From the guidance for prosecutors on the Crown Prosecution Service website: "Where a driver has obtained a policy of insurance by deception, the policy will be valid so far as liability under s.143 RTA 1988 is concerned until the insurers have taken steps to "avoid" it"
https://www.cps.gov.uk/legal-guidance/road-traffic-summary-offences
So, as TTT indicates, the driver had a valid insurance policy (in respect of those provisions required by law) at the time that he was driving the vehicle.
The actual matter of who was responsible for reimbursing the driver seems fairly straightforward to me. His contract with the seller was for him to hand over his money in exchange for a vehicle which was
(a) 'as described' ; and
(b) which the seller held title to, enabling him to lawfully sell it.
As neither of those conditions were met, the contract fails and the purchaser becomes entitled to his money back.