Cheltenham Borough Council sued Christine Laird for fraudulently withholding details about her health, after Laird took the managing director position in 2002 but left three years later on an ill-health pension, having already taken sick leave on full pay.
The council said her health problems had cost the organisation more than £1m.
The legal action was thought to the first involving false statements on a CV or medical questionnaire.
Laird told the court her appointment was “unconditional” and there was no mention of a medical report being required. She said she had given accurate information about her past.
She also alleged she was unlawfully removed after a campaign of bullying and harassment by council members and others who objected to her plans for local authority restructuring.
The Justice of the High Court, Nicholas Hamblen, dismissed the council’s action and also rejected Laird’s claim for damages.
The ruling has been criticised by HR professionals who fear they will now have to sack people on long-term sick leave to cut costs.