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Accountants’ Negligence and Liability: Second edition
9781526512451, 9781526512482, 9781526512475

Author / Uploaded
Simon Salzedo; Tony Singla; Arun Srivastava
Chapter 20 on Money Laundering contributed by

Table of contents :
Preface to the Second Edition
Foreword by The Rt Hon Lord Hoffmann
Acknowledgements
Contents
Table of Cases
Table of Statutes
Table of Statutory Instruments and Other Guidance
Part 1: Introductory
Chapter 1. Introduction and general principles
Introduction
Accountants' range of activities
Contractual liability
Tortious liability
Fiduciary and equitable liabilities
Criminal liability
Disciplinary liability
Causation, remoteness and assessment of loss
Employment, the individual accountant and the firm
Privilege
Part 2: Auditing
Chapter 2. The legal framework of auditing
Introduction
The statutory requirement to prepare accounts
The statutory requirement for audit – Companies Act 2006
European legislation on accounts and audit
Competition and Markets Authority Order
Financial Services and Markets Act 2000
Chapter 3. The regulatory framework of auditing
Introduction
Accounting standards
Authorisation and regulation of auditors
Auditing standards
Chapter 4. Characterising the auditor's relationship with the company and the elements of and defences to a claim for audit negligence
Auditor's relationship with the company
Elements of and defences to a claim for audit negligence
Chapter 5. Caparo: the objects and scope of the auditor's duty of care in tort
Caparo Industries Plc v Dickman
The purpose of the audit – other views
Commonwealth authority on Caparo
After Caparo: what is required to establish a duty of care?
Chapter 6. Applications of the Caparo principle
The general audit duty is not owed to a purchaser of the company
The general audit duty is not owed to investors, lenders, directors or employees
Assumption of responsibility cases: corporate transactions
The auditor in the corporate group
Failed applications to strike out
Chapter 7. Breach of duty and the auditor's standard of care
The standard of care in general
Specific issues in the standard of care
Chapter 8. Scope of auditor's duty – for what losses is the auditor liable?
General principles
Losses claimable by the company
Losses claimable by the purchaser or vendor where a special duty of care is established
Reflective loss
Avoided loss and benefits
Part 3: Other liabilities of accountants
Chapter 9. Non-audit liability of accountants
Introduction and general principles
Accounting, non-statutory auditing and reporting
Chapter 10. Conflicts of interest and confidential information
Introduction
Former client conflicts
Investment advice
Valuation engagements
Corporate finance advisory work
Insolvency practice
Part 4: Defences
Chapter 11. Policy defences – ex turpi and insolvency
Introduction
Illegality
The 'no duty for the benefit of creditors' defence
Chapter 12. Limitation
Introduction
When time starts to run
When time ceases to run
Section 14A
Section 32
Amendments after expiry of the limitation period
Contribution claims
Chapter 13. Disclaimers and exclusions of liability
Introduction
Disclaimers
'Hold harmless' letters
Proportionate liability clauses
Exclusion and limitation clauses
The Unfair Contract Terms Act 1977
Excluding or limiting liability for statutory audits
Chapter 14. Contributory negligence and contribution
Contributory negligence
Contribution
Chapter 15. Counterclaims and mitigation of loss
Counterclaims
Mitigation of loss
Chapter 16. Statutory relief
Introduction
Scope of section 1157
Principles governing the grant of relief
Part 5: Issues arising in litigation concerning accountants
Chapter 17. Disclosure
Introduction
Pre-action disclosure
Standard disclosure
Non-party disclosure
government-licence/version/3)
Specific disclosure
Chapter 18. Expert evidence
Introduction
Admissibility of expert evidence
Duties of experts
Single joint experts
Expert reports
Written questions to experts
Discussions between experts
Experts' requests for directions
Expert evidence at trial
No immunity from suit
Part 6: Disciplinary regimes and money laundering
Chapter 19. Disciplinary regimes
Introduction
Recognised supervisory bodies (RSBs)
Audit Quality Review
The Accountancy Scheme
The new audit enforcement procedure
The Audit, Reporting and Governance Authority
Chapter 20. Money laundering
Introduction
Risk assessment
Proceeds of Crime Act 2002
Failure to prevent the facilitation of tax evasion under the Criminal Finances Act 2017
Terrorism
Tipping off, prejudicing an investigation and super-SARs
Client confidentiality
The Money Laundering Regulations
Guidance issued by supervisory bodies
Application of privilege to the accountancy profession
Index

Citation preview

Accountants’ Negligence and Liability

ii

Accountants’ Negligence and Liability Second edition Simon Salzedo QC Brick Court Chambers

Tony Singla QC Brick Court Chambers

Chapter 20 on Money Laundering contributed by

Arun Srivastava

Partner, Paul Hastings LLP

BLOOMSBURY PROFESSIONAL Bloomsbury Publishing Plc 29 Earlsfort Terrace, Dublin 2, Ireland 50 Bedford Square, London, WC1B 3DP, UK 1385 Broadway, New York, NY 10018, USA BLOOMSBURY and the Diana logo are trademarks of Bloomsbury Publishing Plc Copyright © Bloomsbury Professional, 2021 All rights reserved. No part of this publication may be reproduced or transmitted in any form or by any means, electronic or mechanical, including photocopying, recording, or any information storage or retrieval system, without prior permission in writing from the publishers. While every care has been taken to ensure the accuracy of this work, no responsibility for loss or damage occasioned to any person acting or refraining from action as a result of any statement in it can be accepted by the authors, editors or publishers. All UK Government legislation and other public sector information used in the work is Crown Copyright ©. All House of Lords and House of Commons information used in the work is Parliamentary Copyright ©. This information is reused under the terms of the Open Government Licence v3.0 (http://www.nationalarchives.gov.uk/doc/ open-government-licence/version/3) except where otherwise stated. All Eur-lex material used in the work is © European Union, http://eur-lex.europa.eu/, 1998–2021. British Library Cataloguing-in-Publication Data A catalogue record for this book is available from the British Library. ISBN: HB: 978 1 52651 245 1 ePDF: 978 1 52651 247 5 ePub: 978 1 52651 246 8 Typeset by Compuscript Ltd, Shannon

To find out more about our authors and books visit www.bloomsburyprofessional.com. Here you will find extracts, author information, details of forthcoming events and the option to sign up for our newsletters

Preface to the Second Edition

When writing the first edition, we were surprised how much material there turned out to be in the area of accountants’ liability. Since the publication of the first edition in 2016, the potential liability of auditors in particular has come even more strongly into the spotlight of public and political debate. Following only a little behind that debate has been an increasing wave of litigation. As a result, there has been significant re-writing and updating in this edition. The first edition was cited several times by Bryan J in his substantial trial judgment in AssetCo v Grant Thornton, which covered numerous areas of interest. Among other things, his decision vindicated the view we explain in this work that Galoo v Bright Grahame Murray has been misunderstood by those who think it stands for a principle concerning the non-recoverability of trading losses as damages against an auditor. Some of the most interesting points were re-visited by the Court of Appeal in AssetCo, especially the application of the scope of duty principle to a general audit case and the scope of credits for benefits caused by the breach of duty. Scope of duty was also the issue at the heart of the claim in Manchester Building Society v Grant Thornton, where it was held at trial and in the Court of Appeal to bar recovery of a large loss from interest rate swap transactions. A further appeal was heard by a seven-justice panel of the Supreme Court in late 2020 and the result of that will have to await the third edition. But in the meantime, Chapter 8, concerning what losses are recoverable, has been largely re-written in the light of the greater clarity now available following these accountancy cases and the solicitor’s case in the Supreme Court of Hughes-Holland v BPE Solicitors. Another theme of the first edition was the status of the House of Lords speeches in Stone & Rolls v Moore Stephens. We described it in the preface to the first edition as a ‘dog’s dinner of a decision’, which might have seemed at the time to be hyperbole, but which now looks like understatement. Our explanation of the case survives into this edition, because the resolution of the issues raised in the dissenting speech of Lord Mance, especially in relation to the reporting of fraud, remains unfinished business.

v

Preface to the Second Edition It seems to be more or less inevitable that audit litigation will continue to contribute to the development of the common law in the next few years. We hope that this work will assist those who take part in it. We have endeavoured to state the law as at 1 January 2021. Simon Salzedo QC Tony Singla QC Brick Court Chambers, London January 2021

vi

Foreword

At the time of Arthur Anderson’s difficulties after Enron’s collapse, there was a cartoon in the New Yorker in which a woman says confidentially of her husband ‘Being an accountant gives him that extra aura of danger’. A reader of this book may think her view confirmed by the large contribution which accountants have made to the law of professional negligence. But this is not, I think, because accountants are more likely to be negligent than members of other professions. It is rather that the nature of their work, the risks against which it is intended to safeguard and the fact that the clients are not necessarily the only people who will rely upon it often give rise to very difficult legal problems. One purpose of the book is to guide the legal adviser through these complexities. It used to be different. Sixty years ago the law was clear. Accountants owed a contractual duty to their clients to use reasonable care and no duty to anyone else. In Candler v Crane Christmas & Co [1951] 2 KB 164, hot off the press when I was an undergraduate, the Court of Appeal had affirmed this rule. It says something about the state of the British economy in the 1950s, and the financial services industry in particular, that despite a passionate dissent by Denning LJ, no one thought it worth while to challenge this rule for another 13 years. Finally, in Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465 it was swept away. Accountants could be liable to people who were not clients, but to whom, in which circumstances and for what losses was left to future litigants to establish. Since then the law has been in a state which judges call ‘developing’, a judicial euphemism for muddled and uncertain. In this situation, this book, which walks the reader through the substantial and sometimes inconsistent jurisprudence which has developed, will be a valuable guide to the perplexed. In addition, accountants nowadays have to consider more than potential lability for negligence at common law. There are rules of professional conduct, statutory requirements for an audit under the Companies Act, statutory duties to prevent money laundering. Information on all these and other matters of importance to an accountant, whether involved in litigation or seeking to avoid it, will here be found gathered together in one place. Lennie Hoffmann Brick Court Chambers August 2016

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viii

Acknowledgements

I must record my thanks first and foremost to Catherine and dedicate this book to her. My children have also been ever patient with yet another work-related demand on my time. I’ll make it up to you all one day. Colleagues at the Bar have been unfailingly generous in providing whatever assistance I have requested. Tony Singla foolishly agreed to write this book with me and without him it would never have been completed. Ronald Walker QC, Andrew Lenon QC and Tom Adam QC all deserve thanks for responding to my requests for information and assistance. I also wish to acknowledge two of my pupil masters who are still my colleagues in Chambers, whose guidance for over 20 years has never flagged in breadth or quality: Charles Hollander QC and Richard Lord QC. I am honoured and deeply grateful that Lord Hoffmann agreed to write a foreword. I must also acknowledge with gratitude those clients, both professional and lay, who have entrusted me with their cases in the field of accountancy litigation, the leaders who have tolerated me as their junior, the juniors who have tolerated me as their leader and those judges (the majority) who have listened politely to my submissions whether they liked them or not. You, dear reader, I thank for buying this book and I further thank you in advance for the following service. Tony Singla and I want to ensure that any future editions we may be lucky enough to write will be as useful, accurate and comprehensive as we can make them. Any comments you can provide to assist us in that aim will be very gratefully received. My direct email is [email protected]. Simon Salzedo QC Brick Court Chambers July 2016

ix

x

Contents Preface to the Second Edition v Foreword by The Rt Hon Lord Hoffmann vii Acknowledgementsix Table of Cases xix Table of Statutes xlix Table of Statutory Instruments and Other Guidance liii

Part 1 Introductory Chapter 1 Introduction and general principles 3 Introduction3 Accountants’ range of activities 3 Contractual liability 4 Tortious liability 5 Fiduciary and equitable liabilities 7 Criminal liability 7 Disciplinary liability 8 Causation, remoteness and assessment of loss 8 Employment, the individual accountant and the firm 8 Privilege9 Part 2 Auditing Chapter 2 The legal framework of auditing 13 Introduction13 The statutory requirement to prepare accounts 13 The statutory requirement for audit – Companies Act 2006 14 European legislation on accounts and audit 18 The Accounting Directive 18 The 8th Company Law Directive on the statutory audit 19 The Regulation on the audit of public-interest entities 22 Competition and Markets Authority Order 24 Financial Services and Markets Act 2000 24 Chapter 3 The regulatory framework of auditing 25 Introduction25 Accounting standards 25 Authorisation and regulation of auditors 26 Auditing standards 26

xi

Contents Chapter 4 Characterising the auditor’s relationship with the company and the elements of and defences to a claim for audit negligence 31 Auditor’s relationship with the company 31 Contractual counterparty 31 Obligor under duty of care 31 Recipient of confidential information 32 Officer of the company 33 Servant36 Agent of the company 37 Fiduciary38 Elements of and defences to a claim for audit negligence 45 Chapter 5 Caparo: the objects and scope of the auditor’s duty of care in tort 47 Caparo Industries Plc v Dickman 47 Introduction47 The facts of Caparo 47 The first instance decision of Sir Neil Lawson 48 The decision of the Court of Appeal 49 The decision of the House of Lords 52 Lord Bridge 53 Lord Oliver 58 Lord Jauncey 63 Summary of the decision in Caparo 65 The purpose of the audit – other views 66 Commonwealth authority on Caparo 68 After Caparo: what is required to establish a duty of care? 70 Chapter 6 Applications of the Caparo principle The general audit duty is not owed to a purchaser of the company The general audit duty is not owed to investors, lenders, directors or employees Assumption of responsibility cases: corporate transactions The auditor in the corporate group Failed applications to strike out Introduction to failed strike outs The failed strike out cases Conclusions regarding failed strike out applications

80 83 91 96 96 98 112

Chapter 7 Breach of duty and the auditor’s standard of care The standard of care in general The standard of care in professional negligence The standard of care in auditing Historical development of the auditor’s standard of care

114 114 114 116 119

xii

80 80

Contents Specific issues in the standard of care 128 Introduction128 The audit task 128 Professional responsibility – experience, time, remuneration 130 Professional scepticism and independence 131 Planning the audit 134 Responsibilities relating to fraud 135 Reporting to shareholders and/or those concerned with governance and/or authorities 138 Chapter 8 Scope of auditor’s duty – for what losses is the auditor liable? 141 General principles 141 Scope of duty, causation and remoteness – the framework 141 Factual causation 143 Legal causation 145 Remoteness150 Scope of duty 154 Key (non-accountancy) authorities on scope of duty 154 Scope of duty: the modern principle summarised 162 Application of scope of duty principle to audit cases 163 Relationship between the principles 171 Losses claimable by the company 173 Overpaid dividends 173 Overpaid bonuses 180 Overpaid tax 180 Continuing defalcations 181 Investigation costs 181 Audit fees 181 Trading losses 182 The case law on trading losses before Galoo 182 Galoo v Bright Graeme Murray 186 Reaction to Galoo 188 Conclusions on trading losses and Galoo 197 Taking a loan or issuing shares is not loss 199 Loss of chance 200 Losses claimable by the purchaser or vendor where a special duty of care is established 201 Reflective loss 204 Avoided loss and benefits 205 Part 3 Other liabilities of accountants Chapter 9 Non-audit liability of accountants Introduction and general principles

xiii

211 211

Contents Accounting, non-statutory auditing and reporting Preparing or verifying accounts in a takeover situation Due diligence work Assisting in the raising of finance Contractual audits Public sector audits Reporting to regulators Whitewash reports Other reports required by legislation Prospectuses and listing particulars Valuation work General introduction to valuation issues The ‘bracket approach’ in valuers’ negligence cases Allegations of breach of fiduciary duty in valuation cases Taxation agency and advice Expert witness and forensic work Investment advice Insolvency liabilities

213 213 216 217 219 219 220 222 223 225 234 234 234 242 242 251 252 252

Chapter 10 Conflicts of interest and confidential information 257 Introduction257 The general law of conflicts of interest and confidential information as it applies to accountants 257 Accountants’ professional standards relevant to conflicts of interest and confidential information 261 Former client conflicts 263 Prince Jefri Bolkiah v KPMG 263 Merger cases 266 Investment advice 268 Valuation engagements 271 Corporate finance advisory work 273 Insolvency practice 274 Introduction274 Insolvency practitioner appointed to entities with conflicting interests275 Succession of or sequential insolvency appointments 277 Significant relationship with the entity or someone connected with the entity 277 Accountant is appointed receiver by a creditor and there is a conflict with other interests of the company 281 Part 4 Defences Chapter 11 Policy defences – ex turpi and insolvency 285 Introduction285

xiv

Contents Illegality286 Introduction286 Stone & Rolls v Moore Stephens 286 Facts and issues 286 First instance and Court of Appeal 287 House of Lords 288 Summary of Stone & Rolls v Moore Stephens 291 Bilta v Nazir 292 Singularis Holdings Ltd v Daiwa 296 Ex turpi causa – where are we now as a matter of precedent? 296 Stone & Rolls reconsidered in principle 298 Ex turpi causa – conclusion 304 The ‘no duty for the benefit of creditors’ defence 304 Chapter 12 Limitation 309 Introduction309 When time starts to run 310 When time ceases to run 317 Section 14A 318 Section 32 323 Amendments after expiry of the limitation period 327 Contribution claims 329 Chapter 13 Disclaimers and exclusions of liability 330 Introduction330 Disclaimers330 Audit reports 331 Other forms of reports 334 ‘Hold harmless’ letters 335 Proportionate liability clauses 336 Exclusion and limitation clauses 337 The Unfair Contract Terms Act 1977 341 Introduction341 Exclusion clause or duty defining clause? 342 The reasonableness requirement 345 Excluding or limiting liability for statutory audits 349 Chapter 14 Contributory negligence and contribution 351 Contributory negligence 351 Introduction351 Scope of the defence 352 Claims for breach of contract 352 Claims in deceit 353 Claims for breach of fiduciary duty 353

xv

Contents Identifying fault by the claimant 354 Claimant’s failure to spot the defendant’s negligence 355 The ‘very thing’ issue 356 Apportionment360 Contribution364 Introduction364 Overlap with contributory negligence 365 ‘The same damage’ 366 Apportionment368 Chapter 15 Counterclaims and mitigation of loss 370 Counterclaims370 Introduction370 Barings 1 370 Barings 2 371 Conclusion373 Mitigation of loss 375 Chapter 16 Statutory relief 378 Introduction378 Scope of section 1157 379 Principles governing the grant of relief 380 Part 5 Issues arising in litigation concerning accountants Chapter 17 Disclosure 387 Introduction387 Pre-action disclosure 389 Rights in contract and equity 389 Professional Negligence Pre-Action Protocol 390 CPR 31.16 391 Insolvency Act 1986, s 236 396 Standard disclosure 398 The CPR regime 398 Privilege401 Legal advice privilege 402 Litigation privilege 407 Non-party disclosure 410 Specific disclosure 411 Chapter 18 Expert evidence 412 Introduction412 Admissibility of expert evidence 413 Duties of experts 417 Single joint experts 420

xvi

Contents Expert reports Written questions to experts Discussions between experts Experts’ requests for directions Expert evidence at trial No immunity from suit

421 424 425 426 426 427

Part 6 Disciplinary regimes and money laundering Chapter 19 Disciplinary regimes 431 Introduction431 Recognised supervisory bodies (RSBs) 432 Audit Quality Review 434 The Accountancy Scheme 435 The structure of the Accountancy Scheme 435 What constitutes ‘Misconduct’? 438 Public interest 442 The new audit enforcement procedure 444 The Audit, Reporting and Governance Authority 447 Chapter 20 Money laundering 449 Introduction449 Risk assessment 453 Proceeds of Crime Act 2002 455 The POCA regulated sector 455 Principal money laundering offences 456 Section 327: concealing, disguising or converting 457 Section 328: concerned in arrangements 457 Section 329: acquisition, use and possession 458 Criminal conduct and criminal property 458 Disclosure and the consent regime 460 Reporting suspicions – the regulated sector and POCA, s 330 461 Nominated Officers 463 Consent464 Effect of consent 464 Failure to prevent the facilitation of tax evasion under the Criminal Finances Act 2017 466 Terrorism468 Tipping off, prejudicing an investigation and super-SARs 469 Client confidentiality 471 The Money Laundering Regulations 471 Introduction to the Money Laundering Regulations 471 Scope of the Regulations 472 Customer due diligence 475 Beneficial owner 475

xvii

Contents Customer476 Simplified due diligence 477 Enhanced due diligence 479 Policies, controls and procedures 479 Record keeping 480 Internal reporting procedures 480 Training481 Resourcing and the MLRO 481 Failure to comply with the MLR 2017 482 Supervisory authorities 483 Guidance issued by supervisory bodies 484 Anti-money laundering guidance for the accountancy sector 485 Anti-money laundering guidance for the tax practitioner 487 Anti-money laundering guidance for auditors 488 Application of privilege to the accountancy profession 490 Index493

xviii

Table of Cases [All references are to paragraph numbers]

A A&J Fabrications (Batley) Ltd v Grant Thornton (A Firm) (No 1) [1999] BCC 807, [1998] 2 BCLC 227, [2000] Lloyd’s Rep PN 565, Ch D�� 9.120, 9.121 AB v Ministry of Defence [2012] UKSC 9, [2013] 1 AC 78, [2012] 2 WLR 643, [2012] 3 All ER 673, [2012] PIQR P13, [2012] Med LR 306, (2012) 125 BMLR 69, (2012) 109(22) LSG 19, (2012) 156(11) SJLB 31�� 12.23 Abbott v Strong [1998] 2 BCLC 420, Ch D�� 9.60, 9.61, 9.62, 9.63 ACD (Landscape Architects) Ltd v Overall [2012] EWHC 100 (TCC), [2012] TCLR 4, 140 Con LR 82, [2013] 2 Costs LO 133, [2012] PNLR 19, QBD�� 18.01 A Company v Secretariat Consulting Pte Ltd [2021] EWCA (Civ) 6, [2021] 4 WLR 20�� 4.32A Adelson v Associated Newspapers Ltd Adelson v Associated Newspapers Ltd [2007] EWCA Civ 701, [2008] 1 WLR 585, [2007] 4 All ER 330, [2007] CP Rep 40, [2008] EMLR 9, CA�� 12.30 ADT Ltd v BDO Binder Hamlyn [1996] BCC 808, QBD�� 6.18, 6.19, 6.20, 6.21, 6.34, 8.150, 9.15, 9.20, 13.07 Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd 1994) 14 ACSR 230�� 10.61 Adwell Holdings v Mark Smith [2003] NSWCA 103�� 9.83 AIC Ltd v ITS Testing Services (UK) Ltd (The Kriti Palm) [2006] EWCA Civ 1601, [2007] 1 All ER (Comm) 667, [2007] 1 Lloyd’s Rep 555, [2007] 2 CLC 223, CA�� 12.28 Akai Holdings Ltd v RSM Robson Rhodes LLP [2007] EWHC 1641 (Ch), Ch D�� 10.23 Al Nakib Investments (Jersey) Ltd v Longcroft [1990] 1 WLR 1390, [1990] 3 All ER 321, [1990] BCC 517, [1991] BCLC 7, (1990) 87(42) LSG 37, (1990) 140 NLJ 741, Ch D�� 9.65 Alexander v Cambridge Credit Corporation (1987) 9 NSWLR 310�� 8.21, 8.104, 8.105, 8.106, 8.107, 8.108, 8.113, 8.115, 8.130, 8.133, 8.137, 8.139, 8.142 Allied Maples Group Ltd v Simmons & Simmons [1995] 1 WLR 1602, [1995] 4 All ER 907, [1996] CLC 153, 46 Con LR 134, [1955-95] PNLR 701, (1995) 145 NLJ 1646, [1995] NPC 83, (1995) 70 P & CR D14, CA�� 8.148, 9.111 Allison v KPMG 2000] 1 NZLR 560�� 15.20

xix

Table of Cases Al-Saudi Banque v Clarke Pixley (A Firm) [1990] Ch 313, [1990] 2 WLR 344, [1989] 3 All ER 361, (1989) 5 BCC 822, [1990] BCLC 46, [1989] PCC 442, [1989] Fin LR 353, (1990) 87(10) LSG 36, (1989) 139 NLJ 1341, Ch D�� 6.03, 6.04, 6.06, 6.17, 6.88, 6.90, 6.91, 11.62, 11.67 Altus Group (UK) Ltd v Baker Tilly Tax and Advisory Services LLP [2015] EWHC 12 (Ch), [2015] STC 788, [2015] STI 158, Ch D�� 9.92, 9.94, 9.98, 9.99, 9.105, 9.111 Anderson v Newham College of Further Education [2002] EWCA Civ 505, [2003] ICR 212, CA�� 14.26 Anderson v Pringle of Scotland Ltd 1998 SLT 754, [1998] IRLR 64, 1997 GWD 40-2033, CSOH�� 10.35 Andrew v Kounnis Freeman [1999] 2 BCLC 641, [2000] Lloyd’s Rep PN 263, CA�� 6.84, 6.89, 6.104, 9.30 Aneco Reinsurance Underwriting Ltd (In Liquidation) v Johnson & Higgins Ltd [2001] UKHL 51, [2001] 2 All ER (Comm) 929, [2002] 1 Lloyd’s Rep 157, [2002] CLC 181, [2002] Lloyd’s Rep IR 91, [2002] PNLR 8, HL�� 8.42, 8.43, 8.44, 8.45, 8.48, 8.66, 8.69 Anglo-Moravian Hungarian Junction Railway Co, ex p Watkin, Re (1875) 1 Ch D 130, CA�� 9.124 Anns v Merton LBC [1978] AC 728, [1977] 2 WLR 1024, [1977] 2 All ER 492, 75 LGR 555, (1977) 243 EG 523, (1988) 4 Const LJ 100, [1977] JPL 514, (1987) 84 LSG 319, (1987) 137 NLJ 794, (1977) 121 SJ 377, HL�� 5.59 Anthony v Wright (Investments: Auditing) [1995] BCC 768, [1995] 1 BCLC 236, Ch D�� 6.07, 9.33 Aquachem Ltd v Delphis Bank Ltd (In Receivership) [2008] UKPC 7, [2008] BCC 648, PC (Maur)�� 4.15 Arab Bank Plc v John D Wood (Commercial) Ltd [2000] 1 WLR 857, [2000] Lloyd’s Rep IR 471, [2000] Lloyd’s Rep PN 173, [1999] EG 133 (CS), (1999) 96(47) LSG 30, (2000) 144 SJLB 6, [1999] NPC 134, CA�� 9.80, 9.81, 9.82, 9.83 Arcadia Group Brands Ltd v Visa Inc [2015] EWCA Civ 883, [2015] Bus LR 1362, [2015] 5 CMLR 16, CA�� 12.26, 12.28 Arenson v Casson Beckman Rutley & Co [1977] AC 405, [1975] 3 WLR 815, [1975] 3 All ER 901, [1976] 1 Lloyd’s Rep 179, (1975) 119 SJ 810, HL�� 9.71 Armchair Passenger Transport Ltd v Helical Bar Plc [2003] EWHC 367 (QB), QBD�� 18.13 Arnold v Britton [2015] UKSC 36, [2015] AC 1619, [2015] 2 WLR 1593, [2016] 1 All ER 1, [2015] HLR 31, [2015] 2 P & CR 14, [2015] L & TR 25, [2015] CILL 3689, SC�� 13.24 Arrowhead Capital Finance Ltd (In Liquidation) v KPMG LLP [2012] EWHC 1801 (Comm), [2012] STC 2503, [2012] PNLR 30, [2012] STI 2218, QBD�� 6.102, 12.10, 13.29 Arthur JS Hall & Co v Simons [2002] 1 AC 615, [2000] 3 WLR 543, [2000] 3 All ER 673, [2000] BLR 407, [2000] ECC 487, [2000] 2 FLR 545, [2000] 2 FCR 673, [2001] PNLR 6, [2000] Fam Law 806, [2000] EG 99 (CS), (2000) 97(32) LSG 38, (2000) 150 NLJ 1147, (2000) 144 SJLB 238, [2000] N.P.C. 87, HL�� 18.36

