Abdelmamoud v The Egyptian Association In Great Britain Ltd

On 20 January 2015 I heard the appeal of Mr Gamal Abdelmamoud against the order made by Deputy Master Smith on 30 July 2014 setting aside (a) the judgment entered in favour of Mr Abdelmamoud as claimant against The Egyptian Association in Great Britain Limited as defendant (the “EAGB”) on 26 June 2013 and (b) the final third party debt order obtained by Mr Abdelmamoud on 4 September 2013 in relation to sums standing to the credit of EAGB’s bank account at the National Bank of Egypt. Deputy Master Smith’s order was made on the application of Mr Mostafa Ragab, Mr Shenouda Shalaby, Mr Shady Issa and Mr Azima Madkour (“the Applicants”). At the conclusion of the hearing, I granted the appeal (i) setting aside the Deputy Master’s order setting aside the default judgment obtained by Mr Abdelmamoud and (ii) restoring the final third party debt order obtained by Mr Abdelmamoud on 4 September 2013. I briefly gave my reasons and indicated that I would provide a written judgment in due course. This is that judgment.

In brief, Mr Abdelmamoud’s claim against the EAGB was for repayment of a loan of just over £30,000 made under the terms of a loan agreement dated 14 December 2012. The EAGB is a charity organised as a company limited by guarantee. The Applicants are members of the charity. The loan was repayable on demand, and Mr Abdelmamoud demanded repayment on 29 April 2013. He issued proceedings on 16 May 2013. No acknowledgement of service or defence was filed by EAGB, and Mr Abdelmamoud was granted judgment in default in the sum of £38,025 on 26 June 2013, an interim third party debt order was made in his favour and a final third party debt order was made on 4 September 2013. The Applicants subsequently successfully applied to stay the third party debt order and to have the judgment in default and the third party debt order set aside.

At the beginning of the hearing, I was asked to rule on an application by the Applicants for permission to cross-appeal out of time certain aspects of Deputy Master Smith’s order of 30 July 2014. The Deputy Master had in his order extended the time for the service of any Appellant’s Notice in relation to his order to 28 August 2014, however the Applicants did not serve an Appellant’s Notice by that date. Their application to appeal out of time came before Mr Justice Norris on 6 January 2015, who made no order on the application, but directed the applicants to prepare a statement as to why their application for permission was out of time and why it would be fair to hear their application at the hearing of Mr Abdelmamoud’s appeal, which was listed for 20 January 2015. I considered their statement at the beginning of the hearing and heard the submissions of Dr Shalaby on behalf of the Applicants, who were not represented by counsel. Neither in the statement nor in the submissions of Dr Shalaby were any substantive reasons put forward for their delay in applying for permission to appeal, much less any reason that would justify a delay of over four months following the extended date specified by the Deputy Master in his order. Accordingly, I refused their application and proceeded to hear Mr Abdelmamoud’s appeal.

There are two principal issues on this appeal:

The second issue (if reached) gives rise to three subsidiary issues:

There is a further issue raised in para 51 of the judgment of the Deputy Master, The purported purpose of the loan by Mr Abdelmamoud to the EAGB was to fund the bringing of proceedings by the EAGB against the first Applicant, Mr Ragab. The EAGB did not obtain consent from the Charity Commission to bring those proceedings, as required by section 115 of the Charities Act 2011. The issue raised in the Deputy Master’s judgment is whether that failure of the EAGB to obtain the section 115 consent could somehow give rise to a defence by the EAGB to repayment of the loan with a real prospect of success, in light of other relevant circumstances of the case as found by the Deputy Master.

The factual background is briefly summarised in para 3 above and in detail in paras 6 to 28 of Deputy Master Smith’s judgment The salient facts relevant to this appeal are set out below, including both facts undisputed between the parties and relevant findings of fact by the Deputy Master, Some disputed facts are also mentioned, where the fact of the dispute is relevant to the appeal.

In his judgment, the Deputy Master uses the terms “committee”, “board”, “governing body” and “management committee” in various places in relation to the EAGB, referring in each case, it seems, to the set of its directors (rather thanto a sub set). If there is meant to be a distinction between any of these terms, nothing appears to turn on it in his judgment The EAGB does not appear to be an organisation with a large board of directors entrusting the exercise of certain powers and delegating certain tasks to a smaller management committee of the board.

As the Deputy Master most often uses the term “committee" in his judgment, I will use that term below to mean the directors of the EAGB, bearing in mind that it remains in dispute whether at the relevant times Mr Ismail and the other members of the committee which he purported to chair were the properly appointed directors of the EAGB or whether, instead, Mr Ragab and the other members of the committee which he purported to the chair were the properly appointed directors,

Mr Abdelmamoud is a businessman. He is a member of the EAGB (under the name Gamal Abdelmaboud).

The EAGB is a charity organised as a company limited by guarantee. It was founded in 1997. Its objects include the advancement of education and religion, the relief of poverty, sickness and distress, and the provision of facilities for recreation and leisure in the interests of social welfare and, in particular, for members of the Egyptian community.

