Insolvent Companies Now Free To Sue Fraudulent Directors

A significant and long-awaited judgement has ruled that directors guilty of wrongdoing can now be sued by insolvent companies. The ruling was made in the case of Bilta (UK) Ltd, a company set up by its two directors – one of whom was also its sole shareholder – to carryout a VAT ‘carousal fraud’ scam.

The company, which went into insolvent liquidation in 2009, was purportedly involved in the sale of carbon credits via third parties based in Europe. At the time it entered liquidation, the company owed Her Majesty’s Revenue & Customs £38,733,444.

In the initial ruling that was made in 2013, the company liquidators successfully brought claims against the former directors of Bilta Ltd, as well as the directors of a Swiss company, Jetivia, that was complicit with the fraudulent scheme.

The claims for conspiracy, dishonest assistance, constructive trust and fraudulent trading were upheld by the Supreme Court, in a move which will help creditors and insolvency practitioners seek redress from fraudulent directors in the future.

Lifting the veil of limited liability

The directors of Bilta argued the claims on the basis that their knowledge of the fraud should be attributed to the company, and that Bilta was an instrument of the fraud rather than a victim. They refuted the claims made against them because they were Bilta’s own illegal acts. However, the Court of Appeal disagreed with this approach, leading to a further appeal from the defendants.

The final ruling from the Supreme Court held that where a limited company has been the victim of an act of wrongdoing by the company’s directors, the act itself, or the knowledge of the act, cannot be attributed to the company as a defence against claims brought by the company’s liquidators. This is the case even where the directors are the sole directors and shareholders of the company.

The Supreme Court also ruled that the judgement could extend to individuals or companies who were involved in the act of wrongdoing that was resident overseas, even when the case involved the winding-up of a company registered in the UK. In this case, it was Jetivia, a company based in Switzerland, which was also liable to claims made by creditors and insolvency practitioners.

The Supreme Court’s judgement stated that: “It would seriously handicap the efficient winding-up of a British company in an increasingly globalised economy if the jurisdiction of the court responsible for the winding-up of an insolvent company did not extend to people and corporate bodies resident overseas who had been involved in the carrying on of the company’s business.”

Fraudsters cannot escape the courts

The message from this ruling is loud and clear. Those who structure their companies in an attempt to put themselves or their companies beyond the reach of future claims of creditors and insolvency practitioners will no longer be protected by the English Court.

In this case, the Supreme Court was unwilling to prevent the liquidators of Bilta from pursuing the directors responsible for this blatant act of fraud. The way is now clear for the liquidators to take steps to recover the liabilities from the directors of Bilta personally.

There are still technical legal issues that arose in this case which remain open to debate and may well invite further challenge. But for now, HMRC and the taxpayer look set to benefit from this highly significant ruling.

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