Corporate attribution

We look at the recent Supreme Court decision in Jetivia v Bilta [2015] UKSC 23 in relation to the question of in what circumstances will the knowledge of a director or officer of a company be attributed to the company itself.

As a matter of English law, it is generally the case that a company will be responsible for the actions of its directors and, in many cases, its employees. In contract, this manifests itself through the rules of agency; in tort, through the doctrine of vicarious liability.

However, the fact that a company is responsible to third parties for the actions of its directors, is not the same as the question of whether the knowledge or actions or a director should be attributed to the company – for example, vicarious liability does not involve the attribution of wrongdoing by a director (or employee) to the company, but rather imposes strict liability on the company for acts done in the course of employment.

There are many circumstances in which the court must determine whether the knowledge or actions of an officer should be attributed to the company and the question has arisen in several recent cases.

The general position is that knowledge and actions of a director will be attributed to the company, although questions of attribution are sensitive to the particular facts and this principle has been held not to apply in circumstances where what is in issue is the company’s knowledge of wrongdoing by a particular director.

For example, what is the position where the claim is brought on behalf of the company itself, for example by a liquidator, for losses caused to the company as a result of the (former) employee or officer’s conduct? Should the knowledge or conduct of the director/employee be attributed to the company, thereby providing the director or employee with a defence to the company’s claim on the grounds of ex turpi causa – in other words that the company should be precluded from claiming as a result of its own illegality?

This issue had previously been looked at by the House of Lords in Stone & Rolls v Moore Stephens [2009] 1 AC 1391. That case concerned a claim by a company in liquidation against its auditors. The claim was for alleged negligence on the basis that the auditors had failed to detect and prevent wrongdoing by the company’s sole director, as a result of which, the company became liable to various defrauded banks. The majority of the House of Lords held that the claim failed on the basis that the fraud in that case should be attributed to the company. However, the reasoning behind this decision and the question of what principles may be derived from it has given rise to much debate.

A similar question came before the Supreme Court in the case of Jetivia v Bilta [2015] UKSC 23. However, unlike Stone & Rolls, which involved a claim by the company against a third party, in Bilta the defendants were the alleged wrongdoers themselves.

A claim was brought by liquidators against (amongst others) directors of the insolvent company alleging a conspiracy to defraud the company. The allegation was that there had been a carousel fraud relating to European Emissions Trading Scheme Allowances. The defendants applied to strike out the claim on the ground of ex turpi causa and in particular, it was argued that the knowledge of the directors should be attributed to the company.

The Court of Appeal decided that the knowledge of directors in such circumstances should not be attributed to the company. It is notable that the Court of Appeal’s view was that such conclusion should apply irrespective of whether or not there was a ‘sole actor’ in control of the company and indeed earlier authorities had moved away from the position where the concept of ‘the directing mind and will’ was of principal significance in determining a question of attribution. Further, the Court of Appeal considered that the question of ex turpi causa was irrelevant to the present case.

The Supreme Court dismissed the appellants’ appeal and upheld the Court of Appeal’s decision, holding that the directors’ knowledge could not be attributed to the company – the issue of attribution as between a company and its directors/employees is not the same as between the company and a third party. Lord Neuberger summarised the position 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 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 wrongdoing or knowledge of the directors may be attributed to the company in many other types of proceedings.’

The decision by the Supreme Court in relation to the appeal was unanimous and there appears to have been general agreement as to the above proposition, although there were four different judgments produced by the panel of seven Justices, each containing differing analysis and reasoning. For example, the majority considered that the purpose and scope of the defence of illegality should be left for another occasion, whereas Lords Toulson and Hodge (jointly) and Lord Sumption each give detailed and differing analyses of illegality. Lords Toulson and Hodge and Lord Sumption also differed as to the principles to be derived from the decision in Stone & Rolls. For his part, Lord Neuberger (with whom Lords Clarke and Carnwarth agreed), took the view that Stone & Rolls should no longer be treated as being of assistance and is to be confined to its own facts.

The Supreme Court also confirmed that s.213 of the Insolvency Act 1986 (which allows liquidators to seek a contribution from any person who was knowingly party to fraudulent trading by the company) has extra-territorial effect as had been previously assumed. In other words, claims can be brought against any person, wherever they are in the world.

The decision will of course be relevant in the insolvency context and confirms that insolvency practitioners should be able to bring proceedings against directors of a company without the possibility of such claim being stifled on the basis of an argument that their own wrongdoing should be attributed to the company.

However, the importance of the decision goes beyond insolvency. Where wrongdoing has come to light, whether following an investigation (internal or external) or otherwise, corporates should have some form of civil redress against wrongdoers within the entity. Whether such individuals are worth pursuing from a financial perspective will depend on the particular circumstances. Similarly, while pursuing a wrongdoer may provide a mechanism to begin to restore a company’s tarnished image, in other cases pursuing a wrongdoer could simply lead to additional adverse publicity for the company.