jetivia sa v bilta ( uk ) limited ( in liquidation )
jetivia sa & another v. bilta uk limited (in liquidation) & others [ 2015 ] uksc 23
frances coulson, partner at moon beever, gives her reaction to the supreme court’s decision in jetivia sa and another v bilta (uk) ltd (in liquidation) and others [ 2015 ] uksc 23 .
as with the phones, bilta bought ex uk from suppliers including jetivia (vat free trade within the eu) then sold to uk traders at a price lower than that they paid, and then the uk traders paid jetivia rather than bilta anyway .
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notable cases include the supreme court decision of jetivia sa & another v. bilta uk limited (in liquidation) & others [ 2015 ] uksc 23, a leading authority for the application of the illegality defence. the supreme court' s decision is of particular significance to insolvency practitioners considering claims against the directors of insolvent companies and brings welcome clarity to the scope of the house of lords' decision in stone & rolls limited v. moore stephens [ 2009 ] 1 a. c. 1391 .
bilta would buy the euas from a number of traders based outside the uk, including jetivia, whose sole director was one mr brunschweiler. bilta paid no vat when it acquired the euas from jetivia but then sold these euas on to a number of uk based traders who were registered for vat. the sales of these euas were taxable supplies and bilta thereby incurred substantial liabilities in respect of vat. however, as part of the fraudulent scheme, when the euas were sold to the uk based traders they were sold at a price below the price paid to jetivia plus the vat due. further, the payments made by the uk based traders were either made directly to jetivia or to various offshore bank accounts .
accordingly, bilta did not receive the proceeds of the sales of the euas, which left it unable to meet its vat liabilities, in the sum of gbp 38, 733, 444. in the meantime, both jetivia and the uk based traders were able to make significant profits at the expense of bilta .
bilta had two directors, mr nazir and mr chopra, with mr chopra as the sole shareholder. between 22 april and 21 july 2009 bilta purchased carbon credits from traders (including jetivia) located outside the uk, which were zero rated for vat purposes, and sold these at no profit (and frequently at a loss) to vat registered suppliers within the uk, charging vat. proceeds from these sales, including the vat element, were diverted offshore to jetivia and other third parties. this so - called “third party payment” structure is a common feature of missing trader intra - community (“mtic”) vat fraud. bilta was unable to pay the vat when it fell due and in september 2009 it entered provisional liquidation on the petition of hmrc .
“in common with all members of the court, i consider that this appeal should be dismissed because the court of appeal were right to hold that (i) illegality cannot be raised by jetivia or mr brunschweiler as a defence against bilta’s claim because the wrongful activity of bilta’s directors and shareholder cannot be attributed to bilta in these proceedings, and (ii) section 213 of the insolvency act 1986 has extra - territorial effect. ”
bilta (uk) limited (“bilta”) had been in liquidation since 29 september 2009. at all material times prior to the liquidation, the company had only two directors - messrs. nazir and chopra - and a sole shareholder, mr chopra. between april and july 2009, the company was engaged in an elaborate vat fraud, based on the purchase and resale of european emissions trading scheme allowances (euas). euas were, at this time, treated as taxable supplies under the vat act 1994 and were therefore liable for vat at the standard rate (15 %) .
the court of appeal recently handed down its much - anticipated judgment in (1) jetivia s. a. (2) urs brunschweiler v bilta (uk) limited (in liquidation) (2013). in doing so, it revisited the decision of the house of lords in the auditors’ liability case of stone & rolls ltd (in liquidation) v moore stephens (a firm) (2009), where it was held by a majority that a claim by a “one - man” company defrauded by its director, against auditors who were said to have failed, negligently, to alert the company to the fraud, was barred by the principle of ex turpi causa as that director was the company’s sole mind, will and beneficial owner and his dishonesty was therefore to be attributed to the company .
this left bilta with vat liabilities of £38, 733, 444 which it had no means of paying .
in october, the court heard applications by a swiss company jetivia and its director appealing against decisions to reject its application to strike out claims made against it for conspiracy, dishonest assistance and fraudulent trading. the claims arose from the appellants’ alleged participation with bilta’s directors and others in a vat fraud involving carbon credit trading which left bilta unable to pay debts of over £38m to hmrc .
at first instance (1) – bilta (uk) ltd (in liquidation) v nazir and others chd ([ 2010 ] bus lr 1634, [ 2010 ] 2 lloyd’s rep 29, bailii, [ 2010 ] ewhc 1086 (ch) ) the sixth defendant resisted a claim against it saying that matters between them were governed by a framework agreement which provided for matters to be resolved by arbitration. the claimant resisted, denying the arbitration agreement and saying. .
the supreme court held that s 213 has extra - territorial effect at least to the extent of applying to individuals and corporations resident outside the uk .
