Bilta (UK) Ltd (in liquidation) v. Tradition Financial Services Ltd - Case Update

The UK Supreme Court has provided clarity on who can be held liable for fraudulent trading under section 213 of the Insolvency Act 1986, ruling that the section is not confined to insiders of the company and can be applied to require third parties to make contributions to the company’s assets if they were knowingly parties to the company's fraudulent trading.

Bilta and four other companies were involved in a missing trader intra-community fraud, a complex VAT fraud involving carbon credit trading under the EU Emissions Trading Scheme, also known as EU Allowances (EUAs). These companies are now all in liquidation, with HMRC as their principal creditor.

The companies and their liquidators sued Tradition Financial Services Ltd, a brokerage that had facilitated EUA trades. They claimed Tradition dishonestly assisted the companies’ directors in breaching their fiduciary duty, and also alleged liability under section 213 of the Insolvency Act 1986, which targets fraudulent trading.

By the time the matter reached the UK Supreme Court, two issues were outstanding:

1. whether section 213 applies only to directors and other “insiders” of the companies, or also to third parties; and

2. whether claims made by two of the companies which had been dissolved but were later restored to the register were time-barred. This issue raised a question of how the test in section 32(1) of the Limitation Act 1980 (whether the claimant could with reasonable diligence have discovered the fraud, concealment or mistake) operates during the period of the company's dissolution.

On the first issue, the Court unanimously rejected Tradition’s argument that liability under section 213 should be limited to directors or insiders controlling the company. Interpreting the statute purposively and contextually, the Court found that the phrase “any persons who were knowingly parties to the carrying on of the business” is broad enough to include third parties who knowingly participated in fraudulent business activities, even if they had no managerial control. The Court noted that the purpose of the provision is to deter and impose civil liability on all dishonest participants in fraudulent business activity, not just insiders. Tradition, under the assumed facts, knowingly enabled and facilitated trades with shell companies involved in fraud and failed to conduct adequate due diligence. Therefore, the Supreme Court affirmed that section 213 can apply to outsiders who assist in the fraudulent trading of a company.

On the second issue, the question was whether the limitation period under section 32 of the Limitation Act 1980 was postponed due to the fraud not being discoverable until after restoration. The Court stated that the burden falls upon the party seeking the benefit of the postponement of the running of time under section 32 (the companies) to demonstrate that the fraud could not reasonably have been discovered before November 2011 (six years before the claim was filed). Although the companies were dissolved at the relevant time, section 1032 of the Companies Act 2006, which deems restored companies to have continued in existence, does not mean they had no capacity to discover fraud.

Because the companies failed to provide evidence that they could not have discovered the fraud with reasonable diligence, the dishonest assistance claims were found to be time-barred.

Read the decision HERE.

Professionals involved:

• Christopher Parker KC and Andrew Westwood KC of Maitland Chambers (instructed by Enyo Law) for Bilta (UK) Ltd et al.

• David Scorey KC of Essex Court Chambers and Laurence Emmett KC of One Essex Court (Instructed by Greenberg Traurig) for Tradition Financial Services Ltd