Fraudulent Scheme involving the creation of false invoices

 

This article explains the case of Bilta (UK) Ltd v Tradition Financial Services Ltd (“TFS”) [2023] EWCA Civ 112 is a landmark legal decision in the context of civil fraud within the United Kingdom.

Background

Bilta (UK) Ltd engaged in carbon credit trading. The company’s directors and employees orchestrated a fraudulent scheme involving the creation of false invoices and trading transactions. They designed this scheme to artificially inflate the company’s expenses, reduce its taxable profits, and evade VAT liabilities. The fraudulent activities caused significant financial losses for the company and its creditors. Eventually, this led to insolvency and liquidation proceedings.

The liquidators claimed that TFS had knowingly aided the former directors of the company in violating their fiduciary obligations. They accused TFS of facilitating the directors’ fraudulent activities by serving as a broker for carbon credit transactions. Therefore, the liquidators of Bilta (UK) Ltd sought to use the Insolvency Act 1986.  They did so to pursue contributions for the company and its creditors from the individuals suspected of fraudulent conduct. Pursuant to s.213, the court can order a party to make a contribution.

“(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 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 Court’s Findings

The court established that the company conducted its business with the intention to defraud.  Additionally, it is established that the defendants were aware of their actions. The more challenging issue for the court to address, however, was whether the individuals within question fell within the scope of “any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned”.

Legal Precedent Going Forward

Significantly, previous interpretations of s.213 indicated that the provision did not extend beyond those with management or control over the company. No binding authority on this issue led TFS to submit that the court should limit its interpretation of s.123 in this way. However, while the court declined to both restrict and, indeed, set an outer limit on the provision’s scope, Lewison LJ clarified its application in relation to dishonest assistance. In keeping with the dictum of Templeman J in Re Gerald Cooper Chemicals Limited (in Liquidation) [1978] 1Ch 262 that “a man who warms himself with the fire of fraud cannot complain if he is singed,” Lewison LJ concluded that the court should interpret s.213 to include “outsiders”. Meaning, individuals and corporate third parties who knowingly engage in fraudulent trading. As Lewison LJ highlights at [114], “It is, in my judgment, more consonant with the purpose of section 213 to interpret that phrase in the wider rather than the narrower sense.”

It becomes clear that, while a company itself will not be deemed responsible for the fraudulent conduct of its employees, third parties will be caught by s.213 as a “party” to the carrying on of a fraudulent business if they knowingly do so. In determining whether the provision will bite, at least some positive action is necessary to meet the requisite standard of participation.

Comments

Bilta (UK) Ltd v Tradition Financial Services Ltd is a significant case that clarifies the legal principles governing civil recovery actions in cases of civil fraud. This judgment will be welcomed by many aggrieved victims in seeking to use s.213 to recover losses resulting from fraudulent conduct. It serves as a warning to parties with indirect or tangential involvement in fraud that they may be at increased risk of a claims if they are suspected of engaging with a company involved in fraudulent activities. That the court will not restrict liability to persons with managerial function in a company is clearly significant. Consequently, by expanding the scope of liability, this case illustrates the courts’ willingness to hold third parties accountable for assisting fraudulent activities, even if they are not the primary perpetrators of the fraud itself.