appeal from – jetivia sa and another v bilta (uk) ltd and others ca (bailii, [ 2013 ] ewca civ 968, [ 2013 ] wlr (d) 333, [ 2014 ] 1 all er (comm) 176, [ 2013 ] 3 wlr 1167, [ 2014 ] 1 all er 168, [ 2014 ] ch 52, [ 2013 ] sti 2677, [ 2013 ] bcc 655, [ 2014 ] 1 bclc 302, [ 2014 ] 1 lloyd’s rep 113, [ 2013 ] lloyd’s rep fc 620, [ 2013 ] stc 2298) defendants appealed against refusal of their request for a summary striking out for lack of jurisdiction, of the claims against them arising from their management of the insolvency of the first defendant ...
the subject company went into compulsory liquidation on 30 november 2005, the creditors' petition having been presented on 28 september 2005 .
when the very significant scam was discovered and the company wound up, the liquidators sued various parties they alleged had been involved in a conspiracy to defraud bilta, including jetivia. the causes of action pleaded were conspiracy and dishonest assistance by the company, and by the liquidators for fraudulent trading under s. 213 of the insolvency act 1986 .
team y & r holdings hong kong limited (the “ company ”) was incorporated in hong kong in 2007. the shareholding of the company is as follows
thus in bilta of course the company was the victim of its officers, and the damage was the deficit, the liabilities it could not pay to hmrc .
at first instance (2) – bilta (uk) ltd v nazir and others chd (bailii, [ 2010 ] ewhc 3227 (ch) ) the company had been wound up by the revenue on the basis that it had been used for a substantial vat fraud. the liquidators now sued those said to have participated. a defendant denied the jurisdiction because of a disputed arbitration agreement ...
when the scheme unravelled, liquidators were appointed and the company was wound up. subsequently, the liquidators issued proceedings against a number of parties it alleged to have been involved in a conspiracy to defraud bilta, including jetivia and mr brunschweiler (who subsequently became the appellants). the proceedings involved both a claim by the liquidators on behalf of bilta against the appellants and others for conspiracy and dishonest assistance, and parallel claims by the liquidators for fraudulent trading under s. 213 of the insolvency act 1986 .
bilta (uk) limited (“bilta”) went into liquidation on 29 september 2009 on an hmrc petition. it had only ever had two directors – messrs. nazir and chopra, though mr chopra was the sole shareholder. for a period of 3 - 4 months to july 2009, the company was engaged in a substantial vat fraud, based on the purchase and resale of european emissions trading scheme allowances (euas). euas were, at this time, treated as taxable supplies under the vat act 1994 and were therefore liable for vat at the standard rate (15 %). similar to the traditional mtic fraud where mobile phones or cpu’s were supposedly traded back to back, carbon credits had the advantage of requiring no physical transportation or storage .
cited – burnden holdings (uk) ltd v fielding and another ca (bailii, [ 2016 ] ewca civ 557, [ 2016 ] wlr (d) 313, wlrd) the company, now in liquidation sought to claim for the alledged misapplication by former directors of its funds in 2007. it now appealed against a summary rejection of its claim as time barred. held: the appeal succeeded. section 21 (1) (b). .
applying these principles to this case, patten lj held that bilta was unquestionably the victim: it had suffered the primary damage and the principle in hampshire land would therefore apply .
bilta and its liquidators commenced proceedings against bilta’s directors, the appellants and other alleged co - conspirators in the fraud. the appellants applied for the claims against them to be struck out or summarily dismissed on the grounds that they were either a) (with respect to bilta’s claims) precluded by the ex turpi causa doctrine (relying for these purposes on the decision in stone and rolls), or b) (with respect to the liquidators’ claim) bound to fail because section 213 does not have extra territorial effect .
an extension of the exception was arguably open to the court on the basis that there was still, in bilta, no human embodiment of the company who was unaware of the conspiracy .
wood & another v. kirankumar mistry [ 2013 ] 1 b. c. l. c. 389
re opti - medix ltd (in liquidation) and another matter [ 2016 ] sghc 108 the primary issue before the court was whether liquidation in a jurisdiction other than that of the place of incorporation should be recognized. the court agreed that japan was essentially the sole place where actual business was carried on. singapore was primarily a center for managing funds received in the first instance in japan. further, there was no competing jurisdiction interested in the winding - up of the companies. on the other hand, japan had moved in favor of liquidation. to hinder the orderly dissolution of the companies in this situation would serve no purpose .
region / country... worldwide latin america europe asia pacific africa caribbean australasia asia european union australia u. k. canada cayman islands china costa rica cyprus ireland italy japan netherlands south africa uk united states guernsey
cited – lennard’s carrying company limited v asiatic petroleum company limited hl ([ 1915 ] ac 705, [ 1914 - 15 ] all er 280) the house was asked as to when the acts of an individual became those of his employer under section 502 (‘any loss or damage happening without (the ship owner’s) actual fault or privity’). held: viscount haldane lc said: ‘it must be upon the. .
