For an accounting sleight of hand that elevates end-of-year accounts into a Booker Prize contender for fiction, look no further than those filed by Hallam Estates Ltd at Companies House on New Year’s Eve. During the hearing before HH Judge Snowden on December 17th, that put Hallam into administration, their “consultant”, Michael Stainer (pictured), claimed that Hallam’s accounts, still in draft form, would show that the company was balance sheet solvent, in other words, its assets exceeded its liabilities. This got very short shrift from Judge Snowden when approving the administration order.
The accounts as filed, tell an astonishing story of how Robert Moss (pictured), the sole director, has apparently transformed an insolvent company, that at March 31st 2019, was showing a balance sheet liability of £167,307 into one that was £3,529,323 in credit. We assume he had a little help from Michael Stainer. so he can’t take all the credit ………….. but he will be responsible for their accuracy and veracity.
So let’s look at two glaring issues. In the accounts submitted for year end March 2019, fixed assets are £529,323. In the accounts for year end March 2020, fixed assets are valued at £3,529,323 and the figure carried forward from 2019 has changed to £3,529,323. We have underlined these entries. This is clearly incorrect, and in the words of an accountant we spoke to, “possibly fraudulent”, depending on the motivation. In this case, this appears to be to artificially inflate the true value of the one asset, the freehold.
The second issue is one of chronology, and truthfulness. The accounts were approved by the ‘board’ and signed on November 30th by Mr. Moss. Hallam’s accounts do not require auditing under section 476 of the 2006 Companies Act, so no one external to the company performs any checks. On December 17th, Stainer told the High Court that accounts only existed ‘in draft form’, and that that were they available, or Hallam be granted an adjournment to produce them, they would show a very heathy balance sheet. However, the accounts DID exist and were approved and signed three weeks before.
The explanation for this memory lapse lies beyond this article, but maybe something can be gleaned from the witness statement submitted by Stainer to the High Court in his attempt to stave of administration, during which he admitted that the only asset of Hallam was the freehold of the Grand. This was acquired in 1996 for £148,000.
To gain a full understanding of the legal and accounting position, it’s necessary to understand what ‘fixed assets’ are, and how they valued to conform to proper accounting practices. Something is a fixed asset is “when the asset is held for use in the production or supply of goods or services; for rental to others; or for administrative purposes and is expected to be used for more than one accounting period”. A fixed asset must meet two strict criteria to be recognised as an asset on the balance sheet:
1. It is probable (i.e. more likely than not) that future economic benefits associated with the item will flow to the company
2. The cost of the item can be reliably measured
The measurement of the value is an integral part of this process and must either be done annually, in which case the uplift in value goes firstly onto the profit and loss account and only then will any surplus go onto balance sheet and attract corporation tax. If not carried out this way, revaluations are not permitted. In any case, section 16 of Financial Reporting Standards FRS 102, requires that the valuation of fixed assets such as properties which meet the definition of investment property (which the freehold of the Grand does) must be valued and reported as follows:
An entity shall disclose the following:
(a) the methods and significant assumptions applied in determining the fair value of investment property
(b) the extent to which the fair value of investment property (as measured or disclosed in the financial statements) is based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and class of the investment property being valued. If there has been no such valuation, that fact shall be disclosed
In other words, don’t pluck a figure out of the air.
So with this in mind, let’s see how Mr Stainer, who was a chartered accountant so knows the principles of accounting, fares in his witness statement. He builds up a picture of Hallam’s capital assets as follows, and we must assume that these calculations underpin the dramatic uplift in the value of Hallam’s fixed assets:
The value to Hallam of leasehold reversionary interests, that is what happens when the leases on flats expire and the property reverts to Hallam. He then suddenly throws in the value of selling lease extensions to those with short leases. This of course is income, not capital.
The value of the return from those flats used as holiday lets.
The value of undeveloped space.
