Directors unable to blame company for their own wrongdoing

by Philip Wild on August 14, 2015

Philip Wild

The courts recently ruled that when the directors of a company involved it in fraudulent transactions, the company was not barred by the doctrine of illegality from making claims against the directors and their accomplices for the losses caused by the directors’ breach of fiduciary duty.

The company here was involved in a fraud relating to the European Emissions Trading Scheme Allowances.  The company ended up in liquidation owing HMRC in excess of £30 million, and the liquidator sought financial contributions from the directors.

Because a company is a legal fiction, its state of knowledge is normally determined by reference to the knowledge of its directors, where this is relevant for various legal purposes.  However, in this case the court made an exception from that normal rule and held that where a company has been the victim of wrongdoing by its directors (or of which its directors had notice), then the directors’ wrongdoing (or knowledge) cannot be attributed to the company so as to operate as a defence to a claim brought against the directors by the company’s liquidator.  This was so even where the directors were the only directors and shareholders of the company.

In addition, Section 213 of the Insolvency Act 1986 (which imposes liability on directors for fraudulent trading) had an extra-territorial effect, so that orders could be made against another company which was not registered outside the UK and against foreign nationals who were not resident in the UK.

If you would like assistance in relation to a company commercial matter, call Philip Wild at Kidd Rapinet’s London office on 020 7265 5463 for further information.