Introduction
Fraudulent trading, under section 213 of the Insolvency Act 1986, is an important legal tool for dealing with wrongful actions in companies facing insolvency. This section allows the court to order people involved in running the business of a company with intent to cheat creditors to contribute to the company's assets. To make a successful claim, it must be shown that a company exists, it later becomes insolvent, and its business is run with the required fraudulent intent. This article examines the Supreme Court's decision in Bilta (UK) Ltd v Nazir (No 2) [2015] UKSC 23, an important case that clarifies the reach and use of section 213.
The Facts of Bilta (UK) Ltd v Nazir (No 2)
Bilta (UK) Ltd (“Bilta”) was involved in carbon credit trading. The company’s directors planned a Missing Trader Intra-Community (MTIC) fraud, a scheme to avoid Value Added Tax (VAT). The fraud led to significant losses for HMRC and eventually caused Bilta’s insolvency. The liquidators of Bilta started legal action against the directors and others involved in the fraud, claiming fraudulent trading under section 213.
The Supreme Court’s Decision
The Supreme Court, reversing the Court of Appeal's decision, ruled that the directors and others involved in the fraudulent scheme could be held liable under section 213. The Court clarified that the “running of the business” requirement includes participating in a fraudulent scheme even if the deals harmed the company itself. The Court decided that the focus should be on the intent to cheat creditors, which was present in this case, regardless of whether the company itself gained or lost from the fraudulent activity.
Intent to Defraud Creditors
The Supreme Court confirmed that "intent to defraud creditors" means real dishonesty, involving both actual dishonesty and dishonesty by the standards of reasonable and honest people. This confirms the need for a personal element of dishonesty along with an objective check. The Court distinguished intent to defraud creditors from simple poor management. While poor business choices may lead to insolvency, they do not necessarily constitute fraudulent trading.
The Scope of Section 213
The Bilta decision significantly widened the scope of section 213. Before this case, it was unclear whether people involved in fraudulent schemes that harmed the company itself could be held liable. The Supreme Court clarified that harm to the company does not prevent a claim under section 213, as long as the required fraudulent intent toward creditors can be shown. This widens the potential use of section 213 to include more fraudulent activities.
Implications for Directors and Other Participants
Bilta reminds directors and others of the potential personal liability for participating in fraudulent activities. The decision emphasizes the need to act honestly and in the company's best interests, especially when facing financial difficulties. Participating in fraudulent schemes, even if they seem beneficial for the company in the short term, can lead to significant personal liability if the company becomes insolvent. The ruling clarified that directors cannot avoid liability by claiming their actions, though fraudulent, were part of the company’s business.
Comparing Bilta with Previous Case Law
The Supreme Court's judgment in Bilta builds on and clarifies earlier case law on fraudulent trading. It distinguishes fraudulent trading from wrongful trading, showing the need to prove real dishonesty for a claim under section 213. This distinction highlights the seriousness of fraudulent trading and the higher standard for proving liability compared to wrongful trading. The Bilta decision also clarifies the meaning of "running of the business" in fraudulent trading, expanding its use to cases where the fraudulent activity is central to the company’s operations.
The Importance of Bilta (UK) Ltd v Nazir (No 2)
The Bilta decision provides clear guidance on the meaning and use of section 213 of the Insolvency Act 1986. It clarifies the meaning of "intent to defraud creditors" and expands the scope of "running of the business" in fraudulent trading. The ruling has significant implications for directors, other company officers, and anyone involved in managing a company. It stresses the need to act with honesty and correct behavior and serves as a warning against fraudulent activities. The decision provides more clarity and certainty in the use of section 213, making it more effective as a tool for combating fraudulent activity and protecting creditors.
Conclusion
The Supreme Court's decision in Bilta (UK) Ltd v Nazir (No 2) is a significant development in insolvency law. The judgment clarifies key aspects of fraudulent trading under section 213, particularly the meaning of "intent to defraud creditors" and the scope of "running of the business." This case emphasizes the importance of director duties and the potential personal liability from fraudulent activities. The Bilta ruling provides a strong legal framework for holding people accountable for their actions and protecting creditors' interests in insolvency cases caused by fraudulent trading. It sets a key precedent for future cases with similar issues, providing clarity and certainty in the application of this important aspect of insolvency law.