the justices were required to consider whether the decision in moore stephens v stone & rolls ltd [ 2009 ] ukhl 39 applied to the facts of bilta. stone & rolls ltd has been a debated and much criticised authority, not least because of the significant differences between the reasoning of the majority who argued it .
medical trend limited and opti - medix limited (collectively, the “ companies ”) were incorporated in the bvi. their main business was in japan. the proceeds of the business were however transferred to their bank accounts in singapore. in late 2015, bankruptcy orders were granted by the tokyo district court, and the applicant was appointed as their bankruptcy trustee. the applicant sought the recognition in singapore of the foreign insolvency proceedings in respect of the companies .
the provisional liquidators (“ liquidators ”) of sunlink international holdings limited (“ sunlink ”) issued a writ against deloitte touche tohmatsu (“ defendant ”) on 14 april 2011. the writ was subsequently amended to reflect the assignment of sunlink’s claims to enrich future limited as 1 st plaintiff, and the addition of other plaintiffs in the action .
medical trend limited and opti - medix limited (collectively, the “ companies ”) were incorporated in the bvi. their main business was in japan. the proceeds of the business were however transferred to their bank accounts in singapore. late 2015, bankruptcy orders were granted by the tokyo district court, and the applicant was appointed as their bankruptcy trustee. the applicant sought the recognition in singapore of the foreign insolvency proceedings in respect of the companies .
this case represents an opportunity for the court to clarify the scope of the ex turpi causa non oritur actio doctrine – the principle that the court will not assist a company to recover damages for its own wrong. the appellants assert that the house of lords decision in stone and rolls ltd v moore stephens [ 1 ] (in which the liquidators of stone and rolls were unable to pursue a claim against the company’s auditors for failure to detect a fraud perpetrated by stone and rolls’ sole director and shareholder) applies to the facts in this case thereby preventing bilta (itself now in liquidation) from making any claim .
appeal from – bilta (uk) ltd and others v nazir and others chd ([ 2012 ] stc 2424, bailii, [ 2012 ] ewhc 2163 (ch), [ 2012 ] wlr (d) 236, [ 2013 ] 2 wlr 825, [ 2013 ] 1 all er 375, [ 2013 ] bcc 235, [ 2012 ] sti 2554) the company was said to have engaged in a fraud based on false european trading scheme allowances, and had been wound up by the revenue. the liquidators, in the company name, now sought recovery from former directors and associates. held: the. .
medical trend limited and opti - medix limited were incorporated in the british virgin islands while their main businesses are conducted in japan with sale proceeds transferred to their singapore bank accounts. in late 2015, bankruptcy orders were granted by the tokyo district court, and the applicant was appointed as the bankruptcy trustee of the two companies. the applicant sought to exercise his powers under the japanese bankruptcy orders to ascertain, administer, and dispose of the companies’ assets and hence he applied for the recognition of the singapore court of his appointment as the bankruptcy trustee. the primary issue is whether liquidation in a jurisdiction other than that of the place of incorporation should be recognized .
in the case of re opti - medix ltd (in liquidation) and another matter [ 2016 ] sghc, the singaporean court has handed down the first written judgment which recognizes foreign liquidators from jurisdictions other than the place of incorporation of the company .
re opti - medix ltd (in liquidation) and another matter [ 2016 ] sghc 108 the primary issue before the court was whether liquidation in a jurisdiction other than that of the place of incorporation should be recognized. the court agreed that japan was essentially the sole place where actual business was carried on. singapore was primarily a center for managing funds received in the first instance in japan. further, there was no competing jurisdiction interested in the winding - up of the companies. on the other hand, japan had moved in favor of liquidation. to hinder the orderly dissolution of the companies in this situation would serve no purpose. where winding up is on the ground of insolvency, the applicant has to show that the company has returned to solvency in order to successfully stay the winding up proceedings
patten lj held that the circumstances in which the ‘sole actor’ exception should apply are extremely limited, saying that the decision in stone & rolls “should be confined in my view to the claim and facts in that case” and that “in the context of a claim by the company against its fraudulent directors, the rule has no place in english law” .
the court found that as a general rule, a litigant cannot recover expenses which he incurs in connection with the litigation other than by way of an order for costs: avrahami v biran [ 2013 ] ewhc 1776 (ch); cockburn v edwards (1881) 18 ch d 449. further, the time costs and expenses of insolvency office - holders in respect of litigation are generally not recoverable as costs in the litigation: sisu capital fund v tucker [ 2006 ] bcc 463 .
cited – bowman v secular society limited hl ([ 1917 ] ac 406, [ 1916 - 17 ] all er 1) the plantiff argued that the the objects of the secular society ltd, which had been registered under the companies acts, were unlawful. held: the house referred to ‘the last persons to go to the stake in this country pro salute animae’ in 1612. .
