Charities and internal investigations
In the recent case of Georgallides –v- Secretary of State for Business, Energy and Industrial Strategy  EWHC 768 (Ch), the High Court grappled with the question of how the maxim “fraud unravels all” should apply to disqualification undertakings given pursuant to Section 8A of the Company Directors Disqualification Act 1986 (“the CDDA”).
Mr Georgallides (“MG”) was a former barrister turned restaurateur and nightclub owner. In 2010, pursuant to s.8A CDDA, MG had agreed to a 7 year disqualification undertaking relating to his conduct (including non-payment of taxes and financial misfeasance) as a director of the Mezzanine Group Plc and as sole director of Soiram Limited, (“DU1”). In 2015, MG agreed to a further 12 year disqualification undertaking relating to his conduct as a shadow director of Eastzest Limited, which arose in part due to MG’s breach of DU1, but again also for non-payment of taxes and financial misfeasance (“DU2”). Both undertakings were given by MG to the Secretary of State for Business, Energy and Industrial Strategy (“SoS”).
MG was subsequently charged with using a prohibited company name contrary to s.216(4) of the Insolvency Act 1986, and one count of acting whilst disqualified contrary to s.13 CDDA.
In 2016, MG issued an application (“the Application”) asserting that Mezzanine Group Plc and Soiram Limited (together “the Companies”) had been victims of fraud at the hands of a group of individuals connected with the Companies’ bank, the Reading branch of HBOS (“the Group”), pursuant to which the Group had taken control of the Companies and pushed them toward insolvency so that their assets could be stripped. Some of the Group had given evidence against MG in the first disqualification proceedings, and those individuals had gone on to face charges of fraud and corruption, one of whom was subsequently convicted.
MG therefore sought (amongst other things) to have DU1 rescinded (even though it was expired) on the basis that it had been procured by fraud, and because DU2 was based (in part) upon a breach of D1. The SoS resisted the Application. The criminal proceedings against MG were adjourned pending the outcome of the Application.
At a preliminary issues hearing, Deputy ICC Judge Baister had held that there was no statutory jurisdiction under the CDDA or the Insolvency Rules to rescind disqualification undertakings with retrospective effect, but the Court nevertheless had inherent jurisdiction to do so in cases of fraud.
In her judgment, ICC Judge Barber was quick to note that specific allegations of fraud relied upon in support of the Application were hard to identify, but seemed to encompass the dishonest preparation of witness evidence by the SoS; an assertion that the Group’s fraudulent activity had caused the insolvency of the Companies, and had this been proven at the time, the SoS would not have pursued the case against MG and MG would not have agreed to give DU1; and that evidence given by members of the Group against MG in the first disqualification proceedings had been perjured.
The Judge went on to consider the different principles governing the Court’s ability to set aside judgments, contracts and different types of consent orders on the basis of fraud, before addressing the issue of how a disqualification undertaking should be characterised (i.e. as a judgment, contract, or consent order) and, accordingly, what MG needed to establish in order for DU1 and DU2 to be set-aside. One important common theme identified in the Court’s ability to set-aside judgments, contracts and consent orders on the basis of fraud was that the fraud alleged must either be that of the counterparty in the litigation or transaction, or must at least be have been adopted, or knowingly relied on, by that party.
The Judge agreed with the view expressed by Deputy ICC Judge Baister in the preliminary issues hearing that a disqualification undertaking “'must be a contract, albeit a statutory one… Generally speaking, the court has no role to play: no order is made save, sometimes one which provides for the costs of any proceedings that may have been commenced but been concluded by discontinuing them.”
In the light of this finding, it was held that the proper test to be applied in order to “unravel” a disqualification undertaking procured by fraud was, as with other types of contract, to satisfy the Court that the elements of fraudulent misrepresentation had been made out. As such, it was necessary for MG to show either that the SoS had knowingly made a materially false representation, or that the SoS had actual knowledge of a materially false representation made by a third party, which was intended to and did induce MG to enter into DU1 and DU2.
The Judge concluded that MG had entirely failed to make out the necessary elements to rescind DU1 or DU2. The assertion that the Group had caused the Companies to become insolvent was not made out on the facts. Moreover, no false representations had been identified across the various matters raised by MG which could be said to have induced MG to give the undertakings. Further, none of the matters alleged, for example the perjured evidence of individuals within the Group, could be said to have been attributable to the SoS, or to have been within the SoS’s knowledge. Further, in respect of DU1, MG had stated both at the time to the SoS’s solicitors that he gave DU1 because he was taking a “pragmatic approach, and [wished] to bring [the] matter to a close without further costs being incurred” and later when providing evidence in the second disqualification proceedings, that the decision to give DU1 “was a wholly commercial decision”.
It has not been possible to summarise the full factual background of this case within the confines of this post, however it will be apparent to anyone who goes on to read the judgment that MG’s Application was ambitious.
Nevertheless, this important judgment has both confirmed that disqualification undertakings are to be viewed as a type of contact, and as such, an application to retrospectively rescind such undertakings on the basis of fraud must make out the elements of fraudulent misrepresentation.
It will be interesting to see if this decision needs to be revisited in years to come because, as was argued by MG’s counsel, the fraudulent misrepresentation test may prove too restrictive: Applicants may well struggle to demonstrate that the SoS knowingly made false representations or knew of a third parties’ false representations when entering into disqualification undertakings, despite solid evidence of fraud subsequently coming to light, in respect of which the underlying insolvency and disqualification proceedings are a direct consequence.
The case also highlights the importance of seeking expert assistance when negotiating disqualification undertakings in complex insolvencies, and that care must be taken as to precisely what wrongdoing is contained in the schedule of conduct accompanying such undertakings. Kingsley Napley’s dispute resolution team have experts in civil fraud, contentious insolvency and boardroom disputes.
If you or your clients would like to know more about how we can assist you in relation to director disqualification proceedings or any of the issues touched upon in this post, please contact Richard Clayman or a member of our team.
Richard Clayman is a Senior Associate in our Dispute Resolution team. His experience covers a broad range of commercial disputes, acting for claimants and defendants, often in complex, multi-jurisdiction and high value claims.
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