Fiduciary Duties of Directors and Piercing the Corporate Veil
A decision of the Supreme Court has confirmed that directors who carry out illegal acts in the name of the company cannot argue that it is the company which committed those acts to avoid liability.
This has confirmed that the defence of “illegality” - which prevents a claimant from bringing a claim that arises out of its own illegal acts - cannot be used where the company is claiming against its directors.
The case concerned a company called “Bilta”, which was wound up following a petition presented by HMRC. Bilta's liquidators then brought proceedings against its former directors.
The liquidators alleged that the directors had conspired unlawfully to injure Bilta by a fraudulent scheme. The scheme, which concerned trading in carbon credits, involved the directors breaching their fiduciary duties.
The result of the transactions was to oblige Bilta to account to HMRC for “output” VAT and HMRC to pay a slightly lower sum by way of “input” VAT to another company. HMRC paid the input VAT but the nature of the fraud meant that Bilta was always insolvent and never able to pay the output VAT to HMRC. As a consequence, on its insolvency, Bilta was liable to HMRC for output VAT of more than £38 million.
The claim by the liquidators (in the name of Bilta) against the directors was to recover for the benefit of Bilta’s creditors the loss caused by the directors' breach of their fiduciary duties. The directors argued in defence that Bilta was the party to the illegality and that they were therefore entitled to the “illegality” defence.
The Supreme Court held that the conduct of directors cannot be attributed to the company in the context of a claim against the directors for breach of their duties.
Lord Neuberger summarised the conclusion reached by the court as follows:-
"Where a company has been the victim of wrong-doing by its directors, or of which its directors had notice, then the wrong-doing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company's liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrong-doing, even where the directors were the only directors and shareholders of the company, and even though the wrong-doing or knowledge of the directors may be attributed to the company in many other types of proceedings."
The Supreme Court went on to say that to allow directors to escape liability for breach of their fiduciary duty on the basis that they were in control of the company would undermine the duty in the very circumstances in which it is required.
The decision is logical. It will also help insolvency practitioners if they wish to bring proceedings against directors for breach of duty where the insolvency company has suffered losses as a consequence.
If you have any queries regarding the above issues please contact our Dispute Resolution Team.