exhibit list - madofftrustee...and mr chopra who were the onl) director . of . the company and must...

$: Exhibit List - MadoffTrustee...and Mr Chopra who were the onl) director . of . the company and must therefore . he . treaced . as . 1rs dirccrin.A mind and . will. 1 . hi\ proces!>$
Exhibit List

1

Jurisdiction Exhibit Number

British Virgin Islands Insolvency Act (2003), Part XIX (Sections 466–472) British Virgin Islands 1

Cayman Companies Law (2016), Sections 145–147, 240–243 Cayman Islands 2

United Kingdom Cross-Border Insolvency Regulations (2006), Art. 25 of Schedule 1 United Kingdom 3

United Kingdom Insolvency Act (1986), Sections 213, 238–239, 423, 426 United Kingdom 4

Re Al Sabah [2002] CILR 148 Cayman Islands 5

Al Sabah and Another v. Grupo Torras SA [2005] UKPC 1, [2005] 2 A.C. 333 United Kingdom 6

AWB Geneva SA v. North America Steamships Limited [2007] 1 CLC 749 United Kingdom 7

AWB Geneva SA v. North America Steamships Limited [2007] 2 Lloyd’s Rep 31 Canada 8

Banco Nacional de Cuba v. Cosmos Trading Corporation [2000] 1 BCLC 813 United Kingdom 9

Banque Indosuez SA v. Ferromet Resources Inc [1993] BCLC 112 United Kingdom 10

Bilta (UK) Ltd v Nazir (No 2) [2013] 2 WLR 825 United Kingdom 11

Bilta (UK) Ltd v. Nazir [2014] Ch 52 (CA) United Kingdom 12

Bilta (UK) Ltd v. Nazir [2016] AC 1 (SC) United Kingdom 13

Bloom v. Harms Offshore AHT “Taurus” GmbH & Co KG [2010] Ch 187 United Kingdom 14

In re C (A Bankrupt) BVIHC 0080/2013 British Virgin Islands 15

Cambridge Gas Transportation Corporation v. Official Committee of Unsecured Creditors of Navigator Holdings plc [2006] UKPC 26, [2007] 1 A.C. 508 United Kingdom 16

Re China Agrotech Holdings Ltd. , Unreported, Cause No. FSD 157 of 2017 (NSJ) (Grand Ct. Fin. Servs. Div. Sept. 19, 2017) Cayman Islands 17

Re HIH Casualty and General Insurance Ltd [2008] 1 WLR 852 United Kingdom 18

Jyske Bank (Gibraltar) Ltd v. Spjeldnaes [2000] BCC 16 United Kingdom 19

Re Oriental Inland Steam Co, Ex p Scinde Railway Co (1874) LR 9 Ch App 557 United Kingdom 20

Cases

Statutes & Regulations

Case 17-2992, Document 1094-4, 05/09/2018, 2299298, Page1 of 28

Exhibit List

2

Jurisdiction Exhibit Number

Re Paramount Airways Ltd [1993] Ch 223 United Kingdom 21

Picard v. Bernard L Madoff Investment Securities LLC BVIHCV140/2010 British Virgin Islands 22

Rubin v. Eurofinance SA [2013] 1 AC 236; [2012] UKSC 46 United Kingdom 23

Singularis Holdings Ltd v. PricewaterhouseCoopers [2014] UKPC 36, [2015] A.C. 1675 United Kingdom 24

Stichting Shell Pensioenfonds v. Krys [2015] AC 616; [2014] UKPC 41 United Kingdom 25

McPherson’s Law of Company Liquidation (4th ed. 2017) United Kingdom 26

Anthony Smellie, A Cayman Islands Perspective on Trans-Border Insolvencies and Bankruptcies: The Case for Judicial Co-Operation , 2 Beijing L. Rev. 4 (2011) Cayman Islands 27

A, B, C & D v. E , HCVAP 2011/001 Anguilla 28

Ayerst (Inspector of Taxes) v C&K (Construction) Ltd [1976] AC 167 United Kingdom 29

Re Babcock & Wilcox Canada Ltd. , 2000 CanLII 22482 (O.N.S.C.) Canada 30

Blum v. Bruce Campbell & Co. , [1992-3] CILR 591 Cayman Islands 31

Changgang Dunxin Enterprise Company Ltd. , Unreported, Cause No. FSD 270 of 2017 (LMJ) (Grand Ct. Fin. Servs. Div. Feb. 8, 2018) Cayman Islands 32

Re CHC Group Ltd. , Unreported, Cause No. FSD 5 of 2017 (RMJ) (Grand Ct. Fin. Servs. Div. Jan. 10, 2017) Cayman Islands 33

Re China Shanshui Cement Group Ltd. [2015] 2 CILR 255 Cayman Islands 34

Didisheim v. London & Westminster Bank , [1900] 2 Ch. 15 United Kingdom 35

Kilderkin Investments Ltd. v. Player [1984-85] CILR 63 Cayman Islands 36

Re Lancelot Investors Fund Ltd. [2009] CILR 7 Cayman Islands 37

Rio Tinto Zinc Corp. v. Westinghouse Elec. Corp. [1978] AC 547 United Kingdom 38

Re Trident Microsystems (Far East) Ltd. [2012] (1) CILR 424 Cayman Islands 39

UBS AG New York and others v. Krys , BVIHCM 2009/0136 British Virgin Islands 40

Other Authorities

Cases, continued

Cases Cited by Amici Curiae


Exhibit 12(Part 2 of 2)


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89 (2014)Ch Bil ta (UK) Ltd v Nazir (No 2) (CA}

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bu mess, at least where the company 1s sol,cnt: Mult111cit1011al Gas & Petrochemic~I Co u /1111/tinat1011al Gas & Petrochem1cal Sen11ces Ltd I 1983] Ch i.58. Bue not even rhey :tn validl} conscm to their own appropriation of the company\ aS!>ers for purpose~ which are nor che company' s: Belmont Finance Corp11Ltd11 \Yli//1ams Fttmt1ure Ltd [1979] Ch i50, 261 (Buckley LJ), Attorney Cenera/"s Reference (No t of 1982) I 1984] QB 624, R u Gomez lr993J AC 441, 496-497 {Lord BrowneWilkinson). Mr Presr is of course nor the firsr person ro ignore the scparare personaliry of his company and pillage its a ets, and he will certainly nor be the lasr. But for rhe courr co deploy irs authority tn authorise the appropriation of the company's assets to satisfy :i personal liability of its shaieholder to his wife, in circumstances where the company has not only not consented to that course hut vigorously opposed ir, would, as ir seems co me, be an even more remarkable break with principle .

.. 4:z.. Jr may be said, as rhe judge in effecl did say, rhat the way in which the Jffairs of rhis company were conJucrcd mcJnc that the corpor:icc veil had no realiry. The problem about this is that 1f, as the 1udge thought, the property of a company is property to which its ole shareholder is 'cnritled, either in possession or reversion', then that will be so even in a cal>e where the sole shareholder scrupulous!) respect!> the separate personality of the company and the requirement!> of the Companies Am., and e\·en in a case where none of the exceptional c1rcumscances char may 1usnfy piercing the corporate veil applies. This 1s a propo mon which can be 1usrified onJy by asserting that the corporate veil doe nor matter where che husband is in sole conrrol of rhe company. Bur that ic; plainly not rhe law.""

Altribu t ion 26 In order to engage the ex rurpi causa rule in rhis case the defendants

must establish that che law :mributes to Ililrn lhe unlawful conduct of its directors and sole shareholder so char ics acrionl> ngain:.c them and 'the

F defendants falls to be treated as an action between co-conspirators. Alrhough the applications we are concerntd wirh were nor brought on behalf of rhe directors, Mr Maclean QC accepts thar his argument would, if successful, apply co them as well. Put very simply, his case is rhar Bilra's claim, although pleaded in para 14 of the amended particulars of claim as a conspiracy co defraud the company by unlawful means, in face discloses chac

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Bilro was u ed by its directors and their as ociace<; to carry our a carousel fraud, the only victim of which was HMRC. incc Bi Ira was a party co rhe fraud, ir cannor claim againsr the orher conspiracors for losses which it suffered as a resulc of che &audit carried our.

27 At che heart of chis argumcnc 1!> rhc quesnon of :ittribucion. Mr Maclean rdies on the fact that the fraud wac; orchcsrrared b) Mr Nazir and Mr Chopra who were the onl) director of the company and must therefore he treaced as 1rs dirccrin.A mind and will. 1 hi\ proces!> of attribution, he submics, fixes the com pan) wich the knowledge and criminal intent of its directors so that irs admitted use ac; part of che fraudulenc rran actions becomes a conscious acr of wrongdoing for which the company is personally res ponsible. Although Lord Bramwell e"<pressed the \1ew in Abrath 11 North Eastern Railway Co ( r886) 1 1 App Ca<> l4 7, i.5 1 char irwas

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impossible for a corporation to have either malice or moci,·e, that view was rapidly di carded (see Citizens· Life Ass11ra11cc Co I.Id L' Brown I 1904 l AC .p.3 ) and ir ts common ground on chis appeal (as .1cccp1cd h) the Hou e of Lords in che Stone 6 Rolls case l z.009) AC 1 39 t ) char the process of attribution operares ro make the company personally and nor merely vica riously liable for the actions of its directors. ln short, their d ishonesry becomes rhac of the company itself.

28 Mr Maclean relies on the principles set out by Lo rd I loffmann in Meridian Global Funds Ma11agement Asta Ltd LI ernrities O:munission ! 1 99 51 2 AC 500, 507:

"There is in fact no such thing as the company as c;uch, no 'ding an sich', only the applicable rules. To say rha t a company cannor do something means only thar there is no o ne whose doing of that ace would, under the applicable rules of attribution, count as :in acr of the company. T he company's prima ry rules of attribution together with the general principles of agency, vicarious liability :md so forth arc usu:illy sufficient to cn:tble one ro determine it!> right~ ,rnd obl1gnrions. In exceptional cases, however, rhey will nor pro' ide an answer. Thi will be che case when a rule of law, eirher expressly or br implicanon, excludes anribution on the basis of the general principle of agency or vicarious liability. For example, a ruJe may be c.rarcd in language primarily applicable co a narural person and require some act or state of mind on the part of that person 'himsclP. as opposed co his servants or agents. This is generally crue of ruJes of che c riminal law,\\ hich ordinaril) 1mpo e liabilicy only for rhe acrus reu and mens rea of rhe defendanr himself. How is such a rule to be applied to a company? One possibility is that the court may come to che conclusion that rhe rule was not inrended co apply co companies at all; for example~ a law which created an offence for which the only penalty was community service. Another possibility is that the court might interpret the law as meaning that it could apply to a company only on the basis of its primary rules of arrriburion, i c if the act giving rise co liability was specifically authorised by a reso.lution of t he board or an unanimous agreement of the s hareholder . But there will be mnny cases in which neither of these solutions is sacisfocrory; in ""hich the courrconsiders rharrhe law was incended to apply co companies and char, a lthough ir excludes ordinary vicarious liability, insistence on rhe primary rules of arrriburion would in pracrice def ear thar inrenrion. In such a case, rhe courr muse fashion a special rule of artribution for rhc parcicular substantive rule. This is always a matter of interpretation: given thar it was inrended co apply to a company, how wa it intended to apply? Who e act (or knowledge, or state of mind) wa for tins purpose intended to counr as che ace ere of che com pan)'? One finJ rhe answer co this quesnon by applying the usual canons of anrcrpretanon, talmg into account the language of the ruJe (if 1c 1s a scarure) and its content and policy."

