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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Top Brands & Anor v Sharma [2014] EWCA Civ 761 (23 May 2014) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2014/761.html Cite as: [2014] EWCA Civ 761 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
Strand London, WC2A 2LL |
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B e f o r e :
SIR STEPHEN SEDLEY
____________________
TOP BRANDS & ANR |
Appellant |
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v |
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GAGEN DULARI SHARMA |
Respondent |
____________________
WordWave International Limited
A Merrill Communications Company
165 Fleet Street London EC4A 2DY
Tel No: 020 7404 1400 Fax No: 020 7404 1424
(Official Shorthand Writers to the Court)
Mr J Morgan (instructed by KW Law LLP) appeared on behalf of the Respondent
____________________
Crown Copyright ©
LORD JUSTICE VOS:
Introduction
Misfeasance Proceedings
"(1)This section applies if in the course of the winding up of a company it appears that a person who -
(a) is or has been an officer of the company
(b) has acted as liquidator or administrative receiver of the company, or
(c) not being a person falling within paragraph (a) or (b), is or has been concerned, or has taken part, in the promotion, formation or management of the company,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...
(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..."
"In my judgment, Mr Wilson's submissions on this point do not pay sufficient regard to the significance of the fact, made clear by the authorities, that section 212 is procedural in nature. The true significance of that fact is that the section merely provides an alternative means, in terms of procedure, of enabling the company, to which the defaulting director's duty was owed, to obtain recompense from that director for his breach of duty. If the liquidator chooses to name himself as the formal claimant in lieu of the company, his claim is by application, or (as appropriate) originating application, in the liquidation rather than by a claim form under CPR Part 7. The procedure is not available if it is intended to make someone other than a director (or other person falling within section 212(1)) liable for the wrong to the company, for example a claim against a non-director (along with a director) for having conspired to harm the company; in such a case or where other claims not within section 212 are brought against a director, for example a straightforward claim in debt, the claim must be brought by the company. In each case, however, the claimant is in substance the company; the relief which is granted under section 212(3) is for the repayment, restoration or accounting (to the company) of the money or property of the company or for a contribution to be made "to the company's assets by way of compensation" for the wrong in question. This is so whether the claim is brought by the company or by the liquidator or, for that matter, by a creditor or a contributory. It would be extraordinary, therefore, if, finding that a claim brought by the company in liquidation against a defaulting director had been successfully non-suited on limitation grounds, the company's liquidator could, in effect, ignore that result and advance the self-same claim again but, in his own name, shorn of any risk of a successful limitation defence merely because the claim was brought within six years of the commencement of the liquidation. The reason he cannot is that there is only a single cause of action, that of the company. All that section 212 does is give to the liquidator, if he wishes, the right to bring the claim in his own name."
Thus it will be immediately observed that section 212 is a procedural section providing a means by which a company can obtain recompense; in this case from an allegedly defaulting liquidator. That is the substance of the claim that is being brought under section 212. In other words, whoever is the nominal claimant under section 212, the beneficiary of the claim is the company itself; in this case, MML.
The court's involvement in the acceptance or rejection of proofs
"4.73. In a voluntary winding up (whether members' or creditors') the liquidator may require a person claiming to be a creditor of the company and wishing to recover his debt in whole or in part, to submit the claim in writing to him...
4.82. (1) A proof may be admitted for dividend either for the whole amount claimed by the creditor, or for part of that amount.
4.82. (2) If the liquidator rejects a proof in whole or in part, he shall prepare a written statement of his reasons for doing so, and send it as soon as reasonably practicable to the creditor.
4.83. (1) If a creditor is dissatisfied with the liquidator's decision with respect to his proof (including any decision on the question of preference), he may apply to the court for the decision to be reversed or varied. The application must be made within 21 days of his receiving the statement sent under Rule 4.82(2)...
4.84. A creditor's proof may at any time, by agreement between himself and the liquidator, be withdrawn or varied as to the amount claimed.
4.85. Expunging of proof by the court.
(1) The court may expunge a proof or reduce the amount claimed -
(a) on the liquidator's application, where he thinks that the proof has been improperly admitted, or ought to be reduced; or
(b) on the application of a creditor, if the liquidator declines to interfere in the matter.
(2) Where application is made to the court under this Rule, the court shall fix a venue for the application to be heard, notice of which shall be sent by the applicant -
(a) in the case of an application by the liquidator, to the creditor who made the proof, and
(b) in the case of an application by a creditor, to the liquidator and to the creditor who made the proof (if not himself)."
It will be readily seen that chapter 9 of the Insolvency Rules relates to the relationship between creditors and the liquidator in relation to the amount in respect of which that creditor may be admitted for a dividend in winding up. Rule 4.85 is a part of that regime.With that introduction, I turn to the complex chronological background to the issues that arise for decision in this case.
Chronological Background
"A reconciliation of the SERT account shows that these can never have been trust funds due to SERT at all."
"An order adjourning the trial fixed for 14 to 16 April 2014 so as to allow the Defendant to pursue a claim to set aside the Consent Order... by which she accepted the Claimants as creditors of (MML) and thereby gave them the standing to pursue the present proceedings under section 212 of the Insolvency Act 1986..."
"4. Once I have had the opportunity to complete my investigations I will be in a position to prepare a further report if required, but I will in any event prepare reports for creditors in accordance with my statutory duties.
5. I will also in due course be expecting to interview, one, the former directors, assuming they are traceable; two, (possibly Mrs Sharma) [the Appellant]; and three, any other party I find to have been involved with the company who may have relevant information.
6. It would be wrong for a party in this situation to interpret my earlier statement as supporting the view which they may hold before my investigations are concluded...
. . .
