interests of its creditors.  Section 172 of the Companies Act provides:
“(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.”
22.	The obligation to act in the interests of creditors arises in circumstances where the company is or is likely to become insolvent and is no more than a statutory recognition of the decision of this court in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250.  In this case, as the Chancellor observed, Bilta never had any substantial assets of its own and depended upon receiving the proceeds of sale from the EUAs in order to meet its VAT liabilities.  The purpose and effect of the conspiracy was to deprive Bilta of those monies so that it was insolvent from the moment it entered into the back-to-back transactions.  It follows that the duty of the directors to consider the interests of creditors was engaged from the very start.  
23.	These principles are all well established but were recently re-stated with approval by the Supreme Court in Prest v Petrodel Resources Ltd [2013] UKSC 34; [2013] 3 WLR 1.  The case concerned an application by Mrs Prest for ancillary relief on her divorce.  Moylan J ordered her husband to transfer to her the matrimonial home, free of encumbrances, and to make a lump sum payment to her of £17.5m.  In part satisfaction of this liability, he directed that seven UK properties legally owned by Petrodel Resources Limited and an associated company, Vermont Petroleum Limited, should also be transferred to Mrs Prest.  He made this order not on the basis that there were grounds for piercing the corporate veil (which he rejected) but because, in his view, there existed under s.24 of the Matrimonial Causes Act a wider jurisdiction to treat the seven properties as property to which the husband was “entitled, either in possession or reversion” even if the property in question was not held by the company on an express or resulting trust in favour of the husband.  In the judge’s view the properties fell within the ambit of s.24 because the Petrodel companies were owned and controlled by Mr Prest and their assets were, in the judge’s words, “effectively the husband’s property”.  He therefore ordered the companies to transfer the seven properties to the wife in exercise of the Court’s powers under s.24 and made no findings that any of them (except for the matrimonial home itself) were held by one or other company on trust for Mr Prest so as to give him a beneficial interest in the property.
24.	That order was set aside by this Court ([2012] EWCA Civ 1395; [2013] 2 WLR 557) as being made without jurisdiction because its effect was to equate control of a company with the beneficial ownership of its assets.  Rimer LJ said that:
“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 [1897] 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 [2002] 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.”
25.	This entirely orthodox statement of the law was criticised by a number of commentators in terms verging on the hysterical (“a cheat’s charter”) but was approved unanimously by the Supreme Court.  Mrs Prest succeeded in her appeal only by persuading the Supreme Court to re-consider the evidence as to whether the seven properties were in fact held by the companies for her husband on a resulting trust; an exercise which the judge did not carry out and which she did not ask the Court of Appeal to perform.  On the point of principle, Lord Sumption, giving the leading judgment, said:
“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 [1983] 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 [1979] Ch 250, 261 (Buckley LJ), Attorney-General's Reference (No 2 of 1982) [1984] QB 624, Director of Public Prosecutions v Gomez [1993] 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.” 
Attribution
26.	In order to engage the ex turpi causa rule in this case the appellants must establish that the law attributes to Bilta the unlawful conduct of its directors and sole shareholder so that its actions against them and the appellants falls to be treated as an action between co-conspirators.  Although the applications we are concerned with were not brought on behalf of the directors, Mr Maclean QC accepts that his argument would, if successful, apply to them as well.  Put very simply, his case is that Bilta’s claim, although pleaded in paragraph 14 of the APC as a conspiracy to defraud the company by unlawful means, in fact discloses that Bilta was used by its directors and their associates to carry out a carousel fraud, the only victim of which was HMRC.  Since Bilta was a party to the fraud, it cannot claim against the other conspirators for losses which it suffered as a result of the fraud it carried out.  
27.	At the heart of this argument is the question of attribution.  Mr Maclean relies on the fact that the fraud was orchestrated by Mr Nazir and Mr Chopra who were the only directors of the company and must therefore be treated as its directing mind and will.  This process of attribution, he submits, fixes the company with the knowledge and criminal intent of its directors so that its admitted use as part of the fraudulent transactions becomes a conscious act of wrongdoing for which the company is personally responsible.  Although Lord Bramwell expressed the view in Abrath v North Eastern Railway Co (1886) 11 App Cas 247 at 251 that it was impossible for a corporation to have either malice or motive, that view was rapidly discarded (see Citizens' Life Assurance Co v Brown [1904] AC 423) and it is common ground on this appeal (as accepted by the House of Lords in Stone & Rolls) that the process of attribution operates to make the company personally and not merely vicariously liable for the actions of its directors.  In short, their dishonesty becomes that of the company itself.