xx

Table of Cases Assetco Plc v Grant Thornton UK LLP [2013] EWHC 1215 (Comm), QBD�� 17.10, 17.22 AssetCo Plc v Grant Thornton UK LLP [2019] EWHC 150 (Comm), [2019] Bus LR 2291, [2020] EWCA Civ 1151, [2021] PNLR 1�� 6.102, 8.12, 8.26, 8.75, 8.138, 8.139, 8.148, 8.164, 14.11, 14.24, 14.25, 14.27, 14.36, 15.12, 16.10 Astley v Austrust Ltd (1999) 197 CLR 1�� 14.06, 14.07 Attorney General v Blake [1998] Ch 439, [1998] 2 WLR 805, [1998] 1 All ER 833, [1998] EMLR 309, (1998) 95(4) LSG 33, (1998) 148 NLJ 15, (1998) 142 SJLB 35, CA�� 4.33 Australia & New Zealand Banking Group Ltd v P De Burgh Day, May 6, 1994, SC Victoria, Lexis�� 10.65 Australian Breeders Co-Operative Society v Jones (1997) 150 ALR 488�� 10.34 Avrora Fine Arts Investment Ltd v Christie, Manson & Woods Ltd [2012] EWHC 2198 (Ch), [2012] PNLR 35, Ch D�� 13.39 AWA Ltd v Daniels (formerly practising as Deloitte Haskins & Sells) [1955-95] PNLR 727, (1995) 16 ACSR 607, 37 NSWLR 438, CA (NSW)�� 7.03, 7.07, 7.11, 7.36, 14.19, 14.32, 14.42, 16.12 Axa Equity & Law Life Assurance Society Plc v National Westminster Bank Plc [1998] PNLR 433, Ch D; affd [1998] CLC 1177�� 9.54, 9.55, 9.56, 9.57, 9.58 AXA Insurance Ltd (formerly Winterthur Swiss Insurance Co) v Akther & Darby Solicitors [2009] EWCA Civ 1166, [2010] 1 WLR 1662, [2009] 2 CLC 793, 127 Con LR 50, [2010] Lloyd’s Rep IR 393, [2010] Lloyd’s Rep PN 187, [2010] PNLR 10, (2009) 106(45) LSG 16, (2009) 159 NLJ 1629, [2009] NPC 129, CA�� 12.07, 12.08 B B Johnson & Co (Builders) Ltd, Re [1955] Ch 634, [1955] 3 WLR 269, [1955] 2 All ER 775, (1955) 99 SJ 490, CA�� 4.10 Bairstow v Queens Moat Houses Plc [2001] EWCA Civ 712, [2002] BCC 91, [2001] 2 BCLC 531, CA�� 8.85, 8.88, 8.89 Banco de Portugal v Waterlow & Sons Ltd [1932] AC 452, [1932] All ER Rep 181, HL�� 15.16 Bank of Credit and Commerce International (Overseas) Ltd (In Liquidation) v Price Waterhouse (No 2) [1998] Lloyd’s Rep Bank 85, [1998] BCC 617, [1998] ECC 410, [1998] PNLR 564, (1998) 95(15) LSG 32, (1998) 142 SJLB 86, CA�� 5.71, 5.77, 5.79, 6.48, 6.49, 6.82, 13.07 Bank of Credit and Commerce International (Overseas) Ltd (In Liquidation) v Price Waterhouse (No 4) [1999] BCC 351, Ch D�� 6.57, 8.33, 8.57, 8.58, 8.59, 8.60, 8.129, 8.130, 8.144, 8.145 Bank of Scotland v A Ltd [2001] EWCA Civ 52, [2001] 1 WLR 751, [2001] 3 All ER 58, [2001] 1 All ER (Comm) 1023, [2001] Lloyd’s Rep Bank 73, (2000-01) 3 ITELR 503, (2001) 98(9) LSG 41, (2001) 151 NLJ 102, (2001) 145 SJLB 21, CA�� 20.64 Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191�� 9.80, 11.24

xxi

Table of Cases Barclays Bank Plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), [2015] 2 BCLC 537, [2015] 1 CLC 180, QBD�� 6.21, 6.102, 9.22, 13.09, 13.10, 13.11, 13.12, 13.15, 13.29, 13.45, 13.48 Barclays Trust Co (Jersey) Ltd v Ernst & Young LLP [2016] EWHC 869 (Comm), QBD�� 9.21 Barings Plc (In Administration) v Coopers & Lybrand [1997] BCC 498, [1997] 1 BCLC 427, [1997] ECC 372, [1997] ILPr 576, [1997] PNLR 179, CA�� 6.43, 6.44, 6.45, 6.46, 6.47, 6.54, 7.63, 8.158 Barings Plc (In Liquidation) v Coopers & Lybrand (No 2) [2001] Lloyd’s Rep Bank 85, [2001] Lloyd’s Rep PN 379, [2001] PNLR 22, (2001) 98(13) LSG 40, Ch D�� 18.06 Barings Plc (In Liquidation) v Coopers & Lybrand (No 4) [2002] 2 BCLC 364, [2002] Lloyd’s Rep PN 127, [2002] PNLR 16, Ch D�� 5.69, 5.71, 6.42, 6.45, 6.49, 8.158 Barings Plc (In Liquidation) v Coopers & Lybrand (No 5) [2002] EWHC 461 (Ch), [2002] 2 BCLC 410, [2002] Lloyd’s Rep PN 395, [2002] PNLR 39, Ch D�� 14.23, 15.03, 15.08, 15.11, 15.12 Barings Plc (In Liquidation) v Coopers & Lybrand (No 7) [2003] EWHC 1319 (Ch), [2003] Lloyd’s Rep IR 566, [2003] PNLR 34, Ch D�� 8.23, 8.24, 8.25, 8.35, 8.37, 8.62, 8.63, 8.98, 8.131, 8.141, 14.10, 14.20, 14.21, 14.22, 14.27, 14.30, 14.42, 15.07, 15.08, 15.10, 15.12, 15.24, 16.08 Barings Plc, Re [1999] 1 BCLC 433, Ch D�� 18.07 Barker v Baxendale-Walker [2017] EWCA Civ 2056, [2018] 1 WLR 1905, [2018] STC 310, [2018] PNLR 16; rvsd [2017] EWCA Civ 2056, [2018] 1 WLR 1905, [2018] STC 310, [2018] PNLR 16, [2018] BTC 6�� 9.107, 9.111 Barnes v St Helens MBC [2006] EWCA Civ 1372, [2007] 1 WLR 879, [2007] 3 All ER 525, [2007] CP Rep 7, [2007] PIQR P10, CA�� 12.16 Baron v Lovell [1999] CPLR 630, [2000] PIQR P20, CA�� 18.21 BBL/SAAMCO. See South Australia Asset Management Corp v York Montague Ltd BE Studios Ltd v Smith & Williamson Ltd [2005] EWHC 1506 (Ch), [2006] STC 358, [2005] BTC 361, [2005] STI 1260, Ch D�� 9.105 Beck v Ministry of Defence [2003] EWCA Civ 1043, [2005] 1 WLR 2206, [2003] CP Rep 62, [2004] PIQR P1, (2003) 100(31) LSG 31, CA�� 18.22 Bell v Klein [1955] 1 DLR 37�� 4.13 Benjamin v KPMG [2007] SC (Bda) 21 Com, [2007] BMSC 20�� 6.11 Berezovsky v Abramovich [2011] EWCA Civ 153, [2011] 1 WLR 2290, [2011] 1 CLC 359, (2011) 108(10) LSG 23�� 12.32 Berg Sons & Co Ltd v Adams [1992] BCC 661, [1993] BCLC 1045, [2002] Lloyd’s Rep PN 41, QBD�� 6.04, 7.55, 8.08, 8.14, 8.17, 8.18, 8.19, 8.33, 8.56, 8.109, 8.115, 8.139, 8.142, 9.67, 11.26, 11.29, 11.32, 11.39, 11.40, 11.41, 11.42, 11.43, 11.44, 11.45, 11.46, 11.58, 11.61

xxii

Table of Cases Bermuda International Securities Ltd v KPMG [2001] EWCA Civ 269, [2001] CP Rep 73, [2001] CPLR 252, [2001] Lloyd’s Rep PN 392, (2001) 98(15) LSG 33, (2001) 145 SJLB 70, CA�� 17.18 Berry Taylor (A Firm) v Coleman [1997] PNLR 1, CA�� 10.34 Biggs v Sotnicks (A Firm) [2002] EWCA Civ 272, [2002] Lloyd’s Rep PN 331, CA�� 12.26 Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 23, [2016] AC 1, [2015] 2 WLR 1168, [2015] 2 All ER 1083, [2015] 2 All ER (Comm) 281, [2015] 2 Lloyd’s Rep 61, [2015] BCC 343, [2015] 1 BCLC 443, [2015] BVC 20, SC�� 1.17, 4.44, 11.20, 11.22, 11.23, 11.26, 11.33, 11.34, 11.35, 11.36, 11.38, 11.57 Black v Sumitomo Corp [2001] EWCA Civ 1819, [2002] 1 WLR 1562, [2003] 3 All ER 643, [2002] 1 Lloyd’s Rep 693, [2002] CPLR 148, CA�� 17.14, 17.16, 17.18, 17.19 Bloomsbury International Ltd, Re [2010] EWHC 1150 (Ch), Ch D�� 10.63 Blunt v Park Lane Hotel Ltd [1942] 2 KB 253, [1942] 2 All ER 187, CA�� 17.36 Body Corporate No 207624 (Spencer on Bryon) v North Shore City Council [2012] NZSC 83�� 5.58 Bolam v Friern Hospital Management Committee 1957] 1 WLR 582, [1957] 2 All ER 118, [1955-95] PNLR 7, (1957) 101 SJ 357, QBD�� 5.12, 7.04, 7.05, 7.10 Bolitho (Deceased) v City and Hackney HA [1998] AC 232, [1997] 3 WLR 1151, [1997] 4 All ER 771, [1998] PIQR P10, [1998] Lloyd’s Rep Med 26, (1998) 39 BMLR 1, [1998] PNLR 1, (1997) 94(47) LSG 30, (1997) 141 SJLB 238, HL�� 7.05 Bolivia Exploration Syndicate Ltd, Re [1914] 1 Ch 139, Ch D�� 7.46 Bolkiah v KPMG [1999] 2 AC 222, [1999] 2 WLR 215, [1999] 1 All ER 517, [1999] 1 BCLC 1, [1999] CLC 175, [1999] PNLR 220, (1999) 149 NLJ 16, (1999) 143 SJLB 35, HL�� 4.06, 4.28, 4.29, 10.03, 10.04, 10.16, 10.18, 10.19, 10.21, 10.22, 10.63 Boyd Knight v Purdue [1999] 2 NZLR 278�� 5.58, 8.08, 9.43, 9.67 Boyle v Commissioner of Police of the Metropolis [2013] EWCA Civ 1477, CA�� 18.21 Breen v Williams (1996) 186 CLR 71�� 4.33 Bristol & West Building Society v Mothew (t/a Stapley & Co) [1998] Ch 1, [1997] 2 WLR 436, [1996] 4 All ER 698, [1997] PNLR 11, (1998) 75 P & CR 241, [1996] EG 136 (CS), (1996) 146 NLJ 1273, (1996) 140 SJLB 206, [1996] NPC 126, CA�� 4.31, 4.36, 4.41, 8.48, 10.02, 10.05 British & Commonwealth Holdings Plc (Joint Administrators) v Spicer & Oppenheim [1993] AC 426, [1992] 3 WLR 853, [1992] 4 All ER 876, [1992] BCC 977, [1993] BCLC 168, (1992) 142 NLJ 1611, HL�� 17.26 British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd (No 2) [1912] AC 673, HL�� 15.13 Bruton Pty Ltd, Re (1990) 2 ACSR 277�� 10.49 BSW Ltd v Balltec Ltd [2006] EWHC 822 (Pat), [2007] FSR 1, (2006) 29(6) IPD 29050, Ch D�� 17.15

xxiii

Table of Cases BTI 2014 LLC v PricewaterhouseCoopers [2019] EWHC 3034 (Ch); [2020] PNLR 7, [2021] EWCA Civ 9�� 6.106, 8.91, 8.92, 8.93 BTI 2014 LLC v Sequana SA [2019] EWCA Civ 112, [2019] 2 All ER 784, [2019] 2 All ER (Comm) 13, [2019] Bus LR 2178, [2019] BCC 631, [2019] 1 BCLC 347, [2019] BPIR 562�� 11.48 Burnden Holdings (UK) Ltd, Re [2019] EWHC 1566 (Ch), [2019] Bus LR 2878�� 8.88 C C v Mirror Group Newspapers [1997] 1 WLR 131, [1996] 4 All ER 511, [1996] EMLR 518, [1996] 2 FLR 532, [1997] 1 FCR 556, [1996] Fam Law 671, (1996) 146 NLJ 1093, CA�� 12.28 Canada Steamship Lines Ltd v King, The [1952] AC 192, [1952] 1 All ER 305, [1952] 1 Lloyd’s Rep 1, [1952] 1 TLR 261, (1952) 96 SJ 72, PC (Can)�� 13.24 Canadian Co-operative Leasing Services v Price Waterhouse (1992) 128 NBR (2nd) 1�� 10.64 Candler v Crane Christmas & Co [1951] 2 KB 164, [1951] 1 All ER 426, [1951] 1 TLR 371, (1951) 95 SJ 171, CA�� 1.15, 1.16, 5.07, 5.35, 5.47, 5.70, 6.15, 6.17, 6.22, 7.41, 9.13, 9.15, 9.20 Caparo Industries Plc v Dickman [1990] 2 AC 605, [1990] 2 WLR 358, [1990] 1 All ER 568, [1990] BCC 164, [1990] BCLC 273, [1990] ECC 313, [1955-95] PNLR 523, (1990) 87(12) LSG 42, (1990) 140 NLJ 248, (1990) 134 SJ 494, HL�� 1.17, 2.01, 2.07, 4.04, 4.05, 5.01–5.49, 5.52–5.54, 5.55, 5.57, 5.58, 5.61, 5.65, 5.69, 5.70, 5.71, 5.76, 5.77, 5.81, 6.01, 6.02, 6.03, 6.04, 6.06, 6.07, 6.10, 6.11, 6.12, 6.13, 6.17, 6.18, 6.22, 6.28, 6.39, 6.58, 6.59, 6.60, 6.63, 6.68, 6.70, 6.75, 6.76, 6.80, 6.88, 6.91, 6.104, 7.04, 7.10, 8.05, 8.32, 8.39, 8.40, 8.53, 8.83, 9.12, 9.14, 9.32, 9.67, 11.62, 11.63, 11.67, 11.68, 11.69, 11.70, 11.71, 11.72, 13.04 Capita Alternative Fund Services (Guernsey Ltd) (formerly Royal & SunAlliance Trust (Channel Islands) Ltd) v Drivers Jonas (A Firm) [2012] EWCA Civ 1417, [2013] 1 EGLR 119, CA�� 9.77 Carecraft Construction Co Ltd, Re [1994] 1 WLR 172, [1993] 4 All ER 499, [1993] BCC 336, [1993] BCLC 1259, Ch D�� 19.24 Caribbean Steel Co Ltd v Price Waterhouse [2013] UKPC 18, [2013] 4 All ER 338, [2013] PNLR 27, PC (Jam)�� 18.05 Carillion Plc (in liquidation) v KPMG LLP [2020] EWHC 1416 (Comm)�� 17.23 Carmody v Priestly & Morris Perth [2005] WASC 120�� 9.98 Casson Beckman & Partners v Papi [1991] BCC 68, [1991] BCLC 299, CA�� 17.05 Cave v Robinson Jarvis & Rolf [2002] UKHL 18, [2003] 1 AC 384, [2002] 2 WLR 1107, [2002] 2 All ER 641, [2003] 1 CLC 101, 81 Con LR 25, [2002] PNLR 25, [2002] 19 EG 146 (CS), (2002) 99(20) LSG 32, (2002) 152 NLJ 671, (2002) 146 SJLB 109, HL�� 12.28 Cavendish Square Holding v Makdessi. See Makdessi v Cavendish Square Holdings BV

xxiv

Table of Cases Cendant Corp Securities Litigation, Re, 139 F Supp 2d 585 (D NJ 2001)�� 4.45 Chandrasekaran v Deloitte & Touche Wealth Management Ltd [2004] EWHC 1378 (Ch), Ch D�� 9.105 Chantrey Martin & Co v Martin [1953] 2 QB 286, [1953] 3 WLR 459, [1953] 2 All ER 691, 46 R & IT 516, 38 ALR 2d 663, (1953) 97 SJ 539, CA�� 17.05 Chantrey Vellacott (A Firm) v Convergence Group Plc [2006] EWHC 490 (Ch)�� 17.57 Chantrey Vellacott v Convergence Group Plc [2005] EWCA Civ 290, CA�� 12.33 Charmae Investments Pty Ltd, Re, November 12, 1990, Lexis�� 10.65 Charter Plc v City Index Ltd. See City Index Ltd v Gawler City Equitable Fire Insurance Co Ltd, Re [1925] Ch 407, [1924] All ER Rep 485, CA�� 7.30, 7.31, 7.32, 7.40 City Index Ltd v Gawler [2007] EWCA Civ 1382, [2008] Ch 313, [2008] 2 WLR 950, [2008] 3 All ER 126, [2008] 2 All ER (Comm) 425, [2007] 2 CLC 968, [2008] PNLR 16, [2008] WTLR 1773, (2008) 105(2) LSG 27, CA�� 14.46, 14.47, 14.48, 14.52 Clark Boyce v Mouat [1994] 1 AC 428, [1993] 3 WLR 1021, [1993] 4 All ER 268, (1993) 143 NLJ 1440, (1993) 137 SJLB 231, [1993] NPC 128, PC (NZ)�� 10.05 Clarke (Executor of the Will of Francis Bacon) v Marlborough Fine Art (London) Ltd [2002] EWHC 11 (Ch), [2003] CP Rep 30, Ch D�� 18.05 Clarke v Barclays Bank Plc [2014] EWHC 505 (Ch), [2014] 3 Costs LR 440, Ch D�� 18.21 Cole v Scion Limited [2020] EWHC 1022 (Ch)�� 12.19, 12.23 Commonwealth Bank of Australia v Smith (1991) 102 ALR 453, FC (Aus)�� 10.05 Compagnie Financière et Commerciale du Pacifique v Peruvian Guano Co (1882) 11 QBD 55, CA�� 17.30 Connolly v Law Society [2007] EWHC 1175 (Admin), DC�� 19.33 Controller General v Davison [1996] 2 NZLR 278�� 4.01, 9.28 Convergence Group plc v Chantrey Vellacott. See Chantrey Vellacott v Convergence Group Plc Cook v Green [2009] BCC 204, [2009] Lloyd’s Rep PN 5, Ch D�� 7.04, 9.41, 9.42, 14.52 Co-operative Group Ltd v Birse Developments Ltd (In Liquidation) [2014] EWHC 530 (TCC), [2014] BLR 359, 153 Con LR 103, [2014] PNLR 21�� 12.14 Corporate Jet Realisations [2015] 2 BCLC 15�� 17.27 Cossey v Lonnkvist [2000] Lloyd’s Rep PN 885, [2000] NPC 82, CA�� 8.146, 9.24, 9.25, 9.26 Coulthard v Neville Russell (A Firm) [1998] BCC 359, [1998] 1 BCLC 143, [1998] PNLR 276, CA�� 6.09, 6.67, 6.70, 6.71, 6.72, 6.74, 6.76, 6.82, 6.89, 6.91, 6.101, 6.104, 8.69 Cramaso LLP v Viscount Reidhaven’s Trustees [2014] UKSC 9, [2014] AC 1093, [2014] 2 WLR 317, [2014] 2 All ER 270, [2014] 1 All ER (Comm) 830, 2014 SC (UKSC) 121, 2014 SLT 521, 2014 SCLR 484, (2014) 158(7) SJLB 37, SC�� 9.110 Credit Lyonnais SA v Russell Jones & Walker [2002] EWHC 1310 (Ch), [2003] Lloyd’s Rep PN 7, [2003] PNLR 2, [2002] 2 EGLR 65, [2002] 33 EG 99, [2002] 28 EG 128 (CS), (2002) 152 NLJ 1071, [2002] NPC 91, Ch D�� 9.98

xxv

Table of Cases Crestsign Ltd v National Westminster Bank Plc [2014] EWHC 3043 (Ch), [2015] 2 All ER (Comm) 133, Ch D�� 13.39 Cuff v London and County Land & Building Co Ltd [1912] 1 Ch. 440, CA�� 4.20 Cunningham v Ernst & Young [2018] EWHC 3188 (Comm)�� 12.28 Customer Systems Plc v Ranson; sub nom Ranson v Customer Systems Plc [2012] EWCA Civ 841; [2012] IRLR 769, (2012) 156(26) SJLB 31, CA�� 4.35 Customs and Excise Commissioners v Barclays Bank Plc [2006] UKHL 28, [2007] 1 AC 181, [2006] 3 WLR 1, [2006] 4 All ER 256, [2006] 2 All ER (Comm) 831, [2006] 2 Lloyd’s Rep 327, [2006] 1 CLC 1096, (2006) 103(27) LSG 33, (2006) 156 NLJ 1060, (2006) 150 SJLB.859, HL�� 5.64, 5.66, 6.102, 9.07 Customs and Excise Commissioners v Hedon Alpha Ltd [1981] QB 818, [1981] 2 WLR 791, [1981] 2 All ER 697, (1981) 125 SJ 273, CA�� 16.04 D Dairy Containers v Auditor-General [1995] 2 NZLR 30�� 7.11, 7.36, 7.53, 7.59, 7.65, 7.70, 14.07, 14.23, 14.33, 14.42 Darnley v Croydon Health Services NHS Trust [2018] UKSC 50, [2019] AC 831, [2018] 3 WLR 1153, [2019] 1 All ER 27, [2019] PIQR P4 [2018] Med LR 595, (2019) 165 BMLR 1�� 5.66 Dawes & Henderson (Agencies) Ltd (In Liquidation) (No 2), Re [2000] BCC 204, [1999] 2 BCLC 317, (1999) 96(8) LSG 29, Ch D�� 6.72 De Beer v Kanaar & Co (No 2) [2002] EWHC 688 (Ch), Ch D�� 14.09 De Marco v Bulley Davey [2006] EWCA Civ 188, [2006] BPIR 645, [2006] PNLR 27�� 9.127 De Meza & Stuart v Apple van Straten Shena & Stone [1975] 1 Lloyd’s Rep 498, CA�� 14.14 Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 108 FCR 77, [2001] FCA 173�� 10.65 Deloitte & Touche AG v Johnson [1999] 1 WLR 1605, [1999] BCC 992, [2000] 1 BCLC 485, (1998-99) 1 ITELR 771, PC (Cay Isl)�� 10.06, 10.40 Deloitte & Touche v Executive Counsel to the FRC, 28 January 2015�� 10.15, 10.40 Deloitte & Touche v Livent Inc [2017] 2 RCS 855�� 5.60, 8.34 Deloitte Haskins & Sells v National Mutual Life Nominees [1993] AC 774, [1993] 3 WLR 347, [1993] 2 All ER 1015, [1993] BCLC 1174, (1993) 143 NLJ 883, (1993) 137 SJLB 152, PC (NZ)�� 8.02, 9.43 Demarco v Bulley Davey (A Firm) [2006] EWCA Civ 188, [2006] BPIR 645, [2006] PNLR 27, CA�� 9.125 Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch), Ch D�� 4.37, 9.77, 9.81, 9.82, 9.85, 9.86, 9.87, 9.88, 10.39, 13.23, 13.45, 13.47 Denning v Greenhalgh Financial Services Ltd [2017] EWHC 143 (QB), [2017] 2 BCLC 526, [2017] PNLR 19�� 9.98, 9.101, 12.19 Denton v TH White Ltd [2014] EWCA Civ 906, [2014] 1 WLR 3926, [2015] 1 All ER 880, [2014] CP Rep 40, [2014] BLR 547, 154 Con LR 1, [2014] 4 Costs LR 752, [2014] CILL 3568, (2014) 164(7614) NLJ 17, CA�� 18.21 Destiny Investments (1993) Ltd. See TPD Investments Ltd, Re Dhillon v Siddiqui [2008] EWHC 2020 (Ch), Ch D�� 8.159, 9.105, 9.110

