Bilta (UK) Ltd & Ors v Nazir & Ors [2012] EWHC 2163 (Ch)

Case No HC09C03502[2012] EWHC 2163 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
Venue Royal Courts of Justice, Strand, London, WC2A 2LLDate 30/07/2012
Before
THE CHANCELLOR OF THE HIGH COURT
Between
BILTA (UK) LIMITED (In liquidation)ClaimantsKEVIN JOHN HELLARD (liquidator of Bilta (UK)Ltd)(3) DAVID ANTHONY INGRAM (liquidator of Bilta (UK) Ltd)(1) MUHAMMAD NAZIRDefendants(2) CHETAN CHOPRA(3) PAN 1 LIMITED (4) AMAN ULLAH KHAN(5) SHEIKH ZULFIQAR MAHMOOD(6) JETIVIA S.A. (7) URS BRUNSCHWEILER(8) TRADING HOUSE GROUP LIMITED(9) MUHAMMAD FAYYAZ SHAFIQ
Christopher Parker QC and Rebecca Page (instructed by Gateley LLP) for ClaimantsAlan Maclean QC and Colin West (instructed by Macfarlanes LLP) for 6th and 7th DefendantsHearing Hearing dates: 17 - 18 July 2012
JudgmentThe Chancellor :Introduction
[1]A European Emissions Trading Scheme Allowance (“EUA”), commonly known as a ‘carbon credit’, authorises the holder to emit one tonne of carbon dioxide. Carbon credits are of value to those whose industrial activities give rise to such emissions. They are traded on recognised exchanges and elsewhere. Until 31st July 2009 the supply of such credits was standard-rated for the purposes of VAT, since then they have been zero-rated.[2]Between 22nd April and 21st July 2009 Bilta (UK) Ltd (“Bilta”), a company incorporated in England and registered for the purposes of VAT, traded in the purchase and sale of EUAs on the Danish Emissions Trading Agency. In that period it bought and sold in excess of 5.7m EUAs for some €294m. The following were the relevant features of those trades:(a) The purchases were from traders carrying on business outside the UK, including Jetivia S.A. (“Jetivia”) a company incorporated in Switzerland, and were therefore zero-rated for purposes of VAT.(b) The sales were to persons in the UK registered for the purposes of VAT, including Pan 1 Ltd (“Pan”), none of whom had any use for an EUA in the conduct of its business, such supplies being subject to VAT at the standard rate.(c) The price payable by Pan and the other purchasers net of VAT was less than that paid by Bilta to Jetivia and the other suppliers and was paid to them in full directly or through Bilta.(d) Consequently Bilta was unable to pay the VAT due on its supplies because it had made no profit and the proceeds of its sales had been paid away to the overseas traders.[3]Between 8th September 2009 and 20th January 2011 HMRC raised eight assessments on Bilta for VAT in the aggregate amount of £38m none of which were paid. On 29th September 2009 Messrs Hellard and Ingram (“the Liquidators”) were appointed provisional liquidators of Bilta and commenced the proceedings now before me in the name of Bilta. On 25th November 2009 Bilta was compulsorily wound up and the Liquidators were so appointed. The proceedings were amended on 13th October 2011 to include claims by the liquidators under s.213 Insolvency Act 1986.[4]Thus the claimants in this action are Bilta and the Liquidators. The first and second defendants are the sole directors of Bilta, Mr Nazir and Mr Chopra. Mr Chopra owned all the issued shares in Bilta. The third to fifth defendants are Pan and its two directors Mr Khan and Mr Mahmood. The sixth and seventh defendants are Jetivia and its sole director Urs Brunschweiler (“Mr Brunschweiler”). The eighth defendant Trading House Group Ltd (“THG”), a company incorporated in the British Virgin Islands, was, like Jetivia, a seller of EUAs to Bilta. The amended particulars of claim, to which I shall refer in greater detail later, allege that the defendants(1) conspired to injure and defraud Bilta, and(2) were knowingly parties to the carrying on of the business of Bilta with intent to defraud the creditors of Bilta and other fraudulent purposes. The claimants seek to recover £38,733,444 with compound interest and costs.[5]Save for the ninth defendant, Mr Shafiq only Jetivia and Mr Brunschweiler are now participating in the proceedings. By an application notice issued on 22nd December 2011 they sought orders that the claim be summarily dismissed against each of them on the grounds that(1) the claim made by Bilta is precluded by an application of the maxim ex turpi causa non oritur actio,(2) the claim of the Liquidators under s.213 Insolvency Act 1986 must fail because that section has no extra territorial effect and(3) both claims are outside the jurisdiction of this court because, vis-à-vis Jetivia and Mr Brunschweiler, they constitute the enforcement of a revenue debt of a foreign state. I will consider those three points in due course. First it is necessary to consider the amended particulars of claim in greater detail and the recent decision of the House of Lords in Stone & Rolls v Moore Stephens [2009] 1 AC 1391 on which counsel for Jetivia and Mr Brunschweiler placed much reliance in relation to the first point.