28.	Mr Maclean relies on the principles set out by Lord Hoffmann in Meridian Global Funds Management Asia Limited v Securities Commission [1995] 1 AC 500 at 507:
“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.”
29.	In the context of civil or criminal proceedings brought against a company the acts and intentions of its directors will usually be attributed to it so as to found corporate liability for the actions complained of unless (as explained in Meridian) the statute or legal principle imposing the relevant liability is one not intended to apply to a company except in a vicarious capacity.  In El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 a company was fixed with liability as a constructive trustee on the basis of knowing receipt through the knowledge of one of its directors.  Nourse LJ, at page 695, said:
“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 [1915] 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 ([1993] 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 [1972] 1 All ER 65 at 70, [1972] 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.'”
30.	The same principles were applied by the Privy Council in Royal Brunei Airlines Sdn. Bbd. v Tan [1995] 2 AC 378 to a claim for dishonest assistance. 
31.	Other examples of civil liability being imposed upon a company based on the acts of its employees or agents are McNicholas Construction Co Ltd v Customs & Excise Comrs [2000] STC 353 where the company, through its site managers, fraudulently claimed to recover the VAT on purported payments to bogus sub-contractors and Morris v Bank of India [2005] 2 BCLC 328 where the bank was required to pay compensation under s.213 of the Insolvency Act 1986 as a result of the actions of its senior manager in London who caused it to enter into a scheme to assist BCCI in perpetrating a fraud on its creditors. 
32.	The same principles can be seen in operation in a criminal context in the decision of the House of Lords in Tesco Supermarkets Ltd v Nattrass [1972] AC 153 per Lord Reid at pages 170-171:
“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 [1915] AC 705 was one of them.”
33.	It is, however, clear from the decisions I have just referred to that whilst the acts and intentions of the directors or other senior representative will usually be attributed to the company for the purpose of establishing personal liability for the conduct complained of, the process of attribution is not an automatic one dependent only upon the individual responsible for the unlawful conduct occupying a sufficiently senior position in the management of the company.  In both McNicholas and Morris v Bank of India the defendant company deployed an argument that it should not be made personally liable for the consequences of its employees’ actions because it was also at least a secondary victim of those actions.  In McNicholas the employee’s fraudulent conduct had caused direct loss to the Commissioners and in Morris to the creditors of BCCI.  But it had also exposed the company in both cases to a secondary liability to pay compensation for the loss which it had caused.  The argument was rejected.  As Mummery LJ said in Morris at [114]:
“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.”
34.	The point being made in this passage is that attribution of the conduct of an agent so as to create a personal liability on the part of the company depends very much on the context in which the issue arises.  In what I propose to refer to as the liability cases like El Ajou, Tan, McNicholas and Morris, reliance on the consequences to the company of attributing to it the conduct of its managers or directors is not enough to prevent attribution because, as Mummery LJ pointed out, it would prevent liability ever being imposed.  As between the company and the defrauded third party, the former is not to be treated as a victim of the wrongdoing on which the third party sues but one of the perpetrators.  The consequences of liability are therefore insufficient to prevent the actions of the agent being treated as those of the company.  The interests of the third party who is the intended victim of the unlawful conduct take priority over the loss which the company will suffer through the actions of its own directors. 
35.	But, 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.  As between it and the director, it is the victim of a legal wrong.  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.  There is a breach of fiduciary duty towards the company in both cases.  But Mr Maclean submits that this conclusion was not open to the court in the present case as a result of the decision of the House of Lords in Stone & Rolls and that if one accepts the reasoning of two members of the House (Lord Walker and Lord Brown) that applies regardless of whether Bilta is a primary or a secondary victim of the alleged conspiracy. 