Mr Ragab (also known as Mostafa Ragab Mohamed) was a founding member of the EAGB. In 2011 he decided not to continue as an officer and director. A new committee was elected, which included Mr Ismail and Dr Shalaby. During the course of 2012 there was a dispute of some sort between members of the EAGB, and the committee voted to expel Dr Shalaby from the committee. Dr Shalaby denies that his expulsion was valid,

It is the Applicants' case that at an extraordinary general meeting (“EGM”) of the EAGB on 14 July 2012 the members passed a motion of no confidence in the committee then chaired by Mr Ismail and elected a new committee that included three of the four Applicants (not Mr Madkour). Mr Ismail disputes that the vote at the EGM was effective to remove the incumbent members of the committee, which included Mr Ossama Abdel-Hamid and Mr Moustafa Elsayed.

Mr Ragab, Dr Shalaby and Mr Issa sent returns to Companies House stating that they had been elected directors, but, according to the Applicants, Mr Ismail continued to control the e filing passwords and so was able to prevent the newly elected directors from appearing as directors of the EAGB on the companies register at Companies House.

Notwithstanding this, Mr Ragab began to hold himself out as the new chair of the committee of directors of the EAGB and to communicate with members of the EAGB on this basis. Mr Ismail, with the agreement of the incumbent committee (as he viewed it), decided to bring proceedings against Mr Ragab on behalf of the EAGB to restrain Mr Ragab from holding himself out as the chair of the EAGB.

Mr Ismail was not, however, able to access the funds of the EAGB for this purpose, as the EAGB’s bankers, the National Bank of Egypt, refused to allow drawings from the EAGB’s bank account while there was a dispute as to the identity of the lawful directors of the EAGB, Mr Ismail turned to Mr Abdelmamoud for a loan to fund the proposed proceedings against Mr Ragab. Mr Abdelmamoud as lender entered into the loan agreement dated 14 December 2012 with Mr Ismail, who was purporting to enter into the loan agreement on behalf of the EAGB in his capacity as a director of the EAGB. Whether he had the authority to do so was one of the issues considered by the Deputy Master and, as already noted, remains live on this appeal.

. The Deputy Master found (para 6 of this judgment) that under the loan Mr Abdelmamoud agreed to lend the sum of £30,000 to the EAGB for what were described as “legal purposes”. The loan agreement included, among other things, the following terms:

Mr Abdelmamoud’s case is that over the course of the weeks following entry into the loan agreement he advanced a total of £30,250 to the EAGB or at the request of the EAGB. The Applicants disputed that the monies had been advanced to the EAGB.

On the instructions of Mr Ismail, proceedings were issued against Mr Ragab in the name of the EAGB in December 2012. The procedural history of those proceedings is set out in paras 20 and 21 of the Deputy Master’s judgment. The key points for present purposes are that those proceedings:

Regarding the undertaking of Mr Ragab given to Proudman J, the Deputy Master made it clear in a footnote to para 20 of his judgment that he did not view the undertaking as a concession by Mr Ragab that he had not been duly elected, but simply as a pragmatic accommodation by Mr Ragab in order to settle the issue.

During 2013 the EAGB defaulted on an interest payment due under the loan agreement. On 29 April 2013 Mr Abdelmamoud demanded repayment of the loan. On 6 May 2013 he sent a letter before action to the EAGB, and on 16 May 2013 he issued the claim that commenced these proceedings. The EAGB did not file an acknowledgement of service or a defence. On 26 June 2013 judgment in default was entered in the Queen’s Bench Division of the High Court for Mr Abdelmamoud in the amount of £38,025, being £37,500 for the debt and interest to the date of judgment and £525 for costs. No part of that amount had been paid by the time of the hearing before Deputy Master Smith nor, it appears, had any amount been paid by the time of the hearing of the appeal before me.

On 15 June 2013 a General Meeting of the EAGB was held during which an election of directors was held, overseen by Mr Ahmed Abdel-Hamid, a Westminster councillor who is not a member of the EAGB. Mr Ismail, Mr Ossama Abdel-Hamid and Mr Elsayed were elected (or, in their own view, reelected as directors), however the Applicants dispute the validity of that election.

On 27 June 2013 Mr Abdelmamoud applied for a third party debt order to be directed to the National Bank of Egypt as third party at its address at 11 Waterloo Place, London SW1Y 4AU in relation to the funds held by that bank for the account of the EAGB. On 3 July 2013 an interim third party debt order was granted in favour of Mr Abdelmamoud on the terms sought, and on 4 September 2013 Master McCloud made a final third party debt order on substantially the same terms.

On 6 September 2013 the first and second Applicants, Mr Ragab and Dr Shalaby, made an urgent application without notice was made in the Queen’s Bench Division for a stay of the third party debt order. Master Eastman granted the stay for a period of 28 days, to be extended if an application was made to set aside the default judgment. He also transferred the proceedings to the Chancery Division.

On 9 September 2013 Mr Abdelmamoud applied in the Queen’s Bench Division to set aside Master Eastman’s order on the basis that the EAGB had not authorised the application.

