Top Brands & Anor v Sharma

Section 212 of the Insolvency Act 1986 provides a procedural route for recovery for the benefit of the company. The merits of a misfeasance claim do not depend on the claimant’s status as a creditor.

Under Rule 4.85 of the Insolvency Rules 1986, an admitted proof may be challenged by the liquidator, or by a creditor if the liquidator declines to act. A former liquidator has no standing to challenge creditor proofs through that process or the inherent jurisdiction. The misfeasance trial may proceed while the current liquidator decides whether to challenge the proofs.

The appeal arose from misfeasance proceedings under section 212 of the Insolvency Act 1986. The respondent companies claimed repayment from the former liquidator of money allegedly paid away during the liquidation of Mama Milla Limited.

The former liquidator sought to adjourn the trial so that she could challenge a Consent Order under which the companies had been admitted as creditors. She alleged that the order had been procured by fraud. The High Court considered that the fraud allegation had a real prospect of success, but held that she lacked standing to challenge the companies’ proofs and refused an adjournment. The central issues were whether that conclusion was correct and whether the misfeasance trial should be delayed.

The appeal was dismissed. Lord Justice Vos gave the judgment and Sir Stephen Sedley agreed.

1. Nature of the misfeasance proceedings. Section 212 of the Insolvency Act 1986 is procedural. It provides an alternative means by which the company may obtain recompense for an office-holder’s breach of duty. The company remains the substantive claimant and beneficiary, regardless of whether the application is brought nominally by the company, liquidator or creditor. This was applied from Eurocruit Europe Limited [2008] Bus LR 146.
2. Standing to challenge the proofs. Rule 4.85 of the Insolvency Rules 1986 permits the liquidator, or a creditor where the liquidator declines to act, to apply to expunge or reduce a proof. A former liquidator falls outside those categories. The Consent Order concerned only the relationship between the company and its creditors, so the appellant had no sufficient interest in invoking the court’s inherent jurisdiction to challenge it.
3. Fraud and the section 212 claim. The court accepted that it had inherent jurisdiction to set aside a judgment obtained by fraud, and that a non-party might in some circumstances invoke it. An arguable fraud allegation did not, however, give this former liquidator standing. The companies’ creditor status did not determine whether the misfeasance claim was good. Liability depended on the appellant’s conduct in dealing with MML’s money, while creditor status affected only distribution of any recovery. The standing principles in Deloitte & Touche v Johnson [1999] 1 WLR 1605 were applied.
4. Adjournment. The trial should proceed promptly. The current liquidator had not decided whether to challenge the companies’ status, the appellant had had ample opportunity to raise matters concerning the transactions and repayment, and the companies undertook not to take any procedural point against the current liquidator’s later challenge. The refusal to adjourn was therefore upheld.

1. Court of Appeal (Civil Division): On 23 May 2014, the court dismissed the appeal and upheld the refusal to adjourn the misfeasance trial: [2014] EWCA Civ 761.
2. High Court, Queen’s Bench Division: HHJ Simon Barker QC declared that the former liquidator lacked standing to challenge the Consent Order and refused to adjourn the trial.