'Party To': The Scope Of Section 213 Of The Insolvency Act 1986

• Law Firm: Cooley LLP
• Subject Matter: Corporate/Commercial Law, Litigation, Mediation & Arbitration, Criminal Law, Insolvency/Bankruptcy/Re-structuring, Corporate and Company Law, Directors and Officers, Insolvency/Bankruptcy, Trials & Appeals & Compensation, White Collar Crime, Anti-Corruption & Fraud
• Author: Mr Benjamin Sharrock
• Published date: 07 March 2023

In Tradition Financial Service Ltd v Bilta (UK) Ltd & Others¹, the Court of Appeal considered the scope of section 213 of the Insolvency Act 1986 (the 'Act') and, specifically, whether those beyond the small group of individuals with controlling or managerial functions of the liquidated company could be 'party to' the carrying on of a company's businesses with intent to defraud creditors.

Somewhat surprisingly, there was no binding authority on the point. The Court of Appeal has now helpfully confirmed that section 213 is not restricted to those individuals with controlling or managerial functions but may extend to third parties.

Background

The liquidators of five companies (the 'Liquidators') jointly issued proceedings against various defendants in connection with a complex fraud regarding the cross-border trading of carbon credits that resulted in the claimant companies being left with VAT liabilities to HMRC in excess of '26 million.

The Liquidators brought a separate action against Tradition Financial Services Limited ('TFS'), a trading brokerage, in: (i) dishonest assistance in breach of its fiduciary duty to the claimants; and (ii) participation in fraudulent trading contrary to section 213 of the Act. TFS had facilitated chains of transactions orchestrated by the fraudulent companies by which a large portion of the underlying fraud was perpetrated. Transcripts of TFS's traders' instant chat messages were presented to the court in which it was recognised that they were dealing with 'dodgy little companies. You know, all these little weird names out there... [...] my guys have been doing a lot of spot trades with them in the last few weeks'

The Liquidators claimed that TLS was liable to pay compensation pursuant to section 213 of the Act for knowingly being a party to the carrying on of the companies' businesses with intent to defraud creditors or alternatively for a fraudulent purpose, namely the non-payment of their liabilities to HMRC for VAT.

There was a partial settlement between the parties that left the question to be decided, amongst other things, as to whether TFS was within the scope of section 213.

Section 213 provides as follows:

Fraudulent trading

(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...