36.	Before coming to what was decided in that case I need to say a little more about the operation of the principles of attribution in the context of a claim by the company to recover for losses caused to it by breaches of duty by its directors and those associated with them.  In the passage quoted above from the judgment of Mummery LJ in Morris the reference to the company being treated as the target or victim of the director’s breach of duty can be traced back to the judgment of Buckley LJ in Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250 referred to by Lord Sumption in Prest.  In that case the company sued two of its three directors for loss caused by a dishonest conspiracy as a result of which it acquired the shares in another company (Maximum) for an artificially inflated price of £500,000 and was then sold to one of the defendants for £489,000.  The transaction involved some £0.4m of Belmont’s assets being used to acquire the shares in Maximum (which was itself a breach of fiduciary duty) and was facilitated by the same monies being then used by the fraudster to purchase the shares in Belmont so that the company provided financial assistance for the purchase of its own shares contrary to what was then s.54 of the Companies Act 1948. 
37.	The trial judge dismissed the action on the ground that Belmont was itself a party to the conspiracy on which its action was based because the conduct and knowledge of the guilty directors fell to be attributed to it.  His decision was reversed on appeal.  Buckley LJ (at pages 261-2) said:
“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.”
38.	The decision in Belmont was followed by the Court of Appeal in Attorney-General’s Reference (No. 1 of 1982) [1984] QB 624 in relation to whether the directors and sole shareholders of a company could be convicted of stealing its property.  The issue was one of consent and dishonesty.  It was argued that because the directors were the sole will and directing mind of the company, it was to be treated as having consented to the appropriations.  This was rejected on Belmont principles but the issue of dishonesty ultimately turned on the construction of s.2(1)(b) of the Theft Act and so is of limited assistance on that point.  It does, however, provide further authority for the proposition that where the fraud or dishonesty even of a sole director or shareholder is committed against the company no defence by way of attribution will be available.
39.	Although not referred to or cited to the Court of Appeal in Belmont, the non-attribution to the company of its directors’ fraudulent conduct is said to rest upon what I shall refer to for convenience as the Hampshire Land principle.  This is a reference to the decision of Vaughan Williams J in In re Hampshire Land Co [1896] 2 Ch 743 in which the judge had to decide whether the Portsea Island Building Society was entitled to prove in the liquidation of Hampshire Land for a debt of £30,000.  Hampshire Land was closely connected with Portsea in that they had their offices in the same building and had some common directors.  A Mr Wills was also the secretary of both.  Hampshire Land resolved at a general meeting to borrow the money from Portsea even though no proper notice of the meeting had been given and the amount of the borrowing exceeded what was permitted by the company’s articles of association without a valid resolution of the company in general meeting.  Although there was no authority to borrow, Portsea was protected by the rule in Royal British Bank v Turquand (1836) 6 El. & Bl. 327 which entitled it to assume that the procedure required under Hampshire Land’s articles had been complied with unless it had knowledge to the contrary.  The issue therefore for the judge was whether the knowledge of Mr Wills (who was taken to be aware of the irregularities in the resolution that was passed) should also be attributed to Portsea by virtue of his being an officer of the building society. 
40.	The judge held that the knowledge of the secretary could not be imputed to Portsea.  He gave two reasons for his decision.  The first was that the knowledge of a common officer was not to be imputed to both companies unless the officer had some duty to communicate that knowledge to the company in question.  The second was that even if communication of the information was within the scope of the officer’s duty, it was subject to the exception that, where the officer was guilty of fraud, his knowledge of his own fraud could not be attributed to the company:
“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.”
41.	The essentially factual assumption which Vaughan Williams J relied upon as creating an exception to the presumption of knowledge based on the performance of a duty to disclose cannot in my view be treated as an exhaustive statement of the reasons why the law will not attribute to a company the acts or knowledge of one of its officers.  Hampshire Land was concerned only with the imputation of knowledge which was relevant to Portsea’s ability to enforce a contract that was unauthorised by Hampshire Land.  The judge treated it as a question of whether the knowledge of an agent should be imputed to his principal and it was not therefore necessary for him to consider any wider issues of attribution relevant to unlawful conduct.  In particular, the rationale based on the inherent unlikelihood of the director disclosing his own fraud to the object of his deceit might be thought to apply even where the intended victim was not the company, of which he was a director or officer but was a third party.  Yet this was not sufficient to prevent attribution in El Ajou and the other liability cases I mentioned earlier.
