The Supreme Court was faced with the question of whether a third party involved in a fraud case can be liable for a company’s liquidation process, even if it was not directly a formal part of its management.
Background:
Five companies, Bilta, Weston Trading UK Ltd., Nathanael Eurl Ltd., Vehement Solutions Ltd., and Inline Trading Ltd., became insolvent after acquiring huge tax liabilities as a consequence of engaging in a form of VAT fraud known as ‘missing trader intra-community fraud’, or MTICF. These companies were either defaulters or were involved in deals that led to the default in payments. The fraud was carried out via the trading of EU carbon credits. VAT payments received were paid away to third parties when they should have been passed on to the tax authorities.
In the course of their liquidation, the insolvent companies and their joint liquidators began proceedings against Tradition Financial Services Ltd (Tradition). They argued that Tradition (i) knowingly or suspiciously participated in the fraudulent scheme and should, therefore, be required to contribute to the liquidation under Section 213 of the Insolvency Act (IA) 1986, and further (ii) was liable for having dishonestly assisted the directors of the fraudulent companies in breaching their duties as directors by engaging in the fraud.
The High Court ruled that the dishonest assistance claims were time-barred, as were the Section 213 claims for three of the claimant companies (Bilta, Weston, and Vehement), which were subsequently not appealed. However, the High Court found that Tradition could, in principle, fall within the scope of Section 213. This meant the Section 213 claims for the remaining two companies (Nathanael and Inline), which were not time-barred, succeeded. Tradition unsuccessfully appealed to the CoA.
Decision:
The Supreme Court unanimously dismisses each appeal. Applying ordinary principles of statutory interpretation, Tradition was within the scope of Section 213 of the IA 1986. The Court noted that the wording of Section 213(2) does not limit liability to directors or managers but can extend to third parties who knowingly participate in the conduct of a company's business for a fraudulent purpose. The Court noted that “As to the statutory context, other sections of Part IV, Chapter X of the Insolvency Act 1986, use strikingly different language to identify their targets.” This interpretation is also consistent with previous civil and criminal case law.
The Court held that the dishonest assistance claims remained time-barred. While Section 32 of the Limitation Act 1980 can postpone the limitation period in cases of undiscovered fraud, the burden of proof lies with the claimant companies to show that they could not reasonably have discovered the fraud within the standard six-year period. The Court noted that “Nobody suggests that Nathanael or Inline had discovered the fraud by November 2011 (i.e., six years before the claim was brought). Once abandoned by their directors, neither company had officers with the capacity to uncover the fraud until the liquidators were appointed. The question is, therefore, whether the companies could reasonably have discovered the fraud, or are deemed to have been able to do so during the period of their dissolution.” As Nathanael and Inline provided no evidence to demonstrate they could not reasonably have discovered the fraud during their periods of dissolution, they failed to discharge the burden of proof, and their dishonest assistance claims remained time-barred.
Section 1032(1) of the Companies Act 2006, concerning the restoration of a dissolved company, deems the company to have continued in existence but does not automatically assume the existence of directors or officers during the dissolution period.
Implications:
A significant takeaway from the Supreme Court's ruling is its firm stance on the scope of Section 213 of the Insolvency Act 1986. The Court has unequivocally confirmed that liability for fraudulent trading is not limited solely to a company's directors or managers. This is a welcome clarification that broadens the potential avenues for recovery in cases of serious corporate fraud.
This judgement makes it clear that third parties, including brokers and other entities routinely transacting with a company, can be held liable under Section 213 if they are found to have knowingly participated in the carrying on of the company's business with the intent to defraud creditors or for any other fraudulent purpose. This means that those who facilitate or assist fraudulent transactions, with the requisite knowledge, can face financial consequences alongside the company's own officers.
While the Supreme Court offered a broader interpretation of fraudulent trading, it upheld a stricter approach regarding the limitation period for dishonest assistance claims, especially concerning those companies that have been dissolved and subsequently restored to the register. The Court reaffirmed the established six-year limitation period for dishonest assistance claims and clarified with whom the burden of proof lies.