Fraud—rescission of contracts, judgments and orders under the court’s inherent jurisdiction—application to directors’ disqualification undertakings and section 216(3) of the Insolvency Act 1986 (Re Soiram Ltd)

Fraud—rescission of contracts, judgments and orders under the court’s inherent jurisdiction—application to directors’ disqualification undertakings and section 216(3) of the Insolvency Act 1986 (Re Soiram Ltd)

The application concerned raised a novel issue on the application of the maxim ‘fraud unravels all’ to disqualification undertakings under the Company Directors Disqualification Act 1986 (CDDA 1986) and the prohibited names restrictions under section 216(3) of the Insolvency Act 1986 (IA 1986). The court held that there are established mechanisms for rescission due to fraud that are applicable to contracts, judgments and orders. Notwithstanding that disqualification undertakings have unique features, they are essentially contractual in nature. It followed that an applicant seeking to rescind his disqualification undertaking must look to the established mechanism of fraudulent misrepresentation. The court did not have a wider supervisory jurisdiction to retrospectively dismantle a disqualification undertaking on the general proposition that ‘fraud unravels all’. The court also declined to grant retrospective permission for the use of a prohibited name—a company in liquidation as a result of fraud could not be treated as though it was not insolvent and the fraud did not of itself justify granting retrospective permission for the use of a prohibited name. Written by Tiran Nersessian, barrister at 4 Stone Buildings.

Re Soiram Ltd and another company [2020] EWHC 768 (Ch}

What are the practical implications of this case?

The judgment closes the door to applicants who wish to unravel a disqualification undertaking through a general assertion that ‘fraud unravels all’. The truth of that maxim was not in dispute before the court, but the effect of the decision is that applicants must give careful consideration to whether the fraud they seek to rely on is sufficient to found a properly particularised action for fraudulent misrepresentation, which is the established mechanism for rescinding a contract that a party was induced to enter as a result of fraud.

The fact that a company has entered into liquidation in circumstances where a fraud has been perpetrated upon it will not of itself allow a director who has subsequently given a disqualification undertaking to rely on the fraud as a reason for unravelling their undertaking on the broad ground that they would not have given the undertaking had they known of the fraud at the time or that evidence had been given against them by a witness who was later convicted of fraud.

 

CDDA 1986, s 8A, provides the court with a statutory jurisdiction to rescind disqualification undertakings where ‘some ground is shown which would be sufficient to discharge a private law contract’ (Re INS Realisations Ltd [2006] 1 WLR 3433 at para [31]), but it does not have the power to retrospectively rescind an undertaking that has already expired.

Applicants will need to apply the usual contractual principles in any attempt to rescind an undertaking where the period of that undertaking has already expired.

What was the background?

Mr Georgallides applied to rescind two disqualification undertakings he had given to the Secretary of State:

  • the first was for seven years accepted on 16 February 2010 in respect of his conduct of Soiram Ltd and Mezzanine Group Plc
  • the second was for 12 years in respect of his conduct of Eastzest Ltd. The second undertaking was based in part on the fact that he had breached his first undertaking

By the time he made his application to the court for rescission, the first undertaking had already expired. Mr Georgallides argued that Soiram and Mezzanine were victims of fraud at the hands of the now infamous Reading branch of HBOS. He alleged that its head, Mr Lyndon Scourfield, and a former banker, Mr David Mills, conspired to take control of a number of distressed businesses for dishonest personal gain. Mr Mills swore an affidavit in support of the Secretary of State’s case in the first disqualification proceedings.

The Secretary of State accepted that numerous frauds were committed.

Mr Georgallides argued that he would not have given the first undertaking had he known of the fraud at the time and that—if the first undertaking was rescinded—his second undertaking could not stand given that it was premised (in part) on a breach of the first undertaking.

He further argued he ought to be given retrospective permission to use the prohibited name ‘Nozomi’, which had been used by a number of companies under his directorship in contravention of IA 1986, s 216(3).

What did the court decide?

The court dismissed the application.

Insolvency and Companies Court Judge Barber found that while disqualification undertakings had certain unique features, they were essentially a contract and that an applicant would have to bring an action for fraudulent misrepresentation, which was the established mechanism for retrospectively unravelling a contract that had been induced by fraud.

Significantly, the court accepted the Secretary of State’s submission that there was no general supervisory jurisdiction that could be used to retrospectively rescind a disqualification undertaking merely because a fraud had since been discovered which had arguably caused the relevant company to enter into liquidation or that a deponent for the Secretary of State in the disqualification proceedings had subsequently been convicted of fraud.

The judgment contains a comprehensive exposition of the law on the rescission of contracts, judgments and orders for fraud, which has given rise to several Supreme Court judgments. The court did not feel constrained by the decision of Deputy Registrar Baister at the hearing of the preliminary issue, in which he had held that the court had an inherent jurisdiction to retrospectively rescind a disqualification undertaking for fraud. Judge Barber noted that the learned deputy did not make any finding on the limits of the jurisdiction and that, in any event, he had not had the benefit of full legal argument—she distinguished the Supreme Court decision in Sharland v Sharland [2015] 3 WLR 1070 applicable to the specific case of matrimonial consent orders, on which the learned deputy’s decision was heavily based.

The fraud in question had to be that of a party and the fact that one of the Secretary of State’s witnesses in the disqualification proceedings had subsequently been convicted of fraud was not of itself sufficient to trigger the court’s jurisdiction to rescind. The court further held that the alleged ‘fraud’ could not, without more, justify retrospective permission to use a prohibited name in contravention of IA 1986, s 216(3).

Case details

  • Court: Business and Property Courts of England and Wales, Insolvency and Companies List

  • Judge: Insolvency and Companies Court Judge Barber

  • Date of judgment: 3 April 2020

Tiran Nersessian is a barrister at 4 Stone Buildings. If you have any questions about membership of LexisPSL’s Case Analysis Expert Panels, please contact caseanalysis@lexisnexis.co.uk.

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About the author:

Zahra started working as a paralegal at LexisNexis in the Lexis®PSL Banking & Finance and Restructuring & Insolvency teams in April 2019 and moved to the Corporate team in June 2020, where she currently works as a Market Tracker Analyst. Zahra graduated with 2.1 honours in BA French and Spanish and completed the GDL at BPP University. She has undertaken voluntary work for law firms in London, Argentina and Colombia.