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A Negligent Liquidator: Top Brands Ltd v Sharma

November 06 2014

The court exercised its discretion under the Insolvency Act 1986 s.212 to order a liquidator who had been negligent and incompetent in the discharge of her duties as liquidator to account to creditors for the losses caused by her disregard of her responsibilities.

Top Brands Ltd & Ors v Sharma & Ors [2014]

The High Court recently had to consider whether the former liquidator (Mrs Gagen Sharma) should be held responsible under section 212 of the Insolvency Act 1986 (the “Act”) for misapplying company monies in excess of half a million pounds.

Top Brands Limited and Lemione Services Limited (together the “Creditors of  Mama Milla Limited”) issued an application on 28 October 2013 pursuant to section 212 of the Act, which sought 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”).

The accusation against GS was that the Sum belonged to MML and, whilst acting as liquidator of MML, she negligently and/or in breach of her fiduciary duties misapplied the Sum when paying it out by making or authorising 18 transfers of money between 30 November 2011 and 30 April 2012.

The main issue was whether her payment of the Sum was a breach of a statutory duty and/or negligent and/or in breach of fiduciary duty.

Mrs Sharma’s rejected Defence

Mrs Sharma’s defence was that at the time, she believed (1) based on legal advice from an experienced insolvency lawyer at Gateley LLP, that the Sum was subject to a Quistclose trust in favour of a customer of MML, and (2) that the transferees were nominees of SERT. Mrs Sharma maintained that, at the time, it was reasonable for her so to believe.

The Decision of the Court

The Court described Mrs Sharma’s conduct throughout certain stages of the liquidation of MML as capable of being “characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale” and, based on the evidence, the Court found that Mrs Sharma acted in breach of the duty implied in section 107 of the Act (Distribution of a company’s property) and had acted negligently.

The Court also agreed that Mrs Sharma, when acting as liquidator of MML, owed a duty of care, enforceable through the process provided by section 212 of the Act, in the performance of her duties and in the way she exercised her powers. However, the Court accepted that there is no duty on a liquidator to investigate the affairs of a company before appointment.

HHJ Simon Barker QC concluded:

“In my judgment, GS should be ordered to make good the loss of the Sum to MML.”

The evidence indicated that the liquidator had paid no real attention to MML’s documents, and that she had demonstrated a lack of insight and competence in the handling of the insolvency. She had acted negligently and in breach of the duty implicit in s.107.

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