29 In the context of civil or criminal proceedings brought against a company rhe acts and inremions of its directors will usu:illr be anributed to 1r 'iO as to found corporate liability for the acuon complained of unless (as explained in the Meridia11 case) the statute or legal principle imposing the rcle\anc liabiliry is one not jmendcd to apply co a company except in a


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vicarious capacicy. lo El Ajou 11 Dollar LAnd Holdmgs pie I 1994) z. AJI ER 68 5 a company was fixed wich liability a a consrrucrive trustee on rhe basis of knowing receipt chrough che knowledge of one of 1t~ dirc:cmrc;. Nourse LJ said, ar p 695:

·This doctrine, sometimes known a rhe alter ego doctrine, has been developed, with no djvergence of approach. in borh criminal and civil jurisdicrioDS, the authorities in each being cited indifferently in rhe orher. A company having no mjnd or will of its own, rhe need for it arises because rhe criminal Jaw often require mens rea ns a consriruenr of che i:rimc, and che civil law intenrion or knowledge ns an ingredient of the cause of acrion or defence. In che ofr-quorcd words of Viscount H a ldane LC in Le1111ards Carryi12g Co Ltd 11 Asiatic Petrole11111 Co Ltd (I91 5] AC 705, 7 r3: 'My Lords, a corporation is an abstraction. It has no mind of its own any more than it has a body of its own; its active and directing will muse consequently be sought in tbe person of .-;omebody who for some purpose~ may be called an agent, bur who 1c; really chc dirccrini; mind and will of rhe corporation, the very ego and centre of rhc personality of che corporation.' The doctrine attributes co the compan) chc mind and will of the n:irural person or perc;onc; who m:in:igl:' :ind conrrol ire; :ictionc:. Ar rhac poinr, in the words of Millen J [1993) J All ER ;17, 740: 'Their mmds are its mind; rheir intenrion its inrcnnon; their knowledge ics knowledge.' Ir is imporcanr ro emphasise char management anJ control is nor something to be considcred generally or in the round. le is necessary co identify the oaruraJ person or persons having managemenr and control in relarion ro the acr or omission in point. This wa~ well pur b} Eveleigh J in delivering the judgment of the Criminal Division of this court in R v Andrews \Veather(oil Ltd [1971] I WLR 1 18, 124: 'Ir 1s necessary co e rablish whether the narural person or persons in quesrion have rbe srarus and authority which in law makes rheir aces in chc marrer under considrracion rhe acts of thr company so char rhe namrnl person is to be cre:ned as the corn pan y itself.' "

30 The same principles were applied by rhe Privy Council in Royal Brunei Airlines Sdn Bhd u Tan I 199 51 2 AC 3 78 co a claim for dishonest assistance.

3 r Ocher examples of civil liability being impm.e<l on J company based on che aces of irs employees or agents are McNic/Jolas Omstruction Co Ltd t• Customs and Excise Comrs LioooJ STC 5 53 where rhe comp:iny, rhrough it' ice managers, fraudulently claimed to recover the VAT on purported

payments ro bogus sub-contraetors and In re Bank nf Credit and Commerce l11temat10nal SA (No z5); Moms v Bank of India [2005 I 2 BCLC 328 where the bank was required ro par com pen anon under secrion 2. r 3 of che Insolvency Act r986 as a result of the actions of its emor manager in London who caused it co enrer into a scheme ro assist BCCI m perperracing a fraud on it'> cn:dirors.

31 The amc prinaplcs can be c.:rn rn opcrauon 111 a \.nmrnal conrcxc in che decision of the H ouse of Lords in Tesco Supermarkets Ltd 11 Nattrass (19721AC153, 170-171, per Lord Reid:

"'£ must srart by considering the narure of the perc;onaliry which by a fiction the law arrributes co a corporanon. t\ hvrng person lrns a mind



92 Bilta (UK) Ltd v Nazir (No 2) (CA) Patten lJ

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\\hich can have knowledge or mrention or be negligent and he bas hands to carry out his incencions. A corporation ha none of rhese: ir must act chrough living persons, chough nor alwa)S one or the \ame pcr·on. Then che person who acts is nor speaking or acting for che com pan}. He is a~-ting a~ the company and his mind which directs h1!> aces i~ the mind of the company. There is no question of the comp<my being vicariously liable. He is nor acting as a servant, rcpre~enrarivc, agenc or delegate. He is an embodiment of the company or, one could say, he hears and speaks through rhc persona of rhe compa ny, within his appropriate sphere, and his minJ is rhe mind of the company. If it is n guilry mind chcn that guilt is the guilt of rhe company. It musr be a question of law whether, once the facts have been ascertained, a person in doing particular things is to be regarded as the company or merely as rhe company's servnnt or agent. la thar case any liabiliry of the company can only be .t l>tatutory or vicarious li.ibiliry ... Normally the board of director , the m:inaging director and perhaps ocher superior officers of a company carry out the functions of manJgcmenr and speak and <lCr as the compan). Their ubordmatcs do nor. TI1ey carry out orders from above and it can make no difference char th er are given some measure of discrenon. Bue rhc hon rd of di rectors may delegate some part of their functions of management giving to their delegare full discretion to acr independently of mstructioru. from them. 1 see no difficuJry in holding rhar they have thereby pur such a delegate in their place so char within the scope of the delegation he can ace as the company. Jr may nor alwars be easy to draw the line bur there are cases in which the line must be drawn. Le1111ard's C.1rryi11g Cn Ltd t• Asiatic Petroleum Co Ltd [ .r9I5] AC 705 was one of them."'

33 I r is, however, clear from rhe deci'l1ons I have juc;t referred co that whilst the acts and incenrions of c:he directors or other senior representative will usually be attributed to the compan) for rhe purpo!.e of establishing personal liabiliry for the conduce complained of, the process of attribution is nor an automatic one dependent only on the individual re ponsible fo r the unlawful conduce occupying a sufficicnrl.y senior position in the management of the company. In borh the McNicho/n$ C•lSe 12.000] STC 553 nod Morris v Bank of India [20051 2. BCLC J2..8 rhe defcnd:rnr company deployed an argument chat ir should nor be made personally liable for the consequences of irs employees' accions becau-,e it was a lso ar lease a secondary victim of chose actions. In the McNicbolas case the employee's frnudulenr conduct had caused direct loss ro the Custom'! and Excise Comnussioners and in Mm·ris u Ba11k of l11d1a to the creditors of BCCJ. Bue it had also exposed the company in both ca e co a secondary liabiliry to par compensation for the loss which it bad caused. The argument was rejected. A ~lummery LJ said in Morris v Bank of /udia I ~005 J .z. BCLC 328, para 1 q:

'"Clearly c:here are some circumstances in \\ hich an indi,·idual's knowledge of fraud cannot anJ !>houJd nor be :mrihumJ co a ~ompany. The classic case is where c:he company •~ itself rhe rargec of an agent's or employee's dishonesty. Tn general, it would nor be sensible or realistic co attribure knmvledge ro the company concerned, 1f arrnhution had the effect of defeating the right of rhe company co recover from a d ishonest agem or employee or from a third pally. Mr Mo!>s argued rime there


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(2014) Ch 93

Billa (UK) Lid v Nazir(No 2) (CA) Patten lJ

hould be no anribunon of knowledge as this wa a ca e in which lthe bank) was the 'secondary ' 'icrim' of Mr S.imanr. His acrions were harmful co the inceresrs of !rhe bank), as he had e'\:po ecl it to the risk of potential liabiliry for fraudulent rrading. We have no hesitation in rcjecnng char submission. If ir were correct, it would ne\er be po sible to attribute the knowledge of the mdividual to a cornpan}' under section 213. Thar is contrary to che agreed po irion char a compan y is capable of being made liable under section 2 1 3. Knowledge of fraud may be an:ribured co a company even though such an:riburion may expose it to the risk ofliability under section 2r3."

34 The point being made in rhis passage is thar ::mriburion of the conduct of an agent so as to create a persona l liability on chc part of rhe

C company depends very much on rhe conrcxt in which the issue arises. In whar I propose to refer to as the liability cnscs like ti Ajou I r994] 2 All ER 68 5, Royal Brunei Airlines Sdn Bhd u Tan I 1995 J 2 AC 3 78, McNicholas l:z.oool STC 553 and Morris 11 Ba11k of India l:z.005) i. RCLC n8, reliance on the consequences to rbe company of ntmhutin~ co ic the conduct of its managers or directors is nor enough co prevenr accnburion because, as

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Mummery LJ poinred our., it would pre\'enr l1:ihili£) e\ er heing imposed. As between the company and rhe defrauded rhird part), the former is not ro be treated as a victim of the wrongdoing on which the chi rd p:irry sues but one of the perpetrators. The consequences of l1abiliry are therefore insufficient to pre\ent rbe accions of the agent being treated a rho e of rhe company. I he mreresrs of the third parry who 1s rhe intended 1v1cr1m of che unJawfuJ

conduct take priority over the loss which che company will suffer through t he actions of ics own directors.

