On 10 February 2023, the Court of Appeal handed down judgment clarifying, among other issues, the scope of the fraudulent trading provisions under s213 of the Insolvency Act 1986 (s213).
The issue before the Court concerned the class of persons liable where the business of a company in liquidation has been carried on for fraudulent purposes. The Court held that the scope of the words “any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned” could cover those who do not have a controlling or managerial function within the company.
The Court also made findings on s1032 of the Companies Act 2006 and costs, which are not discussed further in this article.
The Appellant’s appeal on s213 was dismissed. Enyo Law LLP acted for the Respondents to the s213 Appeal.
In 2015, the claimants (Bilta (UK) Ltd and others) issued claims against various defendants, including Deutsche Bank and SVS Securities plc (SVS) in relation to missing trader intra-community fraud (MTIC Fraud) which took place in the summer of 2009. The Court of Appeal was not concerned with these claims.
On 8 November 2017, the claimants issued a separate claim form against Tradition Financial Services Ltd (TFS). The claims were (i) claims by the companies themselves alleging TFS’s dishonest assistance in the breach of fiduciary duty by the directors of the claimants; and (ii) claims by the liquidators alleging participation by TFS in the fraudulent trading of the businesses of the claimant companies pursuant to s213.
The parties entered a partial settlement agreement, the terms of which are confidential. As a consequence of the settlement agreement, there were two issues for the judge at first instance to decide: (i) whether, as TFS alleged, the claims in dishonest assistance were statute barred; and (ii) whether TFS was within the scope of section 213 of the Insolvency Act 1986.
As regards the second (the issue with which this article is concerned), the judge held that TFS was within the scope of section 213. The claims brought by the liquidators of two of the claimant companies therefore succeeded under that section.
The judge did not make (and was not asked to make) findings of fact about TFS’s precise role. The question of whether TFS was within the scope of s213 was determined by reference to the “facts pleaded” by the claimants, even though many of those alleged facts were disputed by TFS.
Scope of s213
The question before the Court of Appeal concerned the scope of s213, which provides as follows:
“(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 contribu-tions (if any) to the company's assets as the court thinks proper.”
The issue on 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”.
TFS submitted that that phrase was limited to persons exercising management or control over the company in question, on the basis that, to be party to the carrying on of a business, a person must take part in its carrying on. That, it argued, is how the word “party” is used in other legal contexts. A party to a contract, for instance, is someone with whom the contract is made, and who has legal rights and obligations under it. A party to legal proceedings is a person who has formally been joined in those proceedings.
The liquidators disputed TFS’s interpretation, instead arguing that as a matter of ordinary English a person who knows that the business he is dealing with is fraudulent is a party to the fraudulent carrying on of that business. The relevant sense of the phrase “party to” is that given by the Oxford English Dictionary (online edition): “With to (formerly also in): a person who is concerned in an action or affair; a participant; an accessory.”
The Court of Appeal rejected TFS’s submission and dismissed its appeal.
In considering TFS’s appeal, the Court was taken to the legislative history of s213 and previous authority. However, the Court expressed its judgment that there is no authority binding on it that holds the wider interpretation of s213 is correct and therefore was free to consider the question. The Court’s reasoning included the following points of interest:
- The Court confirmed that the modern approach to statutory construction 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: Barclays Mercantile Business Finance Ltd v Mawson  UKHL 51,  1 AC 684 at .
- The purpose of s213 is the compensation of 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: Bank of India v Morris at  and .
- As regards the ordinary language used in the statutory provision, the Court considered that the phrase “party to” is capable of bearing either of the two meanings for which the parties respectively contended (as set out above). But, the Court held, even on TFS’s argument it does not follow that to take part in the carrying on of a business one must have a controlling or managerial function in it.
- The Court found that the wider interpretation was more consonant with the purpose of s213, as well as the line of authorities that the Court examined.
- It is a precondition of liability that the business has been carried on with fraudulent intent; incidental frauds committed in the course of a business are not enough. In this case it was clear that the claimant companies which orchestrated the MTIC fraud were carrying on business with fraudulent intent; the question was who else could be made liable. In the Court's judgment, this extended to those who participated in the fraud.
- The Court rejected TFS’s argument that if the defendant was carrying on his own business, it could not be said to be party to the carrying on of a different business. The extent to which a counterparty must be involved in the carrying on of the fraudulent business may depend upon the facts. The Court gave the example of a manufacturer which regularly supplies counterfeit designer clothes to a retailing company, knowing that the retailer will pass them off as genuine. In such circumstances, the Court stated, it would be no misuse of language to describe the manufacturer as “party to the carrying on” of a fraudulent business, even though he exercises no managerial or controlling role within the retailing company; and the manufacturer may have other business activities that are not fraudulent. The manufacturer knows about the retailer’s fraudulent business and is actively participating in, it in the sense of furthering and facilitating it.
- Whilst at the statutory birth of this form of liability it was seen as principally concerned with removing the protection of corporate personality (in other words a form of “veil-piercing”), there has since been a deliberate widening of the scope of the section, and the substitution of a liability to make contribution to the company’s assets in place of a liability for the company’s own debts has greatly weakened that link. The purpose of section 213, as it has evolved, is not limited to veil-piercing but to secure compensation for those who have suffered loss as a result of the fraudulent trading.
The Court stressed that nothing in its judgment should be taken as setting the outer limits of the scope of s213. The only question before the Court was whether a person cannot fall within the scope of s213 unless he has a controlling or managerial function within the company.
Whilst cases will continue to turn on the specific facts, the Court’s confirmation of the wider application of s213 is welcome news for liquidators seeking redress due to the carrying on of fraudulent business.