Sharma v Top Brands Ltd & Ors

This is an appeal from the order dated 4 August 2014 of His Honour Judge Simon Barker QC, sitting as a High Court judge, by which, among other things, he ordered the appellant, Gagen Dulari Sharma (“Mrs Sharma”), the former liquidator of Mama Milla Limited (“MML”), to contribute £548,074.56 to MML’s assets by way of compensation for her breaches of duty as liquidator pursuant to section 212 of the Insolvency Act 1986 (“IA 1986”).

The application under section 212 has been brought by two creditors of MML, Top Brands Limited (“Top Brands”) and Lemione Services Limited (“Lemione Services”), who are the first and second respondents to the appeal (together “the Respondents”). There is a third respondent, Barry Ward (“Mr Ward”), who is the current liquidator of MML.

The sole ground for which permission to appeal has been granted is that the claim under section 212 is in reality a claim to recover criminal property and, for that reason, the Judge should have dismissed the application “as contrary to the public policy of preserving the integrity of the legal system”. In substance, Mrs Sharma’s argument is that she has a defence of illegality.

MML was incorporated in England on 17 November 2009. It carried on business as a supplier of toiletry products, in particular soap and razors, until it entered creditors’ voluntary liquidation on 21 September 2011. Its sole shareholder was Faruq Abdullah Tariq (“Tariq”). He and Mr Savankumar Patel were its registered directors. Mr Hafeez Rehman was a shadow director.

The business conducted through MML involved VAT acquisition fraud. MML, which was registered for VAT as a retailer, purchased toiletries, including razors and soap, from suppliers outside the UK, who were therefore not registered for VAT, and sold the goods to UK trade customers, which were registered for VAT. MML failed to account to HMRC for the VAT on its outputs. Mr Ward’s evidence at the trial was that the VAT lost to HMRC by the fraud was not less than £1.5 million.

The principal purchaser from MML was SERT-MST plc (“SERT”).

Top Brands was incorporated in Malta. Lemione Services was incorporated in Cyprus. Both companies are owned by Mr Dildar Singh, and their businesses were run by his son, Mr Pardeep Singh Heer.

Top Brands claims that it agreed to sell to MML for £332,660, and to deliver to MML’s customer SERT, large quantities of soap and razors; it did deliver those goods to SERT on about 6 September 2011 but it has not been paid. Lemione Services claims that it agreed to sell to MML for £189,000 (plus transport costs of £265), and to deliver to MML’s customer SERT, a large quantity of razors; it did deliver those goods to SERT on about 6 September 2011 but it has not been paid.

The Respondents claim that on 5 and 6 September 2011, pursuant to a contract between them, MML sent SERT three invoices for those goods for the total amount of £548,074.56. On about 14 September 2011 SERT paid that sum (“the Sum”) into MML’s NatWest bank account. The facts in this and the previous paragraph are admitted by Mrs Sharma in her Defence.

MML’s bank account containing the Sum was frozen as a result of an impending meeting of creditors of MML, which Mr Tariq had requested Mrs Sharma to arrange.

On 21 September 2011 the creditors’ voluntary winding up of MML commenced and Mrs Sharma, a licensed insolvency practitioner, was appointed its liquidator.

The money in the NatWest account was transferred to Mrs Sharma’s Barclays account.

As a result of a fraud practised on Mrs Sharma and apparently on MML, which led her to believe that the Sum was an advance payment by SERT for goods which were never delivered and that SERT was entitled to repayment, Mrs Sharma authorised the payment of the Sum out of the Barclays account in various amounts and at various dates to numerous different recipients between 30 November 2011 and 20 April 2012 on what she believed were the instructions of SERT.

Having initially rejected the Respondents’ formal proof of debt in the amount of the Sum, and the Respondents having commenced proceedings challenging the rejection of their proof, on 27 September 2012 Mrs Sharma agreed to a consent order accepting the Respondents as creditors of MML in the amount of the Sum. She subsequently applied to set aside the consent order but that application was rejected by the Judge and, on appeal, by the Court of Appeal.

The Respondents commenced these misfeasance proceedings against Mrs Sharma under IA 1986 section 212 (“section 212”) on 4 October 2012. In them they claim, among other things, an order that Mrs Sharma contribute to MML’s assets an amount equal to the Sum by way of compensation for her breaches of duty.

