Sharma v Top Brands Ltd & Ors

A defence of illegality does not defeat a claim against a liquidator for misapplication of company assets where the claim can be established without reliance on the company’s unlawful conduct. Illegality that merely forms the background to the liquidation, without a causative or sufficiently close connection to the loss, is collateral. Even if funds are criminal property under the Proceeds of Crime Act 2002, that status does not determine the common-law defence. Where public policies compete, the policy requiring liquidators to collect and distribute company assets under the Insolvency Act 1986 may prevail over consistency concerns. The court declined to settle the general law of illegality because the defence failed under each possible approach.

Two creditors of Mama Milla Limited commenced proceedings under section 212 of the Insolvency Act 1986 against its former liquidator. The liquidator had paid out £548,074.56 held for the company after being deceived about the payment’s nature and entitlement to it. The High Court ordered her to contribute that sum to the company’s assets for breach of duty and rejected an illegality defence based on the company’s VAT fraud.

The appeal concerned whether the claim was barred because the money was said to be criminal property, whether the loss was inextricably linked to the company’s fraud, and whether the fraud should be attributed to the company.

1. Appeal dismissed. The Court of Appeal held that the illegality defence could not apply on the facts, while declining to determine the generally binding approach because the authorities disclosed uncertainty.
2. Even assuming that the reliance approach in Tinsley v Milligan [1994] 1 AC 340 applied, the creditors did not need to plead or prove any illegality by Mama Milla Limited. Their claim depended on the sale and delivery of goods, receipt of the money, its transfer to the liquidator’s control, and her subsequent breach of statutory, fiduciary and common-law duties.
3. There was no inextricable or sufficiently close connection between the company’s earlier VAT fraud and the loss claimed. The business had ceased before the liquidator dealt improperly with the money, which had been frozen immediately upon receipt and could not have been used in the fraud. The illegality was collateral and merely part of the background. The case was therefore unlike Columbia Picture Industries Inc v Robinson [1987] Ch 38, Hewison v Meridian Shipping Pte [2002] EWCA Civ 1821 and Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39.
4. The criminal-property argument failed factually. No finding had been made at trial of the separate conspiracy alleged for the first time on appeal, and the proceedings had to proceed on the footing that the money was paid under genuine lawful contracts. In any event, even if the money fell within section 340(3) of the Proceeds of Crime Act 2002, that would not determine the scope of the common-law defence.
5. The relevant public policy was the statutory policy under sections 107 and 212 of the Insolvency Act 1986, requiring company assets to be collected and distributed properly among creditors. That policy prevailed over any policy against appearing to condone illegality. The suggested attribution issue did not arise; in any event, Stone & Rolls was distinguishable and, following Bilta (UK) Ltd v Nazir (No.2) [2015] UKSC 23, was confined to its particular facts.

• Court of Appeal (Civil Division): In [2015] EWCA Civ 1140, the appeal was dismissed.
• High Court of Justice, Chancery Division: On 4 August 2014, His Honour Judge Simon Barker QC ordered the former liquidator to contribute £548,074.56 to the company’s assets under section 212 of the Insolvency Act 1986 and rejected the illegality defence.