xxvi

Table of Cases Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2018] EWCA Civ 2006, [2019] 1 WLR 791, [2019] 1 All ER 1026, [2018] Lloyd’s Rep FC 635, (2019) 35 Const LJ 99, [2019] Crim LR 44�� 17.36, 17.48 D’Jan of London Ltd, Re [1993] BCC 646, [1994] 1 BCLC 561, Ch D�� 4.10, 16.05, 16.08 Donoghue v Stevenson [1932] AC 562, 1932 SC (HL) 31, 1932 SLT 317, [1932] WN 139, HL�� 1.15 Downs v Chappell [1997] 1 WLR 426, [1996] 3 All ER 344, [1996] CLC 1492, CA�� 8.151, 9.16, 14.50 Drabinsky v KPMG 1999 OAC Lexis 363�� 4.41 DTC (CNC) Ltd v Gary Sergeant & Co [1996] 1 WLR 797, [1996] 2 All ER 369, [1996] BCC 290, [1996] 1 BCLC 529, Ch D�� 17.04 Dubai Aluminium Co Ltd v Salaam [2002] UKHL 48, [2003] 2 AC 366, [2002] 3 WLR 1913, [2003] 1 All ER 97, [2003] 2 All ER (Comm) 451, [2003] 1 Lloyd’s Rep 65, [2003] 1 BCLC 32, [2003] 1 CLC 1020, [2003] IRLR 608, [2003] WTLR 163, (2003) 100(7) LSG 36, (2002) 146 SJLB 280, HL�� 1.28, 14.39, 14.48 Dunning v United Liverpool Hospital’s Board of Governors [1973] 1 WLR 586, [1973] 2 All ER 454, (1973) 117 SJ 167, CA�� 17.15 Duomatic Ltd, Re [1969] 2 Ch 365, [1969] 2 WLR 114, [1969] 1 All ER 161, (1968) 112 SJ 922, Ch D�� 16.08 E E v Dorset County Council [1995] 2 AC 685�� 6.69 Eastgate Group Ltd v Lindsey Morden Group Inc [2001] EWCA Civ 1446, [2002] 1 WLR 642, [2001] 2 All ER (Comm) 1050, [2002] CP Rep 7, [2001] CPLR 525, [2002] CLC 144, [2002] Lloyd’s Rep PN 11, [2002] PNLR 9, (2001) 98(43) LSG 34, (2001) 145 SJLB 243, CA�� 14.45 Easyair Ltd (t/a Openair) v Opal Telecom Ltd [2009] EWHC 339 (Ch), Ch D�� 6.56 EDO Corp v Ultra Electronics Ltd [2009] EWHC 682 (Ch), [2009] Bus LR 1306, [2009] 2 Lloyd’s Rep 349, Ch D�� 17.14 Edwards-Tubb v JD Wetherspoon Plc [2011] EWCA Civ 136, [2011] 1 WLR 1373, [2011] CP Rep 27, [2011] PIQR P16, (2011) 121 BMLR 70, (2011) 155(9) SJLB 31, CA�� 18.22 Electra Private Equity Partners v KPMG Peat Marwick [2000] BCC 368, [2001] 1 BCLC 589, [1999] Lloyd’s Rep PN 670, [2000] PNLR 247, CA�� 5.67, 6.80, 6.82, 6.83, 6.103, 6.104, 6.105 ENE 1 Kos Ltd v Petroleo Brasileiro SA Petrobras (The Kos) (No 2) [2012] UKSC 17, [2012] 2 AC 164, [2012] 2 WLR 976, [2012] 4 All ER 1, [2013] 1 All ER (Comm) 32, [2012] 2 Lloyd’s Rep 292, [2013] 1 CLC 1, 149 Con LR 76, (2012) 162 NLJ 680�� 8.22 Environment Agency v Empress Car Co [1999] 2 AC 22, [1998] 2 WLR 350, [1998] 1 All ER 481, [1998] Env LR 396, [1988] EHLR 3, [1998] EG 16 (CS), (1998) 95(8) LSG 32, (1998) 148 NLJ 206, (1998) 142 SJLB 69, [1998] NPC 16, HL�� 8.15 Equitable Life Assurance Society v Bowley [2003] EWHC 2263 (Comm), [2003] BCC 829, [2004] 1 BCLC 180, QBD�� 16.03

xxvii

Table of Cases Equitable Life Assurance Society v Ernst & Young (Application to Amend Claim) [2003] EWHC 804 (Comm), QBD�� 6.94 Equitable Life Assurance Society v Ernst & Young [2003] EWCA Civ 1114, [2003] 2 BCLC 603, [2004] PNLR 16, (2003) 100(38) LSG 33, (2003) 147 SJLB 991, CA�� 6.92, 8.67, 8.69, 8.70, 8.71, 8.134, 8.143, 8.148, 11.64, 11.66 Equitable Life Assurance Society v Ernst & Young [2003] EWHC 112 (Comm), [2003] Lloyd’s Rep PN 88, [2003] PNLR 23, (2003) 100(13) LSG 30, QB�� 6.94, 8.68, 8.89 Equitable Life Assurance Society v Hyman [2002] 1 AC 408, [2000] 3 WLR 529, [2000] 3 All ER 961, [2001] Lloyd’s Rep IR 99, [2000] OPLR 101, [2000] Pens LR 249, (2000) 144 SJLB 239, HL�� 6.92 Ernst & Young Cayman Islands v Bullmore, In the Matter of Bristol Fund Limited [2008] CILR 317 (Grand Court, Cayman Islands)�� 4.14 Esanda Finance Corporation v Peat Marwick Hungerfords [1997] HCA 8, 188 CLR 241, 142 ALR 750�� 5.56, 5.57 Evans v PricewaterhouseCoopers LLP [2019] EWHC 1505 (Ch), [2019] PNLR 28�� 12.15 Exchange Banking Co (Flitcroft’s Case), Re (1882) 21 Ch D 519, CA�� 8.84, 8.85 Extramoney Limited v Chan, Lai Pang & Co [1994] HKCFI 361�� 7.09, 8.08, 14.19 F Factortame Ltd v Secretary of State for the Environment, Transport and the Regions (Costs) (No 2) [2002] EWCA Civ 932, [2003] QB 381, [2002] 3 WLR 1104, [2002] 4 All ER 97, [2003] BLR 1, [2002] 3 Costs LR 467, (2002) 99(35) LSG 34, (2002) 152 NLJ 1313, (2002) 146 SJLB 178, CA�� 18.11 Fawkes-Underwood v Hamiltons, 24 March 1997, Lexis�� 9.115 Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1, [2021] 2 WLR 123�� 8.14, 8.22 Financial Reporting Council Ltd v Sports Direct International Plc [2020] EWCA Civ 177, [2020] 2 WLR 1256, [2020] 4 All ER 552�� 4.07 First Gulf Bank v Wachovia Bank National Association (formerly First Union National Bank) [2005] EWHC 2827 (Comm), QBD�� 17.17 First Independent Factors and Finance Ltd v Mountford [2008] EWHC 835 (Ch), [2008] BCC 598, [2008] 2 BCLC 297, [2008] BPIR 515, Ch D�� 16.04 First Subsea Ltd v Balltec Ltd [2014] EWHC 866 (Ch); aff’d [2018] Ch 25, [2017] 3 WLR 896, [2018] 1 BCLC 20, [2017] FSR 37�� 4.35 First Tower Trustees Ltd v CDS (Superstores International) Ltd [2018] EWCA Civ 1396, [2019] 1 WLR 637, 178 Con LR 35, [2019] 1 P & CR 6�� 13.12, 13.39, 13.40 Flood v Times Newspapers [2009] EWHC 411 (QB)�� 17.55 Fomento (Sterling Area) v Selsdon Fountain Pen Co [1958] 1 WLR 45, [1958] 1 All ER 11, [1958] RPC 8, (1958) 102 SJ 51, HL�� 7.33, 9.27 Ford & Warren v Warring-Davies [2012] EWHC 3523 (QB), QBD�� 12.28 Forsikringsaktieselskapet Vesta v Butcher [1988] 3 WLR 565, [1988] 2 All ER 43, [1988] 1 Lloyd’s Rep 19, [1988] 1 FTLR 78, [1988] Fin LR 67, (1988) 4 Const LJ 75, (1988) 85(31) LSG 33, (1988) 132 SJ 1181, CA�� 14.05, 14.07 Forster v Outred & Co [1982] 1 WLR 86, [1982] 2 All ER 753, (1981) 125 SJ 309, CA�� 12.06, 12.07, 12.15

xxviii

Table of Cases Fulton Shipping Inc of Panama v Globalia Business Travel SAU (formerly Travelplan SAU) of Spain [2015] EWCA Civ 1299, [2016] 1 WLR 2450, [2016] 1 Lloyd’s Rep 383, CA�� 8.160 G Gallaher International Ltd v Tlais Enterprises Ltd 2007] EWHC 464 (Comm), QBD�� 18.13 Galliford Try Infrastructure Ltd (formerly Morrison Construction Ltd) v Mott MacDonald Ltd [2008] EWHC 1570 (TCC), 120 Con LR 1, [2009] PNLR 9, [2008] CILL 2612, QBD�� 13.40 Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360, [1995] 1 All ER 16, [1994] BCC 319, CA�� 6.05, 6.06, 6.63, 6.65, 6.75, 6.87, 6.94, 6.98, 8.03, 8.17, 8.20, 8.21, 8.22, 8.86, 8.101, 8.104, 8.111, 8.112, 8.114, 8.115, 8.116, 8.117, 8.125, 8.126, 8.127, 8.128, 8.130, 8.131, 8.132, 8.133, 8.134, 8.137, 8.142, 8.145, 8.146, 11.32, 11.40, 11.41, 11.42, 11.43, 11.44, 11.45, 11.46, 11.58, 11.60, 11.61, 11.64, 11.65, 11.73 Gartner v Ernst & Young [2003] FCA 152 �� 10.65 GE Capital Commercial Finance v Sutton [2004] EWCA Civ 315, [2004] 2 BCLC 662, (2004) 101(14) LSG 25, CA�� 10.65 Generics (UK) Ltd v Yeda Research and Development Co Ltd [2012] EWCA Civ 726, [2013] Bus LR 777, [2012] CP Rep 39, [2013] FSR 13, CA�� 4.41 Geneva Finance Ltd, Re (1992) 7 ACSR 415; 7 WAR 496�� 10.65 Gerrard (Thomas) & Son, Re [1968] Ch 455, [1967] 3 WLR 84, [1967] 2 All ER 525, (1967) 111 SJ 329, Ch D�� 4.10, 4.18, 4.19, 7.34, 7.35, 7.37, 7.47, 8.83, 8.89, 8.96 Gibson v Bagnall (1978) 22 OR (2d) 234�� 4.13 Glass v 618717 Ontario Inc [2012] ONSC 535�� 4.26, 4.42 Goldberg v Miltiadous [2010] EWHC 450 (QB), QBD�� 9.116 Goldstein v Levy Gee (A Firm) [2003] EWHC 1574 (Ch), [2003] PNLR 35, (2003) 100(34) LSG 32, [2003] NPC 83, Ch D�� 9.71, 9.76, 9.81, 9.85, 9.86 Gomba Holdings (UK) Ltd v Minories Finance Ltd (formerly Johnson Matthey Bankers Ltd) (No 1) [1988] 1 WLR 1231, [1989] 1 All ER 261, (1989) 5 BCC 27, [1989] BCLC 115, [1989] PCC 107, (1988) 85(36) LSG 41, (1988) 132 SJ 1323, CA�� 17.04, 17.05 Grand Field Group Holdings v Chu King Fai [2014] HKCU 1470�� 16.04 Grand Gain Investment v Borrelli [2006] HKCU 872�� 9.123 Granville Technology Group Limited (in liquidation) v Infineon Technologies AG [2020] EWHC 415 (Comm)�� 12.26 Gravgaard v Aldridge & Brownlee [2004] EWCA Civ 1529, [2005] PNLR 19, (2005) 149 SJLB 27, [2004] NPC 187�� 12.19 Gray v Thames Trains Ltd [2009] UKHL 33, [2009] 1 AC 1339, [2009] 3 WLR 167, [2009] 4 All ER 81, [2009] PIQR P22, [2009] LS Law Medical 409, (2009) 108 BMLR 205, [2009] MHLR 73, [2009] Po LR 229, (2009) 159 NLJ 925, (2009) 153(24) SJLB 33, HL�� 11.44, 11.45, 11.58

xxix

Table of Cases Green v BDO Stoy Hayward LLP. See XL Communications Group Plc (In Liquidation), Re Gregory v Wallace [1998] IRLR 387, CA�� 9.124 Gresport Finance Limited v Battaglia [2018] EWCA Civ 540�� 12.26 Grimm v Newman [2002] EWCA Civ 1621, [2003] 1 All ER 67, [2002] STC 1388, [2002] BTC 502, [2002] STI 1507, (2002) 146 SJLB 261, CA�� 9.103, 9.104, 9.105 Guang Xin Enterprises v Kwan Wong Tan & Fong [2003] HKCU 248�� 8.06, 8.09, 8.132 H Hadley v Baxendale, 156 ER 145, (1854) 9 Ex 341�� 8.28 Hague v Nam Tai Electronics [2008] UKPC 13, [2008] BCC 295, [2008] BPIR 363, [2008] PNLR 27, PC (BVI)�� 9.123 Halsall v Champion Consulting Ltd [2017] EWHC 1079 (QB), [2017] STC 1958, [2017] PNLR 32, [2017] BTC 19�� 12.19, 12.22, 13.23, 13.47, 14.16 Hampshire Land Co (No 2), Re [1896] 2 Ch 743, Ch D�� 11.09 Haque v BCCI CA, 24 November 1999, Lexis�� 4.24, 12.19 Harlequin Property (SVG) Ltd v Wilkins Kennedy [2016] EWHC 3188 (TCC), [2017] 4 WLR 30, 170 Con. LR 86�� 10.41 Harris Scarfe Ltd v Ernst & Young [2005] SASC 255�� 8.122, 8.136, 8.137, 8.140, 8.146 Harrison v Bloom Camillin (Costs) [2000] Lloyd’s Rep PN 404, Ch D�� 9.21 Haugesund Kommune v Depfa ACS Bank [2011] EWCA Civ 33, [2011] 3 All ER 655, [2012] 1 All ER (Comm) 65, [2012] Bus LR 230, [2011] 1 CLC 166, 134 Con LR 51, [2011] PNLR 14, (2011) 108(6) LSG 19, CA�� 8.47, 8.48, 9.101 Haward v Fawcetts (A Firm) [2006] UKHL 9, [2006] 1 WLR 682, [2006] 3 All ER 497, [2006] PNLR 25, [2006] 10 EG 154 (CS), [2006] NPC 25, HL�� 12.02, 12.19, 12.23 Hays Specialist Recruitment (Holdings) Ltd v Ions [2008] EWHC 745 (Ch), [2008] IRLR 904, Ch D�� 17.15 Heather Capital v KPMG, 17 November 2015�� 8.125 Hedley Byrne & Co Ltd v Heller & Partners Ltd [1964] AC 465, [1963] 3 WLR 101, [1963] 2 All ER 575, [1963] 1 Lloyd’s Rep 485, (1963) 107 SJ 454, HL�� 1.16, 1.17, 5.19, 5.33, 6.22, 6.35, 9.11, 13.08 Henderson v Dorset Health Care [2020] UKSC 43, [2020] 3 WLR 1124�� 11.44 Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145, [1994] 3 WLR 761, [1994] 3 All ER 506, [1994] 2 Lloyd’s Rep 468, [1994] CLC 918, (1994) 144 NLJ 1204, HL�� 4.03, 12.05, 13.08 Henry v News Group Newspapers [2011] EWHC 1364 (QB)�� 17.55 Hercules Management v Ernst & Young [1997] 2 SCR 165�� 5.59 Highgrade Traders Ltd, Re [1984] BCLC 151, CA�� 17.36 HIH Casualty & General Insurance Ltd v Chase Manhattan Bank [2003] UKHL 6, [2003] 1 All ER (Comm) 349, [2003] 2 Lloyd’s Rep 61, [2003] 1 CLC 358, [2003] Lloyd’s Rep IR 230, (2003) 147 SJLB 264, HL�� 13.24

xxx

Table of Cases HIH Casualty & General Insurance Ltd, Re [2005] EWHC 2125 (Ch), [2006] 2 All ER 671, Ch D�� 9.122, 9.123 Hilton v Barker Booth & Eastwood [2005] UKHL 8, [2005] 1 WLR 567, [2005] 1 All ER 651, [2005] PNLR 23, [2006] Pens LR 1, [2005] 6 EG 141 (CS), (2005) 102(14) LSG 27, (2005) 155 NLJ 219, (2005) 149 SJLB 179, [2005] NPC 14, HL�� 10.37, 10.41 Hirtenstein v Hill Dickinson LLP [2014] EWHC 2711 (Comm)�� 8.149 HIT Finance Ltd v Cohen Arnold & Co [2000] Lloyd’s Rep PN 125, CA�� 9.23 HLC Environmental Projects Ltd, Re [2013] EWHC 2876 (Ch), [2014] BCC 337, Ch D�� 11.48 HMRC’s Application, Re [2018] STI 2325�� 4.07 Hodgkinson v Simms [1994] 3 SCR 377�� 10.03, 10.25, 10.26, 10.28, 10.29, 10.31, 10.32 Holman v Johnson, 98 ER 1120, (1775) 1 Cowp 341�� 11.01 Hondon Development Ltd v Powerwise Investments Ltd [2005] HKCA 37�� 14.07 Hubbard v Lambeth, Southwark and Lewisham HA [2001] EWCA Civ 1455, [2001] CP Rep 117, [2002] PIQR P14, [2002] Lloyd’s Rep Med. 8, CA�� 18.27 Hughes-Holland v BPE Solicitors (SC) [2017] UKSC 21, [2018] AC 599, [2017] 2 WLR 1029, [2017] 3 All ER 969, [2017] 3 WLUK 531, 171 Con LR 46, [2017] PNLR 23�� 6.106, 8.49, 8.50, 8.51, 8.76, 8.77, 8.78, 8.79, 8.154 Hungerfords v Walker (1989) 171 CLR 125�� 9.96 Hurt, Re (1988) 80 ALR 236�� 10.56 Hutchison 3G UK Ltd v O2 (UK) Ltd [2008] EWHC 55 (Comm), [2008] UKCLR 83, QBD�� 17.15 Huxford v Stoy Hayward & Co (1989) 5 BCC 421, QBD�� 10.34 I IFE Fund SA v Goldman Sachs International [2007] EWCA Civ 811, [2007] 2 Lloyd’s Rep 449, [2007] 2 CLC 134, (2007) 104(32) LSG 24, CA�� 13.36 In a Flap Envelope Co Ltd, Re [2003] EWHC 3047 (Ch), [2003] BCC 487, [2004] 1 BCLC 64, Ch D�� 9.41, 16.07 Independents Advantage Insurance Co v Personal Representatives of Cook (Deceased) [2003] EWCA Civ 1103, [2004] PNLR 3, CA�� 6.56, 6.88, 6.101 Inframatrix Investments Ltd v Dean Construction Ltd [2012] EWCA Civ 64, [2012] 2 All ER (Comm) 337, 140 Con LR 59, (2012) 28 Const LJ 438, [2012] CILL 3145, CA�� 13.23 Inland Revenue Commissioners v Exeter City AFC Ltd [2004] BCC 519, DC�� 17.57 Insight Group Ltd v Kingston Smith (A Firm) [2012] EWHC 3644 (QB), [2014] 1 WLR 1448, [2013] 3 All ER 518, [2013] 1 CLC 90, [2013] PNLR 13, QBD�� 12.31 International Trading Co v Lai Kam Man [2004] HKCFI 361�� 14.07 Inveresk Plc v Tullis Russell Papermakers Ltd [2010] UKSC 19, 2010 SC (UKSC) 106, 2010 SLT 941, 2010 SCLR 396, 2010 GWD 23-437, SC�� 9.27 Irene’s Success [1982] QB 461�� 13.27 Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244, [2004] BCC 994, [2005] 2 BCLC 91, [2005] ICR 450, [2004] IRLR 928, (2004) 101(39) LSG 34, (2004) 148 SJLB 1153, CA�� 4.34, 4.35

xxxi

Table of Cases J Jackson v Marley Davenport Ltd [2004] EWCA Civ 1225, [2004] 1 WLR 2926, [2005] CP Rep 8, [2005] BLR 13, [2005] PIQR P10, [2005] 1 EGLR 103, (2004) 101(38) LSG 29, (2004) 148 SJLB 1121, CA�� 18.19 Jackson v Murray [2015] UKSC 5, [2015] 2 All ER 805, 2015 SC (UKSC) 105, 2015 SLT 151, 2015 SCLR 235, [2015] RTR 20, [2015] PIQR P16, 2015 Rep LR 42, 2015 GWD 7-141, SC�� 14.27, 14.28 Jacobs v Sesame Ltd [2014] EWCA Civ 1410, [2015] PNLR 6�� 12.19 Jaison Property Development Co Ltd v Swinhoe [2010] EWHC 2467 (QB), QBD�� 10.34 James-Bowen v Commissioner of Police of the Metropolis [2018] 1 WLR 4021, [2018] UKSC 40, [2018] 4 All ER 1007, [2018] ICR 1353, [2018] IRLR 954�� 5.66 James McNaughton Paper Group Ltd v Hicks Anderson & Co [1991] 2 QB 113, [1991] 2 WLR 641, [1991] 1 All ER 134, [1990] BCC 891, [1991] BCLC 235,[1991] ECC 186, [1955-95] PNLR 574, (1990) 140 NLJ 1311, CA�� 5.76, 9.12, 9.13, 9.14, 9.15, 9.18, 9.20 James Smith & Sons (Norwood) v Goodman [1936] Ch 216, CA�� 9.120, 9.121, 9.122, 9.123 Jay v Wilder Coe (A Firm) [2003] EWHC 1786 (QB), QBD�� 17.19 Jayes v IMI (Kynoch) [1985] ICR 155, (1984) 81 LSG 3180, CA�� 14.26 JEB Fasteners Ltd v Marks Bloom & Co [1983] 1 All ER 583, CA�� 5.12, 5.20, 5.35, 6.16, 6.17, 6.18, 6.34, 8.07, 8.32, 9.20 Jet Holding Ltd v Cooper Cameron (Singapore) Pte Ltd [2006] SGCA 20�� 14.07 JJ Coughlan Limited v Charterhouse (Accountants) LLP Unreported, 23 November 2016�� 12.33 John (Elton) v PriceWaterhouseCoopers (formerly Price Waterhouse) [2002] EWCA Civ 899, CA�� 6.10, 8.148, 8.159, 9.09 Johnson v Chief Constable of Surrey, The Times, 23 November, 1992, CA�� 12.28 Johnson v Gore Wood & Co (No 1) [2002] 2 AC 1, [2001] 2 WLR 72, [2001] 1 All ER 481, [2001] CPLR 49, [2001] BCC 820, [2001] 1 BCLC 313, [2001] PNLR 18, (2001) 98(1) LSG 24, (2001) 98(8) LSG 46, (2000) 150 NLJ 1889, (2001) 145 SJLB 29, HL�� 6.47, 6.50, 8.157, 8.158 Jones v Kaney [2011] UKSC 13, [2011] 2 AC 398, [2011] 2 WLR 823, [2011] 2 All ER 671, [2011] BLR 283, 135 Con LR 1, [2011] 2 FLR 312, [2012] 2 FCR 372, (2011) 119 BMLR 167, [2011] PNLR 21, [2011] CILL 3037, [2011] Fam Law 1202, [2011] 14 EG 95 (CS), (2011) 108(15) LSG 19, (2011) 161 NLJ 508, (2011) 155(13) SJLB 30, SC�� 9.113, 18.34, 18.35, 18.36, 18.37 JP Morgan Bank (formerly Chase Manhattan Bank) v Springwell Navigation Corp [2008] EWHC 1186 (Comm), QBD�� 13.37 JP Morgan Chase Bank v Springwell Navigation Corp (Application to Strike Out) [2006] EWHC 2755 (Comm), [2007] 1 All ER (Comm) 549, QBD�� 18.07 JSI Shipping v Teofoongwonglcloong [2007] 4 SLR 460, [2007] SGCA 40�� 7.05, 7.09, 7.10, 7.12, 7.13, 7.14, 7.15, 7.26, 7.37, 7.45, 7.52, 7.56, 7.66, 8.26, 8.149, 15.10, 16.10, 16.12

xxxii

Table of Cases K K Ltd v National Westminster Bank Plc [2006] EWCA Civ 1039, [2007] 1 WLR 311, [2006] 4 All ER 907, [2006] 2 All ER (Comm) 655, [2007] Bus LR 26, [2006] 2 Lloyd’s Rep 569, [2006] CP Rep 45, (2006) 103(31) LSG 24, (2006) 150 SJLB 982, CA�� 20.30 Killick v PriceWaterhouseCoopers (No 1) [2001] 1 BCLC 65, [2001] Lloyd’s Rep PN 17, [2001] PNLR 1, [2001] WTLR 699, Ch D�� 9.71, 13.29, 13.48 Killick v PriceWaterhouseCoopers (No 2) Unreported, 11 October 2000�� 17.35 King (Deceased), Re�� 11.30 Kingston Cotton Mill Co (No 1), Re [1896] 1 Ch 6, CA�� 4.12 Kingston Cotton Mill Co (No 2), Re [1896] 2 Ch 279, CA�� 4.10, 7.21, 7.26, 7.27, 7.31, 7.33, 7.34, 7.35, 7.36, 8.102, 8.103, 8.112 Kirbys Coaches Ltd, Re [1991] BCC 130, [1991] BCLC 414, Ch D�� 16.03 Kneale v Barclays Bank Plc (t/a Barclaycard) [2010] EWHC 1900 (Comm), [2010] CTLC 233, QBD�� 17.14 Knight v Rochdale Healthcare NHS Trust [2003] EWHC 1831 (QB), [2004] 1 WLR 371, [2003] 4 All ER 416, [2004] CP Rep 6, [2004] PIQR P5, (2003) 74 BMLR 204, (2003) 153 NLJ 1203, QBD�� 12.34 Knightley v Johns [1982] 1 WLR 349, [1982] 1 All ER 851, [1982] RTR 182�� 8.24 Komercni Banka AS v Stone & Rolls Ltd [2003] EWCA Civ 311, [2003] CP Rep 58, CA�� 11.07 Koufos v C Czarnikow Ltd (The Heron II) [1969] 1 AC 350, [1967] 3 WLR 1491, [1967] 3 All ER 686, [1967] 2 Lloyd’s Rep 457, (1967) 111 SJ 848, HL�� 8.29 KR v Bryn Alyn Community (Holdings) Ltd (In Liquidation) (Part 36 Appeal: Joinder of Parties) [2003] EWCA Civ 783, [2003] QB 1441, [2003] 3 WLR 107, [2003] CPLR 415, (2003) 147 SJLB 749, CA�� 12.03 Kripps v Touche Ross (1997) 89 BCAC 288, 145 WAC 288�� 9.69 K/S Lincoln v CB Richard Ellis Hotels Ltd [2010] EWHC 1156 (TCC), [2010] PNLR 31, (2011) 27 Const LJ 50�� 9.77 Kuah Kok Kim v Ernst & Young [1996] 3 SLR(R) 485�� 17.15 Kyrris v Oldham [2003] EWCA Civ 1506, [2004] BCC 111, [2004] 1 BCLC 305, [2004] BPIR 165, [2004] PNLR 18, (2003) 100(48) LSG 17, (2003) 147 SJLB 1306, [2003] NPC 133, CA�� 9.121, 9.122, 9.123 L Lambert v Lewis [1982] AC 225, [1981] 2 WLR 713, [1981] 1 All ER 1185, [1981] 2 Lloyd’s Rep 17, [1981] RTR 346, (1981) 125 SJ 310, HL�� 8.24 Langstane Housing Association Ltd v Riverside Construction (Aberdeen) Ltd [2009] CSOH 52, 2009 SCLR 639, 124 Con LR 211, (2010) 26 Const LJ 566, 2009 GWD 27-429, CSOH�� 13.19 Lanphier v Phipos, 173 ER 581, (1838) 8 Car & P 475�� 7.02 Lascomme v UDT (Ireland) [1993] 3 IR 412 �� 10.65 Lavender v Miller Bernstein LLP [2018] ONCA 729�� 6.11 Law Society v KPMG Peat Marwick [2000] 1 WLR 1921, [2000] 4 All ER 540, [2000] Lloyd’s Rep PN 929, [2000] PNLR 831, (2000) 97(30) LSG 40, (2000) 150 NLJ 1017, CA�� 6.57, 6.89, 8.34, 8.37, 9.30, 9.32, 9.33, 9.34