The amended particulars of claim

[6]Paragraphs 1 to 13 set out the facts, substantially as I have already summarised them. The conspiracy is alleged in paragraph 14 in the following terms:
“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…. (e) It is not known on what date or dates the conspiracy was formed.” (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…. (e) It is not known on what date or dates the conspiracy was formed.”
[7]The fraudulent scheme referred to in paragraph 14(b) is described in detail in paragraph 15. So far as concerns Jetivia and Mr Brunschweiler it is alleged that: “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…’s participation in the fraudulent scheme was not limited to transactions in which Bilta actually acquired EUAs from Jetivia…. (a) In a good number of transactions Jetivia…entered into paperwork with Bilta which showed that Bilta had acquired and sold on EUAs from Jetivia…which EUAs the Registry showed as being transferred from ….Jetivia directly to Bilta’s purchaser or through a different intermediary company before transfer to Bilta’s purchaser or through a different intermediary company before transfer to Bilta’s purchaser (see paragraph 22(8) below). (b) Jetivia…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.” [(b)-(e)] (a) In a good number of transactions Jetivia…entered into paperwork with Bilta which showed that Bilta had acquired and sold on EUAs from Jetivia…which EUAs the Registry showed as being transferred from ….Jetivia directly to Bilta’s purchaser or through a different intermediary company before transfer to Bilta’s purchaser or through a different intermediary company before transfer to Bilta’s purchaser (see paragraph 22(8) below). (b) Jetivia…would receive payments directly from the First Line Buffers depriving Bilta of the means of meeting its VAT liabilities.[8]Paragraphs 16 to 21 relate, respectively, to Bilta’s lack of credit, the Danish Emissions Trading Agency registry, the amounts involved and the unpaid assessments to VAT made on Bilta. Paragraph 22 alleges that the trading by Bilta was neither bona fide nor consistent with legitimate commercial trading. Substantial particulars of that allegation are set out in subparagraphs (1) to (15).[9]Paragraphs 23 to 25B make specific allegations against Jetivia. Paragraph 23 alleges, with substantial particulars contained in sub-paragraphs (1) to (14), that the pattern of trading by Jetivia with or involving Bilta was not bona fide or consistent with legitimate commercial trading and, it should be inferred, was undertaken in furtherance of the conspiracy. The extent of that trading, as alleged in sub-paragraph (4), was €60m all of which was received by Jetivia from Bilta or from the purchasers from Bilta. Paragraph 24 asserts facts from which it is alleged that the court should infer that Jetivia knew that its dealings with Bilta were dishonest and part of a ‘missing trader’ fraud. Paragraphs 25 to 25B assert facts in support of the allegations previously made.[10]Paragraphs 26 to 41 contain comparable allegations against THG, Pan and other buyers of EUAs from Bilta and the connections between all participants in the alleged conspiracy. Paragraphs 42 to 50 summarise the claims against Mr Nazir and Mr Chopra. So far as relevant they assert: “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.”[11]Paragraphs 57 to 64 contain the claims against Jetivia and Mr Brunschweiler. The latter is alleged to be the directing mind and will of Jetivia in paragraph 57. Paragraphs 58 to 60 assert liability as parties to the conspiracy and under s.213 Insolvency Act 1986. Paragraphs 61 to 64 allege: “61. Further or in the alternative, Jetivia is liable to Bilta in equity for knowing receipt in the amount of the sums it received from Pan 1.[62]Further or in the alternative, Jetivia and/or Mr Brunschweiler are liable to account to Bilta in equity for dishonestly assisting breaches of fiduciary duty by Mr Nazir and/or Mr Chopra. They knowingly and dishonestly assisted in the diversion of book debts due to Bilta or, alternatively, the VAT element thereof away from it.[63]Jetivia and Mr Brunschweiler knew or were reckless as to the fact that the receiving of payments by Jetivia from Pan 1 would lead to Bilta being unable to discharge its VAT liability….[64]Jetivia and/or Mr Brunschweiler are liable to account for the sum of £38,733,444.04 for dishonestly assisting each of Mr Nazir and/or Mr Chopra’s breaches of fiduciary duty.”

