Hellard & Anor v Graiseley Investments Ltd & Ors

A claim under Insolvency Act 1986, section 238, requires the alleged transaction to be properly identified and the value given and received to be addressed. Accounting journal entries do not necessarily create, evidence or reverse legal transactions. Their evidential weight depends on the surrounding records and circumstances. A genuine bookkeeping error may be corrected. Where no authorised transaction occurred, a claim based on its alleged reversal cannot succeed. A misfeasance claim founded on the same alleged transaction fails with it.

The liquidators of Guardian Care Monies (West) Limited applied against Graiseley Investments Ltd and Gary and Karen Hartland. They alleged that West had transferred fixtures and fittings to Graiseley Investments Ltd at an undervalue and that the transaction was later reversed. The claims were brought under sections 238 and 212 of the Insolvency Act 1986.

The respondents disputed that the journal entries represented legally effective transactions. The court considered the pleading of the alleged transaction, the evidential significance of the accounting records, the respondents’ knowledge and authorisation, and whether the alleged transaction existed at all.

1. The applications were dismissed. The applicants had failed properly to plead or define the transaction relied on for section 238 purposes. They had also failed adequately to identify the value allegedly given by, and received by, West. The transaction-at-an-undervalue claim therefore failed at the threshold ([57]-[64], [111]-[112]).
2. The journal entries did not, without more, establish a sale, contractual debt or release. The court considered the entries together with the related journals and surrounding documents. Several entries were provisional, made in preparation for possible restructuring, or erroneous. The contemporaneous material therefore did not reliably prove that a transaction had occurred ([60]-[64], [78]-[80]).
3. The court found that Mr Hartland had not instructed or authorised a transfer of the fixtures and fittings from West to Graiseley Investments Ltd, and that Mrs Hartland neither knew of nor authorised it. The entry recording that transfer was a bookkeeping error by Mr Spruce. His later entries were an attempt to correct that error ([66]-[72], [113]-[114]).
4. Even if the entries could otherwise have established a sale, any such sale would have been void for common mistake on the facts found. West therefore lost nothing by the subsequent correction. The section 238 claim consequently failed on the evidence as well as on pleading grounds ([113]-[115]).
5. The section 212 misfeasance claim depended on the alleged transaction at an undervalue and therefore failed. The court also criticised the liquidators’ investigation and pleading, including the failure to allege or prove relevant knowledge against Mrs Hartland and the introduction of allegations materially beyond the pleaded case ([115]-[121]).