Bilta UK Ltd, an English company, was run by two directors, Mr Chopra and Mr Nazir. Bilta was alleged to have fraudulently bought carbon credits from Jetivia SA, a Swiss company, as part of a so-called carousel fraud. Bilta owed HM Revenue & Customs (HMRC) about £38 million in unpaid VAT. It was inherent in the fraud that Bilta, which had no proper funds of its own, would be unable to pay the VAT to HMRC.

HMRC petitioned the court to wind up Bilta, and the liquidators claimed:

The appellants attempted to rely on the illegality defence; that is, they argued that the fraudulent acts of Mr Chopra and Mr Nazir prevented Bilta from pursuing its claims because the causes of action relied on the directors' illegal acts, which should properly be attributed to Bilta. They also argued that the claim for a contribution under section 213 should be dismissed as it had no extra-territorial effect.

The illegality defence, also known as ex turpi causa, is based on the principle that the court will not assist anyone who founds an action on illegal or immoral acts. However, the precise public policy basis of the defence is the subject of much dispute.

The Supreme Court agreed unanimously that a director or another agent of the company cannot attribute his own dishonesty to the company in order to give himself immunity from the legal consequences of his breach of duty. Whether the act, knowledge or state of mind of a director or agent can be attributed to the company depends on the context of the claim. Where a company makes a claim against a third party, the act, knowledge or state of mind of the director or agent should be attributed to the company. The company is to be considered a perpetrator of the fraud, not a victim and, depending on the circumstances, there is no reason in principle why a third-party victim should be prevented from availing itself of the illegality defence.

However, there is a limited exception: where a company makes a claim for breach of duty against its directors, it would be unjust for the directors to be able to rely on their own breach of fiduciary duty to defeat the claim. This so-called breach of duty exception applied to Bilta's claims against its directors, who were unable to attribute their own wrongs to Bilta and so the claims against the appellants could not be struck out.

Although the justices agreed unanimously that the appellants could not raise the illegality defence, their reasoning differed. Lord Sumption considered that the illegality defence is based on a narrow rule of public policy: that the courts should not be used to enable private parties to get an advantage from their illegal or immoral acts. He referred to Les Laboratoires Servier v Apotex Inc, in which he had set out the three questions that start the analysis of whether or not the illegality defence should apply ([2014] UKSC 55; www.practicallaw.com/1-589-4070):

The third question was the key issue in Jetivia. The rationale for Lord Sumption's approach was to establish a framework to enable the courts to determine whether or not the illegality defence should apply (see box "Another decision on illegality").

By contrast, Lords Hodge and Toulson considered that the illegality defence was based on a number of public policy objectives, not a single rationale. In their opinion, the proper approach was to consider the basis of the claim and whether it would be contrary to public policy for that claim to advance. In Jetivia, they considered that the application of the illegality defence would undermine the purpose of the provisions in the Companies Act 2006 that impose fiduciary duties on company directors and protect the creditors of insolvent companies. The liquidators of Bilta were pursuing the case in order to recover sums owed to HMRC: this was the public policy reason why the illegality defence should not apply.

In addition to these differences, the justices struggled to draw any meaningful precedent from the much-criticised decision of the House of Lords in Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) that a claim by a company against auditors for their failing to spot fraud by the company's sole owner and director should be struck out on the basis of the illegality defence ([2009] UKHL 39; www.practicallaw.com/8-422-4238).

Lord Sumption and Lord Neuberger agreed that it meant that, where a company makes a claim, and the company's directing mind and will has fraudulently caused loss to a third party, but the company relies on the fraud to advance a cause of action against another third party, the defendant third party cannot invoke the illegality defence unless the company is a "one-man band". If there were other innocent shareholders, it might not be just to bar the company's claims against the defendant third party as this action would, in part, aim to compensate the innocent shareholders.

By contrast, Lords Hodge, Toulson and Mance considered that the central issue in Stone & Rolls was really the extent of an auditor's duty of care rather than the illegality defence. However, all the justices considered that it was very difficult to determine the principle established by Stone & Rolls and that it is best considered a case that was decided on its own specific facts.

The Supreme Court agreed with the Court of Appeal that section 213 had extra-territorial effect and therefore could be used to pursue the appellants ([2013] EWCA Civ 968; www.practicallaw.com/3-542-5426).

Section 213 gives the court jurisdiction, on the application of a liquidator, to require that "any persons" who were knowingly parties to the carrying on of the business in an improper fashion so as to deplete the insolvent company's assets must make a contribution to make good that loss for the benefit of the creditors. The court held that this reference to "any persons" should be seen in the worldwide context of liquidation.

Although the winding-up of an English company occurs in England and Wales, the English court claims jurisdiction over all of its assets and their proper distribution, regardless of their location.

The court also noted the extra-territorial effect of other sections of the 1986 Act. It considered that the reasons given by the Court of Appeal in Re Paramount Airways Ltd in relation to the extra-territorial application of section 238 of the 1986 Act applied by analogy to the present case ([1993] Ch 223). There, the Court of Appeal had noted that the English court's power to wind up an English company would be seriously handicapped if it could not exercise jurisdiction over individuals and companies that had been involved in the company's business but were resident abroad.

The closeness of the connection between the overseas parties and the insolvent company would be a factor in determining whether or not service out of the jurisdiction would be permitted but, in the context of a globalised economy and in the absence of statute suggesting otherwise, there was nothing in the 1986 Act that limited the court's discretionary powers.