xxxiii

Table of Cases Law Society v Sephton & Co [2006] UKHL 22, [2006] 2 AC 543, [2006] 2 WLR 1091, [2006] 3 All ER 401, [2006] PNLR 31, (2006) 156 NLJ 844, (2006) 150 SJLB 669, [2006] NPC 56, HL�� 9.34, 12.06, 12.07, 12.08, 12.12, 12.15 Leeds Estate, Building and Investment Co v Shepherd (1887) 36 Ch D 787, Ch D�� 7.17, 8.83, 8.89, 8.94, 8.101, 8.102, 14.19 Leigh & Sillivan Ltd v Aliakmon Shipping Co Ltd (The Aliakmon) [1985] QB 350, [1985] 2 WLR 289, [1985] 2 All ER 44, [1985] 1 Lloyd’s Rep 199, (1985) 82 LSG 203, (1985) 135 NLJ 285, (1985) 129 SJ 69, CA�� 13.27, 13.28 Les Laboratoires Servier v Apotex [2014] UKSC 55, [2015] AC 430, [2014] 3 WLR 1257, [2015] 1 All ER 671, [2014] Bus LR 1217, [2015] RPC 10�� 11.04 Letang v Cooper [1965] 1 QB 232, [1964] 3 WLR 573, [1964] 2 All ER 929, [1964] 2 Lloyd’s Rep 339, (1964) 108 SJ 519, CA�� 12.32 Levy-Russell v Tecmotiv Inc (1994) 54 CPR 3d 161�� 10.65 Lewis v Lambert. See Lambert v Lewis Lexi Holdings Plc v Pannone & Partners [2009] EWHC 3507 (Ch), Ch D�� 11.21 Leyland Shipping v Norwich Union Fire Insurance [1918] AC 350�� 8.79 Lictor Anstalt v Mir Steel UK Ltd [2012] EWCA Civ 1397, [2013] 2 All ER (Comm) 54, [2013] CP Rep 7, [2013] 2 BCLC 76, CA�� 9.125, 13.24 Linklaters Business Services v Sir Robert McAlpine Ltd [2010] EWHC 2931 (TCC), 133 Con LR 211�� 12.14 Lion Nathan Ltd v CC Bottlers Ltd [1996] 1 WLR 1438, [1996] 2 BCLC 371, (1996) 93(24) LSG 26, (1996) 140 SJLB 174, PC (NZ)�� 9.72, 9.80, 9.81, 9.82 Livent v Deloitte & Touche [2016] ONCA 11�� 7.09, 7.11, 7.26, 7.50, 8.133, 14.19 Lloyd Cheyham & Co v Littlejohn & Co [1987] BCLC 303, [1986] PCC 389, QBD�� 7.04, 7.09 Lloyd’s Bank plc v Rogers [1999] 38 EG 83�� 12.32 Lockheed Martin Corp v Willis Group Ltd [2010] EWCA Civ 927, [2010] CP Rep 44, [2010] PNLR 34, CA�� 12.30 London & County Securities v Nicholson (formerly t/a Harmood Banner & Co) [1980] 1 WLR 948, [1980] 3 All ER 861, (1980) 124 SJ 544, Ch D�� 4.21 London and General Bank (No 2), Re [1895] 2 Ch 673, CA�� 4.05, 5.11, 7.17, 7.19, 7.20, 7.24, 7.25, 8.10, 8.56, 8.83, 8.89 London and General Bank, Re [1895] 2 Ch 166, CA�� 4.11, 4.12 Lonrho Ltd v Shell Petroleum Co Ltd (No 1) [1980] 1 WLR 627, (1980) 124 SJ 412, HL�� 17.31 Lonrho Plc v Al-Fayed (No.1) [1992] 1 AC 448, [1991] 3 WLR 188, [1991] 3 All ER 303, [1991] BCC 641, [1991] BCLC 779, (1991) 141 NLJ 927, (1991) 135 SJLB 68, HL�� 6.55 Lowes v Clarke Whitehill CA, 21 November 1997, Lexis�� 8.100, 9.106, 9.112 Lucas v Barking, Havering and Redbridge Hospitals NHS Trust [2003] EWCA Civ 1102, [2004] 1 WLR 220, [2003] 4 All ER 720, [2003] CP Rep 65, [2003] Lloyd’s Rep Med 577, (2004) 77 BMLR 13, (2003) 100(37) LSG 34, (2003) 153 NLJ 1204, CA�� 18.18 Luen Cheong Tai Construction Co Ltd, Re [2002] 1354 HKCU 1�� 10.49 Luscombe v Roberts and Pascho (1962) 106 SJ 373�� 9.37, 11.16, 11.42

xxxiv

Table of Cases M Madhani v Pirani British Columbia Supreme Court 16 October 1997, Lexis�� 10.34 Maharaj v Johnson [2015] UKPC 28, [2015] PNLR 27, PC (T&T)�� 12.08, 12.09, 12.11, 12.12 Makar v Pricewaterhousecoopers LLP [2011] EWHC 3835 (Comm), QBD�� 4.05, 6.09, 6.71 Makdessi v Cavendish Square Holdings BV [2015] UKSC 67, [2015] 3 WLR 1373, [2016] 2 All ER 519, [2016] 2 All ER (Comm) 1, [2016] 1 Lloyd’s Rep 55, [2016] BLR 1, 162 Con LR 1, [2016] RTR 8, [2016] CILL 3769, SC�� 13.33 Maltby Investments Ltd, Re (In Administration); sub nom Spratt v Lomas [2012] EWHC 4 (Ch), Ch D�� 17.21 Man Nutzfahrzeuge AG v Ernst & Young [2003] EWHC 2245 (Comm), [2004] PNLR 19, QBD�� 6.58 Man Nutzfahrzeuge AG v Freightliner Ltd [2007] EWCA Civ 910, [2007] BCC 986, [2008] 2 BCLC 22, [2007] 2 CLC 455, [2008] Lloyd’s Rep FC 77, [2008] PNLR 6, (2007) 104(37) LSG 35, (2007) 151 SJLB 1229, CA�� 5.24, 5.47, 5.64, 5.69, 5.70, 6.08, 6.23, 6.24, 6.25, 6.26, 6.27, 6.29, 6.30, 6.31, 6.32, 6.33, 6.35, 6.36, 6.37, 6.38, 6.40, 6.57, 6.102, 8.11, 8.122, 8.155, 8.157, 13.04, 14.10, 14.18, 14.45 Manchester Building Society v Grant Thornton [2018] EWHC 963 (Comm), [2018] PNLR 27; affd [2019] EWCA Civ 40, [2019] 1 WLR 4610, [2019] 4 All ER 90, [2019] PNLR 12�� 6.102, 6.106, 8.72, 8.73, 8.75, 8.76, 8.77, 8.93, 8.99, 14.05, 14.24, 14.35, 16.10 Marex Financial v Sevilleja [2020] UKSC 31, [2021] AC 39, [2020] 3 WLR 255, [2021] 1 All ER 585, [2021] All ER (Comm) 97, [2020] 2 Lloyd’s Rep 165, [2020] BCC 783, [2020] BPIR 1436�� 8.158, 8.159 Marren v Dawson Bentley & Co [1961] 2 QB 135, [1961] 2 WLR 679, [1961] 2 All ER 270, (1961) 105 SJ 383�� 12.05 Marshall v Allotts (A Firm) [2004] EWHC 1964 (QB), [2005] PNLR 11, QBD�� 17.09, 17.19 Matrix Securities Ltd v Theodore Goddard [1998] STC 1, [1998] PNLR 290, [1997] BTC 578, (1997) 147 NLJ 1847, Ch D�� 9.108 Maxwell Communications Corp Plc (No 1), Re [1992] BCC 372, [1992] BCLC 465, Ch D�� 10.60 McCullagh v Lane Fox & Partners Ltd, 49 Con LR 124, [1996] PNLR 205, [1996] 1 EGLR 35, [1996] 18 EG 104, [1995] EG 195 (CS), [1995] NPC 203, CA�� 13.08 McInerney v MacDonald [1992] 2 SCR 138�� 4.33 McKew v Holland & Hannen & Cubitts (Scotland) Ltd [1969] 3 All ER 1621, 1970 SC (HL) 20, 1970 SLT 68, 8 KIR 921, HL�� 8.24 McMahon v Grant Thornton [2020] CSOH 50, [2020] STC 1732, 2020 SLT 908, [2020] BTC 16, [2020] STI 1388, 2020 GWD 19-269�� 8.148, 9.101 McParland & Partners Limited v Whitehead [2020] EWHC 298 (Ch), [2020] Bus LR 699�� 17.02 MDA Investment Management Ltd (No.2), Re [2004] EWHC 42 (Ch), [2005] BCC 783, Ch D�� 16.07

xxxv

Table of Cases Meadow v General Medical Council [2006] EWCA Civ 1390, [2007] QB 462, [2007] 2 WLR 286, [2007] 1 All ER 1, [2007] ICR 701, [2007] 1 FLR 1398, [2006] 3 FCR 447, [2007] LS Law Medical 1, (2006) 92 BMLR 51, [2007] Fam Law 214, [2006] 44 EG 196 (CS), (2006) 103(43) LSG 28, (2006) 156 NLJ 1686, CA�� 18.35 Meara v Fox [2002] PNLR 5, Ch D�� 10.03, 10.28, 10.33 Medforth v Blake [2000] Ch 86, [1999] 3 WLR 922, [1999] 3 All ER 97, [1999] BCC 771, [1999] 2 BCLC 221, [1999] BPIR 712, [1999] Lloyd’s Rep PN 844, [1999] PNLR 920, [1999] 2 EGLR 75, [1999] 29 EG 119, [1999] EG 81 (CS), (1999) 96(24) LSG 39, (1999) 149 NLJ 929, CA�� 9.126 Medisys Plc v Arthur Andersen (A Firm) [2002] Lloyd’s Rep PN 323, [2002] PNLR 22, QBD�� 17.20 Mehjoo v Harben Barker (A Firm) [2014] EWCA Civ 358, [2014] 4 All ER 806, [2014] STC 1470, [2014] PNLR 24, [2014] BTC 17, [2014] STI 1627, CA�� 9.101 Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, [1995] 3 WLR 413, [1995] 3 All ER 918, [1995] BCC 942, [1995] 2 BCLC 116, (1995) 92(28) LSG 39, (1995) 139 SJLB 152, PC (NZ)�� 11.20 Merivale Moore Plc v Strutt & Parker [1999] Lloyd’s Rep PN 734, [2000] PNLR 498, [1999] 2 EGLR 171, [1999] EG 59 (CS), (1999) 96(19) LSG 27, [1999] NPC 48, CA�� 9.76, 9.77, 9.79, 9.80, 9.81 Michael v Chief Constable of South Wales [2015] AC 1732�� 5.66 Michael v Miller [2004] EWCA Civ 282, [2004] 2 EGLR 151, (2004) 148 SJLB 387, [2004] NPC 46, [2004] 2 P & CR DG5, CA�� 9.79 Micro Enhancement Intern v Coopers & Lybrand (2002) 110 Wn App 412�� 4.45 Midland Bank Trust Co Ltd v Hett Stubbs & Kemp [1979] Ch 384, [1978] 3 WLR 167, [1978] 3 All ER 571, [1955-95] PNLR 95, (1977) 121 SJ 830, Ch D�� 9.101 Midland Packaging Ltd v HW Accountants Ltd [2010] EWHC 1975 (QB), [2011] PNLR 1, QBD�� 9.102, 9.105 Mitchell v News Group Newspapers Ltd [2013] EWCA Civ 1537, [2014] 1 WLR 795, [2014] 2 All ER 430, [2014] BLR 89, [2013] 6 Costs LR 1008, [2014] EMLR 13, [2014] CILL 3452, (2013) 163(7587) NLJ 20, CA�� 18.21 Mitsui & Co Ltd v Nexen Petroleum UK Ltd [2005] EWHC 625 (Ch), [2005] 3 All ER 511, Ch D�� 17.16 Monarch Steamship Co Ltd v A/B Karlshamns Oljefabriker [1949] AC 196, [1949] 1 All ER 1, (1948-49) 82 Ll L Rep 137, 1949 SC (HL) 1, 1949 SLT 51, 1949 SLT (Notes) 1, 65 TLR 217, [1949] LJR 772, (1949) 93 SJ 117, HL�� 8.113 Montgomery v Lanarkshire Health Board [2015] UKSC 11, [2015] AC 1430, [2015] 2 WLR 768, [2015] 2 All ER 1031, 2015 SC (UKSC) 63, 2015 SLT 189, 2015 SCLR 315, [2015] PIQR P13, [2015] Med LR 149, (2015) 143 BMLR 47, 2015 GWD 10-179�� 7.06 Moody v Cox [1917] 2 Ch 71, CA�� 10.05 Moon v Franklin, 19 December 1991, Lexis�� 9.96 Moore v Zerfahs [1999] Lloyd’s Rep PN 144, CA�� 8.147 Moresfield Ltd v Banners (A Firm) [2003] EWHC 1602 (Ch), Ch D�� 17.19

xxxvi

Table of Cases Morgan Crucible Co Plc v Hill Samuel Bank & Co Ltd [1991] Ch 295, [1991] 2 WLR 655, [1991] 1 All ER 148, [1991] BCC 82, [1991] BCLC 178, (1990) 140 NLJ 1605, CA�� 5.47, 5.69, 5.73, 6.59, 6.60, 6.61, 6.63, 6.64, 6.82, 6.105, 9.66 Morgan Est (Scotland) Ltd v Hanson Concrete Products Ltd [2005] EWCA Civ 134, [2005] 1 WLR 2557, [2005] 3 All ER 135, [2005] CP Rep 23, [2005] BLR 218, (2005) 102(17) LSG 32, CA�� 12.30 Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue [2014] HKCFA 22�� 11.21, 12.19 Murfin v Campbell [2011] EWHC 1475 (Ch), [2011] PNLR 28, Ch D�� 8.160 Mutch v Allen [2001] EWCA Civ 76, [2001] CP Rep 77, [2001] CPLR 200, [2001] PIQR P26, CA�� 18.23 Mutual Reinsurance Co Ltd v Peat Marwick Mitchell & Co [1997] 1 Lloyd’s Rep 253, [1996] BCC 1010, [1997] 1 BCLC 1, [1997] PNLR 75, CA�� 4.14 N National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The Ikarian Reefer) (No 1) [1993] 2 Lloyd’s Rep 68, [1993] FSR 563, [1993] 37 EG 158, QBD�� 18.10 Nationwide Building Society v Dunlop Haywards (DHL) Ltd (t/a Dunlop Heywood Lorenz) [2009] EWHC 254 (Comm), [2010] 1 WLR 258, [2009] 2 All ER (Comm) 715, [2009] 1 Lloyd’s Rep 447, [2010] Lloyd’s Rep PN 68, [2009] PNLR 20, QBD�� 14.53 Nationwide Building Society v Various Solicitors (No 3) [1999] Lloyd’s Rep PN 241, [1999] PNLR 606, [1999] EG 15 (CS), (1999) 96(9) LSG 31, (1999) 143 SJLB 58, [1999] NPC 15, Ch D�� 14.09 Nederlandse Reassurantie Groep Holding NV v Bacon & Woodrow (No 3) [1997] LRLR 678, QBD�� 9.21 New China Hong Kong Group, Re [2003] 3 HKC 252�� 4.14 New Plymouth Borough v The King [1951] NZLR 49�� 14.19 Newhart Developments v Co-operative Commercial Bank Ltd [1978] QB 814, [1978] 2 WLR 636, [1978] 2 All ER 896, (1977) 121 SJ 847, CA�� 10.65 Nickel Mines Ltd, Re (1978) 3 ACLR 686�� 10.49 Nida Pty Ltd, Re (1993) 10 ACSR 195�� 10.49 Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2) [2004] EWCA Civ 487, [2004] 2 All ER (Comm) 289, [2004] 2 Lloyd’s Rep 319, [2004] 1 CLC 882, (2004) 148 SJLB 538, CA�� 14.46 North Shore Ventures Ltd v Anstead Holdings Inc [2012] EWCA Civ 11, [2012] WTLR 1241, (2012) 109(8) LSG 16, CA�� 17.31 NRAM v Steel [2018] UKSC 13, [2018] 1 WLR 1190, [2018] 3 All ER 81, 2018 SC (UKSC) 141, 2018 SLT 835, 2019 SCLR 379, [2018] PNLR 21, 2018 GWD 24-311�� 5.66, 5.70 Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (Interest on Damages) [1997] 1 WLR 1627, [1998] 1 All ER 305, [1998] Lloyd’s Rep Bank 39, [1998] CLC 116, [1998] 1 Costs LR 108, [1998] PNLR 197, [1998] 1 EGLR 99, [1998] 05 EG 150, (1998) 95(1) LSG 24, (1998) 142 SJLB 29, [1997] NPC 165, (1998) 75 P & CR D28, HL�� 8.152, 9.86, 12.09,12.10

xxxvii

Table of Cases O Oakley Smith v Information Officer [2013] EWHC 2485 (Ch), [2014] Ch 426, [2014] 2 WLR 1067, [2014] 1 All ER 98, [2014] BCC 56, [2013] 2 BCLC 465, [2013] Info TLR 323, Ch D�� 9.124 O’Hare v Coutts & Co [2016] EWHC 2224 (QB)�� 7.06 Okpabi v Royal Dutch Shell Plc [2021] UKSC 3�� 5.66 Orient Power Holdings, Re [2008] HKCU 200�� 10.60 Oropesa, The [1943] P 32, [1943] 1 All ER 211, (1942) 74 Ll L Rep 86, CA�� 8.24 Osborne v Inspector of Taxes [1942] 1 All ER 634�� 8.164 Oswal v Burrup Fertilisers [2013] FCAFC 9�� 10.65 Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] 1 All ER (Comm) 981, [1999] 2 Lloyd’s Rep 273, [1999] CLC 1243, CA�� 13.45 Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co (The Wagon Mound) [1961] AC 388, [1961] 2 WLR 126, [1961] 1 All ER 404, [1961] 1 Lloyd’s Rep 1, 100 ALR 2d 928, 1961 AMC 962, (1961) 105 SJ 85, PC (Aus)�� 8.39 Owen Investments v Bennett Nash Woolf & Co, 30 March 1984, Lexis�� 9.90 P Pacific Acceptance Corp v Forsyth (1970) 92 WN (NSW) 29�� 7.29, 7.35, 7.36, 7.41, 7.46, 7.65, 7.71, 16.11, 16.12, 18.08 Pantelli Associates Ltd v Corporate City Developments Number Two Ltd [2010] EWHC 3189 (TCC), [2011] PNLR 12, QBD�� 18.01 Parabola Investments Ltd v Browallia Cal Ltd (formerly Union Cal Ltd) [2010] EWCA Civ 486, [2011] QB 477, [2010] 3 WLR 1266, [2011] 1 All ER (Comm) 210, [2010] Bus LR 1446, [2011] 1 BCLC 26, [2010] 19 EG 108 (CS), (2010) 107(20) LSG 20, CA�� 9.96 Paragon Finance Plc v DB Thakerar & Co [1999] 1 All ER 400, (1998) 95(35) LSG 36, (1998) 142 SJLB 243, CA�� 12.26 Paramount Acceptance Co v Souster [1981] 2 NZLR 38�� 10.65 Parmalat Capital Finance Ltd v Food Holdings Ltd (In Liquidation) [2008] UKPC 23, [2008] BCC 371, [2009] 1 BCLC 274, [2008] BPIR 64, PC (Cay Isl)�� 10.47 Parvizi v Barclays Bank Plc [2014] EWHC B2 (QB)�� 20.65 Patel v Mirza [2016] UKSC 42, [2017] AC 467, [2016] 3 WLR 399, [2017] 1 All ER 191, [2016] 2 Lloyd’s Rep 300, [2016] Lloyd’s Rep FC 435, 19 ITELR 627, [2016] LLR 731�� 11.04, 11.44 Pavan & Gowshan v Ratnam [1996] NSWSC 571�� 10.03, 10.27, 10.28, 10.32, 10.33 PCP Capital Partners LLP v Barclays Bank Plc [2021] EWHC 307 (Comm)�� 8.149 Peach Publishing Ltd v Slater & Co [1998] BCC 139, [1998] PNLR 364, CA�� 9.17, 9.18, 9.19, 9.20 Pech v Tilgals (1994) 28 ATR 197�� 9.95 Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315, [1983] 3 All ER 193, (1984) 81 LSG 203, (1983) 127 SJ 806, QBD�� 12.26 Peek v Gurney (1873) LR 6 HL 377, [1861-1873] All ER Rep 116, HL�� 9.65, 9.66

xxxviii

Table of Cases Pegasus Management Holdings SCA v Ernst & Young (A Firm) [2010] EWCA Civ 181, [2010] 3 All ER 297, [2010] 2 All ER (Comm) 191, [2010] STC 1461, [2010] PNLR 23, [2010] BTC 398, [2010] STI 1366, CA�� 9.110, 12.08, 12.11, 12.15 Pegasus Management Holdings SCA v Ernst & Young [2012] EWHC 738 (Ch), [2012] 2 BCLC 734, [2012] PNLR 24, [2012] STI 1387, Ch D�� 8.160 Perak Pioneer Ltd, Re (No 2) [1985] HKC 430�� 10.49 Perre v Apand [1999] HCA 36, 198 CLR 180, 64 ALR 606�� 5.57 Perry v Moysey [1998] PNLR 657, QBD�� 12.21 Perry v Raleys Solicitors [2019] UKSC 5, [2020] AC 352, [2019] 2 WLR 636, [2019] 2 All ER 937, [2019] PNLR 17�� 8.148 Peskin v Anderson [2001] BCC 874, [2001] 1 BCLC 372, CA�� 9.121 Pfeiffer (John) Pty Ltd v Canny (1981) 148 CLR 218�� 8.39 Phillips v McGregor-Paterson [2009] EWHC 2385 (Ch), [2010] 1 BCLC 72, [2010] BPIR 239, Ch D�� 16.03 Phillips v Symes (A Bankrupt) (Expert Witnesses: Costs) [2004] EWHC 2330 (Ch), [2005] 1 WLR 2043, [2005] 4 All ER 519, [2005] 2 All ER (Comm) 538, [2005] CP Rep 12, [2005] 2 Costs LR 224, (2005) 83 BMLR 115, (2004) 101(44) LSG 29, (2004) 154 NLJ 1615, Ch D�� 18.35 Pilkington v Wood [1953] Ch 770, [1953] 3 WLR 522, [1953] 2 All ER 810, (1953) 97 SJ 572, Ch D�� 15.18, 15.19, 15.21 Pilmer v Duke [2001] HCA 31, [2001] 2 BCLC 773�� 4.33, 8.164, 9.44, 9.45, 9.46, 9.47, 9.48, 9.70, 9.89, 10.03, 10.28, 14.16 Pirelli General Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1, [1983] 2 WLR 6, [1983] 1 All ER 65, (1983) 265 EG 979, HL�� 12.17 PlanAssure PAC v Gaelic Inns [2007] 4 SLR 513, [2007] SGCA 41�� 7.05, 7.48, 7.52, 14.07, 14.11, 14.34 Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190, [1999] 2 WLR 518, [1999] 1 All ER 833, [1999] CLC 867, (1999) 1 TCLR 18, [1999] PNLR 469, [1999] 1 EGLR 77, [1999] 13 EG 119, [1999] EG 26 (CS), (1999) 96(10) LSG 31, (1999) 149 NLJ 283, (1999) 143 SJLB 65, [1999] NPC 21, HL�� 8.51, 14.04 Playboy Club v Banca Nazaionale del Lavoro [2018] UKSC 43, [2018] 1 WLR 4041, [2019] 2 All ER 478, [2019] 1 All ER (Comm) 693, 179 Con LR 17, [2018] PNLR 35, [2018] LLR 657�� 5.70 Porter v Magill [2001] UKHL 67, [2002] 2 AC 357, [2002] 2 WLR 37, [2002] 1 All ER 465, [2002] HRLR 16, [2002] HLR 16, [2002] BLGR 51, (2001) 151 NLJ 1886, [2001] NPC 184, HL�� 10.42 Portman Building Society v Bevan Ashford [2000] Lloyd’s Rep Bank 96, [2000] Lloyd’s Rep PN 354, [2000] PNLR 344, (2000) 80 P & CR 239, [2000] 1 EGLR 81, [2000] 07 EG 131, [2000] EG 2 (CS), (2000) 79 P & CR D25, CA�� 8.48 Possfund Custodian Trustee Ltd v Diamond [1996] 1 WLR 1351, [1996] 2 BCLC 665, Ch D�� 9.50, 9.65, 9.66 Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] Ch 447, [1985] 3 WLR 812, (1985) 1 BCC 99539, [1986] PCC 105, (1985) 129 SJ 683, CA�� 8.88

xxxix

Table of Cases Preiss v General Dental Council [2001] UKPC 36, [2001] 1 WLR 1926, [2001] IRLR 696, [2001] HRLR 56, [2001] Lloyd’s Rep Med 491, (2001) 98(33) LSG 31, PC�� 19.32 Price Waterhouse v BCCI Holdings (Luxembourg) SA [1992] BCLC 583, Ch D�� 4.07, 17.48, 17.50 Price Waterhouse v Kwan [2000] 3 NZLR 311�� 8.123 PricewaterhouseCoopers v National Potato Co-operative [2015] ZASCA 2�� 4.01, 8.08, 8.34, 9.29, 12.19 Prince Abdulaziz v Apex Global Management Ltd [2014] UKSC 64, [2014] 1 WLR 4495, [2015] 2 All ER 206, [2015] 1 All ER (Comm) 1183, [2015] 1 Costs LO 79, SC�� 17.33 Propell National Valuers (WA) Pty v Australian Executor Trustees [2012] FCAFC 31�� 9.83 Providence Investment Funds PCC Ltd v PricewaterhouseCoopers CI LLP [2020] GRC021 (Guernsey)�� 6.100 Pulsford v Devenish [1903] 2 Ch 625, Ch D�� 9.120, 9.121, 9.122, 9.123 Q Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370, [1966] 2 WLR 1017, [1966] 2 All ER 283, 1 KIR 9, (1966) 110 SJ 214, CA�� 8.113 R R v Da Silva [2006] EWCA Crim 1654, CA�� 20.33 R v GH [2015] UKSC 24, [2015] 1 WLR 2126, [2015] 4 All ER 274, [2015] 2 Cr App R 12, [2015] Lloyd’s Rep FC 387, [2015] Crim LR 637, SC�� 20.31 R v Institute of Chartered Accountants in England and Wales ex p Brindle [1994] BCC 297, CA�� 4.07, 19.09 R v K [2007] EWCA Crim 491, [2007] 1 WLR 2262, [2008] STC 1270, [2007] 2 Cr App R 10, [2007] WTLR 817, [2007] Crim LR 645, [2007] STI 1771, (2007) 151 SJLB 399, CA�� 20.38 R v Panel on Takeovers and Mergers ex p Datafin Plc [1987] QB 815, [1987] 2 WLR 699, [1987] 1 All ER 564, (1987) 3 BCC 10, [1987] BCLC 104, [1987] 1 FTLR 181, (1987) 131 SJ 23, CA�� 19.09 R v Price (Jon) [2008] EWCA Crim 590, (2008) 172 JPN 260, CA�� 20.27 R v Rogers (Bradley David) [2014] EWCA Crim 1680, [2015] 1 WLR 1017, [2014] 2 Cr App R 32, [2014] Lloyd’s Rep FC 638, [2014] Crim LR 910, (2014) 158(32) SJLB 41, CA�� 20.37 R v Rourke (Veronica Patricia) [2008] EWCA Crim 233, CA�� 20.27 R v Shacter (Norman) [1960] 2 QB 252, [1960] 2 WLR 258, [1960] 1 All ER 61, (1960) 44 Cr App R 42, (1960) 124 JP 108, (1960) 104 SJ 90, Ct of Crim Appeal�� 4.12 R (on the application of Baker Tilly UK Audit LLP) v Financial Reporting Council [2015] EWHC 1398 (Admin), [2015] ACD 120, QBD; aff’d [2017] EWCA Civ 406�� 19.37, 19.38, 19.39, 19.42