At a meeting of creditors held on 17 January 2014 Mrs Sharma was removed as liquidator and replaced by Mr Ward.

The section 212 proceedings were tried by the Judge over four days in June 2014. He handed down his judgment on 4 August 2014.

Section 212 provides as follows, so far as relevant:

“212 Summary remedy against delinquent directors, liquidators, etc.

(1)

This section applies if in the course of the winding up of a company it appears that a person who—

(a)

…

(b)

has acted as liquidator … of the company …,

(c)

…

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.

(2)

The reference in subsection (1) to any misfeasance or breach of any fiduciary or other duty in relation to the company includes, in the case of a person who has acted as liquidator . . . of the company, any misfeasance or breach of any fiduciary or other duty in connection with the carrying out of his functions as liquidator . . . of 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.

(4)

The power to make an application under subsection (3) in relation to a person who has acted as liquidator. . . of the company is not exerciseable, except with the leave of the court, after he has had his release.”

The Judge considered whether any or all of Top Brands, Lemione Services or SERT were involved in a joint enterprise with or through MML to perpetrate a VAT fraud. He said (at [8]) that, on the available material, including the written and oral evidence of witnesses involved in the management of the Respondents and SERT, “such a possibility cannot be rejected as fanciful or unrealistic” but he also said that observation was “emphatically … not a finding of fact that any of [Top Brands], [Lemione Services] and SERT were involved in a joint enterprise VAT fraud through or with those in control of MML”.

The Judge said (at [26]) that the nature and extent of the core duties of a liquidator in a creditors’ voluntary winding up may largely be ascertained from section 212 and IA 1986 section 107. Section 107 provides that, subject to the provisions of IA 1986 as to preferential payments, the company’s property in a voluntary winding up shall on the winding up be applied in satisfaction of the company’s liabilities pari passu and, subject to that application, shall (unless the articles otherwise provide) be distributed among the members according to their rights and interests in the company. He said (at [27]) that, in a case such as the winding up of MML where there are no preferential creditors and there will not be a surplus for distribution to the members, it is implicit in section 107 that the liquidator has duties to gather in and realise the non-monetary assets, aggregate the proceeds with monetary assets, ascertain the liabilities, and distribute the available monies on an equal basis.

The Judge concluded that, in paying out the amount of the Sum in the circumstances in which she did, Mrs Sharma acted in breach of the duty implicit in section 107 and negligently, that is to say below the standard of care to be expected of an ordinary, skilled insolvency practitioner. He summarised his findings on Mrs Sharma’s breaches of duty in paragraphs [173] to [175] as follows:

“173.

On my findings, the Sum, which should have been available for distribution to creditors, was paid out […] by [Mrs Sharma] to third parties in circumstances where, (1) inadequate steps were taken by [Mrs Sharma] to ascertain MML’s state of affairs at liquidation, (2) inadequate, if any, consideration was given by [Mrs Sharma] to the material available as to MML’s trading, assets and liabilities, (3) no attempt was made by [Mrs Sharma] to obtain important missing information, (4) inadequate instructions were given by [Mrs Sharma] to the solicitor [advising her], who advised that repayment could be made, (5) inadequate thought was given by [Mrs Sharma] to new circumstances and evidence as they presented themselves to [Mrs Sharma], (6) inadequate enquiries were made by [Mrs Sharma] as to the payees of the Sum before payment, and (7) [Mrs Sharma] failed to notice, before making payments out, that the indemnity in fact obtained was not in the required form

174.

Had [Mrs Sharma] acted with the care and diligence to be expected of an ordinary, skilled insolvency practitioner (1) the Sum would have been retained within her Barclays account for the benefit of MML; (2) before reaching any conclusions, [Mrs Sharma] would have reconstituted MML’s trading records by, at the very least, obtaining and analysing a complete set of bank statements (not an onerous task given the relatively short period of trading); (3) supporting documentation would have been obtained from creditors (Applicants) and customers (SERT) presenting themselves to [Mrs Sharma] and collated and considered; and (4) any competent insolvency practitioner would then have realised that (a) VAT had not been accounted for, (b) Applicants had a recent but active history of trading with MML as suppliers, and (c) SERT had an active history of trading with MML and was its most significant customer. This would have prompted further investigations, very different instructions to [her Solicitor], and, very possibly, an application to the court for directions. What would not have happened was the loss of the Sum before the true position as to MML’s trading, assets and liabilities had been enquired into by the liquidator, let alone established.

