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Judge has Mercy on defendants

26 Feb 2024
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In a significant ruling, His Honour Justice Johns KC determined that when calculating equitable compensation, proprietary claims and recoveries made from third parties should be taken into account.

Mercy Global Consult Ltd (Mercy) provided payroll services to healthcare workers but failed to pass on VAT charged on supplies to HMRC. Following an investigation by HMRC, a petition for the compulsory winding up of Mercy was granted, and liquidators appointed. The liquidators of Mercy alleged that the former director and his associates had committed VAT fraud on a large scale between 2015 and 2020 and made claims in knowing receipt and dishonest assistance against them, which were upheld at a previous hearing. The purpose of this hearing was to establish the quantum of the equitable compensation sought from each defendant.

When deciding the issue of the quantum of equitable compensation Mercy were entitled to receive, the Judge found that credit should be given for the assets to which a proprietary claim was established. The assets that had been traced into were still available to Mercy. Therefore, the sums were not losses, nor were they reflective of losses for all of the assets to which a proprietary claim was established.

Further, the liquidators had traced the sums owed into assets held by other director defendants but had given no credit for that in their calculation of the equitable compensation owed by the first defendant. Justice Johns found that this was wrong, as any sum which the beneficiary recovered had the effect of compensating him for the primary breach of trust he had suffered.

The defendants sought an adjournment to adduce evidence of the current value of the assets recovered rather than their purchase price. Justice Johns had, however, issued debarring orders against the defendants at an earlier stage and found that there was no authority to suggest that this debarring did not also apply to questions of quantum.

Justice Johns also ruled that a sum of £2m that was still held by Mercy in its account could not be deducted from the total compensation owed. While the sum was available to the liquidators, it could not be determined whether it derived from the fraud. The liquidation was also incomplete and therefore might eventually be unavailable to the liquidators as equitable compensation.

The draft order should contain a cap for a specific amount, which represented the ceiling for any recovery to prevent double recovery.

This is an important case for insolvency practitioners and legal practitioners when deciding their asset recovery strategy. Harneys does not advise on the law of England and Wales, but this judgment will be of persuasive in common law jurisdictions such as the BVI, Cayman and Bermuda.