42.	Therefore, although the Hampshire Land principle is often referred to in cases dealing with the attribution to a company of the acts of its directors and others, the principles applied to determine liability for unlawful conduct more generally are not limited to asking whether the director is likely to have wished to keep knowledge of his fraud secret.  They involve the application of a more fundamental rule accepted by this court in Belmont and also in Stone & Rolls that the law will not attribute the fraud or other unlawful conduct of the director to the company when it is itself the intended victim of that conduct.  This, as I explained earlier, is a question to be determined in the context of the proceedings in which attribution is relied on.  In a liability case the company will not be the victim for purposes of the attribution rule.  But where the company makes the claim based on the director’s breach of duty it is the victim and Belmont confirms that the law will not allow the enforcement of that duty to be compromised by the director’s reliance on his own wrong.
43.	One can illustrate the operation of these principles by looking at the decision of Dyson J (as he then was) in McNicholas.  In considering whether the company should be made liable for the fraud on HMRC carried out by its site managers, the judge said:
“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 [1928] 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) [1995] 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.”
44.	As mentioned earlier, the argument for the company had been that the loss which it would suffer by being made to compensate the Commissioners for their loss of VAT was sufficient to prevent the dishonesty of the employees being attributed to the company.  In the passage quoted, Dyson J rejects the argument just as this court did in Morris (see [32] above).  In Stone & Rolls Rimer LJ at [55] said:
“The McNicholas case [2000] 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.”
45.	But it does not follow from this that secondary damage of the kind relied on unsuccessfully in the liability cases will not be sufficient to prevent attribution when it forms the subject matter of the action by the company against those whose breach of duty has caused it.  In that context the damage is not secondary but primary and the company is the direct victim of the breach of duty relied on.  It ought therefore not to matter whether the conspiracy alleged in these proceedings had as its object a VAT fraud on HMRC or is limited to depriving Bilta of the proceeds of sale from the EUAs.  In both cases the directors and the other defendants will have committed or aided a breach of fiduciary duty and other wrongs against the company for which Bilta can sue.  In neither case should it be open to the directors and their accessories such as the appellants to rely upon a process of attribution to defeat the claim.  What remains to be considered is whether there is anything in Stone & Rolls which requires us to reach a different conclusion.
Stone & Rolls
46.	Stone & Rolls involved a claim by a company against its former auditors for damages for negligence.  The company (“SR”) was owned and controlled by a Mr Stojevic who was its only director.  He carried out a fraud on a Czech bank which involved SR presenting false documents to the bank which purported to relate to share transactions that had never taken place.  As a result of this, the bank paid monies to SR which were then channelled to the other parties to the fraud.
47.	The bank obtained judgment for deceit against SR and Mr Stojevic and was awarded substantial damages.  SR, then in liquidation, began proceedings against Moore Stephens, who had been its auditors in the years in which the frauds against the bank had been committed, seeking damages for negligence of some US$174m which represented the losses it had suffered as a result of the auditors’ failure to detect the dishonest behaviour of Mr Stojevic.
48.	The auditors applied to strike out the claim on the ground that it was barred by the ex turpi causa principle.  Their case (as here) was that, as the directing mind and will of the company, Mr Stojevic’s fraudulent conduct fell to be attributed to SR so that its reliance on the fraud to found a cause of action in negligence against the auditors amounted to it relying upon its own wrong.  The company could not, it was said, rely on being the victim of the fraud to avoid attribution because the only victim of the fraud was the bank.  In the alternative, it was submitted that where the company was under the sole control of the fraudster (i.e. it had no directors or shareholders who were not participants in the fraud) then there was no room for the operation of the Hampshire Land principle because there was no-one at the company from whom the fraudulent director would wish to or could conceal his fraud.  The company was therefore fixed with personal liability for the fraud and could not base a cause of action on it against the auditors. 
49.	In the Court of Appeal the second of these two arguments was rejected by Rimer LJ as being inconsistent with the decisions of this court in Belmont and Attorney-General's Reference (No 2 of 1982).  But he accepted the submission for the auditors that SR was only a victim of Mr Stojevic’s fraud in the sense that it was thereby exposed to a secondary liability to the bank.  In the context of a claim by SR against its auditors, this was, he held, insufficient to allow it to take advantage of the Hampshire Land or Belmont principle.
