How will the court approach misfeasance cases against office-holders? Top Brands Ltd v Sharma; Re Mama Milla Ltd

Original news

Top Brands Ltd v Sharma; Re Mama Milla Ltd (in creditors voluntary liquidation) [2014] EWHC 2753 (Ch), [2014] All ER (D) 32 (Aug)

Can reliance on legal advice defeat a claim for breach of fiduciary duty or negligence?

James Morgan of St Philips Chambers, who appeared for the applicants in a recent misfeasance case, says the court will enquire whether the adviser was provided with all the relevant information.

What were the facts of the case?

The applicants were creditors of Mama Milla Ltd (MML) who brought misfeasance proceedings under IA 1986, s 212 against the respondent (as former liquidator of MML) alleging breach of fiduciary duty and/or negligence as a result of her paying away the company’s only major asset—namely £548,000 in cash—to multiple (and largely) overseas bank accounts in reliance on purported instructions from a company claiming (wrongly) that this cash was held on trust for it.

What were the main legal arguments arising?

To a large extent the case turned on the facts, but the main legal arguments concerned:

• whether the respondent’s fiduciary duty extended to not acting perversely or irrationally or for irrelevant or extraneous reasons

• the extent to which the respondent could rely on legal advice that she received in relation to entitlement to the cash, and

• in circumstances where MML had been used by its directors for some form of VAT fraud, whether the claim against the respondent was barred by reason of illegality or ex turpi causa

What was the decision of the judge and why do you think he reached his decision in this case?

On the facts, the judge decided that the respondent was negligent and in breach of her fiduciary duties to MML in paying away the cash without properly investigating entitlement to it. He concluded that the respondent could not rely on legal advice she received because she had given her solicitor incomplete and untrue information. He also rejected the illegality defence primarily on the basis that the VAT fraud merely gave the opportunity for the breach of duty and was not sufficiently connected with it to bar the claim. Overall, the judge decided the case as he did because the respondent was an experienced insolvency practitioner of whom a high standard of conduct was to be expected, but she had consciously disclaimed or disregarded responsibility for assets under her control.

To what extent is the judgment helpful in clarifying the law in this area?

Successful misfeasance cases against office-holders are unusual. The judgment confirms or clarifies that:

• as a paid professional, an office-holder will to be held to a high standard of care and diligence

• his fiduciary duty extends to not acting perversely or irrationally or for irrelevant or extraneous reasons

• he cannot rely on legal advice in defence of a misfeasance claim in circumstances where he has not taken proper care and skill to provide the adviser with truthful and complete relevant information, and

• where the illegality relates to the manner in which the company was run prior to liquidation, it is very unlikely to provide a misfeasant office-holder with a means of avoiding liability for their own subsequent breach of duty (cf Stone & Rolls Ltd (in liq) v Moore Stephens (a firm) [2009] UKHL 39, [2009] 4 All ER 431; Bilta (UK) Ltd v Nazir [2014] Ch 52)

What practical lessons can those advising take away from this case?

At least three practical lessons:

• if the office‐holder is 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 and 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

Interviewed by Nicola Laver.

The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.

Further reading

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How will the court approach misfeasance claims? 

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