Stone & Rolls Ltd v Moore Stephens

[12]In this case Moore Stephens, a firm of chartered accountants, was the auditor of Stone & Rolls Ltd (“Stone”). Ostensibly the director of Stone was a resident in Sark and its entire share capital was vested in a company registered in the Isle of Man. In fact it was under the sole control of Mr Stojevik as the beneficial owner of the shares and an attorney of the sole director. Under such control Stone fraudulently extracted money from a Czech bank. Details of the fraud are sufficiently summarised in the judgment of Langley J quoted by Rimer LJ at [2009] 1 AC 1399 [6]. The money thereby obtained was applied for the purposes of Mr Stojevik, not those of Stone. Judgment for damages for deceit was obtained by the bank against Stone which it could not meet. Stone was wound up and proceedings against the auditors were commenced by the liquidator. In those proceedings Stone alleged that in breach of its duties in both contract and in tort the auditors had negligently failed to detect various aspects of the fraudulent scheme with the result that the activities of Mr Stojevik continued, Stone fraudulently extracted further money from the Czech bank and thereby incurred further liability which it could not satisfy. The loss claimed was, in substance, the additional liability incurred after the end of each audit period in which it was alleged that the frauds should have been discovered. Moore Stephens applied to the court to have the claim struck out or summarily dismissed on the basis that it was barred by the maxim ex turpi causa non oritur actio. The turpis causa relied on was the fraud practised on the Czech Bank, see the argument of counsel for Moore Stephens at [2009] 1 AC 1444 C-D. Langley J refused to do so and dismissed the application. Moore Stephens successfully appealed to the Court of Appeal. Stone then appealed to the House of Lords. That appeal was, by a majority (Lords Phillips, Brown and Walker) dismissed. The minority (Lords Scott and Mance) considered that the appeal should be allowed. It is necessary to refer to all five speeches in some detail.[13]It is convenient to start with that of Lord Walker of Gestingthorpe. After setting out the facts and describing the issue he noted [131] that the main area of dispute was whether the criminal acts and intentions of Mr Stojevik should be attributed to Stone. He concluded [136] that Stone was primarily, not merely vicariously, liable to the Czech bank for the frauds of Mr Stojevik. In a long section [137] to [168] under headings of the Hampshire Land principle, sole actors and secondary victims and the modern cases Lord Walker pointed out [161] that:
“In this appeal, by contrast, the issue is the attribution to S & R of a dishonest state of mind. Where that is the issue the notion of a one-man company does become meaningful, as Royal Brunei demonstrates. In this context I would treat the expression as covering cases where there is one single dominant director and shareholder (such as Mr Tan in Royal Brunei, Mr Golechha in Berg, or Mr Stojevic in the present case) even if there are other directors or shareholders who are subservient to the dominant personality (such as Mr Tan's wife in Royal Brunei, the inactive solicitor-director in Berg, or S & R's nominee directors). I would also treat it as covering cases where there are two or more individual directors and shareholders acting closely in concert, such as the anonymised directors in Attorney General's Reference (No 2 of 1982) or Mr Chappell and Mr Palmer in Brink's-Mat. It may be simplest to propose a test in negative terms, on the lines of what Hobhouse J said in Berg, that is a company which has no individual concerned in its management and ownership other than those who are, or must (because of their reckless indifference) be taken to be, aware of the fraud or breach of duty with which the court is concerned.”
[14]After considering various US cases Lord Walker concluded in paragraph [167]:
“In the case of a one-man company (in the sense indicated above) which has deliberately engaged in serious fraud, I would follow Royal Brunei (and the strong line of United States and Canadian authority) in imputing awareness of the fraud to the company, applying what is referred to in the United States as the "sole actor" exception to the "adverse interest" principle.”
[15]In [168] Lord Walker added:
“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…..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.”
