Bilta (UK) Ltd ((in Liquidation)) and Others v Tradition Financial Services Ltd

The power of the court to require persons who were knowingly parties to a company's fraudulent trading to make contributions to the company's assets, under section 213 of the Insolvency Act 1986, was not restricted to those who were directors of or involved in the management or control of the company, but extended to any party who transacted with the company knowing it was involved in fraudulent trading.

Where a company had been dissolved and then restored to the register, the fact that the company was deemed to have always continued in existence, did not mean that the company was also deemed to have had no competent directors or liquidators during that period, so that it could not with reasonable diligence have discovered a fraud during the period of actual dissolution and thus stop the relevant limitation period running. Whether the company was to be assumed to have had officers of some kind was a question of evidence and to be decided on the balance of probabilities.

The Supreme Court so held in dismissing the appeals of (i) the defendant, Tradition Financial Services Ltd, and (ii) the third claimant, Nathanael Eurl Ltd, and the fifth claimant, Inline Trading Ltd, from a decision of the Court of Appeal (Lord Justice Lewison, Lord Justice Stuart-Smith and Lady Justice Falk)([2023] Ch 343) which upheld the decision of Mr Justice Marcus Smith([2022] BCC 833) in proceedings brought by Bilta (UK) Ltd and four other companies and their respective liquidators against the defendant for dishonestly assisting the directors of the claimant companies to engage in missing trader intracommunity VAT fraud through the trading of carbon credits under the European Union Emissions Trading Scheme.

David Scorey KC and Laurence Emmett KC for the defendant; Christopher Parker KC and Andrew Westwood KC for the claimants.

LORD HODGE and LORD BRIGGS, with whom the other members of the court agreed, said that appeals raised two questions. The first involved the interpretation of section 213 of the Insolvency Act 1986 and asked whether the persons who might be required to make contributions to a company's assets because they were knowingly parties to the company's fraudulent trading were confined to those involved in the management or control of the fraudulent business.

The second was whether the claims of two of the claimant companies, which had been dissolved and later restored to the companies register, were timebarred. It 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) operated during the period of a company's dissolution.

As to the first issue, subsection 213(1) addressed the business activities of the company and the purpose of those activities. If the persons who carried on the company's business did so with intent to defraud creditors or for any fraudulent purpose, subsection (2) came into effect.

Subsection (2) identified the persons who might incur the liability to make a contribution to the company's assets as the court thought proper. They were "any persons who were knowingly parties to the carrying on of the business" of the company for any fraudulent purpose.

There was nothing in the language of section 213(2) which restricted the scope of the provision to directors and other "insiders" who were directing or managing the business of the company.

The natural meaning of the statutory words was wide enough to cover not only such "insiders" but also persons who were dealing with the company if they knowingly were parties to the fraudulent business activities in which the company was engaged. Such 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.

Turning to the statutory context, section 213 was located in Part IV of Chapter X of the 1986 Act, which was concerned with malpractice before and during the liquidation of a registered company. It was striking how the language used in the surrounding sections to identify the persons who were their targets differed from that of section 213(2).

In both section 212 and section 214 those persons targeted by the provisions were closely defined. In section 212 the person had to have been concerned in the promotion, formation or management of the insolvent company, while in section 214 the targets were directors and shadow directors. They were all company insiders.

Further, the contrast between subsection 216(3)(b) and subsection 216(3)(c) showed that parliament identified different types of involvement in a business, distinguishing between the management of a company and taking part in the carrying on of a business.

There was nothing in the statutory context or the legislative history which militated against giving the critical statutory words their natural meaning.

The correct interpretation of section 213(2) of the 1986 Act was that third parties or outsiders who participated in, facilitated or assisted fraudulent transactions by a company when they knew that the company's business was being carried on for any fraudulent purpose were within the ambit of that section.

That conclusion on the first issue, that the liquidators of the claimants had valid claims against the defendant under section 213, meant that nothing of any commercial consequence now turned on the outcome of the second issue. Nonetheless, because the issue had been fully argued and there was no other authority directly in point, it ought to be addressed and decided because of its more general public importance.

For the critical periods before the cut-off date for limitation purposes, both the third and fifth claimant companies had ceased to exist. Nonetheless, the effect of section 1032(1) of the 1986 Act was that upon restoration to the register they were both deemed never to have been struck off, but rather to have continued in existence.

While there was plenty of authority upon each of section 32 of the Limitation Act 1980 and section 1032 of the 1986 Act, viewed separately, there was not much about their interaction where, as in the present case, it was the previously struck-off company which sought to surmount limitation difficulties arising during the period when it was dissolved, so as to be able to bring proceedings against a third party.

Under section 1032(1) of the 1986 Act all that was to be deemed to be true about the restored company was that it continued in existence during the period of its dissolution, no more and no less. The question whether it should be assumed during that period to have had competent directors or liquidators was to be answered by other means.

Having such officers, or not having them, were not consequences which inevitably flowed from it being deemed to have continued to exist.

Whether the company was to be assumed to have had officers of some kind, and if so what type and during what periods was to be answered on the balance of probabilities as a question of fact (counterfactual not historical) by reference to such evidence as was adduced by the opposing parties, and paying appropriate regard to the burden of proof if evidence was lacking.

The question of what would have happened if the company had not been dissolved was not to be treated as a matter of speculation or assertion. It was a question of evidence, to be decided on the balance of probabilities. It was a question the answer to which section 1032 offered no assistance, either by deeming or otherwise.

A conclusion that section 1032(1) did not require it to be deemed that a restored company had no officers during the period of its former dissolution was also to be derived from a purposive construction of section 32 of the 1980 Act.

If every restored company wishing to pursue a claim in fraud was to be deemed to have had no competent officers, and therefore to have been unable to discover the relevant fraud while dissolved, that would give restored companies carte blanche to rely upon the postponement of the running of time, because they could always demonstrate that they could not have discovered the fraud by the use of reasonable diligence.

That would run counter to the general purpose of section 32, namely to postpone the running of time in favour of prima facie deserving claimants, rather than those which (in most cases) only got struck off and dissolved through their own default.

The result was that the burden lay upon the two companies to show that they could not with reasonable diligence have discovered the relevant fraud and there was no answer to the conclusion that they had failed to discharge that burden.