Barber J cuts novel disqualification argument down to size

Judge Barber was first complimentary about the arguments raised by the Applicant in a directors disqualification before dismissing the claim. However, she was not persuaded that the Court’s inherent jurisdiction was exercisable in these circumstances.

The Applicant, Marios Georgallides, had accepted a disqualification undertaking in 2010 arising from the insolvency of Mezzanine Group PLC. In breach of that disqualification undertaking Mr Georgallides then assumed the position of a shadow director in relation to Soiram Limited.

The passage of time had established that both Mezzanine Group PLC and Soiram Group Limited were the victims of a fraud perpetrated by its bankers: the notorious “Reading Branch” of HBOS.

Seeking to avail himself of the maxim “fraud unravels all” Mr Georgallides’ lawyers sought to rescind both disqualification undertakings. The novel argument was that because the insolvent companies had been the victims of a fraud causing or contributing to the insolvency the evidence adduced in those later disqualification proceedings were therefore tainted.

The matter had already been before Deputy Registrar Baister as a preliminary issue. At paragraph 188 of her judgement Barber J summarised Deputy Baister’s finding: At paragraph 35 of his judgment he concluded that the court did have jurisdiction to rescind or vary disqualification undertakings with retrospective effect “on the ‘fraud unravels all’/inherent jurisdiction basis”. He further concluded, in part on the footing that it was ‘arguable.. that fraud will unravel all’, that the court had jurisdiction to give retrospective permission to use a prohibited name.

She went on to qualify Deputy Baister’s previous ruling: What Mr Deputy Registrar Baister does not appear to have been addressed on at the preliminary issues hearing, no doubt because the ‘fraud unravels all’ argument was introduced late in the day, are the limits of the court’s inherent jurisdiction to set aside judgments obtained by fraud, and the essential pre-requisites for rescinding a contract (including an ordinary civil consent order) for fraudulent misrepresentation. As demonstrated by the cases of Re Odyssey and Cinpres Gas considered earlier, even where it is proven that a judgment has been obtained by perjured evidence, that of itself is not sufficient to warrant setting aside the judgment. The fraud or perjury must be shown to be that of a party to the proceedings, whether directly, by attribution, or by adoption. The fraud of a ‘mere witness’ does not suffice. The suggestion that the fraud of a mere witness is sufficient to ‘taint’ proceedings and to warrant setting aside a judgment was fully argued in Re Odyssey and was roundly rejected by the Court of Appeal. As made clear by the Court of Appeal’s decision in the later case of Cinpres Gas, the ‘fraud of a party’ rule still stands.

In clarifying the law and setting out when it would be appropriate to rescind a disqualification order or undertaking she said at paragraph 206: For all of these reasons, I conclude that the party seeking rescission of a disqualification undertaking on a retrospective basis on grounds of fraud must satisfy the Court that the elements of a fraudulent misrepresentation are made out. This requires a false material representation, dishonestly made, which was intended to and did induce the representee to act to its detriment. The misrepresentation must either be made by the SoS or known to the SoS to be false at the material time.

For specialist insolvency advice contact Stephen Chinnery on 07460 005 769.