50.	Much of the argument which Mr Sumption QC directed to this point was based on the passages in McNicholas and Morris which I quoted earlier at [32] and [42].  But those, as I have said, were both cases in which the claim in issue was one made against the company based on the fraud of its directors or employees.  The court was not concerned with what the position would be if the claim was being made against the directors or their accomplices for fraud or breach of fiduciary duty against the company and Rimer LJ, I think, accepted this at least implicitly by his rejection of Mr Sumption’s second line of argument and by what he said at [71] and [72] about the auditors’ reliance on the decisions in McNicholas and Morris:
“[71] 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.
[72] 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 [2000] STC 553, para 56), or it is the target of their acts (the Bank of India case [2005] 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 [2000] 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 [2005] 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 [1999] 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.”
51.	In agreeing with him, Mummery LJ said at [118]:
“[118] 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.”
52.	Rimer LJ accepted in [72] that, for the purposes of SR’s claim against the auditors, it could not rely on the loss it suffered by being involved in the fraud on the bank so as to prevent it being treated as a fraudster along with Mr Stojevic and so falling foul of the ex turpi causa principle.  Moore Stephens had been arguably negligent in their conduct of the audit but they were not party to a fraud on the company and owed no duty to its creditors.  Mr Stojevic who had undoubtedly committed a breach of fiduciary duty against the company was not a defendant and his actions against SR were not the subject matter of the claim.  In these circumstances, I do not read Rimer LJ’s judgment as going any further than to hold that in the proceedings against the auditors the fact that SR did suffer loss as a result of the actions of Mr Stojevic against the bank was not sufficient to engage the Hampshire Land principle so as to prevent the auditors from relying on the ex turpi causa rule.  The case is not authority for any wider proposition.
53.	The decision of the Court of Appeal was upheld by a majority in the House of Lords but the speeches disclose a variety of different approaches to the principles to be applied.  
54.	Lord Phillips of Worth Matravers considered that the answer to the question whether the ex turpi causa rule applied to the claim was not to be found in the application of the Hampshire Land principle but by looking behind the company at the persons whose interests the duty of the auditors was intended to protect.  Since this was owed to the shareholders of the company and not to its creditors, there was no justification for disapplying the ex turpi causa rule:
“[86] 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.”
55.	If SR had not been under the sole control of Mr Stojevic but also had independent shareholders then he would have concluded that the claim was not barred by the ex turpi causa rule: see [63]:
“[63] 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.”
56.	Lord Walker of Gestingthorpe and Lord Brown of Eaton-under-Heywood (also in the majority) dismissed the appeal for different reasons from those of Rimer LJ in the Court of Appeal. They adopted the auditors’ second line of argument that the Hampshire Land principle can have no application to what Lord Walker described as a one-man company where both ownership and control was vested in the fraudster or fraudsters.
57.	In his speech Lord Walker emphasised (at [139]) that Belmont did not concern a one-man company and was obviously itself the victim of a conspiracy:
“[144] 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.”
58.	He refers at [145] to what Rimer LJ said at [71] about McNicholas and Morris but then goes on:
“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.”
59.	That is, of course, true but the contexts in which the point arises are very different.
60.	At [157] Lord Walker begins his analysis of the sole actor exception to the adverse interest principle, the essence of which is summarised in the extract from the decision of the Second Circuit of the United States Court of Appeals in Re The Mediators Inc; The Mediators Inc v Manney (1997) 105 F 3d 822 which he quotes at [163]:
“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.”
61.	His conclusions on this point follow at [168]:
“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 [1990] 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 [1990] Ch 313, the facts of which were comparable to those of the present case.”
62.	Finally, in relation to the issue of SR being a secondary victim, Lord Walker said at [173] to [174]:
“[173] 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 [1999] 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.
[174] 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 [2000] STC 553 and Bank of India [2005] 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.”
63.	Lord Brown set out his conclusions in [200]-[201]:
“[200] 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.
[201] 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).”
64.	The reasoning of the minority is contained in the speeches of Lord Scott of Foscote and Lord Mance.  Lord Scott considered that recovery by SR against the auditors would not breach the policy of the ex turpi causa rule:
“[120] 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?
[121] 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?”
65.	But more important for present purposes is what he said about the sole actor exception:
“[107] 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 [1995] 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.”
[108] 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.
[109] 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.
[110] 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.
