Top Brands & Anor v Sharma

The Court of Appeal dismissed an appeal against HHJ Simon Barker QC's refusal to adjourn a trial of misfeasance proceedings brought under section 212 of the Insolvency Act 1986. The court held that the former liquidator did not have standing under the Insolvency Rules (in particular rule 4.85 and Chapter 9) to challenge a consent order admitting proofs of debt once she had ceased to be liquidator, and that the statutory regime for proofs identified who may apply to expunge or reduce a proof. The judge accepted that the appellant's allegation that the consent order had been procured by fraud had a real prospect of success but concluded that the proper route for challenging proofs lies with the current liquidator or a creditor. For procedural and case-management reasons the adjournment was refused: the new liquidator endorsed the need to proceed with the misfeasance trial and could, if he wished, later apply to challenge the companies' status as creditors.

Background and parties:

Top Brands Limited (incorporated in Malta) and Lemione Services Limited (incorporated in Cyprus) (together "the companies" / claimants) brought misfeasance proceedings under section 212 of the Insolvency Act 1986 against Mrs Gagen Sharma (the former liquidator of Mama Milla Limited, "MML"). The companies alleged that approximately 548,074.56 had been wrongly paid away from MML and sought repayment. The appellant (Mrs Sharma) sought to set aside a consent order of 28 September 2012 by which, as liquidator, she had accepted the companies as creditors for that sum and thereby given them standing to bring the s.212 application.

Procedural history:

• MML was placed into creditors' voluntary liquidation in September 2011 and Mrs Sharma became liquidator.
• The companies' proofs were originally rejected by Mrs Sharma; a consent order of 28 September 2012 later admitted their proofs.
• Mrs Sharma was removed as liquidator in January 2014 and Mr Barry Ward was appointed as the new liquidator.
• The companies issued misfeasance proceedings under s.212 (October 2013). Mrs Sharma later issued proceedings seeking to set aside the consent order for fraud (April 2014) and applied to adjourn the s.212 trial so that the fraud challenge could be tried concurrently.
• HHJ Simon Barker QC refused the adjournment and declared that Mrs Sharma lacked standing to challenge the consent order. That decision was appealed to the Court of Appeal.

Relief sought and issues:

• The appellant sought: (i) an order setting aside the consent order on the basis it was procured by fraud, and (ii) an adjournment of the s.212 trial so that that challenge could be heard together with the misfeasance claim. She also sought damages for fraudulent misrepresentation arising from the alleged procurement of the consent order.
• The court framed the issues as: (1) does a former liquidator have standing to challenge the consent order; (2) is the appellant estopped from challenging the consent order; (3) would the appellant's action be an abuse of process; and (4) should the s.212 trial be adjourned so that the challenge to the consent order could be heard concurrently?

Court's reasoning:

• The Court of Appeal agreed with the first-instance judge that rule 4.85 of the Insolvency Rules and Chapter 9 establish who may apply to expunge or reduce proofs: the liquidator or, if the liquidator declines to act, a creditor. A former liquidator who is no longer an officer and who is not a creditor lacks the procedural standing under rule 4.85 to challenge proofs admitted in a liquidation.
• The court acknowledged the inherent jurisdiction to set aside judgments obtained by fraud but held that, in the context of the statutory insolvency regime, that jurisdiction does not displace the rules which regulate who may challenge proofs and the composition of creditors. The status of creditors is a matter for the liquidator (or creditors) under the Insolvency Rules; the ex-liquidator had no sufficient proprietary or procedural interest to invoke the court's inherent jurisdiction in this context.
• Although the judge found the fraud challenge had a real prospect of success, he refused the adjournment for case-management reasons: the new liquidator (Mr Ward) supported proceeding with the s.212 trial and could in due course himself challenge the creditors' status; further, the companies gave an undertaking not to challenge Mr Ward's standing to do so later. That combination meant there was no good reason to delay the misfeasance trial.

Outcome: Permission to appeal had been granted on paper but the appeal was dismissed because the judge's conclusion on standing and the case-management decision to refuse an adjournment were correct.

The appeal was dismissed. The Court of Appeal agreed that the former liquidator lacked standing under the Insolvency Rules (in particular rule 4.85 and the Chapter 9 regime) to challenge the consent order once she had ceased to be liquidator and was not a creditor. Although the court accepted the fraud challenge had a real prospect of success, the statutory scheme identifies who may challenge proofs and the present liquidator or creditors should pursue that route; further, for case-management reasons the judge properly refused to adjourn the s.212 trial given the new liquidator's position and the undertakings given.

Appeal to the Court of Appeal (Civil Division) from the decision of HHJ Simon Barker QC in the High Court, Queen's Bench Division refusing an adjournment of the misfeasance trial and declaring that the former liquidator lacked standing to challenge the Consent Order (order dated 16 May 2014). Permission to appeal was given on paper on 21 May 2014; appeal heard and dismissed in the Court of Appeal on 23 May 2014 (Neutral citation: [2014] EWCA Civ 761).