cited – the citizens life assurance company limited v brown pc (bailii, [ 1904 ] ukpc 20, [ 1904 ] ac 423) (new south wales) a malicious libel was alleged. the life assurance company was vicariously liable in respect of a libel contained in a circular sent out by a person who was employed by the company under a written agreement as its ‘superintendent of. .
on 1 st april, the court of final appeal handed down its judgment in cheng wai tao and others v poon ka man jason (suing on behalf of himself and all other shareholders in smart wave limited except the 1st appellant) and another facv17 / 2015. the judgment marked an end of the protracted battle over litigation between two partners of the successful chain of sushi restaurants, itamae .
fieldfisher llp (“ ff ”), a firm of solicitors, brought an application for an administration order in relation to pennyfeathers limited (the “ company ”) based on a disputed debt in the parties’ conditional fee agreement (“ cfa ”) .
the case is important as it shows the liberal approach of the singaporean court in recognizing foreign liquidation in a jurisdiction other than that of the place of incorporation. while the judgment is not binding on hong kong courts, it is a good support for future litigants to argue for the same in hong kong .
on 28 july 2016, the english court of appeal delivered its decision in express electrical distributors ltd v beavis and others [ 2016 ] ewca civ 765, which considered whether a validation order should be granted in respect of a payment that had been made for pre - liquidation supplies at a time when neither party was aware of the winding - up petition. the judgment is important as it clarifies the principles of granting a validation order .
subject to limited exceptions, all property belonging to or vested in the bankrupt forms part of the bankrupt’s estate, and thus vests in his trustee. however, property which is “peculiarly personal” to the bankrupt does not form part of the bankrupt’s estate. in haig v aitken [ 2001 ] ch 110, rattee j held that a bankrupt’s estate does not include the bankrupt’s personal correspondence which is of nature peculiarly personal to him and his life as a human being .
re ardent harmony fund inc (in official liquidation) (fsd 54 of 2016) the chief justice of the grand court of cayman islands held that the court has jurisdiction to restrain a creditor over whom it has personal jurisdiction from the institution or continuance of proceedings in a foreign court, where the effect of those proceedings would be to subvert the universal collective process of the liquidation. the chief justice went on to say that there was in fact public interest in the ability of a court exercising insolvency jurisdiction in the place of the company’s incorporation to conduct an orderly winding up of its affairs on a worldwide basis .
while there was no exact factual match between bilta and stone & rolls (which was a “one - man” company; in bilta there were two directors, one of whom was the only shareholder, and both of whom were involved in the conspiracy), an opportunity presented itself to the court of appeal to extend the operation of the “sole actor” exception. for example, the decision in stone & rolls had left open the question of whether the exception applied to such factual scenarios (rather than a simple “oneman” company) and / or to a claim by a company against its directors .
cited – ashmore, benson, pease and co v a v dawson ltd ca ([ 1973 ] 1 wlr 828) by acquiescing in the overloading of the hauliers’ lorries, the consignors’ assistant transport manager and his assistant made the haulage contract unenforceable at the instance of the consignors, who were unable to recover when a lorry toppled over. .
s 213 is one of a number of discretionary powers conferred by statute on the english court to require persons to contribute to the deficiency who have dealt with a company now in liquidation in a manner which has depleted its assets, with no express limits on their territorial application. it provides as follows :
it was alleged that in february 1998, leung yat tung (the “ bankrupt ”) transferred to harbour front limited (“ harbour front ”) certain shares owned by him at a gross undervalue. in march 2001, the bankrupt was adjudicated bankrupt and official receiver (“ or ”) was appointed as trustee in bankruptcy .
to begin with, the fact that a company is in liquidation in a particular country does not by itself give rise to a basis to recognize that liquidation in singapore. something more has to be shown. the court acknowledges that there has been a general trend towards recognition that universal cooperation between jurisdictions is a necessary part of the contemporary world in the context of cross - border insolvency. in line with such a universalist approach, there is a greater readiness to go beyond traditional bases for recognizing foreign insolvency proceedings. the place of incorporation of a company may be an accident of many factors, and may be far removed from the actual place of business .
cited – salomon v a salomon and company ltd hl ([ 1897 ] ac 22, 66 ljch 35, [ 1895 - 99 ] all er 33) mr salomon had incorporated his long standing personal business of shoe manufacture into a limited company. he held nearly all the shares, and had received debentures on the transfer into the company of his former business. the business failed, and. .
unlike their counterparts in the uk, consumers in hong kong seem to be in a worse position. in the absence of a statutory regime, consumers can only rely on the voluntary “chargeback” arrangements offered by credit card issuers in limited circumstances. a simple google search will reveal that not all credit card issuers offer chargeback arrangements and even they do, card issuers do not always do enough to inform consumers about how to raise a chargeback claim and what documentation needs to be provided to the bank. the bank regulator’s executive director of the monetary authority, carmen chu, also warned that in some situations, where the banks paid the business in full first, before later on collecting the sum from credit card users in instalments, the customer is still obliged to make monthly repayments to the bank, even if the business has closed down .
