Khan v Edgbaston Holdings Ltd

Factual and Procedural Background

The Plaintiff issued a claim form on 25th September 2006 seeking damages from the Defendant Company following the Plaintiff's purchase of two properties in The City for a total of £7.7 million. The claim alleged fraudulent and/or negligent misrepresentations by the Defendant regarding the properties' value and the existence of tenants whose rent would cover the Plaintiff's mortgage. The Plaintiff claimed damages exceeding £5 million, representing the difference between the purchase price and the actual value of the properties, said to be £2.6 million.

The Defendant failed to acknowledge service or file a defence, resulting in default judgment entered against it on 11th December 2006, with damages to be assessed. The Defendant indicated a desire to set aside the judgment for the first time at a hearing on 22nd May 2007, and formally applied to set aside the judgment on 4th June 2007. A condition imposed by the court requiring the Defendant to pay £1 million into court was later revoked. This judgment concerns the Defendant's application to set aside the default judgment pursuant to CPR 13.3.

Prior to the claim, the Serious Fraud Office had obtained a restraint order over the Defendant Company's assets and the assets of its directors. The Defendant's directors were replaced by their wives following the restraint order. The Plaintiff obtained a freezing order against the Defendant's assets on the same day as the claim form was served, limiting the Defendant's ability to spend on legal advice to £10,000 initially. The Defendant engaged multiple solicitors between October 2006 and early 2007 but took no steps to respond to the claim until after judgment was entered. Subsequent variations to the freezing order removed the spending limit on legal advice.

The Defendant's delay in applying to set aside the judgment spanned several months, with explanations including confusion over overlapping restraint and freezing orders and the illness and travel of an ex-director involved in the case. The Defendant's application to set aside the judgment and the Plaintiff's application for damages assessment were adjourned to the current hearing.

Legal Issues Presented

1. Whether the Defendant has acted promptly in making the application to set aside the default judgment.
2. Whether the Defendant has a real prospect of successfully defending the claim.
3. Whether there is some other good reason to set aside the default judgment.

Arguments of the Parties

Defendant's Arguments

• The Defendant argued that the claim's large sum should constitute a 'good reason' to set aside the judgment.
• The Defendant contended that the nature of the claim, involving allegations of fraud, risked unfairly staining the reputation of an ex-director if the Defendant was not allowed to defend.
• The Defendant submitted that the assessment of damages would be more difficult without a trial on liability, providing a further reason to set aside the judgment.
• The Defendant's defence, as expressed through an ex-director's statement, was that he did not attend relevant meetings and thus did not make the alleged misrepresentations personally.
• In argument, the Defendant suggested that the agent who made the representations acted beyond his authority, although this was not pleaded or supported by evidence.

Plaintiff's Arguments

• The Plaintiff submitted that the Defendant did not act promptly in applying to set aside the judgment, with unjustified delays spanning several months.
• The Plaintiff argued the Defendant had no real prospect of successfully defending the claim, as the key representations were made by the Defendant's agent and were not challenged on their factual basis.
• The Plaintiff pointed to independent evidence from their solicitor indicating that tenancy agreements existed and were represented by the Defendant's solicitors, undermining any defence on that point.
• The Plaintiff rejected the Defendant's contentions that the size or nature of the claim justified setting aside the judgment.
• The Plaintiff emphasized the prejudice and delay that would result if the judgment were set aside.

Table of Precedents Cited

Court's Reasoning and Analysis

The court applied the principles set out in CPR 13.3, focusing on three key issues: promptness, real prospect of success, and other good reasons to set aside the judgment.

On promptness, the court found the Defendant did not act with reasonable celerity. The Defendant failed to apply promptly to set aside the judgment following its entry in December 2006, with nearly six months elapsing before the application was made. Explanations for delay, including legal advice confusion and illness of an ex-director, were insufficient or unsupported. The court emphasized that no credible justification was offered for considerable delay.

Regarding the real prospect of success, the court examined the Defendant's pleaded defence and the evidence. The Defendant's ex-director claimed he did not make the alleged misrepresentations personally; however, the claim was against the Defendant Company, not individuals. The key representations were made by the Defendant's agent, whose authority was not challenged with evidence. The Defendant failed to provide evidence that the agent acted beyond authority, and critical individuals involved did not provide evidence. The Defendant's defence was therefore considered no more than fanciful.

The court also considered the Defendant's arguments for other good reasons to set aside the judgment, including the claim's size, the nature of allegations, and difficulties in assessing damages. These were rejected as irrelevant or insufficient to justify setting aside the judgment.

Applying the CPR 3.9 checklist, the court found the interests of justice favored maintaining the judgment, noting the prejudice and delay that would result from setting it aside. The Defendant's delay was unjustified, and the prejudice to the Plaintiff would be extensive. The court concluded that the Defendant's failure to act promptly and lack of a real prospect of success, combined with the absence of other good reasons, warranted refusal to set aside the judgment.

Holding and Implications

The court's final decision was to REFUSE THE APPLICATION TO SET ASIDE THE DEFAULT JUDGMENT.

The judgment remains valid, and the Plaintiff's application for assessment of damages will proceed immediately. The court ruled that damages will be assessed on the tortious basis only. This decision directly affects the parties by upholding the default judgment and enabling the Plaintiff to pursue damages without further delay. No new legal precedent was established beyond the application of existing principles to the facts of this case.