Gagen Sharma (as former Liquidator of Mama Milla Ltd) v Top Brands Ltd and Others (First and Second Respondents)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Christopher Clarke,Lord Justice Lloyd Jones |
| Judgment Date | 10 November 2015 |
| Neutral Citation | [2015] EWCA Civ 1140 |
| Docket Number | Case No: A2/2014/2732 |
| Court | Court of Appeal (Civil Division) |
| Date | 10 November 2015 |
[2015] EWCA Civ 1140
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
His Honour Judge Simon Barker QC
Royal Courts of Justice
Strand, London, WC2A 2LL
THE CHANCELLOR OF THE HIGH COURT
Lord Justice Christopher Clarke
and
Lord Justice Lloyd Jones
Case No: A2/2014/2732
Michael Soole QC and William Hansen (instructed by Saints Solicitors) for the Appellant
James Morgan and Nicholas Brown (instructed by KW Law LLP) for the 1 st and Second Respondents 3 rd Respondent did not attend the hearing
Hearing dates: Tuesday 20th October 2015
The Chancellor (Sir Terence Etherton):
This is an appeal from the order dated 4 August 2014 of His Honour Judge Simon Barker QC, sitting as a High Court judge, by which, among other things, he ordered the appellant, Gagen Dulari Sharma ("Mrs Sharma"), the former liquidator of Mama Milla Limited ("MML"), to contribute £548,074.56 to MML's assets by way of compensation for her breaches of duty as liquidator pursuant to section 212 of the Insolvency Act 1986 (" IA 1986").
The application under section 212 has been brought by two creditors of MML, Top Brands Limited ("Top Brands") and Lemione Services Limited ("Lemione Services"), who are the first and second respondents to the appeal (together "the Respondents"). There is a third respondent, Barry Ward ("Mr Ward"), who is the current liquidator of MML.
The sole ground for which permission to appeal has been granted is that the claim under section 212 is in reality a claim to recover criminal property and, for that reason, the Judge should have dismissed the application "as contrary to the public policy of preserving the integrity of the legal system". In substance, Mrs Sharma's argument is that she has a defence of illegality.
The factual background
MML was incorporated in England on 17 November 2009. It carried on business as a supplier of toiletry products, in particular soap and razors, until it entered creditors' voluntary liquidation on 21 September 2011. Its sole shareholder was Faruq Abdullah Tariq ("Tariq"). He and Mr Savankumar Patel were its registered directors. Mr Hafeez Rehman was a shadow director.
The business conducted through MML involved VAT acquisition fraud. MML, which was registered for VAT as a retailer, purchased toiletries, including razors and soap, from suppliers outside the UK, who were therefore not registered for VAT, and sold the goods to UK trade customers, which were registered for VAT. MML failed to account to HMRC for the VAT on its outputs. Mr Ward's evidence at the trial was that the VAT lost to HMRC by the fraud was not less than £1.5 million.
The principal purchaser from MML was SERT-MST plc ("SERT").
Top Brands was incorporated in Malta. Lemione Services was incorporated in Cyprus. Both companies are owned by Mr Dildar Singh, and their businesses were run by his son, Mr Pardeep Singh Heer.
Top Brands claims that it agreed to sell to MML for £332,660, and to deliver to MML's customer SERT, large quantities of soap and razors; it did deliver those goods to SERT on about 6 September 2011 but it has not been paid. Lemione Services claims that it agreed to sell to MML for £189,000 (plus transport costs of £265), and to deliver to MML's customer SERT, a large quantity of razors; it did deliver those goods to SERT on about 6 September 2011 but it has not been paid.
The Respondents claim that on 5 and 6 September 2011, pursuant to a contract between them, MML sent SERT three invoices for those goods for the total amount of £548,074.56. On about 14 September 2011 SERT paid that sum ("the Sum") into MML's NatWest bank account. The facts in this and the previous paragraph are admitted by Mrs Sharma in her Defence.
MML's bank account containing the Sum was frozen as a result of an impending meeting of creditors of MML, which Mr Tariq had requested Mrs Sharma to arrange.
