UK Supreme Court clarifies statutory provisions on fraudulent trading and limitation
Judgment was handed down by the UK Supreme Court on 7 May 2025 in the last of a series of cases involving Bilta (UK) Ltd. The judgment clarifies who can be liable for fraudulent trading, and the operation of limitation when a previously dissolved company wishes to bring a claim for fraud.
Background
Bilta and certain other companies incorporated in England & Wales were used as so-called ‘missing traders’ to commit large-scale VAT fraud in connection with the spot trading of European Union Allowances (EUAs) issued under the EU Emissions Trading Scheme, commonly referred to as carbon credits. Missing trader intra-community fraud (MTIC fraud) is a common fraud which exploits the fact that goods are imported from one EU country to another without VAT, but are subject to VAT when sold on within the jurisdiction. The missing trader is paid the VAT by its purchaser, but instead of accounting to HMRC for that VAT, it is paid away to third parties, leaving HMRC with significant VAT claims against a missing trader that has no assets apart from its claims against those who were involved in the extraction of the VAT.
MTIC fraud is serious organised crime, and HMRC loses millions of pounds in revenue from it each year. Typically, it involves the importation of physical goods into the jurisdiction. Whilst those goods are typically low volume, high value products such as mobile phones or computer chips, with the same goods being imported and exported many times in a so-called carousel, the fact that goods need to be physically imported into the jurisdiction does slow down the rate at which the fraud can be committed. The spot trading of EUAs was a significant EU wide problem in 2009 due to the fact trading was conducted via electronic registries. This meant the goods in question - the EUAs - could be recycled at great volumes and great speed in a very short period of time. The VAT liabilities generated were huge. Taking Bilta as an example, three months or so of ‘trading’ generated a six-figure liability to HMRC. One by one, EU countries declared the supply of EUAs zero-rated for tax purposes. In the UK, HMRC declared the zero-rating of the supply of EUAs with effect from 31 July 2009. It was the only way to control the fraud.
The Bilta cases document Bilta’s efforts to recover compensation, initially from its directors and others understood to be directly involved in the commission of the fraud and latterly from the banks who had participated in the transaction chains, selling the EUAs back into the market and thereby facilitating the continuation of the fraud. The judgment handed down on 7 May 2025 addresses the claims of Bilta and others against Tradition Financial Services Ltd (TFS), a name passing broker that was not a participant in the transaction chains, but nonetheless (on Bilta’s case) was engaged in the fraud through its introduction of certain of the missing traders to a third party, SVS Securities plc, and the introduction of SVS to the banks.
Questions for the court
Prior to trial, the claims against TFS were partially settled on confidential terms, leaving only two questions to be decided by the court:
- whether TFS’s participation in the transactions was within the scope of s. 213 of the Insolvency Act 1986 (fraudulent trading); and
- whether Bilta’s claims in dishonest assistance were time barred.
The fraudulent trading issue
S.213 provides that the court may require “any persons who were knowingly parties” to carrying on the business for a fraudulent purpose to contribute to the company’s assets in a winding up.
TFS argued that the words “any persons who were knowingly parties” should be construed narrowly and were only intended to apply to persons exercising management or control over the company. It had never been alleged that TFS itself was a party to the conspiracy to defraud the missing traders and/or HMRC, and on a correct statutory interpretation, TFS was outside the scope of s.213.
The Supreme Court (unanimously and in agreement with both courts below) dismissed this argument, finding that “third parties/outsiders who participate in, facilitate or assist fraudulent transactions by a company when they know that the company’s business is being carried on for any fraudulent purpose are within the ambit of” s.213.
The Supreme Court could have stopped there, as the claimants only needed to win on one appeal for a successful outcome. Nevertheless, judgment was also given in relation to the claimants’ appeal against the decision that their claims in dishonest assistance were time barred, because the courts below had given different reasons for rejecting the claims and there was no other authority on how s. 1032 of the Companies Act 2006 (the effect of an order for restoration of a company) interrelates with s. 32 of the Limitation Act 1980 (postponing the limitation period in certain cases of fraud, concealment or mistake).
