Are Outsiders Inside Fraudulent Trading Provisions?
A recent Supreme Court case (Bilta UK Ltd) looking at whether third parties/outsiders who participate in, facilitate or assist in transactions, which they know to be fraudulent, are caught by section 213 of the Insolvency Act 1986 (which is functionally the same as section 255 of the BVI Insolvency Act) for the purpose of making a contribution to the company’s assets.
Background
Five companies in liquidation sued Tradition Financial Services Ltd (“Tradition”), alleging it dishonestly assisted their directors in fraudulent trading (section 213(2) of the Insolvency Act 1986), in breach of their fiduciary duties to those companies. The liquidators accordingly sought a ruling that Tradition be held liable to contribute towards the companies’ assets. Tradition argued that section 213(2) applied only to those managing or controlling a company and that the claims were also statute-barred.
The third and fifth claimants, previously struck off and dissolved before restoration and liquidation, argued that under section 32 of the Limitation Act 1980, the limitation period was paused during dissolution. They claimed that, under section 1032 of the Companies Act 2006, they were deemed to have continued existing either without directors or with the same directors responsible for the fraud, preventing discovery of the fraud during that period. The High Court and the Court of Appeal rejected this argument. The Court of Appeal held that neither section 32 nor section 1032, alone or together, could be relied on to imply that the companies had or lacked competent directors or liquidators. Accordingly the Court of Appeal found that the claimants failed to prove they could not have reasonably discovered the fraud.
Findings of the Supreme Court Dismissing the Appeal
The interpretation of section 213(2): the wording of the section did not limit its application to directors or other insiders who were directing the business and affairs of the company. The wording “any persons who were knowingly parties to the carrying on of the business” in the section was not only wide enough to cover insiders but also persons who were dealing with the company if they knowingly participated in, facilitated or assisted fraudulent activities by the company when they knew that the company’s business was being carried out for any fraudulent purpose within the ambit of the section.
Limitation: the Supreme Court held that the effect of restoring a company pursuant to section 1032 created a counterfactual scenario in which the company was deemed to have continued to exist, but no more. It found that it was not correct to say that the company did not have any director or other officers during that period and that if the companies wanted to make these arguments, they would have needed to have adduced evidence demonstrating this on the balance of probabilities, as a matter of fact.
