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.
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