the decision in bilta serves to illustrate the uncertainty that had existed, following stone & rolls, as to the potential availability of the “sole actor” exception. the court of appeal’s judgment goes some way in clarifying the position, in that it held that the “sole actor” exception was of limited application, and in particular does not apply to claims by a company against its fraudulent director (s). patten lj does not, however, provide a great deal of explanation for circumscribing the extent of the “sole actor” exception in this way. this was also a court of appeal rather than a supreme court decision and it remains to be seen whether the legal position will be tested further .
at common law, liquidation of a foreign company has no automatic consequences in relation to the property of such company in a local jurisdiction. the common law maintains that the court has power to recognise foreign liquidators and assist the courts of the place of incorporation of an insolvent company operating a similar insolvency regime in ensuring that the affairs of the company are properly investigated .
the court held that in order for the plaintiff to defend the counterclaim successfully, the plaintiff must establish that she has a beneficial interest in the property: cheung wing kwan tommy v hong kong export credit insurance corp [ 2012 ] 2 hklrd 1255; health v tang [ 1993 ] 1 wlr 1421. but she cannot establish such an interest because any such interest she may have had is vested in the tib. hence, she has no defence .
the supreme court’s decision in jetivia will be one of the most important decisions in insolvency for many years. if the supreme court upholds the appeal, the impact on proceedings brought by administrators and liquidators against fraudulent directors will be significant. additionally, any decision which denies the extra - territorial reach of the insolvency act will have serious implications for office holders who are ever more frequently trying to make recoveries for the benefit of creditors in relation to businesses which have a global reach .
the court was satisfied that it had jurisdiction over itto, as it was a shareholder of the fund and had submitted a proof of debt. noting that the appointment of bankruptcy trustee in barbados would definitely interfere with the conduct of the cayman islands liquidation, the court granted the anti - suit injunction .
an application for recognition and assistance was made by the joint and several official liquidators (the “ liquidators ”) of rennie produce (aust) pty ltd which was in liquidation in australia. such application was made pursuant to a letter of request issued by the federal court of australia. a separate application was made for production of documents by two banks in hong kong .
the english high court referred to the court of appeal decision in salford estates (no. 2) ltd v altomart ltd [ 2014 ] ewca civ 1575, in which it was held that the court should, save in wholly exceptional circumstances, exercise its discretion in an application for winding up consistently with the legislative policy embodied in the arbitration act 1996 .
as noted above, jetivia and mr brunschweiler were said by the liquidators to have dishonestly assisted the directors in the conspiracy to defraud the company. at first instance, and on appeal, the appellants sought to have this claim struck out, relying on the principle of ex turpi causa non oritur actio, on the basis that the company itself was part of a conspiracy to defraud hmrc. the principle of ex turpi causa was originally defined by lord mansfield cj in holman v johnson (1775) as the rule that “ no court will lend its aid to a man who founds his cause of action upon an immoral or illegal act ” .
back in mid - 1990s, there was discussion in hong kong regarding the introduction of an insolvent trading provision, which closely mirrors the wrongful trading provision of the uk insolvency act 1986. the purpose of the introduction of the insolvent trading provision is to encourage better corporate governance. it was designed to raise the awareness of company directors of their duty to creditors, rather than just having regard to the interests of themselves or the shareholders .
the law commission believes that an additional category of preferential creditor would not add much complexity, delays and costs, since the limited preference is not designed to protect consumers in all circumstances. rather, it would cover only the most serious cases, where businesses take new (and substantial) cash payments from consumers in the run - up to insolvency .
at trial the defendants relied on the house of lords decision in stone & rolls ltd (in liquidation) v moore stephens (a firm) (2009), where it was held by a majority that a claim by a ‘one - man’ company defrauded by its director, against auditors who were said to have failed, negligently, to alert the company to the fraud, was prevented by the principle of ‘ex turpi causa’ (see above) as that director was the company’s sole mind, will and beneficial owner and his dishonesty was therefore to be attributed to the company .
the appellants’ application was dismissed at first instance and on appeal. at first instance and in the court of appeal, the appellants submitted that in respect of bilta’s claims, the court was bound by the decision of the house of lords in stone and rolls – in which the house of lords attributed knowledge of a director’s fraud to a one - person company, creating an exception to the rule in re hampshire land co (no. 2) [ 2 ] and allowing the company’s auditors to resist the company’s claim in negligence on the basis of ex turpi causa .
