UK Court of Appeal Indicates that Victims of Fraud Can Target Third Parties
Tradition Financial Services Ltd v Bilta (UK) Ltd and others  EWCA Civ 112
- Under section 213 Insolvency Act 1986, liquidators may bring claims against third parties suspected of being a party to fraud, even where they were not involved in the management or control of the insolvent company.
- The Court declined to set an outer limit to the scope of s 213, potentially opening the door to opportunistic litigation by liquidators to test how far the Courts are prepared expand the scope of the provision in the context of fraudulent business.
- The judgment underlines the potential of s 213 as a powerful tool for liquidators while serving as a warning to parties with indirect or tangential involvement in fraud that they may be at increased risk of a claims following insolvency.
The Court of Appeal found that third parties can be held accountable under section 213 of the Insolvency Act 1986 (IA 1986), even if they do not exercise management or control over a company, as long as they are involved in carrying on a fraudulent business. The ruling arose from a case involving five companies who participated in missing trader intracommunity (MTIC) fraud (also commonly known as Carousel Fraud) in the context of carbon credits, and subsequently went into liquidation owing HMRC considerable sums of unpaid VAT.
The Appellant argued that the scope of s 213 was limited to persons exercising management or control over a company, but the Court of Appeal concluded that it should be interpreted more widely to include "outsiders". This judgment provides clarification that liquidators can indeed pursue third parties suspected of being a party to fraud and may consequently lead to an increase in claims against third parties.
Section 213 IA 1986 enables a liquidator to seek contributions from individuals who have been "knowingly parties to the carrying on of the business" in a fraudulent manner. Previous interpretations of this provision had suggested that it was limited to those with management or control over the insolvent company.
Five companies that had participated in MTIC fraud in 2009 went into liquidation with substantial sums of unpaid VAT owing to HMRC. The liquidators of those insolvent companies sought to bring claims against a number of parties alleged to be involved in the fraud. An issue arose on appeal as to whether a liquidator could bring a claim against a party who, on the assumed facts, was involved in the fraudulent activity of the insolvent company but had not exercised management or control of that company.
The Court of Appeal considered the legislative history and case law relating to s 213 and concluded that there was no binding authority on the issue of whether it extended to individuals or entities who were not directly party to the fraudulent business. The Court had regard to the purpose of the provision, noting that this was "to make those who have been parties to fraudulent trading liable to compensate the creditors of the fraudulent company"; i.e.: to secure compensation for those who have suffered loss as a result of the fraudulent trading.
The Court considered the disadvantages to adopting a wide interpretation of s 213 but ultimately found that that s 213 should be interpreted more widely in this case to include an "outsider" who was party to the carrying on of a fraudulent business. However, the Court declined to set an outer limit to the scope of s 213.
The ruling clarifies that s 213 can be used to pursue third parties suspected of being involved in fraudulent trading, even if they do not exercise management or control over a company. While there had been indications in earlier cases that the scope of s 213 could be interpreted as including "outsiders" who were parties to the fraudulent business, the position was not clear until the present ruling.
Before the Court of Appeal, the Appellant’s counsel had sought to argue that even if management or control were not required his client should not be liable under s 213 on the assume facts in this case, however the Court declined to address this argument as it was not part of Grounds of Appeal. Accordingly, this judgment does not provide any real clarity as to when such outsiders will be liable in a claim under s 213. Different causes of action that are relevant where there has been fraud or other wrongdoing require different levels of knowledge and/or culpability before a defendant will be found liable but what is required in a s 213 claim remains unclear and is therefore likely to be subject of further litigation in the future.
This judgment will be welcomed by many as it strengthens the liquidators' ability to make recoveries for the benefit of creditors of fraudulent companies. However, parties should be alert to the risk of being the subject of claims in the event that they are alleged to have dealt with a company that was trading on a fraudulent basis.