[16]Lord Walker then considered the position of ‘secondary victims’. He concluded in [173]-[174]: “173. 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. 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.”[17]Finally, on this aspect of the appeal Lord Walker considered whether the liquidation of the ‘one man company’ made any difference. He concluded [184]:
“It was argued for the appellants that the public policy defence should not bar claims brought by a company in insolvent liquidation, where the creditors were innocent parties who had been defrauded by Mr Stojevic. If that were right, it would create a very large gap in the public policy defence, since most fraudsters (individual and corporate) become insolvent sooner or later and have liabilities to those whom they have defrauded. Mr Brindle conceded that if Mr Stojevic had carried out his frauds directly (and not through a one-man company) neither he nor his trustee in bankruptcy could have resisted the public policy defence. That conclusion was reached by Langley J. (para 65(2)) and is clearly correct (see Fry LJ in Cleaver v Mutual Reserve Fund Life Association [1892] 1 QB 147, 156). There is no good reason to apply a different rule to a company in liquidation. Apart from special statutory claims in respect of misfeasance, wrong trading and so on, it cannot assert any cause of action which it could not have asserted before the commencement of its liquidation, as Mr Brindle concedes. That is especially true in the context of the duties of an auditor, which are not owed to a company's creditors.”
[18]Lord Brown of Eaton-under-Heywood was of the same opinion. He concluded [201] that in the case of a one man company the company can be in no better position than the one man, and the liquidator in no better position than either of them, to resist the ex turpi causa defence.[19]Lord Phillips of Worth Matravers described [14] the fallback submission of counsel for Moore Stephens to be that where there is no human embodiment of the company other than the fraudster attribution of his fraud to the company is inevitable. In [18] he summarised his conclusions in the following six propositions:
“(1) Under the principle of ex turpi causa the court will not assist a claimant to recover compensation for the consequences of his own illegal conduct. (2) This appeal raises the question of whether, and if so how, that principle applies to a claim by a company against those whose breach of duty has caused or permitted the company to commit fraud that has resulted in detriment to the company. (3) The answer to this question is not to be found by the application of Hampshire Land or any similar principle of attribution. The essential issue is whether, in applying ex turpi causa in such circumstances, one should look behind the company at those whose interests the relevant duty is intended to protect. (4) While in principle it would be attractive to adopt such a course, there are difficulties in the way of doing so to which no clear resolution has been demonstrated. (5) On the extreme facts of this case it is not necessary to attempt to resolve those difficulties. Those for whose benefit the claim is brought fall outside the scope of any duty owed by Moore Stephens. The sole person for whose benefit such duty was owed, being Mr Stojevic who owned and ran the company, was responsible for the fraud. (6) In these circumstances ex turpi causa provides a defence to the claim.”
[20]Thus, in his fifth proposition Lord Phillips agreed with Lords Walker and Brown. He returned to this aspect of the appeal in [67] and [68] where he said: “67. For the reasons that I have already given, I consider that the real issue is not whether the fraud should be attributed to the company but whether ex turpi causa should defeat the company's claim for breach of the auditor's duty. That in turn depends, or may depend, critically on whether the scope of the auditor's duty extends to protecting those for whose benefit the claim is brought.[68]One fundamental proposition appears to me to underlie the reasoning of Lord Walker and Lord Brown. It is that the duty owed by an auditor to a company is owed for the benefit of the interests of the shareholders of the company but not of the interests of its creditors. It seems to me that here lies the critical difference of opinion between Lord Walker and Lord Brown on the one hand and Lord Mance on the other. Lord Mance considers that the interests that the auditors of a company undertake to protect include the interests of the creditors.”[21]Lord Phillips returned to this aspect of the case in [86] where he said:
“The scope of Moore Stephens' 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.”
[22]In order to appreciate the full import of the speeches of those in the majority, in particular Lord Phillips, it is helpful to refer briefly to the speech of Lord Mance. Lord Mance considered [263] that Moore Stephens's argument and the majority conclusion overlooked a critical distinction between a company which is solvent and a company which is insolvent at the audit date. After dealing with two other submissions he returned to this point at [265] where he said:
“The fact that S & R was insolvent at each audit date is, in contrast, in my opinion critical. The powers of directors and shareholders in circumstances of insolvency or potential insolvency are qualified (as described in paras 235 to 240 above). The issue as between the company and its auditors is whether the auditors' duty to the company extends, like the directors', beyond the protection of the interests of shareholders in a situation where the auditors ought to have detected that the company was (in fact, as a result of the fraud which the auditors ought to have discovered) insolvent. Despite the immense and highly skilled attention that the appeal has had generally, both prior to and during its presentation before the House, I fear that the centrality of this point may have been a little obscured by the spread of argument over other issues.”