On 7 October 2013 the first, second and third Applicants (Mr Ragab, Dr Shalaby and Mr Issa) together with others (Sharif Shaker, Essam Arafa and Sayed Fouad) made an urgent application without notice in the Chancery Division to extend Master Eastman’s stay. Mr Justice Birss, after hearing Mr Ragab and Mr Shaker, extended the stay to 14 October 2013, subject to the condition that, if an application were made to set aside the default judgment by close of business on that day, the stay would be continued until after the resolution of the application,

On 14 October 2013 Dr Shalaby, Mr Shaker “and others” (unnamed on the application notice) applied for the default judgment obtained by Mr Abdelmamoud against the EAGB to be set aside. By the time the application was heard, it appears that Mr Shaker was no longer a named applicant and Dr Shalaby had been joined by Messrs Ragab, Issa and Madkour as named applicants.

The application was initially heard by Deputy Master Smith on 17 January 2014. Mr Philip Flower represented the Claimant, and Mr Gareth Reeds represented the Applicants. Mr Reeds made various submissions concerning the general circumstances in which the loan was made, but the Deputy Master found that Mr Reeds said little about any specific defences to repayment of the purported loan, and he noted that no draft defence having been prepared. He therefore adjourned the hearing in order to give the Applicants the opportunity to prepare a draft defence.

The adjourned hearing resumed in April 2014, on which occasion the Applicants represented themselves. They had prepared a draft defence, but apparently had done so without the assistance of counsel or solicitors. (This is relevant to the order that the Deputy Master made at the conclusion of the hearing.)

The Deputy Master noted in para 25 of his judgment that there were two principal issues to be addressed in relation to the application, namely, (i) whether the Applicants had standing to make the application and (ii) whether the requirements of CPR Rule 13.3 were satisfied so that the court could exercise its power to set aside the default judgment entered under CPR Part 12.

The Deputy Master addressed the issue of the standing of the Applicants to make the application in paras 48 and 49 of his judgment. He considered it on the basis of CPR Rule 40.9, which concerns the circumstances in which a person who is not a party but who is “directly affected” by a judgment or order may apply to have it set aside or varied. He proceeded, in other words, for this purpose on the basis that none of the Applicants were at that stage lawfully elected directors of the EAGB capable of representing the EAGB directly as the Defendant in the proceedings. He had already noted in para 18 of his judgment that the issue of the identity of the lawful directors of the EAGB was disputed by the Applicants but also that it was not disputed by the Applicants that this was not reflected in the public records maintained by the registrar of companies at Companies House.

Mr Flower on behalf of the Claimant argued that in order to have standing under CPR Rule 40.9 a person must have a “tangible and quantifiable interest” in the outcome of the action, and he referred the Deputy Master to the judgment of Mr Justice Briggs (as he then was) in Latif v Imaan Inc [2007] EWHC 379. The Deputy Master did not consider that Mr Flower was assisted in his argument by the decision in Latif, which in his view did not set limits to the scope of CPR Rule 40.9. He noted that CPR Rule 40.9 is in wide terms and requires only that a person be “directly affected”. He considered that members of a charity who dispute the validity of the election of the purported current directors of the charity are directly affected within the meaning of the Rule even if they have no proprietary interest in the charity’s funds. They have an interest in protecting the funds of the charity of which they are members. Given that Mr Ismail and his committee were not defending the claim brought be Mr Abdelmamoud, the Deputy Master concluded that the Applicants were entitled to defend the proceedings in the name of the EAGB subject to the giving of suitable indemnities.

Deputy Master Smith then turned to the issue of whether the requirements of CPR Rule 13.3 were satisfied so that the court could set aside the default judgment entered in Mr Abdelmamoud’s favour. CPR Rule 13.3(1) provides that a court may set aside or vary a default judgment if either (a) the defendant has a real prospect of successfully defending the claim or (b) there is some other good reason why the judgment should be set aside or varied or the defendant should be allowed to defend the claim. The test under CPR Rule 13.3(l)(a) is the same as the test for summary judgment under CPR Part 24, namely, not whether the defendant has an arguable case but rather whether the defendant has a real, as opposed to fanciful, prospect of successfully defending the claim.

Noting that there had been numerous accusations and counter-accusations during the course of the hearing between the Applicants and the Claimant and that he did not need to refer to them all, Deputy Master Smith found (para 35 of his judgment) that the Applicants had raised seven principal grounds on which they would seek to rely to defend the claim on behalf of the Defendant, EAGB. In relation to the first five grounds, the Deputy Master found that none of them raised a real prospect of the Applicants being able successfully to defend Mr Abdelmamoud’s claim for repayment of the loan. He did, however, find that there was substance in the sixth and seventh grounds raised by the Applicants. Paragraph references below are to paragraphs of the Deputy Master’s judgment.

First, the Applicants argued that the loan agreement specified no duration or term for the loan. The Deputy Master dismissed this argument noting (para 36) that the loan was payable on demand and that there was no requirement for a loan to specify a fixed term.

Secondly, the Applicants argued that the Claimant should prove that the loan agreement complied with the Consumer Credit Act 1974. The Deputy Master dismissed this argument noting (para 37) that the EAGB is a company limited by guarantee and therefore the loan agreement cannot be a consumer credit agreement. He also noted that the Applicants had failed to make out any reasons why the 1974 Act should apply in this case.

Thirdly, the Applicants argued that the money allegedly advanced by the Claimant was never received by the EAGB, saying that it was instead paid to Gramdan solicitors, the firm who were acting, on the instructions of Mr Ismail, as solicitors for EAGB in relation to the proceedings by the EAGB against Mr Ragab issued in December 2012, The Deputy Master did not accept this defence to Mr Abdelmamoud’s claim, noting (para 38) that “[a] loan is no less a loan because it is paid to a third party at the request of the borrower rather than directly to the borrower”. He also found (para 39) that “[t]he money paid by the Claimant appears to have been treated by Gramdan solicitors as money received on behalf of the Charity”.

