Winding up – s 212 Insolvency Act 1986, misfeasance proceedings – standard of care to be expected from liquidator – wholescale disregard for assets in liquidator’s care amounting to breach of fiduciary duty
Top Brands, creditor of Mama Mia Ltd (‘MML’), in liquidation, applied under s.212 of the Insolvency Act 1986 for orders that Mrs Sharma (MML’s former liquidator) account to MML for some £548,000 paid away from the company in the course of the liquidation to a third party company, SERT, as a result of her negligence and in breach of her fiduciary duties. SERT, a customer of MML’s, claimed that the £548,000 was a prepayment for goods, impressed with a Quistclose trust in its favour entitling it to repayment of the sum. In fact, SERT’s claim was entirely fraudulent.
Granting the relief sought, HHJ Simon Barker QC held that the effective cause of the loss was not the fraud, as Mrs Sharma contended, but her failure to conduct the liquidation of MML with the care and diligence to be expected of an ordinary, skilled insolvency practitioner. The Judge found that even the most cursory review of the documents in Mrs Sharma’s possession would have revealed the fraud. Had she reviewed the documents as she ought to have done, she would readily have discovered a number of serious irregularities including the fact that the pattern of trading between MML and SERT involved goods always being paid for by SERT after, not before, delivery. Had she discharged her duties to a reasonable standard, the sum in question would not have been paid away before the true position as to MML’s trading, assets and liabilities had been enquired into by the liquidator. By contrast, within two months of taking office, the new liquidator discovered a VAT fraud on the part of MML thought to be in the region of some £1.5 million in addition to the SERT fraud.
The Judge concluded (obiter, since he decided the claims on the basis of negligence) that Mrs Sharma’s conduct could also be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale and were a breach of fiduciary duty on her part. The case may go to the Court of Appeal.
It is rare that a court will order a former liquidator to account to the company in liquidation for sums wrongfully paid away to a third party as a result of negligence. But it is possible in an extreme case, such as this where the Judge also concluded that the former liquidator’s omissions amounted to breach of fiduciary duty to the company.