175.

Although, again, not essential to my decision, [Mrs Sharma’s] conduct through to 5.3.12, and continuing on through to 30.4.12, may also be characterised as a conscious disclaimer or disregard of responsibility for the assets in her charge on a material scale and a breach of fiduciary duty on her part.”

The Judge further concluded (at [184]) that it was not a case where the court should exercise its discretion to decline to grant or to limit relief under section 212. He also held (at [187]) that relief ought not to be granted to Mrs Sharma under section 1157 of the Companies Act 2006 (power of the court to grant relief where the officer of the company has acted honestly and reasonably and ought fairly to be excused) since she did not act reasonably in the conduct of MML’s liquidation and the payment of the Sum.

In the skeleton argument prepared on behalf of Mrs Sharma for the trial an illegality argument was raised for the first time. The Judge considered that it was not necessary for Mrs Sharma to have pleaded an illegality defence in order for her counsel to raise it in submissions. The Judge addressed it in paragraphs [188] to [205] of his judgment. He dismissed it for the reasons set out in paragraph [204] of his judgment as follows:

“204.

In my judgment, the illegality defence does not assist [Mrs Sharma] in this case. Parliament has chosen to provide a statutory procedure by which a creditor may claim against a liquidator for misfeasance and the court, after examining into the conduct of the liquidator may order repayment, restoration, an account or compensation to the company. Upon examination into the liquidator’s conduct, in this case an order is justified. The illegality is peripheral to the subject matter of the court’s examination (what the liquidator did or did not do and why); MML’s fraudulent intent, which being rooted in the minds of its directors and its owner, did not impregnate or blight the Sum as it arrived in MML’s NatWest account, nor could it do so after transfer of the Sum into [Mrs Sharma’s] Barclays account. [Mrs Sharma] was oblivious to the fraudulent use to which MML was put throughout her tenure of office, notwithstanding circumstances which should have put her on the scent. The separate fraud apparently perpetrated on her in relation to payment out of the Sum does not raise a barrier to the claim against [Mrs Sharma] for the reason that the payment out was the result of omissions and errors on [Mrs Sharma’s] part which an ordinary, skilled insolvency practitioner would not have made. An illegality defence simply does not arise in the circumstances of this case.

Mr Michael Soole QC, for Mrs Sharma, presented the following facts as a context for his legal submissions. He said that MML was a fraudulent enterprise from beginning to end and from top to bottom, and its only business was the conduct of VAT fraud. He relied particularly on the following statements in the judgment:

“7.

… the real business conducted through MML was VAT fraud. It is apparent from [Mr Ward’s] 1^st interim report that within two months of his appointment [Mr Ward] 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.”

“183.

…MML was simply a vehicle for fraud.”

“199 MML … was to all intents a one man company (Messrs Rehman, Tariq and Patel being of the same mind and acting in concert).”

“199 The illegality in this case is that … the purpose for which the company was established, i.e. the intention of its owners and controlling management, was fraud …”

Mr Soole submitted that implicit in those statements of the Judge was a finding that, prior to receipt of the Sum in MML’s NatWest Bank account, all those in control of MML, namely Mr Rehman, Mr Tariq and Mr Patel, had reached an agreement to procure the Sum in order to carry out a VAT fraud on HMRC.

Mr Soole characterised the present claim as one for tortious wrongdoing. He submitted that in tort claims, other than for conversion of goods, the test for whether the claim is barred by illegality rests on two limbs: (1) the loss claimed must be inextricably linked to the illegality; and (2) the public policy of consistency, that is to say that the court must not permit recovery of loss where that would give the appearance of condoning illegality, is not outweighed by some countervailing public policy.

He distinguished that test from the “reliance” test in Tinsley v Milligan [1994] 1 AC 340, that is to say the claim will be barred only if the claimant needs to rely on facts which show the illegality. He said that the reliance test is applicable only to claims in contract, claims to assert a property right and actions for conversion.

