Fraud Not A Defence For Fraudulent Directors: yes it is news!


    A claim by a company (B), which had been the vehicle for a VAT carousel fraud, against its former directors and overseas suppliers alleged to have been involved in the fraud, was not precluded by the fact that it arose as a result of the company’s unlawful activity.

    B was the vehicle for a VAT carousel fraud. As a result it had incurred a very large liability for unpaid VAT. It claimed compensation from former directors and suppliers for conspiracy and dishonest assistance in that fraud. The directors caused B to purchase certain tradable rights abroad. No VAT was chargeable on the purchases. The rights were then sold. VAT was properly chargeable on the sales but the sale price was less than the acquisition cost plus VAT. The sale price was paid direct to the original seller abroad. Accordingly B had no money to pay VAT when it became due.

    B sued its directors (and the overseas suppliers). They argued the claim should fail because it arose out of B’s own illegal acts and so fell within the snappily branded defence principle “ex turpi causa non oritur actio” (a claim cannot be made based on one’s own illegal act).

    In Stone Rolls v Moore Stephens [2009] 1 AC 1391 the Supreme Court had upheld that defence against a claim by a defrauded company against its auditors who had failed to spot the fraud.

    However, the Court of Appeal decided that the fraudsters could not use the defence against a claim by the company because it was the immediate victim of the fraud (even though the ultimate victim was HMRC to which VAT was payable).

    (1) JETIVIA S.A. (2) URS BRUNSCHWEILER v (1) BILTA (UK) LTD (In Liquidation) (2) KEVIN JOHN HELLARD (3) DAVID ANTHONY INGRAM (Liquidators of Bilta (UK) LTD) [2013] EWCA Civ 968


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