xl

Table of Cases R (on the application of Prudential Plc) v Special Commissioner of Income Tax [2013] UKSC 1, [2013] 2 AC 185, [2013] 2 WLR 325, [2013] 2 All ER 247, [2013] STC 376, [2013] 2 Costs LR 275, [2013] 1 FCR 545, 82 TC 64, [2013] BTC 45, [2013] CILL 3309, [2013] STI 264, [2013] 5 EG 96 (CS), (2013) 163 NLJ 109, SC�� 1.30, 17.38–17.46, 20.146 Raiffeisen Zentralbank Osterreich AG v Royal Bank of Scotland Plc [2010] EWHC 1392 (Comm), [2011] 1 Lloyd’s Rep 123, [2011] Bus LR D65, QBD�� 13.38, 13.39 Rainy Sky SA v Kookmin Bank [2011] UKSC 50, [2011] 1 WLR 2900, [2012] 1 All ER 1137, [2012] 1 All ER (Comm) 1, [2012] Bus LR 313, [2012] 1 Lloyd’s Rep 34, [2011] 2 CLC 923, [2012] BLR 132, 138 Con LR 1, [2011] CILL 3105, SC�� 13.24 Rakusen v Ellis Munday & Clarke [1912] 1 Ch. 831, CA�� 10.20 Ranson v Customer Systems Plc. See Customer Systems Plc v Ranson Rawlinson and Hunter Trustees SA v Director of the Serious Fraud Office [2015] EWHC 937 (Comm), QBD (see also Tchenguiz v Director of the Serious Fraud Office (Non-Party Disclosure)�� 17.35, 17.52 RBS (Rights Issue Litigation), Re [2015] EWHC 3433 (Ch), Ch D�� 18.06, 18.07 Reeman v Department of Transport [1997] 2 Lloyd’s Rep 648, [1997] PNLR 618, CA�� 5.69 Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360, [1999] 3 WLR 363, [1999] 3 All ER 897, (2000) 51 BMLR 155, [1999] Prison LR 99, (1999) 96(31) LSG 41, (1999) 143 SJLB 213, HL�� 8.25, 11.09, 14.17, 15.09 Resolution Trust Corp v KPMG Peat Marwick 844 F Supp 431 (ND Ill 1994) �� 4.45 Revenue and Customs Commissioners v Begum [2010] EWHC 1799 (Ch), [2011] BPIR 59, Ch D�� 12.32 Riddick v Thames Board Mills [1977] QB 881, [1977] 3 WLR 63, [1977] 3 All ER 677, CA�� 17.35 Ridgeland Properties Ltd v Bristol City Council [2011] EWCA Civ 649, [2011] RVR 232, [2011] JPL 1498, [2011] 23 EG 87 (CS), CA�� 18.36 Rihan v Ernst & Young Global Ltd [2020] EWHC 901 (QB)�� 6.09 Roberts v Gill & Co [2010] UKSC 22, [2011] 1 AC 240, [2010] 2 WLR 1227, [2010] 4 All ER 367, [2010] PNLR 30, [2010] WTLR 1223, (2010) 154(20) SJLB 36, SC�� 12.30 Robinson v Chief Constable of West Yorkshire [2018] UKSC 4, [2018] AC 736, [2018] 2 WLR 595, [2018] 2 All ER 1041, [2018] PIQR P9�� 5.66 Rose v Lynx Express Ltd [2004] EWCA Civ 447, [2004] BCC 714, [2004] 1 BCLC 455, (2004) 101(17) LSG 31, (2004) 148 SJLB 477, CA�� 17.14 Royal Bank of Scotland Plc v Bannerman Johnstone Maclay [2005] CSIH 39, 2005 1 SC 437, 2005 SLT 579, [2006] BCC 148, [2005] PNLR 43, 2005 Rep LR 66, 2005 GWD 17-309, CSIH�� 5.71, 5.80, 6.21, 6.58, 9.50, 13.05, 13.06, 13.07, 13.08, 13.09 Royal Bank of Scotland Plc v Etridge (No 2) [1998] 4 All ER 705, [1998] 2 FLR 843, [1998] 3 FCR 675, (1999) 31 HLR 575, [1998] Fam Law 665, (1998) 95(32) LSG 31, (2001) 151 NLJ 1538, (1998) 148 NLJ 1390, [1998] NPC 130, (1998) 76 P & CR D39, CA�� 8.147

xli

Table of Cases Royal Brompton Hospital NHS Trust v Hammond (No 3) [2002] UKHL 14, [2002] 1 WLR 1397, [2002] 2 All ER 801, [2002] 1 All ER (Comm) 897, [2003] 1 CLC 11, [2002] BLR 255, [2002] TCLR 14, 81 Con LR 1, [2002] PNLR 37, HL�� 14.43 Roylance v General Medical Council (No.2) [2000] 1 AC 311, [1999] 3 WLR 541, [1999] Lloyd’s Rep Med 139, (1999) 47 BMLR 63, (1999) 143 SJLB 183, PC�� 19.31 Rushmer v Mervyn Smith (t/a Mervyn E Smith & Co) [2009] EWHC 94 (QB), [2009] Lloyd’s Rep PN 41, QBD�� 6.09 S Saddington v Colleys Professional Services [1999] Lloyd’s Rep PN 140, [1995] EG 109 (CS), [1995] NPC 105, CA�� 8.147 Said v Butt [1920] 3 KB 497, KBD�� 9.125 Salomon v Salomon & Co Ltd [1897] AC 22, HL�� 8.85 Sansom v Metcalfe Hambleton & Co, 57 Con LR 88, [1998] PNLR 542, [1998] 2 EGLR 103, [1998] 26 EG 154, [1997] EG 185 (CS), (1998) 95(5) LSG 28, (1998) 142 SJLB 45, [1997] NPC 186, CA�� 18.05 Santander UK v RA Legal Solicitors [2014] EWCA Civ 183, [2014] Lloyd’s Rep FC 282, [2014] PNLR 20, [2014] 2 EGLR 73, [2014] WTLR 813, [2014] 2 P & CR DG6, CA�� 16.06 Sarayiah v Royal & Sun Alliance Plc [2018] EWHC 3437 (Ch)�� 17.55 Sasea Finance Ltd (In Liquidation) v KPMG (formerly KPMG Peat Marwick McLintock) (No 1) [1998] BCC 216, Ch D�� 4.14, 4.32, 17.27 Sasea Finance Ltd (In Liquidation) v KPMG (formerly KPMG Peat Marwick McLintock) (No 2) [2000] 1 All ER 676, [2000] BCC 989, [2000] 1 BCLC 236, [2000] Lloyd’s Rep PN 227, CA�� 6.85, 6.105, 7.70, 8.35, 8.61, 8.86, 8.87, 8.98, 8.131 Sasea Finance Ltd (In Liquidation) v KPMG (formerly KPMG Peat Marwick McLintock) (No 3) [2002] BCC 574, Ch D�� 6.87, 8.87 Saunders v Bank of New Zealand [2002] 2 NZLR 270�� 9.38 SBA Properties v Cradock [1967] 1 WLR 716, [1967] 2 All ER 610, [1967] 1 Lloyd’s Rep 526, (1967) 111 SJ 453, Ch D�� 4.10 Scarth v Northland Bank, Manitoba Queen’s Bench, 6 December 1996, Lexis�� 10.60 Schering Agrochemicals Ltd v Resibel NVSA, CA Unreported 26 November 1992�� 8.24 Scott Group v MacFarlane [1978] 1 NZLR 553, CA (NZ)�� 5.19, 5.20, 5.33, 5.58, 5.76, 6.01 Seddon v DVLA [2019] EWCA Civ 14, [2019] 1 WLR 4593, [2019] RTR 32�� 5.75 Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2009] EWHC 2066 (TCC), [2009] BLR 481, 126 Con LR 69, [2010] Lloyd’s Rep IR 490, QBD�� 12.32 Segenhoe Ltd v Atkins [1999] ACSR 691, [2002] Lloyd’s Rep PN 435�� 8.84, 8.88, 8.89, 8.90, 15.19 Selangor United Rubber Estates Ltd v Cradock (No 1) [1967] 1 WLR 1168, [1967] 2 All ER 1255, (1967) 111 SJ 633, Ch D�� 4.10

xlii

Table of Cases Sew Hoy v Coopers & Lybrand [1996] 1 NZLR 392�� 8.117, 8.118, 8.119, 8.120, 8.121, 8.122, 8.123, 8.124, 8.125, 8.126, 8.132, 8.133, 8.137, 8.140, 8.145 Shah v HSBC Private Bank (UK) Ltd [2011] EWCA Civ 1154, [2012] Lloyd’s Rep FC.105, CA�� 17.28, 17.30, 20.65 Shanks v Central Regional Council [1987] SLT 1105 �� 10.65 Sharp v Blank [2019] EWHC 3096 (Ch)�� 8.164 Sheikh Al Nehayan v Kent [2018] EWHC 333 (Comm), [2018] 1 CLC 216�� 4.32A Sheppard & Cooper Ltd v TSB Bank Plc [1996] BCC 653, [1997] 2 BCLC 222, (1996) 93(12) LSG 30, CA�� 10.59 Shire of Frankston and Hastings v Cohen, 102 CLR 607�� 9.28 Siddell v Smith Cooper & Partners [1999] Lloyd’s Rep PN 79, [1999] PNLR 511, CA�� 6.74, 6.77, 6.89, 6.101, 6.104, 6.105, 9.09 Simpson v Harwood Hutton (A Firm) [2008] EWHC 1376 (QB), Ch D�� 10.38, 13.43, 13.44 Singlehurst v Tapscott Steamship Co Ltd [1899] WN 133, CA�� 16.03 Singularis Holdings Ltd (In Liquidation) v Daiwa Capital Markets Europe Ltd [2018] EWCA Civ 84, [2018] 1 WLR 2777, [2018] 4 All ER 204, [2018] 2 All ER (Comm) 975, [2018] Bus LR 1115, [2018] 1 Lloyd’s Rep 472, [2018] 2 BCLC 1, [2018] PNLR 19; affd [2019] UKSC 50, [2020] AC 1189, [2019] 3 WLR 997, [2020] 1 All ER 383, [2020] 1 All ER (Comm) 1, [2019] Bus LR 3086, [2020] 1 Lloyd’s Rep 47, [2020] BCC 89, [2020] Lloyd’s Rep FC 54, [2020] PNLR 5�� 8.19, 11.20, 11.31, 11.34, 11.35, 11.36, 11.40, 11.57, 14.24, 15.12 Singularis Holdings Ltd v PricewaterhouseCoopers [2014] UKPC 36, [2015] AC 1675, [2015] 2 WLR 971, [2015] BCC 66, [2014] 2 BCLC 597, (2014) 158(44) SJLB.37, PC (Bermuda)�� 8.19, 17.28 Sisu Capital Fund Ltd v Tucker (Costs) [2005] EWHC 2321 (Ch), [2006] 1 All ER 167, [2006] BCC 463, [2006] 2 Costs LR 262, [2006] BPIR 154, [2006] FSR 21, (2005) 155 NLJ 1686, Ch D�� 10.43, 10.48, 10.58 Skipton Building Society v Sorsky [2003] EWHC 930 (QB), QBD�� 12.22 Slater & Gordon (UK) 1 Limited v Watchstone Group plc Unreported, 12 July 2019�� 17.55 Slattery v Moore Stephens (A Firm) [2003] EWHC 1869 (Ch), [2003] STC 1379, [2004] PNLR 14, [2003] BTC 483, [2003] STI 1422, Ch D�� 9.109, 14.15 Sliteris v Ljubic [2014] NSWSC 1632�� 10.03, 10.28, 10.32 Smith New Court Securities Ltd v Citibank NA [1997] AC 254, [1996] 3 WLR 1051, [1996] 4 All ER 769, [1997] 1 BCLC 350, [1996] CLC 1958, (1996) 93(46) LSG 28, (1996) 146 NLJ 1722, (1997) 141 SJLB 5, HL�� 8.151 Smith v Eric S Bush (A Firm) [1990] 1 AC 831, [1989] 2 WLR 790, [1989] 2 All ER 514, (1989) 21 HLR 424, 87 LGR 685, [1955-95] PNLR 467, [1989] 18 EG 99, [1989] 17 EG 68, (1990) 9 Tr LR 1, (1989) 153 LG Rev 984, (1989) 139 NLJ 576, (1989) 133 SJ 597, HL�� 5.71, 5.76, 13.35, 13.39 Smith v Secretary of State for Energy and Climate Change [2013] EWCA Civ 1585, [2014] 1 WLR 2283, CA�� 17.11, 17.14

xliii

Table of Cases Societe Commerciale de Reassurance v Eras International Ltd (formerly Eras (UK)) [1992] 2 All ER 82 (Note), [1992] 1 Lloyd’s Rep 570, CA�� 12.19 Solicitor, Re [1972] 1 WLR 869, [1972] 2 All ER 811, (1972) 116 SJ 275, CA�� 19.33 Soltra Pty v Grant (1980) 5 ACLR 10�� 4.16 South Australia Asset Management Corp v York Montague Ltd [1997] AC 191, [1996] 3 WLR 87, [1996] 3 All ER 365, [1996] 5 Bank LR 211, [1996] CLC 1179, 80 BLR 1, 50 Con LR 153, [1996] PNLR 455, [1996] 2 EGLR 93, [1996] 27 EG 125, [1996] EG 107 (CS), (1996) 93(32) LSG 33, (1996) 146 NLJ 956, (1996) 140 SJLB 156, [1996] NPC 100, HL�� 5.02, 6.31, 6.94, 6.97, 6.98, 8.05, 8.17, 8.38, 8.40, 8.41, 8.42, 8.44, 8.48, 8.51, 8.52, 8.53, 8.58, 8.66, 8.152, 8.155, 9.21, 9.23, 9.24, 14.04 Sports Direct International Plc v Financial Reporting Council [2020] EWCA Civ 177, [2020] 2 WLR 1256, [2020] 4 All ER 552�� 17.47 Springwell Navigation Corp v JP Morgan Chase Bank (formerly Chase Manhattan Bank) [2010] EWCA Civ 1221, [2010] 2 CLC 705, CA�� 13.39 Standard Chartered Bank v Pakistan National Shipping Corp (No 2) [2002] UKHL 43, [2003] 1 AC 959, [2002] 3 WLR 1547, [2003] 1 All ER 173, [2002] 2 All ER (Comm) 931, [2003] 1 Lloyd’s Rep 227, [2002] BCC 846, [2003] 1 BCLC 244, [2002] CLC 1330, (2003) 100(1) LSG 26, (2002) 146 SJLB 258, HL�� 14.08 Standard Chartered Bank v Pakistan National Shipping Corp (Reduction of Damages) [2001] QB 167, [2000] 3 WLR 1692, [2000] 2 All ER (Comm) 929, [2000] 2 Lloyd’s Rep 511, [2000] Lloyd’s Rep Bank 342, [2000] CLC 1575, CA�� 15.06, 15.08 Stanford International Bank Ltd (In Receivership), Re [2010] EWCA Civ 137, [2011] Ch 33, [2010] 3 WLR 941, [2010] Bus LR 1270, [2011] BCC 211, [2010] Lloyd’s Rep FC 357, [2010] BPIR 679, CA�� 9.117 Stanilite Pacific v Seaton [2005] NSWCA 301�� 8.90, 9.68 Stanton v Callaghan [2000] QB 75, [1999] 2 WLR 745, [1998] 4 All ER 961, [1999] CPLR 31, [1999] BLR 172, (1999) 1 TCLR 50, 62 Con LR 1, [1999] PNLR 116, [1998] 3 EGLR 165, (1999) 15 Const LJ 50, [1998] EG 115 (CS), (1998) 95(28) LSG 32, (1998) 95(33) LSG 33, (1998) 148 NLJ 1355, (1998) 142 SJLB 220, [1998] NPC 113, CA�� 18.34 Starbev GP Ltd v Interbrew Central European Holding BV [2013] EWHC 4038 (Comm), QBD�� 17.51 State of South Australia v Peat Marwick Mitchell (1997) 24 ACSR 231�� 4.05, 4.40 Stead Hazel & Co v Cooper [1933] 1 KB 840, KBD�� 9.124 Stewart Gill Ltd v Horatio Myer and Co Ltd [1992] QB 600, [1992] 2 WLR 721, [1992] 2 All ER 257, 31 Con LR 1, (1991) 11 Tr LR 86, (1992) 142 NLJ 241, CA�� 13.46 Stewart v Engel (Permission to Amend) [2000] 1 WLR 2268, [2000] 3 All ER 518, [2001] CP Rep 9, [2001] ECDR 25, CA�� 1.19, 9.124, 9.125

xliv

Table of Cases Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39, [2009] 1 AC 1391, [2009] 3 WLR 455, [2009] 4 All ER 431, [2010] 1 All ER (Comm) 125, [2009] Bus LR 1356, [2009] 2 Lloyd’s Rep 537, [2009] 2 BCLC 563, [2009] 2 CLC 121, [2009] Lloyd’s Rep FC 557, [2009] BPIR 1191, [2009] PNLR 36, (2009) 159 NLJ 1218, (2009) 153(31) SJLB 28, HL�� 1.17, 1.26, 4.18, 4.44, 9.34, 11.06, 11.07, 11.08, 11.09, 11.10, 11.11, 11.12, 11.13, 11.22, 11.23, 11.24, 11.25, 11.26, 11.27, 11.28, 11.29, 11.30, 11.31, 11.32, 11.33, 11.34, 11.35, 11.36, 11.37, 11.38, 11.42, 11.43, 11.44, 11.45, 11.46, 11.57, 11.58, 11.67, 11.72, 11.73 Stringer v Peat Marwick Mitchell [2000] 1 NZLR 450�� 9.36, 9.37, 9.38 Sutherland Shire Council v Heyman, 60 ALR 1�� 8.39 Swynson Ltd v Lowick Rose LLP (In Liquidation) (formerly Hurst Morrison Thomson LLP) [2015] EWCA Civ 629, [2016] 1 WLR 1045, [2015] PNLR 28, CA�� 8.160, 9.21 T Taiga Building Products Ltd v Deloitte & Touche LLP [2014] BCSC 1083�� 4.43, 15.04 Tchenguiz v Director of the Serious Fraud Office (Non-Party Disclosure) [2014] EWCA Civ 136, [2014] 4 All ER 627, [2014] 2 All ER (Comm) 571, [2014] 2 BCLC 1, [2014] Lloyd’s Rep FC 502, CA�� 17.51 Tchenguiz v Serious Fraud Office [2014] EWCA Civ 1409�� 17.35 Tchenguiz v Serious Fraud Office [2015] EWHC 266 (Comm)�� 17.35 Temseel Holdings Ltd v Beaumonts Chartered Accountants [2002] EWHC 2642 (Comm), [2003] PNLR 27, QBD�� 6.58, 8.133, 8.140, 8.145 Thai Airways International Public Co Ltd v KI Holdings Co Ltd (formerly Koito Industries Ltd) [2015] EWHC 1250 (Comm), [2016] 1 All ER (Comm) 675, [2015] 1 CLC 765, QBD�� 15.13, 15.15, 15.16 Thornbridge Limited v Barclays Bank plc [2015] EWHC 3430 (QB)�� 13.39 Three Rivers DC v Bank of England (Disclosure) (No 1) [2002] EWCA Civ 1182, [2003] 1 WLR 210, [2002] 4 All ER 881, [2003] CP Rep 9, [2003] CPLR 181, (2002) 99(39) LSG 40, CA�� 17.52 Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1, [2000] 2 WLR 1220, [2000] 3 All ER 1, [2000] Lloyd’s Rep Bank 235, [2000] 3 CMLR 205, [2000] Eu LR 583, (2000) 2 LGLR 769, (2000) 97(23) LSG 41, HL�� 6.56 Three Rivers DC v Bank of England (No 4) [2002] EWCA Civ 1182, [2003] 1 WLR 210, [2002] 4 All ER 881, [2003] CP Rep 9, [2003] CPLR 181, (2002) 99(39) LSG 40�� 17.55 Three Rivers DC v Bank of England (No 5) [2002] EWHC 2730 (Comm)�� 17.36 Three Rivers DC v Bank of England (Disclosure) (No 6) [2004] UKHL 48, [2005] 1 AC 610, [2004] 3 WLR 1274, [2005] 4 All ER 948, (2004) 101(46) LSG 34, (2004) 154 NLJ 1727, (2004) 148 SJLB 1369, HL�� 17.36 TPD Investments Ltd, Re [2016] EWHC 507 (Ch), Ch D�� 17.55

xlv

Table of Cases Titan Europe 2006-3 Plc v Colliers International UK Plc (In Liquidation) [2015] EWCA Civ 1083, [2016] 1 All ER (Comm) 999, [2016] PNLR 7, CA�� 9.77 Tiuta International Ltd (In Liquidation) v De Villiers Chartered Surveyors Ltd [2016] EWCA Civ 661, CA�� 8.06 Tom Hoskins v EMW [2010] ECC 20�� 8.125 Topping Chance Development Ltd v CCIF CPA Ltd [2015] 3 HKC 71�� 12.19 Toth v Jarman [2006] EWCA Civ 1028, [2006] 4 All ER 1276 (Note), [2006] CP Rep 44, [2006] Lloyd’s Rep Med 397, (2006) 91 BMLR 121, CA�� 18.12 Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, CA�� 4.07 Townsend v Roussety & Co [2007] WASCA 40�� 10.03, 10.28, 10.32 Transplanters (Holding Co), Re [1958] 1 WLR 822, [1958] 2 All ER 711, (1958) 102 SJ 547, Ch D�� 4.22 Travelers Insurance Co Ltd v Countrywide Surveyors Ltd [2010] EWHC 2455 (TCC), [2011] 1 All ER (Comm) 631, [2011] Lloyd’s Rep IR 213, [2010] CILL 2947, QBD�� 17.14 Trouw UK Ltd v Mitsui & Co Plc [2007] EWHC 863 (Comm); [2007] UKCLR 921, QBD�� 17.17 Twomax Ltd v Dickinson, McFarlane & Robinson, 1982 SC 113, 1983 SLT 98, CSOH�� 6.01 U UBS AG (London Branch) v Kommunale Wasserwerke Leipzig GmbH [2014] EWHC 3615 (Comm), QBD�� 3.13 Ultramares Corporation v Touche (1931) 255 NY 170, 174 NE 441�� 1.14, 5.18, 5.33 United Bank of Kuwait v Prudential Property Services Ltd [1995] EG 190 (CS), CA�� 18.07 United Project Consultants v Leong Kwok Onn [2005] 4 SLR 214�� 9.97, 11.43 United States v Philip Morris Inc (No 1) [2004] EWCA Civ 330, [2004] 1 CLC 811, (2004) 148 SJLB 388, CA�� 17.48 United States v Wenger (1972) 457 F2d 1082�� 4.39 University of Keele v Price Waterhouse [2004] EWCA Civ 583, [2004] PNLR 43, CA�� 13.25 V Vasiliou v Hajigeorgiou [2005] EWCA Civ 236, [2005] 1 WLR 2195, [2005] 3 All ER 17, [2005] CP Rep 27, (2005) 102(18) LSG 22, [2005] NPC 39, CA�� 18.22 W W (An Infant), Re [1971] AC 682, [1971] 2 WLR 1011, [1971] 2 All ER 49, (1971) 115 SJ 286, HL�� 5.12 Wade v Poppleton & Appleby [2003] EWHC 3159 (Ch), [2004] 1 BCLC 674, [2004] BPIR 642, Ch D�� 10.62 Wagon Mound. See Overseas Tankship (UK) Ltd v Morts Dock & Engineering Co (The Wagon Mound)

xlvi

Table of Cases Walker v Geo H Medlicott & Son [1999] 1 WLR 727, [1999] 1 All ER 685, [1999] 1 FLR 1095, [1999] Lloyd’s Rep PN 20, [1999] PNLR 531, [1999] Fam Law 214, (1999) 96(1) LSG 24, [1998] NPC156, CA�� 15.23 Wallace Smith Trust Co Ltd (In Liquidation) v Deloitte Haskins & Sells [1997] 1 WLR 257, [1996] 4 All ER 403, [1997] BCC 29, CA�� 17.55 Wardley Australia Ltd v State of Western Australia (1992) 175 CLR 514�� 12.06 Waugh v British Railways Board [1980] AC 521, [1979] 3 WLR 150, [1979] 2 All ER 1169, [1979] IRLR 364, (1979) 123 SJ 506, HL�� 17.36, 17.47 Webb Resolutions Ltd v E.Surv Ltd [2012] EWHC 3653 (TCC), [2013] PNLR 15, [2013] 1 EGLR 133, QBD�� 9.77 Wellesley Partners LLP v Withers LLP [2015] EWCA Civ 1146, [2016] Ch 529, [2016] 2 WLR 1351, 163 Con LR 53, [2016] PNLR 19, [2016] CILL 3757, CA�� 8.27 Welsh Development Agency v Redpath Dorman Long Ltd [1994] 1 WLR 1409, [1994] 4 All ER 10, 67 BLR 1, 38 Con LR 106, (1994) 10 Const LJ 325, (1994) 91(21) LSG 42, (1994) 138 SJLB 87, CA�� 12.32 West London Pipeline & Storage Ltd v Total UK Ltd [2008] EWHC 1729 (Comm), [2008] 2 CLC 258, QBD�� 17.48 West v Ian Finlay and Associates [2014] EWCA Civ 316, [2014] BLR 324, 153 Con LR 1, [2014] 2 EGLR 63, [2014] CILL 3507, CA�� 13.19, 13.20, 13.33 West Wiltshire DC v Garland [1995] Ch 297, [1995] 2 WLR 439, [1995] 2 All ER 17, [1995] CLC 149, 93 LGR 235, [1995] RVR 97, (1995) 159 LG Rev 529, (1995) 92(3) LSG 38, (1994) 144 NLJ 1733, (1995) 139 SJLB 18, CA�� 4.01, 4.03, 4.05, 9.28, 9.29 Western Trust & Savings Ltd v Clive Travers & Co [1997] PNLR 295, (1998) 75 P & CR 200, CA�� 15.22 Westminster International BV v Dornoch BV [2009] EWCA Civ 1323, CA�� 17.48 Westminster Road Construction & Engineering Co Ltd, Re (1932) Acct LR 38�� 8.89, 8.94 Westpac Banking Corporation v 789TEN Pty Ltd (2005) 55 ACSR 519�� 4.23 Whessoe Oil and Gas Ltd v Dale [2012] EWHC 1788 (TCC), [2012] PNLR 33, QBD�� 18.01 White v Jones [1995] 2 AC 207, [1995] 2 WLR 187, [1995] 1 All ER 691, [1995] 3 FCR 51, (1995) 145 NLJ 251, (1995) 139 SJLB 83, [1995] NPC 31, HL�� 13.28 Whitehouse v Jordan [1981] 1 WLR 246, [1981] 1 All ER 267, (1981) 125 SJ 167, HL�� 18.10, 18.11 Whiteoak v Walker (1988) 4 BCC 122, Ch D�� 9.71 Williams v Fanshaw Porter & Hazelhurst [2004] EWCA Civ 157, [2004] 1 WLR 3185, [2004] 2 All ER 616, [2004] Lloyd’s Rep IR 800, [2004] PNLR 29, (2004) 101(12) LSG 36, CA�� 12.28 Williams v HCB Solicitors [2017] EWCA Civ 38�� 6.97 Williams v Natural Life Health Foods Ltd [1998] 1 WLR 830, [1998] 2 All ER 577, [1998] BCC 428, [1998] 1 BCLC 689, (1998) 17 Tr LR 152, (1998) 95(21) LSG 37, (1998) 148 NLJ 657, (1998) 142 SJLB 166, HL�� 9.124, 9.125

xlvii

Table of Cases Woodworth v Conroy [1976] QB 884, [1976] 2 WLR 338, [1976] 1 All ER 107, (1975) 119 SJ 810, CA�� 17.04 Worboys v Acme Developments (1969) 4 BLR 133�� 18.05 Wynbergen v Hoyts Corp Pty Ltd (1997) 149 ALJR 25�� 14.26 X X (Minors) v Bedfordshire CC; E (A Minor) v Dorset CC (Appeal) [1995] 2 AC 633, [1995] 3 WLR 152, [1995] 3 All ER 353, [1995] 2 FLR 276, [1995] 3 FCR 337, 94 LGR 313, (1995) 7 Admin LR 705, [1995] ELR 404, [1995] Fam Law 537, (1996) 160 LG Rev 103, (1996) 160 LG Rev 123, (1995) 145 NLJ 993, HL�� 6.55 XL Communications Group Plc (In Liquidation), Re; sub nom Green v BDO Stoy Hayward LLP [2005] EWHC 2413 (Ch), Ch D�� 4.14, 17.27 Y YBM Magnex, Re (2000) 275 AR 352�� 4.41, 10.64 York Gas Ltd (In Creditors’ Voluntary Liquidation), Re [2010] EWHC 2275 (Ch), [2011] BCC 447, Ch D�� 10.48 Yorkshire Enterprise v Robson Rhodes, 17 June 1998, Lexis�� 6.22, 6.34, 6.36, 8.152, 8.153, 8.154 Young v Robson Rhodes (A Firm) [1999] 3 All ER 524, [1999] Lloyd’s Rep PN 641, Ch D�� 10.23 Z Zivadinovich v Mehta (1999) 117 OAC 328�� 10.34

xlviii

Table of Statutes [All references are to paragraph numbers]