66.	In relation to the position as between the company and its directors, Lord Mance adopted a similar line of reasoning:
“[227] Though not essential to my reasoning, I also consider that the principle established in In re Hampshire Land Co [1896] 2 Ch 743, Belmont Finance [1979] Ch 250 and Attorney General's Reference (No 2 of 1982) [1984] 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 [1979] Ch 250, 261d-h, per Buckley LJ, and p 271f-g, per Goff LJ, and Attorney General's Reference (No 2 of 1982) [1984] 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 [1928] AC 1 and Kwei Tek Chao v British Traders and Shippers, etc, Ltd [1954] 2 QB 459, 471-472.
[228] 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.
[229] 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) [1984] 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.
[230] 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) [1984] 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.”
67.	In relation to Rimer LJ’s view that the secondary liability of the company was not enough to enable it to rely on the Hampshire Land principle in relation to claims against the auditors, he said:
“[234] In Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd's Rep 262, 282-283 Rix J, and in Brink's-Mat Ltd v Noye [1991] 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 [2000] STC 553 (Dyson J) and in In re Bank of Credit and Commerce International SA (No 15); Morris v Bank of India [2005] 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.”
68.	In particular, he expressly rejected the submission that the sole actor exception should be imported so as to bar a claim by a company against its sole director and shareholder.  To do so would be to undermine the protection given to creditors both at common law and under the Companies Act:
“[237] 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 [1991] 1 AC 187, 217, PC; Yukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2) [1998] 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 [1988] BCLC 250, CA)."
[238] 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 [1998] 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.
[239] 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.
[240] 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.”
69.	Lord Mance went on to consider the position of the auditors and concluded that they could not rely on the ex turpi causa principle even in relation to a claim by a one-man company where the company was insolvent at the date of the audit due to the fraudulent activities of its owners and directors.  In such circumstances they had a reporting duty which went beyond the shareholders to consider the interests of creditors and it was no answer therefore to say that Mr Stojevic did not need their advice that he was acting fraudulently and was not prejudiced by not receiving it.  His fraudulent conduct should not therefore be attributed to the company so as to lead to the operation of the ex turpi causa rule. 
The present appeal
70.	Mr Maclean relies on both limbs of the auditors’ argument in Stone & Rolls.  He submits that the Hampshire Land/Belmont principle only applies to prevent attribution of the directors’ fraud to Bilta if it can properly be regarded as the victim of that fraud.  The true victim was not Bilta but HMRC who suffered loss from what the pleading accepts was a carousel fraud in which Bilta was a key participant.  He relies in particular on the references in paragraphs 15 and 17 of the APC to First Line and Second Line Buffers (all features of a carousel fraud) and to the express reference to a carousel in paragraph 22(9).  Even without travelling outside the terms of the pleading, it is apparent, he submits, that Bilta’s formulation of the terms and purpose of the conspiracy in paragraph 14 does not accurately describe what the parties were allegedly engaged upon.  Bilta’s inability to pay its VAT liabilities was not the consequence of the conspiracy but an essential feature of the fraud on HMRC.
71.	It follows, he submits, that Bilta was not in truth a victim but rather a villain and that, as in Stone & Rolls, its loss was simply a secondary consequence of the fraudulent scheme it participated in.  It cannot therefore rely on Hampshire Land and its claim against the appellants does therefore amount to it relying on its own fraud to found a cause of action against its co-conspirators.
72.	In the alternative, Mr Maclean adopts the one-man company approach favoured by Lord Walker and Lord Brown in Stone & Rolls which excludes the operation of the Hampshire Land rule due to the absence of any independent directors or shareholders.  He relies in particular on what Lord Walker said at [173]-[174] quoted above.  Here also there were no innocent participators in the company who could be said to be prejudiced by its inability to recover compensation for the consequences of the directors’ fraud and the loss which it has suffered in the form of the claim by HMRC is not therefore sufficient to prevent attribution of the directors’ fraud to the company.  
73.	The Chancellor decided that the ratio in Stone & Rolls is not applicable to a case in which the claim is based on a breach of duty which extends beyond the interests of the fraudsters as shareholders.  Here the directors always had a duty under s.172 to consider the interests of the creditors.  Mr Maclean says that this is unsustainable because it fails to engage with the reasoning which underlines the decision of the majority.  Unless there are innocent directors or shareholders there is no-one from whom the fraudulent directors can be assumed to wish to conceal their conduct.  The notional desire on their part to conceal their wrongdoing from the creditors is not relevant to whether the company should be fixed with knowledge of their fraud.  They are not part of the directing mind and will of the company and the position of the directors in relation to them cannot therefore be determinative of whether the directors’ conduct should be attributed to the company. 
