UK Supreme Court examines the question of who may be liable to contribute to estate assets under the English statutory provision for fraudulent trading (Section 213 of the Insolvency Act)
The decision will be of great interest to Cayman Islands and BVI practitioners, because Section 213 of the Insolvency Act is in substantially the same form as Section 147 of the Companies Act (in the Cayman Islands) and Section 255 of the Insolvency Act 2003 (in the BVI). As a Supreme Court decision, Bilta is highly persuasive.*
The underlying fraud discovered in Bilta involved a conspiracy related to the trading of carbon credits during the summer of 2009: payments intended to account for VAT to the relevant tax authorities were instead directed to third parties via multi-layered and high-speed transactions. Based on assumed facts (which are not addressed in any detail in this blog), Tradition - a third-party brokerage firm - had been involved to a certain extent in that underlying fraud.
Section 213 of the Insolvency Act provides (emphasis added)
- 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.
- 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.
Following a helpful summary of the key principles concerning the correct approach to statutory interpretation and a consideration of prior authorities, the Supreme Court held that (subject to certain exceptions not relevant for present purposes) there was nothing in the language of Section 213 which restricts the scope of the provision to directors and other “insiders” who were directing or managing the business of the company.
The natural meaning of the statutory words is wide enough to cover not only such “insiders” but also persons who were dealing with the company if they knowingly were parties to the fraudulent business activities in which the company was engaged. Such transactions could include those who transacted with the company in the knowledge that by those transactions the company was carrying on its business for a fraudulent purpose. Section 213 was therefore held to be sufficiently broad in principle such that Tradition fell within its crosshairs.
There is, perhaps surprisingly given the breadth of its potential application, very little authority in the Cayman Islands concerning Section 147 of the Cayman Islands Companies Act. That being said, the Cayman Islands Grand Court has very recently handed down an important decision concerning, amongst other matters, the effect of submission to the jurisdiction within the context of s.147 claims against persons based overseas, and the issue of whether s.147 has extraterritorial effect: Conway & Ors v Air Arabia PJSC. A further blog concerning that decision will follow.
*Harneys do not practice the laws of England and Wales. Whilst decisions of the Supreme Court only bind the lower courts of England and Wales, the decisions of the Judicial Committee of the Privy Council (JCPC) bind the British Overseas Territories, Crown Dependencies and Commonwealth countries which it serves. A number of the JCPC’s members are the same judges who sit on the UK Supreme Court.
