Kali & Burlay v Chawla & Ors

A company officer or agent must not treat company assets as personal assets and is liable for misappropriation caused by a conflict of interest. In jointly owned property, equality remains the starting presumption, but it may be rebutted by evidence of the parties’ shared intentions, including intentions formed after acquisition. A transaction may be both a sham and a transaction defrauding creditors where it creates only the appearance of a transfer and is made at a significant undervalue for a real and substantial purpose of prejudicing creditors. Subrogation to a redeemed mortgage charge may extend to interest, subject to the former mortgagee’s rate, but does not ordinarily secure the later lender’s costs of unsuccessfully challenging a prior encumbrancer’s security.

The claimants pursued claims arising from the conduct of Mr Chawla in relation to commission payable through Burlay, the beneficial ownership of jointly registered property formerly owned by Mr and Mrs Chawla, and a subsequent transfer of the property to Mrs Advani. The court had previously delivered a judgment on the facts and then heard submissions on their legal consequences.

The court also determined the effect of the transfer under Insolvency Act 1986, the allegation that it was a sham, and the Bank of Scotland’s entitlement to subrogation to a redeemed Lloyds Bank charge. The central issues were the parties’ beneficial interests, the validity and purpose of the transfer, and whether subrogation covered interest and litigation costs.

1. Commission and fiduciary duties. Mr Chawla acted as Burlay’s agent and was probably also a de facto director when he directed commission into an account in which only he was interested. He acted in a conflict of interest and misappropriated money due to Burlay. Burlay therefore had a claim for €444,678, enforceable by Kali by assignment.
2. Beneficial ownership. Applying Stack v Dowden, the court accepted that equity followed the law and that equal beneficial ownership was presumed for jointly registered property. The claimant bore a heavy burden of rebutting that presumption. The relevant inquiry was the parties’ shared intention, assessed from all the circumstances and capable of changing over time. The parties’ divorce, prolonged physical and financial separation, the payments made by Mr Chawla, and Mrs Chawla’s understanding that she had no continuing interest were sufficient to establish that Mr Chawla held the entire beneficial interest from February 2001, if not earlier.
3. Transfer to Mrs Advani. The transfer was at a significant undervalue within section 423(1)(c) of the Insolvency Act 1986. The relevant date for assessing value was the date of transfer because there was no antecedent binding contract. The statutory purpose under section 423(3)(a) need not be dominant, provided it was real and substantial. The purpose here was to put the property beyond the reach of actual or potential claimants, and Kali and Burlay were persons capable of being prejudiced within section 423(5). The transfer was therefore a transaction within section 423 and was also a sham.
4. Sham. Applying Snook v London & West Riding Investments Ltd, the transaction created the appearance of rights different from those intended by the parties. The circumstances showed that neither Mr Chawla nor Mrs Advani intended any genuine transfer of the beneficial interest.
5. Subrogation. The Bank was entitled to subrogation to the redeemed Lloyds charge for the principal advanced and for interest, capped at the rate payable under the former charge. The interest claim reflected the enrichment obtained by the person entitled to the equity of redemption when relieved from the former mortgage interest. The Bank was not entitled to subrogation for the costs of proceedings in which it had unsuccessfully challenged Kali’s security. Those costs did not correspond to costs of enforcing or protecting the former mortgage security.