On 21 September 2011 the creditors' voluntary winding up of MML commenced and Mrs Sharma, a licensed insolvency practitioner, was appointed its liquidator.
The money in the NatWest account was transferred to Mrs Sharma's Barclays account.
As a result of a fraud practised on Mrs Sharma and apparently on MML, which led her to believe that the Sum was an advance payment by SERT for goods which were never delivered and that SERT was entitled to repayment, Mrs Sharma authorised the payment of the Sum out of the Barclays account in various amounts and at various dates to numerous different recipients between 30 November 2011 and 20 April 2012 on what she believed were the instructions of SERT.
Having initially rejected the Respondents' formal proof of debt in the amount of the Sum, and the Respondents having commenced proceedings challenging the rejection of their proof, on 27 September 2012 Mrs Sharma agreed to a consent order accepting the Respondents as creditors of MML in the amount of the Sum. She subsequently applied to set aside the consent order but that application was rejected by the Judge and, on appeal, by the Court of Appeal.
The Respondents commenced these misfeasance proceedings against Mrs Sharma under IA 1986 section 212 ("section 212") on 4 October 2012. In them they claim, among other things, an order that Mrs Sharma contribute to MML's assets an amount equal to the Sum by way of compensation for her breaches of duty.
At a meeting of creditors held on 17 January 2014 Mrs Sharma was removed as liquidator and replaced by Mr Ward.
The section 212 proceedings were tried by the Judge over four days in June 2014. He handed down his judgment on 4 August 2014.
Section 212
Section 212 provides as follows, so far as relevant:
"212 Summary remedy against delinquent directors, liquidators, etc.
(1) This section applies if in the course of the winding up of a company it appears that a person who —
(a) …
(b) has acted as liquidator … of the company …,
(c) …
has misapplied or retained, or become accountable for, any money or other property of the company, or been guilty of any misfeasance or breach of any fiduciary or other duty in relation to the company.
(2) The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who has acted as liquidator … of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator … of the company.
(3) The court may, on the application of the official receiver or the liquidator, or of any creditor or contributory, examine into the conduct of the person falling within subsection (1) and compel him —
(a) to repay, restore or account for the money or property or any part of it, with interest at such rate as the court thinks just, or
(b) to contribute such sum to the company's assets by way of compensation in respect of the misfeasance or breach of fiduciary or other duty as the court thinks just.
(4) The power to make an application under subsection (3) in relation to a person who has acted as liquidator… of the company is not exerciseable, except with the leave of the court, after he has had his release."
The judgment
The Judge considered whether any or all of Top Brands, Lemione Services or SERT were involved in a joint enterprise with or through MML to perpetrate a VAT fraud. He said (at [8]) that, on the available material, including the written and oral evidence of witnesses involved in the management of the Respondents and SERT, "such a possibility cannot be rejected as fanciful or unrealistic" but he also said that observation was "emphatically … not a finding of fact that any of [Top Brands], [Lemione Services] and SERT were involved in a joint enterprise VAT fraud through or with those in control of MML".
The Judge said (at [26]) that the nature and extent of the core duties of a liquidator in a creditors' voluntary winding up may largely be ascertained from section 212 and IA 1986 section 107. Section 107 provides that, subject to the provisions of IA 1986 as to preferential payments, the company's property in a voluntary winding up shall on the winding up be applied in satisfaction of the company's liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company. He said (at [27]) that, in a case such as the winding up of MML where there are no preferential creditors and there will not be a surplus for distribution to the members, it is implicit in section 107 that the liquidator has duties to gather in and realise the non-monetary assets, aggregate the proceeds with monetary assets, ascertain the liabilities, and distribute the available monies on an equal basis.
The Judge concluded that, in paying out the amount of the Sum in the circumstances in which she did, Mrs Sharma acted in breach of the duty implicit in section 107 and negligently, that is to say below the standard of care to be expected of an ordinary, skilled insolvency practitioner. He summarised his findings on Mrs Sharma's breaches of duty in paragraphs [173] to [175] as follows:
"173. On my findings, the Sum, which should have been available for distribution to creditors, was paid out […] by [Mrs Sharma] to third parties in circumstances where, (1) inadequate...
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