C Child Trust Funds Act 2004 s 1(2)�� 20.106 Civil Evidence Act 1972 s 3(1)�� 18.02 Civil Liability (Contribution) Act 1978�� 6.27, 12.34, 13.18 s 1(1)�� 14.37, 14.38, 14.41 s 1(2)�� 14.40 s 1(4)�� 14.39 s 1(6)�� 14.38 s 2(1)�� 14.41, 14.49 s 6(1)�� 14.38 Companies Act 1879�� 2.07 s 10�� 4.11 Companies (Winding–up) Act 1879 s 7�� 4.11 Companies Act 1900 s 23�� 2.07 Companies Act 1907 s 19�� 2.07 Companies Act 1928 s 39, 41�� 2.07 Companies Act 1929 s 130�� 2.07 Companies Act 1948 s 158�� 2.07 s 162�� 7.33 s 167�� 4.21 s 448�� 16.01 Companies Act 1985 s 151�� 6.67, 6.72, 6.73 Pt VII (ss 221–262A)�� 5.40, 5.42 s 221–245�� 5.11 s 227�� 6.44 s 235–246�� 2.07 s 310�� 13.49 s 311�� 12.21 s 394�� 11.49, 11.50 s 394(1), (3)�� 11.18 s 431, 432�� 4.21

Companies Act 1985 – contd s 434�� 4.21 s 709�� 5.11 s 727�� 13.49, 16.01, 16.05, 16.08, 16.09 Companies Act 2006�� 2.22, 4.08, 9.40, 13.02, 13.50 s 2(1)�� 16.04 Pt 15 (ss 380–474)�� 2.02 s 384A�� 2.04 s 393�� 2.05 s 394�� 2.03 s 394A�� 2.03 s 414�� 2.03 s 423�� 2.06 s 430�� 2.06 s 434�� 2.06 s 437�� 2.06 s 459(2)�� 7.07 s 494A�� 2.04 Pt 16 (ss 475–539)�� 2.02, 2.08, 19.48 s 475–481�� 2.08 s 475–539�� 2.08 s 482�� 2.09 s 483�� 2.09 s 485�� 2.10 s 485(3)(c)�� 4.08 s 485A�� 2.11 s 485B�� 2.11 s 487�� 2.10, 4.08 s 487(1C)�� 2.11 s 489�� 2.10 s 489(3)(c)�� 4.08 s 489A�� 2.11 s 489B�� 2.11 s 491�� 2.10, 4.08 s 491(1C)�� 2.11 Pt 16 Ch 3 (ss 495–509)�� 13.06 s 495�� 2.12 s 495(1)�� 4.08

xlix

Table of Statutes D Data Protection Act 1998�� 9.122 Directors Liability Act 1890�� 9.49

Companies Act 2006 – contd s 496�� 2.13 s 497�� 2.13 s 497A�� 2.13 s 498�� 2.14 s 498A�� 2.14 s 499�� 2.15, 2.55 s 501�� 2.15, 2.55 s 502�� 2.16 s 504�� 1.29 s 504(3)�� 1.29 s 507�� 1.24 s 511A�� 2.18 s 513�� 2.17 s 517�� 2.17 s 518�� 2.17 s 519�� 2.17, 11.18, 11.50, 20.140 s 519A�� 2.04 s 520�� 2.17, 11.18, 11.50 s 521�� 2.17 s 521(3)�� 1.24 s 522�� 2.17 s 522(5)�� 1.24 s 532, 533�� 13.51 s 534(1), (3)�� 13.51 s 535�� 13.51 s 536�� 13.51 s 537�� 13.51, 13.52 s 537(1), (3)�� 13.52 s 714�� 9.40 s 830�� 8.83 s 847�� 8.88 s 1157�� 4.08, 4.49, 13.51, 16.01, 16.02, 16.03, 16.04, 16.05, 16.06, 16.07, 16.08, 16.11 s 1173�� 4.17 s 1173(1)�� 4.08 Pt 42 (ss 1209–1264)�� 19.48, 20.21, 20.96 s 1210�� 20.96, 20.134 s 1211�� 2.20 s 1212�� 19.06 s 1214�� 4.17 s 1216�� 1.29 Sch 10�� 2.20, 19.02 Consumer Rights Act 2015�� 13.30 s 62(4)�� 13.33 Criminal Finances Act 2017�� 20.04, 20.67, 20.69, 20.88 Pt 3 (ss 44–52)�� 20.67, 20.68

E Enterprise Act 2002 s 167�� 2.52 European Union (Withdrawal) Act 2018 s 3�� 2.40, 19.43 F Finance Act 2013 s 206–215�� 9.91 Financial Services Act 1986 s 150�� 9.51, 9.54, 9.55, 9.56 s 152(1)�� 9.55 s 152(8)�� 9.55, 9.56 Financial Services Act 2000 s 166, 166A�� 9.39 Financial Services and Markets Act 2000�� 2.54 s 90�� 9.51, 9.54, 9.59 s 90(1)�� 9.53 s 339A�� 2.55 s 339B�� 2.55 Pt XXII (ss 340–346)�� 2.55 s 341�� 2.55 s 342�� 2.55 s 343�� 2.55 Sch 10�� 9.52 I Insolvency Act 1986 s 44�� 9.122 s 212�� 4.09, 4.10, 4.18, 4.19, 4.21, 9.118, 11.17 s 234(3)�� 9.125 s 235�� 4.14 s 236�� 4.14, 17.25, 17.26, 17.26 s 246�� 17.04 s 251�� 4.09 s 351�� 20.80 s 388�� 20.21, 20.96 s 393�� 20.80

l

Table of Statutes L Latent Damage Act 1986�� 12.17 Law Reform (Contributory Negligence) Act 1945�� 14.05, 14.08, 14.09, 14.20, 14.25, 14.28 s 1�� 4.49 s 1(1)�� 14.02, 14.06, 14.27, 14.35, 14.36 s 1(6)�� 14.36 s 4�� 14.09 s 6(1)�� 14.36 Legal Services Act 2007�� 20.117 Limitation Act 1623�� 12.02 s 31�� 12.18 Limitation Act 1980�� 12.01, 12.15 s 2�� 12.04 s 5�� 12.04 s 10(1), (3), (4)�� 12.34 s 14A�� 12.04, 12.17, 12.18, 12.19, 12.20, 12.21, 12.22, 12.23, 13.23, 13.47 s 14A(8)(a)�� 12.23 s 14A(9)�� 12.23 s 14B�� 12.23 s 32�� 12.04, 12.19, 12.24, 12.25 s 32(1)�� 12.26 s 32(1)(a)�� 12.27, 12.28 s 32(1)(b)�� 12.19, 12.27, 12.28 s 32(1)(c)�� 12.26, 12.27 s 32(2)�� 12.28 s 32(5)�� 12.19 s 35(1)–(5)�� 12.29 s 38(9)(a)�� 12.28 Local Audit and Accountability Act 2014 s 4(1)�� 20.96 Sch 5�� 20.21

Proceeds of Crime Act 2002�� 20.02, 20.13, 20.17, 20.19, 20.68, 20.78, 20.80, 20.82, 20.83, 20.84, 20.88, 20.90, 20.94, 20.144 Pt 5 (ss �� 20.67 Pt 7 (ss 327–340)�� 20.19 s 327�� 20.22, 20.26, 20.27, 20.28, 20.37 s 327(1), (3)�� 20.26 s 327–329�� 20.19, 20.20, 20.24, 20.25, 20.36, 20.41 s 328�� 20.22, 20.24, 20.29, 20.30, 20.31, 20.63, 20.138 s 329�� 20.22, 20.32 s 329(2)(c)�� 20.32 s 330�� 20.20, 20.40, 20.45, 20.46, 20.51, 20.52, 20.57, 20.122, 20.123 s 330(5)�� 20.50 s 330(6)�� 17.37 s 330(6)(a)�� 20.53 s 330(7)�� 20.54 s 330(7A)�� 20.52 s 330(8)�� 20.122 s 330(9)�� 20.50 s 330(10)�� 17.37 s 330(14)�� 17.37 s 331�� 20.20, 20.51, 20.57, 20.122, 20.123 s 333A�� 20.20, 20.84 s 333B–33D�� 20.86 s 336A�� 20.58 s 337(1)�� 20.90 s 338�� 20.25, 20.41, 20.66, 20.124 s 338(2A)�� 20.42 s 338(4)�� 20.90 s 339ZB–339ZG�� 20.88 s 340�� 20.23 s 340(2)�� 20.36 s 340(3)�� 20.33, 20.38 s 340(4)�� 20.35 s 340(6)�� 20.38 s 340(9)�� 20.33 s 342�� 20.87 Sch 9�� 20.21

M Misrepresentation Act 1967�� 13.39 s 3�� 13.38 P Partnership Act 1890 s 10�� 9.116 Poor Law Amendment Act 1834�� 9.28

li

Table of Statutes S Senior Courts Act 1981 s 51�� 18.35 Serious Crime Act 2015�� 20.66, 20.124 Pt 1 (ss 1–40)�� 20.124 s 37�� 20.66, 20.124 s 45�� 20.125 Solicitors Act 1974�� 9.33, 9.34, 9.35 s 34�� 9.31, 9.34 s 34(9)�� 9.34 s 35, 36�� 9.31

Unfair Contract Terms Act 1977 – contd s 13�� 13.34, 13.35 s 20�� 13.45 s 21�� 13.45 Sch 2�� 13.32, 13.45, 13.47 Foreign Legislation Australia Companies Act s 365�� 16.11 Corporations Law s 1318�� 16.01, 16.11 Law Reform (Miscellaneous Provisions) Amendment Act 2000 (New South Wales)�� 14.06 South Australian Wrongs Act 1936 s 27A(3)�� 14.06

T Taxes Management Act 1970 s 20�� 17.39 Terrorism Act 2000�� 20.13, 20.77, 20.78, 20.79, 20.84, 20.88, 20.90 s 1�� 20.106 s 15–18�� 20.79 s 21A�� 20.81 s 21B�� 20.90 s 21CA–21CF�� 20.88 s 21D�� 20.84 s 21E–21G�� 20.86 s 39�� 20.87 Theft Act 1968 s 17�� 1.24 Trustee Act 1925 s 61�� 16.06

Hong Kong Companies Ordinance (Cap 32)�� 16.04 s 358�� 16.01 Limitation Ordinance (Hong Kong) Mauritius Companies Act 1984 s 189�� 4.15 New Zealand Companies Act 1955 s 468�� 16.01 Securities Act 1978 s 50�� 9.43 Tax Administration Act 1994 s 20B–20G�� 17.43 Taxation (Base Maintenance and Miscellaneous) Act 2005�� 17.43

U Unfair Contract Terms Act 1977�� 1.12, 12.19, 13.02, 13.11, 13.12, 13.15, 13.20, 13.22, 13.25, 13.30, 13.31, 13.33, 13.34, 13.36, 13.40 s 1(1), (3), (4)�� 13.32 s 2�� 13.32, 13.37, 13.39, 13.40 s 2(1)�� 13.32 s 3�� 13.32, 13.39 s 6(3)�� 13.45 s 7(3), (4)�� 13.45 s 11�� 13.32 s 11(1)�� 13.41 s 11(3)�� 13.42 s 11(4)�� 13.43 s 11(5)�� 13.44

Singapore Companies Act (Cap 50) s 391�� 16.01, 16.11 s 391(1)�� 16.08 Contributory Negligence and Personal Injuries Act s 3(1)�� 14.20 United States of America Foreign Account Tax Compliance Act 2014�� 20.121

lii

Table of Statutory Instruments and Other Guidance [All references are to paragraph numbers]

C Civil Procedure Rules 1998, SI 1998/3132 Pt 3 r 3.4(2)(a)�� 6.5, 6.56 r 3.9�� 18.21 r 3.12–3.18�� 18.04 Pt 7 r 7.2(1)�� 12.16 PD 7A para 5.1�� 12.16 Pt 16 PD 16 para 3.1�� 12.03 Pt 17 r 17.4�� 12.29, 12.32, 12.33 Pt 19 r 19.5�� 12.29, 12.30, 12.31 r 19.5(3)�� 12.30 Pt 24�� 6.6 Pt 31�� 17.01, 17.02 r 31.3(1)(a)–(d)�� 17.33 r 31.4�� 17.29 r 31.5�� 17.34 r 31.5(3), (7)�� 17.34 r 31.6�� 17.12, 17.29, 17.30, 17.31, 17.32, 17.34, 17.35 r 31.7�� 17.32 r 31.7(2)�� 17.32 r 31.7(3)�� 17.33 r 31.8�� 17.31 r 31.8(2)�� 17.31 r 31.10�� 17.33 r 31.11�� 17.35 r 31.12�� 17.56, 17.57 r 31.15(a)�� 17.33 r 31.16�� 17.02, 17.10, 17.11, 17.12, 17.18, 17.24, 17.27

Civil Procedure Rules 1998, SI 1998/3132 – contd Pt 3 – contd r 31.16(3)�� 17.12, 17.13, 17.14 r 31.16(3)(a)�� 17.13, 17.14, 17.20, 17.23 r 31.16(3)(b)�� 17.13, 17.14, 17.20, 17.23 r 31.16(3)(c)�� 17.13, 17.14, 17.15, 17.23 r 31.16(3)(d)�� 17.12, 17.14, 17.16, 17.22, 17.23 r 31.17�� 17.02, 17.19 r 31.17(3)�� 17.53, 17.54 r 31.17(3)(a), (b)�� 17.55 r 31.19(3)�� 17.33 r 31.22�� 17.02, 17.35 r 31.22(1)(b)�� 17.35 r 31.23�� 17.33 PD 31A�� 17.02 para 2�� 17.32 para 4�� 17.33 para 5�� 17.56 PD 31B�� 17.02, 17.32, 17.34 Pt 35�� 17.45, 18.01, 18.02, 18.03, 18.21 r 35.1�� 18.04 r 35.2(1)�� 18.03 r 35.3�� 18.09 r 35.4(1)–(3)�� 18.04 r 35.5(1)�� 18.16 r 35.6�� 18.23 r 35.6(1), (2)�� 18.23 r 35.6(3), (4)�� 18.26 r 35.7�� 18.14 r 35.10�� 18.16, 18.18 r 35.10(2)�� 18.09, 18.18 r 35.10(3)�� 18.18 r 35.10(4)�� 18.19

liii

Table of Statutory Instruments and Other Guidance I Individual Savings Account Regulations 1998, SI 1998/1870�� 20.106 reg 2B�� 20.106 Insolvency (Northern Ireland) Order 1989, SI 1989/2405�� 20.96 International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019, SI 2019/685�� 3.03

Civil Procedure Rules 1998, SI 1998/3132 – contd Pt 35 – contd r 35.12�� 18.27 r 35.12(1)�� 18.27 r 35.12(3)�� 18.28 r 35.12(4)�� 18.27 r 35.12(5)�� 18.29 r 35.13�� 18.21 r 35.14�� 18.31 r 35.14(2), (3)�� 18.31 PD 35�� 18.02 para 2�� 18.09 para 3�� 18.16, 18.17 para 5�� 18.19 para 7�� 18.14 para 9�� 18.27 para 9(4)�� 18.27 para 11�� 18.33 Pt 39�� 17.01 r 39.2(c)�� 17.33 Pt 40 r 40.20�� 20.59 Pt 46�� 17.01 r 46.1(2)�� 17.52 Pt 51 PD51U�� 17.02, 17.34, 17.56 para 5.1�� 17.02 para 18�� 17.56 Pt 78�� 17.01 r 78.26�� 17.33 PD Pre-action Conduct para 4.6�� 17.07 Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012, SI 2012/2301�� 2.08

M Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, SI 2020/991�� 20.11A reg 5�� 20.11A reg 7�� 20.11A Money Laundering and Terrorist Financing (Amendment) Regulations 2019, SI 2019/1511�� 20.12 Money Laundering Regulations 2007, SI 2007/2157�� 20.11 Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692�� 20.02, 20.09, 20.14, 20.20, 20.54, 20.91, 20.92, 20.93, 20.94, 20.95, 20.96, 20.98, 20.101, 20.103, 20.105, 20.107, 20.110, 20.112, 20.113, 20.114, 20.117, 20.118, 20.119, 20.122, 20.143, 20.144 reg 3(1)�� 20.101 reg 4�� 20.101 reg 5�� 20.100 reg 6�� 20.100 reg 8�� 20.06 reg 10(1), (2)�� 20.95 reg 11�� 20.96 reg 11(c)�� 20.97 reg 13�� 20.95 reg 17(9)�� 20.106 reg 18�� 20.18, 20.92

F Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001, SI 2001/2587�� 2.55 Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001, SI 2001/2956 reg 6�� 9.53 reg 6(4)�� 9.53

liv

Table of Statutory Instruments and Other Guidance Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017, SI 2017/692 – contd reg 18(1)�� 20.106 reg 19�� 20.108 reg 27�� 20.98 reg 27(8)�� 20.98, 20.103 reg 28�� 20.99, 20.105 reg 37�� 20.104 reg 47�� 20.106 reg 76(6)�� 20.122 reg 86(2)�� 20.122 Sch 1�� 20.121

Statutory Auditors and Third Country Auditors Regulations 2016, SI 2016/649�� 2.08, 2.18, 2.26, 2.40, 17.47, 19.45 reg 2�� 19.43 Statutory Auditors and Third Country Auditors Regulations 2016, SI 2016/649 – contd Sch 1�� 10.12 para 2�� 3.10, 7.28, 7.49 para 2(b)(ii)�� 7.50 para 4�� 7.07, 7.41 para 9�� 4.06 para 15�� 6.51 Sch 2 para 1�� 17.47 para 1(8)�� 17.47 Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019, SI 2019/177�� 2.08

O Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017, SI 2017/1301�� 20.121 P Partnerships (Accounts) Regulations 2008, SI 2008/569�� 20.134

U Unfair Terms in Consumer Contracts Regulations 1999, SI 1999/2083�� 13.20 reg 5(1)�� 13.33

S Small Companies (Micro-Entities’ Accounts) Regulations 2013, SI 2013/3008�� 2.04

lv

lvi

Part 1

Introductory

2

Chapter 1

Introduction and general principles

INTRODUCTION 1.01 Accountants’ liability, like other apparently specialist areas of the law, is in reality a working out of general legal principles in a specific factual context. There are other texts that deal with the established principles. Our aim in the present work is to focus strongly on the aspects which in practice tend to arise in relation to accountants. This introductory chapter will traverse broad tracts of the legal landscape, pointing out whereabouts in that landscape accountants may find themselves and identifying the areas which will be examined in more detail in later chapters. 1.02 The authors are barristers in England and Wales. This work seeks to state the law in that jurisdiction, but we have sought to take account of significant developments and case law from other common law, especially commonwealth, jurisdictions.

ACCOUNTANTS’ RANGE OF ACTIVITIES 1.03 While the trend for individual professionals has been towards evergreater specialisation, accountancy as a profession has widened its range of activities. The range of legal issues that may arise in connection with accountants and their liabilities is expanding likewise. Obviously an accountant may keep books or prepare accounts. Many accountants act as auditors and it is in this field that accountants have proved themselves (unwilling) pioneers in the law, being party to some of the most important civil litigation in the common law courts. 1.04 Accountants have often given advice as to investment opportunities, general business matters including management consultancy and corporate finance. In all these fields, disputes of many sorts can rise. 1.05 Accountants act as tax agents, submitting returns for individuals and companies. This activity gives rise to numerous claims, but these are mostly too small to result in appellate or reported decisions. Tax advice is a different matter.

3

1.06 Introduction and general principles This can concern massive sums of money and often goes wrong, but the larger claims tend to involve lawyers and, especially, counsel. 1.06 Insolvency office holders are usually drawn from the ranks of the accountancy profession and the largest insolvencies often benefit from the resources of a major firm of accountants. Disputes are naturally legion in this environment, especially concerning conflicts of interest. 1.07 Corporate acquisitions invariably involve accountants preparing due diligence reports for vendors or purchasers or both. Accountants may also be involved in preparing special accounts for the acquisition or completion accounts afterwards. It is not uncommon for purchasers of companies to claim to have relied upon audit reports giving rise to disputes as to whether the auditor owed a relevant duty of care to the purchaser. 1.08 Individual accountants regularly bring their professional skills to bear on roles such as directorships of companies (whether executive or non-executive) and trusteeship. In this capacity, they can incur all the usual liabilities of the holders of such positions and also disciplinary liability as accountants. 1.09 Accountants are often involved in litigation in roles going beyond that of a defendant or another party. Forensic accountants investigate fraud and error and may assist in putting together a legal case or supporting it. This extends to giving expert evidence in court. Similarly, expert evidence may be given by accountants both as to accounting standards where relevant and as to the standard of skill and care to be expected of the profession where that is called into question in a negligence action. Giving expert evidence rarely results in liability, but it can give rise to issues of conflict of interest. Similarly, it is worth noting that accountants sometimes act as arbitrator of the disputes of others and more often as expert in the sense of determining issues, including valuations, under an agreement for expert determination.

CONTRACTUAL LIABILITY 1.10 Where an accountant has a contract with the claimant, the terms of the contract will govern their relationship and will often largely determine the analysis of the claim. An accountant, like anybody else, may be liable for breach of contract. As with other professionals, contracts for the services of an accountant will generally be subject to an implied term that the accountant will use reasonable care and skill in the performance of the contractual services. 1.11 It is now well established that the contractual duty to apply reasonable care and skill is identical to the duty to avoid negligence causing economic loss, and wherever the former applies so will the latter. (Of course, the latter 4

Tortious liability 1.15 may apply in other situations as well.) For claimants, a claim in negligence is sometimes more attractive than the equivalent contractual claim because of more favourable rules as to time bar. However, where there is a contract between the parties, insofar as the contract sets out the scope of the services to be provided and any other relevant terms and conditions, these matters will generally be governed by the contract even where tortious liability is relied upon. 1.12 Contracts with accountants generally incorporate more or less standard terms and conditions drafted on behalf of the accountant. These will often contain express limitations on the accountant’s liability which may be the subject of dispute as to their interpretation and/or compliance with the ‘requirement of reasonableness’ set out in the Unfair Contract Terms Act 1977. These issues are considered below at Chapter 13. The extent to which such contractual limitations can be applied to a tortious liability connected with the contract is a difficult issue which has divided judicial opinion: see paras 13.26–13.29, below.

TORTIOUS LIABILITY 1.13 Sets of accounts are often the best available evidence of the worth and creditworthiness of a legal entity. When they are audited, their evidential value is higher still. In the modern commercial world, where it is common for participants to deal on credit terms with entities of which they can have no first hand knowledge, it is hard to overstate the importance of accounts. Against that background, it should come as no surprise that accountancy cases have frequently been in the vanguard of developments in the law of negligence. 1.14 The classic statement of Cardozo CJ that tortious liability should not be ‘in an indeterminate amount for an indeterminate time to an indeterminate class’ was made in the accountancy case of Ultramares Corporation v Touche in the Court of Appeals of New York in 1931.1 1 (1931) 255 NY 170, 174 NE 441.

1.15 Cardozo CJ’s words were introduced to the English canon in Candler v Crane Christmas & Co,1 which was a case of an accountant who (negligently) prepared the accounts for a target company, gave them to the potential buyer and discussed them with that buyer. The Court of Appeal held by a majority that there was no tortious liability in English law for non-fraudulent misstatement causing financial loss. Denning LJ was invited to give his dissenting judgment first. He set out a manifesto for the expansion of tortious liability from carelessness causing physical damage as in Donoghue v Stevenson2 to negligent statements which cause financial loss.