Fourthly, the Applicants submitted that the monies advanced “may have been” (in the words of the Deputy Master) applied by Gramdan solicitors for the purposes of an assault claim being pursued by Mr Abdelmamoud against Mr Ragab. The Deputy Master noted (para 39) that no evidence had been produced to support this supposition.

Fifthly, the Applicants argued that Mr Abdelmamoud and Mr Ismail were acting in concert to sabotage the EAGB or pursue a personal vendetta against Mr Ragab (para 40). The Deputy Master found (para 40) that there was no real evidence to support the allegation that Mr Abdelmamoud and Mr Ismail were motivated by a wish to sabotage the EAGB. It did appear to him that there was personal animosity between Mr Abdelmamoud and Mr Ragab, but he did not see how this would enable the EAGB to establish a defence to repayment of the loan based on a tort of conspiracy.

Sixthly, the Applicants argued that Mr Ismail was not a lawful director of the EAGB when the loan was entered into, and the committee chaired by Mr Ismail was not the lawful committee. Accordingly, he did not have authority to enter into the loan agreement on behalf of the EAGB at the time it was allegedly made, and the committee he chaired did not have the authority to pass a resolution approving the loan. It is not in dispute that a resolution was passed by Mr Ismail’s committee and shown to Mr Abdelmamoud before Mr Abdelmamoud made the loan.

The Deputy Master rejected arguments advanced by Mr Flower as to the ostensible authority of Mr Ismail to act on behalf of the EAGB and estoppel operating against the EAGB to prevent its denying the validity the resolution approving the loan agreement. The Deputy Master said (para 43) that he was not in a position to resolve that issue and concluded that there was a real prospect that the Applicants could succeed on this ground if they could show that Mr Abdelmamoud was aware that Mr Ismail’s status as a director and that of his purported fellow directors were in dispute.

The Deputy Master also rejected Mr Flower’s argument that the committee elected in June 2013 had since ratified the loan agreement, while noting (para 44) that Mr Ismail supported the Claimant’s contention on this point. The Applicants also disputed the validity of the June 2013 election, notwithstanding the fact that it was overseen by Councillor Ahmed Abel Hamid, a Westminster councillor who is not a member of the EAGB and who appears to be independent and notwithstanding the fact that no steps appear to have been taken to challenge the June 2013 election other than a complaint to the Charity Commission. Accordingly, the Deputy Master concluded that he could not reject out of hand the Applicants’ argument that the loan agreement was not binding on the EAGB as it was not made or ratified by the lawful directors. In other words, he concluded that the Applicants would have a real, as opposed to fanciful, prospect of success in defending the claim on that ground as required by CPR Rule 3.13.

Finally, the seventh and final ground considered by the Deputy Master was the argument of the Applicants that the EAGB has no power to borrow under its governing documents. The Deputy Master was not persuaded (para 46) by Mr Flower’s argument that the power is implied. He was also not persuaded that section 39 of the Companies Act 2006, which provides that the validity of an act of a company cannot be called into question on the grounds of lack of capacity by reason of anything in its constitution, protected the Claimant from a defence based on the EAGB’s lack of capacity to borrow. He noted that section 39 is subject to section 42, which disapplies section 39 in relation to charities, subject to certain exceptions. The Deputy Master was not satisfied that it was clear that any of the exceptions would apply (with the effect of preserving for the Claimant the protection of section 39) given that the Claimant had been a vice chair of the EAGB and remained a member. Therefore the Deputy Master concluded that there was a real and not fanciful prospect that the Applicants would have a defence to the claim based on the EAGB’s lack of capacity to borrow, once again as required by CPR Rule 3.13.

Mr Flower on behalf of the Claimant argued that even if there is merit in what the Deputy Master characterised as the sixth and seventh grounds on which the Applicants would defend the claim, the Claimant would have a restitutionary claim against the EAGB. The Deputy Master, however, rejected this argument on the basis that the restitutionary claim was not pleaded, there may be possible defences to a restitutionary claim and it is therefore not possible to conclude that the Claimant must succeed on a restitutionary claim.

Finally, the Deputy Master identified (para 51) a further reason why the default judgment in favour of the Claimant should be set aside, namely, the proceedings by Mr EAGB against Mr Ragab, as already noted, were brought without the consent of the Charity Commission or, in the absence of such consent, leave of the court as required by section 115 of the Charities Act 2011.

As already noted, the Applicants represented themselves at the hearing, as was their right. Their principal spokesman was Dr Shalaby, but Mr Ragab also made some submissions. Despite the animosity noted by the Deputy Master between, on the one side, the Applicants and, on the other side, the Claimant, Mr Ismail and Mr Ismail’s committee, Dr Shalaby and Mr Ragab made their submissions with admirable restraint and, for the most part, admirable calm.