35 But, m a different conrexr, rhe po ition of the company as vicrim oughr to be paramount. Alrbough the loss cau ed ro che companr by its director's conduct will be no answer ro rhe claim agninsr the ompany by the injured third parry, ir will and ought m have very different consequences when the company seeks to recover from rhc director the loss which it has suffered t l:i rough his acrio ns. In such cases the company will itself be seeking

F compensation by an award of damages or equitable compcnsarion for a breach of the fiduciary duty which rhc director or ugenr owes to the company. As berween ic and rhe director, ir is the ' ' ictim of a legal wrong. To :illow the defendant co defeat that claim hy seek111g co attribute co the company the uolawfuJ conduct for which he i'l re ponsible so as to make it

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the company's own conducr as well would be to allow rhe defaulting direcror co rely on his own breach of dury ro defeac the operation of the provisions of sections 171. and ::!.39 of rhc Companies Act whose vel) purpose is ro protect the company againsr unlawful brea hes of dury of rhif> kind. For this purpose and (it should be stres cd) in chis concext. ir ought therefore not to maner whether the lo v. h1ch the ce>mpan) seek ro recover arises our of the fraudulent conduce of its directors CO\\ ardr. a third party (as in rhc McNteholas case I 2000J STC 5 53 :10d Moms L' Bank of /11d10 [i.005] 2 BCLC 3 28) or oar of fraudulenr conduct directed at rhe company itself which Sir Andrew Morrin C accepted was what ii; alleged in rhe present case. There is a breach of fiduciary dury cowards che compan)' in both case. Bur Mr Maclean submits that chis concluc;ion was nor open co the court in rhe present case as a result of rhe decision of rhe Houc,e of Lords m rhe Stone

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& Rolls case [2009! AC 1391 and tbat if one accepts the reasoning of two members of rhe House (Lord Walker and Lord Brown of Earon-LmderHcywood ) thar applies regardless of whether Bilta is a primary or a secondary vjctim of the alleged conspiracy.

36 Before coming ro what was decided in that case I need to say a little more about the operation of the principles of attribution in the context of a claim by the company to recover for losses caused to it by breaches of duty by irs directors and those associated wirh them . In the passage quoted above from the judgment of Mummery LJ in Morris u Bank of Tndia !2.005] 2 BCLC 328 the reference to the company being treated as the target or victim of the director's breach of duty can be u aced back to the judgment of Buckley LJ in Belmont Finance 0Jrp11 Ltd u Williams Furniture Ltd [1979J Ch 250 referred ro by Lord Sumption ]SC in Prestv Prest f2013J 2 AC 415. In that case the company sued rwo of its c:hree directors for loss caused by a djshonest conspiracy as a result of which it acquired the shares in another company (Maximum) for an artificially inflated price of £500,000 and was then c:oln rn one of tht> deft>nn:rnr.s for £4R9,rmn. T he rr:inc:~crinn involved some £0·4m of Belmont's assets bejng used to acquire the shares in Maximum (which was itself a breach of fiduciary duty) and was facili tated by the same moneys being then used by rhe fraudster to purchase rhe shares in Belmont so that the company provided financial assistance for the purchase of irs own shares contrary co what was then section 54 of the Companies Act T948.

37 The rrial judge dismissed the action on rhe ground that Belmont was itself a party to c:he conspiracy on which its action was based because the condm:t and knowledge of the gui lty directors fell to be attributed co it. H is decision was reversed on appeal. Buckley LJ said 11979] Ch 250, 261- 262:

" O n the footing cliat the directors of the plainriff company who were present at che board meeting on r 1 October 1963, knew that the sale of the Maximum shares was at an inflated value, and thar such value was inflated for the purpose of enabling the third, fourth, fifth and sixth defendants to buy the share cap ital of the plaintiff company, those directors must be taken to have known that the transaction was illegal under section 54.

"It may emerge at a trial char c:he facts are not as a lleged in [he stacemenr of claim, but if che allegations in rhe statement of claim are made good, the clirectors of the plai_ntiff company must then have known that rhe transaction was arr illegal transaccion.

"But in my view such knowledge should not be imputed ro the company, for the essence of the arrangement was to deprive rbe company improperly of a large parr of frs assets. As 1 have said, the company was a victim of the conspiracy. I think ir would be ir rational to treat the direcrors, who were allegcdJy parties ro the conspiracy, notionall y as having transmitted this knowledge ro the company; and indeed ir is a well-recognised exception from rhe general rule that a principal is affected by notice received by his agent t ha t, if the agent is acting in fraud o f his principal and the matter of which he has notice is relevant to the fraud, that knowledge is not to be imputed to the principal

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parry co the conspiracy, on the ground of lack of the necessary guilty knowledge."

38 The decision in cne Belmont case was followed by the Court of Appeal in Attomey General's Reference (No 2 of 1982) 11984] QB 624 in relation to whether the direcrors and sole shareholders of a company could be convicted of stealing its property. T he issue was one of consent und dishonesty. lr was argued thar because the directors were the sole will and directing mind of the company, it wa"> ro be created as having consented to the appropriations. This was relecred on Belmont principles bur che issue of dishonesty ultimately turned on the construction of section 2(1)(b) of the Theft Ace 1968 and so is of limited assistance on char point. Jc does, however, pro,•ide forrher authority for the proposition that where the fraud or dishonesty even of a sole director or shareholder is committed against the company no defence by way ofattribucion will be available.

39 Alrhough not referred co or cired co rhe C.ourc of Appeul in the Belmont case f L979l Ch 250. the non-attriburion ro the company of its direcrors' fcaudulenr conduct is said ro resr on whar I shall refer ro for

0 convenience as the Hampshire Land principle. This is a reference co the decision of Vaughan Williams J jn fo re Hmnpshire Land Co l 1-896] 2 Ch 743 in which rhe judge had co decide whether the Porrsea lsland Building Sociecy was entitled ro prove in the liquidation of Hampshire Land for a debt of £30,000. Hampshire land was closely connected wirh Portsea in that rhe)' had their offices in rhe same building and had some common directors. A Mr Wills was also rhe secretary of both. Hampshire Land resolved at a

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general meering co borrow rhe money from Porrsea even though no proper notice of the meeting had been given and the arnounr of the borrowing exceeded what was permitted by the company's articles of association without a valid resolution of the company in general meeting. Although there was no authority co borrow, Portsea was protccred by rhc rule in Royal Britisb Bank v Turquand (L8J6) 6 E & B 327 which enrirled it co assume that the procedure required under H ampshire Land's articles had been complied wirh unless it had knowledge to the contrary. The issue therefore for the judge was wherher the knowledge of Mr Wills (who was taken to be aware of rhe irregularities In the resolution char was passed) should a lso be attributed to Porrsea by virtue of his being an officer of the building sociery.

40 The judge held that the knowledge of rhe secretary could nor be impured to Porrsea. He gave two r easons for rus decision. The first was rhac che knowledge of a common officer was nol cu be imputed co both companies unless the officer had some ducy co communicare that knowledge co the company in question. The second was char even if communicarion of the information was with.in the scope of che officer' s ducy, ir was subject co the exception that, where the officer wa guilty of fraud, his knowledge of his own fraud could nor be amibured ro the compan)' ( 18!161.?. Ch 743, 749:

"because common sense at once lend. one ro rht' conclusion thar it would be impossible to infer that rhe duty, either of giving or receiving notice, will be fulfilled where the common agenr is himself guilty of fraud."

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41 The e..ssentiaUy factual assumption which Vaughan Williams J relied on as creating an exception to the presumption of knowledge based on the performance of a dury to di cluse cannot in my view be treated as an exhaustive statemenr of the reasons why the law will not attribute to a company the acts or knowledge of one of its officers. Hampshire Land was concerned only wirh the imputation of knowledge which was relevaor to

Portsea's ability to enforce a contract that was unauthorised by Hampshire Land. The judge treated it as a question of whether the knowledge of an agent should be imputed to his principal and it was not therefore necessary for him to consider any wider issues of attribution relevant to unlawful conduct. In parricular, the rationale based on the inherent unlikelihood of the director disclosing his own fraud ro rhe object of his deceit might be thought to apply even where the intended victim was not the company, of which. he was a director or officer but was a third party. Yet this was not sufficient tO prevenr attribution in El Ajozt l I994] 2 All ER 68 5 and the other liability cases I mentioned earlier.

42 Therefore, although thC' Hampshire Land principle is often referred ro in cases dealing with the artr1burion ro a company of the acts of its directors and orhers, rhe principles applied to determine liability for unlawful conduct more generally are not limited to asking whether the director is likely ro have wisbed ro keep knowledge of his fraud secret. They involve the application of a more fundarnenral rule accepted by this court in the Belmont [1979] Ch 2.so and also in Stone & Rolls [20091 AC r391 case that rhe law will not arrribute the fraud or other unlawful conduct of the director to the company when it is itself the intended victim of that conduct. This, as 1 explained earlier, is a question to be determined in the context of the proceedings in which anribution is relied on. ln a liability case the company will not be me victim for purposes of the attribution rule. Bur where the company makes the claim based on rhe director's breach of duty it is the victim and the Belmont case confirms thar the law will nor allow the enforcement of that duty to be compromised by the director's reliance on his own wrong.

43 One can illusrrate the operation of these principles by looking at the decision of Dyson J in the McNicholas case [2000] STC 553. In considering whether the company should be made liable for the fraud on HMRC carried out by its site managers, the judge said, at paras 5 5-5 6:

"55. In my judgment, the tribunal correctly concluded that there should be attribution in the present case, since the company could not sensibly be regarded as a victim of the fraud. They were right to hold that the fraud was ' neutral' from the company's point of view. The circumstances in wbich the exception ro the general rule of attribution will a pply are where the person whose acts iris sought to impute to the company knows or believes that his acts are detrimental ro the interests of the company in a material respect. This ell..rplains, for example, the reference h)' Viscount Sumner in JC Houghton & Co v Not hard Lowe & Wills Ltd [1928j AC 1, _r9 to making 'a clean breast of their delinquency'. It follows that, in judging whether a company is to be regarded as the victim of the acts of a person, one should consider the effect of the acts themselves, and not what rhe position would be if those acts evenrually prove to he ineffective. A~ the tribunal pointed out, in Jn re Supply of


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Ready Mixed Ca11crete (No z) I 1995 J 1 AC 4 56 the company suffered a large fine for contempt of court on account of the wrongful aces of its managers. The facr that their w rongful am cau.,cd rhe compan} co suffer a financial penalry in this way did not prcvcnr the acts and knowledge of the managers from being attribuced to it .

.. 56· The Hampshire Land principle or exception i founded in common sense and jusrice. le 1s obviou good sense and jusrice chat the acr of an employee should not be attributed to the employer company if, in trurh, rhe ace is directed at, a nd harmful co, rhe inreresrs of rhe comp11ny. In the present case, the fraud wtls nor aimed at the company. l t was nor inrended by the parcicipanrs in chc fraud rhar the interests of rhe company should be harmed by rheir conduce. In judging whether the fraud was in fact harmful ro che interests of the company, one should not be roo ready ro find such harm. In my view, the cash flow point made by Mr Purle [leading counsel for the company I comes nowhere near being serious enough co trigger the principle. Looking at rhe faces of chis case from a common sense point of view. cherc wa~ no VAT fraud or harm co the incerests of the company. The cribunal were enricled to reach this conclusion. Ir was the correct conclu ion co reach ...

