Scenic International Group Limited v Richard Adenaike & Ors

Regular default judgment may be set aside under Civil Procedure Rules 1998, r 13.3 only where the defendant has a real prospect of defending the claim or there is some other good reason. The court must avoid a mini-trial, but may evaluate evidence sufficiently to determine whether a defence is realistic, including in fraud claims.

A company is bound by an HMRC VAT assessment where the statutory appeal route is unavailable. A director cannot rely on informal shareholder approval to validate fraudulent conduct. Compensation for fiduciary breach must restore the fund to the position it would have occupied absent the breach, allowing credit for legitimate payments. Dishonest assistance and knowing receipt remain fact-sensitive as to the period of liability and quantification.

The claimant, a company in provisional liquidation, alleged that it had been used to evade VAT and PAYE/NIC in a labour-supply business. Default judgments were entered against eight defendants. The first defendant applied to set aside the judgments on behalf of himself and three other applicants: an associated company, his wife and another associated company.

The application raised whether the applicants had a real prospect of defending claims for fraudulent breach of directors’ duties, dishonest assistance and knowing receipt. It also raised the proper approach to equitable compensation, including the effect of payments made through associated companies’ bank accounts.

1. Application refused. The default judgments were regular. Applying [2009] EWHC 339 (Ch), the court had to decide whether the applicants had a real prospect of defending the claims. It was not to conduct a mini-trial, but could evaluate the evidence and consider evidence reasonably expected to be available at trial. The caution required in fraud claims did not prevent that evaluation.
2. The evidence established that the claimant had no real prospect of defending the allegation that it was used as a vehicle for fraudulent evasion of VAT and PAYE/NIC. The claimant should have been VAT-registered. The VAT assessment was binding under Value Added Tax Act 1994, Schedule 1 and ss 73(1), 73(9), and could not be appealed under s 83(1)(p) because no returns had been submitted.
3. The first defendant’s knowledge was attributable to the companies of which he was the directing mind and will, but his knowledge as a director could not be attributed to the claimant to defeat its claim against him: [2009] BCC 425 and [2015] UKSC 23. His conduct breached the duty in Companies Act 2006, s 172. The objective test applied because there was no evidence that he had actually considered the claimant’s interests. Fraudulent tax evasion could not promote the company’s success.
4. Informal shareholder approval under the Duomatic principle could not validate fraudulent conduct. The first defendant therefore had no real prospect of defending the fiduciary-duty claim.
5. The default judgment sums against the first defendant, ELHR and Ms Ezed could not stand without assessment. Equitable compensation had to restore the fund, with credit for legitimate payments made through ELHR’s accounts. The first defendant’s judgment was varied to £5,667,050.55 plus interest and court fees. Judgments against ELHR and Ms Ezed were varied to liability-only, with assessment of compensation. The precise relief against BCUK required further submissions.
6. ELHR and BCUK had no real prospect of defending dishonest-assistance claims where their accounts were knowingly used to divert or dissipate sums representing VAT or PAYE/NIC. Ms Ezed likewise had no real prospect of defending the dishonest-assistance and knowing-receipt claims. Liability and quantification remained subject to the factual assessment required by the evidence.