Re Top Brands Ltd v Sharma; Mama Milla Ltd (in creditors voluntary liquidation)
| Jurisdiction | England & Wales |
| Judge | HHJ Simon Barker |
| Judgment Date | 04 August 2014 |
| Neutral Citation | [2014] EWHC 2753 (Ch) |
| Docket Number | Case No. 8570 of 2013 |
| Court | Chancery Division |
| Date | 04 August 2014 |
[2014] EWHC 2753 (Ch)
IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
BIRMINGHAM DISTRICT REGISTRY
Birmingham Civil and Family Justice Centre
The Priory Courts
33, Bull Street, Birmingham
His Honour Judge Simon Barker QC
sitting as a Judge of the High Court
Case No. 8570 of 2013
In the Matter of the Insolvency Act 1986
And in the Matter of Mama Milla Limited (In Creditors Voluntary Liquidation)
Representation:
Mr James Morgan instructed by KW Law LLP for the Applicants
Mr William Hansen instructed by ZAK Solicitors until 4 July 2014 and by Saints Solicitors as from 4 July 2014 for the Respondent
Mr Barry Ward in person
Hearing dates 3 – 5 June, 7 July 2014 and 4 August 2014
JUDGMENT (2)
HHJ Simon Barker QC:
Introduction
By an application issued on 28.10.13 pursuant to s.212 of the Insolvency Act 1986 (respectively "s.212" and " IA 1986") Top Brands Limited ("TBL") and Lemione Services Limited ("LSL") as the applicants (collectively "As") seek an order that Mrs Gagen Sharma ("GS") repay, restore, account or pay compensation to Mama Milla Limited (in liquidation) ("MML") for the sum of £548,074.56 ("the Sum") or such other sum as the court thinks just, and other relief.
For the purposes of this judgment, each of TBL and LSL are to be taken to be creditors of MML and, therefore, to have standing under s.212(3) to seek an order that GS repay, restore, account or pay compensation in the Sum to MML. As' status as creditors is derived from a consent order in earlier proceedings between As and GS (Case No. 8264 of 2012). Very shortly before the date set for the trial in these proceedings GS sought permission to challenge As' standing as creditors in a fresh action which GS wished to run parallel with these proceedings on the grounds that TBL's and LSL's claims to be creditors of MML and their proofs of debt are fraudulent and that GS' consent to the order in the earlier proceedings was procured by As' fraudulent misrepresentation. To accommodate the parallel proceedings, GS also sought an adjournment of the trial. GS's application was refused, ultimately by the Court of Appeal on 23.5.14 (see [2014] EWCA Civ 761).
The allegation against GS is that the Sum was money belonging to MML and that, while acting as liquidator of MML, GS negligently and/or in breach of fiduciary duties misapplied the Sum when paying it out by making or authorising 18 transfers of money between 30.11.11 and 30.4.12. Put shortly, GS's defence is that, at the time, she believed (1) based on legal advice from an experienced insolvency lawyer at Gateley LLP (respectively "KT" and "Gateley"), that the Sum was subject to a Quistclose trust in favour of a customer of MML, SERT-MST PLC ("SERT"), and (2) that the transferees were nominees of SERT. GS maintains that, at the time, it was reasonable for her so to believe.
GS is no longer the liquidator of MML. In these proceedings As also applied, under s.108(2) IA 1986, for an order that GS be removed from office and be replaced by Mr Barry John Ward ("BW"). On 20.12.13, the court directed that there be a meeting of creditors to decide this question and, at a meeting held on 17.1.14, GS was removed from office and replaced by BW.
BW was joined as a party on 3.6.14, the first day of the trial. This was foreshadowed during a telephone hearing on 16.5.14 in which BW did not participate. On 23.5.14, As issued an application for an order that, without prejudice to such rights as BW may have as regards challenging the status of As as creditors of MML, BW (as liquidator of MML) be joined to this application so that he is bound by the judgment at trial and may enforce any order made. BW attended at the trial in June and, on the basis proposed by the court that he would not be required to participate in the trial other than as a witness if required to give oral evidence, did not oppose being joined. After being joined as a defendant, BW agreed that, should an order for restoration or repayment be made against GS, he would not oppose an order that any recovery should not be paid out to As, or either of them, without further order of the court.
