Rescinding Directors Disqualification Undertakings: The Right Type of Fraud will Unravel All


Reference:
Georgallides v Secretary of State [2020] EWHC 768 (Ch).

Date:
21st April 2020

Court:
Chancery Division

Facts:

Rescinding Directors Disqualification Undertakings: The Right Type of Fraud will Unravel All

Georgallides v Secretary of State [2020] EWHC 768 (Ch)

 

Summary

ICC Judge Barber’s decision in Georgallides provides a useful exposition of the manner in which judgments, contracts and consent orders may be vitiated and rescinded on the basis of fraud. Applying the various fraud doctrines to disqualification undertakings it is now clear that the retrospective rescission of undertakings is available but will be permitted only on the narrow grounds which would apply to vitiate orders and private law contracts.

The principal mode by which the harshness of undertakings can be mitigated or extinguished (to a degree) will remain the power afforded by section 8A of the Company Directors Disqualification Act 1986 (“CDDA”) to reduce the period of an undertaking or to terminate an undertaking altogether (prospectively). However, where a director feels pressured into offering an undertaking to stave off proceedings which arouse a suspicion of reliance upon fraudulent evidence there is now ground to investigate such allegations. Confirmation that a jurisdiction to rescind exists is welcome, but the high hurdle of demonstrating actual or imputed knowledge on the part of the Secretary of State (“SoS”) will be extremely difficult to surmount.

Facts

The application sought orders that multiple disqualification undertakings be rescinded pursuant to the court’s inherent jurisdiction, and for permission to use a prohibited name pursuant to section 216(3) of the Insolvency Act 1986. The application was novel, relying on the maxim that “fraud unravels all.” The Applicant’s case was that two of the companies in relation to which a seven-year undertaking was given were victims of fraud by the Reading branch of HBOS. A former banker with the branch and various associates swore affidavits in support of the Secretary of State’s case in disqualification proceedings commenced in 2006 and due for trial in early 2010. The Applicant argued that these caused him to offer the disqualification undertaking.

The Applicant sought the rescission of the expired 2010 undertaking for fraud, and thereafter the ability to resile from or the rescission of a further undertaking given in 2015 in consequence of this being based upon the 2010 undertaking.

The Judgment at First Instance

Deputy Registrar Baister held that the court lacked jurisdiction to rescind or vary undertakings retrospectively under section 8 of the CDDA or rule 12.59 of the Insolvency (England and Wales) Rules 2016 (covering appeals and reviews of court orders). However, the court could, in cases of fraud, retrospectively rescind undertakings under its inherent jurisdiction.

The Allegations of Fraud

The following points were relied upon by the Applicant:

1. An insinuation that the witness evidence for the SoS in disqualification proceedings was prepared in a misleading and dishonest manner.

2. Criminal proceedings were later pursued against Mr Scourfield, who it was contemplated may provide evidence for the SoS, based upon a scheme to exploit “victim” companies. The Crown’s case in the criminal trial did not expressly mention the Applicant’s company, but it was suggested that the Applicant’s evidence that his company was targeted was consistent with this case.

3. Linked to point 2, the credibility of witnesses who later received criminal convictions would have materially and significantly impacted the disqualification proceedings and therefore the assessment of whether to offer an undertaking.

4. That Mr Scourfield, amongst others, had given fraudulent evidence for the SoS in the first disqualification proceedings.


Judge:
Judge Barber

Comment:

Reasoning and Conclusions

The key points to consider when attempting to set aside orders on grounds of fraud are:

 

1. Particulars of fraud must be pleaded, and the allegations proved with cogent evidence, save where admitted or the evidence is incontrovertible;

2.  The fraud must be conscious or deliberate and go to a material issue operating upon the court’s judgment so as to entirely change that judgment once evidence of fraud has come to light;

3. Crucially, the fraud must be committed by a party to the proceedings, or at least be suborned by or knowingly relied on by that party. It is not sufficient to show that a judgment was obtained through perjured evidence. The evidence must arise directly from a party, or be attributable to or adopted by the same.

 

The court held that a disqualification undertaking was founded in contract but modified by statute. Disqualification undertakings thereby differ somewhat from typical judgments. In consequence, the court accepted the submission that as a form of “statutory contract”, a disqualification undertaking was susceptible of rescission for fraudulent misrepresentation, which required the following elements to be proved:

 

1. The misrepresentation may be a, rather than the sole cause of the inducement;

2. Where the fraudulent statement is material, in that it is likely to induce a party to enter into a contract, it will be very difficult to rebut the presumption of fact that the party was thereby induced;

3. The misrepresentation must be made by the contracting party. Alternatively, if the representation is made by a third party, the contracting party must have actual knowledge that the representation was false.

 

In consequence, if these elements are not made out, the court has no residual supervisory jurisdiction to rescind the undertaking on the basis that “fraud unravels all” in the abstract. In reaching this conclusion, the court noted that the jurisdiction to rescind was exceptional and should remain so. However, where a party can satisfy the court that the grounds of fraudulent misrepresentation are made out, the discretionary jurisdiction to rescind undertakings retrospectively will be available.

In the particular context of disqualification undertakings, the applicant must prove that the SoS dishonestly made a material false representation which was intended to induce the Applicant to act to his detriment, or that the SoS had actual knowledge of a material false representation made by a third party. This is likely to be a very difficult hurdle to surmount.

In Mr Georgallides’ case, the grounds of fraud raised ere either implausible or were not shown to amount to misrepresentations made by, or attributable to, the SoS. Further, the requisite evidence of inducement was also lacking.

As a final point of note, the court expressed the obiter view that where a second undertaking is given to remedy a breach of a prior undertaking which is later rescinded for fraud this would not lead inevitably to the rescission of the later undertaking. The court adopted the decision in Brian Sheridan Cars Ltd [1995] BCC 1035 that variations of leave to act cannot be made with retrospective effect and extended this position to retrospective rescission. In short, a valid breach will have occurred, despite the later rescission of the first order.

James Saunders

21st April 2020

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