MML supplied toiletry products until entering creditors'
voluntary liquidation in 2011. The business conducted through the
company involved VAT acquisition fraud. The claimant creditors
delivered goods to the company but had not been paid. A few weeks
before liquidation, MML sent invoices for the goods which had been
delivered to its onward purchaser, SERT. Over GBP 500,000 was paid
by SERT into MML's account. The account was subsequently frozen
and the liquidator (Ms Sharma) appointed. The sum was transferred
to her and she authorised the transfer of the sum to different
recipients, wrongly believing that the money was supposed to be
returned to SERT as a result of being an advance payment for goods
that were never delivered.
The High Court concluded that Ms Sharma owed a duty of care, had
acted in breach of her duties under the Insolvency Act 1986 and was
liable in negligence by acting below the standard of care expected
of an ordinary, skilled practitioner.
It refused to grant Ms Sharma relief and found that she could
not rely on the illegality defence as a bar to the claim.
Accordingly, she was ordered to pay nearly GBP 550,000 to MML by
way of compensation. Ms Sharma appealed.
The Court discussed the alternative approaches adopted in
previous case law to the illegality defence, but ultimately found
that (whichever test was applied) the illegality defence could not
succeed as the illegality had no causative relationship to the loss
claimed as, by the time of her involvement, MML's business had
entirely ceased and the monies paid into MML (and paid away by Ms
Sharma) could never have actually been employed in a VAT fraud.
It is notable that the decisions reached by the courts in cases
requiring consideration of the illegality defence are highly fact
specific. The courts will, in general, attempt to consider the
defence in a sensible manner which achieves a just and fair result
but there is uncertainty as to the parameters of the defence. The
Court concluded that the illegality defence was ripe for
consideration by the Supreme Court.
In the recent decision in Joyce Whitfield v Revenue & Customs Commissioners  UKFTT 685 (TC) the Tribunal considered that inflexible and disproportionate behaviour by a party's legal representative...
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