When being joined to these proceedings, BW also made clear that he would not object to being bound by the outcome of As' application provided he would remain free to make a separate s.212 application against GS on other grounds, should his investigations as liquidator reveal such. Mr Hansen, GS's counsel, submits that the joinder of BW should have the effect of precluding him from issuing any s.212 application as liquidator of MML against GS because GS should not face such litigation more than once and because the court raised the question of joinder on 16.5.14 expressly with a view to affording GS protection from the risk of repetitious litigation. It is correct that I raised the prospect of BW being joined with GS's position in mind, but it is also the case that when joinder of BW was considered, BW had been in office for less than months and had made clear in reports circulated to the parties and filed at court that his investigations into MML and its liquidation were still ongoing. That being so, it would be an unjust interference with the exercise by BW of his duties and powers as liquidator of MML to prohibit him from making an application under s.212 based on material – if there be such – not before the court on As' application. Thus, the joinder operates only to bar BW from attempting, in separate proceedings, to make the same claims or or raise the same issues as are for determination by this judgment.
BW has also made clear that his investigations include MML's trading with TBL and LSL (from whom MML is said to have purchased substantial consignments of toiletries, in particular soap and razors) and with SERT (to whom MML is said to have sold such consignments). The reason for this is that the real business conducted through MML was VAT fraud. It is apparent from BW's 1 st interim report that within two months of his appointment BW had discovered that MML had been used to defraud HMRC of more than £780,000 of VAT by simply not accounting for VAT on outputs and by making no or false VAT returns. Of course, MML being a fictional person, the dishonest intent was that of those in control of MML. At trial, BW's oral evidence was that the value of the VAT lost to HMRC by fraud was not less than £1.5million. The facts that BW describes in his 1 st report point clearly to what is termed acquisition fraud (straightforward under accounting for VAT to HMRC by MML). BW is, or was at the date of the trial, still investigating whether the fraud is a more sophisticated missing trader or carousel fraud involving any or all of TBL, LSL and SERT.
In the judgment by which I dismissed GS's application to be permitted to challenge As' standing as creditors, I considered whether or not it is realistically arguable on the available material that any or all of TBL, LSL and SERT were involved in a joint enterprise with or through MML to perpetrate a VAT fraud and concluded that such a possibility cannot be rejected as unrealistic (see [2014] EWHC 1454 (Ch) paragraphs 19 – 29). That remains my view; indeed, if anything, it has strengthened somewhat as a result of the oral evidence at trial 1. The relevant circumstances are (1) before 4.8.11 LSL and SERT had previously traded directly with each other; (2) the pricing structure for the sales by As to
MML (which were VAT exempt) and of the on-sales by MML to SERT (which attracted VAT on outputs as UK domestic sales by MML) only worked if MML treated the VAT element of its selling prices as revenue rather than tax; (3) at least in theory this enabled As to sell at an uncompetitively high price and SERT to buy at an uncompetitively low price; (4) the period and volume of trading was short and substantial; (5) As knew that the consignments were for delivery direct to SERT but it made no attempt to trade directly and cut out MML as the middleman; (6) SERT knew that the consignments were to be supplied by As but they made no attempt to trade directly and cut out MML as the middleman; (7) there were no formal contracts or terms of trade between MML and any of TBL, LSL and SERT; (8) TBL's and LSL's invoices for the supply of goods assert retention of title until paid, but no goods were ever to be delivered to MML and the evidence is silent as to any retention of title notified to SERT; and, (9) TBL, LSL and SERT are not novices in the toiletries business and each would, or may be expected to, know the difference between achievable and unrealistic wholesale prices. These factors are consistent with trading arrangements based on conscious averting of the eyes so as not to see the obvious, alternatively, deliberate joint enterprise fraud; however, that is not to say that there is not some perfectly innocent explanation. My observation emphatically is not a finding of fact that any of TBL, LSL and SERT were involved in a joint enterprise VAT fraud through or with those in control of MML, rather it is an observation that on the available material, including the written and oral evidence of witnesses involved in the management of As and SERT, such a possibility cannot be rejected as fanciful or unrealistic. All of that is no doubt under consideration by BW.GS faces this misfeasance application because, while liquidator of MML, she was not alive to any aspect of the fraudulent trading and because she appears to have been the victim of a separate fraud when deceived into paying out the Sum by 18 transfers in accordance, so she says she believed, with the instructions of SERT. It is for As to prove,...
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