44 A mentioned earlier, the argument for the company had been tbac the lo~s which it would suffer by being made co compensare the Commissioners for their loss of VAT was sufficienr co prevenr the disbonesry of the emplorees being anribured ro the compan). In the passage quoted, Dyson J rejeccs the argument just as this courr did in Moms t• Bank of India 12005) i. BCLC 328: see para 33 above. In the . tone & Rollscaseli.009) AC 1391, para 55 Rimer LJ said:

'"The Mi:Nicholas ca e 120001 STC 553 how~ that, in assessing whecher the Hampshire Land principle applies, it is noc appropriate to factor into rbe consideration the adverse con'>cqucnccs ro the company when and if rhe fraud is found ouc."'

4~ But it does not follow from this that secondary damage nf the kind relied on unsuccessfully in the liability cases will not be sufficient ro prevent amiburaon when it forms the ubject mnrcer ol the ncnon hy rhc company against those ·whose breach of duty h:l' caused it. In that context the damage is not econdary bur primary and the compan~ is the Jirccc vicrim of the breach of dury relied on. 1t ought therefore nor ro marter whecher the LOll:>piraLy alleged in chese pr0Lcedi11r, haJ a:. i1~ ol>jcLl a VAT fraud on HM RC or is limited to depriving Bil ca of rhe proceed of sale from rhe EU As. In borh cases cbe directors and the ocher defendant will h:ive commirred or aided a breach of fiduciary duty and other wrong!. againsr the company for which Bilta can sue. In neirher case should 1t he open to rhe directors and their acct>Ssories such as the defendants ro rel) on .i process of anribution to defeac che claim. What remains to be con idered i whether rhere is anything in rhc !)/011e 6-.,. Rolls ca e w hich require-; u ro rcnc;h a d ifferent conclu-.iun.

Stone & Rolls 46 The Stone & Rolls case l2009] AC 1391 involved n daim by a

company against its former a udfrors for damages for negligence. The company ("S & R") was owned and conrrolkd br :i Mr ~rojevic who was its



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only director. He carried our a fraud on a Czech bank which involved S & R pre enting false documenrs to the bank which purported to relate to share rranl>acnons char had ne\•er raken place. A\ a re ulr of rh1 , rhe bank paid money to S &. R which were chen channelled ro rhe mher parries to rhe fraud.

47 The bank obrained judgment for deceit against S & R and Mr Srojevic and was awarded substantial damages. S & R, then in liquidario n, began proceedings against Moore Stephen-., who had been its auditors in the years in which rhc frauds against rhe bank had been committed, seeking damages for negligence of l>Omc US$ L 74111 which represcnrcd rhe losses it had suffered as a result of the auditors' failure co dcrecr che dishonesr behaviour of Mr Stojevic.

48 The auditors applied ro ~trike out the claim on rhc ground thar it was barred by the ex rurpi c.iusa principle. Their case (as here) was chat, as che directing mind and will of the company, Mr Sro1ev1c's fraudulent conduct fell robe atrribuccd to S & R so that its rel1.mce on the fraud to found a cause of acuon in negligence against the auditor .\mounted tC> it rel)'ing on it!> own wrong. The company could not, ic was said, rely on being che victim of the fraud to avoid amiburion because rhe only victim of che fraud was rhe bank. In the alrernat1ve, it was submitted that where the compan} was under the sole conrrol of the fraudster (i e it had no directors or c;hareholders who were not parricipanrs in the fraud) rhea there was no room for the operation of che Hampshire Land principle because there was no-one ar the company from ""horn rhe frauduJenc director would wish ro or could conceal his fraud. The company was therefore fixed with personal li:ibihry for rhe fraud and could nor b.ise a cause of acrion on it against the auditors.

49 In the Court of Appeal chc second of these rwo arguments was rejected by Rimer LJ as being incnnsisrenc with the decisions of chis coun in the Bt!l111011t f 1979] Ch 250 and Attorney Cent?ra/'s Reference (No .z of 1 982) [ 1984] QB 624 cases. Bur he accepted the submission for the auditors thar S & R was o nly a victim of Mr Srojevic's fraud in the sense that it was thereby exposed to a secondary liab~lity to the bank. In the context of a claim by S & R against its auditors, this was, he held, insufficient co allow it co rake advantage of the Hampshire Land or Belmo11l principle.

50 Much of the argumenr which Mr Sumption QC directed ro this point was based on the p~sages in the McN1cholas ca)e 120001 STC 553 and Mnrris L' Bank of India I 2.005 J :z.. BCLC p.R which I quoted earlier ar paras 33, 43- But those, as I ha\'e said, were both c.1 es in which the claim in issue wa one made against the company based on rhe fraud of ics directors or employees. The court was not concerned with what the position would be if the claim was being made against che directors or their accomplices for fraud or breach of fiduciary dury against the company and Rimer LJ, I think, accepted this at Jeast implicitly hr his rejecuon of Mr Sumprion's econd line of argumenr and by what he said 120091AC1391, paras 71-72 about che auditor · reliance on rhe dcci~ions in chc ~lcNlc/10/as c1 c and Mnrris v Ba11k vf l11d1a:

"71. J find it a little surprising that rhe Mc Nicholas and Bank of India ca es emerge as authorities conrriburing co the jun prudence on the application of rhe Hampshire Land principle. They were borh concerned with fixing liabilitv on a company at the o;u1t of a chi rd party and a central


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question in each was whether rhc rele\'anr srnturory policy (respectively the VAT legislation and the insolvency leg1slat1on) required rhe anrihucion ro the company of the acrs of ih .igcnts, 1-leing agcn~ who were nor its directing mind and will. Once, as in each case ir did, the court held that the applicable policy did require such arrnbution, I find it difficult ro see on what basis ir was considered rhar such anriburion could or might be trumped by the Hampshire Land principle, which is primarily concerned not with a company's liabilities to o thers bur rarher with its claims agajnst others.

"'72. Bu~ surprising o r not, there is no escaping that bo th in rhe McNicholas case and in cbe Bank of India case chc court discussed rbe cope of the Hampshire Land principle. In my judgment both cases

support Mr Sumprion's submission tha t the principle will o rdinarily only apply in circumstances in which du: agcmc; incend LO harm Lhe company (the McNicholas case f 2000] STC 5 53, para 56), or it i the carger of their acrs (rhe Bank oflndia case I i.005 I 2 BCLC ; i.8, para 1 1 8), a nd rhar it is nor enough co engage rhe pnnciple that an agent's acts may result in harm to the company. In che former case it made no difference that the agencs' frauds were found our and resulted in m:nerial harm ro ;\ kNicholas in che shape of assessments to tax of more than £ 1m: sec li.ooo) STC 553, para 1; and in the latter case ir made no difference thar Mr Samanr's actions resulted in [the bankj being made liable under section HJ to a judgment of over USS8om: see [2005) i. BCLC ;i.8, para 1. In borb cases the companies were, in the phrase used in argument, left ' ho lding rhe bab)"', just as the companr is said to have been here. Both authorities support t he view char being a 'secondary' victim of thil. narure is nor enough ro engage rhe principle; what counts is the idenrificarion of the victim against whom the fraudulent acts are directed. The logic underlying this approach is that it is irrelevam in the present context to rake :'ICCOtu1t of rhc adverse co11sequcnccs to chc fraudster of being a fraudster: rhose are simply rhe conscq11e11ces rhar rhe law visits on fraudsters, but they do nor, in the prescnr concexL, make the fraudster a victim. Whilst I recognise Arab Bank /1/c u Zurich Insurance Co l1999l 1 Lloyd's Rep i.6z. as pointing in a different direction, I rake rhe view that chis court in the Bank of India case preferred and approved the reasoning in the McNicholas case, and in m) judgmenr we should rake our lead from the Bank of India case . .,

51 In agreeing w1th him, Mummery LJ c;a1d, at para 1 i 8:

.. Whar abour the primary and second3r} rule-. on attribution ro the company of knowledge and of a guilty mind? They are relevanr t<> whose acrs counr as acts of the company for the purpo-.e of rhe ubstannve rule in question and co fu::ing it wirh respons1bili[} for/ liabihcy for rhc fraud of it'> d irector or vicariou liabilil). In my 1udgmcnr, 1n thi'> case che knowledge of the fraudulenr mastermind and the knowledge of his creature company are identical in targeting the victim bank. Ir is nor a cJse of a company icself being a n innocent vicnm of deception by one of its officers. This company was parcy co rhe fraud, nor an innocent victim o f ir:'




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52 Rimer LJ accepted in para 72 rhar, for tbe purposes of S & R's claim against the auditors, it could nor rely on the loss it suffered by being involved in the fraud on rhe bank so as to prevent it being treated as a fraudster along with Mr Stojevic and so falling foul of the ex rurpi causa principle. Moore Stephens had been arguably negligenr in their conduct of the audit but they were not parry ro a fraud on rhe company and owed no dury to its creditors. Mr Srojevic who had undoubtedly commined a breach of fiduciary duty against the company was not a defendanr and his actions against S & R were nor the subject matter of the claim. fn these circumstances, l do nor read Rimer LJ's iudgmenc as going any further than to hold that in -rhe proceedings against the auditors the fact that S & R did suffer loss as a result of the actions of Mr Stojevic against the bank was not sufficienr to engage the Hampshire Land principle so as LO prevent the auditors from relying on the ex turpi causa rule. The case is not aurhoriry for any wider proposition.

53 The decision of the Court of Appeal was upheld by a majority in rhe H ouse of Lords bur. the speeches disclose a variety of different approaches to the principles to be applied.

54 Lord Phillips of Worth Matravers considered that rhe answer to the question whether the ex turpi causa rule applied to the claim was not to be found in the application of the ffampshire Land principle but by looking behind the company at the persons whose interests the dury of the auditors was intended co protect. Since this was owed to the shareholders of rhecompany and nor to irs creditors, there was no justification for disappl}'ing the ex turpi causa rule li.009] AC T391, para 86:

~The scope of Moore Stephens's duty is not directly in issue on this appeal. What is in issue is whether ex rurpi <.:ausa provides a defence to S & R's claim rhat 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. r have reached the conclusion that all whose inrerests formed rhe suhjecr of any dury 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 1 join with Lord Walker and Lord Brown in concluding that ex rurpi causa provides a defence."

