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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 &

STONE & ROLLS

SIMON SALZEDO Q.C.

Brick Court Chambers

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.