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Fraudulent Trading: Is Liability Limited to Managers in a Company?

Author: Nicola Sharp  17 February 2023
3 min read

Nicola Sharp considers the recent appeal decision in Tradition Financial Services Ltd v Bilta (UK) Ltd [2023] EWCA Civ, and the ways in which it affects the definition of fraudulent trading

In Tradition Financial Services Ltd v Bilta (UK) Ltd [2023}, the five claimant companies all became insolvent due to sums they owed to HMRC in respect of VAT. They were involved in a missing trader intra-community (MTIC) fraud, which exploits the fact that imports from one EU country into another are VAT-free. In these proceedings, the MTIC fraud involved spot trading in carbon credits under the EU Emissions Trading Scheme. 

In the appeal, it was clear that the claimant companies who orchestrated the MTIC fraud were carrying on business with fraudulent intent. The question to be considered was: Who else can be held liable? 

Fraudulent trading – how wide is the definition? 

It is helpful to begin with a reminder of the exact provision relating to fraudulent trading, as set out in section 213 of the Insolvency Act 1986, which provides:   

  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. 

The issue in the appeal was the scope of the words “any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned”.  

Tradition Financial Services Ltd (TFS) argued that the phrase was restricted to persons exercising management or control over the company in question. The judge at first instance rejected that argument, and TFS resurrected the argument on appeal. 

The claimants’ position was that as a matter of ordinary English language, a person who knew that the business he was dealing with was fraudulent was a "party to" the fraudulent carrying on of that business. 

The purpose of the law on fraudulent trading 

In order to analyse the merits of the conflicting definitions, Lord Justice Lewison explored in detail the legislative history and the case law that has led to the current wording in section 213 Insolvency Act 1986.  

Reviewing the evolution of the law gave context to the purpose for which the law was created. He adopted the “modern approach to statutory construction”, which he said “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” (citing Barclays Mercantile Business Finance Ltd v Mawson [2004] UKHL 51

TFS’s argument was that the law was designed to deal with a case where the company’s business was directed, controlled or managed by a criminal mastermind who was the brains behind the fraud and where the directors were merely dupes.  

The Court considered that the purpose of section 213 is to compensate those who have suffered loss as a result of fraudulent trading. It is to make those who have been parties to fraudulent trading liable to compensate the creditors of the fraudulent company (citing Bank of India v Morris [2005] EWCA Civ 693)  

Piercing the veil 

Lord Justice Lewison, delivering the lead judgment, said that he was prepared to accept that originally, this form of liability was seen as principally concerned with removing the protection of corporate personality. It was a form of “veil-piercing” that made company directors liable for the company’s own debts.  

But over the course of time, there has been deliberate widening of the scope of the section. The purpose of section 213, as it has evolved, is not limited to veil-piercing. It is to secure compensation for those who have suffered loss as a result of the fraudulent trading. 

Conclusion 

Given the increasing prevalence of cross-border fraud, a wide interpretation of section 213 is necessary to protect consumers and businesses from fraud.  

The appeal to restrict the scope of fraudulent trading to “persons exercising management or control over the company in question” was dismissed. 

Nicola Sharp C 09983

Nicola Sharp

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Nicola is known for her fraud, civil recovery, arbitration and business crime expertise, her experience of leading the largest financial disputes and multinational investigations and her skills in devising preventative measures and conducting internal investigations for corporates.

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