Judgments on claims for fraudulent trading (s 213 Insolvency Act 1986) do not come along every day: they are hard to make good. A recent example is, however, that of Charles Morrison (sitting as a Deputy Judge of the High Court) in Bouchier & Anor v Booth & Anor [2023] EWHC 3195 (Ch). It runs to 281 paragraphs and covers a wide range of law and fact.
The claim arose out of the insolvency of Tiuta International Limited. TIL was part of a group of companies, the parent being Tiuta plc, of which it was a wholly-owned subsidiary. Its business was the provision of short-term bridging loans secured by legal charges over property. Whilst the loans made by the plc and its subsidiaries were made in part from the funds of each company, the business model also involved the use of facilities from bank lenders.
TIL received its funding from a number of sources including an investment fund established especially for the purpose of providing liquidity to TIL and which was intended to work closely with TIL itself, which would provide expertise in short-term or bridge financing and also investment proposals. TIL got into difficulty during the period following the financial crisis of 2007-2008. Administrators were appointed in July 2012; creditors’ voluntary liquidation followed in December 2013. At the time of its demise, TIL owed around £109.7 million to the fund, with an estimated net deficiency of £72.7 million.
The joint liquidators contended that the financial problems of the company had been exacerbated by a series of bad loan-making decisions, and that one set of loans in particular had been made by the directors fraudulently and in breach of duties they owed as directors of the company. They argued that the respondents had known that the business that TIL was conducting was not only fraught with risk, but that the business of the company simply could not have succeeded, given the lending that it had entered into. Central to that case were loans that it was said the respondents had procured TIL to make to a Mr Ramadan and his associates, not for a proper commercial purpose benefitting TIL, but to preserve the liquidity of the plc and its subsidiaries and to relieve financial strain on the group generally. The liquidators alleged that the respondents had intended to raise cash through lending from the fund with a view to permitting the discharge of liabilities outstandings to bank lenders to the plc and its subsidiaries, thereby preserving the availability of facilities granted by those banks and the general financial health of the plc:
“By the device of refinancing the Ramadan Loans, which had been non-performing in the books of TPLC and its subsidiaries, those entities could continue trading and no longer needed to recognise those loans as bad debts. These facts were the foundation for another allegation made by the [joint liquidators] at the trial. It was their case that the Ramadan Loans were obviously non-performing, and that in consequence, the TIL accounts for the years ending 2009 and 2010, should have made due provision for them; had they done so, the accounts would have revealed both a loss, and the fact that TIL was insolvent. As it was, those accounts failed to provide a true and fair view of TIL.”
The deputy judge’s analysis of the law on fraudulent trading runs to 22 paragraphs and includes consideration not only of the elements of the statutory provision itself (s 213) but a great deal of case law. It includes consideration of the subjective and objective elements going to intent to commit fraud, for example, the decision in R v Grantham in which it was said that an intent to defraud arose when a trader “knows he is stepping beyond the bounds of what ordinary decent people engaged in business would regard as honest.” The judge noted the absence of any definition of “carrying on business with intent to defraud,” but accepted that, where a person intended by deceit to induce a course of conduct which put another person’s economic interests in jeopardy, that person was guilty of fraud even though it was not intended that actual loss should ultimately be suffered by that other person (Re Allsop, a case where submitting false particulars in an application form had led to the recipient talking a greater risk than would ordinarily have been the case, even though loss had not been intended or immediately caused).
He drew on the guidance in the judgment of Lewison LJ, in Bilta (UK) Ltd v Tradition Financial Services Ltdas to who could be held liable:
“The ratio of that decision was that a ‘party to’ a company’s fraudulent trading under the Insolvency Act 1986 section 213 was not restricted to a person with a controlling or managerial function within the company.”
He reminded himself that not every fraud perpetrated by a company amounted to fraudulent trading, referring in that regard to the decision of the Court of Appeal in Morphitis v Bernasconi. On the issue of knowledge he cited the test for liability in the decision in Morris v Bank of India. A number of paragraphs deal with the substantial body of case law on dishonesty. The authorities on the principles governing quantum also receive attention,
Having done all that, and reviewed the law on directors’ duties, and “taking full account of the high threshold that must be applied in reaching…a finding,” the deputy judge, on the facts (including facts going to the basis on which valuations had been made for the purpose of loans), concluded that both respondents had acted dishonestly, and carried on the business of the company with intent to defraud its creditors or the creditors of the fund, i.e. the company’s investors. Their behaviour, he said, had amounted to the carrying on of the company’s business for a fraudulent purpose.
As to quantum, he said:
“It seems right to me that the enquiry so far as it relates to an order under section 212(3) in respect of the fraudulent trading, should focus upon what led to the misapplication, or misappropriation, of the company’s assets. The compensatory order should direct that those knowingly party to such misapplication or misappropriation contribute an amount equal to the value of assets misapplied or misappropriated. Adopting this reasoning, in my judgment the correct approach to arriving at the appropriate level of contribution, is to adopt the method of Mr Woodward [an expert witness] when he arrives at the 2012 balance sheet deficiency attributable to the Restructured Ramadan Loans. The shortfall applicable at each balance sheet date was individually calculated as the lesser of the eventual shortfall and the net loan balance. The sum arrived at is £19,990,358.”
He also found in favour of the liquidators on their breach of duty claim: procuring the company to enter into the restructured Ramadan loans breached the respondents’ duty under s172(1) Companies Act 2006 as there had been no benefit to the company in agreeing to them; nor did they promote the success of the company, as the respondents knew to be the case. He similarly upheld the liquidators’ claim for breach of s172(3).
An application by one respondent for relief under s 1157 Companies Act was, unsurprisingly in the light of the foregoing findings, rejected.