It was unfortunate for the Applicants that I was not able to accede to their application to cross-appeal against certain aspects of the Deputy Master’s order, for the reasons already explained. This meant that they were limited to responding to the points of law raised by the Claimant on this appeal. It appears that they had prepared for the appeal in the expectation that it would be a rehearing of the original application. Their frustration was understandable, therefore, when I explained that as it was an appeal to which they, and the EAGB, were the respondents, my jurisdiction was limited to a review under CPR Rule 52.11 of the Deputy Master’s decision, there being no circumstances that compelled me to the conclusion that it was in the interests of justice that I should take the exceptional course of holding a re-hearing.

Accordingly, the appeal was limited to my consideration of the Grounds of Appeal attached to the Appellant’s Notice, there being no Respondent’s Notice. Each of the Grounds of Appeal was concerned with a point of law. The Applicants’ submissions were largely concerned with the factual issues canvassed before the Deputy Master, however his findings of fact on the evidence he reviewed were not at issue on this appeal. For example, the Deputy Master had found, as noted above, that on the evidence presented to him the Applicants had no real prospect of defending the claim on the basis that Mr Abdelmamoud had not, in fact, advanced the amount of £30,250 to the EAGB. The Applicants wished to continue to dispute this point as a factual matter in their submissions at the appeal. I explained to them that the Deputy Master had made his ruling on this point, and there was no basis for me to disturb his conclusion. The question did not arise on Mr Abdelmamoud’s appeal.

It was the Applicants’ case before the Deputy Master that three of them (that is, all the Applicants other than Mr Madkour) constitute the lawful committee of the EAGB, the election of directors held in July 2012 having been decided in their favour and the election of directors held in June 2013 being invalid. On that basis, they would have power to represent the EAGB as a party to the proceedings relating to Mr Abdelmamoud’s claim against the EAGB, and there would be no need for a separate application under CPR Rule 40.9. As the status of the Applicants as directors was in dispute, the Deputy Master proceeded for this purpose on the basis that they were not parties to the proceedings and considered whether they were “directly affected”.

CPR Rule 40.9 permits a person who is not a party to proceedings but who is “directly affected” by a judgment or order made in those proceedings to have it set aside or varied. The White Book notes at 40.9.5 that the principal relevance of CPR Rule 40.9 appears to be in relation to default judgments, there being separate rules in the CPR for most other types of order seeking to set aside or vary a judgment or order, some of which deal expressly with the question of whether a non-party may invoke the rule. These are summarised in the White Book at 40.9.2, which suggests that CPR Rule 40.90 is best understood if read in conjunction with these other rules.

The White Book also notes at 40.9.1 that “[f]or obvious reasons, the bias of procedural law is against permitting parties to cause the court to go back on judgments and orders given and made, so that the circumstances in which a party may succeed in such an application are bound to be, at least to an extent, restricted.” If this is true for a party seeking to set aside or vary a judgment or order, it must also be true for a non-party. This is not strictly speaking relevant to the question of whether a non-party has legal standing under CPR Rule 40.9, but it tends to reinforce the proposition that despite the apparent breadth of the words “directly affected”, whether a non-party has been “directly affected” by a judgment or order needs to be carefully scrutinised for the purposes of this rule.

Mr Flower submitted that the Deputy Master had been wrong as a matter of law to conclude that the Applicants were “directly affected” in the sense intended by CPR Rule 40.9. This must mean something more than merely being “affected”. Some recognisable interest of the Applicants, legal or equitable, must be affected by the relevant judgment or order. There must be some personal connection between the judgment or order and rights or property of the non— party that are affected.

Mr Flower relied on two cases to support these propositions, in one of which the court considered that the non-party was not “directly affected” for purposes of the order and in the other of which it considered that the non-party was “directly affected”. The first case, in which the non-party was held by HHJ Behrens QC not to be “directly affected” was Hepworht Group Ltd v Stockley [2006] EWHC 3626 (Ch), [2007] 2 All ER (Comm) 82. That case arose out of an order made by the judge following a repudiatory breach by Hepworht Group Ltd of a contract to purchase a hotel in Scarborough from Mr and Mrs Stockley. As part of the consideration for purchase of the hotel, certain private individuals associated with Hepworht Group (the “transferors”) had agreed to transfer ownership of an apartment in Andalucía to Mrs Stockley. Following acceptance by the Stockleys of the repudiatory breach, the judge ordered, among other things, that the apartment be transferred to Hepworht Group, subject to certain conditions intended to protect the Stockleys in relation to their costs against the Hepworht Group. The transferors made an application under CPR Rule 40.9 to vary the order to require that the apartment be transferred back to them, free of the conditions. The judge held at para 62 of his judgment that the transferors were not “directly affected” by the order as they had no direct claim in restitution or otherwise (for reasons it is not necessary to set out here) to a transfer back of the apartment,