8. I am surprised to be told by the solicitors for the Applicants in these proceedings that the former liquidator and Respondent [the Appellant] has read my report and relies on it for the purposes of an interim application to challenge the status of the Applicants as creditors on the basis that they are alleged to be party to the VAT fraud. My interim report does not come to any such conclusion.
9. The investigations do lead to conclusions which Mrs Sharma could have reached herself and which, had she done so, she would have been obliged to report to HMRC.
10. Immediately on my appointment as liquidator I sought to establish the trading position and it was immediately evident that the terms filed at HMRC did not reflect the trading position of the company.
11. I am surprised the issues I was able to identify in the very short period of time were apparently not discovered at all by Mrs Sharma during her 24 months (also in office).
12. On the face of what I have seen, the company had been involved in VAT fraud for a considerable period of time...
. . .
16. In my interim report I have explained that the fraud has elements of a carousel fraud. In this instance, the fraud is not particularly complicated... With regard to the transaction which is the subject matter of the application for misfeasance, I have seen no evidence which would suggest either that this transaction was a sham or that SERT-MST or the Applicant were involved in a fraud with the company..."
The judge's reasons
1. Does the Appellant, being a former liquidator who is no longer an office holder, have sufficient standing to bring an action to set aside the Consent Order?
2. Is the Appellant estopped from challenging the Consent Order on the ground that her consent was obtained by fraud?
3. Would an action by the Appellant against the companies based on such a challenge be an abuse of the court's process?
4. Should the court refuse further to adjourn the trial and refuse to give directions for the concurrent trial of the companies' challenge to the Consent Order for procedural reasons?
"47. In my judgment, the route to challenging a proof of debt already accepted by a liquidator is provided for by r.4.85 IR 1986, which authorises a liquidator or a creditor (if a liquidator declines to act) to apply to the court for a proof to be expunged or reduced. This subordinate legislation, embodied in regulations made under IA 1986, clearly identifies the category of person who may make the application. Thus, r.4.85 limits the jurisdiction of the court (the first kind of case identified by the Privy Council in Deloitte &Touche AG). R [the Appellant] is neither the liquidator nor, so far as I am aware, a creditor of MML. As the former liquidator of MML, R has no jurisdiction to seek to expunge or reduce the proofs of [the companies] TBL and LSL, which is the outcome sought by R's [the Appellant's] intended challenge to the Consent Order...
50. If my conclusion that r.4.85 is relevant, that R [the Appellant] does not qualify as an applicant to challenge the validity of As' [the companies'] proofs and, therefore, that the court lacks jurisdiction to entertain a challenge by her to the Consent Order is wrong, I would accept Mr Lawrence's submission as to the more general kind of case referred to in Deloitte &Touche AG and hold that R [the Appellant] has demonstrated a sufficient interest to enable the court to exercise its inherent jurisdiction and recognise her as a competent party to challenge the Consent Order. Such interest would be based upon (1) the nature of As' [the companies'] claim against R [the Appellant], there being a real prospect that As' [the companies] derive their status from a consent order procured and obtained by fraudulent misrepresentation, and (2) the nature of the claim and remedy to be sought by R [the Appellant]. However, that is not my decision on the Competent Party Issue."
"Ignoring for the moment my decision on the Competent Party Issue, I attach great weight to R's [the Appellant's] desire to raise a fraud challenge to the Consent Order, in this context I treat R's [the Appellant's] challenge as having a real prospect of success and I disregard Mr Morgan's submission that it is very weak; however, I attach even greater weight to the continuation of the s.212 application without further delay because (1) the present liquidator of MML, Mr Ward, endorses the call for R [the Appellant] to explain her conduct as liquidator of MML, and (2) Mr Ward, as liquidator of MML, will be duty bound to satisfy himself that As [the companies] are genuine creditors before making any distribution from MML's assets to its creditors, not least because any distribution to As [the companies] will adversely affect the distribution to MML's undoubted creditor, HMRC."
Accordingly, the judge rejected the application for an adjournment.
Ground 1: Was the judge wrong to hold that the Appellant had no standing to challenge the Consent Order?
"In their Lordships' opinion two different kinds of case must be distinguished when considering the question of a party's standing to make an application to the court. The first occurs when the court is asked to exercise a power conferred on it by statute. In such a case the court must examine the statute to see whether it identifies the category of person who may make the application. This goes to the jurisdiction of the court, for the court has no jurisdiction to exercise a statutory power except on the application of a person qualified by the statute to make it. The second is more general. Where the court is asked to exercise a statutory power or its inherent jurisdiction, it will act only on the application of a party with a sufficient interest to make it. This is not a matter of jurisdiction. It is a matter of judicial restraint. Orders made by the court are coercive. Every order of the court affects the freedom of action of the party against whom it is made and sometimes (as in the present case) of other parties as well. It is, therefore, incumbent on the court to consider not only whether it has jurisdiction to make the order but whether the applicant is a proper person to invoke the jurisdiction."
"A person who is not a party but who is directly affected by a judgment or order may apply to have the judgment or order set side or varied. A judgment which has been obtained by fraud either in the court or of one or more of the parties may be set aside and challenged in fresh proceedings alleging and proving the fraud... theoretically it may be true that even a party to a judgment which has been obtained by fraud is entitled to ask the court to disregard it in subsequent proceedings, but a party who has taken no proceedings to set aside the judgment would have great difficulty in establishing the fraud and a party to a consent judgment obtained by fraud must apply to set aside the judgment in order to avoid the estoppel..."
Ground 2: Was the judge wrong to refuse to adjourn the trial so that the Appellant's challenge to the Consent Order could be heard at the same time?
Disposal
SIR STEPHEN SEDLEY: