The Supreme Court has handed down a decision in Bilta (UK) Ltd (in liquidation) and others v Tradition Financial Services Ltd [2025] UKSC 18, which clarifies the parties who are liable to contribute to a company’s insolvency, in the event that the company had the intent to defraud its creditors.
The decision confirms that it is not just the management and directors of the insolvent company that may need to contribute. But contracting parties, who were aware of the fraudulent activities of the company, may also have to contribute towards the company’s assets.
Questions before the Supreme Court
The case raised two questions before the Supreme Court:
(A) Are the people who were knowingly parties to the companies fraudulent trading confined to those involved in the management or control of the fraudulent business?
The answer to this question interprets section 213 of the Insolvency Act 1986 and dictates who is required to make contributions to the company’s liquidation.
(B) Are the claims in dishonest assistance brought by two of the claimant companies time-barred?
The companies had been dissolved and later restored to the register. The Supreme Court considered how the test in section 32(1) of the Limitation Act 1980 operates during the period of the company’s dissolution, and how this interplayed with the deemed existence rule in section 1032 of the Companies Act 2006.
The Supreme Court’s decision
On (A), the Supreme Court found that Tradition Financial Services Ltd (Tradition) was within the scope of s.213 of the Insolvency Act. That means that the scope of s.213 extends beyond the directors or management of the fraudulent business. It captures a party who trades with the fraudulent business, but only if that party knowingly participated in the fraudulent scheme.
On (B), the dishonest assistance claim was time-barred. The deemed existence of Nathanael and Inline during the period in which they were in dissolution did not necessitate assuming that they lacked directors or other officers at the time.
Background facts
The claimant companies in the case were five insolvent companies: Bilta (UK) Ltd, Weston Trading UK Ltd, Nathanael Eurl Ltd (“Nathanael”), Vehement Solutions Ltd, and Inline Trading Ltd (“Inline”). The companies were vehicles in a missing trader intra-community fraud (MTIC fraud) in the summer of 2009 involving spot trading in EU carbon credits. VAT payments that they received were paid to third parties, rather than to the tax authorities, as they should have been.
The five companies were left with enormous VAT liabilities owing to HMRC and HMRC are the principal creditors in their insolvencies.
Tradition was a broker and introduced counterparties for the trades. Tradition negotiated the terms on which the carbon credits were bought and sold.
In November 2017, the companies and their respective liquidators issued a claim form against Tradition. The claims were that:
- Tradition had dishonestly assisted their directors in the breach of their fiduciary duties to the claimant companies.
- Claims by the liquidators under s.213 alleging that Tradition had knowingly participated in the fraudulent trading of the businesses of the claimant companies.
Tradition has denied wrongdoing, but the case against it went ahead on the assumed facts that its brokers knew the deals were fraudulent and proceeded regardless.
At first instance, the High Court held that Tradition was within scope of s.213 but the dishonest assistance claims were out of time. The Court of Appeal agreed. Read our briefing on the Court of Appeal decision here.
Both sides appealed to the Supreme Court.
The law
S.213 of the Insolvency Act 1986 provides, under the heading “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 above-mentioned are to be liable to make such contributions (if any) to the company’s assets as the court thinks proper.” (Emphasis added)
Scope of the words – the narrow interpretation
The main crux of this appeal turns on the scope of the words: “any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned.”
Tradition’s argument was that the phrase is restricted to persons exercising management or control over the company in question. They say that the plan to defraud HMRC was hatched by the directors of the companies and it was not alleged that Tradition was a party to that conspiracy. It should therefore not be treated as a party to the carrying on of the fraudulent business of the companies.
A wider interpretation is more appropriate
The Supreme Court instead preferred a wider interpretation, which they described as “the proposition that the provision extends to those who dishonestly assisted or contributed to the carrying on by the company of any business which has been carried on with intent to defraud creditors.”
The “wide interpretation” is that section 213 applies to anyone who dishonestly assists in or contributes to the fraudulent breach of duty committed or procured by those controlling the company.
The Supreme Court held that the natural meaning of the statutory words is wide enough to cover persons who were dealing with the company, if they knowingly were parties to the fraudulent business activities in which the company was engaged.
Those persons could include those who transacted with the company in the knowledge that, by those transactions, the company was carrying on its business for a fraudulent purpose.
Does this decision expand administrators’ powers?
The Supreme Court’s interpretation is not a stark departure from previous authorities, and instead continues a trend in expanding the range of persons targeted by the fraudulent trading provision. That trend is seen in the legislative history, and in the case law.
For example, in In re Bank of Credit and Commerce International SA [2002] BCC 407 Neuberger J stated that “the ambit of section 213(2) is not limited to those who perform a managerial or controlling role within the company concerned.”
In Morris v State Bank of India [2003] EWHC 1868 (Ch); [2003] BCC 735, the principal question was whether the State Bank of India had knowledge that the transactions in which it was participating were intended to defraud the creditors of BCCI. Patten J held that all that was required was that the counterparty knowingly participated in the carrying on of the business with intent to defraud.
In Morris v Bank of India [2004] EWHC 528 (Ch) it was common ground that a counterparty to a transaction with BCCI in this context could be within the ambit of s. 213(2).
These authorities are explored in more detail in the judgment.
Should businesses be cautious about who they contract with?
Directors reading this judgment may feel cause for concern about who their business contracts with. This is a legitimate concern, given that counterparties can be on the hook for defrauding creditors, and made to contribute towards the insolvent company’s liquidation.
However, this is only the case where the counterparty has the requisite knowledge of, including wilful blindness to, the fraudulent activity in the conduct of the company’s business.
The wording of s.213 indicates that a person can only be liable if they were actively involved in the carrying on of the fraudulent business, and not merely party to a one-off fraudulent transaction. Companies should worry if they are routinely transacting with a company that they know is carrying on a fraudulent business.
In this case, some of the assumed facts that arguably brought Tradition into the ambit of s.213 include:
- They knew that Inline and Nathanael were unlikely to be legitimate trading concerns, but introduced them to a buyer of the trades anyway.
- Tradition knew that Inline and Nathanael’s true purpose was to amass VAT.
- Tradition did not perform any genuine “know your client” inquiries of the suppliers.
- Tradition knew, or did not care whether, the trading was linked to financial crime and in particular VAT fraud.
- Despite its suspicions Tradition failed to make inquiries as to whether its clients’ trading was legitimate and not connected with criminal activity.
One helpful takeaway for businesses is the reminder for the need for continual due diligence and KYC on suppliers and contracting parties. In any scenario, businesses should be cautious with whom they contract. This decision gives one more reason for high standards of scrutiny.
