The UK Supreme Court recently handed down a judgment in Tradition Financial Services Ltd v Bilta (UK) Ltd & Others[1] in which it considered the scope of section 213 of the Insolvency Act 1986, specifically whether those beyond the small group of individuals with controlling or managerial functions of the liquidated company could be ‘party to’ the carrying on of a company’s business with intent to defraud creditors.
The Supreme Court has helpfully confirmed that section 213 is not restricted to those individuals with controlling or managerial functions but may extend to third parties. This is an instructive decision for those seeking to recover funds in the event of an insolvency from potentially fraudulent third parties.
Background
The liquidators of five companies jointly issued proceedings against various defendants in connection with a complex fraud regarding the cross-border trading of carbon credits that resulted in the claimant companies being left with value-added tax (VAT) liabilities to HM Revenue & Customs (HMRC) in excess of 26 million pounds.
The liquidators brought a separate action against Tradition Financial Services (TFS), a trading brokerage, in (i) dishonest assistance in breach of its fiduciary duty to the claimants and (ii) participation in fraudulent trading contrary to section 213 of the Insolvency Act. TFS had facilitated chains of transactions orchestrated by the fraudulent companies by which a large portion of the underlying fraud was perpetrated. Transcripts of TFS traders’ instant chat messages were presented to the court in which it was recognised that they were dealing with ‘dodgy little companies. You know, all these little weird names out there. … My guys have been doing a lot of spot trades with them in the last few weeks.’
The liquidators claimed that TFS was liable to pay compensation pursuant to section 213 of the Insolvency Act for knowingly being a party to the carrying on of the companies’ businesses with intent to defraud creditors or, alternatively, for a fraudulent purpose, namely the nonpayment to HMRC of their VAT liabilities.
There was a partial settlement between the parties that left to be decided, amongst other things, the question as to whether TFS was within the scope of section 213.
Section 213 provides as follows:
Fraudulent trading
(1) If in the course of the winding up of a company it appears that any business of the company has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose, the following has effect.
(2) The court, on the application of the liquidator may declare that any persons who were knowingly parties to the carrying on of the business in the manner abovementioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper. [emphasis added]
TFS argued that section 213 was restricted to persons exercising management or control over the fraudulent company (e.g. directors, shadow directors and the like) whereas the liquidators argued that, as a matter of ordinary English language, a third party person/company who knew that the business they were dealing with was fraudulent was a ‘party to’ the fraudulent carrying on of that business.
An overview of the judicial treatment of this question in the High Court of Justice and Court of Appeal can be found in a previous blog we wrote. In short, the Court of Appeal found against TFS, and TFS appealed.
Supreme Court decision
The Supreme Court unanimously dismissed TFS’s appeal.
The Supreme Court relied upon the ordinary principles of statutory interpretation in its review of section 213. It began by looking at the actual words Parliament used for the provision in the context of the Insolvency Act as a whole and the historical background against which it was enacted. Through this process, the Supreme Court considered that it could best assess the intention of Parliament when it passed the Insolvency Act.
Using that approach, the Supreme Court held:
- The wording of section 213 indicates that a person can be liable only if they were actively involved in the carrying on of the fraudulent business (and not, for example, merely a party to a one-off fraudulent transaction).
- Other sections of the Insolvency Act used notably different language to identify their targets.
- The natural meaning of section 213 should not be departed from. It was emphasised, in particular, that the courts must be wary of doing anything that would frustrate the ability of the ordinary citizen to ascertain what a provision means by reading it.
Accordingly, third parties who know that a company’s business is being carried on for a fraudulent purpose and then participate in, facilitate or assist with fraudulent transactions are within the scope of section 213.
Takeaway
This judgment affirms a powerful tool for liquidators seeking to maximise the assets of the company for distribution to creditors. It also puts parties on notice that they will not be insulated from the financial consequences of participating in fraudulent trading by reason of their status as a third party. Seen in context with other developments in this area, such as the Economic Crime and Corporate Transparency Act 2023, it is clear that it is more important than ever for companies to ensure they have robust anti-fraud compliance measures.
[1] [2025] UKSC 18.
Contributors
Ben Sharrock-Mason