When can Directors’ Crimes be Attributed to the Companies on Whose Boards They Sit–And Does it Matter?

Board in Jail

This is a question with which English law has had to grapple on many different occasions and in many different contexts, both civil and criminal. It is even directly relevant to D&O insurance since it can mean the difference between insurers’ ability to rescind an insurance policy against all insureds and their ability to do so only against the guilty ones. As Lord Hoffman put it in Meridien Global Funds Management Asia Limited v Securities Commission [1995]:

“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 a company”.

So What are the Applicable Rules?

This question came to be considered again most recently by the Court of Appeal in the case of Jetivia SA (and others) against Bilta (UK) Limited (in liquidation) in which judgement was handed down in July 2013.  Bilta, prior to liquidation, had two directors one of whom was also its sole shareholder.  It engaged in an elaborate fraud based on the purchase and resale of European emissions trading scheme allowances which resulted in tax liabilities to HMRC in excess of £38m.  Proceedings were then brought by the liquidators of Bilta against a number of parties on the basis of allegations that they had conspired with and dishonestly assisted the directors of Bilta in trading fraudulently contrary to section 213 of the Insolvency Act 1986.

The legal defence employed by those accused of dishonestly assisting the directors of Bilta relied on the application of the English public policy principle of “ex turpi causa non oritur actio” (a claim cannot be made based on one’s own illegal act).  In other words, it was argued that since Bilta was used as the vehicle of a fraud on HMRC and was, in effect, a co-conspirator in that fraud, it could not bring a claim against its fellow co-conspirators.  The only victim of the fraud was HMRC itself and not the company in whose name the claim was brought.

The liquidators of Bilta unsurprisingly took a different view.  They accepted that the general rule of attribution with respect to the acts and intentions of the directors and other senior representatives of the company which is that their knowledge will be attributed to the company for the purposes of establishing the company’s own liability for unlawful conduct.  They argued though that the process of attribution was not an automatic one and should not apply to these facts. Perhaps the best known exception to this rule of attribution (at least among lawyers) is the so-called “Hampshire Land” principle.  The principle takes its name from an 1896 case which decided that where an officer of a company is guilty of fraud, his knowledge of his own fraud cannot be attributed to the company.

In Bilta, the Court of Appeal, after reviewing the relevant authorities, stated that the so-called Hampshire Land principle was part of a more fundamental rule “… 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”.

One of the essential questions with which the court had to grapple in Bilta was therefore whether the company could itself properly be regarded as the victim of the fraudulent conduct of its former directors.  If it was the victim, the knowledge of its dishonest directors would not be attributable to it and it would be free to pursue its claims for dishonest assistance against others.  If it was not the victim of the fraud then perhaps the knowledge of its former fraudulent directors had to be attributable to it such that it was in law to be treated as a co-conspirator.

The obvious primary victim of this VAT fraud was HMRC itself.  Having acknowledged this to be so and having reviewed the relevant authorities, The Court of Appeal went on to reason that Bilta itself would have suffered (secondary) damage in the form of the fines and other liabilities visited on it by HMRC.  As a secondary victim of the fraud, The Court held that it should be free to pursue its claims against others.

Angels Dancing on Pinheads

If all this sounds a little like angels dancing on pinheads it is perhaps because there may be an element of public policy in play here. In essence, The Court faced a choice as to whether to allow the liquidators to pursue those allegedly responsible for assisting in the fraud or whether to use the law so as to enable the alleged fraudsters to defeat the claim and avoid liability.  It is therefore perhaps unsurprising that the Court decided in favour of the liquidators in this instance. (The case may still go on appeal to The Supreme Court.) If the facts were stacked up differently one can’t help but wonder if the result might have been otherwise.

What is perhaps inescapable (but nevertheless worth understanding from a director’s perspective) is that the question as to the circumstances in which his or her knowledge and that of his or her co-directors will be attributed to the company and with what result, where some element of fraud, dishonesty or other misfeasance is uncovered, are impossible to predict. The morals of this story seem to be: choose your colleagues on the board carefully, make sure you have access to good legal advice and have deep enough pockets to pay for it!

About Francis Kean

Francis is an Executive Director in Willis Towers Watson's FINEX Global, where he specializes in insurance for Dir…
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