mr. innhaug, being the founding shareholder of nordic international limited (the “ company ”) entered into a shareholders’ agreement with sinwa ss (hong kong) co ltd (“ sinwa ”), which took up 50% stake in the company. not long after, disputes surfaced between the parties and the parties have since been involved in multiple litigation and arbitration proceedings .
disputes arose over the allotment of shares in the subsequent itamae restaurants. as a result, the ajisen shareholders entered into a shareholders’ agreement known as the hero elegant agreement at the end of 2015, under which it was agreed that jason and daisy would be allotted shares in the itamae sushi business through their corporate vehicle, fine elite group limited (“ fine elite ”) .
not to be followed – moore stephens (a firm) v stone rolls ltd (in liquidation) hl (bailii, [ 2009 ] ukhl 39, times 11 - aug - 09, [ 2009 ] 1 ac 1391, [ 2009 ] bus lr 1356, [ 2009 ] pnlr 36, [ 2009 ] 3 wlr 455) the appellants had audited the books of the respondent company, but had failed to identify substantial frauds by an employee of the respondent. the auditors appealed a finding of professional negligence, relying on the maxim ex turpi causa non. .
at the same time, the report of the law reform commission of hong kong on corporate rescue and insolvent trading (1996) recognized that the insolvent trading provision should not be so harsh as to discourage responsible persons from taking the time to consider, and to seek advice, as to whether a company could be saved or go into liquidation. nor should the provision make the responsible persons more inclined to push companies into voluntary liquidation or receivership unnecessarily, for fear of being made liable for trading while insolvent. the report also recognized that responsible persons who paid attention to their business, and who took appropriate action when faced with insolvency, should never face an application in respect of insolvent trading .
in the last issue of our “onc corporate disputes and insolvency quarterly”, we discussed the decision in aabar block s. a. r. l, edgeworth capital (luxembourg) s. a. r. l v glenn maud [ 2016 ] ewhc 1016 (ch). there has been a further development in relation to this case .
months of waiting are over as today the supreme court handed down its decision in the bilta case. seven justices (including lord mance a minority judge in the stone & rolls case) considered this vitally important case in the fraud arena, albeit of wider application. the supreme court has not however decided to deal fully with the question of illegality, saying that this case was not going to be determinative of the questions and thus those questions would wait for another day .
pursuant to section 150fa of the predecessor companies ordinance (cap 32), masterwise was ordered to produce various classes of documents under an inspection order, which include records of shenzhen fifu company limited, a wholly owned subsidiary of masterwise, and huizhou fifu electronics co ltd, which is in turn a wholly owned subsidiary of shenzhen fifu. both shenzhen fifu and huizhou fifu are incorporated in prc .
when a company goes into liquidation, the liquidator must distribute the remaining assets of the company to creditors in accordance with a strict statutory hierarchy. consumers, alongside many others, including suppliers, landlords and utility companies, are unsecured creditors. most of the money will go to secured lenders and preferred creditors, such as employees, leaving very little, often negligible to unsecured creditors .
the joint liquidators (the “ liquidators ”) of ralls builders limited (the “ company ”) brought a claim against three former directors (the “ directors ”) of the company for wrongful trading under section 214 of the insolvency act 1986. the court found that the directors ought to have concluded that there was no reasonable prospect of the company avoiding liquidation by 31 august 2010. however, the court refused to make a declaration that the directors should make a contribution to the assets of the company in respect of any losses caused to the company during the period after 31 august 2010, because the court did not find it proven that the net deficiency of the company increased during that period .
further, in the matter of moulin global eyecare holdings limited (in liquidation) & ors v olivia lee sin mei [ 2012 ] 4 hklrd 263, (2014) 17 hkcfar 466, barma j, remarkably, allowed the liquidator to add a claim based on increase in net deficiency. in essence, the liquidator claimed that at material time, the defendant, acting as a non - executive director of the company, knew or ought to have known, that the company was insolvent and there was no hope to trade out of insolvency. she should have procured the appointment of provisional liquidators, or otherwise blown the whistle. but she did not. instead, she left the company to trade on and as a result, there was an increased net deficiency of hk $ 1. 23 billion by the time the company was wound up. on appeal, barma j’s order was set aside, but restored by the court of final appeal. while the final outcome is still pending, the moulin case demonstrates the possibility of a claim based on insolvent trading .
