Fraudulent Trading Basic Overview
Who does Fraudulent Trading apply to was considered in the matter of Tradition Financial Services Ltd v Bilta (UK) Ltd & Ors [2023] EWCA Civ 112 which was a case that came before the Court of Appeal.
The Fraudulent Trading legislation says:
(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 contributions (if any) to the company’s assets as the court thinks proper.
It has been previously considered in this blog in the post How To Steer Clear Of Fraudulent Trading.
Apply Beyond The Management Of The Company?
Up for discussion was could the Fraudulent Trading provision, Section 213 of the Insolvency Act 1986 extend beyond the management of the company in question carrying on its business.
The appellant (Tradition Financial Services Ltd (“TFSL”) said Fraudulent Trading was restricted to the Directors and did not extend to third parties. The Court of Appeal said that “any persons” could extend beyond persons with control or a managerial function over the relevant company.
It looked at various legal cases and concluded the ambit of Section 213 of the Insolvency Act 1986 can go beyond fiduciaries.
Neuberger J in Re BCCI [2002] BCC 407 said:
“… that that is not a good reason for preventing a liquidator from pursuing a person who actively and dishonestly assisted, and/or benefited from, the company in adopting a dishonest course of conduct, which predictably led to lenders to, or shareholders of, the company being defrauded.”
“…In my judgment, just as an employee of the company who was merely carrying out orders does not fall within s. 213(2) whereas somebody who orchestrates, organises or can seize [control?] of the business concerned does fall within the section, so a company or other entity which carries on (so far as it is concerned) a bona fide business with the company, does not fall within s. 213(2), but a company which is involved in, and assists and benefits from, the offending business, or the business carried on in an offending way, and does so knowingly and, therefore, dishonestly does fall or at least can fall within s. 213(2).”
The Court of Appeal decided that the wider interpretation of the ambit of persons affected by Section 213 can apply:
In my judgment, therefore, there is no authority binding on this court that holds that the wider interpretation of section 213 is correct. As I have said, the judge correctly said that there was no precedent binding on him, but that he should follow decisions of courts of co-ordinate jurisdiction unless persuaded that they were clearly wrong. That is an entirely conventional approach to authority: Colchester Estates (Cardiff) Ltd v Carlton Industries plc [1986] Ch 80; Re Cromptons Leisure Machines Ltd [2006] EWHC 3583 (Ch), [2007] BCC 214. The judge said at [79]:
“With that, I turn to Mr Foxton, QC’s article, which is – unsurprisingly, given the author – compellingly and clearly written. However, despite the critique of the decisions recording a wide approach, I am unpersuaded that that approach is clearly wrong. Indeed, given the fact that a defendant must participate knowingly in order for section 213 to bite, I see the force in Templeman J’s dictum that “a man who warms himself with the fire of fraud cannot complain if he is singed”. It seems to me that if this policy is to be unwound, given that it is based on a reading of the section that is a plausible construction (to put it no higher than that), that is something not for me, but for the Court of Appeal. I certainly do not consider the wide reading of the section to be clearly wrong. Rather, it is a perfectly defensible reading of the provision. In the interests of consistency, I therefore conclude that the claim made by the Claimants under section 213 is a proper one.”
…
As I have already said, the phrase “party to” can bear either of the two meanings for which Mr Scorey and Mr Parker respectively contended. It is, in my judgment, more consonant with the purpose of section 213 to interpret that phrase in the wider rather than the narrower sense. It is also more consistent with the line of authority to which I have referred. Any gap between the civil law and the criminal law is filled, in the case of the criminal law, by the offence of aiding and abetting.
I should make it clear, however, that nothing I say must be taken as setting the outer limits of the scope of section 213. All that we are asked to decide is whether a person cannot fall within the scope of section 213 unless he has a controlling or managerial function within the company. Whether an “outsider” can be said to be party to the carrying on by a company of a fraudulent business may well be a question of fact and degree which requires careful analysis.
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