I wanted to draw your attention to a very helpful re-statement (as it turns out) of the law on fraudulent trading (section 213 of the Insolvency Act, 1986) by the High Court in England, handed down on 31st March. The case revolved around the voluminous and very long-running litigation following the liquidation of Bilta (UK) Limited (“Bilta”) relating to its involvement in missing trader intra-community fraud (“MTIC fraud”). The liquidators of Bilta have been on a mission (presumably encouraged and supported by HMRC) to recover as much of the ill-gotten gains as possible and that has now spread into seeking to recover from third parties:
“who were knowingly parties to the carrying on of the business” (section 213(2))
of a company, which:
“has been carried on with intent to defraud creditors of the company or creditors of any other person, or for any fraudulent purpose” (section 213(1))
The main issue for Smith J to decide related to the English law on limitation, which does not concern us. It is the secondary issue of the applicability of section 213 to persons who were not exercising management or control of the company’s business that is important. In this case, the liquidators of Bilta were pursuing redress from brokers that were involved in the trading of the carbon credits that were the basis for the MTIC fraud.
The argument put in this case by the Defendant was that the “parties to the carrying on of the business” had to be either directors (or shadow directors) or the management of the company. The assertion seems to have been that only those carrying on the business could be responsible and, it would seem, the “knowingly” aspect was to allow non-participating directors or managers to avoid responsibility.
In analysing previous decisions, and in reaching his own conclusion on the facts, the Judge decided that the current, wider interpretation was to be preferred and that third parties were included in the ambit of a section 213 claim.
To date, all my section 213 claims have been against directors or shadow directors but, it seems to me, that the terms of section 213 are very clear:
(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.
As a result, the analysis of other decisions and the effect that they had on the circumstances of this case seems surprising. Section 213(1) does not limit the fraudulent activity to that of directors or management; although, of course, carrying on the business would normally be attributable to directors or managers. As a result, the wider phrase in section 213(2) of “any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned” must include third parties, separate from and additional to those “within” the company who were involved in that activity.
As you will be aware, section 213 claims are not that common. Section 214 (wrongful trading) claims are much more common, not least because they are easier to prove (the burden of proof for “fraud” is higher than that for “wrongful”). The drawback is, of course, that section 214 relates to “a person who is or has been a director of the company” and so third parties cannot be caught within its ambit.
Given the apparently enormous amount of Covid-related fraud, it seems that section 213 could be dusted off to deal with third parties who orchestrated the formation of companies for the purposes of fraudulent applications for loans. Just because those people may not have been directors (or shadow directors) may not allow them to avoid liability.