Top Brands Ltd and another v Sharma and another

The court, on a first instance s.212 Insolvency Act 1986 application by two creditors, held that the former liquidator, Mrs Gagen Dulari Sharma, was liable to make good the loss of £548,074.56 to Mama Milla Limited (in liquidation). The judge found that the liquidator had acted below the standard of care expected of an ordinary, skilled insolvency practitioner by failing to obtain and analyse readily available bank and VAT information, by giving materially flawed instructions to her solicitor (Gateley LLP), and by causing or permitting two tranches of payments to be made from company funds.

Legally significant issues determined included (a) the duties of a liquidator under s.107 IA 1986 and the summary remedies under s.212 IA 1986, (b) the standard of care and the availability of reliance on professional advice (drawing on Pitt v Holt and the authorities cited), (c) the possible characterisation of the conduct as breach of fiduciary duty, (d) causation and the relation of the loss to the liquidator's omissions, (e) the court's discretionary power under s.212 and the possibility of relief under s.1157 Companies Act 2006, and (f) whether an illegality defence (PCA 2002 / VAT fraud context) barred relief. The court rejected the illegality defence and refused to relieve the liquidator under s.1157, concluding that repayment/compensation should be ordered.

Background and parties: Top Brands Limited and Lemione Services Limited (claimant creditors) applied under s.212 Insolvency Act 1986 for orders that the former liquidator, Mrs Gagen Sharma, repay or account for £548,074.56 which had been received into Mama Milla Limited's accounts shortly before liquidation and subsequently paid out by the liquidator. The application was heard at first instance in the Chancery Division; Mr Barry Ward, appointed as successor liquidator, was joined to be bound by the outcome.

Nature of the claim / relief sought: The applicants sought relief under s.212 for misapplication/misfeasance and alternatively compensation; removal and replacement of the liquidator had already occurred pursuant to s.108(2). The claim engaged also the exercise of the court's discretion under s.1157 CA 2006 and a contested illegality defence based on alleged VAT fraud.

Issues framed by the court:

• What are the nature and extent of a liquidator's duties (s.107 and s.212 IA 1986) and the standard of care?
• Did the liquidator negligently or in breach of fiduciary duty misapply company funds by making or authorising the payments?
• Did the liquidator's conduct cause the loss to the company?
• Should relief be granted and in what form under s.212 (and whether relief should be reduced or excused under s.1157 CA 2006)?
• Is the claim barred by an illegality defence linked to suspected VAT/carousel fraud?

Court's reasoning and findings:

• The judge applied the ordinary professional negligence standard for insolvency office‑holders and emphasised the duty to take prompt, basic enquiries (bank statements, VAT returns, checking available trading documents) and, where appropriate, seek court directions.
• On the facts the liquidator had received and retained a set of documents and bank statements which, upon proper review, would have revealed substantial trading and VAT exposure and a pattern inconsistent with the limited account given by the company's directors; she failed to obtain missing bank statements, did not analyse available records, and gave flawed factual instructions to her solicitor on which legal advice was given.
• As a result she effected or authorised payments: (i) a tranche of about £148,000 on 30 November 2011 and (ii) transfers equating to £400,000 (paid out as US$630,204 between March and April 2012 via an intermediary) which the judge found should not have been made. Those losses were caused by her omissions and failures rather than the intervening fraud alone.
• The judge found that the pattern of omissions could amount to breach of fiduciary duty as well as negligence, but the principal finding was breach of the duties implicit in s.107 and liability under s.212. Reliance on advice did not excuse her because the legal advice had been given on materially incorrect instructions.
• The court rejected the illegality defence: the company’s fraudulent purpose did not preclude an examination of the liquidator’s conduct nor did it render the sums incapable of restitution (the cash had been frozen and then under the liquidator's control), and Stone & Rolls and related authorities were considered but distinguished on the facts. The judge also refused to excuse liability under s.1157 CA 2006.

Outcome: the court ordered that the liquidator make good the loss to the company; interest and other consequential matters were to be addressed at the further hearing specified.

The court allowed the s.212 application: Mrs Gagen Sharma was ordered to make good the loss of £548,074.56 to Mama Milla Limited. The judge concluded she had acted below the standard of an ordinary, skilled insolvency practitioner and, alternatively, breached fiduciary duties by failing to obtain and analyse available bank and VAT information, by giving inadequate instructions to counsel, and by authorising improper payments. The illegality defence and the claim for relief under s.1157 Companies Act 2006 were rejected.