UK Supreme Court Clarifies Scope of Fraudulent Trading Liability
The recent Supreme Court decision in Bilta (UK) Ltd (in liquidation) & others v Tradition Financial Services Ltd, provides important guidance on those who may be caught within the scope of fraudulent trading under section 213 of the Insolvency Act 1986.
Meaning of “any person” under section 213 Insolvency Act 1986
Section 213 enables the English court to order that “any person” that was party to the fraudulent business of a company being wound up to be held liable to contribute to the company’s assets: if in the course of the winding up of the 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 UK Supreme Court has held that the people to whom the section applies – i.e. “any persons who were knowingly parties to the carrying on of the business” – is not limited to people who were actually involved in the management or control of relevant companies. Giving the words their natural meaning, the section extends to anyone who knowingly participated in the company’s fraudulent business, including external parties:
“…third parties/outsiders who participate in, facilitate or assist fraudulent transactions by a company when they know that the company’s business is being carried on for any fraudulent purpose are within the ambit of [fraudulent trading]”
The fundamental reason being that there is nothing in the statute to suggest that the words should be given a restrictive, rather than their natural meaning.
The Supreme Court also made an important finding on limitation periods where a company is restored to the register. The claimant companies had been dissolved and restored to the register, such that by the time proceedings were issued the usual six-year limitation period had expired. Statute provides that a company in this scenario is “deemed to have continued in existence as if it had not been dissolved or struck off the register”.
It was argued that, while the companies were dissolved, there were no directors or other officers who could have discovered the wrong-doing and brought the claim, which on its face was now time barred. However, the Supreme Court held that a company’s deemed existence during a period of dissolution does not carry with it an assumption as to what officers would have been in place in the counterfactual scenario, and whether the fraud could have been discovered during that period. It was for the companies to submit evidence as to whether they should be treated as having had no directors who could have discovered the fraud.
As a practical takeaway, parties considering restoring a company that has been dissolved should evaluate the merits and associated limitation periods of potential claims sooner rather than later.
