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Ex Turpi Causa: Incomprehensible even in English?

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20/05/2015

The Supreme Court has recently considered the illegality defence. It has concluded that this legal principle has become incoherent through inconsistent authority and application. Walker Morris’ Head of Commercial Dispute Resolution, Gwendoline Davies, reviews this important rule of public policy.

The murky world of corporate crime was the backdrop to the recent Supreme Court case of Jetivia SA v Bilta [1]. The facts, which are not uncommon, were that the liquidators of an insolvent company issued a fraud claim against the company’s directors and third party companies. The defendants sought to rely on the principle of ex turpi causa non oritur action, also known as the illegality defence, and the fact that the company was complicit in the fraud, in their application to strike out the claim.

(The defendants also argued that certain elements of the claim must fail on the basis that the relevant provisions of the Insolvency Act 1986 (“IA”) did not have extra-territorial effect, and the defendants were domiciled out of England and Wales and did not have any assets in the jurisdiction.)

The High Court, Court of Appeal and Supreme Court all dismissed the defendants’ arguments, but the justices could not agree on the proper approach to the illegality defence. The following key points arise:

  • Ex turpi causa is an important rule of public policy which provides that no action should be founded on an illegal act. A claimant should not be entitled to pursue legal rights or remedies where they have been involved in illegal conduct which is linked to the claim.
  • If the courts accept the illegality defence, it often involves granting an unjustified windfall to the defendant (who may be equally implicated in the illegality); but if the courts refuse, they may be helping a claimant who has behaved illegally.
  • The courts have, over time, sought to set out guidelines to govern application of the illegality defence but the rules have become complex and confused. The myriad possible circumstances in which the illegality defence could arise are hugely wide in scope and, of course, case law is primarily concerned with reaching the correct outcome on specific facts.
  • Lords Toulson and Hodge considered that the application of ex turpi causa in this case was inconsistent with statutory policy requiring directors to have regard to the interests of creditors, whereas Lord Sumption believed that the defence is a rule of law that is not dependent on the balance of merits between the parties in any particular case. Ultimately, the Supreme Court did not accept the illegality defence in Jetivia.
  • In 2010 The Law Commission recognised that the law is complex, uncertain, arbitrary and occasionally unjust. In this case Lord Sumption stated that the illegality defence has become “encrusted with an incoherent mass of inconsistent authority” [2].
  • The case has therefore highlighted the need for a review of ex turpi causa. In the meantime, whilst it remains impossible to glean strict rules, it seems that the courts will consider the policy rationales that underlie the illegality defence and apply them to the facts of any given case.

WM Comment
So far as businesses and practitioners are concerned, the Supreme Court’s ruling in Jetivia, and its decision not to determine the wider problems with the illegality defence, is likely to represent a significant relief to administrators and liquidators who may continue to bring claims against fraudulent directors. The case also serves as a reminder of an important principle which, in the right circumstances, can assist a party who is being pursued by any person guilty of relevant wrongdoing itself.

(Additionally, the decision did not deny the extra-territorial effect of the IA, which is good news for office holders who are increasingly looking to make recoveries for the benefit of creditors of businesses with international reach.)

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[1] Jetivia SA & another v Bilta (UK) Ltd (in liquidation) & others [2015] UKSC 23
[2] para. 61

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