74.	It is said that there would be other anomalies.  It would mean, for example, that a distinction would exist between a fraudster who acted as a sole trader and one who carried out the fraud using an off the shelf company.  In the former case, it would not be possible for the trustee to sue the fraudster for the loss to his creditors because it would amount to an action by the fraudster against himself.  But, on the Chancellor’s reasoning, the company would be entitled to maintain such an action.  The Chancellor appeared to think that if the appellants are right there would be a lacuna in the law.  But in most cases involving an insolvent company, this will be filled by the statutory cause of action for fraudulent trading vested in liquidators by s.213 of the Insolvency Act.
75.	I am not convinced by any of these submissions.  This court is, in my view, bound by the decisions in Belmont and Attorney-General's Reference (No 2 of 1982) to hold that a director even of a one-man company can be held liable to account for breaches of fiduciary duty which he commits against the company.  As Lord Scott and Lord Mance point out in their speeches in Stone & Rolls, the fact that the fraudulent director is the directing mind and will of the company has never been regarded as an answer to a claim by the company against the directors for a breach of duty committed against the company.  And, for the reasons I have set out earlier in this judgment, in that context the company is to be treated as the victim even though the loss which it suffers from the breach may be the compensation which it has had to pay to a third party who has been damaged by the fraud.  Although loss of that kind may not be sufficient to prevent attribution under the Belmont/Hampshire Land principles when what is at issue is the company’s own liability to a third party, like Lord Mance, I cannot see why it should have the same effect when the company is the claimant and the fraudulent directors and their associates are the defendants.  Nothing that was said in McNicholas or Bank of India suggests otherwise.
76.	It is said by Mr Maclean that the Belmont analysis is rendered inapplicable by this being a conspiracy to defraud HMRC as part of a carousel fraud.  But that, in my view, is a point to be decided at the trial.  For the purposes of an application for summary judgment, the claim to be considered is that summarised in paragraph 14 of the APC.  If, on a further examination of the evidence, it transpires that the conspiracy (if proven) had a different object and involved a different unlawful act then the claim will fail for that reason alone.  But, for present purposes, we are bound, in my view, to take the pleaded conspiracy as it stands.
77.	On this basis, Bilta was the intended and only victim and the Belmont principles apply to the claim unless Mr Maclean is right on his second submission that they have no application in relation to a one-man company.  For the reasons explained earlier, I would, however, have come to the same conclusion even if the true object of the conspiracy had been HMRC.  In the context of a claim against the directors and the appellants for breach of fiduciary duty, the company is the victim regardless of whether its loss was consequential on that to a third party.  Stone & Rolls decided that this did not apply for the purpose of a claim against its auditors but that is not what we have to consider in this case.
78.	The second line of argument based on the sole actor exception requires us to consider whether we should apply such a rule to the claim against the directors and their co-conspirators in this case and whether we are compelled in any event to apply that principle as a result of the decision in Stone & Rolls.  Both Lord Walker and Lord Brown decided the appeal in Stone & Rolls on that basis.  But Lord Phillips expressed no concluded view upon it and Lord Scott and Lord Mance were strongly opposed to its importation into English law.
79.	My own view is that in the context of a claim by the company against its fraudulent directors, the rule has no place in English law and would directly contradict the protection given to creditors under s.172 and 239 of the Companies Act which applies regardless of whether the company is what Lord Walker described as a one-man company or one in which there are innocent directors and shareholders.  As Lord Mance pointed out, the application of the sole actor exception in the United States is balanced by the creditors having a direct right of action against those responsible for the fraud. 
80.	Lord Walker considered that the adoption of the sole actor exception could be justified as being in line with what the English courts have decided in the liability cases.  But that, in my view, ignores the contextual difference between the two situations which calls for a much more nuanced approach to the question of attribution and not a mechanistic application of a rule regardless of the circumstances and the nature of the claim.  I prefer the analysis of Lord Scott and Lord Mance contained in the passages from their speeches which I have quoted which, in my view, properly recognise these differences. 