Mr Soole referred to Gray v Thames Trains Ltd [2008] EWCA Civ 713, the judgment of Ward LJ in Hewison v Meridian Shipping Pte [2002] EWCA Civ 1821, [2003] PIQR P17 at [66] to [69], Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889 and R (Best) v Chief Land Registrar [2015] EWCA Civ 17, [2015] 2 P&CR 1 as authority for those propositions of law.

He summarised the question to be posed in the present case as whether the Respondents’ claim for loss is so closely connected or inextricably linked to MML’s unlawful conduct that the court cannot permit recovery without appearing to condone the illegality. In that context, it was common ground before us (and so not in dispute) that section 212 is purely procedural and facilitates a claim for a cause of action vested in the company, even though the proceedings may be commenced, as in the present case, by creditors. Mr Soole cited Re Eurocruit Europe Ltd [2007] EWHC 1433, [2008] Bus LR 146 in that connection. In other words, in the present case the section 212 proceedings are in substance by and for the benefit of MML and not individual creditors or MML’s creditors as a group.

Mrs Sharma contends that that the requirements to raise an illegality defence to a tort claim are satisfied in the present case. Mr Soole’s starting point, as it was before the Judge, is that the entirety of the Sum was criminal property as defined in section 340 (3) of the Proceeds of Crime Act 2002 (“POCA”). That provision is as follows:

“Property is criminal property if –

(a)

it constitutes a person’s benefit from criminal conduct or it represents such a benefit (in whole or part and whether directly or indirectly), and

(b)

the alleged offender knows or suspects that it constitutes or represents such a benefit.”

Mr Soole submitted that the Sum fell within that statutory definition from the moment of its receipt in MML’s bank account because there was a criminal conspiracy between Mr Mr Rehman, Mr Tariq, Mr Patel and their vehicle MML to cheat HMRC by an acquisition fraud in relation to the Sum, and that conspiracy was complete at the moment those individuals agreed to procure the Sum in order to carry out the fraud.

It followed, Mr Soole submitted, that in the present case the Court is being asked to award compensation for the loss of criminal property. His argument is that this underscores both (1) the inextricable connection between the relief claimed in the present proceedings and the illegality of MML in relation to its business generally and the criminal conspiracy in relation to the Sum in particular, and (2) the inevitable inconsistency, if such relief is granted, between the law’s condemnation of the criminal enterprise of MML and treatment of the Sum as criminal property, on the one hand, and the awarding of compensation in respect of dealings with the same criminal property, on the other hand.

Approaching the matter from a different perspective, Mr Soole submitted that MML has suffered no loss in relation to Mrs Sharma’s dealings with the Sum because the Sum was never legitimately acquired in the first place and was tainted from the moment it was received by MML. He referred in that context to Lord Sumption’s repetition in Bilta (UK) Ltd v Nazir (No.2) [2015] UKSC 23, [2015] 2 WLR 1168, (at [96]) of the following statement of Lord Phillips in Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39, [2009] 1 AC 1436 at [5]:

“If a person starts with nothing and never legitimately acquires anything he cannot realistically be said to have suffered any loss.”

Mr Soole cited, by way of analogy, Columbia Picture Industries Inc v Robinson [1987] Ch 38, in which the plaintiff had obtained an Anton Piller order without full disclosure and for an improper purpose and the order had been executed by the plaintiff’s solicitors oppressively and in abuse of their powers. Scott J refused to order any inquiry as to damages, under the plaintiff’s cross-undertaking, into that part of the defendant’s business which comprised the sale of pirate tapes of films unlawfully copied in breach of copyright. Scott J said (at p.88A/B) that:

“the prospect of an inquiry as to the damage caused by the Anton Piller order to such a business bring to my mind the application by the highwayman against his partner for an account. The court would not countenance that application …”

Mr Soole submitted that there is no countervailing public policy applicable to the present claim which outweighs the public policy of avoiding an inconsistency between condemning illegal conduct, on the one hand, and awarding compensation which gives the appearance of condoning it, on the other hand. In particular, he submitted that MML’s creditors can be in no better position that MML itself and there is nothing in IA 1986 which says that they should be.

