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Supreme Court ruling suggests fraudulent activity by directors cannot be attributed to firms

Easily one of the most famous accounting scandals in history, the discovery of accounting fraud at Japanese firm Olympus Corporation shook the country.

British-born Michael Woodford was made CEO two weeks prior to the scandal emerging and was alerted to the possibility of an asset impairment scheme. When he made these concerns public, he was dismissed and swiftly replaced.

However, subsequent investigations uncovered 117.7bn Yen ( £680m) in investment losses none of which were known to shareholders.

The most recent case to grace the Supreme Court would have surely been of great importance to shareholders back then, and itsjudgement will be crucial to the creditors and shareholders of companies where the directors have been up to no good.

In 2009, Biltas liquidators brought proceedings against two former directors and the CEO of Swiss company Jetivia SA for conspiracy, dishonest assistance and fraudulent trading.

The claims arose from Jetivias alleged participation with Biltas directors in a VAT fraud involving carbon credit trading, which left Bilta unable to pay debts of over 38m to HMRC.

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The appeal concerned the question of whether a director in breach of duty, along with his co-conspirators, could defend a claim on the grounds of ex turpi causa. Thisis a legal doctrine which states that a plaintiff will be unable to pursue legal remedy if it arises in connection with his own illegal act.

It was also said that the case would represent an opportunity for the court to clarify on the principle that the court will not assist a company to recover damages for its own wrong.

The appeal is widely regarded as one of the most significant company and insolvency matters to go to the Supreme Court this year, and a decision has finally been made.

Fiona Simpson, a partner and civil law fraud specialist at Kingsley Napley, suggested that the defendants argued that the company could not rely on its own illegal acts in making a claim.”

Such a defence is not permissible the Supreme Court has ruled.

“The acts of a fraudulent director are not to be treated as the acts of the innocent company,” Simpson said.

Insolvency practitioners will be breathing a sigh of relief at the decision and the fact that, according to Simpson, it has not removed one of the well-used tools in their armoury to recover losses for creditors and shareholders.

Image: Shutterstock



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