The second case relied upon by Mr Flower was Latif v Imaan Inc [2007] EWHC 3179 (Ch), in which Mr Justice Briggs (as he then was) held that a non-party, Lexi Holdings plc, had standing under CPR Rule 40.9 to apply to set aside a default judgment obtained by Messrs Latif and Arif, allegedly trading as Hamra Financial Associates, against Imaan Incorporated. The default judgment related to a loan allegedly made by Messrs Latif and Arif (whether or not in fact trading as Hamra Financial Associates, which was disputed) to Imaan on 18 November 2006. Imaan had on 20 October 2007 charged a residential property in Knightsbridge in favour of Hamra to secure the loan, and on 30 October 2007 Master Foster had made an interim third party debt order in favour of Hamra requiring the tenants of the Knightsbridge property to pay their rent in future to Hamra rather than to Imaan. That charge and the third party debt order conflicted with an equitable charge in Lexi’s favour in the same property created by an order of Briggs J on 6 December 2007 in a related case. Lexi sought to have the default judgment set aside in order to enable it to challenge the validity of the loan and therefore of the charge allegedly supporting it, thereby establishing the priority of its equitable interest in the property. In Latif Briggs J held that Lexi had standing to make the application under CPR Rule 40.9 by virtue of its equitable charge on the Knightsbridge property, notwithstanding that the default judgment it was seeking to set aside was a personal money judgment against Imaan that did not have a direct effect on the Knightsbridge property.

Mr Flower submitted that there although there appears to be little other authority on the meaning of “directly affected” for the purposes of CPR Rule 40.9 these two cases, Hepworht and Latif are sufficient to show that in order for a non—party applicant under the rule to be “directly affected” the applicant must show that some interest of the applicant capable of recognition by the law is affected. Mr Flower further submitted that the Applicants in this case are not able to show that they have any such interest, as they are merely members of the EAGB, it being trite law that a member of a limited company has no proprietary interest in the assets of the company and is not directly liable for the debts of the company. The default judgment obtained by the Claimant is a personal judgment obtained against the EAGB that does not affect any proprietary interest of or impose any liability on any Applicant,

Deputy Master Smith did not accept these submissions when made to him below. He was of the view (para 49) that Latif did not purport to set out the limits to CPR Rule 40.9 and that the reported authorities simply show that each case needs to be decided on its own facts. CPR Rule 40.9 is drafted in wide terms and only requires that a person be “directly affected”. In his view, the Applicants, as members of the EAGB, were directly affected by the default judgment granted against the EAGB. Even though they have no proprietary interest in the funds of the EAGB, they have an interest in protecting the funds of the EAGB, it being a charity of which they are members. He therefore concluded that they should be entitled, on the giving of suitable indemnities, to defend the proceedings in the name of the EAGB in circumstances where the registered directors are not proposing to defend the claim.

As I have already noted in [51] above, despite the apparent breadth of the words “directly affected”, the circumstances in which a person claims to be directly affected by a judgment or order need to be carefully scrutinised in light of the general policy that a judgment or order should not easily be set aside. In IPCom GmbH & Co KG v HTC Europe Co Ltd [2013] EWHC 2880 (Ch), another case mentioned in the White Book at para 40.9.1, a non-party sought successfully to set aside an order against a party that would have involved disclosure of the non-party’s confidential business secrets. The non-party was directly affected because the order affected its right to preserve its confidential business secrets.

IPCom, Hepworht and Latif all, in my view, support the proposition that in order for a non—party to be “directly affected” by a judgment or order for the purpose of CPR Rule 40.9, it is necessary that some interest capable of recognition by the law is materially and adversely affected by the judgment or order or would be materially and adversely affected by the enforcement of the judgment or order. In IPCom, the interest was the non—party’s interest in the preservation of its confidential business secrets. The enforcement of the order for disclosure would have potentially harmed it economically. In Hepworht the non—party applicants clearly had an interest in a general sense in recovering the Spanish property that they had transferred to the defendants (and so were affected by the order, one might even say “directly” using that word in its everyday sense), but they had no restitutionary or other interest in the Spanish property recognised by the law and so were not “directly affected” by the order for the purpose of CPR Rule 40.9. In Latif the non—party was “directly affected” by the default judgment obtained by the claimants because that default judgment prevented its challenging the validity of a charge on residential property in which it had an equitable interest.

Since the “directly affected” test is for the purpose of establishing locus standi, it is sufficient that the relevant judgment or order would prima facie be capable of materially and adversely affecting a legal interest. It is not necessary to show that it would, in fact, do so, for that would be the subject of the application itself.

In this case, I do not see that the Applicants have any interest capable of recognition by the law that is “directly affected” in the sense discussed above. As members of the EAGB, the Applicants have various rights, including the right to vote at general meetings of the company on questions such as who should be the directors of the company. As already noted, however, the members have no proprietary interest in any funds or other assets of the company and no direct liability for the debts of the company. A conscientious and interested member of any company, including a charitable company, will naturally be interested in the company’s conduct of its business, including its conduct (or lack of conduct) of the defence of proceedings brought against the company. But this interest, however sincere or enthusiastic, even passionate, is not, without more, a legal interest, that is, an interest protected by a legal rule or equitable principle.

The limited company exists as a legal form in order to provide a means by which a group of persons, the members, may indirectly carry on certain activities without exposing those members to liability for the debts or other liabilities incurred in doing so. An important part of the bargain between the company and the members, and between the members inter se, is the entrusting of the management of the company to the directors. This is an important part of the justification for the shield of limited liability. Company law provides various remedies for members who are unhappy with the conduct of the business of a company, but this does not extend to usurping the function of the directors in, for example, deciding whether or not to defend proceedings against the company.