He concluded [271] that Moore Stephens could not invoke the maxim ex turpi causa or deny causation by reference to the knowledge of and involvement in the fraud of Mr Stojevic if Moore Stephens ought, with proper skill and care, to have detected that Stone was subject to a continuing scheme of fraud in circumstances in which Stone was insolvent and being made increasingly so. Lord Scott of Foscote was in general agreement with Lord Mance.[23]I will return to the decision in Stone in the light of the submissions of counsel for the parties in this case. At this stage I would make the following observations:(1) The turpis causa relied on by Stone was the fraud practised on the Czech bank by Stojevic.(2) The duty of the auditors did not, in the view of the majority, extend to the protection of creditors where the company was or was becoming insolvent.(3) Stone was a one man company within Lord Walker’s formulation.

The claim of Bilta

[24]I turn now to the first point underlying the application of Jetivia and Mr Brunschweiler. Is the claim against them made by Bilta barred by the principle of ex turpi causa? Their counsel submits, in summary, that it is. He contends that I am bound by the decision of the House of Lords in Stone and that the ratio decidendi of that decision is applicable to the facts of this case. He relies on the facts that Bilta was under the control of Mr Nazir and Mr Chopra and that Mr Chopra was beneficially entitled to all the shares in Bilta. It follows, he submits, that Bilta was a ‘one man company’ in the sense explained by Lord Walker to which the frauds of Mr Nazir and Mr Chopra are to be attributed. Further he relies on paragraphs 14, 15, 22 and 23 of the amended particulars of claim (quoted or referred to above) as demonstrating that Bilta is relying on those frauds in its claim against them.[25]Counsel for Bilta does not dispute that if the ratio decidendi in Stone is applicable to the facts of this case then the result for which counsel for Jetivia and Mr Brunschweiler contends would follow. He submits that that condition is not satisfied for two reasons. First, Bilta was the victim of the fraud not the villain. In that connection he relies on the decision of Warren J in Greener Solutions Ltd v HMRC [2012] STC 1056. Second, the relevant duty owed to Bilta was that of the directors, Mr Nazir and Mr Chopra, not of auditors and extended to the interests of creditors. He relies on the provisions of ss.172 and 180 Companies Act 2006.[26]Greener Solutions Ltd v HMRC [2012] STC 1056 also concerned a ‘missing trader’ fraud. In that case Greener Solutions (“GSL”) sought repayment of the input tax incurred in respect of mobile telephones it had bought and then exported. The individual who had effected all the relevant transactions on behalf of GSL was Oliver Murray. Murray knew of the fraud committed by Jag-Tec, the missing trader. The question was whether his knowledge should be imputed to GSL. Warren J concluded [43] that it should be because Murray had effectively implemented the fraud on behalf of GSL but the fraud was not aimed at GSL. Counsel for Bilta submits that this decision exemplifies the limitation on the ratio decidendi of Stone for which he contends.[27]S.172 Companies Act 2006 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.” (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.[28]It is not disputed that in circumstances where the company is or is likely to become insolvent the requirement to consider and act in the interests of creditors is imposed on the directors of the company. As Bilta never had any assets of its own of any substance but entered into commitments of considerable value this duty was operative on Mr Nazir and Mr Chopra at all material times.[29]S.180 Companies Act 2006 provides:
“(1) In a case where– (a) section 175 (duty to avoid conflicts of interest) is complied with by authorisation by the directors, or (b) section 177 (duty to declare interest in proposed transaction or arrangement) is complied with, the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring the consent or approval of the members of the company. This is without prejudice to any enactment, or provision of the company’s constitution, requiring such consent or approval. (2) The application of the general duties is not affected by the fact that the case also falls within Chapter 4 (transactions requiring approval of members), except that where that Chapter applies and– (a) approval is given under that Chapter, or (b) the matter is one as to which it is provided that approval is not needed, it is not necessary also to comply with section 175 (duty to avoid conflicts of interest) or section 176 (duty not to accept benefits from third parties). (3) Compliance with the general duties does not remove the need for approval under any applicable provision of Chapter 4 (transactions requiring approval of members). (4) The general duties– (a) have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors, or any of them, that would otherwise be a breach of duty, and (b) where the company’s articles contain provisions for dealing with conflicts of interest, are not infringed by anything done (or omitted) by the directors, or any of them, in accordance with those provisions. (5) Otherwise, the general duties have effect (except as otherwise provided or the context otherwise requires) notwithstanding any enactment or rule of law.”
