Stone & Rolls shelved

22/04/15

The Supreme Court has today upheld the decision of the Court of Appeal in Bilta v Nazir, to the effect that the attribution of the knowledge or state of mind of an individual to a company with which he is associated depends upon the purpose for which such attribution is being made, and in particular the nature of the claim being pursued.

As such, the fraudulent state of mind of the sole directors and shareholder of a one-man company would be attributed to that company for the purposes of actions against the company by third parties damaged by the fraud, but would not be attributed to the company for the purposes of an action by the company against its directors for breach of fiduciary duty in involving the company in the fraud, or against others alleged to have conspired with or assisted the directors in breaching those duties.

In so holding the Supreme Court ruled that the House of Lords decision in Stone & Rolls v Moore Stephens [2009] 1 AC 1391, which had been taken as authority for the proposition that, in the case of a one-man company, the knowledge or state of mind of the one man will inevitably be attributed to the company, should be “put on one side and marked ‘not to be looked at again’”. Whilst the case remains authority pro tem for the point it decided, the Court was also of the view that that point might itself have to be reconsidered.

There was disagreement between the members of the Court as to the law of illegality generally, including as to the requisite nexus between the illegality and the cause of action; the role of any countervailing public policy; the respective status of the decisions in Tinsley v Milligan [1994] 1 AC 340 and Hounga v Allen [2014] 1 WLR 2889; and the correctness or otherwise of the decision of the Court of Appeal in Safeway Stores v Twigger [2011] 2 All ER 814. The law on illegality would have to be re-considered by the Supreme Court at the earliest opportunity.

The decision in Bilta has some peculiar consequences. It means that the company both has and does not have a guilty mind at one and the same time, depending on the purpose for which one is asking the question. Where one is asking the question for the purposes of an action by a one-man company against the one man, the company is reduced to a ‘mindless creature’, as there is no natural person whose mind is treated as the mind of the company for that purpose. Where a fraudulent conspiracy is implemented through the medium of a number of companies, a company which has been damaged by virtue of its participation in the fraud can sue the other participants in the fraud for the loss it has suffered by having been a fraudster (via an action against its directors for breach of fiduciary duty, to which the other participants in the fraud are joined as co-conspirators or assistants). For the purposes of that action, the company is treated as not having been a fraudster, even though, as between the company and the victims of the fraud, the company was a fraudster, and even though that may be the reason the company has suffered damage in the first place.

The judgment is here.