Bank vicariously liable for dishonest assistance and fraudulent trading
27 April 2020
A bank and its subsidiary were held vicariously liable, as employers of two traders, for knowing participation in fraudulent trading and dishonest assistance of fiduciary breaches by the directors of the insolvent claimant companies relating to carbon credit trading. The case demonstrates the breadth of the concept of dishonest assistance – the traders were found to have “assisted” fraud at the other end of a chain of transactions, despite lacking actual knowledge of the fraud. The ruling provides a useful example of how concepts of dishonesty and assistance can apply in a commercial context: Bilta (UK) Ltd (in liquidation) & ors v NatWest Markets plc & anr co  EWHC 546 (Ch)
The claimants were a group of UK companies, all in liquidation as a result of their directors’ participation in a “carousel fraud”. The fraud involved the purchase by the companies of carbon credits from EU Member States (which did not attract VAT), which were sold via an intermediary to UK counterparties (which did attract VAT), including one of the defendants. The directors misappropriated the VAT paid, leaving the companies with huge tax debts.
The defendants were the Royal Bank of Scotland (RBS), now NatWest Markets plc, and RBS Sempra Energy Europe Ltd (RBS SEEL), a subsidiary of RBS. The claimants alleged that two traders dishonestly assisted in the claimants’ directors’ breaches of fiduciary duty, and that both RBS and RBS SEEL were vicariously liable as the traders’ employers. The “assistance” was said to be the traders’ purchases, on behalf of RBS, of carbon credits from the intermediary. The intermediary had purchased the carbon credits from the claimant companies.
The defendants both denied liability, each submitting that the other was solely vicariously liable. They also argued that the trading could not be “assistance” because it was too removed from the ultimate breaches of fiduciary duty by the directors, and that the traders had not acted dishonestly, as they had not known of the directors’ fraud.
Knowing participation in fraudulent trading contrary to s213 Insolvency Act was also argued in the alternative by the claimants. On this alternative claim, Snowden J held that where knowing assistance in a fiduciary breach was made out, knowing participation in fraudulent trading would also be made out.
Both RBS SEEL and RBS are liable: dual vicarious liability
Snowden J said this was a “paradigm case for the imposition of dual vicarious liability” because the traders were so much a part of the “work, business or organisation” of both RBS SEEL and RBS that it would be just to make both companies liable for any wrongs that the traders committed against third parties.
RBS SEEL was vicariously liable for the traders as their legal employer and, because it was primarily liable to pay the traders’ salaries and benefits, the traders were subject to RBS SEEL’s supervision and control, and RBS SEEL had an obligation to ensure that its managers supervised the traders’ activities.
RBS was held also to be vicariously liable because the traders were authorised to trade as agents for RBS (and had the power and authority to commit RBS to trades), they were to comply with instructions given by RBS, RBS reimbursed RBS SEEL for their salaries and RBS could direct them not to enter into certain trades.
Broad meaning of “assistance” includes transactions via an intermediary
Dishonest assistance requires proof of three elements: a breach of fiduciary duty, assistance by the defendant in that breach and dishonesty by the defendant.
Regarding the second element, the alleged assistance in this case was of an unusual kind because the traders did not have any direct interaction with the fraudulent directors. The defendants argued that classing the purchases of carbon credits from an intermediary company as “assisting” a breach of fiduciary duty that they didn't even know of would be an illegitimate extension of the scope of dishonest assistance.
The court rejected this argument, holding that the case of Alpha Sim v CAZ Distribution Services  EWHC 207 (Ch) (Alpha Sim) provides authority for “assistance” being possible when the defendant’s actions are separated from the breach by intermediary transactions.
Snowden J further noted that the same meaning of “assistance” would also apply to liability for knowing participation in fraudulent trading under s213 Insolvency Act. Snowden J reached this conclusion based on an extension of the finding in Bank of India v Morris  BCC 739 that “outsiders” (ie not part of the management of the company) who had dealt with the fraudulent company could be liable.
“Dishonesty” includes failure to make enquiries
In Alpha Sim, the trader had direct knowledge of the fraud. Here, it was not alleged that the traders had such knowledge. Instead, their “dishonesty” arose from having suspicions about their purchases, but failing to make enquiries.
To decide whether a party has acted honestly, based on Ivey v Genting, the court will first determine what that party actually knew or believed at the relevant time. Then the court will determine what an ordinary person, acting honestly, would have done if possessed of that knowledge. If the party did not take that action, they have acted dishonestly.
The traders’ initial knowledge of VAT fraud generally in the sector, and their curiosity about where the company they were buying credits from had obtained them, would not have prompted an ordinary person to take action. When the volume of trading increased to a “wholly exceptional” level after a week, however, it was held that an ordinary person would have become suspicious that they were involved in a fraudulent scheme, and made enquiries. The traders therefore acted dishonestly when they failed to make those enquiries, because they “dishonestly turned a blind eye” to the risk that they were participating in fraud. It did not matter that the traders did not have a detailed understanding of the fraud; Snowden J commented: "I do not think that it matters that they did not understand the detailed mechanics of MTIC fraud, or have an understanding of the particular type of MTIC fraud that was being carried on, or as to the specific role of [the intermediary] in it".
The court ordered that the two defendants were jointly and severally vicariously liable both for dishonest assistance and fraudulent trading.
The judge also considered attribution as an alternative to vicarious liability in relation to RBS only (as it was RBS that had entered into the trades). Snowden J held that the persons whose knowledge would be attributed to RBS in this case would be the traders, because they were given the authority to conduct the relevant trades on behalf of RBS.
This decision does not make new law but it does provide a good illustration of how the concepts of dishonesty and assistance can impact liability of the participants in a chain of commercial transactions. The judgment illustrates how those involved in trading can become liable in relation to a fraud of an unrelated, and even unknown, party at the far end of a chain of transactions. Companies must encourage employees to flag suspicious activity and make enquiries where they suspect that the transactions they are involved in may be linked, even indirectly, to fraud. There may also, of course, be an obligation to report suspected money laundering.
This case summary is part of the Allen & Overy Litigation and Dispute Resolution Review, a monthly publication. If you wish to receive this publication, please contact Amy Edwards, email@example.com