Tradition Financial Services Ltd v Bilta (UK) Ltd & Ors

Liability for fraudulent trading under section 213 of the Insolvency Act 1986 is not confined to persons who manage or control the insolvent company. An outsider may be liable where, with the requisite knowledge, the outsider actively participates in the fraudulent business by furthering or facilitating it. Whether the outsider’s involvement is sufficient is a question of fact and degree.

Restoration of a dissolved company under section 1032 does not deem former directors, ordinarily competent directors or an absence of directors to have continued throughout the dissolution. The statutory fiction extends to consequences that inevitably follow from deemed continued existence, not consequences that are merely possible or probable.

Five companies affected by VAT missing-trader fraud alleged dishonest assistance against Tradition Financial Services Ltd. Their liquidators also claimed that the company had knowingly participated in fraudulent trading under section 213 of the Insolvency Act 1986. Following a partial settlement, the High Court determined limitation and section 213 issues.

Marcus Smith J held that the dishonest-assistance claims were statute-barred but that the pleaded conduct fell within section 213: [2022] EWHC 723 (Ch). He subsequently determined costs in [2022] EWHC 1431 (Ch). Tradition appealed on the scope of section 213. The claimants challenged the limitation decision concerning two companies which had been dissolved and restored, and the pre-settlement costs order.

The principal questions were whether section 213 is confined to persons exercising managerial or controlling functions, how section 1032 of the Companies Act 2006 affects limitation during dissolution, and whether the costs order exceeded the judge’s discretion.

1. All appeals dismissed. Section 213 of the Insolvency Act 1986 is not confined to persons exercising managerial or controlling functions within the fraudulent company. Its compensatory purpose and legislative development support liability extending to outsiders who knowingly participate in the fraudulent business. Active participation may consist of furthering or facilitating that business, although the court did not define the provision’s outer limits. Whether a particular outsider was sufficiently involved remains a question of fact and degree.

2. The statutory precondition is that the company’s business, or a discrete part of it taken as a whole, was carried on fraudulently. Participation in an incidental fraud committed during an otherwise legitimate business is insufficient. Mere knowledge or concurrence is also insufficient; positive participation is required.

3. The severance of criminal and civil fraudulent-trading provisions permits the civil provision to have a wider scope. Civil liability under section 213 is not reduced by criminal authorities concerning managerial involvement. A person without a managerial role may in any event incur criminal liability for aiding and abetting fraudulent trading.

4. Section 1032(1) of the Companies Act 2006 deems a restored company to have continued in existence. The fiction extends only to inevitable consequences of that continued existence. It does not require an assumption that directors in office at dissolution remained throughout the period, that ordinarily competent directors existed, or that there were no directors. Those matters are possible factual consequences, not inevitable legal consequences.

5. Time runs against a dissolved company as it does against an extant company. Relief under section 1032(3) depends on evidence that dissolution caused the failure to pursue the claim, and cannot place a person in a better position than if dissolution had not occurred. The companies failed to prove under section 32 of the Limitation Act 1980 that reasonable diligence would not have revealed the fraud.

6. The pre-settlement costs order remained within the judge’s broad discretion. A substantial settlement payment does not necessarily make its recipient the successful party, particularly where success was partial, several claims failed completely and substantial issues were determined for the payer. The order was not manifestly unjust.

1. Court of Appeal (Civil Division): Dismissed Tradition’s appeal on section 213, the claimants’ appeal concerning restoration and limitation, and the claimants’ costs appeal: [2023] EWCA Civ 112.
2. High Court, Chancery Division: Marcus Smith J held that the dishonest-assistance claims were statute-barred but that the pleaded conduct fell within section 213 of the Insolvency Act 1986: [2022] EWHC 723 (Ch); [2022] BCC 833. The judge subsequently determined costs: [2022] EWHC 1431 (Ch).