Accountants' and Auditors' Liability Seminar with Simon ... · Brick Court Chambers Thursday, 7...
Transcript of Accountants' and Auditors' Liability Seminar with Simon ... · Brick Court Chambers Thursday, 7...
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Accountants' and Auditors' Liability Seminar
with Simon Salzedo QC and Tony Singla of
Brick Court Chambers
Thursday, 7 April 2016
Caparo v Dickman
[1990] 2 AC 605
Caparo’s 2 claims Any potential corporate bidder
Shareholder qua potential buyer of more shares
Any potential bidder claim rejected as part of the retreat from Anns v Merton
Caparo – First instance
Argument for claimant: Statutory requirement for report to
shareholders – proximity, akin to contract
Eminently foreseeable that shareholders would consider buying or selling shares on basis of report
Sir Neil Lawson [1988] 4 BCC 144 Contract was with company
Statute imposed no liability
Shareholders as a body could sack auditor
No duty of care to shareholders at all
Caparo – Court of Appeal
[1989] QB 653 (6 days)
Bingham LJ Statutory scheme to ensure shareholders have
independent information about the company and their investment
Investment in shares is economically important
Duty owed
Taylor LJ Duty owed
O’Connor LJ Duty only owed to shareholders as a body and
any loss recoverable by company
Caparo – House of Lords
[1990] 2 AC 605 (6 days) (53 cases)
Lord Bridge, Lord Oliver, Lord Jauncey (Lord Roskill, Lord Ackner)
Relevant duty NOT owed
Caparo: House of Lords (2)
Threefold test Foreseeability
Proximity
Fair just & reasonable
Shareholders qua general meeting entitled to a remedy against auditors, but that claim brought by company. (Reflective loss).
Caparo: House of Lords (3)
“It is never sufficient to ask simply
whether A owes B a duty of care. It
is always necessary to determine
the scope of the duty by reference
to the kind of damage from which A
must take care to save B harmless.”
Scope of duty – see later SAAMCO.
Caparo – Wrap Up
Truly seminal
Could have gone either way
Common ground that auditor’s
primary duty is owed to
company
Additional duty to shareholders
owed only to the body –
irrelevant for practical purposes
Stone & Rolls v Moore
Stephens - facts
One man company
Used to defraud banks
Bank sued company and won
Company, now insolvent, sued
auditors for failing to detect
fraud
Moore Stephens applied to
strike out on ground of ex turpi
causa non oritur actio
Stone & Rolls – House of Lords
[2009] 1 AC 1391
3 days, 128 cases
Lord Mance bemoans points not
fully argued.
Stone & Rolls – majority
decision
3 different sets of reasoning.
Basis of the claim was the
company’s own fraud, so the claim
is barred by ex turpi causa.
Lord Phillips: auditors owe no duty
for benefit of creditors.
Lord Walker, Lord Brown: Stojevic
could not recover, nor could his
company.
Stone & Rolls –
misunderstanding of Caparo
The majority all expressed the view
that the auditors duty was not owed
for the benefit of creditors and
attributed that to Caparo.
That is completely wrong. Caparo
was not concerned with who
benefits from the auditor’s duty to
the company. See Salzedo in Butterworths Journal of International
Banking and Financial Law Oct 2015.
Bilta v Nazir (No 2) [2016] AC 1
Guilty directors/shareholders took
Stone & Rolls to logical conclusion -
argued the liquidator’s claim must
fail.
Nothing to do with auditors
2 days (70 cases)
Result was no surprise –
defendants lost unanimously at all
levels.
Bilta on Stone & Rolls
Stone & Rolls confined to a decision
on its own facts.
Lord Mance says it may one day fall for
reconsideration (#50).
How does that work?
Clear that an ex turpi strike out would
fail if there are any innocent
shareholders.
Not clear what should happen at trial.
Not clear whether claim on same facts
could/should be struck out.
Personal view
Lord Mance was right about the
issue in Stone v Rolls.
Clearly no reliance by the company,
so no claim on ordinary Galoo /
Berg principles (see Tony’s talk).
Question is whether insolvency (and
SAS 110/ISA 240) means auditor’s
duty extends to losses felt without
such reliance.
Majority do not address that issue.
