Serge Belle (formerly known as Serguei Beloussov) & Anor v Ratna Singh & Anor

Fraudulent misrepresentation requires a materially false representation of fact, intended to be relied on and in fact relied on, made knowingly, without belief in its truth, or recklessly. The representation is construed objectively in context, but the claimant must prove the meaning understood and the representor’s relevant state of mind where ambiguity arises.

A founder’s questionnaire may require disclosure of facts concerning the founder’s business career, conflicts of interest, management conduct and investor confidence. Whether disclosure is required depends on the objective wording and commercial context. Fraud damages cover loss directly flowing from the transaction and consequential loss caused by it, subject to reasonable mitigation.

The claimants invested US$2.5 million in Integrated Health Partners Ltd, a start-up company founded and managed by the defendants. They claimed damages for breach of warranties and fraudulent misrepresentation concerning the company’s relationship with existing investors, the conditions on which those investors would provide further funding, the use of company funds for personal expenditure, and the occupation of a company-rented New York apartment by the defendants’ son.

The defendants denied falsity, fraud, reliance, causation and loss. The court determined the construction and effect of the founders’ questionnaires, the contractual warranties, the additional representations, inducement, liability limitations and damages.

1. Fraudulent misrepresentation. The court applied the established elements of deceit. The additional representations concerning existing investors were false because they omitted conditions requiring a down round or a change in the CEO’s role. The omissions were deliberate. The defendants knew the representations were false or were reckless as to their truth.
2. Questionnaires. Question 22 referred to circumstances objectively likely to lead to proceedings brought by third parties, with “likely” meaning at least a 50% likelihood. It did not require disclosure of circumstances that might later give rise to claims by the investors themselves. The answers of “no” to question 22 were therefore true.
3. Question 30 was a broad but sufficiently certain wrap-up question. It required disclosure of facts concerning the founders, their spouses and their business careers which a reasonable prospective investor would consider relevant. This included the breakdown in relations with existing investors, their loss of confidence in the CEO, conditions attached to further investment and the use of company funds for personal expenses. Question 31 required disclosure of objectively relevant matters bearing on suitability to be a director of a publicly quoted company.
4. The defendants’ answers to questions 30 and 31 were false and breached the warranty in paragraph 2.3 of Schedule 5 to the Subscription Agreement. The breach was fraudulent. The defendants also breached paragraph 11.2 of Schedule 5 by failing fairly to disclose that their son occupied the company-rented apartment. That breach was not fraudulent and was subject to the contractual liability limitation, but caused no separate loss.
5. The claimants relied on the representations. The court accepted that reliance could be established through the claimants’ agents and advisers, and that the evidence supported actual reliance in addition to the rebuttable presumption applicable to fraudulent representations.
6. Loss. The measure of direct loss was the difference between the warranted value and actual value of the shares. The court accepted the claimants’ valuation evidence and assessed a 55% discount. Mr Bell recovered US$550,001 direct loss and US$82,000 consequential loss. Mr Zubarev recovered US$825,000 direct loss and US$123,000 consequential loss.
7. The defendants failed to establish that later management decisions or an engineered March 2021 fundraising round broke the chain of causation or constituted a failure to mitigate. Judgment was entered for Mr Bell in US$632,001 and for Mr Zubarev in US$948,000.