5

1.16 Introduction and general principles 1 [1951] 2 KB 164. 2 [1932] AC 562.

1.16 Candler v Crane Christmas was followed by the Court of Appeal in a case about a banker’s reference: Hedley Byrne & Co v Heller & Partners.1 In the House of Lords, although the result was the same owing to an express disclaimer in the reference, the course of the law was changed by the unanimous approval of Denning LJ’s dissent in Candler.2 1 [1962] 1 QB 396. 2 [1964] AC 465.

1.17 In 1990, it was another accountancy case, Caparo Industries v Dickman,1 in which the House of Lords established limits on the scope of the new kinds of tortious duties made possible by the decision in Hedley Byrne. Caparo is examined in detail later in this work.2 For present purposes, it suffices to note that it dealt with the question of the purposes for which a statutory audit report could be used within the tortious responsibility of the auditor. Caparo must be one of the most widely cited cases of its era, yet its interpretation divided the House of Lords in yet another accountancy case, Stone & Rolls v Moore Stephens, in 2009.3 The five judgments in that case were reconsidered by a seven-judge constitution of the Supreme Court in 2015 in Bilta v Nazir.4 1 [1990] 2 AC 605. 2 See below at Chapter 5. 3 [2009] 1 AC 1391. 4 [2016] AC 1.

1.18 The extent of accountants’ duties of care in negligence, both as to persons and as to the scope of the damage for which they are responsible, raises difficult issues with which we do our best to wrestle in this book. In short, however, the position is that accountants can owe tortious duties, subject to questions of proximity to the particular claimant and of the particular purpose for which their statements are made and relied upon, and can therefore become subject to tortious liability if those duties are breached. 1.19 Of course, accountants may commit other torts, including in the course of their professional duties,1 but these are not the subject of a great deal of specifically accountancy-related authority and we say far less about them in this volume than the tort of negligence. 1 For an example, see Stewart v Engel [2001] 1 WLR 2268, where an accountant acting as liquidator was arguably liable for the tort of conversion (though the claim could not be pursued for reasons explained in the majority judgments).

6

Criminal liability 1.24

FIDUCIARY AND EQUITABLE LIABILITIES 1.20 A fiduciary relationship arises when one person – the fiduciary – is required in equity to act in the interests of another person – the principal. The relationship is generally limited to particular purposes. Classic examples include the express trustee who is required to act in the interests of the beneficiaries for the purpose of the custody and distribution of certain property and the lawyer who represents his client in litigation. Other professionals, including accountants, are regularly alleged to be fiduciaries and, less frequently, held to be such. 1.21 An accountant will be a fiduciary where he acts as trustee or holds client money. Fiduciary obligations may well also arise when advice is given, since that advice must be given not just competently, but also in the interests of the advisee, not the adviser. Insofar as an accountant does act as fiduciary, he will be obliged to act in good faith for the interests of the principal, without permitting there to arise secret profits or conflicting interests, unless the principal first gives fully informed consent. A clear example of this principle is that an accountant may not advise a client to invest in a project in which the accountant has a personal interest unless the client is fully informed of the accountant’s own interest, a test which is much easier to state than it is to satisfy in practice. 1.22 Conflicts of interest are a fruitful area for potential liability and they are considered below in Chapter 10, ‘Conflicts of interest and confidential information’. They are most often of concern to accountants in the course of their work as insolvency practitioners, but crop up elsewhere as well. The question whether auditing gives rise to fiduciary obligations is addressed at paras 4.27–4.46. 1.23 Other forms of equitable liability can arise for accountants. Thus, a dishonest accountant, like any dishonest party, may find he is liable to account in equity, including as constructive trustee, for his ill-gotten gains. Similarly, equitable causes of action such as dishonest assistance in a breach of trust or fiduciary duty, or knowing receipt of trust property, may be alleged against accountants. Detailed treatment of these causes of action is not within the scope of the present work.

CRIMINAL LIABILITY 1.24 Like anybody else, accountants may break the criminal law. It is fair to say that there are some offences that accountants may be more likely to commit than other people: false accounting contrary to s 17 of the Theft Act 1968 springs to mind; Companies Act 2006, s 507 has created offences of 7

1.25 Introduction and general principles knowingly or recklessly falsifying an audit report, or causing that report to omit certain required statements; and only an auditor can commit the offences under s 521(3) and s 522(5) of the Companies Act 2006 of failing to notify the Registrar of Companies and the appropriate audit authority of the circumstances of the auditor’s cessation of office. However, criminal liability is generally outside the scope of this work.

DISCIPLINARY LIABILITY 1.25 Accountants are generally members of a professional body (though they do not have to be) and such bodies have contractual jurisdiction to discipline their members for a variety of disciplinary breaches. In addition, the accountants’ professional bodies are ‘Participants’ in the Financial Reporting Council’s Accountancy Scheme which has disciplinary jurisdiction over matters which raise ‘important issues affecting the public interest in the United Kingdom’. In practice, this tends to mean cases where an accountant’s misconduct may have contributed to a high-profile corporate failure. Disciplinary schemes are discussed below at Chapter 19, ‘Disciplinary regimes’.

CAUSATION, REMOTENESS AND ASSESSMENT OF LOSS 1.26 Claims against accountants regularly raise difficult issues relating to the scope of losses that are properly recoverable. These issues may be couched in the language of scope of duty, causation, reliance, remoteness or assessment of loss. It is not always easy to distinguish between these concepts as they apply in accountancy claims. In Stone & Rolls v Moore Stephens, Lord Phillips of Worth Matravers said: ‘I have had difficulty in this case in distinguishing between questions of duty, breach and actionable damage and, indeed, it is questionable whether it is sensible to attempt to distinguish between them.’1 These issues are explored in particular in Chapter 8, ‘Scope of an auditor’s duty – for what losses is the auditor liable?’, but of course they can be, and often are, raised in any claim. 1 [2009] 1 AC 1391, 1468G, [81].

EMPLOYMENT, THE INDIVIDUAL ACCOUNTANT AND THE FIRM 1.27 Many accountants are employed in business where the main activity is not accounting. They will owe to their employers all the usual duties of an employee in contract and in equity, including the implied term of trust and confidence and good faith and fidelity. Directors are normally fiduciaries and 8

Privilege 1.30 other employees may also owe fiduciary duties. Cases of accounting fraud often involve the breach of such duties, but they rarely give rise to legal issues specific to accountants and for that reason are not covered in detail in this volume. 1.28 On some occasions, an individual accountant in private practice will be pursued in relation to personal liability for his or her conduct. However, for the most part the profession is carried on by accountants in partnership trading under the name of a firm. Most claims are accordingly made against a firm. In the vast majority of cases, this does not cause difficulty. However, in principle issues can arise from this dichotomy, such as the scope of the vicarious liability of the firm for the conduct of individual partners, which the House of Lords discussed in a solicitors’ case in Dubai Aluminium v Salaam.1 1 [2003] 2 AC 366.

1.29 A striking example of the distinction between the accountant and his firm is found at Companies Act 2006, s 504, which requires an audit report to be signed by the ‘senior statutory auditor’ in relation to that audit,1 in his own name for and on behalf of the audit firm. This contrasts with the former practice whereby an auditor would generally sign with the name of the firm.2 Section 504(3) clarifies that this requirement does not subject the senior statutory auditor to any civil liability which he would not otherwise have. 1 The ‘senior statutory auditor’ is the designated engagement partner: see Auditing Practices Board Bulletin 2008/6 April 2008. That is to say, (s)he is the partner who ‘takes responsibility’ for the audit as set out in IAS 220. 2 In relation to the statutory audit, specific provision is made for the continuation of appointment upon partnership changes: see Companies Act 2006, s 1216.

PRIVILEGE 1.30 Finally, we mention here the case of R (on the application of Prudential plc) v Special Commissioner of Income Tax (ICAEW and others intervening)1 in which the Supreme Court decided that legal advice privilege would not be extended to accountants even where they were giving legal advice, including as to taxation law. The decision of the majority is based on essentially pragmatic reasons: it was thought that it was just too difficult to demarcate the boundaries of privilege if they were allowed to stray from the clear line enclosing only professional lawyers. Accountants may prefer the principled approach found in the strong dissenting judgment of Lord Sumption. But unless Parliament finds time to review the issue, it must now be regarded as closed, at least in England. We consider it further at Chapter 17, ‘Disclosure’. 1 [2013] 2 AC 185.

9

10

Part 2

Auditing

12

Chapter 2

The legal framework of auditing

INTRODUCTION 2.01 A chapter on the legal framework of auditing may look like dull fare. However, it should be recalled that the statutory framework was at the heart of the reasoning of the appellate courts in Caparo.1 Its proper appreciation was held to be essential in order to ascertain the purpose for which the audit report was made and thus the types of loss for which a statutory auditor could be liable to shareholders. At the time of writing, the transition period in relation to the exit of the UK from the European Union has ended on 31 December 2020. We have endeavoured to state the law as it stood immediately afterwards. 1 Caparo Industries Plc v Dickman and Others [1990] 2 AC 605.

2.02 The requirement on a company to produce and file accounts is set out in Pt 15 of the Companies Act 2006 (‘the Act’) and the requirement for them to be audited is the subject of Pt 16. These are the primary sources of the law on these matters and their central provisions are summarised in this chapter. Although many of these statutory provisions have long roots in the law of England and Wales, they were also the means by which relevant European Union law was implemented in the United Kingdom between 1972 and 2020. Nearly all of the statutory provisions described below have been influenced by this role, whether or not they also reflect historic English law. Should any issue of statutory construction arise, it may be necessary to consider the relevant European instruments in addition to the English legislative history. The key European measures are therefore also summarised below.

THE STATUTORY REQUIREMENT TO PREPARE ACCOUNTS 2.03 The requirement to prepare accounts is contained in s 394 of the Act and it applies to each company for each financial year, save for those which are exempt under s 394A. The exemption is for any unquoted dormant subsidiary whose parent company has given a guarantee of all the subsidiary’s liabilities. Accounts must be approved by the board and signed by a director (s 414).

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2.04 The legal framework of auditing 2.04 The Act contains detailed requirements as to the form of accounts which vary depending whether the company: ●●

is a ‘public interest entity’, meaning that its securities are admitted to trading on a UK regulated market and/or a credit institution and/or an insurance undertaking;1

●●

is subject to the small companies regime or not so subject;

●●

qualifies as a micro-entity;2

●●

is private or public;

●●

is quoted or unquoted;

●●

is part of a group; and/or

●●

chooses to adopt International Accounting Standards.

Most of these requirements are not considered further in this work. 1 For the definition, see Companies Act 2006, s 494A, and see also s 519A where ‘public interest company’ is similarly defined. 2 See Companies Act 2006, s 384A and other changes introduced by the Small Companies (Micro-Entities’ Accounts) Regulations 2013, SI 2013/3008, which sought to implement EU Directive 2012/6/EU (the ‘Micros Directive’).

2.05 All UK company accounts are required to ‘give a true and fair view of the assets, liabilities, financial position and profit or loss’ of the company or group concerned. Section 393 prohibits a director from approving accounts which do not meet this requirement and requires an auditor to have regard to that duty of the directors. 2.06 Accounts, together with associated reports, must be sent to every member of a company, every holder of debentures and every person entitled to receive notice of a general meeting (s 423), laid before a general meeting of the company (s 437) and delivered to the Registrar of Companies (s 441). The provision for delivery to the Registrar means in effect that company accounts, together with the associated audit report, are generally available to any member of the public. Quoted companies must also ensure that their latest accounts are available on a website (s 430). Published accounts must include the audit report (s 434).

THE STATUTORY REQUIREMENT FOR AUDIT – COMPANIES ACT 2006 2.07 The historical roots of the audit requirement run very deep indeed.1 However, for practical purposes, the main statutory developments up to 1990 were summarised by Lord Oliver of Aylmerton in Caparo at 630G to 631D: 14

The statutory requirement for audit – Companies Act 2006 2.08 ‘The requirement of the appointment of auditors and annual audit of the accounts, now contained in sections 235 to 246 of the Companies Act 1985, was first introduced by the Companies Act 1879 (25 & 26 Vict c 76) in relation to companies carrying on the business of banking and was extended to companies generally by the Companies Act 1900. Section 23 of that Act required the auditors to make a report to the shareholders on the company’s balance sheet laid before the company in general meeting, stating whether the balance sheet exhibited a true and correct view of the state of the company’s affairs. By the same section, the report was required to be read before the company in general meeting. Section 19 of the Companies Act 1907 substituted a new section 23 which, whilst repeating the requirement that the auditors’ report should be read before the company in general meeting, added a requirement that it should be open to inspection by any shareholder, who was entitled, on payment of the fee, to be furnished with a copy of the balance sheet and report. The new section also made it an offence for any officer of the company to be party to issuing, circulating or publishing any copy of the balance sheet which did not either append or contain a reference to the auditors’ report. The matter was carried one stage further by section 130 of the Companies Act 1929 (consolidating provisions contained in sections 39 and 41 of the Companies Act 1928) which required the annual balance sheet and auditors’ report of a public company to be sent not less than seven days before the date of the meeting to every member of the company entitled to receive notice of the meeting and entitled any member of the company and any debenture holder to be furnished on demand and without charge with a copy of the last balance sheet and the auditors’ report. Finally, for relevant purposes, section 158 of the Companies Act 1948 required the accounts and report to be sent to every member of the company and to every debenture holder not less than 21 days before the general meeting before which the accounts are to be laid.’ 1 ‘As is well known, the audit dates in Britain from at least medieval times, when the auditor on landed estates literally heard the accounts read out and checked on the lord’s behalf that his steward had not been negligent or fraudulent.’: Derek Matthews, A History of Auditing (Routledge, 2006), Ch 2.

2.08 The core provisions of English law regarding corporate audit are now contained in the Companies Act 2006 at Pt 16, ‘Audit’, which runs from s 475 to s 539. They are summarised here as they stood at 1 January 2021, including the changes made by the Companies and Limited Liability Partnerships (Accounts and Audit Exemptions and Change of Accounting Framework) Regulations 2012, SI 2012/2301 and by the Statutory Auditors and Third Country Auditors Regulations 2016, SI 2016/649 (SATCAR), which implemented the requirements of Regulation (EU) No 537/2014 in relation to 15

2.09 The legal framework of auditing the audit of public interest entities and by the primary and secondary legislation implementing changes with effect from the end of the EU Exit transition period on 31 December 2020, including the Statutory Auditors and Third Country Auditors (Amendment) (EU Exit) Regulations 2019, SI 2019/177. 2.09 The audit requirement applies to all companies, other than those which are: (i)

small companies as defined in the Companies Act;

(ii) subsidiaries of another company (in the United Kingdom) where the parent guarantees the liabilities of the subsidiary; or (iii) dormant. Sections 475 to 481 of the Act contain relevant definitions, exceptions and other provisions about the exemptions from the audit requirement.1 1 Further, more minor, exceptions are specified at ss 482 and 483.

2.10 A private company’s directors (or the members, in default of action by the directors) are required to appoint auditors within a period of 28 days after the accounts for the previous year are (or should have been, if they are late) sent out (s 485). After that date, any audit appointment made by the directors for the previous year automatically terminates (s 487). In a public company, the appointment must generally be made by members in the general meeting that considers the accounts (s 489) (in practice, the annual general meeting), and is valid only until the next accounts meeting (s 491). 2.11 In the case of a public interest entity, whether it is a private or a public company (but with an exception for small- or medium-sized enterprises), the audit committee must make a recommendation to the directors for the appointment of an auditor, having carried out in the previous ten years a selection process in the form required by Regulation (EU) 537/2014 (ss 485A, 489A). If the entity has no audit committee, then the directors must themselves carry out the selection process at least every ten years (ss 485B, 489B). These provisions for auditor rotation are subject to transitional provisions, which are set out in the relevant sections. Subject to those provisions, the maximum continuous term for which any auditor of a public interest entity may serve is 20 years (ss 487(1C), 491(1C)). 2.12 Section 495 sets out the content of the auditor’s report including a statement of opinion whether the accounts give a true and fair view, and whether they have been properly prepared in accordance with the relevant financial reporting framework and the requirements of the Companies Act. The audit report must also include a description of the scope of the audit identifying the audit standards in accordance with which the audit was conducted. 16

The statutory requirement for audit – Companies Act 2006 2.17 The auditor’s report must be either unqualified or qualified and must include reference to any matters to which the auditor wishes to draw attention by way of emphasis. 2.13 In recent times, the auditor’s work qua auditor has been expanded well beyond the report on the accounts themselves. Section 496 requires a statement from the auditor whether in his opinion the information given in the strategic report and directors’ report is consistent with the accounts. For a quoted company, the auditor must report on the auditable part of the directors’ remuneration report (s 497). Where a corporate governance statement is prepared, the auditor must state his opinion whether it is consistent with the accounts (s 497A). 2.14 Other matters must be reported by exception, such as if the auditor is of the opinion that adequate accounting records have not been kept or the auditor has not obtained all the information and explanations which he believes necessary for his audit (s 498), or if a corporate governance statement was required but not prepared (s 498A). 2.15 A company auditor has the statutory right (under s 499) to access at all times to the company’s books accounts and vouchers and may require any officer, employee or subsidiary of the company to provide him with such information and explanations as he thinks necessary, on pain of criminal liability under s 501. 2.16 The auditor also has the right to receive all information concerning general meetings and resolutions and to attend all general meetings and speak on any business that concerns him as auditor (s 502). 2.17 Provisions regarding the cessation of an audit appointment are designed to ensure that an auditor, who may have discovered matters which the company or some of its organs might prefer to keep hidden, cannot be silenced by being removed from office or being forced to resign. When an auditor ceases to hold office, he is required to make a written statement of the circumstances connected with his ceasing to hold office, or a statement that there are no such circumstances (s 519). This statement must be deposited by the auditor at the company’s registered office; the company must send it to all members (s 520); and the auditor must send it to the Registrar of Companies (s 521). If the auditor has resigned, then the company is obliged to deposit the notice of resignation with the Registrar (s 517) and the auditor has the right to require a general meeting to be convened to discuss the resignation (s 518). Even if the auditor is removed by resolution of the members, the right to speak at the meeting at which his term of office would otherwise have expired is maintained (s 513). Where the resignation is mid-term, or relates to the audit of a quoted company, the leaving statement must also be sent by the auditor to ‘the appropriate audit

17

2.18 The legal framework of auditing authority’ (s 522) which means either the Financial Reporting Council, which is expected to be replaced by the Audit Reporting and Governance Authority (ARGA), or the recognised supervisory body to which the auditor belongs (eg the Institute of Chartered Accountants in England and Wales). 2.18 An auditor of a public interest entity may be removed by order of the Court upon the application of either the competent authority (the Financial Reporting Council) or at least five per cent of members of the company (s 511A). This provision was added by SATCAR and is untested. It may be that such an application could be made, for example, if a minority group of shareholders took the view that the auditor was affected by a conflict of interest which the directors did not consider to be a concern. 2.19 Auditors are restricted by statute as to the manner and form of any limit upon their liability for audit work. This is considered in more detail below at 13.49–13.52. 2.20 The Companies Act also controls who may be appointed an auditor and provides for compulsory regulation of statutory auditors. Section 1211 restricts eligibility for appointment as auditor to members of a recognised supervisory body who are eligible under the rules of that body. Schedule 10 sets out the essential matters that a recognised supervisory body (in turn supervised by the Financial Reporting Council as ‘competent authority’) has to ensure, including auditor qualifications, integrity and independence. There are more stringent standards of independence laid down for the audit of public interest entities. Schedule 10 also contains a requirement that the recognised supervisory body promulgates technical standards to be applied in statutory audit work and that it must monitor performance of audits by inspections and have a disciplinary regime and arrangements for the investigation of complaints. The body must ensure its members maintain adequate insurance or are otherwise able to meet claims arising out of statutory audit work.

EUROPEAN LEGISLATION ON ACCOUNTS AND AUDIT The Accounting Directive 2.21 The Accounting Directive, 2013/34/EU, replaced the earlier accounting directives (78/660/EEC and 83/349/EEC) and incorporated the Micro-entity Directive (2012/6/EU).1 It was intended to reduce and limit the information to be provided by smaller companies after many years of gradual increases to reporting requirements. Implementation was required to be completed in all Member States by 20 July 2015. 1 Banks and insurance companies have their own European directives additional to the main Accounting Directive.

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European legislation on accounts and audit 2.28 2.22 The Accounting Directive sets out (at art 3) the categories of small and medium sized undertakings and groups that also feature in the Companies Act 2006 (and earlier English legislation). It also provides (at art 36) for exemptions for micro-undertakings. 2.23 Article 4 requires that financial statements must be drawn up in accordance with the Directive and must ‘give a true and fair view of the undertaking’s assets, liabilities, financial position and profit or loss’, even where that requires derogation from other provisions of the Directive. Fundamental accounting principles are set out at arts 6 to 8. Accounts formats are prescribed at arts 9 to 14. Details are given of the disclosures and additional reports required at arts 15 to 20 and of group accounting at arts 21 to 29. 2.24 The basic requirement that accounts be audited (save for small undertakings) is at art 34. 2.25 Article 30 requires that undertakings should publish their annual financial statements together with the audit report, though exemptions are permitted for small- and medium-sized undertakings (art 31).

The 8th Company Law Directive on the statutory audit 2.26 The principal source of European law on the detail of the audit requirement is the 8th Company Law Directive, 2006/43/EC, as amended by Directive 2008/30/EC (the Accounting Directive) and Directive 2014/56/EU. The changes introduced by Directive 2014/56/EU take effect as from 17 June 2016, by which date relevant laws are required to be in force in each Member State. In the UK, the principal implementing measure is SATCAR. 2.27 The 8th Company Law Directive requires that Member States designate a competent authority to approve auditors and audit firms and sets out minimum requirements for approval (art 3), including ‘good repute’ (art 4). The Directive prescribes no fewer than 19 subject topics that have to be included in the examinations for an audit qualification (art 8) and also requires practical training (art 10) and continuing professional education (art 13). Confidentiality of audit information must be protected, subject to exceptions for incoming auditors or auditors of undertakings in the same group (art 23). The internal organisation of audit firms is subject to the numerous requirements of art 24a, including such matters as a quality control system, arrangements to ensure continuity and regularity and remuneration policies. 2.28 The Directive requires Member States to impose independent systems of quality assurance, investigation and sanctions and public oversight on auditors, which are prescribed in detail at arts 29 to 36.

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2.29 The legal framework of auditing 2.29 The basic rules for appointment and dismissal of auditors are at arts 37 and 38 of the Directive, which require that appointment should be by the members of the entity and independent from the management and that any dismissal must be for proper reasons and notified to the relevant oversight bodies. 2.30 Public-interest entities (broadly, quoted companies, banks and insurance companies) are generally required to have an audit committee with a majority of members being independent of the entity itself (art 39). 2.31 Each audit must be allocated to ‘at least one key audit partner’, who is required to be ‘actively involved in the carrying-out of the statutory audit’ (art 24b). Files must be kept for each audit, client accounts and any complaints. 2.32 Article 26 obliges Member States to ensure that auditors comply with international audit standards insofar as these have been adopted by the European Commission. In practice, substantially all international audit standards are adopted. The content of the audit report is largely prescribed by art 28. 2.33 Article 21 of the Directive is entitled ‘Professional ethics and scepticism’. It provides at para 1: ‘Member States shall ensure that all statutory auditors and audit firms are subject to principles of professional ethics, covering at least their public-interest function, their integrity and objectivity and their professional competence and due care.’ 2.34 At art 21(2), as amended by Directive 2014/56/EU, it is provided that: ‘Member States shall ensure that, when the statutory auditor or the audit firm carries out the statutory audit, he, she or it maintains professional scepticism throughout the audit, recognising the possibility of a material misstatement due to facts or behaviour indicating irregularities, including fraud or error, notwithstanding the statutory auditor’s or the audit firm’s past experience of the honesty and integrity of the audited entity’s management and of the persons charged with its governance. The statutory auditor or the audit firm shall maintain professional scepticism in particular when reviewing management estimates relating to fair values, the impairment of assets, provisions, and future cash flow relevant to the entity’s ability to continue as a going concern. For the purposes of this Article, “professional scepticism” means an attitude that includes a questioning mind, being alert to conditions

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European legislation on accounts and audit 2.39 which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.’ 2.35 Article 22(1) requires that auditors are independent of the audited entity and not subject to any conflicts of interest. The prohibition on conflicts of interest is broader than would be required by the common law, in particular because it includes ‘where appropriate’ the audit firm’s ‘network’, its employees, and ‘any person directly or indirectly linked to the statutory auditor or the audit firm by control’. The intention here is presumably to prohibit connected or networked professional services firms from cross-selling services wherever such services might create a conflict of interest for the auditor if they were carried out by the same entity. 2.36 Article 22(1) further provides that: ‘The statutory auditor or the audit firm shall not carry out a statutory audit if there is any threat of self-review, self-interest, advocacy, familiarity or intimidation created by financial, personal, business, employment or other relationships between: —

the statutory auditor, the audit firm, its network, and any natural person in a position to influence the outcome of the statutory audit, and

—

the audited entity,

as a result of which an objective, reasonable and informed third party, taking into account the safeguards applied, would conclude that the statutory auditor’s or the audit firm’s independence is compromised.’ 2.37 The consequences of these general principles are spelled out in subsequent paragraphs of art 22, which also deals with conflict of interest procedures on a merger of audit firms. In the UK, these provisions are implemented through the rules of the professional bodies which supervise auditors. 2.38 Long standing concerns about the independence of auditors are further addressed by articles added in 2014. Article 22a imposes a one-year moratorium on the audit partner accepting a management position or nonexecutive directorship in the audited entity. Article 22b makes it obligatory for auditors to consider and document their compliance with art 22, the safeguards undertaken to mitigate any threats to independence and the availability of sufficient staff and other resources to carry out the statutory audit in an appropriate manner. 2.39 Independence also lies behind art 25, which requires that rules be in place to ensure that audit fees are not influenced by the provision of non-audit services or based on any form of contingency. 21

2.40 The legal framework of auditing

The Regulation on the audit of public-interest entities 2.40 Public-interest entities1 and their auditors are also subject to Regulation (EU) No 537/2014, which applied from 17 June 2016 (art 44). From that date, significantly stricter requirements intended to ensure auditor independence applied to auditors of public-interest entities. Although the Regulation is directly applicable throughout the European Union and the European Economic Area, it contains several options for Member States to derogate from certain requirements. It was applied in England and Wales in accordance with SATCAR. It will remain applicable in the UK as ‘retained EU law’ under the European Union (Withdrawal) Act 2018, s 3. 1 Public-interest entities are, broadly, listed companies, credit institutions (eg banks and building societies) and insurance companies. The definition is at art 2(13) of the 8th Company Law Directive.