SCOPE OF DUTY AND THE
RECOVERABILITY OF
TRADING LOSSES
TONY SINGLA
Brick Court Chambers
7 April 2016
The scope of duty principle
One of four restrictions on the recoverability of damages against negligent professionals
Logically arises for consideration before causation and remoteness
Caparo Industries plc v Dickman [1990] 2 AC 605 per Lord Bridge at page 627D:
‘It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.’
SAAMCO
[1997] AC 191
Should the negligent valuers be held liable:
only for the loss represented by the extent of
their negligent over-valuation?
or should they also be liable for the additional losses incurred by the lenders as a result of the market crash?
Seminal judgment of Lord Hoffmann
SAAMCO continued
At page 213:
‘Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.’
The example of the mountaineer’s knee
Important distinction between (1) a duty to provide information and (2) a duty to advise on what course of action to take
Information v advice cases
Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2001] UKHL 51 per Lord Steyn at [41]-[42]:
‘... the inescapable conclusion on the facts that
the brokers assumed a duty to advise Aneco as to what course to take.’
Haugesund Kommune v Wikborg Rein & Co [2011] EWCA Civ 33 per Rix LJ at [76]:
‘Wikborg Rein had no general responsibility to advise Depfa on whether to proceed with the transactions or not ... It was giving a specific piece of legal advice.’
Scope of duty in audit cases
Berg Sons & Co Ltd v Adams [1992] BCC 661 per Hobhouse J at page 677D-F:
‘... the purpose of the statutory audit is to
provide a mechanism to enable those having a proprietary interest in the company or being concerned with its management or control to have access to accurate financial information about the company. Provided that those persons have that information, the statutory purpose is exhausted. What those persons do with the information is a matter for them and falls outside the scope of the statutory purpose.’
Scope of duty in audit cases
continued
BCCI v Price Waterhouse [1999] BCC 351. Laddie J at [65]-[66] – not arguable that legitimate but loss-making activities within scope of duty.
Barings Plc v Coopers & Lybrand [2003] EWHC 1319 (Ch). Evans-Lombe J at [806]-[825] – losses caused by trading with ‘Dollar Funding’ within scope of duty.
Equitable Life v Ernst & Young [2004] PNLR 269. Brooke LJ at [129] – arguable that lost sale within scope of duty.
Trading losses
Galoo Ltd v Bright Graeme Murray [1994] 1 WLR 1360
A case about legal causation or scope of duty?
Glidewell LJ at page 1375A:
‘The breach of duty by the defendants gave
the opportunity to Galoo and Gamine to incur and to continue to incur trading losses; it did not cause those trading losses, in the sense in which the word “cause” is used in law.’
Trading losses continued
Galoo distinguished in Sasea v KPMG [2000] BCC 989 at 995:
‘... a distinction may be made between the present case and Galoo. We are concerned with losses brought about by fraud or irregularities the risk of which KPMG ought to have apprehended and reported..
There does not seem to us to be any fair distinction to be drawn between the four transactions as pleaded. Each in its own way was fraudulent or irregular. Each in its own way was the kind of transaction against the risk of which KPMG had a duty to warn.’
Trading losses continued
Galoo has repeatedly been distinguished
Temseel Holdings Limited v Beaumonts Chartered Accountants [2003] PNLR 27. Tomlinson J at [52]:
‘It seems to me that the complaint which is
made in the present case, whether or not it is well founded, is of a different nature. The complaint made by the company is not simply that it was allowed to continue trading, but rather that in reliance upon the figures which had been supplied to it and represented to be correct it continued to trade in a particular manner.’
Trading losses continued
Galoo has also been distinguished in other jurisdictions:
Sew Hoy and Sons Ltd v Coopers and Lybrand [1996] 1 NZLR 392
OPI Pacific Finance v Sherwin Chan & Walshe [2014] NZHC 449
Heather Capital v KPMG, Isle of Man High Court, 17 November 2015
Conclusions on Galoo
Galoo does not establish that an auditor can never be held liable for trading losses.
On its facts, Galoo was similar to Berg Sons v Adams. In neither case was an independent organ of the company misled by the negligent auditor reports. So no chain of legal causation could be proved / pleaded.
Ultimately whether the losses claimed in any given case were caused by the auditor’s breach of duty is a question of fact to be determined at trial.