55 lf 5 & R had not been under the sole control of Mr Stojevic but had also had independent shareholdeq; then he would bave concluded that the claim was not barred by the ex rurpi causa rule: see para 63:

"My Lords, I would not think it right to hold as a matter of general principle that ex turpi causa does not apply to a claim by a company against its auditors for failing ro detect rhat the company has been operating fraudulently unless it were demonstrated how the djfficulties to which I have referred could be resolved. There has been no such demonstration in chis case. Thus I am nor able ro join Lord Scorr and Lord Mance in concluding, for rhe reasons that they have given, that ex turpi causa does not apply ro S & R's claim. At the same rime, 1 have nor been persuaded by Mr Sumprion's primary case that the reliance test, or the principle of public policy rhat underlies ir, would necessarily defeat S & R's claim if S & R were a company with independent shareholders


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that had beea 'high-jacked ' by Mr Stojevic. Ln that, at least, l believe that I share common ground witb all your Lordship . "

56 Lord Walker and Lord Brown (also in che majority) dismissed the appeal for different reasons from those of Rimer LJ in rhe Court of Appeal. They adopted rhe audirors' second line of argumenr char rhe Hampshire Land principle can have no application to whar Lord Walker described as a one-man company where boch ownership and control was vesred in rhe fraudsrer or fraudsters.

57 In his speech Lord Walker emphasised, ar para , 39. thar the Belmont case [19791Ch250 did nor concern a one-man company and was obviously itself the victim of a conspiracy: see para 144:

" ln all these cases there was a company which was the victim of a fraud or serious breach of dury, and the court held char it was nor to be prejudiced by the guilty knowledge of an individua I officer who could not be expected to disclose his own fault. (The facr char duties were mved to

two different companies in rhe Hampshtre Lmd and Houghton cases is, I think, an irrelevant coincidence). This principle is sometimes referred to in the United States of America as the 'adverse interest' exception co rhe usual rule of imputation (see for instance Rudo lph and Tanis, ' Invoking In Pari Delicto to Bar Accountant Liability Acrions Brought by Trustees and Receivers' (z.008) ALI-ABA Study Marerials). Ir is applied, typically, in cases in which the corporate victim is the claimant and the defence seeks to rely on the corporate victim's notice, knowledge or complicity. lr will be necessary co consider some recent Engl~h ca es which do not fit so neatly inro rhesame mould."'

58 He refers at para 145 to what Rimer LJ said at para 71 about rhe McNicholas 12000] STC 553 and Morris v Bank of India 12005) 2 BCLC 3 28 cases but then goes on:

"Bur I can see no reason why rhe principle should be limited ro claims. Ir is, as I have said, a general principle of agency which can apply ro any issue as to a company's notice, knowledge or complicit}', whether that issue arises as a marrer of claim or defence."

59 That is, of course, true but the conrexts in which the poinr arises are very different.

60 Ar para 157 Lord Walker begins his analysis of the sole actor exception ro the adverse interest principle, the essence of which is summarised in the extract from the decision of the Second Circuit of the United States Court of Appeals in Tn re The Mediators Inc; The Mediators Inc v Manney (I997) rn5 F 3d 822 which he quotes. at para 163:

"'Second, rhe adverse inreresr exception does not apply to cases in which the principal is a corporation and che agent is its sole shareholder. As noted, the adverse interest exception is ro a presumption that an agent has discharged rhe duty of disclosing mareri::il faces ro rhc principal. Under New York law, where the agenr is defrauding the principal, such disclosure cannor be presumed because it would defeat-or have defeated-the fraud. However, where rhe principal and agent are one and the same, the adverse inrerest exception is itself subject co an exception styled the 'sole acwr' rule. This rule imputes rhe agent's



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knowledge ro the principal norwirhstanding rhc agent's self-dealing because the parry rbar should have been informed was the agent itself albeit in ics c::ipacicy as principal. Where. as hen~ .• 1 i.ole -;hareholder is alleged to ha,·e srripped rhe corporanon of ::i ser'>, rht: adverse inrerest exceprion to the presumption of knowledge cannot apply."

61 His conclusions on this poinr follow I 20091ACi39 i, para r68:

"In particular 1 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 ro call a halt ro that fraud. Here I return ro Mr Brindle's point (para i32 above) abour rhc need to decide any quesrion of attriburion by reference ro its conccxr. Looking at the conrexr, I cannot accepr his submission that a claim again t auditors is a context in which S & R should nor be rrearcd a-. primarily {or directly) liable for irs fraud against LKomercni Banka SA}, and so disabled by the ex turpi causa principle. ~lr Sumpncm rnnceJcd, m ltne w1rh the pleadings, rhat rhe auditors did owe a duty of care ro S & R, although Mummery LJ (with whom, as with Rimer LJ, Keene LJ agreed) considerc~ ante, p 1-05, para J 15, that 'the firm did nor owe a duty of care ro rhe company, which was a fraudsfcr in fhe total grip of anorher fraud ter'. On the assumption char the auditors did O\\ e a duty of care ro S & R, it was a duty owed ro chat company as a whole, nor co individual hareholders, or porenrial shareholders. or currenr or prospective

creditors, as this House decided in Caparo lndustrtes pie L' Dickman It 990! 2 AC 605. If the only human embodimenr of rhe company already k nrw :i II :thom ir-. frn11d11lrnt :tcri,·irirc;, rhi>rt> w:tc; rP:i li .. rica lly no prorection rhar its audi-rors could give ir. In u1paro this House approved the decision of Millerr Jin Al Saudi Banque L' Clarke Pixley [1990J Ch 3 13, rhe facts of which were comparable to those of the present case."

62 Finally, in relation to the issue of S & R being a ~econdary victim, Lord Walker said, at pan1s 1 73-174:

.. r73. However it is unnecessary ro spcculnu: further about the commercial rerms on which gangs of robbers or fraudsters might be expected ro organise their criminal acrivitics. There i in mr opinion a clearer and firmer basis on which ro derermine whar (if any) ignificance to give to the notion of a compan)' being the secondary vicrim of the fraud (aimed ar a rhird party) of one or more of its dirccrors. Ir is necessary to

keep well in mind why the law makes an exception (rhe adverse lllteresr rule) for a compan~ which i a primar} v1et1m (lih rht Belmont company. which was manipuJared inco buying Maximum :u a gro)i. overvaluarionl. The company is not 6.xed with its directori.' frauduJenr intentions because char would be unjust co irs innocenc participarors (hone t directors who were decei\·ed, and shareholders who were cheared): the guilty are presumed nor co pass on rhc1r gutlf} knowledge to rhc mnocenr. Bur if che company is itself primarily (or directly) liable becau e of the 'sole accor' rule, there is ex hyporhesi no innocenc participator, and no one who doe not already share (or must by his reckless indifference be taken as sharing) the guilty knowledge. Thar is consisrenc with rhe an.ilysis by Rix J in Arab Bank (r999l T Lloyd's Rep 262. In rh:H Lac,c Mr Browne was nor


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the directing mind of JDW. which was nor a one-man company; Rix J accepted that d1e position might have been different if it had been.

"'r74. I would therefore fimic my ground of decision an chis appeal co the proposition that one or more individuals who for Fraudulent purposes run a one-man company (in the sense de cribed above) cannot obtain an advantage by clain:Ung that the company is not a fraudster, but a secondary victim. McNicholas [20001STC5 53 and Bank of Tndia (2005] 2. BCLC 328 may be best analysed as depending on a special rule of aruibution required by the scheme of the legislation relating ro VAT or fraudu lent trading (as the case may be). It is not necessary to the disposal of this appeal, or prudent, to address every s iruarion char may be described as involving a secondary victim."

63 Lord Brown set our his conclusions at paras 200-10 1:

'·200. For this reason I find rhe concepr of the 'sole actor' exception to the adverse imeresr exception {the Hampshire Land principle) a somewhat puzzling one. Wh>• 1s 1t necessary ro except from an exception a category of case which cannot logically fall inro the exception in the first place? Assuming, however, thac there is scope for such an exception to the 1 lampsliire Land principle, then che need for it eems to me compelling and as good a staremenr of ir a any is co be found in /n re The Med;ators lnc; The Mediators Inc 11 Maumy (r997) l05 F 3d 82.2. already fully set our ar para i63 of Lord Walker's opinion.

"201. Ir is on this basis and chis basis alone-the one-man company or sole accor basis-that 1 would uphold the Court o( Appeal's judgment that S & R is in no different or better position than Mr Srojevic himself to re ic;r rhe ex mrpi caus;t clefence (:rncl thl" lirp1idnrnr of S & R in no berrer position than either of chem)."

64 T he reasoning of the minoriry is conrained in chc speeches of Lord Scort and Lord Mance. Lord Scotr considered that recovery by S & R against the auditors would not breach rhe policy of the ex turpi causa rule, at paras I20-ri.1 :

.. 110. The ex turpi causa rule. is a procedural rule based on public policy. The perpetrators of illegality, a forciori of dishonest illegality, ought nor to be allowed to benefit from their reprehensible conduct. If S & R had remained a solvent company, an action against Moore Stephens chat would have enabled Mr Stojevic to benefic from any damages char were recovered would have offended rhe ex turpi causa rule. Take tbe case of a solvent company thar under che direction of irs managing director engages in an unlawful and, in the C\'t:nr, loss making activity that could and should have been prevented by a timely repon made by its auditors. Let ic be supposed the managing director is also a shareholder and thar he and the audirors are cogcrher sued for negligent breach of duty. r know of no aurhority that would bar such an action on ex curpi cau a grounds. The acrion, assuming tt succeeded again t both defendanrs, could be expecred, via contribution proceerungs, ro leave the delinquent managing director with no benefit from an}' damages recovered from the auditors. And why, if char were so, should public policy require che auditors to be relieved of li::ibility for rheir breach of duty?

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- n. i. In a case, such as the present, where the comp:inr 1s insolvent and will star so whatever damages are recoverable from rhe audirors, the need co ensure that the delmqucnr d1rec.ror docs not t>enefit from the damages does nor present a problem. There 1 no possibility of Mr Scojevic benefiring from any damage') recoverable from Moore Stephens. So, 1 repeat, wh)' should the ex rurpi causa rule, a rule based on public policy, bar an action against the auditors based on their breach of duty?"

