Geoffrey Wayne Bouchier & Anor v Gary Booth & Anor

Fraudulent trading under Insolvency Act 1986, section 213, requires business to have been carried on with intent to defraud or for a fraudulent purpose, participation by the defendant, and knowing participation. The provision is not engaged by every fraudulent transaction. Knowledge may include deliberate blindness, but negligence or untargeted suspicion is insufficient.

Dishonesty is assessed under the two-stage test in Ivey. A director’s duty under section 172 of the Companies Act 2006 is ordinarily subjective, but a director cannot honestly promote a company’s success by dishonestly manipulating a transaction or disregarding the company’s separate interests. A director may delegate reasonably, but must retain sufficient knowledge and supervision.

The joint liquidators of Tiuta International Limited brought proceedings against its former directors, Gary Booth and Steven Nicholas. They alleged fraudulent trading under section 213 of the Insolvency Act 1986, misfeasance and breach of duty under section 212, and breaches of directors’ duties under the Companies Act 2006.

The principal allegations concerned the refinancing of non-performing loans to Demi Ramadan and associated borrowers through a fund whose investment memorandum described low-risk, short-term bridge lending. The issues included whether the transactions were fraudulent, whether the directors knowingly participated, whether they breached duties owed to Tiuta, and the proper basis for any contribution.

1. Fraudulent trading. The claim under section 213 succeeded. The court applied the three elements identified in Morris v Bank of India: fraudulent trading or a fraudulent purpose, participation in that business, and knowing participation. The expression “party to” is wider than persons exercising management or control, as explained in Bilta (UK) Ltd v Tradition Financial Services Ltd.
2. Section 213 is directed at the carrying on of a business with intent to defraud. It is not automatically engaged by an isolated fraud or fraudulent misrepresentation in an individual transaction. The court accepted the guidance in Morphitis v Bernasconi.
3. The directors knowingly refinanced distressed and non-performing loans through the Fund. They knew the borrowers were not prime borrowers, the valuations were unreliable, the transactions were not short-term bridge financings, and the lending did not comply with the Fund’s stated criteria. The transactions were designed to relieve pressure on the wider Tiuta group and concealed their true nature from the Fund and investors.
4. Knowledge included blind-eye knowledge. The suspicion had to be firmly grounded and targeted. The court applied the objective limb of the Ivey dishonesty test after determining the directors’ actual knowledge or belief.
5. Breach of duty. The directors breached section 172. The duty is ordinarily subjective, but neither director honestly believed that the transactions promoted Tiuta’s success. They also failed to have regard to the company’s reputation for high standards of business conduct. The creditors’ duty under section 172(3) arose by November 2009 and was breached.
6. The directors’ duties were owed to TIL, not to the corporate group generally. Delegation was permissible only if reasonable and did not remove the continuing duty to supervise and maintain sufficient knowledge.
7. The proposed civil claim based directly on section 393 was not permitted. The court was not satisfied that the statutory obligation was imposed for the benefit of a particular class in a manner creating a private remedy.
8. The court ordered each respondent to contribute to TIL’s assets on a joint and several basis. The appropriate contribution was £19,990,358, representing the shortfall attributable to the restructured loans. The court accepted that section 213 relief required a sufficient nexus between the fraudulent trading and the loss, but that ordinary causation, mitigation and contribution principles did not govern the statutory contribution in the same way as ordinary damages.

First-instance decision. No appellate history was stated in the judgment.