Vol 13 (2016) - Issue 2

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Jetivia SA v Bilta (UK) Limited: The Illegality Defence of ex turpi causa non oritur actio and the Extra-territorial Effect of Section 213 Insolvency Act 1986

On 22 April 2015 the Supreme Court handed down its judgment in Jetivia SA v Bilta (UK) Limited, which unanimously held that a company that is the subject of the fraudulent decisions of its directors will not have the fraudulent acts attributed to it so as to afford its directors the defence of illegality. In addition, the court held that the provisions of the Insolvency Act 1986 ('IA 1986') in respect of fraudulent trading are extraterritorial in their effect.

Background
Bilta (UK) Limited ('Bilta') was an English company which entered compulsory liquidation in November 2009. Bilta’s board of directors comprised Mr Nazir and Mr Chopra. Mr Chopra was also Bilta’s sole shareholder. Together, the directors were accused of causing Bilta to engage in the fraudulent trading of carbon credits with third parties including Jetivia SA ('Jetivia'), a company based in Switzerland.
The trading Bilta engaged in amounted to a 'missing trader' or 'carousel' fraud. Between April and July 2009 Bilta purchased Danish-registered European Emissions Allowances, a type of carbon credit, from Jetivia outside of the UK (and therefore free from UK VAT). Bilta subsequently sold the carbon credits back to UK VAT-registered companies at a slightly reduced price. The proceeds of such sales, including the VAT element, were paid either directly to Jetivia or received by Bilta, which then transferred the proceeds to third parties, including Jetivia. The activity resulted in Bilta becoming insolvent and unable to meet its VAT liability to HMRC in the sum of GBP 38 million.
Bilta’s liquidators, on behalf of Bilta, commenced proceedings against the directors on the basis that the directors had conspired to defraud Bilta and were in breach of their fiduciary duties. It was further alleged that Jetivia and its chief executive officer, Mr Brunschweiler, a French resident, had dishonestly assisted the directors in committing the fraud. The liquidators also asserted that each of the appellants was liable for fraudulent trading pursuant to section 213 of the IA 1986.
The appellants sought to strike out Bilta’s claim on the basis that:

1. they would be bound to defeat the claims by application of the principle of ex turpi causa non oritur actio, i.e. that Bilta would be unable to bring a cause of action based on its own illegal act; and
2. section 213 of the IA 1986 does not have extraterritorial effect and thus could neither apply to Jetivia, a Swiss company, nor Mr Brunschweiler, a French domicile.

The appellants’ principal argument was that Bilta was not the victim of any wrong-doing on the basis that the fraud was against HMRC and the state of mind of Bilta’s directors and its sole shareholder was attributable to the company, thus rendering Bilta a party to the wrong-doing. On this reasoning, the appellants argued that the claim of dishonest assistance and conspiracy was void as Bilta was barred from the illegality principle under ex turpi causa non oritur actio. The appellants failed in both the court of first instance and the Court of Appeal, before appealing to the Supreme Court.

1. Ex turpi causa non oritur actio
The principle of ex turpi causa non oritur action is a rule of public policy that is often referred to as the 'illegality defence'. At its heart is the premise that a wrong-doer should not be able to bring a claim at law that is founded in his own illegal or immoral action, the classic example being from 1725 when a highwayman was prevented from suing his partner in crime for a greater share of their ill-gotten gains.