On 7 May 2025, the UK Supreme Court (UKSC) handed down a judgment providing useful guidance on the meaning of “fraudulent trading” within s.213 of the Insolvency Act 1986 (Insolvency Act) and how the test in s.32(1) of the Limitation Act 1980 (Limitation Act) operates, in Bilta (UK) Ltd (in liquidation) v Tradition Financial Services Ltd [2025] UKSC 18 (Bilta). In this article, we give a brief summary of the facts, issues and rulings in the judgment and its practical implications for Hong Kong’s corporate insolvency regime.
Background
The Claimants were five companies in liquidation in a missing trader intra-community fraud (the non-payment of Value Added Tax to a government) involving spot trading in carbon credits in the EU. Tradition Financial Services Ltd (the Defendant) brokered deals and introduced the third and fifth Claimants (Nathanael and Inline, respectively) to a company that purchased carbon credits for its clients. The Defendant knew that Nathanael and Inline were likely involved in fraudulent trading and failed to make relevant inquiries to ascertain the legitimacy of their trading.
The Claimants and their liquidators claimed against the Defendant on the basis that (i) the Defendant dishonestly assisted their directors in the breach of their fiduciary duties to the Claimants; and (ii) the Defendant knowingly participated in the fraudulent trading of the businesses of the Claimants under s.213 of the Insolvency Act.
The issues on appeal in the UKSC were: (i) whether persons required to make contributions to a company’s assets due to fraudulent trading under s.213 of the Insolvency Act are confined to persons in management or control of the fraudulent business; and (ii) how the limitation period under s.32(1) of the Limitation Act operates during the period of a company’s dissolution in respect of the dishonest assistance claim.
Section 213 of the Insolvency Act
S.213 of the Insolvency Act applies 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.1
Under s.213(2), on application of a liquidator, the court 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.”
The Defendant argued that the words “any persons who were knowingly parties to the carrying on of the business in the manner above-mentioned” are confined to persons exercising management or control over the company in question.
The UKSC considered the context of the statute as a whole, its legislative history, its statutory purpose of discouraging fraud, and held that s.213(2) should be given its natural, ordinary meaning. The plain language of s.213(2) indicated that:
- The person to incur liability must be a party to the carrying on by the company of a fraudulent business and not merely involved in a one-off fraudulent transaction, unless the fraud is sufficient evidence on its own of the carrying on of a fraudulent business;
- Being party to the carrying on by the company of a fraudulent business does not extend to a mere failure to advise; and
- The person liable must have had an active involvement in the carrying on of the fraudulent business by the company.
As such, there was nothing in s.213(2) that restricted the scope of the provision to directors and other “insiders” who were directing or managing the business of the company. The provision should be given a wide interpretation to also cover persons dealing with the company if they were knowing parties to the fraudulent business activities. This includes third parties or outsiders who participate in, facilitate or assist fraudulent transactions by a company when they know that the company’s business was being carried on for a fraudulent purpose. Accordingly, the Defendant’s appeal on this issue was dismissed.
Section 32 of the Limitation Act
S.32(1)(a) of the Limitation Act stipulates that where an action is based on the fraud of the defendant, the period of limitation shall not begin to run until the plaintiff has discovered the fraud or could with reasonable diligence have discovered it.
Between May and July 2009, the Defendant committed the acts of alleged dishonest assistance. Both Nathanael and Inline were then abandoned by their directors, struck off, subsequently restored to the register, and then ordered to be wound up. On 8 November 2017, both companies issued their claim form. As dishonest assistance claims have a limitation period of 6 years, s.32 of the Limitation Act could only avail Nathanael and Inline if they could show that they did not discover, and could not with reasonable diligence have discovered, the fraud before 8 November 2011, 6 years before the date they issued their claim forms. However, on 8 November 2011, both companies were already struck off and did not exist.
S.1032(1) of the Companies Act 2006 (Companies Act) provides that the general effect of an order by the court for restoration to the register is that the company is deemed to have continued in existence as if it had not been dissolved or struck off the register.
Nathanael and Inline argued that s.32 of the Limitation Act applied to postpone the running of the limitation period in their favour, given that it was deemed that neither company had officers capable of discovering the fraud until after 8 November 2011 pursuant to s.1032(1) of the Companies Act.
