The UK Supreme Court has brought clarity to the scope of fraudulent trading under Section 213 of the Insolvency Act 1986 in the case of Bilta (UK) Ltd (in liquidation) and others v. Tradition Financial Services Ltd. The judgment adopts an expansive interpretation of who may be held liable under Section 213, confirming that liability is not limited solely to company insiders, but also extends to third parties who knowingly participate in fraudulent trading.
The Court also examined whether limitation periods should be suspended during the period of a company’s dissolution.
Background
The case arose from a complex Missing Trader Intra-Community (MTIC) fraud arrangement. This type of fraud exploits the fact that imports between EU countries are VAT-free. The MTIC arrangement in this case involved spot trading of carbon credits under the EU Emissions Trading Scheme (EU Allowances), which at the time attracted VAT. The perpetrators would import EU Allowances without VAT, and sell them inclusive of VAT. The company would then fail to account for the VAT to HMRC, instead transferring the funds to a third party before entering liquidation.
The claimants were five companies engaged in the trading who ultimately entered liquidation. They sought to rely on Section 213 to compel the defendant, Tradition Financial Services Limited (TFS), to contribute to the companies’ assets. With many issues settled between the parties, the Court was left to address two outstanding points:
- Whether Section 213 limits liability for contributing to a company’s assets due to participation in fraudulent trading to only those involved in managing or controlling the fraudulent business ("insiders"); and
- Whether the dishonest assistance claims of two of the claimant companies ("Nathanael" and "Inline") were time-barred.
Issue 1: The Scope of Section 213
Section 213 offers a remedy to liquidators to recover assets where it appears that the business of a company has been carried out for fraudulent purposes.
TFS argued that Section 213 applies only to individuals in control of the company, such as directors, shadow directors, or others responsible for decision-making. They contended that liability should not extend to external entities such as brokers or service providers who had no managerial role in the company. The Supreme Court unanimously rejected this narrow interpretation. In its view, the wording of Section 213 is deliberately broad, encompassing “any persons” who were “knowingly parties” to the fraudulent business. This contrasts with other provisions of the Insolvency Act—such as Section 212—which specifically targets directors, liquidators, administrative receivers, or others who have taken part in the management of the company.
Lord Hodge, delivering the lead judgment, emphasised that the provision’s purpose is to hold all culpable actors accountable for their role in fraudulent activity, regardless of their formal relationship with the company.
Issue 2: Limitation Periods and Restored Companies
The second issue concerned whether the standard limitation period is interrupted when a company is dissolved and later restored.
The claimants alleged that TFS had dishonestly assisted the directors of Nathanael and Inline between May and July 2009. Both companies were dissolved shortly thereafter, before being restored and placed into liquidation. Claims against TFS were not brought until November 2017—exceeding the six-year limitation period for dishonest assistance claims in England. [It should be noted that the equivalent period in Scotland is five years.]
The claimants relied on Section 32 of the Limitation Act 1980, which postpones the commencement of the limitation period in cases involving fraud where the claimant could not, with reasonable diligence, have discovered the wrongdoing. However, Section 1032(1) of the Companies Act 2006 deems restored companies to have continued in existence as if they had never been dissolved. The claimants argued that, notwithstanding the effect of Section 1032(1), during the period of dissolution, there were no directors in place who could have discovered the fraud.
The Court held that this deeming provision creates only a narrow legal fiction—namely, that the company existed during the dissolution period “no more and no less”—and does not assume the presence (or absence) of directors. It is for the claimant to adduce evidence to support such a presumption, which, in this case, they did not. As a result, the dishonest assistance claims were found to be time-barred.
Comment
Section 213 of the Insolvency Act 1986 applies in Scotland as it does in England, and this judgment significantly expands the scope of liability under that provision. It provides liquidators on both sides of the border with a broader tool to seek contributions from third parties who knowingly assist directors in fraudulent trading.
The judgment also illustrates the interaction between the relevant limitation period and Section 1032 of the Companies Act 2006 in cases involving dissolved companies. It is clear that the burden of proof for those seeking to rely on Section 1032 is considerable, as claimants must produce evidence to support what are often speculative scenarios.
This article was co-authored by Scott Hamilton, Trainee Solicitor in MFMac's Commercial Litigation and Dispute Resolution team.
