Atkinson & Anor v Varma (aka Sanjeev Varma & Ors

A defendant debarred from defending remains unable to advance evidence or submissions amounting to a defence, but the claimant must still prove the claim on the evidence. The court may consider documents or pleadings filed by the debarred defendant to understand the dispute and identify admissions or manifest error.

A person is a de facto director where, objectively, he assumes the status and function of a director and forms part of the company’s corporate governance. The court examines what he actually did, the corporate governance structure, and the cumulative effect of his activities. A de facto director who misappropriates company money is liable to account as a constructive trustee. A company controlled by that person may be liable in knowing receipt, and compound interest may be awarded in equity for fiduciary wrongdoing.

Joint liquidators of Grosvenor Property Developers Ltd applied for judgment against Sanjiv Varma, Grosvenor Consultants FZE and Arjun Khadka. Varma and GCFZE were debarred from defending for non-compliance with unless orders. Khadka was in default but was not debarred.

The liquidators alleged that Varma acted as a de facto or shadow director, diverted company money for his own benefit, and transferred company funds to GCFZE. They also alleged that GCFZE was liable in knowing receipt or for transactions at an undervalue. The central issues were whether the claims had been proved despite the debarring orders, whether Varma was a de facto or shadow director, and whether the payments were company money misappropriated in breach of fiduciary duty.

1. Debarring orders. Varma and GCFZE could not defend the claims, rely on evidence by way of defence, or make submissions about the significance of documents in support of a defence. They could identify a manifest error. The liquidators nevertheless had to prove their claims. The court could consider documents and pleadings filed by the debarred parties where necessary to understand the dispute or assess the claim.
2. De facto director. The relevant question was whether Varma assumed responsibility to act as a director and became part of the company’s corporate governance. The court considered objectively what he did, rather than his title, belief or asserted motivation. Applying the principles summarised in Smithton Ltd v Naggar [2014] EWCA Civ 939, Varma had instructed solicitors and architects, negotiated with investors, directed transfers of substantial funds and effectively run the company. He was therefore a de facto director.
3. Shadow director. The evidence did not establish that the de jure director was accustomed to act in accordance with Varma’s directions. Varma was acting as the effective director himself, rather than directing another director. The shadow-director case therefore failed.
4. Misappropriation. Varma had misappropriated £925,000 paid into his personal account, £140,000 traced from the Casa account, and specified personal and luxury expenditure. These sums were company money and were diverted in breach of the duties owed by Varma as a de facto director. The liquidators failed to prove several other claimed payments because the evidence did not establish that they were company money or that Varma, rather than England, was responsible.
5. GCFZE. Varma’s ownership and control of GCFZE enabled his knowledge to be attributed to it. GCFZE knowingly received company money transferred in breach of Varma’s fiduciary duties. The alleged diamond and jewellery transaction was unsupported by credible evidence and did not provide consideration. Varma and GCFZE were jointly and severally liable to pay £3,122,841.75 by way of equitable compensation.
6. Interest and Khadka. Compound interest was appropriate because the liabilities arose from flagrant fiduciary breaches and knowing receipt. The application against Khadka was adjourned to the listed trial, with costs reserved.