Counsel for Bilta relies on s.180(5) as demonstrating that there is no limitation on the duty imposed by s.172(3) in cases of ‘one man’ companies. (a) section 175 (duty to avoid conflicts of interest) is complied with by authorisation by the directors, or (b) section 177 (duty to declare interest in proposed transaction or arrangement) is complied with, the transaction or arrangement is not liable to be set aside by virtue of any common law rule or equitable principle requiring the consent or approval of the members of the company. (a) approval is given under that Chapter, or (b) the matter is one as to which it is provided that approval is not needed, it is not necessary also to comply with section 175 (duty to avoid conflicts of interest) or section 176 (duty not to accept benefits from third parties). (a) have effect subject to any rule of law enabling the company to give authority, specifically or generally, for anything to be done (or omitted) by the directors, or any of them, that would otherwise be a breach of duty, and (b) where the company’s articles contain provisions for dealing with conflicts of interest, are not infringed by anything done (or omitted) by the directors, or any of them, in accordance with those provisions.[30]The riposte of counsel for Jetivia and Mr Brunschweiler involved a detailed examination of the amended statement of claim in order to establish that Bilta was relying on its own wrong. He contended that the allegations made in paragraphs 43 and 45, quoted in paragraph 10 above, were, inevitably, attributable to Bilta and one consequence of such attribution is that Bilta must have been the villain and not the victim. He accepted the further consequence of his submission, namely, that the defence of ex turpi causa would be available to Mr Nazir and Mr Chopra too.[31]In relation to s.180 Companies Act 2006 counsel for Jetivia and Mr Brunschweiler pointed out that subsection 4(a) preserved the efficacy of general rules of law to qualify the general duties of a director of a company. He contended that the defence of ex turpi causa was available to any claim based on any breach of any duty. Accordingly, so he submitted, the defence must be available to a claim based on a breach of the duty imposed or recognised by s.172(3).[32]I accept the submission of counsel for Bilta to the effect that the facts of this case distinguish it from those of Stone in both the respects on which counsel relies. It is clear from the paragraphs in the amended particulars of claim I have set out above that the conspiracy alleged in paragraph 14 was aimed at Bilta; that is what paragraph 14(a) and (c) assert. The conspiracy involved denuding Bilta of its assets so that it would be unable to satisfy its liability to HMRC for VAT at the standard rate on its sales of EUAs to Pan and others, as alleged in paragraph 15(7). This was achieved by ensuring that the moneys due to Bilta in respect of those sales were paid directly or indirectly to Jetivia or the other overseas entities from which Bilta bought the EUAs, as alleged in paragraph 15(4). It is not alleged that Bilta was a party to or beneficiary of the conspiracy.[33]The conspiracy so alleged subjected Mr Nazir and Mr Chopra to the duty imposed by s.172(3) Companies Act and its infringement by them with, as alleged, the active, knowing and fraudulent participation of Jetivia and Mr Brunschweiler, amongst others. Thus the present and future creditors of Bilta were within the scope of the directors’ duty. It is true that, as their counsel submitted, Jetivia and Mr Brunschweiler are one step removed from Mr Nazir and Mr Chopra. But if the defence of ex turpi causa is not available to them I do not understand how it can be available to those who fraudulently conspired with them to breach their duties as directors of Bilta.[34]Accordingly, I would start by testing the propositions for which counsel for Jetivia and Mr Brunschweiler contends by considering their application to the case against Mr Nazir and Mr Chopra. It was not disputed that if an individual agent defrauds his individual principal the defence of ex turpi causa would not be available as a defence to a claim against the agent by the principal. It would be the same in the case of a company principal and individual agent except where, as in Stone, the company can be identified as the agent in corporate form. That, as I understand it, is the basis for the ‘one man’ company exception applied by Lords Walker and Brown.[35]But the conclusion of the majority in Stone also depended on the fact that the scope of the auditors’ duty was restricted to the company and those interested in it as members. As Lord Walker pointed out in [168] “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.” Lord Brown [205] agreed with Lord Walker. The fifth proposition enunciated by Lord Phillips [18] and the further statements made by him in [67], [68] and [86], which I have quoted in paragraphs 19 to 21 above, emphasise the need to consider the scope of the duty alleged to have been infringed. None of them referred to s.172 Companies Act 2006.[36]In my judgment, the ratio decidendi of Stone is not applicable to cases in which the claim is based on a breach of duty the scope of which encompasses persons or interests other than the fraudsters in corporate form. None of the majority so held. Whether the true view is that in such a case the company is not a ‘one man’ company for the purposes of that claim or that the scope of the duty extends to persons or interests not implicated in the fraud may be a moot point. In either case my conclusion is consistent with the views of Lord Mance [265] which I have quoted in paragraph 22 above.