The limitation issue
All of the claims against TFS in dishonest assistance were issued outside of the primary limitation period of six years. The claimants relied on s. 32 to postpone the commencement of the limitation period until such time as they could reasonably have discovered the fraud. Two of the claimant companies, Nathanael Eurl Ltd and Inline Trading Ltd, were dissolved for part of the relevant period and had been restored pursuant to applications made by HMRC under s. 1032. The ordinary effect of a restoration order is that the company concerned is “deemed to have continued in existence as if it had not been dissolved or struck off the register”. Whilst periods of limitation do not cease to run against dissolved companies, Nathanael and Inline argued that for the period of their dissolution, neither had any directors who could have taken any steps to discover the fraud.
The Supreme Court held that the effect of restoring a company pursuant to s. 1032 created a counter-factual scenario in which the relevant company was deemed to have continued to exist, but no more. It was not correct that the company was deemed to have had no directors or other officers during this period. It was for Nathanael and Inline to adduce evidence as to whether they should be treated as having had no directors, and they had not discharged that evidential burden.
Comment
It is difficult to understand how companies in a similar position to Nathanael and Inline should now proceed. Whilst a direction could be sought under s. 1032(3) to suspend the period of limitation, the relevant case law stipulates that the court’s discretion to make such a direction:
- may only be exercised in exceptional circumstances,
- has an effect which is completely to override the statutory limitation regime, and that, therefore,
- fairness would generally require that the company, like any other claimant faced with a limitation defence, should be left to attempt to meet that defence by recourse to the statutory regime in the Limitation Act 1980.
There is nothing exceptional about companies used as vehicles for fraud being abandoned by their directors and not having the requisite knowledge to bring a claim unless and until they are restored.
Further, if it is for the claimant to establish, in the counter-factual scenario that the relevant company would have had directors or other officers and whether those directors were reasonable and honest, what evidence can a claimant produce to satisfy that burden? What may have happened had Nathanael and Inline not been struck off and whether or not they might have had any directors capable of investigating the claims are matters of pure speculation. The former directors had abandoned the companies, and the liquidators were the only people capable of giving evidence on behalf of Nathanael and Inline. The only evidence the liquidators could properly give is that at the point of their dissolution, the only directors were those involved in the fraudulent conspiracy. That evidence was before the court.
The judgment makes reference to the Court of Appeal case of Davy v Pickering [2017] EWCA Civ 30, which was a case concerning an application for a limitation direction under s. 1032(3). Mr Davy, a creditor of the company, wanted to restore the company to the register in order to bring a negligence claim against it. That claim was statute barred, and Mr Davy therefore sought a direction under s. 1032(3) that the limitation period should cease to run for a specified period of time to enable him to commence his claim. Mr Davy had not been given notice of the striking off. This gave rise to the hypothetical question as to whether, if Mr Davy had been given notice of the application, he would have progressed his claim and brought it in time. The only evidence was Mr Davy’s testimony that he would have objected to the striking off. David Richards LJ concluded:
“The problem is that this is no more than speculation as to what might have happened. The only evidence given by Mr Davy is that, if Mrs Pickering had given notice of the application to strike off the company, he would have objected. His conduct after he learned of the striking-off does not suggest that he would have instructed solicitors or otherwise behaved differently. The strong probability is that he would have continued with his complaint with the FOS or transferred his claim to the FSCS.”
Whilst Mr Davy was at least in a position to say what he believed he would have done had he been aware of the application to strike off the companies, the liquidators of Nathanael and Inline were not in a position to give any evidence at all as to what might or might not have happened during the companies’ period of dissolution.
Conclusion
The fact this is the first reported case which addresses the interrelationship between s. 32 and s. 1032 suggests that the facts in this particular case are relatively unusual. The mischief against which the Supreme Court is trying to protect is clear from paragraph 82 of the judgment:
“If every restored company wishing to pursue a claim in fraud was to be deemed to have had no competent officers, and therefore to have been unable to discover the relevant fraud while dissolved, that would give restored companies carte blanche to rely upon the postponement of the running of time, because they could always demonstrate that they could not have discovered the fraud by the use of reasonable diligence. But that would run counter to the general purpose of section 32, namely to postpone the running of time in favour of prima facie deserving claimants, rather than those which (in most cases) only got struck off and dissolved through their own default.”
The Supreme Court may also have been influenced in this case by the fact their findings on this particular issue made no difference to the outcome for Nathanael and Inline. Whether other prima facie deserving claimants will be as fortunate remains to be seen.
