Top Brands Ltd & Ors v Sharma & Ors

A liquidator must exercise the care and diligence expected of an ordinary, skilled insolvency practitioner. That requires an enquiring and neutral approach, careful consideration of available information, diligent steps to obtain missing information, and reassessment when circumstances change. Legal advice does not protect a liquidator where the instructions were materially incomplete or inaccurate. The statutory remedy under s.212 of the Insolvency Act 1986 is not defeated merely because the company may have been used for fraud, where the alleged loss resulted from the liquidator’s own breach of duty. Relief is discretionary, but should not be limited where the liquidator acted unreasonably and the loss was caused by the failures in the liquidation.

The applicants, creditors of Mama Milla Limited in creditors’ voluntary liquidation, applied under s.212 of the Insolvency Act 1986 for orders against the former liquidator, Gagen Sharma. They alleged that she had wrongly paid out £548,074.56 which should have remained available for the company’s creditors.

The principal issues were whether the payments breached the liquidator’s statutory, common-law and fiduciary duties; whether her reliance on legal advice answered the claim; whether the payments caused the loss; whether relief should be limited under s.212 or s.1157 of the Companies Act 2006; and whether illegality barred recovery.

1. Liability. The claim succeeded. The former liquidator acted in breach of the duty implicit in s.107 of the Insolvency Act 1986 and negligently when paying out the company’s money. She failed to analyse the available bank statements and trading documents, obtain essential missing information, investigate competing claims, identify the unusual payment instructions, and notice that the indemnity obtained was defective.
2. A liquidator must be judged by the standard of an ordinary, skilled insolvency practitioner. The proper approach is neutral rather than trusting or distrusting those involved. The liquidator must form a judgment from available information, make careful and diligent enquiries, probe further where appropriate, and revisit earlier judgments when circumstances change.
3. Reliance on legal advice was not a defence. The advice concerning a possible Quistclose trust was based on materially inaccurate instructions. Advice cannot be regarded as properly obtained where the liquidator failed to identify relevant considerations or to obtain information relevant to the instructions and advice.
4. The omissions and errors caused the loss. Had the liquidator investigated the company’s trading, VAT position, bank accounts and the applicants’ claims, the payments would not have been made. The court also considered that the conduct would, if necessary, amount to a breach of fiduciary duty because it showed a conscious disregard of responsibility for company assets.
5. The discretion under s.212(3) should be exercised to require compensation equivalent to the Sum. Relief under s.1157 was unavailable because the liquidator had not acted reasonably. The illegality defence did not apply: the fraudulent purpose of the company did not taint the money in the relevant circumstances, and the statutory misfeasance remedy remained available.