[37]I do not suggest that creditors of a company not in liquidation have any proprietary interest in the assets of the company, but their interests as creditors are within the scope of the duties of directors at least where the company is or may become insolvent. S.172 Companies Act 2006 is statutory recognition of the principle to that effect recognised by Dillon LJ in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250. In my view, therefore, the defence of ex turpi causa would not be available to Mr Nazir and Mr Chopra as a defence to any of the claims made against them in paragraphs 42 to 45 of the amended particulars of claim quoted in paragraph 10 above.[38]In my judgment Jetivia and Mr Brunschweiler can be in no better position. Paragraphs 61 to 64 of the amended Particulars of Claim, quoted in paragraph 11 above, assert, in addition to participation in the conspiracy, their dishonest assistance in the breaches of the duties of Mr Nazir and Mr Chopra. If the defence of ex turpi causa is not available to Mr Nazir and Mr Chopra I am unable to detect any basis on which it could be available to those who dishonestly conspired with them to break it. In my view the defence of ex turpi causa is not available to Jetivia and Mr Brunschweiler as a defence to the claim brought against them by Bilta. Accordingly, I shall not dismiss that claim.

S.213 Insolvency Act 1986

[39]That section is in the following terms:
“(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.”
[40]The claim was amended in October 2011 so as to join the Liquidators as the second and third claimants. The particulars of claim were amended so as to include a claim against all the defendants under that section. Jetivia and Mr Brunschweiler do not allege that such claim is not properly pleaded against them. Nor do they assert that they are not amenable to service of the amended claim. They contend that the section does not have extra-territorial application so as to cover their activities outside the United Kingdom constituted by the sale of EUAs on the Danish Emissions Trading Agency. They rely on the well established principle of statutory construction that statutes are presumed not to have such an effect unless the express words of the statute or a clear implication indicate otherwise, see Ex p.Blain (1879) 12 ChD 522; Clarke v Oceanic Contractors [1983] 2 AC 130. Counsel for Jetivia and Mr Brunschweiler submits that there is no authority to the effect that s.213 can have extra territorial effect and there are no clear words or necessary implication to justify me in concluding that it does. By analogy they rely on the decision of the House of Lords setting aside an order under CPR 71 requiring the director of a company resident in Greece to attend for cross-examination as to the company’s assets, see Masri v Consolidated Contractors [2010] 1 AC 90.[41]The general principle is not in doubt. Counsel for the Liquidators contends that the context of insolvency and the unqualified references to “any business” and “any person” do entitle and require the court to conclude that s.213 does have extra-territorial effect. He relies on a number of decided cases as examples. Thus:(1) S.133 Insolvency Act 1986 (orders for the public examination of officers of a company in liquidation) was held to have extra-territorial effect in Re Seagull Manufacturing Co Ltd. [1993] Ch 345.(2) S.238 Insolvency Act 1986 (orders setting aside transactions at an undervalue) was held to have extra-territorial effect in Re Paramount Airways [1993] Ch 223.(3) S.423 Insolvency Act 1986 (transactions defrauding creditors) was held to have extra-territorial effect in HMRC v Begum [2010] EWHC 1799.(4) S.214 Insolvency Act 1986 (wrongful trading) was assumed to have extra-territorial effect in Re Howard Holdings Inc [1998] BCC 549.(5) S.213 was assumed to have extra-territorial effect in Carman v The Kronos Group SA [2006] BCC 451; Stocznia Gdanska SA v Latreefers Inc [2001] 2 BCLC 116.[42]The starting point must be the nature of corporate insolvency. This was described by Millett J in Re International Tin Council [1987] Ch. 419. At page 446 he said:
“Although a winding up in the country of incorporation will normally be given extra-territorial effect, a winding up elsewhere has only local operation. In the case of a foreign company, therefore, the fact that other countries, in accordance with their own rules of private international law, may not recognise our winding up order or the title of a liquidator appointed by our courts, necessarily imposes practical limitations on the consequences of the order. But in theory the effect of the order is world-wide. The statutory trusts which it brings into operation are imposed on all the company's assets wherever situate, within and beyond the jurisdiction. Where the company is simultaneously being wound up in the country of its incorporation, the English court will naturally seek to avoid unnecessary conflict, and so far as possible to ensure that the English winding up is conducted as ancillary to the principal liquidation. In a proper case, it may authorise the liquidator to refrain from seeking to recover assets situate beyond the jurisdiction, thereby protecting him from any complaint that he has been derelict in his duty. But the statutory trusts extend to such assets, and so does the statutory obligation to collect and realise them and to deal with their proceeds in accordance with the statutory scheme.”