Finally, Mr Soole submitted that, in the particular context of the present case, the illegal intentions and conduct of Mr Rehman, Mr Tariq and Mr Patel, as the directing minds of MML, should be attributed to MML. He distinguished a case, like Bilta, in which a company claims against its directors in respect of their unlawful conduct, since Mrs Sharma was not a party to any such conduct. He relied upon Stone & Rolls as authority that it makes no difference that Mrs Sharma’s defaults occurred at a time when MML was insolvent and was being wound up. Mr Soole said that, in any event, if the test of inextricable link is satisfied, attribution of illegality to MML must inevitably follow.

The judgments of the Supreme Court in Les Laboratoires Servier v Apotex Inc [2014] UKSC 55, [2014] 3 WLR 1257, Hounga v Allen [2014] UKSC 47, [2014] 1 WLR 2889 and Bilta give rise to uncertainty on the proper approach to a defence based on illegality. In the light of those decisions, it is far from clear that the legal test for the defence to a tort claim (other than for conversion) is that put forward by Mr Soole, and, in particular that the Tinsley reliance approach is restricted to claims in contract, claims to assert a property right and actions for conversion.

It would not be profitable on this appeal to consider in detail all the relevant case law and to state a conclusion on the principles currently binding on this court for two reasons. Firstly, I consider that, whatever is the correct approach to the defence, it plainly cannot apply on the facts of this case. Secondly, it is apparent from the differences of view in Bilta about the current state of the law that the proper approach to the defence of illegality needs to be addressed by the Supreme Court (conceivably with a panel of nine Justices) as soon as appropriately possible, as was expressly stated by Lord Neuberger (with whom Lord Clarke and Lord Carnwath agreed) at paragraph [15] of Bilta.

For the purposes of this appeal, it is sufficient to give the following very brief summary of the possible approaches and why, as regards each of them, the illegality defence cannot apply on the facts of the present case.

In neither Les Laboratoires Servier nor Bilta was the illegality defence raised in the context of a claim in contract or for conversion or to enforce a property right. In particular, Bilta involved a claim in tort for conspiracy to injure and claims based on constructive trust and fraudulent trading. In Les Laboratoires Servier (at [15] to [19]) and in Bilta (at [62]) Lord Sumption stated that Tinsley [1994] 1 AC 340 is binding subject to review in the Supreme Court. Lord Neuberger and Lord Clarke are recorded as agreeing with Lord Sumption in Les Laboratoires Servier; and in Bilta (at [17]) Lord Neuberger stated (subject to an important qualification which I mention at paragraph 51 below) that Les Laboratoires Servier provides a basis for saying that the approach in Tinsley has recently been reaffirmed by the Supreme Court and that it would be inappropriate for the Supreme Court to visit the point again.

Lord Sumption summarised the approach of the House of Lords in Tinsley at paragraph [18] of Les Laboratoires Servier. He said that the House of Lords was divided on the test to be applied. Lord Keith and Lord Goff favoured a rule which would bar any claim tainted by a sufficiently close factual connection with the illegal purpose. Lord Browne-Wilkinson, with whom Lord Jauncey and Lord Lowry agreed, preferred the “reliance test”, the effect of which is that the claim is barred only if the claimant needs to rely on (ie to assert, whether by way of pleading or evidence) facts which disclose the illegality. Lord Sumption said that both are intended to exclude those consequences of an illegal act which are merely collateral to the claim.

As is apparent from the Respondents’ amended points of claim in these section 212 proceedings and from the Judge’s judgment, there has been no need for the Respondents to rely upon any facts which disclosed illegality on the part of MML. The essential ingredients of the Respondents’ case are that: (1) the Respondents sold goods to MML, which were delivered, at MML’s request, to SERT; (2) MML did not pay the Respondents for those goods; (3) MML sold the goods to SERT, which paid the Sum by way of purchase price into MML’s bank account where it was immediately frozen as a result of notice having been given of a meeting to be held of MML’s creditors; (4) MML entered into liquidation and Mrs Sharma was appointed the liquidator; (5) the Sum was transferred into an account in her name or under her control; (6) Mrs Sharma sent the Sum to various bank accounts for the benefit of persons other than creditors of MML and otherwise than to meet proper expenses of the liquidation; (7) in so doing, Mrs Sharma acted in breach of her statutory duty as liquidator, and in breach of fiduciary duty and negligently.

