A Stark Warning for Insolvency Practitioners

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Ian Scobbie

The recent case of Top Brands Limited and others –v- Gagen Dulari Sharma and others sets out the fiduciary duties a liquidator has whilst in tenure.

Ms Sharma (“Respondent”) was appointed as the liquidator of Mama Milla Limited (“MML”) on 21 September 2011. Whilst in office, Ms Sharma made 18 transfers of money between 30 November 2011 and 30 April 2012 amounting to £548,074.56.

The purported creditor, who claimed the funds were held on trust, received the sum of £548,074.56 (“Sum”). However, the Respondent had in fact been a victim of fraud. The Sum purported to be held on trust, was gained via a VAT fraud. The Respondent had transferred the Sum to an overseas bank account and the fraudulent company absconded with the funds.

The creditors of MML were denied a dividend payment (inclusive of the Sum) which should have been made available to them. Top Brands Limited and Lemione Services Limited brought an action against the Respondent pursuant to Section 212 of the Insolvency Act 1986 (“the Act”) and sought an Order for the Respondent to restore the Sum to the estate of MML.

The Claimants’ case centred on the Respondent paying monies to a third party without exercising the necessary due care and attention in her enquires before doing so. Within two months of Mr Ward’s appointment, as the replacement Liquidator of MML, it materialised that MML had been used as part of a VAT fraud, a fact which the Respondent had failed to recognise.

On the facts, it was held that:

  • The Respondent had been negligent and in breach of her fiduciary duties in making the payments of the Sum without making proper investigations;
  • She was not able to rely on the legal advice she had received as she had not given the solicitor in question sufficient information in order to receive advice on the matter; and
  • The defence of the claim being barred for illegality was dismissed as the VAT fraud merely provided an opportunity for her to commit the breach;
  • Finally, the Respondent was to receive no remuneration for her time as liquidator of MML.

This case, as with all cases under Section 212 of the Act, are often decided on their own facts. In this case, the Respondent’s experience was taken into consideration as someone in her position should have been more diligent in their investigations.

‘IPs’ can take the following lessons from this case:

  • If the office holder has any doubt about the correct application of a substantial asset then an Application should be made to court for directions;
  • Reliance on legal advice is not a ‘trump card’ when defending claims for breach of fiduciary duty and/or negligence as the court will enquire whether the adviser was provided with all the relevant information, and
  • In the context of misfeasance claims, the scope of the illegality defence has been narrowed further.

Ian Scobbie
Associate Solicitor
Commercial Dispute Resolution Department
IScobbie@LawBlacks.com
 0113 2279327

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