The value of the bars, restaurants and public room space
Firstly, none of these are assets, let alone fixed assets, by any stretch of the accounting imagination. The shortest lease is 54 years so won’t revert back to Hallam, or whoever, until 2074.
Secondly, income from flats owned by a third party, is just that – income. In, fact the flats are vested in Stainer’s Trustees in Bankruptcy, so are completely irrelevant.
Thirdly, without planning consents, and there are none, where is the value in undeveloped space, and as you can see below, he claims there is the potential for a further 51 flats! Mind you, this is the man who raised a mortgage and drew up a lease on a flat that doesn’t exist.
Finally, what is the value of commercial space, and in reality, last two items would already be subsumed within the overall value of the freehold? But let Stainer explain his maths:
So, at present the capital value is currently comprised of the reversionary interests in the leases, and the development potential of the prospective additional 51 flat units. Taking the figures above, the reversionary interests are worth in the region of £1,000,000+, and the development value about half its gross value of, say, £5,100,000, ie. about £2,500,000. The freehold’s current written down value in the company’s balance sheet is about £500,000, so a revaluation uplift could be justified of, say, £1,000,000 + £2,500,000 – £500,000 = £3,000,000.
His next paragraph makes a total nonsense of the accounts as submitted:
The company’s last published accounts, for the year to 31 March 2019, showed a deficiency in its reserves of £167,307, which will have declined slightly since to about £160,000. Applying a revaluation uplift of £3,000,000 therefore increase its reserves to a positive figure of £3,000,000 – £160,000 = £2,840,000
So where is the revaluation? Was one carried out? Explain how he retrospectively tries to uplift the 2018-2019 fixed assets as mentioned above, and to what purpose? Of course, no such valuation has ever taken place because, as we wrote earlier, this revaluation would have to be “based on a valuation by an independent valuer who holds a recognised and relevant professional qualification and has recent experience in the location and class of the investment property being valued professional valuation.”
That wouldn’t suit Stainer one little bit. Any such valuer would have made mincemeat of Stainer’s logic. This also explains why the accounts weren’t presented to the High Court, despite being available. Witness statements are supported by a statement of truth, and the accounts would have given the lie to Stainer’s evidence and statement in Court.
In conclusion, what do we have? A self-assessed valuation of the Grand based on false premises, groundless assumptions and delusional speculation wrapped up into accounts that fail to meet any objective standards of good accounting practice, with only one purpose – to mislead and confuse the authorities and the administrators appointed by the High Court. It won’t wash Mr Moss, and there will be a price to pay.
Memo to Moss: Company directors have a legal duty under the Companies Act 2006 (“the Act”) not to file false information on Companies House. Knowingly or recklessly delivering information or making a statement to the Registrar of Companies that is misleading, false or deceptive is a criminal offence under s.1112 of the Act and can lead to imprisonment and/or a fine.
A Companies House spokesperson in a recent case in which a company director was fined for deliberately falsifying information about his company said:
“Deliberately filing false information on the register is a serious offence and people who have been found to have knowingly done this can face prosecution.”
As to Stainer himself, he cannot claim ignorance. He was a chartered accountant registered as such at the ICAEW until struck off when declared bankrupt. Let’s remind ourselves of what was said of his professional expertise and integrity back in 2016 when the First Tier Tax Tribunal delivered a nasty sting to him, confirming and even increasing the fines initially imposed by HMRC
“HMRC was particularly critical in its assessment of Stainer, arguing that he was an accountant and “should have been familiar with the PAYE process”. The judge agreed, stating: “Failing to account for PAYE and NI and make returns for someone in Mr Stainer’s position was careless and so the extended period for assessment under s 36 TMA 30 1970 should apply”.
As a final footnote, as a final farewell to 2020, in a separate matter before the High Court on December 31st, Master Cooke broke the news to Stainer that he and his wife were facing fresh bankruptcy proceeding, papers having been filed in Canterbury County Court in November.
“Those who cannot remember the past are condemned to repeat it”.
The Shepway Vox Team
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