When can a company sue its directors for their illegal acts?

Print publication


Bilta (UK) Limited (Bilta) was a UK company that went into liquidation in 2009 on an HMRC petition. For approximately four months in 2009, Bilta, through the actions of its two directors, effected a fraud based on the purchase and resale of European Emissions Trading Scheme Allowances (EUAs).

At the time, EUAs were treated as taxable supplies under the VAT Act 1994 and were consequently liable for VAT at the standard rate. Bilta purchased EUAs from sources outside the UK (thereby making the purchase VAT exempt due to the rules governing trading within the EU), before reselling the EUAs to UK registered companies, usually at a loss. The purchase monies were either paid direct to Jetivia SA (Jetivia), a Swiss company, or to Bilta who would subsequently pass the amount on to Jetivia.

The end result was Bilta being insolvent and unable to meet its VAT liabilities that it owed as a consequence of selling the EUAs to a UK registered company. At the time of liquidation, Bilta owed HMRC £38,733,444.

The judgment [1] covers the following three areas:

The judgment provides a detailed chronology of the principle that a company is a separate legal entity with the capacity for having the mental states of agents and employees (such as dishonesty or malice) attributed to it. In doing so, the judgment concludes that the answer to any question of attribution will depend upon the context in which the question is asked. However, the judgment is useful for providing guidance on what ought to be taken into account when considering such context.

The first point to consider is the extent to which the company in question acts in accordance with the instructions of a director or employee. This is referred to as the company’s “directing mind and will” and is often seen in one director and/or one member companies in which the company is inseparable from those who govern it. Importantly, the principle of attribution in this sense may apply even when the person who is deemed to be the company’s “directing mind and will” is only held to be so within the strict confines of the corporate action that is the subject of the dispute.

The second point refers to the different ways in which a company may be a party to a cause of action:

  • where a third party makes a claim against a company, for both reasons of agency and public policy, the acts of a director or employee are likely to be attributed to the company
  • where a company pursues a claim against a director or employee for breach of duty, such actions cannot be attributed to the company on the basis that this would negate the company of any cause of action
  • thirdly, and finally, where the company claims against a third party, the extent to which the knowledge of a director or employee should be attributed to a company will depend on the nature of the claim, with the act of the third party needing to be evaluated.

Ex turpi causa
In this case, it was clear that the acts of Bilta’s directors would ordinarily be attributed to Bilta. The effect of this would be that the company (acting by its liquidators) would be unable to bring a claim against the directors (and potentially Jetivia) on the basis of ex turpi causa which is the principle that states that “no court will lend its aid to a man who founds his cause of action on an immoral or an illegal act”.

In order to address the unfairness of this potential outcome, the Court relied on the “breach of duty exception”. The essence of the principle is that a company will not be deemed to have knowledge of, and therefore not a party to, acts which constitute a breach of the fiduciary duties owed by directors to the company. As such, directors of a company cannot use their illegal acts, which harmed the company that is claiming against them, as a defence to the company’s cause of action.

Another point which the judgment considered was the distinction between acts that a company is directly liable for and those which it is vicariously liable for. In doing so, the judgment drew on the example of insurance cases where the difference is important in protecting a company’s position under a contract for insurance, and ensures that the illegal act of a company’s employee does not vitiate the insurance policy.

Extra-territorial effect of section 213 Insolvency Act 1986 (the Act)
The Supreme Court held that section 213 of the Insolvency Act 1986 (concerning wrongful trading) had extra-territorial effect. It applied prior case law holding that the phrase “any person” in section 213 was not confined to a person within the UK.

The previous leading case in this area was Stone & Rolls Ltd v Moore Stephens [2]. The Supreme Court considered that case to be unhelpful and that it ought to be confined to a box marked “not to be looked at again”. Whilst Bilta may not be quite so unhelpful as a precedent, it remains a judgment that is highly reliant on the facts unique to it. Similarly, for many professional practitioners who welcomed the Stone & Rolls judgment due to its clarification of the scope of the duty of care owed by (in that case) auditors, a case which makes it easier for liquidators to sue third parties may not be so well received.


[1] Jetivia SA and another v Bilta (UK) Limited (in liquidation) and others [2015] UKSC 23
[2] Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39