The UKSC rejected this argument. The Court opined that:
- The starting point is to apply s.32 to a counterfactual state of affairs, rather than to the historical fact about them, i.e. if the companies had not been dissolved, could they with reasonable diligence have discovered the fraud?
- The deeming provision in s.1032(1) of the Companies Act does not mean that a company is to be deemed to have had no directors or liquidators for as long as they remained struck off. All that is deemed to be true about the restored company under s.1032(1) is that it continued in existence during the period of its dissolution, no more and no less; and
- The question of whether the company is to be assumed to have had officers of some kind, and if so, what type and during which periods, is to be answered on the balance of probabilities as a question of fact by reference to such evidence as is adduced by the opposing parties, and considering the burden of proof on the party seeking to rely on s.32 if evidence is lacking.
Applying the above principles, it was irrelevant that Nathanael and Inline did not, in fact, have directors or liquidators while dissolved (the historical fact), but that the companies were deemed to have continued in existence in the counterfactual world. On the facts, both Nathanael and Inline failed to adduce sufficient evidence to prove that they could not, with reasonable diligence, have discovered the fraud. Based on the above, the UKSC dismissed Nathanael and Inline’s appeal on this issue.
Practical implications
Fraudulent trading
In Hong Kong, the equivalent of s.213 of the Insolvency Act is s.275 of the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap.32) (CWUMPO).
S.275(1) of the CWUMPO states that 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 court, on the application of the Official Receiver, or the liquidator or any creditor or contributory of the company, may, if it thinks proper so to do, declare that any persons who were knowingly parties to the carrying on of the business in the manner aforesaid shall be personally responsible, without any limitation of liability, for all or any of the debts or other liabilities of the company as the court may direct.
As one will note, s.275(3) provides that the person concerned may be guilty of an offence and be liable to imprisonment and a fine. Further, the provision under the CWUMPO is wider than its UK counterpart in relation to the consequence of fraudulent trading: (1) s.275 can be invoked by not only the liquidator of the company, but also the creditor and contributory of the company; (2) the discretion to order payment under s.275 is much less restrictive. It is said in the Joint and Several Liquidators of Days Impex Ltd (in Liquidation) v Dayaram [2024] HKCFI 3386 that s.275 gives the Court a wide power to order payment of such sum as it thinks appropriate – to the extent that the payment may, theoretically but rarely, carry a punitive element.
Given that Bilta is persuasive guidance to the Hong Kong Court, those who are parties to the carrying on of business of a company in dire financial difficulties should carefully monitor the handling of business transactions to avoid falling within the ambit of s.275.
In addition, specifically in relation to the position of directors, it was established in BTI 2024 LLC v Sequana SA [2022] UKSC 25 that when a company is insolvent or bordering on insolvency, the directors’ duties are modified so as to include a duty owed towards not just the company itself but also its creditors. The ambit of that duty is to take into account and give appropriate weight to the interests of the creditors as a whole, with the weight to increase with the precarity of the status of the company. While the extent of application of the duty described in Sequana in Hong Kong remains to be explored, one would expect that the duty would, in parallel, operate to govern the directors’ conduct of a failing company’s business (by remaining actionable under s.276 of the CWUMPO). On a related note, there are currently no provisions on insolvent / wrongful trading in Hong Kong (unlike the regime in the UK – see s.214 of the Insolvency Act). There have been discussions about introducing insolvent trading to Hong Kong’s corporate insolvency framework for many years, but as at the time of writing, the legislative process has yet to commence.
Postponement of the limitation period due to fraud
Similar to s.32(1)(a) of the Limitation Act, s.26(1)(a) of Hong Kong’s Limitation Ordinance (Cap.347) (LO) provides that where an action is based upon the fraud of the defendant, the period of limitation shall not begin to run until the plaintiff has discovered the fraud or could with reasonable diligence have discovered it.
Further, s.1032(1) of the Companies Act is reflected in s.768(1) of Hong Kong’s Companies Ordinance (Cap.622) (CO), which states that if a company is restored to the Companies Register under s.767 of the CO (i.e. by a court order), it is to be regarded as having continued in existence as if it had not been dissolved.
As at the time of writing, there are no Hong Kong cases analysing the interplay between s.767 of the CO and s.26 of the LO. It is likely that Hong Kong will follow Bilta when facing a similar situation.
For further information, please contact:
Paul Kwan, Partner, Deacons
paul.kwan@deacons.com
1 For the equivalent section under the Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap. 32), see section 275(1).