81.	But are we bound by Stone & Rolls to apply the sole actor exception in this case?  I do not believe that we are.  The issue on that appeal concerned a claim by the company against its auditors who were not party to the fraud on the bank but were negligent in not alerting the company to its existence.  Both this court and the House of Lords have decided that Hampshire Land did not prevent attribution in that case.  There is, however, a significant difference between the liability of an auditor for failing to notify the company about what was taking place and a conspiracy against the company by its directors and others to deprive it of its assets.  The claim against the auditors was a claim against a third party who owed no fiduciary duties as such to the company or its creditors based on what in the context of that claim was secondary damage caused to the company by a separate breach of duty on the part of the company’s own director.  It is therefore readily distinguishable from what we have to consider. The decision in Stone & Rolls should be confined in my view to the claim and the facts in that case.
82.	For these reasons, we are not bound in my view to hold that the sole actor exception is now an established feature of English law for all purposes nor should we do so.  It was relied upon by only two out of the five members of the Appellate Committee and in a quite different context.  The House of Lords did not overrule Belmont or Attorney-General's Reference (No 2 of 1982) and we are bound to give effect to them.  The general adoption of the sole actor exception in relation to directors or accessories such as the appellants in this case is also inconsistent with the reasoning of the Supreme Court in the passage from Lord Sumption’s speech in Prest which I quoted earlier in this judgment. Mr Maclean’s submission that a rejection of the sole actor exception will create a disparity between the insolvency of a company and that of an individual is simply the result of a company having a separate legal personality with the consequences now re-affirmed by the Supreme Court in Prest.  It has nothing to do with the adoption or not of the sole actor exception.
83.	I would therefore dismiss the appeal against the Chancellor’s refusal to dismiss the claim by Bilta. 
Section 213
84.	Section 213 of the IA 1986 provides:
“(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.”
85.	The only issue is whether the appellants are “any persons” within the meaning of s.213(2).
86.	Mr Maclean submits that in the absence of express words or necessary implication a statute will be presumed to apply only to persons within the jurisdiction.  This rule of statutory construction can, he says, be traced back to Ex parte Blain (1879) 12 Ch.D. 522 at 526 per James LJ but was given modern expression by Lord Scarman in Clark v Oceanic Contractors Inc [1983] 2 AC 130 where he said (at page 145):
“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.”
87.	The facts of the present case are that Jetivia is domiciled and carries on business in Switzerland and Mr Brunschweiler is domiciled in France.  Neither has any assets in England and neither is alleged to have been present in England at any time material to the acts relied on for the purposes of the s.213 claim.  Their only connection with the jurisdiction is that they sold EUAs to Bilta and are alleged to have been parties to the conspiracy pleaded in paragraph 14 of the APC.  They will not therefore be caught by s.213 unless it applies to all persons who were knowingly parties to the fraudulent trading regardless of where they were at the material time.
88.	The appellants contend that s.213 cannot have been intended by Parliament to apply to the entire world.  But the Chancellor rejected this argument relying in terms of authority on the decision of this court in Re Paramount Airways Ltd [1993] Ch 223 which concerned the scope of s.238 of the IA 1986 which allows the court to set aside or adjust the effect of a transaction entered into by the company “with any person at an undervalue”: see s.238(2).  In Paramount Airways the transaction in question had been entered into with a bank in Jersey.  The bank claimed that s.238 did not have extra-territorial effect.  Sir Donald Nicholls V-C said that although there were powerful arguments for applying some limitation on the scope of the section, there was no one simple formula which was compelling:
“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.”
89.	Mr Parker QC for the liquidators also drew our attention to Re Seagull Manufacturing Co Ltd [1993] Ch 345 where it was held that orders made under s.133 of the IA 1986 for the public examination of officers had extra-territorial effect and HMRC v Begum [2010] EWHC 1799 (Ch) where s.423 had been construed in the same way.
90.	The short answer to this part of the appeal is that there are no grounds for distinguishing between s.213 and s.238 in terms of whether Parliament intended them to have extra-territorial effect.  Both use the same unqualified language (“any person”) and the reasoning of the Court of Appeal in Paramount Airways applies in my view with equal force to s.213.
Conclusions
91.	I would therefore dismiss these appeals. 
Lord Justice Rimer :
92.	I agree.
The Master of the Rolls :
93.	I also agree.