The Road to Profit is Not Always Paved with Good Intentions

Jordan Moulds

In a recent decision, the English High Court has found the Royal Bank of Scotland (“RBS”) (now Natwest Markets), together with one of its subsidiaries (“RBS SEEL”), liable for dishonest assistance and fraudulent trading. The Defendants were found to have played a pivotal role, through two of their traders, in an elaborate VAT fraud perpetrated by the directors of Bilta (UK) Limited and nine other companies: Bilta v Natwest Plc & Anor [2020] EWHC 546 (Ch). The decision provides useful guidance for fraudulent trading and dishonest assistance claims against professional third parties arising out of complex commercial contexts.

Background

The directors of Bilta and nine other companies (the “Claimant Companies”) orchestrated a fraudulent scheme whereby their companies would purchase VAT-free carbon credits under the EU Emissions Trading Scheme (“EUAs”) from various EU suppliers, and then sell those EUAs in the United Kingdom with VAT added, normally to CarbonDesk Limited. Rather than accounting for the VAT received to HMRC, the directors misappropriated the funds for their own benefit, leaving the Claimant Companies with nothing but liabilities to HMRC, which they could not satisfy.

The claims against the Defendants turned on their role in that fraudulent scheme. Two traders employed by RBS SEEL (the “Traders”) caused RBS to purchase from CarbonDesk large quantities of the EUAs sold to CarbonDesk by the Claimant Companies. The purchase funds were then directly or indirectly remitted to one of the Claimant Companies.  This was said to have taken place against a backdrop of rumours of VAT fraud in the emissions trading market and despite clear suspicions held by the Traders as to the legitimacy of the trades. The crux of the Claimants’ case was that, rather than addressing those suspicions, the Traders dishonestly turned a blind eye and continued trading until even after the decision was made by others within RBS that trading with CarbonDesk should be halted.

The Decision

After detailed consideration, Snowden J found the Defendants liable for dishonest assistance and fraudulent trading by reason of RBS’s trading with CarbonDesk between 26 June 2009, the day after the Traders met with CarbonDesk but had failed to raise any of their concerns, and 6 July 2009, when RBS finally ceased trading with CarbonDesk.

As a first instance decision, it does not stand as high authority.  Nor does it embrace any novel principle of law. However, Snowden J’s judgment does provide a valuable resource for practitioners as to the law on dishonest assistance and fraudulent trading claims. In particular, it provides clear guidance about the threshold between mere suspicions and dishonesty.  Such guidance is not just relevant to lawyers. Bankers and other professionals engaging in transactions involving an appreciable risk of fraud would do well to heed the guidance.

Dishonest Assistance

The principles governing the imposition of liability for dishonest assistance, particularly the cornerstone element of ‘dishonesty’, are now largely settled. Drawing on classic and more recent authorities in the area, Snowden J:

  • found that the Traders’ conduct in causing RBS to enter into contracts to purchase EUAs from CarbonDesk, and RBS paying CarbonDesk the amount of VAT chargeable, was sufficient to constitute ‘assistance’ of the directors’ breaches of fiduciary duty, despite the defence that the conduct was too far removed from the directors’ breaches of duty;
  • endorsed the two-step approach to dishonesty formulated in Ivey v Genting Casinos (UK) Limited [2017] 3 WLR 1212; i.e. (1) ascertain the actual state of the defendant’s knowledge or beliefs; and (2) examine, objectively, whether the defendant’s conduct, in light of that knowledge, was dishonest; and
  • expressed support for the principle that a finding of dishonesty can be made where an assister does not know all of the relevant facts relating to the fraud.

Applying the two-stage approach, Snowden J considered the facts and circumstances informing the Traders’ knowledge, beliefs and suspicions and proceeded to find that the Traders’ conduct was objectively dishonest. Key factual findings that led to the judge’s finding of dishonesty were as follows:

  • The Traders had been aware by no later than 11 June 2009 and 15 June 2009 respectively that spot trading in EUAs might be used as part of a VAT fraud.
  • By 18 June 2009, the Traders had appreciated that there was something unusual about their trading with CarbonDesk, but did not, at that stage, have a clear suspicion that it was connected to VAT fraud.
  • By 24 June 2009, the volume of EUAs sold by CarbonDesk to RBS had increased to a level which was “wholly exceptional”. Notwithstanding this, the Traders made no enquiries as to CarbonDesk’s business and the source of the large volumes of EUAs at a dinner they attended with CarbonDesk the following day.

The deliberate decision not to ask questions amidst the backdrop of swirling rumours about VAT fraud and the wholly exceptional” trade volumes being conducted by CarbonDesk and RBS rendered their actions between 26 June 2009 and 6 July 2009 dishonest.

Significantly, little regard was given to the Traders’ subsequent actions which were ostensibly inconsistent with a dishonest state of mind. The Traders sought, unsuccessfully, to rely on that conduct to negate a finding of dishonesty. Snowden J found that it was plausible that a person who only had a suspicion of the fraud, particularly one which he had decided to ignore, might seek to give the outward appearance of carrying on business as usual.

Fraudulent trading

When considering the Defendants’ liability for fraudulent trading pursuant to section 213 of the Insolvency Act 1986 (the Hong Kong equivalent of which is section 275 CWUMPO), Snowden J considered himself bound by the principles in Bank of India v Morris [2005] BCC 739 and held that an outsider without direct involvement in the management of a company could be liable under section 213. Following his findings on dishonesty, Snowden J also found the Defendants liable for knowingly participating in the Claimant Companies’ fraudulent trading.

Attribution

The issue of attribution was also in play; specifically, whether the Traders’ knowledge was capable of being attributed to RBS and RBS SEEL. Snowden J had no difficulty finding that it was. The Traders were the ones who embodied those entities for the purposes of the subject transactions. Snowden J also found that the Defendants would be vicariously liable to the Claimant Companies for the Traders’ misconduct.

Comment

Bilta v Natwest stands as a very recent example of a first instance English judge applying the now settled principles governing dishonest assistance and fraudulent trading to a professional third party’s participation in a complex commercial fraud. It also provides a long overdue reminder that the effect of the decision in Bank of India v Morris, that outsiders without direct involvement in the management of a company are capable of being held liable for participation in fraudulent trading, remains as powerful as ever.

The decision provides a timely warning for banks and other financial institutions engaging in high-risk transactions. In the economic storm brought about by COVID-19, the line between acceptable and unacceptable risk taking in the pursuit of profit is likely to be easier, and more tempting, to cross than ever. Institutions engaging in high-risk transactions are well advised to ensure that they have clear procedures in place to enable their staff of all levels to identify suspicious transactions. They should also make sure that they have established suitable practices to ensure that any suspicions are promptly reported, dealt with and followed-up.

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