Barber J (first-instance judgment)

This was an application by the liquidators of Guardian Care Homes (West) Limited under section 238 of the Insolvency Act 1986 for an alleged transaction at an undervalue, and under section 212 IA 1986 for misfeasance against two directors. The judge found that the applicants had failed to define the 'transaction' relied upon for the purposes of section 238, and that the contemporaneous Sage journal entries relied upon were, on the evidence, provisional entries or accounting errors made by an employee (Mr Spruce) rather than legally effective sale or release transactions. The court therefore dismissed the s.238 claim and, as the s.212 misfeasance claim depended on it, dismissed that claim as well.

The court also excluded from evidence a late witness statement of one of the liquidators (Ms Wade) because it contained opinion, unexplained assertions and material beyond factual witness evidence and beyond the pleaded case, contrary to the Chancery Guide and CPR practice. The judgment relied on principles concerning the primacy of contemporaneous transactional documentation, the limits of journal entries as proof of contractual transfers and the requirement for adequate pleading of the relevant transaction under s.238 IA 1986.

Background and parties:

• The applicants were the liquidators of Guardian Care Homes (West) Limited seeking recovery under section 238 IA 1986 (transaction at an undervalue) against Graiseley Investments Limited and, under section 212 IA 1986, seeking misfeasance relief against Mr and Mrs Hartland as directors.
• West had carried on a care-home business in a Propco/Opco group. The assets in issue were the items described in the accounts as 'Fixtures and Fittings'. The group accountant, Mr Spruce, had posted various Sage journal entries in 2009–2010 which, on their face, recorded transfers and inter-company movements.

Procedural posture: First instance trial before ICC Judge Barber. Evidence included witness statements and oral evidence from Mr and Mrs Hartland and Mr Plant. The applicants did not call witnesses in chief and the liquidators' statement of Ms Wade was excluded.

Relief sought: Recovery under section 238 IA 1986 of the value of an alleged transaction at an undervalue and misfeasance relief under section 212 IA 1986 for causing or allowing that transaction.

Issues framed by the court:

• Whether a 'transaction' within the meaning of section 238 IA 1986 had been proved and, if so, its identity and value.
• Whether the Sage journal entries (notably journals 2045, 2252, 2261 and 2262 and related journals) evidenced a sale by West to Graiseley Investments Limited or instead reflected provisional entries or errors.
• Whether the directors authorised or caused any such transaction, engaging liability under section 212 IA 1986.
• Evidential issues about late and opinionated witness material and the proper approach to contemporaneous accounting records.

Court's reasoning and findings:

• The applicants had failed adequately to plead and define the 'transaction' relied upon under s.238 IA 1986. Multiple interrelated journal entries existed and the pleaded case selectively relied on particular items without addressing the wider set of entries and their effect.
• On the balance of probabilities the Sage journal entries were bookkeeping errors or provisional entries made by Mr Spruce, who had health problems and a known working practice of posting provisional journals to see effects on trial balances. Journals 2261 and 2262 were part of corrective entries. There was no contemporaneous documentary trail (contract, board minutes, VAT invoices) evidencing a sale of the Fixtures and Fittings to Graiseley at book value.
• The judge accepted the evidence of Mr Hartland and Mr Plant that Mr Hartland had intended any interim transfer to be to the holding company (UK) pending a Propco restructuring, not to Graiseley, and that he did not authorise or know of the entries recording a transfer to Graiseley. Mrs Hartland had limited involvement and no relevant knowledge.
• Because the s.238 claim failed for pleading and evidential reasons, the dependent s.212 misfeasance claim also failed. Even if a sale had otherwise been proved, any such sale would have been vitiated by common mistake on the found facts.
• The court emphasised the need for liquidators to conduct careful, impartial investigations and to plead clearly the transaction relied upon, noting failings in the applicants' investigation and pleadings.

Application dismissed. The court held that the applicants failed to identify and properly plead the transaction relied upon under section 238 IA 1986 and, on the evidence, the Sage journal entries were provisional or accounting errors rather than legally effective transfers. Consequently the s.238 claim failed and the s.212 misfeasance claim, being dependent upon the former, also failed. The court further excluded a late liquidator's witness statement for being opinionated, un-sourced and inconsistent with the pleaded case.