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The court dismissed an appeal by the liquidators of a company who had made an application under section 238 of the Insolvency Act 1986 (IA 1986) alleging a transaction at undervalue. The liquidators challenged a transaction between the insolvent company and a related company, which they alleged had been effected by book entries made by the company’s financial controller. The respondents denied that the book entries were capable of effecting (as opposed to recording) a transaction, and claimed they had been entered in error. The claim was rejected at trial and the liquidators appealed, challenging findings on their pleadings and the respondents’ defence, and the judge’s assessment of all the evidence. Zacaroli J upheld the first instance decision in a thorough judgment which emphasised the liquidators’ failure to prove their pleaded case and the usual rule of appellate courts deferring to the evidential findings of trial judges. Written by Otis Graham at Enterprise Chambers.
Re Guardian Care Homes (West) Ltd (in liquidation)  EWHC 2994 (Ch)
The decision should stand as a warning to officeholders investigating the acts of a company’s former management to exercise caution in process of forensic accounting. The liquidators’ case was built on the allegation that book entries had effected a transaction at an undervalue with a related company. Despite denials that the entries reflected the intention of management or revealed any actual transfer of value, together with a lack of supporting documentation in the form of a written agreement or board resolution, the liquidators continued to assert an underlying transaction on the basis of complex analyses of the company’s accounts and corporate relationships. Unfortunately for the company’s creditors, this was to no avail where, as was found at trial and upheld on appeal, it simply had not been shown that the company’s management had caused it to enter into a transaction. The judgments emphasise the importance of officeholders considering the sum of the documentation in context.
Officeholders and those advising them should therefore think carefully when using tools such as IA 1986, s 238 to make ambitious claims against former management. If liability can only be established with the aid of rarefied analysis, there may be a heightened risk of punitive costs consequences should the analysis collapse. Here, the trial judge’s award of indemnity costs against the liquidators, on the basis that the claim was ‘misconceived’ and ‘irresponsible’, was upheld on appeal.
Prior to the company’s entry into liquidation, book entries were made in its accounting system recording that the fixtures and fittings it owned (with a book value of £3.5m) had been transferred to a related company, GIL. This transfer was subsequently reversed by another book entry. The liquidators claimed that this reversal constituted a transaction at an undervalue, as the consideration received by the company from the reversal (the actual value of the assets, which was only £177,600) was less than the consideration it had provided, namely release of the outstanding £3.5m debt owed to it by GIL in respect of the initial transfer.
The respondents (GIL and the company’s directors) denied that these transactions had taken place at all, asserting that the relevant book entries had been made by the company’s financial controller, Mr Spruce, in error; that its director Mr Hartland had not instructed Mr Spruce to make them—and that they recorded no actual transaction.
At first instance ICCJ Barber dismissed the claim for the following reasons: (i) the liquidators had failed to properly plead or define the ‘transaction’ for the purpose of IA 1986, s 238; (ii) they had failed to establish on the balance of probabilities that the transactions alleged had actually taken place; and (iii) on the evidence the second respondent, Mr Hartland, had not instructed or authorised a transfer of the assets by Mr Spruce.
The liquidators appealed on grounds summarised by Zacaroli J as the ‘pleading point’, the ‘abandonment point’ and the ‘evidence point’.
On the first broad ground of appeal, Zacaroli J expressly agreed with the judge’s findings that the liquidators had failed properly to plead a transaction for the purpose of IA 1986, s 238, but accepted the liquidators’ argument that their pleaded case had made clear to the respondents the substance of the case they had to meet.
The second ground was that evidence given by Mr Hartland under cross-examination suggesting he had instructed Mr Spruce to transfer the assets to the company’s parent meant that the respondents’ defence (which, per the liquidators, implied no instruction been given by Mr Hartland), had been abandoned. Zacaroli J rejected this wholesale—the respondents had pleaded that no instruction had been given to transfer the assets to GIL, and the contrary had not been proved.
The third ground of appeal was that the judge below had been wrong on all the evidence to conclude that there was no transfer to GIL. The liquidators emphasised alleged weaknesses and inconsistencies in the respondents’ evidence. Zacaroli J cited familiar authorities on judicial reluctance to interfere on appeal with findings of fact by a trial judge, and found that the matters relied on by the liquidators clearly did not meet the high threshold. Consequently, it had not been shown that there was no basis in evidence for the judge’s findings.
Finally, Zacaroli J upheld ICCJ Barber’s award of indemnity costs against the liquidators, recognising the ‘generous ambit’ that must be afforded to a first instance judge in respect of decisions on costs.
Court: High Court, Chancery Division
Judge: Zacaroli J
Date of judgment: 07 November 2019
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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.
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