the case was appealed to the supreme court, the court of appeal not having gone into huge detail about the circumstances where the ex turpi causa defence might apply or be defeated. however the supreme court has decided this is not the case in which to expand the discussion. it did say that stone & rolls was limited to its facts. lord neuberger said that
however, the court decided that the “sole actor” exception did not apply to a case like bilta, where the claim was against the fraudulent directors themselves (and / or those dishonestly assisting them). amongst other things, patten lj agreed with the court below that the reasoning in stone & rolls is not applicable to a case in which the claim is based on breach of a duty which (unlike the duty owed by the auditors in stone & rolls, which the majority of the house of lords accepted was a duty owed to the company alone) extends beyond the interests of the fraudsters as shareholders, to creditors. stone & rolls did not, therefore, apply in bilta, where (as patten lj noted) the directors’ duties had always included a duty to consider the interests of creditors under s. 172 of the companies act 2006 (and it should be noted that there were also parallel proceedings under s. 213 of the insolvency act 1986). patten lj said that this would be the position even in a case where a true “one - man” company sued its sole director and owner for a breach of duty against the company. indeed, patten lj held that the circumstances in which the “ sole actor” exception should apply are extremely limited, saying that the decision in stone & rolls “should be confined in my view to the claim and facts in that case ” and that “ in the context of a claim by the company against its fraudulent directors, the rule has no place in english law ” .
in the recent decision of shlosberg v avonwick holdings ltd and others [ 2016 ] ewhc 1001 (ch), the english high court considered the nature and devolution of legal professional privilege in the context of bankruptcy. it was held that the trustee in bankruptcy might be unable to waive privilege even when entitled to possession of privileged documents to administer the bankrupt’s estate .
the court agreed with the english court of appeal’s decision in liquidator of west mercia safetywear ltd v dodd and another (1988) bcc 30, in which a director was made personally liable for procuring an undue preference. the court found that holding a director who procures an undue preference directly responsible for restoring the company to the position it would otherwise have been in is not only just, but also in line with the clear direction of the singapore court of appeal in liquidators of progen engineering pte ltd v progen holdings ltd [ 2010 ] 4 slr 1089 that a director has a fiduciary duty to take into account the interests of the company’s creditors when a company is insolvent, or near insolvency .
another such provision, s 238 (which empowers the court to make orders against any person to reverse transactions at an undervalue), was held by the court of appeal to apply without territorial limitations in in re paramount airways ltd [ 1993 ] ch 223. in this case, sir donald nicholls v - c observed: (i) that current patterns of cross - border business weaken the conducting the liquidation of a united kingdom company; (ii) that the absence in the statute of any test for what would constitute presence in the united kingdom makes it unlikely that presence there was intended to be a condition of the exercise of the power; and (iii) that the absence of a connection with the united kingdom would be a factor in the exercise of the discretion to permit service out of the proceedings as well in the discretion whether to grant the relief, which was enough to prevent injustice (para. 110) .
ian robert (trustee in bankruptcy of mr. elichaoff deceased) v sarah jane duncanson woodall [ 2016 ] ewhc 538 (ch) the tib contended that causes in action, as property of the bankrupt estate, vest in a trustee in bankruptcy upon his appointment unless the claims are of an entirely personal nature: section 283 of the insolvency act and heath v tang [ 1993 ] 1 wlr 1421. the tib observed that claims for financial provisions will not be entirely personal because they may include sums which will be paid to creditors. the court concluded that the right to seek financial provision does not vest in the tib. hence, the court granted the application to strike out the relief claimed within the tib’s application .
the court in bilta, a case involving the different situation of a claim by a company against parties said to have dishonestly assisted the company’s directors in defrauding the company, circumscribed the ambit of this “sole actor” exception and decided that it did not apply in this case. a question remains, however, as to the implications of this for third party professionals such as solicitors or accountants who might be sued by an insolvent company on the basis that those professionals have failed to spot or alert the company to a fraud perpetrated by its directors .
the first restaurant was opened by smart wave limited (“ smart wave ”), using the trade name “itamae” (板長壽司). apart from ajisen shareholders, smart wave also had five minority shareholders, who were suppliers and key staff. ricky was the sole director of smart wave. three additional itamae restaurants were opened within two years of the first .
fieldfisher llp v pennyfeathers limited [ 2016 ] ewhc 566 (ch) the evidence disclosed that there is a good arguable case that ff is owed large sums and is therefore a creditor with sufficient status to apply for an administration order: hammonds v pro - fit usa ltd [ 2007 ] ewhc 1998 (ch). however, the cfa contains an arbitration clause, whereby the parties agree to refer any dispute arising out of or in connection with the cfa to arbitration. the court noted that exercise of the discretion otherwise than consistently with the policy underlying the arbitration act 1996 would inevitably encourage parties to an arbitration agreement to bypass the arbitration agreement by invoking insolvency procedures in the companies court. parties should not be allowed to do so, since it would be entirely contrary to the parties’ agreement as to the proper forum for the resolution of such an issue and to the legislative policy of the arbitration act 1996: salford estates. the application was accordingly dismissed .
