Top Brands v Sharma (Court of Appeal)

The Court of Appeal dismissed an appeal against an order under section 212 of the Insolvency Act 1986 requiring the former liquidator, Mrs Sharma, to contribute £548,074.56 to the company’s assets for breaches of duty. The court confirmed that the claim under section 212 was not barred by an illegality defence or by the suggestion that the sum was "criminal property" within the meaning of the Proceeds of Crime Act 2002.

The court accepted the trial judge’s findings that Mrs Sharma had breached duties implicit in IA 1986 section 107 and section 212 and had acted negligently and, in parts, in breach of fiduciary duty by paying out the frozen sum without adequate enquiries, instructions to advisers or consideration of available records (findings summarised at [173]–[175]). The court held that any illegality in the company’s prior trading was collateral to the misfeasance claim, that the statutory scheme in IA 1986 favoured enforcing a liquidator’s duties to gather and distribute assets, and that no factual basis had been shown for attributing a prior conspiracy to the company in a way that would defeat the creditors’ claim.

Background and parties: Mama Milla Limited (MML) entered creditors’ voluntary liquidation on 21 September 2011. The liquidator, Mrs Gagen Sharma, was later the subject of a section 212 misfeasance claim brought by two creditors, Top Brands Limited and Lemione Services Limited, who alleged that a sum of £548,074.56 paid into MML’s bank account had been wrongly paid out by the liquidator. Mr Barry Ward became liquidator by replacement. The claim proceeded to a four day trial before His Honour Judge Simon Barker QC, whose order of 4 August 2014 required Mrs Sharma to contribute the sum to MML’s assets; Mrs Sharma appealed.

Nature of the claim: The respondents pursued a statutory remedy under IA 1986 section 212 seeking repayment or a contribution to the company’s assets for misapplication of company property and breaches of fiduciary and statutory duty by the liquidator. The principal contested legal issue on appeal was whether the claim was barred by illegality on the ground that the sum was criminal property (POCA s340(3)), or otherwise whether public policy prevented recovery.

Issues before the Court of Appeal:

1. Whether an illegality defence (ex turpi causa / criminal property under POCA) barred the section 212 claim;
2. Whether any alleged criminal conduct by MML or its controllers was inextricably linked to the loss claimed;
3. Whether the public policy underpinning the insolvency statutory scheme outweighed any public policy ground for barring recovery; and
4. Whether attribution of the directors’ or owners’ dishonest intentions to the company could defeat the creditors’ section 212 claim.

Court’s reasoning and conclusions: The Court of Appeal upheld the trial judge’s factual findings that Mrs Sharma had acted below the standard of an ordinary, skilled insolvency practitioner by failing to make adequate enquiries, obtain and analyse bank statements and supporting documentation, give adequate instructions to solicitors, or notice defects in indemnities before making payments out. The court explained that:

• the claim under section 212 did not require reliance on any facts disclosing illegality by MML and therefore any illegality in MML’s prior trading was collateral to the statutory misfeasance claim;
• there was no trial finding (and no evidence before the trial judge) that the creditors or other third parties had been party to a conspiracy rendering the Sum "criminal property" at the moment it was received; accordingly Mrs Sharma could not for the first time raise a different conspiracy on appeal;
• even if POCA might render property forfeitable, that statutory code did not displace the common law illegality defence in the manner asserted and does not provide a clear steer that civil recovery under IA 1986 must be barred; and
• the competing public policy in IA 1986 (notably sections 107 and 212) favour enforcement of a liquidator’s duty to realise and distribute company assets for the benefit of creditors, and that policy predominated where the illegality was collateral and non-causal to the loss.

The Court therefore dismissed the appeal and affirmed the order that Mrs Sharma contribute the stated sum to MML’s assets.

Appeal dismissed. The court held that the section 212 misfeasance claim was not barred by an illegality defence: the illegality in MML’s prior trading was collateral to the statutory claim, there was no proved conspiracy rendering the sum criminal property, and the statutory insolvency scheme (sections 107 and 212 IA 1986) and public policy favour enforcing a liquidator’s duties to gather and distribute assets.

Appeal from order of His Honour Judge Simon Barker QC (High Court, Chancery Division, Birmingham District Registry) dated 4 August 2014; judgment of the Court of Appeal delivered 10 November 2015, [2015] EWCA Civ 1140.