A recent Supreme Court decision will be encouraging for liquidators trying to recover money for companies through claims in fraudulent trading. It confirms that not just directors or senior managers, but other people involved in dishonest company activities (including third parties), can be held responsible under UK law.
What is Section 213 of the Insolvency Act?
This part of the law allows liquidators to take legal action if there are grounds to argue that the company was involved in fraudulent trading—in other words, doing business with the intention of defrauding creditors or others, or if there has been some other fraudulent purposes. To bring a claim, the liquidator has to prove that the target of the claim knew or ought to have known of the fraud. This doesn’t mean they had to know every detail—turning a “blind eye” to suspicious activity can still count.
The case in question
The recent Supreme Court decision in Bilta (UK) Ltd (in liquidation) and others (Respondents) v Tradition Financial Services Ltd (Appellant); Nathanael Eurl Ltd (in liquidation) and another (Appellants) v Tradition Financial Services Ltd (Respondent) delved into some important points when it comes to fraudulent trading claims.
The case involved a company called Tradition Financial Services Limited (TFS). TFS had worked as a broker, in a series of deals involving EU carbon credits. The companies they were working with turned out to be involved in a kind of tax scam known as “missing trader fraud,” where VAT is stolen through complex cross-border trading.
The liquidators of the failed companies claimed that TFS knowingly took part in the fraudulent business and make a contribution to the insolvent estate. Although the parties settled some parts of the case, the courts still had to decide whether a company like TFS could even be targeted under Section 213.
TFS had played a part in a number of ways –this included being involved as a broker/ introducer in respect of several deals which the claim related to – it was an assumed fact for the purposes of the appeal that TFS would have known that the trades in which it was involved were suspicious and that some of the entities involved were likely to be fronts for illegitimate activity.
TFS argued that only those in charge of the relevant company, like directors or managers, should fall within the scope of s213. The High Court found that, in principle, TFS could fall within the scope of s213. The Court of Appeal agreed and so TFS appealed all the way to the Supreme Court.
What did the Supreme Court say?
The Supreme Court rejected TFS’s argument. Here’s what they said:
- The law isn’t limited to company bosses. There is nothing within the language of s213 that indicated that its scope was restricted to directors or managers – the wording was clear that it applied to persons involved in the carrying on of the fraudulent business.
- That includes people outside of the company. If someone regularly does business with a company they know or ought to know is acting dishonestly, they could be held responsible too.
- This interpretation fits with what Parliament intended. The Court looked at how the law was written and its historical context and said it clearly covered a wide range of people; and
- Helping or taking part in a fraud knowingly is enough. Even if someone wasn’t calling the shots, they can still be caught by the law if they helped and knew what was going on.
Our Comment
This ruling serves as a reminder that the net for liquidators trying to recover money lost through fraud/dishonest conduct can often be wide. It shows that that even third parties, like brokers or consultants, can be investigated if they were knowingly involved in dishonest company dealings. That’s important, because fraudulent schemes often involve many different players.
If you think this might apply to your situation, or if you’re worried about being affected by a similar issue, our experienced litigation team is here to help. We can provide expert advice tailored to your case.
How can we help?
For further information about issues raised in this article, please contact a member of our Commercial Disputes team.
