PROVING THINGS 112: ITS NO USE JUST WAVING ACCOUNTANT’S REPORTS AROUND

In  Berkshire Homes (Northern) Ltd v Newbury Venture Capital Ltd [2018] EWHC 938 (Ch) the respondent relied on accountant’s reports in an attempt to prove its case. The case shows that it is insufficient just to produce accounts. Evidence has to be adduced to support those accounts and the conclusions reached.

“… although the Respondent is relying on the findings and conclusions of its accountants to confirm the true inter-company position, neither the Applicant nor the court have been told what instructions the accountants had been given by the Respondent; what documents they had been shown; how they had satisfied themselves that the payments referred to were made or the credits properly applied; whether the entries were bona fide liabilities of the Applicant to be credited in favour of the Respondent; and/or whether the Respondent had made the payments reclaimed in the first place.“

THE CASE

The applicant company applied for an administration order over the respondent company.  The applicant’s case was that it was a creditor of the respondent. The respondent asserted that a number of set-offs, counter-claims and credits meant that it was not a debtor.

THE JUDGMENT

His Honour Judge Hodge QC (sitting as a judge of the High Court) considered the respondent’s evidence in relation to its case that money was not due.

1. I cannot accept that there is a sum over £1 million due and outstanding in respect of Springbank Gardens. If there were, that sum, rather than £120,000, would have been mentioned. I am prepared to give the Respondent credit for that further £120,000 against the balance of £1,181,006; but that simply reduces the indebtedness to the Applicant to a sum of just over £1 million.

2. As far as the asserted claim for damages for loss of profit in relation to Springbank Gardens is concerned, it seems to me that that is supported by no real evidence. It is a claim that I regard as tenuous and entirely speculative. In my judgement, it does not fall to be considered. One then has to look at the schedule prepared by Hardy & Co. The schedule is addressed in Mr Nelson’s second witness statement. Mr Weaver submits that the schedule is of no assistance at all, and ought properly to be ignored by the court, for the reasons which he sets out at paragraph 35 of his skeleton.

3. First, Mr Weaver says that the entries in the schedule are almost entirely unsupported by evidence, or even explanation, of any kind. The entries in the schedule are not verified by supporting documents. At paragraph 10 of his witness statement, Mr Kiely says that he had paid his accountants to produce a schedule of the position as it stood between the two companies. There is no evidence whatsoever from anyone from Hardy & Co as to the basis upon which the schedule was produced. There is no indication of what documentation was relied upon in producing the schedule.

4. I share Mr Weaver’s bafflement at the lack of any supporting documentation, or explanation, for the vast majority of the entries. In a letter dated 8 December 2017 (which is exhibited to Mr Kiely’s witness statement at pages 18 to 19 of exhibit HK1), the Applicant’s solicitors, Fraser Brown, had indicated that the liquidators of the Applicant company expected the Respondent’s evidence to include copies of the full accounts in respect of the accounting periods up to and including the year end of 30 April 2015, together with the supporting documents relating to the transactions with the company.

5. In the light that letter, the omission of such supporting documents I find incredible. At paragraph 7 of his witness statement, Mr Kiely asserted that he was under no obligation to disclose sensitive accounts to the Applicant when it had no right to see them; but that misses the point. What the Applicant was inviting the Respondent to do was to support its assertion of the inter-company position by relevant documentation. Mr Kiely has not taken the opportunity to do that. The Respondent has not provided any meaningful documentation to evidence its assertions.

6. Secondly, Mr Weaver makes the point that there is a summary sheet, and a list of entries to the credit of the Respondent, but the other side of the analysis, namely the entries to be credited to the Applicant, is missing. Thirdly, Mr Weaver points out that some of the entries are incorrect. An entry shows credit for sale proceeds of Plot 27 Kandel Court. That is incorrect given that the Respondent was never entitled to those sale proceeds, so cannot claim the credit for the sale. Likewise, entries for sums said to have been paid by the Respondent to Lancashire Mortgage Corporation, as secured creditor, are incorrect since those payments were made directly upon the completion of each sale by the Applicant company.

7. Mr Weaver, in his opening address, pointed to three entries towards the bottom of page 90 of exhibit HK1, amounting to £244,263, which were wholly unexplained. The annotation refers to Commissions and JV interest, DLA and JV legal costs. Those entries are wholly unexplained. Taking those three entries, totalling £244,263, together with the £18,748 for Plot 27 Kandel Court, and the sums totalling £182,250 credited by way of payments to Lancashire Mortgage Corporation, they come to £445,261. Moreover, in his second witness statement Mr Nelson identified a further £897,251 from the sale of Kandel Court properties. Logically, that sum must also form part of the payments to be included in any proper schedule of payments due to the Applicant. My understanding from Mr Tindall’s submissions is that those payments have been included in the reconciliation but it is not possible to identify them from the schedules that have been produced.

8. Fourthly, Mr Weaver points out that although the Respondent is relying on the findings and conclusions of its accountants to confirm the true inter-company position, neither the Applicant nor the court have been told what instructions the accountants had been given by the Respondent; what documents they had been shown; how they had satisfied themselves that the payments referred to were made or the credits properly applied; whether the entries were bona fide liabilities of the Applicant to be credited in favour of the Respondent; and/or whether the Respondent had made the payments reclaimed in the first place.

9. In short, it is said to be utterly unclear on what basis the schedule was produced and how accurate it might be. Mr Weaver submitted that the schedule raised more questions than it answered. I am not satisfied that the Respondent, on whom, in my judgement, the evidential burden lies, has produced sufficient satisfactory evidence to show that there is no sum owing from the Respondent to the Applicant, or that any sum owing from the Respondent to the Applicant is less than the critical figure of £332,589 that constitutes the net asset figure for the Respondent.

10. I am satisfied that the Applicant, after making all due allowance for the credits, cross-claims and set-offs originally intimated by the Respondent, has demonstrated that there is a balance due to the Applicant in excess of £1 million. I am not satisfied that the evidence produced by the Respondent has, on a balance of probabilities, reduced that balance below the critical amount of £332,589. I am therefore satisfied, on a balance of probabilities, that the Respondent company is indeed unable to pay its debts. I am satisfied, on the basis of what is said by Mr Nelson at paragraphs 31 through to 35, that there is a real prospect that the administration order is reasonably likely to achieve the purpose of administration. Indeed, the contrary is not suggested by Mr Kiely in his evidence; and Mr Tindall advanced no submissions to the contrary.