65 Bur more imponant for present purposes is what he said about the sole actor exception l2.009_I AC 1391, paras l07-1 10:

"107. There are, however, cases, sometimes referred tons •sole <lcror' cases, where the company has no human cmbod imem ocher than rhe fraudsrer and where, therefore, there is no one in the company for the fraudster ro deceiv·e, no one in the company co whom 'a clean breast of . . . delinquency' could be made. In these 'one ncror' cases, ir is said, the H11111pslnre Land Co rule c:in h.wc no ~en'>1ble .lpplic:ation. The knowledge of the fraudster simply ts the knowledge of the company. An example of this proposition m acrion 1s Royal Brunei A1rlmes Sdn Bbd 11

Tan I r995 J 2 AC 3 78. This was a case in which rhe issue was whecher the company, BLT. had been guilty of fraud or d1shone:.ry in relation to mone) ir held in trust for the plainaff airline. The company had become insolvent and rhe airline sued its controlling director, .Mr Tan, on the ground char he had knowingly as jsted in the dio;sipaoon by BLT of rhe mone}. Lord Nicholls of Birkenhead said, at p 393: The defendant accepted that he knowingly assisted in rhar breach of crust. In other word , he cau_c;ed or permitted hie; comp:rny ro ;i11ply rhe money in :t w:iy he knew was not aurhori ed by the trust of which rhe company was trustee. Ser our in these bald rerms, the defendant's conduct was di honest. By rhe same roken, and for good measure, BLT al o acred dishoncsrly. The defendant was the compa ny, and his stare of mind is to be imputed ro the company.'

"108. But the attribution to BLT of Mr Tan's dishonesty for rhe purposes of rhe airline's claim against, in effccr, BLT and Mr Tan, could nor be taken to bar misfeasance proceeding~ by rhc liquidator of BLT against Nir Tan or against any other officer of BLT who, in relation to the trusr money, ' has .. . been guilty of any mi feasancc or breach of a ny ... or her dury in relation ro' BLT -section 2l 2( 1) of the I nsol vcncy Act r 986-assuming, of course, that sectton i.1 i. or some 'iimilar sratutory provision "'ere applicable ro BLT in ol\'ent hquidacion.

.. ro9. Tt is noteworthy that cherc appear to be no case in which the 'sole actor' exception co the Hampslnre umd Co rule ha been applied so as to bar an action bcought by a company against an officer for breaches of dury rhar have caused, or contributed to, lo'> to rhe company as a result of rhe company engaging in illegal acri' 1tie . I can easily accept char, for the purpoc:;es of an acrion ag:11n!>t the compan)' b> an innO\..ent 1hird parry, \\ ith nu notice of any illegality or impropricry b)• the compan) in che conduct of 1rs affairs. the state of mind of a •5ole actor' could and should be attributed ro the compaoy if ir were rclevanr to the cau e of acrion as erted against the company ro do so. Bur it does nor follow that chat :mribucion should cake place whe1e chc action is being broug.hc by che


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company against an officer or manager who has been in breach of duty to the company .

.. 1 1 o. re appear that the liquidator' of S & R know of no assets of Mr Srojevic that could become the fruits of succe sful proceedings against him for breach of duty. Bur suppose that were nor so. There can surely be no doubt that the liquidators could issue a misfeasance summons against him under section 2 n{rl(c) of the Insolvency Acr 1986. C.Ould Mr Stojevic, on such a summons, contend that his dishonesty should be aruibuted ro the company thar, in breach of his fiduciary duties under rhe power of attorney, he had turned inco his vehicle for fraud? It is long established tbar secrion 2 T z., like its srarurory predecessors, is procedural and does nor create a cause of action where none previously existed- although it is robe noted that section z.1 2(3)(b) confers on rhe court a judgmemal discretion as tO rhe quantum of compensat ion that would not in an ordinary damages acrion be applicable. But Mr Stoievic could not, in my opinion, reduce bis liability for breach of duty ro S & R by arrriburing to S & R hts own dishonesty, praying m aid rhe 'sole actor' exception and the application of the ex rurpi causa rule.

66 Jn relation to rhe posirion as between the company and its directors, Lord Mance adopted a sirnilaI line of rea oning 120091 AC l39I, paras :.27-230:

-1.27. Though not essential to my reasoning, J also consider that the principle established in In re Hampshire 1-..and Co [ 1 896] z. Ch 743, Belmont Finance [I979J Ch 250 and Attorney General"s Reference (No 2 of 19Jh) (19841 QB 624 points cowards rhe same result. le prevents a company heing treaced as parry ma frnud commirred hy ire; olficerc; 'on' or 'against' the company, at least in rhe context of claims by the company for redress for offences committed against the company: Belmont Finance [1979] Ch 250, 26rO-H, per Buckley LJ, and p 27ir-<., per Goff Lj, and Attomey General's Reference (No 2of1982) I 19841QB624, 640A-H, per Kerr Lj; and see Edwards Karwacki Smith 0~ Co Pty Ltd u Jacka Nominees Pty Ltd (r994) 15 ACSR 502, 5t5-517. Thus, in Belmont Finance the company's directors were party to an illegaJ conspiracy, 'part and parcel' of which was that the company bought sha res at an inAated price (p z.64A), bur their knowledge of rhis illegality was not imputed to the company and did not bar rhe company suing them for the conspiracy. The principle bas also been applied in the context of a claim or allegation of estoppel against a company, seeking to hold the company responsible for a transaction in fraud oI the company, by arrriburing co it knowledge of the fraud possessed by direccors or agents who did nor represent or act for rhe company in che transaction bur had knowledge of it which chey withheld from the company: JC Houghton & Co 11 Notluird Lowe & \'(!il/s Ltd (:r928J AC 1 and Kwei Tek Cbao 11 British Traders and Shippers, etc, Ltdl1954) 2QB459,471- 472.

-us. Mr Sumption submits char rhc principle has no prc~cnt relevance for two reasons. The firsr is based on irs original rationale: that, since an agent deceiving a company will nor disclose his own fraud ro the company, the company cannot be impured wirh knowledge of or treated as party to the fraud. This rationale, Mr Sumption submits, posrulares a company with an 'innocent consriruency' (orher officers and/or



106 Bil ta (UK) Ltd v Nazir (No 2) (CA) Patten lJ

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hareholders) ro whom Mr Stojevic could have disclosed, but from whom he would and did acrually conceal, h1 misdeed . If the suggesrion is thar rhe I /ampsh1re Land principle or the thinking behind 1t can onJ} apply ''here a companr alleges loss through being deceived, I ee no reason why it hould be so confined. Whether knowledge o;hould he armbuted to a company is irrelevant in contexts like the prcsenr, where S & R's claim is nor that there were others within rhe company who relied on misleading statements by Mr Srojevic, but rather that Mr Stojevic's actions were in breach of his duties to S & R and chat, had Moore Stephens detected them, no further breaches of duty would have been possible.

"2.l.9. Neither in Belmont Fina11ce nor in Attorney General's Reference (No i. u( 198z.) is there any suggestion that the applic:icion of the principle in Hampshire Land depends on there being some innocenr constituency wirhjn the company ro whom knowledge could hJvc been communicated. Moreover, Attorney General's Reference (No.? n( 198i. ) I 19841 QB 624 is duect authority to the contrary. The rwo defendnnt!> were charged with theft, cons1 ring of the ab rr3ction of rhe J!l~i.'r of compan1ci., of which they were 'rhe sole shareholders and d1recror ' and 'the sole will and chrecring mind'": pp 63 50-r, 638F-G. They contended that che companjes were bound by and bad consented to the ab-;tracrjons pC'Cciselr because rhey were its sole shareholders, direcror and directing mind and will: pp 634E-F, 638F-H. The C.ourr of Appeal acknowledged rhe rule of attribution attributing ro a solvcnr company rhe unnnimou decision of all its shareholders {p 640\-0), bur round!) rejected its application ro circumstances where the sole shareholders, <lirectorc; and directing minds were acting illegally or dishonestly in relation to rhe compnny. The court c ited Belmmzl FinanC£ :t'\ 'direcrly cnnrrndinlingl the h;ic;ic; nf the defcndancs' argument': p 6418-(.. The defendants' acts nnd knowledge were tbus nor ro be artribured to che companies-nlchough there was no ocher innocent consriruency within rhe companies. Another justification for this concJusion may be rhac rhe effect of rhc limirarions recognised by Lord Hoffmann in Meridian Global Funds Ma11agme11t Asia Ltd L'

Securities Commission 1199512 AC 500 (para u1 above) is th:u in such situations there is another innocent consrirucncy with interests in S & R, since it is nor open even ro a direcring mind owning all :i company's shares to run rior wich the company's assets and affair in a W3} which renders or would render a company insolvenc ro rhe detrimenr of i~ creditors .

.. i.30. The second reason advanced by Mr Sumption is that, if the Hampshire Land principle could ocherwi e apply, the frauJ here wa committed on the banks, nor on S & R. The Courr of Appeal agreed with this subm1ssfon. The companr' expo urc when it wa left 'holding che baby' was merely a 'secondary exposure' which was nor enough to engage the principle: see paras 72-73. In so reasoning, Rimer LJ was influenced by the fact that Mr Srojevic's fraud would be (and WaJ. b) Toulson J) nrmbuced co S & R irself in rhe conrexr of an) claims b}' the banks against S & R. This distinction beC\vcen pcr!><>nnl Jnd '11.:ar1ou\ habiltcy towards third parries could have been relcvanr if, for e'ample, S & R had been prosecuted for fraud (see e g Attorney General's Reference (No 2. o f I982) I 1984) QB 624, 640A-6) or if (more fancifully) there had been a general banking facility berween Komercni Banka and 5 & R under which the l:mer's Liabiliry depended on whether ir w:ic; perc;onally :is opposed ro


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vicariously Liable for the deceprion of Komcrcni Banka. Bur it is irrde,·ant m the present conrext where & R is seeking recourse from persons who, whate\.'er rheir status ... i'>·3· \ 1s rhc company m the eye of the outside world, owe duties and have commirred wrongs towards S & R. The truth hehind the Hampslme I tJ11d principle as explained in Belmont Finance and Attorney Ce11emf's Reference (No 2 of 1982) is that such ituarions are different. They compel hy rhdr nacure a separarion of the interests and scates of mind of the company and those owing it duties.''