It does not, in my view, make a difference in general or in this case that the company is a registered charity. In other words, the members of a charity are no more “directly affected”, in the sense required by CPR Rule 40.9, by a default judgment made against the company than the members of any other company. As Mr Flower suggested, their interests as members are, if anything, given greater protection by virtue of the company’s charitable status, given the oversight of the Charity Commission, the statutory framework for charities and the additional duties owed by the directors as the “trustees” of the charity under that framework, than in the case of an ordinary company. Given the lack of a legal interest materially and adversely affected by the default judgment against the EAGB capable of bringing the Applicants within the scope of CPR Rule 40.0, the willingness of the Applicants to provide indemnities in order to be permitted to undertake the defence of the proceedings is of no avail to them. Accordingly, in my view Deputy Master Smith erred in law in concluding that the Applicants had locus standi under CPR Rule 40.9 to bring their application and accordingly the appeal would succeed on that ground alone.

Because, however, the second issue, set out in [4(ii)] above, and its three subsidiary issues set out in [5] above, were fully argued before Deputy Master Smith and before me, I now turn to consider them. As already noted, Deputy Master Smith concluded that the Applicants had a real, as opposed to fanciful, prospect of successfully defending Mr Abdelmamoud’s original claim against the EAGB, for the reasons I have summarised in [40] - [44] above.

As to the legal capacity of the EAGB to enter into the loan, section 39 of the Companies Act 2006 provides that the validity of an act done by a company shall not be called into question on the ground of lack of capacity by reason of anything in the company’s constitution. This is subject to section 42 in relation to charities. The relevant parts of section 42 for present purposes are sections 42(1)(b) and 42(3). Section 42(1)(b) provides that section 39 does not apply to acts of a charity except in favour of a person who:

“(b)

gives full consideration in money or money’s worth in relation to the act in question and does not know (as the case may be) —

(i)

that the act is not permitted by the company’s constitution, or

(ii)

that the act is beyond the power of the directors.”

Deputy Master Smith rejected the argument of the Applicants that the loan was not made to the EAGB, so the only potential issue is whether Mr Abdelmamoud knew that the act (that is, borrowing the money) was not permitted by the company’s constitution or was otherwise beyond the power of the directors. Section 42(3) makes it clear that the burden of proving that a person knew that an act was not permitted by the company’s constitution or was beyond the power of the directors lies on the person asserting that fact, namely, in this case, the Applicants. No evidence that would support the Applicants’ case in the discharge of this burden of proof was referred to in Deputy Master Smith’s judgment or appeared in the evidence presented for my consideration at the hearing of the appeal. The constitution of the EAGB was not put before me, but the Deputy Master observed that there was no provision of it that dealt with the EAGB’s power to borrow. That observation alone, in my view, falls far short of the level of evidence that would be needed to discharge the burden of proof under section 42(3). A company registered under the Companies Act 2006 is not a statutory corporation, such as a local authority, whose legal capacity is limited to expressly enumerated objects and powers. Furthermore, there appears to have been no evidence that Mr Abdelmamoud consulted the EAGB’s constitution at the time of making the loan nor was he under any duty to do so. The fact that he was at one time a vice chair of the EAGB and remains a member again falls short of what would be needed to discharge the relevant burden of proof. Accordingly, it is my view that the Deputy Master was wrong in law to conclude that the Applicants had a real, as opposed to fanciful, prospect of succeeding in defending Mr Abdelmamoud’s claim against the EAGB on this ground.

As to the authority of Mr Ismail to enter into the loan on behalf of the EAGB, it is not in dispute that Mr Ismail was a registered director of the EAGB at the time of the loan. Mr Abdelmamoud’s evidence is that he checked the register at Companies House to confirm that Mr Ismail was a director, and he also asked for a resolution of the directors approving entry into the loan he was going to (and did) make to the EAGB.

The Deputy Master was, as noted above, of the view that the Applicants would have a real prospect of defending Mr Abdelmamoud’s claim if they could show that he was aware that there was a dispute as to the lawful directors of the EAGB, notwithstanding his having checked the identity of the directors on the statutory register at Companies House and his having obtained a copy of a resolution of the then board of directors. He does not, however, refer in his judgment to section 161 of the Companies Act 2006.

Section 161(1) provides that the acts of a person acting as a director are valid notwithstanding that it is afterwards discovered that there was a defect in his appointment, that he was disqualified from holding office, that he had ceased to hold office or that he was not entitled to vote on the matter in question. There is no exception to this provision for a person who is aware of a dispute concerning the appointment or election of directors.

The Deputy Master considered and rejected arguments made by Mr Flower regarding Mr Abdelmamoud relying on ostensible authority or estoppel or on ratification by the directors elected in the June 2013 election. There is not, however, in my view a real, as opposed to fanciful, prospect of the Applicants being able to establish that Mr Ismail was not acting as a director in relation to the entry into the loan on behalf of the EAGB with Mr Abdelmamoud.

Notwithstanding that Mr Abdelmamoud may have been aware of a dispute concerning the status of the directors at the time he made the loan, the validity of Mr Ismail’s entry into the loan on behalf of the EAGB is protected, in my view, by section 161(1) as far as concerns the enforceability of the loan by Mr Abdelmamoud against the EAGB is concerned. Whether the members of the EAGB have any remedy against Mr Ismail in relation to his entry into the loan on behalf of the EAGB is another matter and one that I do not need to consider. Accordingly, I am of the view that the Deputy Master erred in law in concluding that the Applicants had a real prospect of success in defending the claim on the basis of Mr Ismail’s lack of authority to bind the EAGB.