[43]Although that passage must now be read in the light of the provisions, where they apply, of UNCITRAL Model Law on Cross Border Insolvency and Council Regulation on Insolvency Proceedings 1346/2000/EC the underlying theory of corporate liquidation remains as Millett J described it. Its international effect was recognised and given further effect by Sir Donald Nicholls V-C in Re Paramount Airways [1993] Ch 223. That case concerned a transaction at an undervalue within s.238 Insolvency 1986 effected by a transfer to a bank in Jersey. Proceedings were taken under that section against the bank. The bank claimed that the section did not have extra-territorial effect. The Vice-Chancellor disagreed. He noted that the section did not purport to have any territorial limitation [235G-H]. At [239C-E] he added:
“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.”
[44]Though stated in relation to s.238 the principles expressed by the Vice-Chancellor then are equally, if not more, applicable to this case some twenty years later. If a company is involved in trade across state boundaries and that trade is designed to defraud its creditors there is no more reason to confine the operation of the section to those within the jurisdiction than in cases where the transaction in question is at an undervalue. In the case of both ss. 213 and 238 the object of the section is “any person”. Both sections confer on the court a discretion as to what order to make. Both sections, and many others, are directed to recovering assets, wherever they may be, or compensation for the benefit of all the creditors of the company in liquidation whether resident in the United Kingdom or elsewhere. I would hold that s.213 is of extra-territorial effect and reject the second ground advanced in support of this application by counsel for Jetivia and Mr Brunschweiler.

Revenue Debt

[45]It is a well-known principle of private international law that the courts in England have no jurisdiction, directly or indirectly, to enforce a revenue law of a foreign state, see Dicey, Morris and Collins on the Conflict of Laws 14th Ed.100 Rule 3. There is no evidence as to the laws of Switzerland. I assume it to be to the same effect.[46]It was submitted by counsel on behalf of Jetivia and Mr Brunschweiler that the claim made in this action by both Bilta and the Liquidators seeks to enforce the claim of HMRC for VAT under the VAT Act duly assessed on Bilta. He contended that this was a ground for distinguishing Re Paramount Airways and, in addition, a reason summarily to dismiss this claim ‘by way of comity’.[47]I reject this submission. First, the claim is not the enforcement directly or indirectly of a revenue claim. The claimants seek to recover compensation for a conspiracy to defraud it wherewith to provide a fund from which HMRC and any other creditor may be paid a dividend in respect of their debts. Second, even if it is a revenue claim, it is the claim of HMRC not of the revenue authorities of some foreign state. There is no basis for refusing to enforce the proper claims of HMRC in the courts of England and Wales whether based on comity or otherwise. Third, even if the claimants do seek to enforce the claim of HMRC, no question of comity arises. The claimants are not seeking to enforce the revenue laws of Switzerland and this is a court of England and Wales not of Switzerland! For all these reasons I see no reason to distinguish Re Paramount Airways either.

Summary of conclusions

[48]Having rejected each of the arguments summarised in paragraph 5 above I will dismiss this application. I would make two further observations. First, the fact that there is, in accordance with my conclusions, a claim against these defendants both at common law and under s.213 Insolvency Act 1986 is no reason for extending the defence of ex turpi causa so as to provide a defence to the claim by Bilta. There will be cases in which a company is defrauded to the detriment of creditors but is not being wound up. Second, there is no risk of any of the malefactors, such as Mr Chopra, benefitting from any judgment Bilta or the Liquidators may obtain. The claim under s.213 necessarily gives rise to the discretion of the court under s.213(2). Any damages or specific relief granted in respect of Bilta’s claim can be limited and directed to the creditors (and innocent shareholders if any) by the operation of the principle of Re VGM Holdings Ltd [1942] Ch 235 as applied in Selangor United Rubber Estates Ltd v Cradock (No.4) [1969] 1 WLR 1773 and the orders made in Kota Tingghi Rubber Co. Ltd v Burden 1970 (unreported) Karak Rubber Co Ltd v Burden (No.2) [1972] 1 WLR 602.

Cited in 2 later judgments