Turning to the test advanced by Mr Soole, the first limb is that the loss claimed must be inextricably linked to the illegality. This resonates with the approach in Tinsley of Lord Goff, with whom Lord Keith agreed. He adopted (at p. 362C) the approach that all that is required is that the alleged misconduct has “an immediate and necessary relation” to the relief claimed. The “inextricable link” test has been endorsed in several cases, which were reviewed by Lord Wilson in Hounga (at [31] to [36]). In the event, Lord Wilson, with whom Baroness Hale and Lord Kerr agreed, approached the matter by concentrating on public policy. Lord Hughes, with whom Lord Carnwath agreed, did, however, focus on (at [58]) and apply the requirement that there must be sufficiently close connection between the illegality and the claim made. He contrasted that (at [58]) with a case where the bar of illegality will not fall because the illegality is not sufficiently closely connected to the claim and can properly be regarded as collateral, or as doing no more than providing the context for the relationship which gives rise to the claim.

I reject Mr Soole’s submission that, on the facts of the present case, there is an inextricable link between the claim or, specifically, the loss claimed and the fraudulent conduct of MML and its directors. That is reflected in the fact that, as I have said, it has not been necessary for the Respondents to rely on anything illegal in order to found the claim against Mrs Sharma. By the time of her improper dealings with the Sum the business of MML had entirely ceased and was never going to revive. The Sum, which was frozen the moment it was received by MML, could never actually have been employed in a VAT fraud.

This is not a case, like Columbia Pictures, or the example of the highwayman given by Scott J in that case, where the claim is for compensation for loss incurred in an unlawful business as a result of the defendant’s conduct. A similar example was given by Clarke LJ in Hewison (at p. 264) of a person who makes his living from burglary seeking to have damages assessed on the basis of what he would have earned from burglary but for the defendant’s negligence: see also the statement of principle to the same effect by Hobhouse LJ in Hunter v Butler [1996] RTR 396 at405B. Nor is this a case like Stone & Rolls where the complaint is that the defendant ought to have prevented the illegal business from continuing.

In the present case, as in Hounga, the illegality has no causative relationship to the loss claimed. It is, in the words of Lord Hughes in Hounga (at [58]), no more than collateral to the Respondents’ claim. It is simply part of the background, and no more than a legally irrelevant aside in that context, in a description of the business which MML carried on prior to the winding up of the company and the appointment of Mrs Sharma as MML’s liquidator.

I reject Mr Soole’s argument that there was a close connection, or inextricable link, between the relief claimed by the Respondents and the illegal conduct of MML and its directors on the ground that the Sum was criminal property as defined by section 340(3) of POCA. That argument rests on the assertion that, prior to the receipt of the Sum by MML, there was an agreement amounting to a criminal conspiracy between Mr Rehman, Mr Tariq, Mr Patel and MML to commit a VAT fraud using the proceeds of the re-sale of the Respondents’ goods to SERT. This assertion falls at the first hurdle because no such argument was addressed to the Judge, who made no finding that there was any such agreement, and indeed who heard no evidence from any of the individuals said to have reached the agreement. The only argument advanced before the Judge relevant to a criminal conspiracy was that SERT and the Respondents were parties to an intended VAT fraud. The Judge, however, did not find any such allegation proved. He emphasised that he made no finding of fact that the Respondents or SERT were jointly involved with MML in any VAT fraud. Accordingly, the proceedings are to be decided on the footing that the Sum was paid pursuant to genuine and lawful contracts of sale. Mrs Sharma cannot assert for the first time in this court a different conspiracy in reliance on general statements by the Judge about MML’s fraudulent business and in the absence of any finding of fact by the trial Judge on the conspiracy now asserted.

In any event, even if the Sum were criminal property within the definition in section 340(3) of POCA, it would not assist Mrs Sharma. POCA gives effect to the intention of Parliament regarding the forfeiture to the State of proceeds of crime. Its scope and meaning turn on the language of the statute intended by Parliament to give effect to its object (apparent from section 2A) of reducing crime. It provides no clear steer for the scope and application of the common law principle ex turpi causa non oritur actio in a civil action for negligence and breach of duty. That point is reinforced by the qualifications in POCA to forfeiture to the State, including, for example, the statutory provisions in section 281 which enable the victims of crime to recover their property, of which they were deprived by unlawful conduct, and the recovery of sums due by way of tax pursuant to section 317.