In view of my conclusions in relation to the Applicants’ lack of a real prospect of successfully defending Mr Abdelmamoud’s claim on the basis of the EAGB’s lack of capacity or Mr Ismail’s lack of authority, I do not need to consider whether the Applicants would have a real prospect of defending a claim, in the alternative, by Mr Abdelmamoud for restitution for unjust enrichment in relation to the monies he advanced to the EAGB, but I am inclined to doubt that they would have a real prospect, in view of the Deputy Master’s conclusion that the loan had been made to the EAGB.

The Deputy Master appears to have been influenced in reaching his conclusions by his doubts as to whether the loan by Mr Abdelmamoud to the EAGB was a “simple commercial arrangement” (para 29), an “ordinary commercial transaction” (para 30) or an “ordinary commercial loan”. Those doubts may be well—founded, but there is no general rule to the effect that a lender to a company is not entitled to repayment of a loan if the loan is not an “ordinary commercial” loan. The Deputy Master concluded that the loan was made, and I have concluded that the Applicants have no real prospect of successfully defending a claim on behalf of the EAGB in relation to its lack of capacity or Mr Ismail’s lack of authority. No other defences arise for consideration on this appeal.

In para 51 of his judgment, the Deputy Master gives a final reason for concluding that the default judgment obtained by Mr Abdelmamoud should be set aside, presumably under the second limb of the test set out in CPR Rule 13.3(1), namely, where there is some other good reason why the judgment should be set aside or the defendant allowed to defend the claim. He notes that the claim by the EAGB against Mr Ragab was brought without the consent of the Charity Commission under section 115 of the Charities Act 2011, the purpose of which is to avoid the funds of a charity being squandered in internal disputes that are not in the best interest of the charity. He notes that the Applicants have alleged that the loan made by Mr Abdelmamoud to the EAGB was a “device” arranged by Mr Abdelmamoud and Mr Ismail (and his committee) to “procure access to the Charity’s funds in the frozen bank account for [the] unauthorised proceedings [against Mr Ragab]”. He further notes that Mr Abdelmamoud appears to “have been willing to continue funding the litigation without any obvious prospect of reimbursement and therefore may have been a willing participant in the internal dispute as opposed to a neutral investor”. He concludes that “it is not for me to devise possible defences which have not been fully argued, but I think that these are matters which merit further consideration and amount to a good reason why the judgment should be set aside and a proper Defence filed, provided that the Charity is protected against costs”.

With respect to the Deputy Master, this seems to me to involve a considerable degree of speculation. Even if Mr Abdelmamoud is not a “neutral investor”, the terms on which he lent the money to the EAGB and the terms on which he was entitled to demand repayment are clear and are not disputed. The loan was repayable on demand, and it is not disputed that he did demand repayment before commencing these proceedings against the EAGB. Even if Mr Abdelmamoud was somehow involved in the dispute between Mr Ismail and his committee with Mr Ragab and other members, it is hard to see how this can, under any circumstances, amount to a defence to repayment of the loan. (I note in passing that para 40 of the Deputy Master’s judgment appears to support this view. See [39] above.) Accordingly, I must conclude that the reasons given by the Deputy Master are not sufficient to justify his decision to set aside the default judgment in favour of Mr Abdelmamoud under the second limb of the test in CPR Rule 13.3(1).

The Applicants did not have standing under CPR Rule 40.9 to bring their application to set aside the default judgment obtained by Mr Abdelmamoud. If my view on that is wrong, the Applicants did not, in any event, establish that they would have a real prospect of successfully defending the claim by Mr Abdelmamoud against the EAGB for repayment of the loan. In my view, there is no other good reason why the default judgment should be set aside or the Applicants allowed to defend the claim on behalf of the EAGB. Mr Abdelmamoud’s appeal is therefore granted.

At the conclusion of the hearing of the appeal, the Applicants brought to my attention that they had only just received, during the course of the hearing, a copy of the appeal bundle prepared on behalf of the Claimant. This was both unfortunate and unsatisfactory, and I made my displeasure clear to Claimant’s counsel and his solicitors, who were in attendance at the hearing. I was told that there had been some confusion as to where to send the bundle and an apology for the late delivery was made on behalf of the Claimant’s team. Given the nature of the appeal, which raised only issues of law, very little reference was, in fact, made to the appeal bundle. Such elements of the bundle as were referred to (principally copies of orders previously made in these proceedings and, of course, the judgment and order of Deputy Master Smith) were clearly in the possession of the Applicants as were Mr Flower’s skeleton argument and his bundle of authorities. Accordingly, I concluded that the late delivery of the appeal bundle, while extremely regrettable and unsatisfactory, did not prejudice the Applicants in relation to the appeal and therefore did not amount to a serious procedural irregularity.

In light of the fraught nature of the disputes between various members of the EAGB, which appear to have generated a good deal of personal animosity amongst the participants and which form the background of this case, I am grateful to Dr Shalaby and Mr Ragab for their assistance in presenting the case for the Applicants and the calm, clear and helpful way in which they did so. I am also grateful to Mr Flower for his assistance in presenting the case for the Claimant