Bilta (UK) Ltd (In Liquidation) & Ors v (1) NatWest Markets Plc (2) Mercuria Energy Europe Trading Ltd (2020)
A claim brought by insolvent companies against a bank and its subsidiary for dishonest assistance and knowing participation in fraudulent trading, via the actions of its traders, was established where the evidence showed that the traders, contrary to their evidence, had been aware at all times that VAT was chargeable on their EU allowance carbon credit trades. Their evidence was untrue, implausible and designed to falsely suggest that there was no reason why they should have made the connection between the vast increase in trade that they were witnessing and the possibility that it was connected to VAT fraud.
The claimant insolvent companies and liquidators brought a claim for dishonest assistance and knowing participation in fraudulent trading against the first defendant bank and the second defendant company (R).
R was an indirect subsidiary of the bank. R employed traders who traded EU carbon credits called EU Allowances (EUAs) on behalf of the bank. The defendants were alleged to have participated in the commission of missing trader intra-community VAT fraud (MTIC fraud) in 2009. The fraud was alleged to have been perpetrated by the directors of the claimant companies, who participated in chains of transactions for the purchase of EUAs from other EU member states (which did not attract VAT) and their sale to UK counterparties (which did attract VAT). The directors then misappropriated or misapplied the VAT payable, rather than accounting for it to HMRC. The claimant companies were then left without assets and defaulted on their obligations to HMRC. It was alleged that the fiduciary breaches had been dishonestly assisted by two of R's traders, who caused the bank to buy large quantities of EUAs from an intermediary company (C). The claimants alleged that, against a background of rumours of VAT fraud in the emissions trading market, the two traders must have had clear suspicions about the legitimacy of the significantly increased volume of the profitable trading with C; but that instead of raising their suspicions they dishonestly carried on trading. It was alleged that the trading continued unchecked until 30 June 2009 when the leading trading exchange contacted the bank to query the sudden surge in trade volume. Although that led to the involvement of the defendants' compliance and anti-money laundering (AML) departments, trading continued for several days. On 3 July 2009 the bank's management decided to cease emissions trading with C but several trades were nevertheless conducted on 6 July 2009. The claimants were all in insolvent liquidation. The total value of the pleaded claim for dishonest assistance was over £83 million, which was alleged to be the amount of the claimants' unpaid VAT liabilities to HMRC.
The claimants submitted that as a result of the traders causing them to buy EUAs from C, the bank had assisted the fraud and was party to fraudulent trading; the traders knew from 17 June 2009 that C's trading pattern was suspicious with an obvious risk that it was connected to VAT fraud, and dishonestly failed to report their suspicions; their dishonesty was attributable to the defendants who were vicariously liable for their wrongful acts. The defendants contended that the traders had not acted dishonestly and that they neither knew of nor ignored the risk that the trades were connected to a VAT fraud by C's clients, and argued that neither trader had fully understood the risk of VAT fraud prior to 1 July 2009 or knew that VAT was chargeable on trades of EUAs until 1 July 2009.
Dishonest assistance - Equity would impose liability on a person who rendered dishonest assistance to a breach of fiduciary duty. The basic requirements for liability were that there must have been a breach of trust or fiduciary duty; the defendant must have procured or assisted that breach; and have acted dishonestly in doing so, Royal Brunei Airlines Sdn Bhd v Tan  2 A.C. 378 applied. Nothing less than dishonesty would suffice for liability, Ivey v Genting Casinos UK Ltd (t/a Crockfords Club)  UKSC 67 applied. The conduct amounting to assistance was the acts of the traders in causing the bank to enter into contracts for the purchase of carbon credits from C, and in paying C the amount of VAT chargeable on those contracts, which assisted the subsequent breaches of fiduciary duty by the directors (see paras 159-165 of judgment). A person who caused a company to participate in a transaction under which monies were passed in one direction and goods passed in the other, could be liable for providing assistance to defaulting fiduciaries of a company further along a chain of similar transactions, Alpha Sim Communications Ltd v Caz Distribution Services Ltd  EWHC 207 (Ch) applied. The traders and bank had been buffered from the frauds at the claimant companies by C, but if a chain of transactions could be established linking the actions of the traders and the bank with the misapplication of the VAT monies by the directors, then assistance could still be said to have been given (paras 170-172).
Knowledge and dishonesty - The manner in which the traders had given evidence was not that of witnesses attempting genuinely to provide their unvarnished recollection (para.492). It was inherently unlikely that both traders, from different business backgrounds, would have been labouring under the same fundamental misapprehension that VAT was not chargeable on the spot trading of EUAs. In relation to the first trader, by 11 June 2009 he had been well aware that VAT was charged on any spot EUA trading with a UK counterparty and that there was a risk that EUAs might be used as part of a VAT carousel or MTIC fraud (para.310). The court did not believe the second trader's evidence that he had been unaware that VAT was payable until early July 2009 (para.327). By 18 June 2009, both traders knew that C was a small company which had, with no similar trading history, suddenly traded in a large number of EUAs over a short period. That steep increase had caused the traders to question what C's business model might be. Contrary to their evidence, they had been well aware at all times that VAT was chargeable (para.435). Their evidence was untrue, implausible and designed falsely to suggest that there was no reason why they should have made the connection between the increased trading and the possibility that it was connected to VAT fraud (para.452). Their evidence was fundamentally undermined by the total lack of documentary records (para.455). At the latest, by 25 June 2009, they had deliberately decided to ignore the obvious risk that C's trading was connected with VAT fraud; and by continuing to trade with C thereafter, they had acted dishonestly (para.497). The case of dishonest assistance or knowing participation in fraudulent trading was made out in relation to the trading between the bank and C after 25 June 2009. Both defendants were liable for dishonest assistance and knowingly being a party to fraudulent trading by the claimant companies by reason of the bank's trading with C from 26 June 2009 to 6 July 2009. The remainder of the claim was dismissed (para.557).
Judgment for claimants in part.