stephen paul grant and james richard tickell (joint liquidators of ralls builders limited) v william ralph ralls, nicholas lee ralls and gary christopher hailstones [ 2016 ] ewhc 243 (ch) the liquidators then applied to the court for an order that the additional costs and expenses incurred by them in dealing with the wrongful trading claim, which amounted to £256, 160. 75, be contributed by the directors to the assets of the company. moreover, the court pointed out that it had found that the continued trading did not result in any increase in the net deficiency of the company. it would be illogical if the court, despite such findings, nevertheless ordered the directors to pay for the additional fees and costs incurred by the liquidators in investigating and unsuccessfully trying to prove that some loss was sustained .
the position in new york is in fact consistent with the position in hong kong. in east asia satellite television (holdings) ltd v new cotai llc & ors [ 2011 ] 3 hklrd 734, the hong kong court of appel held that whether a derivative action can be brought on behalf of a foreign company is a matter of substantive law, determined by the law of the place of incorporation. similarly, in wong ming bun v wang ming fan [ 2014 ] 1 hklrd 1108, peter ng j quoted the following passage from graeme johnston, the conflict of law in hong kong, at p. 592: “the ability to bring a derivative action in hong kong is a matter for the law of the place of incorporation of the company, though it is also necessary to comply with hong kong procedural requirements for the bringing of such actions. ”
interestingly, in bilta, as is commonly the case in a claim brought by an insolvent company, the main beneficiary of a successful claim would be the revenue and, ultimately, the taxpayer. as such, in some ways, the decision facing the court of appeal was a simple one. either the court allowed a claim to progress that could result in substantial recovery for the taxpayer or it allowed alleged fraudsters (the appellants) to defeat the claim and avoid liability. it is easy to identify the public policy in play, although it would be interesting to see how the court might respond in circumstances where the claim, if successful, would not ultimately benefit the taxpayer but some other third party, such as a litigation funder .
express electrical distributors ltd (“ express ”) is a company which trades in the wholesale supply of electrical goods. edge electrical limited (“ edge ”) was in the business of installing electrical equipment in high value properties. in about 2011, edge became a customer of express and purchased significant quantities of goods from express every month or so. in order to utilize the maximum credit to which edge was entitled, edge generally paid for the supplies on the last available payment date allowed under express’s terms and conditions. however, from november 2012, edge started to pay late. on 29 may 2013, in response to a number of attempts by express to contact edge, edge made a payment of £30, 000 to express in respect of goods already supplied .
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cited – abrath v north eastern railway co hl (( 1886) 11 app cas 247) the plaintiff had brought an action against the company of malicious prosecution. it was rejected by the jury and again on appeal. held: the appeal failed. in an action for damages for the tort of malicious prosecution one of the elements of..
jetivia sa v bilta ( uk ) limited ( in liquidation ) [ 2015 ] uksc 23 ( sometimes referred to as bilta ( uk ) limited v nazir ) is a uk company and insolvency law decision of the supreme court of the united kingdom in relation to ( i ) the attribution of unlawful acts of a director to the company where the company is the victim of the unlawful act , and ( ii ) the extent to which liability for fraudulent trading under section 213 of the insolvency act 1986 has extraterritorial effect . the supreme court held that : the defence of ex turpi causa could not operate to prevent a claim brought by the liquidators on behalf of a company against its former directors on the basis that , where the company was essentially the victim of a fraud by the directors , the conduct of the directors would not be attributed to the company and thereby treat the company as a party to the illegality ; and liability for fraudulent trading under the insolvency act 1986 had extraterritorial effect .
jetivia sa v bilta (uk) limited (in liquidation) [ 2015 ] uksc 23 (sometimes referred to as bilta (uk) limited v nazir) is a uk company and insolvency law decision of the supreme court of the united kingdom in relation to (i) the attribution of unlawful acts of a director to the company where the company is the victim of the unlawful act, and (ii) the extent to which liability for fraudulent trading under section 213 of the insolvency act 1986 has extraterritorial effect. the supreme court held that: the defence of ex turpi causa could not operate to prevent a claim brought by the liquidators on behalf of a company against its former directors on the basis that, where the company was essentially the victim of a fraud by the directors, the conduct of the directors would not be attributed to the company and thereby treat the company as a party to the illegality; and liability for fraudulent trading under the insolvency act 1986 had extraterritorial effect.
jetivia sa v bilta (uk) limited (in liquidation) [ 2015 ] uksc 23 (sometimes referred to as bilta (uk) limited v nazir) is a uk company and insolvency law decision of the supreme court of the united kingdom in relation to (i) the attribution of unlawful acts of a director to the company where the company is the victim of the unlawful act, and (ii) the extent to which liability for fraudulent trading under section 213 of the insolvency act 1986 has extraterritorial effect. the supreme court held that: the defence of ex turpi causa could not operate to prevent a claim brought by the liquidators on behalf of a company against its former directors on the basis that, where the company was essentially the victim of a fraud by the directors, the conduct of the directors would not be attributed to the company and thereby treat the company as a party to the illegality; and liability for fraudulent trading under the insolvency act 1986 had extraterritorial effect.