67 In rclarion to Rimer Lj's view chat rhc secondary liability of the company was not enough ro enable it co rely on rhc Hampshire Land principle in relation ro claims againsr the auditors, he ~nid 12009] AC t391, p.l r:l 2)4:

" In Arnb Bank pie u Zurid1 lns11rance Co I 1999 j 1 Lloyd's Rep 262, 2.82-283 Rix J, and in Brink's-Mat Ud L' Noye I J 991 I t Bank LR 68 (a ca e involving a scheme of fraud with analogies 10 the pre ent) the Court of Appeal considered rhac a company exposed to ch1rd party Liability by fraud could be regarded as a victim of rhe fraud for the purpo es of a claim against other persons a llegedly in breach of duty [0 it. rn d1 ringuishing between primary and secondarr victim , rhe Court of Appeal in che present case was, however, influenced by reasoning in AJcNicbolru Co11stmction Co Ltd v Customs a11d Excise Comrs 12000] TC 553 (Dyson Jl and in In rt• Ba11k of Cr<!dtt ,md Commerce

lntemational SA (No 15): Morris u Bank of India (2005 J 2. BCLC 328 (Court of Appeal). Both chose cases were (a'> Rimer LJ noced) concerned with daim" against the company hy injurrd rhird p:irri~~. rnther rhan cl:iims by che company against others in breach of duty co it. So it is not clear why the Hampshire Land issue arose ac all, and in my view the statemencs in them are of no assistance in resoh ing any issue of attribution in rhe presentconcext."

68 [n particular, be expressly rejected rhe submission rhar the sole actor exception should be imported so as ro bar a claim by a ccimpany against its sole director and shareholdet. To do so would be to undermine rhe protection given to creditors both at common bw and under che Companies Acr, ar paras 2 3 7- i.40:

"237. The current edinon (1007) of Palmer's Com/Jany Law Annotated Cu;de to the Companies Act 2 0 06 sratec; rhe position, at p r69: 'The scope of the common law duty requiring c.Jirecrors ro consider the incerc ~ of creditors is more conrro\'erc;1al. Ca c upport a varicry of propositions, bur the better accepred \"ICW is rh.n a duty is owed by directors to cbe company (and not to the creditors rhemselves: Kmvait Asta Bank EC L' National Mutual Life ummees I td I r 99 1 J 1 AC r 87, :tr"', PC; Yukong Line Ltd of Korea L' Re11dsb11rf.! lm1estme11ts Corpn of I 1berw (No 2) I 1998J 1 WLR 2.9-t ITuul .. on JJ), and th1!> dut) reqmres c.Jirecrors of insolvent o r borderline in oh cm compan1e!> co ha\'e regard to che interests of the company's creditors: West Merna Safetywe.:ir Ltd v Dodd I 1988j BCLC 250, CA.'

"i.38. l agree with rhis analysis. The Court of Appeal was therefore also correct in West Mercia ro hold rhar direcrors who know rhe company



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co be insolvenc owe co the company an enforceable dut) ro have regard to

rhe inreresrs of rbe companr's credirori.. In )'ukrmg l me I 1998] 1 WLR 294 Toul on J was likewise righr ro con)idcr th:u char would be so: p 3 q F-G. There, as in West Mercia, the directing mind and owner of a company which had incurred a large liabiliry ought ro put the company's as ers our of the reach of its creditor by transferring them co another of his companies. A claim by rhe creditor against rhe director failed on che basis that the direcror owed no direct fiduciary or other dury cowards credicors. H is liability was, as in \Vest Mercia, co che company for disregard of t he inrercsts of its credicors. Far from undcrmming rhe integrity of the common law if such a liability were recognised and enforced, it would undermine rhe concept of separate corporate idenrity and che proceccion for creditors in insolvent situations at which company law aims, if a company were nor entitled to claim againsL it<; Jircccing mind and sole conrrolling shareholder in such a sicu:uion. The Fnglish cases RBG Resources pie v Rastogi !i.ooz.I EWHC 2781 (Ch); 12004! EWHC ro89 (Ch) and Brmk 's-Mat Ltd t! No)'c I 199 1 I 1 Bank LR 68 .1nd rhe Canadian case Oger t ' Chie{scope inc ( r996) z.9 OR 3d 215: upheld (1998) 113 OAC 373, in all of which the directing minds of the relevant companies were the only shareholder , reach the same conclusion.

~i.39. In In re The Mediators Inc: The A.Jedtators Incl' Manney ( 1997) 105 F 3d 8n (USAC, 2nd Cir). the court held inadm1so;ible a claim by a creditors· committee standing in the companr' hoes broughr against the company' sole shareholder, chief execum e officer and chairman together with its bankers, lawyers and accounranr for deliberarel) devising a scheme, which srripped the com pan) of its a~. ers in order to shield rhem from liquidation and from the company's c reditors, while rendering rhe company liable for the coi.r of <;O doing. The rca oning was char, in a case of a sole shareholder and decision-make r, 'whatever deci ions he made were, by definition, authorised by, and made on behalf of, chc corporation' (p 8i.7) and that che company had ' no standing to assen aiding-and-abetting claims against third p:ircics for co-operating in the very misconduct that it had iniciaced': p 826. This is not Englis h law. Bur an important element to under randing rhii. ru le is rhar in American law 'Where third parries aid and abet a fiduciary's brcnch of dut y ro credirors-as is claimed here-the creditors ma) bring an action in their own righragainstsuch parties': p 825.

~240. In summary, it is no :mswer in Engli h law to a claim by S & R against Mr Sroje,;c thar Mr Srojevic had, as So' R'~ ole directing mind and sole shareholder, authorised che ·cherm· of fraud which co his knowledge made tlie company increasingly in o lvenr ro rhe dernmem of irs ex1 ting and future creditors. For pre ent purposes 1t 1s to be assumed (and in fact ir seems clear) that Mr Stojcvic must have known t hac, as a result of his scheme of fraud, S & R w~ (increasingly ) in o lvenc at each a udir dare."'

69 Lord M ance wenr on co consider the po ition of the auditors and concluded tbat they could not rely on the ex turpi causa principle even in relarion co a claim by a one-man company where che company was insolvenr ar chc dare of the audit due ro the fraudulent acciviries of its owners and direcrors. ln such circumstances rhey had :i reporting dury which wem


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beyond the shareholders to consider the interests of creditors and it was no answer rherefore to say that Nlr Srojevic did not need their advice that he was acring fraudulently and was nor prejudiced by nor receiving it. His fraudulent conduct should not therefore be attributed to rhe company so as to lead to the operation oftbe eJ< turpi causa rule.

The present appeal

70 Mr Maclean relies on both limbs of the audirors' argumenr in the Stone & Rolls case (2009] AC .lJ9T. H e submits that the Hampshire Land/Belmont principle only applies to prevent arrribution of the directors' fraud ro Bilta if it can properly be regarded as the victim of that fraud. The true victim was not Bilta bm HMRC who suffered loss from what the pleading accepts was a carousel fraud Lil which BiJra was a key participant. He relies in particular on the references in paras 15-r7 of the amended particulars of claim to first Line and second line buffers (all features of a carousel fraud) and to che express reference to a carousel in para 22(9). Even without travelling outside the terms of che pleading, ic: is apparent, he submits, rhat Bilta's formulation of the terms and purpose of rhe conspiracy in para 14 does not accurately describe what the parties wel'e allegedly engaged upon. Bilta's inabiliry to pay its VAT liabilities was not the consequence of rhe conspiracy but an essential feature of the fraud on HMRC.

71 Ir follows, he submits, that Bih:a was not in truth a victim but rather a villain and that, as in the Stone & Rolls case, its loss was simply a secondary consequence of rhe fraudulent scheme it participated in. le cannot therefore rely on Hampshire Land and its claim against rhe defendants does therefore amount to ir relying on its own fraud ro found a cause of action against irs co-conspirarors.

72 ln the alternative, Mr Maclean adoprs the one-man company approach favoured by Lord Walker a nd Lord Brown in rhe Stone & R.olls case which excludes rhe operation of the Hampshire Land rule due ro the absence of any independent directors or shareholders. He relies in particular on what Lord Walker said at paras 173-r74 quoted above. Here also there were no innocent participators in the company who couJd be said to be prejudiced by its inability ro recover compensation for the consequences of the directors' fraud and rhe loss which ir has suffered in the form of tbe claim by HMRC is not therefore sufficient to prevent attribution of the directors' fraud co the company.

73 Sir Andrew Morritt C decided that the ratio in the Stone & Rolls case is not applicable co a case in wbich tbe claim is based on a breach of duty which extends beyond the interests of tbe fraudsters as shareholders. Here the directors always had a duty under section x7 i. co consider the interests of the creditors. Mr M aclean says that this is unsustainable because it fai ls to engage with the reasoning which underlines the decision o f the majority. Unless there are innocent directors or shareholders there is no-one from whom the fraudulenr directors can be assumed to wish to conceal their conduct. The notional desire on their part to conceal their wrongdoing from the creditors is not relevant co whether the company should be fixed with knowledge of rbeir fraud. They a re noc pare of rhe directing mind and will of the company and the position of the directors in relarion to them cannot



110 Bllta (UK) Ltd v Nazir (No 2) (CA) Patten lJ

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therefore be determinarive of '' hether the dtrectors' conduct should be attributed co thecompan~·-

74 It i said that there would be other anomJlte!>. It would mean, for example, rhar a distinction would exisc between a fraud cer \\ho acted as a sole trader and one who carried our the fraud using an off rhe shelf company. In the former case, it would not be pos ible for the rruscee co sue che fraudster for che loss co his credicors becau'>e ic would amount to an action by rhe fraudster against himself. Bur, on Sir Andrew M omrr C's reasoning, the company would be entitled to maintain such an action. Sir Andrew Morrirr C appeared co chink that if the defendants are right rhcre would be a lacuna in the law. Bur in most cases involving an insolvent company, this will be filled by che statutory cause of acrion for fraudulenr era.ding vested in liquidators by section H3 of the Insolvency Acr.

75 1 am not convinced by any of these submissions. This 1.:ourr is, in my view, bound by the decisions in rhe Belmont case I 1979 J Ch 250 and Attont<!)' General's Reference (No 2 of 1982) [ 1984] QB 624 ro hold chat a direcmr even of a o ne-man comp:rny can be held liJhle ro account for breaches of fiduciary dury whjcb he commies again r che company. As Lord corr a nd Lord Mance poim out m their speeches in Stone & Rolls, the fact

that rhe fraudulent d irector is the directing mind and will of rhe company has ne,·er been regarded as an answer to a claim b)' rhe company against che directors for a breach of duty committed againsr the com pan). And, for the reasons J have set our earlier in r:his judgment, in th:ir context the company is ro be creared as rhe victim even chough rhe loss \\hrc.h ir suffers from rhe hreach may be the compensation which ir ha had co pa) co a third party who has been damaged by the fraud. Although lo~s of rhac kind may not be sufficient ro prevent anriburion under rhc Belmo111/Ha111µslnre Land principles when what is at issue is rhc company's own li:ibiliry co a third parry, like Lo rd Mance~ l cannot see why ir hould have rhc amc effect when rhc company is the claimant and the fraudulent director!> and rheir associates arc the dcfcndanrs. Nothing char was sa id in rhe McN1cholas or Bank of / 11dia cases suggests otherwise.