The second limb of Mr Soole’s test focuses on issues of public policy, and, in particular, competing public policies. There is support for this approach in Les Laboratoires Servier and Hounga.

In Bilta (at [102]) Lord Sumption explained the decision and reasoning of the Supreme Court in Hounga as being consistent with, and not showing any intention to depart from, Tinsley on the footing that it was an example of a case in which there was a competing public policy requiring that damages for the statutory tort of unlawful discrimination should be available to an employee who had been privy to her own unlawful trafficking into the United Kingdom. That appears to have been the same approach as that of the Court of Appeal in R (Best) v Chief Land Registrar.

Lord Neuberger, on the other hand, acknowledged in Bilta at ([17]) the possibility of an argument that the strict reliance approach in Tinsley might no longer be the law. He said that it was not argued in Les Laboratoires Servier that Tinsley was wrongly decided, and, in the light of what the majority said in Hounga at paragraphs [42] to [43], there is room for argument that the Supreme Court has refused to follow Tinsley.

At paragraph [42] of Hounga Lord Wilson, with whomBaroness Hale and Lord Kerr agreed, said as follows:

“The defence of illegality rests on the foundation of public policy. “The principle of public policy is this …” said Lord Mansfield by way of preface to his classic exposition of the defence in Holman v Johnson (1775) 1 Cowp 341, 343. “Rules which rest on the foundation of public policy, not being rules which belong to the fixed or customary law, are capable, on proper occasion, of expansion or modification”: Maxim Nordenfelt Guns and Ammunition Co v Nordenfelt [1893] 1 Ch630, 661 (Bowen LJ). So it is necessary, first, to ask “What is the aspect of public policy which founds the defence?” and, second, to ask “But is there another aspect of public policy to which application of the defence would run counter?” ”

In the present case Mr Soole submitted that a defence of illegality will give effect to the public policy of consistency, that is to say a policy of avoiding the recovery of loss where that would give the appearance of condoning illegal conduct. That policy has no application on the facts of the present case, however, since the fraudulent business carried on by MML prior to its winding up had no causative relationship or close connection to the loss claimed and, as I have said, is simply a legally irrelevant part of the background in the context of describing MML’s business prior to MML’s winding up and the appointment of Mrs Sharma as MML’s liquidator.

Furthermore, as in Hounga, there is another public policy in play on the facts of the present case which would be thwarted by an illegality defence. That is the policy, enshrined in IA 1986 sections 107 and 212, requiring a liquidator properly to collect in and distribute the company’s property among the creditors in accordance with the statutory scheme. In the light of the collateral, non-causal, connection between MML’s fraudulent business prior to liquidation and the breaches of duty by Mrs Sharma as liquidator in disposing of the Sum, it is plainly the policy of requiring liquidators properly to collect and distribute the assets of the company that must prevail. The illogicality and impracticality of allowing an illegality defence in the present case is underscored by the fact that one of the creditors is HMRC itself, which would be deprived of a major asset of MML on the basis of the very illegal conduct of MML which has given rise to HMRC’s loss.

For those reasons the appeal must fail and no question arises as to whether the fraudulent intentions and conduct of Mr Rehman, Mr Tariq and Mr Patel, as the directing minds of MML, should be attributed to MML. For the sake of completeness, however, Stone & Rolls is plainly distinguishable. In that case, the auditors, who were not privy to the fraud of the company, were sued for negligently failing to prevent the company from committing it. That was the third of the three situations mentioned by Lord Sumption in Bilta at paragraph [87] in which the question of attribution arises, namely where the company sues a third party who was not involved in the directors’ breach of duty for an indemnity against its consequences. In the present case, the claim is by two creditors of an insolvent company, for the benefit of the creditors as a whole, against a liquidator for breach of the statutory, common law and equitable duties of a liquidator after the fraudulent business of the company had ceased. There can be no public policy for imputing to the company, as the recipient of any compensation payable under section 212, the dishonest intentions and conduct of the company’s controlling director and sole shareholder for the purpose of defeating the creditors’ claim.

Further, the Supreme Court concluded in Bilta that Stone & Rolls should be treated as turning on its own particular facts and not as authority for any general principle.

For the reasons I have given I would dismiss this appeal.

I agree.

I also agree.