In Tradition Financial Service Ltd v Bilta (UK) Ltd & Others, the Court of Appeal considered the scope of section 213 of the Insolvency Act 1986 (the ‘Act’) and, 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 businesses with intent to defraud creditors.
Somewhat surprisingly, there was no binding authority on the point. The Court of Appeal has now helpfully confirmed that section 213 is not restricted to those individuals with controlling or managerial functions but may extend to third parties.
The liquidators of five companies (the ‘Liquidators’) 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 VAT liabilities to HMRC in excess of £26 million.
The Liquidators brought a separate action against Tradition Financial Services Limited (‘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 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’s 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 TLS was liable to pay compensation pursuant to section 213 of the 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 non-payment of their liabilities to HMRC for VAT.
There was a partial settlement between the parties that left the question to be decided, amongst other things, as to whether TFS was within the scope of section 213.
Section 213 provides as follows:
(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]
It was common ground between the parties that there were three elements that needed to be established before a party could be ordered to make a contribution under section 213:
- The business of the company in liquidation had been carried on with the intent to defraud creditors or for any other fraudulent purpose.
- The defendant participated in the carrying on of the business of the company in that manner.
- That the defendant did so knowingly.
There was no need for the court to consider the first and third limb in light of the role played by TFS in the fraudulent trading and the subsequent settlement agreement. The issue before the court was the second limb and specifically whether TFS fell within the scope of ‘any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned’.
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.
The High Court’s decision
The High Court found that while there was no binding authority, a wider interpretation of section 213 was consistent with the purpose of the Act. The court expounded the principle that ‘a man who warms himself with the fire of fraud cannot complain if he is singed’ and that TFS were therefore within the scope of the provisions of the Act and liable to contribute to the Liquidators. TFS appealed against the decision.
The Court of Appeal’s decision
The Court of Appeal agreed that it was not bound by any particular authority on the scope of section 213 but did find the case of Bank of India v Morrisparticularlypersuasive. In that case, a broad interpretation of section 213 was assumed to be correct but, critically, the point was not actually argued before the court and therefore there was a question over whether it formed the ratio of the decision. In that case, it was held by Mummery LJ that:
‘… both civil liability to pay compensation and criminal sanctions may be imposed on any person who is knowingly a party to fraudulent trading. Both types of liability extend beyond the company which actually carried on its business with intent to defraud creditors and its directors to “outsiders”, meaning individuals and corporate third parties who have knowingly been parties to the fraudulent trading in question … It is accepted that “outsider” companies can be made liable under s.213, provided that it is established they were “knowingly” parties to the fraudulent trading.’
The Court of Appeal also held that, by convention, it should follow the decisions of courts of co-ordinate jurisdictions unless it was persuaded that they were clearly wrong and particular regard was given to the interpretation of a similar provision in the Irish Supreme Court. In O’Keeffe v Ferris it was held that:
‘A third party who knowingly participates in an act of fraudulent trading committed by a company’s directors (for example, a creditor of the company who accepts payment of his debt out of money which he knows its directors have obtained by fraud) may be compelled personally to restore the money so applied by means of an order under the section’
Further, the Court of Appeal noted that the modern approach to statutory construction is to have regard to the purpose of a particular provision and interpret its language, so far as possible, in a way which best gives effect to that purpose. It was held that the purpose of section 213 was to compensate the victims of fraudulent trading and to make those who have been parties to fraudulent trading liable to compensate those victims.
The Court of Appeal therefore considered that a wider interpretation of section 213 was more consonant with the purpose of the legislation than a narrower definition (and was more consistent with authorities in other jurisdictions). Accordingly, it was unanimously held that section 213 of the Act is not restricted to those individuals with controlling or managerial functions but extends to any third parties who meet the relevant criteria, and the appeal was dismissed.
Takeaway While perhaps surprising there was no binding authority already in existence, this judgment affirms the generally accepted view of section 213 and will be welcome news for victims of fraud. In particular, it will serve as a powerful tool for liquidators seeking to gather contributions to the assets of the company being liquidated for onwards distribution to creditors and shareholders.
  EWCA Civ 112
 Bilta UK Ltd v NatWest Markets Plc  EWHC 546 (Ch)
  EWCA Civ 693
  3 IR 463