Fraudulent trading: not always an "inside job" (but bring your claims quickly)

The Supreme Court has confirmed that liability for fraudulent trading can attach to third parties who knowingly participate in a business being carried on for any fraudulent purpose and is not limited to company “insiders”. More concerningly it has also held that limitation periods continue to run during the period in which the claimant was dissolved.

Bilta (UK) Ltd (in liquidation) and others v Tradition Financial Services Ltd [2025] UKSC 18 examined the intricacies of fraudulent trading and dishonest assistance, particularly in the context of missing trader intra-community fraud (MTIC Fraud) involving carbon credits under the EU Emissions Trading Scheme.

Background

The case centred around a group of five companies which participated in MTIC Fraud, a type of VAT fraud which exploits the VAT-free movement of goods between EU countries. Fraudsters that engage in MTIC Fraud typically establish a chain of companies across EU member states to import goods VAT-free to then sell them domestically with VAT included, consequently creating significant VAT liabilities that the fraudulent companies do not declare to the relevant tax authorities.

The companies involved in this MTIC Fraud had accumulated substantial VAT liabilities. They failed to account for the VAT that was due, instead paying the VAT receipts to third parties prior to the fraudulent companies going into insolvent liquidation.

The liquidators of the five involved companies brought a claim against a third party, Tradition Financial Services Ltd (TFS), who had acted as broker and had negotiated the trades of carbon credits at the centre of the MTIC Fraud. The liquidators alleged that TFS either knew (or ought to have suspected) that the trades were not genuine, making TFS liable for fraudulent trading.

Key legal issues

There were two issues to be determined by the Supreme Court:

1. The scope of section 213 of the Insolvency Act 1986 (IA 1986); and
2. Whether the claims were time-barred.

Section 213 IA 1986

Section 213 IA 1986 provides (our emphasis added):

“(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.”

The Supreme Court considered whether the wording of section 213 restricted the scope of fraudulent trading to only those persons exercising specific management or control over a company, or whether an outsider (such as TFS) who dishonestly assisted with the transaction could also be liable.

Considering the explicit wording of the statute, the Supreme Court confirmed that liability can extend to third parties who knowingly participate in or facilitate fraudulent trading, even if they do not exercise management or control over the company. In coming to this decision, the Supreme Court set out the principles of statutory interpretation and concluded that there was no restriction placed on who could be liable for fraudulent trading within the wording of section 213 IA 1986. This follows the natural reading of the section, specifically in reference to “any persons who were knowingly parties to” the fraudulent activity. This was viewed as being deliberately broad, rather than seeking to limit liability to any person who was involved in the management of an insolvent company.

The court noted that the purpose of section 213(2) IA 1986 in particular “depends upon dishonest participation and…exists to discourage such participation” and liability is founded on this basis. By including “any persons who were knowingly parties to” fraud, the net is cast over those who knowingly associate themselves with fraud, rather than those who are unwittingly involved in a fraudulent scheme (or, as put in the judgment “a man who warms himself with the fire of fraud cannot complain if he is singed”). However, liability will not attach to those who either:

1. were involved in a one-off fraudulent transaction, which did not constitute ‘carrying on business’ (unless such a singular fraudulent transaction serves as evidence of the carrying on of a fraudulent business); or
2. merely failed to advise against the carrying on of a fraudulent business – whilst such people may have been aware of the fraudulent activity, the lack of “active involvement” is sufficient to exclude them from the scope of section 213 IA 1986.

Time-bar: the statute of limitations

The secondary issue addressed by the court was whether the claims brought by two of the companies, Nathanael Eurl Ltd (Nathanael) and Inline Tracing Ltd (Inline), against TFS were time-barred. The claims of other claimants had already been found to be time-barred earlier in the proceedings, and permission to appeal refused. But Nathanael and Inline differed from those other claimants because of the substantial period of time during which they were dissolved prior to their restoration to the Companies House register and the bringing of their claims.

The Limitation Act 1980 (LA 1980) provides that a claim founded on fraud must be brought within six years. However, Section 32 LA 1980 provides that such time period begins to run only from the date the claimant discovered the fraud or could, with reasonable diligence, have discovered it: “where in the case of any action for which a period of limitation is prescribed by this Act…the action is based upon the fraud of the defendant…the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.”

The key question raised was whether these companies could have, with reasonable diligence, discovered the fraud during the period in which they were dissolved:

• On the basis that the fraud occurred between May and July of 2009, the claims for dishonest assistance were time-barred at the end of July 2015, unless section 32 LA 1980 applied.
• Nathanael was dissolved on 1 February 2011, with Inline being dissolved on 7 December 2010.
• After the fraud perpetrated in 2009, both companies had been abandoned by their directors and were not operational until they were restored to the register on 19 March 2012 and 8 June 2015 respectively.
• The claim forms were issued on 8 November 2017.

Assuming that the claim forms had been issued on the last day of the six-year limitation period, Nathanael and Inline were required to demonstrate that they were not aware of the fraud, and could not have discovered the fraud with reasonable diligence, at any time before 8 November 2011. The companies’ key argument was that during their respective periods of dissolution their existence during this period had been “bare” and there was no-one in place at either company during this period that could have exercised reasonable endeavours to discover the fraud.

Section 1032 of the Companies Act 2006 provides that companies that have been dissolved and restored to the register are deemed to have continued in existence throughout. The Supreme Court’s view was that the burden remains throughout on the company seeking to rely on that section to demonstrate the counter-factual: that they could not, with reasonable diligence, have discovered the fraud during the period of dissolution. Dissolution did not displace that requirement and here, the Supreme Court concluded, both Nathanael and Inline had simply failed to produce the required evidence. As such, the claims of dishonest assistance against TFS in respect of these two companies were found to be time-barred.

Implications of the judgment

The Supreme Court decision reaffirms the position of the Court of Appeal that any person who is knowingly a participant in the carrying on of an insolvent business with the intent to defraud creditors could be liable for fraudulent trading under section 213 IA 1986. This confirmation comes as a welcome development for liquidators and creditors of insolvent companies alike, as it provides for recourse against (potentially solvent) third parties for the benefit of the insolvent estate.

It is not all plain sailing, however. The threshold for fraudulent trading claims remains high as the liquidator must prove that the business has been carried on for a fraudulent purpose. Therefore, whilst a broader statutory interpretation has been confirmed, it seems unlikely that in practice we will see many more claims commenced under section 213 IA 1986.

The Supreme Court’s ruling regarding limitation is more troubling. In circumstances where a company has been effectively abandoned by its delinquent directors leading to its eventual dissolution, where that company is latterly restored to the register any claims against those directors may be time-barred. Shareholders or creditors concerned about director misconduct should act swiftly to commence claims or seek the appointment of liquidators to investigate and pursue all available claims.