Landmark cases or Supreme Court cases are defining aspects of how private liability, and thus, single-member companies are run. The UK and German supreme courts provide decisions upon which insolvency laws applied to these companies. For instance, Jetivia SA v Bilta (UK) Limited (2015) was one of the Supreme Court cases regarding insolvency law in the UK. However, Bilta (UK) is in liquidation. Bilta along with its liquidators brought assertions against nine defendants, who included Bilta directors. The claims were mainly based on breaching the fiduciary duties, as well as conspiracy and dishonesty to defraud the entity. Bilta, also raised claims against other parties, such as a Swiss company, as well as Jetivia SA along with its director. These claims revolved around dishonesty in helping the Bilta directors to commit the fraudulent activities, stipulated in section 213 of the Insolvency Act of 1986.
The liquidators put forth claims that the directors of Bilta fraudulently traded carbon credits, therefore breaching their director duties, thereby rendering Bilta insolvent, and thus, the company was unable to meet its VAT liabilities that totalled 38 million (Crawford & Mack, 2015). The insolvency law decision of the UK Supreme Court was in relation to unlawful acts attributed to director of the company, where it is a victim of unlawful act from the director, as well as the degree of liability for fraudulent trading encompassed in the Insolvency Act 1986 in section 213 (Liu & Wilson, 2002). The UK Supreme Court held that the defense of ex turpi causa (Debattista, 1984) was not in a position to operate and prevent a clam by the liquidators on behalf of a company against the former directors.
This verdict was on the basis of the fact that where the company was a victim of fraud by the directors, their conduct would not be attributed to the entity, and thus, it is only logical to treat the corporation as a party to the illegality. In addition, the Supreme Court held that the liability of fraudulent trading, which is encompassed under the Insolvency Act of 1986, is extraterritorial. For this reason, the decision considered that directors are not in a position to rely on their illegal acts to defend claims of breach of their duties using the entity as a shield and thus, attributing their fraudulent activities to the corporation.
K Montage und Dienstleistungen Ltd
On the other hand, a similar case in the German context involving the insolvency law is the K Montage und Dienstleistungen Ltd. In K Montage, the Supreme Court of Germany (Federal Court of Justice) was involved in a question as to whether section 64 of the German Limited Liability Companies Act made provisions for insolvency law by considering Article 4, Section 1 of the European Insolvency Regulation (EIR), which is applicable to English directors of a company with its operations in Germany. As such, K Montage und Dienstleistungen Ltd has been instrumental in making decisions that involve the jurisdiction over directors for oversea countries in the context of fraudulent trading, duties for directors, as well as disqualification.
According to Mitchell-Fry and Kappstein (2015), K-Montage was an English company operating as a private LLC, limited by shares and its main business conducted in Germany, with a branch office there. The director was not domiciled in the country. The proceedings of the case began in Germany, and in accordance with Article 3 paragraph 1 of the EIR, based on the fact that K Montages centre of main interests (COMI) was present for the sole purpose of filing insolvencies (Wessels, 2015). The insolvency administrator for Germany brought forth claims against the director of K Montage to recover payments made at a time when the entity was already illiquid. With the German Federal Court agreeing with the lower courts, it considered that the director was liable under the laws of Germany for the payments (Dithmar, 2015). For this reason, the court applied that there was a provision for the English director should be liable to the German Limited Liability Companies Act. Considering Article 4, section 1 of the EIR, it clearly makes a provision for the law applicable to insolvency, which shall be that of the Germany, the country or Member State where such proceedings are initiated. As such, the courts decision was based on section 64 of the German Limited Liabilities Companies Act, where insolvency law applies.
The Germanys Federal Court ruled that the director was liable for the payments, based on the fact that section 64 of the German Limited Liabilities Company Act and the insolvency administrator can bring the claims against the limited company, where K Montage was limited by shares. Therefore, the case was comparable to GmbH, and according to the Federal Court of Justice, private companies limited by shares (GTAI, 2016), such as K Montage, and GmbH are comparable because in both entities, shareholders are not personally liable for the corporations debts, and the entitys business and debts should be conducted by an individual not necessarily a shareholder. As such, in light of this view, there is a danger that directors can make payments even after the entity is insolvent, which in turn reduces insolvency estate, usually at the expense of the entitys creditors. Therefore, in an insolvency situation, German GmbH and English private companies should be treated the same, and thus, the K Montage director was liable for the payments.
The two cases involved private companies. In essence, private companies are composed of shareholders, ranging from one in the case of single-member companies to a few more in private LLCs (Tessema, 2012). In both cases, directors were the ones who made decisions, which negatively affected the other shareholders, and thus, should be held accountable because as Pathak (2013) asserts, they have a duty of care to the company. In light of the single-member company, the sole shareholder is the director, and thus, he is liable for all the actions, including making decisions. Therefore, a single decision that is fraudulent can render the entity insolvent, at the expense of the creditors. However, they are responsible for the action, whether the company has one or more than two shareholders. Besides, in the articles of association and during the application of registration, the extent of the directors powers are stated (Ci-yun, 2006). Also, just as in a single-member company, the director should compensate any damages, and this can be reflected in the two cases where the respective Supreme Courts ruled against the directors adverse decisions (Dine et al., 2007). In addition, the law makers in both cases, the director is liable for any debts of the entity, which is commonly referred to as piercing the corporate veil, which is common for single-member entities (Alting, 1994; Bowmer, 2000). Besides, just as in the single-member companies, where the director is accountable for the obligations of the company, the directors in the two cases were answerable to the claims waged against them. In addition, the two cases considered the Insolvency Act, which had an extraterritorial effect on both cases, as both are in the European Union. Furthermore, as required in the single-member entity, the directors were natural people. In conclusion, both cases represent the breach of duty, just as in a single-member company where as Lowry (2009) asserts, can be can be charged in a court of law.
The first case, Jetivia SA v Bilta (UK) Limited (2015), the directors for Bilta sold goods they had imported at a lower price, thereby making it difficult for the company not to meet the VAT obligations while in the second case, the director made payments while the company was insolvent. As such, the first case involved the director making a decision which made the company illiquid while in the second case, the director made a decision after the company was insolvent. However, in both cases, the directors were liable for their actions. In the second case, it signifies the importance of Article 2 of the twelfth company law directive, which according to Dunn (2000), it gives discretion to the EU member states to come up with various laws that regulate a group of companies in instances when the single-member company or any other legal person acting as the companys sole member. As such, even though the director was an English and conducting business in Germany, the member state had put in place measures to ensure that the company was protected, and hence, the director was liable to their action. Therefore, this is different from the first case, where a group of directors were on the wrong side of the law. As such, just as in a single-member company, directors are liable for their actions, regardless of their number. In addition, the second case, it is in line with section 35(4) of the German Limited Liability Companies Act, which asserts that business conducted by a single member in a single-member entity, should be recorded in writing, such as a memorandum (Eroglu, 2008). Therefore, the second case pinpointed one director who made the payment, and thus, was liable under German law, just as in the GmbH law requires. In the first case, however, the directors were more than one and thus, the jurisdiction was joint. As such, in the second case, the approach to law was more inclined to a single-member entity.
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Mitchell-Fry, L. & Kappstein, H. (2015). Directors' duties in Europe: on insolvency, where do directors owe their duties when the company's centre of main interests is in another Membe...
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