76 fr is sa id by tv1r Maclean that the Belmont analysis i rendered inapplica ble by this being a conspiracy co defraud HMRC as pare of a carousel fraud. Bur rbar, in my' iew, is a point co be decided at the rriaJ. For the purposes of an application for summ:lry judgmenr, rhe claim co he considered is tbat summarised in para 14 of rhe Jmcnded parric uJars of claim. lf, on a further examination of the evidence, ic rran pires rhar rhe conspiracy (if proven) had a different objccr a nd involved a different unlawful acr then the dairn will fail for char reJson alone. But. for present purpo:.cs, we a re boun~ in my view, ro rake rhe pleaded conspiracy as it :.rands.

77 On this basis Bilca was rhe intended and o nl) victim and the Belmont principles apply ro cbe datm unless Mr ~laclean is right on bis -;econJ ubmission char rhey ha\'e no applu.;.m on in relanon ro a one-man company. For the reasons explained earlier, I would, howe\ e r, have come to

the same conclusion even if the true object of the con piracy had been HMRC. ln the context of a claim against the directors and the defendants for breach of fiduciary ducy, the company is the v1ct1m regardless of whether irs loc;c; was consequemiaJ oa that co a third p::11 ry. The Stone 6 Rolls case


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120091 AC 139r decided thar this did not apply for chc purpose of a claim against irs auditors but that is not what we have to consider in rh1s case.

78 The o;econd line of argument based on the .,nlc actor exception requires us ro consider whether we should apply uch a rule ro che claim against the directors and rheir co-conspirators in chis case and whether we are compelled in any event co apply that principle a a re ·ulr of rhe decision in rhe Stone C.v Rolfs case. Both Lord Walker nnd Lord Brown decided the appeal in rhe Stone b" Rolls case o n that basis. But Lord Phillips expressed no concluded view on ir and Lord Scott and I ord Mance were srrongly opposed to its importation into English law.

79 My own view is chat in the context of i.l claim by the company against its fraudulcnrdirectors, the rule has no place in English law an<l would directly conrradictthe prorection given to c red itors under sections 172 and 2 39 of the Companies Act i.006 which applies regardless of whether the company is what Lord Walker described as a o ne-man company or one in which there are innocent directors and shareholders. A Lord Mance pointed out, the ::ipphcanon of che sole actor exception m che United Srnccs 1., balanced by the creditors having a direcrrightofacrion against tho e respon ible for the fraud.

80 Lord Walker considered chat the adoption of the sole accor exception could be justified as being in line with what the Cngli.,h coum ha\'C decided in che liability cases. But that, in my vie'"· ignore rhe conrexrual difference between rhe r.vo siruarions which call for a much more nuanced approach co rhe question of attribution and not a mechani nc application of a rule regardless of the circumstances and the nature of the claim. I prefer the analysis of Lord Scott and Lord Mance contained m the pas age from their speeches which I have quored which. in my view, properly recognise these ciifll'rence .

81 But are we bound by the Stn11e & Rolls case ro ::ippl) rhe sole actor exception in chis case? I do not believe that we are. The issue on char appeal concerned a claim by che company against irs audirors who were nor parry to the fraud on rhe bank but were negligent in nor nlercing rhe company to ic~ existence. Borh rhis court and rhc H ouse of Lords h:we decided rhar the Hnmpshire Land case 118961 2 Ch 743 did not prevent acrriburion in that case. There is, however, a significant difference herwccn rhe liability of an auditor for fai ling to notify che company about whar was caking place and a conspiracy against the company by its directorc; and others co deprive it of its assets. The claim against the auditors was a claim against a third parry who owed no fiduciary duries as such to the company or 1c creditors based on what in the context of that claim was econdary damJ.ge caused to the company by a separate breach of dul) on the part of the companr's own director. ft i rherefore readily distinguishahle from what we have to consider. Tne decision in the Stone & Rolls case lz.0091ACr391 should be confined in my view to the claim and the facts in that case.

81 For these reasons, we are not bound in m> \1cw ro hold that the sole actor exceprion is now an established fearure of English law for all purposes nor c;hould we do !>O. Ir was relieJ on by onl> two out of rhc fi, c member!> of rhc Appellate C.Ommittee and in a quite differenr context. The House of Lords did nor overrule the Belmont case I 19791 Ch 250 or Attorney General's Reference (No 2. of 1982) [ 19ltt) QB 614 and we are bound ro give effect co chem. The general adoption of che sole accor exceprion in relation co d1rcccors or accessories uch as rhe defcnJams in chis case is also




(2014] Ch

inconsi rem wirh the reasoning of the Supreme Court in rhc passage from Lord Sumprion JSC's speech in Prest t ' Pres/ I io 1 3 I :?. AC 4 r 5 which I quoted earlier in rhis judgment. ~Ir Mnclean' submis!l1on that a re1ecrion of chc sole acror exception will creare a dispamy bern een rhe insolvency of a company and rhar of an individual is s1mpl} the result of a company having a separate legal personalirr with the consequences now reaffirmed by che Supreme Coun in Prest 11 Prest. It has nothing co do with the adoption or nor of the sole accor exception.

83 I would rherefore dismiss che appeal against Sir Andrew Morrirt C's refusal ro dismiss rhe claim by Bilrn.

Section i J 3 84 Secrion z. r3 ofthe Insolvency Act 19tl6 provides:

••( 1) If in the course of the winding up of a comp:rny it appears rhat any business of the company has been carried on wi th anrenr ro defraud crediror of the company or creditor' of an} other person, or for any fraudulent purpose, the following has ctfecr .

... (z.) The court, on the application of the liqu1daror may declare chat anr persons who were knowingly parties co chc carrying on of che business in the manner above-mencioned a re ro he liable ro make such conmbutions (if any) to the company' assers ao; the court thinks proper."

85 The only issue is whether the defendanr are '"any persons" wichin rhe me:tning of ~crion 213 (2).

86 ~r ~laclean submirs that in rhe absence of express words or neces ary implication a srarure will be pre urned to appl} only to persons within the jurisdiction. This ruJe of s tatutory construction c:in, he says, be traced back co Ex p Blain; In re Sawers ( 1879) 11. Ch D 521, 526, per Jame LJ but was given modern expression by Lord Scannan in Clark v Oceanic C.Ontractors Inc [1983j 2 AC 130, qs where he sa id:

.. Puc inro che language of roday, t he general principle being there stared is simpl)' r.hat, unless the contrary is expressly cnacccd or so plainly implied that rhe couns must give effect ro ir, United Kingdom legislation is applicable only to "British subjects or to foreigners who by coming to the United Kingdom, whether for a short or a long rime, have made themselves subject ro British jurisdiction.··

87 The faces of che presenrcase are charJecivia i!. domiciled and carries on business in Switzerland and Mr Brunscbwc1ler io; domiciled in France. Neirher has any assets in England and neither 1s a lleged ro have been present in Cngland ar any rime material ro the acrs relied on for rhe purposes of rhe sect ion u 3 claim. Their only connection '"irh the 1unsdict1on is char rhey sold EUAs ro Bilta and are alleged ro have been parriel> ro rhe conspiracy pleaded in p:ira q of the amended particulars of claim. The} will nor therefore be caught by section 2 1 3 unless ir applies to all per:.on~ who were knowingly parries co rhe fr:iudulent trading regardleSl. of" here thev "'ere JI the maccnal nme.

88 The defendants conrend that ection i.1 .3 cannot ha\'e been inrended by Parliament co apply to rhe entire world. Bur Sir Andrew Morritt C reiccted chis argument relying m terms of auchonrr on che decision of this court in /11 re Paramount Airways Ltd fl 993] Ch u3 which concerned the scope of secrion 238 of rhe .r986 Act which a Jim, rhc 1.oun ro set aside or


A

B

c

D

E

F

G

H


A

8

c

D

F

F

G

H

(201 4) Ch 113

Billa (UK) Lid v Nazir(No 2) (CA) Patten lJ

adju~r the effect of a rransacrion enrered inro by rhe company "with any person at an undervalue": see secrion :q8(2). In the Paramo1111t Airways ca e the transacrion in question had been cnrered into with a bani.. 1n Jersey. The bank claimed that section 238 did nor have extratcrmoriaJ effect. Sir Donald Nicholls V-C said, at p 239, that although there were powerful arguments for applying some limitarion on rhe '>cope of chc section, there wa no one simple formula which was compelling:

.. In my view the solution ro the quesrion of statutory interpretation raised by tbis appeal does noc lie in retrearing to a rigid and indefensible line. Trade takes place increasing ly on :rn intcrnarional basis. So does fraud. M oney is transferred quick ly and easily. To meet these changing conditions English courts are more prepared than formerly ro g rant injunctions in suitable cases againsr non-residents or foreign narionals in respect of overseas activities. As I see ir, the considerations set ouc above and raken as a whole lead irresisribl) ro rhc condusion that, when considering the expression ·any peri;on' in rhc section'>, 1t 1<; 1mpo sihle to identify any particular limiration which can be .,aid, with any degree of confidence. ro represenr the presumed 1nrennon of Parliament. What can be seen is that Parliament cannot have intended an implied limitation along the lines of E.x p Blain, 1.?. Ch 5 2.2.. The e'pre s1on rhcrefore must be left ro bear its literal, and nacural, meaning: anr person ...

89 Mr Parker QC for che liquid:irors al o dre\\ our anenr1on ro In re Seagull Manufacturing Co Ltd l T 99 JI Ch H 5 where 1r was held that o rders made under section r33 of the i986 Act for rhe public examination of officer had extraterrirorial effect and Revenue ilnd Customs C.Omrs v Begum l 20 r 1 I BPIR 59 where section 4 i.3 had been con trued in the c;ame way.

90 The short answer ro rhi pare of the appeal i thar there are no grounds for distinguishing between secrion 2 r 3 and secrion 2 3 8 in terms of whether Parliament intended chem ro have extraterritorial effect. Borh use the same unqualified language ("any person") and tht> reasoning of rhe Courr of Appea l in rhe Paramount Airways cac;c applies in my view with equal fo rce ro section 21 3.

Omclusio11s

91 I would therefore dismiss these appeals.

RIMER Lj 92 I agree.

LORD DYSON MR 93 1 also agree.

Appeal dismissed w1tl1 costs. Pernussum to appetll refused.

\, ,,, D~'''· Bun rcr



exhibit list - madofftrustee...and mr chopra who were the onl) director . of . the company and must...

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