2.41 Regulation (EU) No 537/2014 was part of the EU’s response to the financial crisis of 2008, taking as its premise that fully independent and rigorous audit of systemically important entities is a vital public good, not just a protection for shareholders. As it is put in Recital 1 to the Regulation: ‘Statutory auditors and audit firms are entrusted by law to conduct statutory audits of public-interest entities with a view to enhancing the degree of confidence of the public in the annual and consolidated financial statements of such entities. The public-interest function of statutory audit means that a broad community of people and institutions rely on the quality of a statutory auditor’s or an audit firm’s work. Good audit quality contributes to the orderly functioning of markets by enhancing the integrity and efficiency of financial statements. Thus, statutory auditors fulfil a particularly important societal role.’ 2.42 Any audit firm that carries out statutory audits of public-interest entities will be required to publish on its website a ‘transparency report’ describing the audit firm, listing its public-interest entity clients and giving detailed information about the firm’s revenues, partner remuneration, training policies, partner rotation policies, etc (art 13). 2.43 Under the Regulation, at art 4, audit fees must not be contingent and non-audit fees from a public-interest entity may not exceed 70 per cent of the audit fee from that entity. If fees from a public-interest entity exceed 15 per cent of the audit firm’s total fees, then the audit firm’s independence must be reviewed by the firm and by the entity’s audit committee. 2.44 An audit firm is prohibited from providing a wide range of non-audit services from the start of the period audited to the issuing of the audit report (art 5). 22

European legislation on accounts and audit 2.51 The categories of work prohibited may be widened or narrowed in certain respects by individual Member States. 2.45 Before accepting or continuing an audit engagement with a publicinterest entity, an audit firm must document its compliance with arts 4, 5 and 17 and submit a statement of its independence to the entity’s audit committee (art 6). 2.46 Before issuing any audit report, the audit firm must ensure that there is an engagement quality control review performed by a qualified auditor other than the audit partner (art 8). 2.47 Audit reports for public-interest entities are more extensive under the Regulation than under previous English law. Under art 10, the audit report must describe the most significant risks of material misstatement (including those due to fraud), a summary of the auditor’s response to those risks and key observations arising with respect to those risks. The report must also ‘explain to what extent the statutory audit was considered capable of detecting irregularity, including fraud’ and include various declarations as to independence-related issues including any non-audit services provided and dates of appointment and renewal of appointment. 2.48 An additional audit report is required to be made to the entity’s audit committee (art 11). This is required to include matters like deficiencies in the entity’s controls and suspicion of non-compliance with law, regulation or articles of association. It must also contain details on the audit process itself, including, for example: ‘which categories of the balance sheet have been directly verified and which categories have been verified based on system and compliance testing, including an explanation of any substantial variation in the weighting of system and compliance testing when compared to the previous year’. 2.49 Specific whistle-blowing duties in favour of regulators are included at art 12 in cases of material breach of law or regulation, doubt as to going concern or any qualification to the audit report. 2.50 The appointment process is regulated by arts 16 and 17. There is to be a maximum term for which auditors may be reappointed, which is to be ten years in default of certain permitted derogations at individual Member State level. The UK applied the maximum derogation to permit an engagement to be extended up to 20 years, subject to re-tendering after ten years. Individual audit partners may not remain involved for more than seven years. 2.51 Member States are required to ensure that competent authorities have a range of powers to supervise and regulate the audit of public-interest entities (arts 20 to 25), and to establish a system of quality assurance inspections (art 26) 23

2.52 The legal framework of auditing and monitoring of market quality and competition (art 27). Provision is also made for the national competent authorities to co-operate and share information.

COMPETITION AND MARKETS AUTHORITY ORDER 2.52 By s 167 of the Enterprise Act 2002, any person to whom an ‘enforcement order’ applies has a duty to comply with it. Such an order has been made in respect of statutory audits of large companies, namely the Statutory Audit Services for Large Companies Market Investigation (Mandatory Use of Competitive Tender Processes and Audit Committee Responsibilities) Order 2014 issued by the Competition and Markets Authority. 2.53 The Order applies to FTSE 350 companies. It requires them to undertake a competitive tendering process for their statutory audit at least every ten years, reflecting arts 16 and 17 of Regulation (EU) No 537/2014. However, where a tender has not been carried out for five years, the company must state the year when it proposes to complete a tender process and the reasons why that timetable is in the bests interests of the company’s members.

FINANCIAL SERVICES AND MARKETS ACT 2000 2.54 The Financial Services and Markets Act 2000 (FSMA) provides for the regulation of the financial industry in the United Kingdom, including any person whose business includes arranging, advising or dealing in investments or taking deposits or writing insurance policies. FSMA (as later amended) established two regulators: the Financial Conduct Authority (FCA) and the Prudential Regulation Authority (PRA). The PRA is part of the Bank of England. 2.55 Part XXII of FSMA is entitled ‘Auditors and Actuaries’. It provides for consultation and whistle-blowing between auditors of authorised persons under the Act (ie those carrying out regulated activities) and the regulators under the Act. Auditors of PRA-regulated entities must have regular meetings with the PRA and, where relevant, also the FCA (ss 339A and 339B). Section 341 confirms the auditor’s information rights in terms similar to Companies Act 2006, ss 499 and 501. Sections 342 and 343 provide that an auditor does not breach any duty by passing any information or opinion to the regulators if he reasonably believes that such information or opinion is relevant to their functions. In certain circumstances, the auditor is obliged to report to the regulators, including where he believes there is a contravention of any relevant requirement, a going concern issue or a failure to prepare accounts in accordance with statutory requirements.1 1 See the Financial Services and Markets Act 2000 (Communications by Auditors) Regulations 2001, SI 2001/2587.

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Chapter 3

The regulatory framework of auditing

INTRODUCTION 3.01 In addition to statutory law, there is other regulatory material which forms the background to auditing and which may be relevant to an auditor’s duty to its client.

ACCOUNTING STANDARDS 3.02 Accounting for entities is more than merely adding up numbers. It involves numerous judgments and presentational options. These must be done in accordance with Generally Accepted Accounting Principles, or GAAP. This work is not the place for a detailed review of GAAP. Nor will we seek to set out their history. However, it is appropriate to mention the current structure of accounting standards, which form an important part of the background to every audit. It is also important to note that compliance with accounting standards is not sufficient: accounts must give a ‘true and fair’ view, which is not authoritatively defined. The Financial Reporting Council (FRC) and its predecessors have obtained counsel’s opinions, published on the FRC website, confirming that: ‘Directors must consider whether, taken in the round, the financial statements that they approve are appropriate. Similarly, auditors are required to exercise professional judgment before expressing an audit opinion. As a result, the Opinion confirms that it will not be sufficient for either directors or auditors to reach such conclusions solely because the financial statements were prepared in accordance with applicable accounting standards.’ 3.03 UK GAAP were substantially overhauled in 2012 and 2013, with a new structure coming into compulsory effect for periods ending after 1 January 2015. The structure of UK GAAP is definitively described in Financial Reporting Standard 100 – Application of Financial Reporting Requirements (FRS 100). Pursuant to FRS 100, para 4, entities have several options for preparing their financial statements. Any entity may adopt EU-adopted International Financial Reporting Standards (IFRS). After the Brexit transition period, these will be 25

3.04 The regulatory framework of auditing called UK-adopted International Accounting Standards (IAS), but in practice they will be identical, at least initially.1 Any entity which does not have its securities listed on a stock exchange may adopt FRS 102, which contains the principal accounting rules for the UK and Ireland. Subsidiaries whose parent prepares full accounts may adopt the ‘Reduced Disclosure Framework’ of FRS 101. Where FRS 102 is used, any relevant Statement of Recommended Practice (SORP) should also be considered. 1 International Accounting Standards and European Public Limited-Liability Company (Amendment etc.) (EU Exit) Regulations 2019, SI 2019/685.

AUTHORISATION AND REGULATION OF AUDITORS 3.04 As noted at para 2.20 above, each UK statutory auditor must be a member of a recognised supervisory body, which is required to have a regime covering qualifications, standards and discipline of its members. Thus, for example, a document entitled ‘Audit regulations and guidance’ is published jointly by the Institute of Chartered Accountants in England and Wales (ICAEW), the Institute of Chartered Accountants in Ireland and the Institute of Chartered Accountants of Scotland.1 1 The current version at the date of this edition is effective from 1 January 2020.

3.05 In addition to the audit regulations and guidance, each recognised supervisory body issues more detailed rules for its members. For example, the ICAEW issues a ‘Members’ Handbook’ which is revised annually and which contains detailed rules and regulations. Of particular interest is the ‘Code of Ethics’ within the Handbook, which deals with independence issues and conflicts of interest. 3.06 Further ethical standards, adopting a very similar approach to those of the Institutes, are issued by the FRC. For example, the Revised Ethical Standard 2019 is subtitled ‘Integrity, Objectivity and Independence’ and provides for the maintenance of those qualities and the identification and management of threats to them.

AUDITING STANDARDS 3.07 Auditing Standards are promulgated by the FRC,1 and available from the FRC’s website. They are largely based on International Auditing Standards2 and are called ‘International Standards on Auditing (UK)’, or ISAs. Insofar as any authoritative statement exists of the nuts and bolts of auditing, it is to be found in the ISAs. A short summary is provided here of some of the most important provisions in the ISAs, but of course reference should be made to 26

Auditing standards 3.10 the standards themselves for the full detail. The full set of ISAs was revised in June 2016 for audits of financial statements for periods commencing on or after 17 June 2016 and many of them have been revised or updated since that date. 1 Formerly, the FRC included an Auditing Practices Board which fulfilled this role, but it is now performed by the Audit and Assurance Team within the Codes and Standards Division of the FRC. 2 International Auditing Standards are published by the International Auditing and Assurance Standards Board (IAASB), in which the FRC participates.

3.08 ISA 200 is entitled ‘Overall Objectives of the Independent Auditor and the Conduct of an Audit in Accordance with International Standards of Auditing (UK)’. ISA 200 introduces some key concepts. It explains at para 5 that: ‘As the basis for the auditor’s opinion, ISAs (UK) require the auditor to obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error. Reasonable assurance is a high level of assurance. It is obtained when the auditor has obtained sufficient appropriate audit evidence to reduce audit risk (that is, the risk that the auditor expresses an inappropriate opinion when the financial statements are materially misstated) to an acceptably low level. However, reasonable assurance is not an absolute level of assurance, because there are inherent limitations of an audit which result in most of the audit evidence on which the auditor draws conclusions and bases the auditor’s opinion being persuasive rather than conclusive.’ 3.09 The concept of materiality is defined at para 6: ‘In general, misstatements, including omissions, are considered to be material if, individually or in the aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of the financial statements. Judgments about materiality are made in the light of surrounding circumstances, and are affected by the auditor’s perception of the financial information needs of users of the financial statements, and by the size or nature of a misstatement, or a combination of both. The auditor’s opinion deals with the financial statements as a whole and therefore the auditor is not responsible for the detection of misstatements that are not material to the financial statements as a whole.’ 3.10 Another key concept is ‘professional scepticism’: ‘An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.’ 27

3.11 The regulatory framework of auditing Reflecting SI 2016/649, Sch 1, para 2, ISA 200 provides that: ‘The auditor shall plan and perform an audit with professional skepticism recognizing that circumstances may exist that cause the financial statements to be materially misstated. In the UK, the auditor shall maintain professional skepticism throughout the audit, recognising the possibility of a material misstatement due to facts or behaviour indicating irregularities, including fraud, or error, notwithstanding the auditor’s past experience of the honesty and integrity of the entity’s management and of those charged with governance.’ 3.11 As well as planning and performing the audit in compliance with relevant ethical standards, with professional scepticism, exercising professional judgment and obtaining sufficient appropriate audit evidence to reduce audit risk to an acceptably low level, ISA 200 requires that the auditor shall understand and comply with all other relevant ISAs. It is only in exceptional circumstances that an auditor is permitted to depart from any requirement of an ISA and that is expected to arise only where the procedure specified by the ISA would be ineffective in achieving its aim. 3.12 However, compliance with each ISA is not necessarily sufficient: the auditor is required to use the objectives stated in the ISAs to determine whether sufficient audit evidence has been obtained and whether additional audit procedures may be required over and above those specified in the individual ISAs. 3.13 ISA 230 requires that the auditor’s work must be properly documented. If these requirements are not met, then a court may refuse to permit the auditor to benefit from any doubt about the work done.1 1 See the analogous approach of Males J in UBS v KWL [2014] EWHC 3615 (Comm), [893] to [896].

3.14 ISA 240 covers the auditor’s responsibilities relating to fraud, an area which frequently raises issues in litigation. The auditor is concerned with fraud that causes a material misstatement in the financial statements, which may be divided into misstatements resulting from fraudulent accounting and misstatements resulting from misappropriation of assets. The auditor’s responsibility is to obtain reasonable assurance that the financial statements are free from material misstatement, whether caused by fraud or error. The maintenance of professional scepticism is especially important in relation to fraud, as is emphasised by ISA 240. A fraudulent misstatement may be harder to detect than an innocent error, because it may involve deliberate efforts at concealment. The ISA points out that: ‘[T]he auditor’s ability to detect a fraud depends on factors such as the skilfulness of the perpetrator, the frequency and extent of 28

Auditing standards 3.20 manipulation, the degree of collusion involved, the relative size of individual amounts manipulated, and the seniority of those individuals involved.’ 3.15 ISA 260 covers communication by the auditor with ‘those charged with governance’. The auditor is required to communicate significant findings from the audit, including difficulties encountered, matters discussed with management and any other matters that are significant to the oversight of the financial reporting process. 3.16 This is an important aspect of some audit claims, because the question of causation of loss may depend upon the actions of the person to whom a report should have been made, who will generally be a person ‘charged with governance’. According to the ISA, those charged with governance are those with responsibility for: ●●

overseeing the strategic direction of the entity, which will include the directors; and

●●

obligations related to the accountability of the entity, including oversight of the financial reporting process, for example by an audit committee.

In an ideal world ‘those charged with governance’ will not be the management, but in a smaller entity, such ideals may not be realised. 3.17 The critical requirement is that: ‘[T]he auditor shall determine the appropriate person(s) within the entity’s governance structure with whom to communicate.’ This will vary both with the entity’s structure, and with the nature of the communication that the auditor has to make. 3.18 ISA 265 requires the auditor to report to those charged with governance and management deficiencies in internal control that the auditor has identified. The auditor reviews internal controls for the purposes of assessing risk and designing audit procedures. In this process, and throughout the audit, the auditor may come across deficiencies in internal controls. These are to be reported under ISA 265, sometimes by way of what is often called a ‘management letter’. 3.19 An audit must be properly planned under the guidance given by ISA 300 which involves an assessment of the risks of material misstatement (ISA 315) and of the appropriate level at which to set materiality (ISA 320). 3.20 Audit evidence is discussed in general by ISA 500 and in some particulars by ISA 501, including a requirement that the auditor attends a physical inventory counting (or stock-take) unless impracticable. ISA 505 makes the point that independent confirmations, especially if obtained directly by the auditor, may be a good source of reliable evidence. 29

3.21 The regulatory framework of auditing 3.21 Audit testing is considered in detail by ISA 520 on substantive analytical procedures (also called ‘analytical review’), ISA 530 on audit sampling and ISA 540 on auditing accounting estimates. 3.22 Other matters of particular concern to auditors include related party disclosures (ISA 550), post-balance sheet events (ISA 560) and the assumption that a business is a going concern (ISA 570). The weight which an auditor should place upon management’s written representations (which are obtained as a standard part of any audit) is considered by ISA 580 including in the situation where the representations are inconsistent with other audit evidence. 3.23 Reliance by one auditor upon another is dealt with in ISAs 600 and 610. ISA 600 is concerned with the common problem of how far a group auditor can rely upon the work of an auditor of a subsidiary or other component entity, while ISA 610 addresses the use of the work of internal auditors. 3.24 Occasionally, an auditor may need to appoint an expert in some field other than accounting or auditing to assist in understanding the entity or for other reasons in the course of an audit. This rather specialised scenario is covered by ISA 620. 3.25 The principal exception to UK auditing standards being based upon international standards is ISA 700, concerning the auditor’s report, where the UK version addresses the requirements of national company law and also provides for a more succinct audit report than the international version. However, the report must contain additional statements if it is for a public interest entity: para 45R-1. Where the audit opinion is qualified, adverse or disclaimed, it is described as ‘modified’ and modified opinions are addressed by ISA 705. Emphasis of matter paragraphs are covered by ISA 706. 3.26 The auditor’s responsibility in relation to information contained in published financial statement documents other than the accounts themselves, such as prior year comparative information, directors’ reports and other reports that are packaged with the financial statements, are the subject of ISAs 710 and 720.

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Chapter 4

Characterising the auditor’s relationship with the company and the elements of and defences to a claim for audit negligence

AUDITOR’S RELATIONSHIP WITH THE COMPANY Contractual counterparty 4.01 Almost invariably, the auditor will have a contract with the audited entity.1 This should be an express contract in writing. But even if no such express written contract was made, it is hard to imagine that there would not be either an oral contract or a contract implied by conduct between auditor and company.2 1 There are always exceptions in the law. Statutory auditors of governmental bodies will not generally have a contractual relationship with the audited entity. See, for example, West Wiltshire DC v Garland [1995] Ch 297, 308 and Controller General v Davison [1996] 2 NZLR 278, 303. 2 For a failed attempt to argue to the contrary see PricewaterhouseCoopers v National Potato Co-operative [2015] ZASCA 2 at [57] to [60].

4.02 The usual incidents of a contractual relationship will apply as between auditor and client. If there is no agreement for the auditor’s fees, then they should be assessed on a quantum meruit basis. Unless covered by an express term, there will be an implied contractual term that the auditor will carry out his task with reasonable care and skill.

Obligor under duty of care 4.03 The auditor will owe a tortious duty of care to the client entity to use reasonable care and skill in carrying out his duties. ‘The very nature of the function of auditing indicates that the auditor owes a duty towards the body whose accounts are being audited.’1 This tortious duty will be co-extensive with the contractual duty (although of course the other incidents of tortious liability can be distinct from those in contract, including the rules of remoteness and limitation2). 31

4.04 Characterising the auditor’s relationship with the company 1 Per Balcombe LJ in West Wiltshire DC v Garland [1995] Ch 297 at 307. 2 As explained by Lord Goff in Henderson v Merrett [1995] 2 AC 145 at 185F–186B.

4.04 An auditor also owes a duty of care in tort to the shareholders of the company as a body in respect of their interest as the ultimate overseers of the management of the company (although not in respect of other interests they may have, for example, as investors).1 However, that interest will invariably be protected by an action in the name of the company itself2 and the shareholders’ losses would normally be excluded in any event by the principle barring recovery of reflective loss.3 1 Caparo v Dickman [1990] 2 AC 605. 2 Per Lord Bridge in Caparo at 626D–F. 3 See below at paras 8.157–8.159.

4.05 It has been said that a statutory auditor will not generally owe a statutory duty enforceable in tort as such,1 although a local government auditor generally will do so.2 Although company auditors have regularly been described as having a ‘statutory duty’,3 it does not appear that a claim for breach of statutory duty will add anything to a claim in negligence in any ordinary situation.4 1 Makar v PricewaterhouseCoopers [2011] EWHC 3835 (Comm), [33], State of South Australia v Peat Marwick Mitchell (1997) 24 ACSR 231. 2 West Wiltshire DC v Garland [1995] Ch 297. 3 Re London and General Bank (No 2) [1895] 2 Ch 673, 688, cited by O’Connor LJ in his dissenting judgment in the Court of Appeal in Caparo at [1989] QB 653, 714, which reference was approved in the House of Lords [1990] 2 AC 605, 653G, 662B. 4 An arguable exception may be a case like Re London and General Bank (No 2) [1895] 2 Ch 673 where the auditor reported correctly to the directors but failed to make a proper report to the shareholders, thus failing directly to comply with his statutory duty, rather than merely falling short of the required standard in doing so.

Recipient of confidential information 4.06 The auditor will naturally have access to, and be in receipt of, a great deal of confidential information belonging to his client. Whether by virtue of an express or implied contractual term or an equitable obligation of confidentiality, the auditor will have a duty to keep the information confidential.1 It is also now a statutory requirement that audit standards provide for such confidentiality.2 1 See per Lord Millett in Bolkiah v KPMG [1999] 2 AC 222 at 235B and more generally Toulson and Phipps, Confidentiality, 4th ed (Sweet & Maxwell, 2020), Ch 3. 2 SI 2016/649, Sch 1, para 9.

4.07 The duty of confidentiality is not absolute. In addition to statutory requirements upon auditors to disclose certain matters to regulators of the audited entity (see above at para 2.55) and to the auditor of a parent company, or the regulator of the auditor (the Financial Reporting Council),1 the auditor 32

Auditor’s relationship with the company 4.10 would also be entitled to disclose client information if required as part of standard disclosure in civil proceedings, even where the client was not a party.2 For an unusual case where an auditor obtained a declaration that it was not precluded from supplying documents or information to an inquiry into the audit client’s affairs, see Price Waterhouse v BCCI Holdings (Luxembourg).3 Many auditor’s documents are excluded from the requirement to respond to an information notice from tax authorities.4 1 Under the Statutory Auditors and Third Country Auditors Regulations 2016 (‘SATCAR’), SI 2016/649, Sch 2, para 1(1). See also Financial Reporting Council Ltd v Sports Direct International Plc [2020] EWCA Civ 177 for discussion of the extension of this requirement to obtaining information from the audit client and its interaction with legal professional privilege. 2 See Tournier v National Provincial and Union Bank of England [1924] 1 KB 461, applied to accountants in R v ICAEW [1994] BCC 297 at 312. 3 [1992] BCLC 583, discussed further below at para 17.50. 4 See Re HMRC’s Application [2018] STI 2325.

Officer of the company 4.08 The Companies Act 2006 (like its predecessors for over a century) contains in its general definitions section a statement that ‘officer, in relation to a body corporate, includes a director, manager or secretary’, without making clear whether ‘officer’ might also include an auditor.1 It also contains in s 1157 (which makes provision for relief from liability for officers acting honestly and reasonably)2 an express reservation as to whether or not an auditor may also be an officer. However, the Act (again in common with its predecessors) refers to ‘the office of auditor’,3 to an auditor ‘holding’, ‘taking’ and being in ‘office’,4 to the auditor’s ‘term of office’,5 and to his ‘tenure of office’.6 1 Companies Act 2006, s 1173(1). 2 See below at Chapter 16 for discussion of this section. 3 Companies Act 2006, ss 485(3)(c), 489(3)(c). 4 Companies Act 2006, ss 487 and 491. 5 Companies Act 2006, s 491, heading. 6 Companies Act 2006, s 495(1).

4.09 The issue of whether an auditor is an officer of the audited company has arisen on several occasions in relation to Insolvency Act 1986, s 212 and its statutory predecessors. The same quasi-definition of ‘officer’ as may be found in the Companies Act now applies in the Insolvency Act by virtue of s 251. 4.10 Section 212 of the Insolvency Act permits the court on the application of a liquidator or a creditor of a company being wound up to compel any ‘officer’ of the company to contribute to the company’s assets or to compensate the company for any misfeasance or breach of duty by that officer in relation to the company. For this purpose at least, it is now clear law that an auditor is an ‘officer’ and is thus amenable to a form of action still often called a ‘misfeasance summons’,1 even though the auditor may be accused of negligence, which at least arguably falls short of ‘misfeasance’.2 33

4.11 Characterising the auditor’s relationship with the company 1 But see per Hoffmann LJ in Re D’Jan of London Ltd [1993] BCC 646, 347: ‘This is a summary procedure which used to be called a misfeasance summons but has been extended to include breaches of any duty including the duty of care.’ 2 There were conflicting authorities as to what counted as ‘misfeasance’ within the meaning of the predecessors of this section. In In re Kingston Cotton Mill Company (No 2) [1896] 2 Ch 279, the Court of Appeal (Lindley, Lopes, Kay LJJ) held that the remedy of the section applied to any breach of duty by an officer which resulted in a misapplication of assets of the company. See also Re B Johnson & Co (Builders) [1955] Ch 634, 648 to 650 where several earlier cases are discussed by Lord Evershed MR and three cases decided within a few weeks of each other: SBA Properties v Cradock [1967] 1 WLR 716, In Re Thomas Gerrard & Son [1968] Ch 455 and Selangor United Rubber Estates v Cradock [1967] 1 WLR 1168. However, these are now largely of historic interest in England since the matter was put beyond doubt by the addition to the section in 1985 of the words ‘or breach of any fiduciary duty or other duty in relation to the company.’

4.11 The issue was first authoritatively addressed by the Court of Appeal in In Re London and General Bank in relation to the Companies (Winding-up) Act 1879, s 10. In that case, Lindley LJ said:1 ‘it seems to me impossible to deny that for some purposes and to some extent an auditor is an officer of the company. He is appointed by the company, he is paid by the company, and his position is described in [s 7, Companies (Winding-up) Act 1879] as that of an officer of the company, although he is not a servant of the directors, but on the contrary is appointed by the company to check the directors.’ 1 [1895] 2 Ch 166 at 170.

4.12 In Re Kingston Cotton Mill Company,1 Lord Herschell reserved his opinion on whether Re London and General Bank had been correctly decided on the point, but nevertheless held that the Court of Appeal was bound by the earlier decision and applied it. In Re London and General Bank was followed in the criminal case of R v Schacter,2 in which the Court of Criminal Appeal explained that the reason that auditors were not referred to in the general definition of ‘officer’ was to allow for a situation in which an auditor was appointed for a limited private purpose, rather than holding the statutory office of auditor of the company.3 1 [1896] 1 Ch 6 at 16–17. 2 [1960] 2 QB 252. 3 See at 257.

4.13 An interesting application of this approach, but one that has received little attention in later cases, may be found in the decision of the Court of Appeal of British Columbia in Bell v Klein (No 3).1 The Supreme Court Rules of British Columbia provided that an ‘officer or servant of a corporation’ was amenable to an order for examination on discovery by any party with an adverse interest to the corporation. This was held to include within its ambit the corporation’s statutory auditor. The Court made clear that the case was unusual 34

Auditor’s relationship with the company 4.16 in that it seemed likely that auditor would be the best source of information about the company’s accounting documents, but otherwise, the reasoning of the earlier English cases was applied.2 1 [1955] 1 DLR 37. 2 The decision was effectively confirmed by the rules authorities in British Columbia, in that the rule was clarified to refer expressly to external auditors: see for example Gibson v Bagnall (1978) 22 OR (2d) 234 at 237.

4.14 It was again confirmed in the modern context, in Mutual Reinsurance Co Ltd v Peat Marwick Mitchell1 in which the earlier case law is reviewed, that an auditor will be an officer of the company if he is appointed to the office of auditor under the Companies Act, though he will not be an officer if merely conducting ad hoc audit work. The point was all but conceded in Sasea v KPMG,2 where auditors were required as ‘officers of the company’ to co-operate with an insolvency office holder under Insolvency Act 1986, ss 235–236.3 In the Grand Court of the Cayman Islands, it has been held that an auditor is an officer entitled to benefit from an indemnity under the Articles of a company.4 1 [1996] BCC 1010. Although this case relates to Bermudan statutes, the Court of Appeal made clear that they were in the same form as the relevant English legislation. 2 [1998] BCC 216 at 222H–223D. 3 It was also stated that auditors were officers for the purpose of these sections in Green v BDO Stoy Hayward [2005] EWHC 2413 (Ch), [30]. Materially similar provisions in Hong Kong were held to have the same effect in Re New China Hong Kong Group [2003] 3 HKC 252 at [33]. 4 Ernst & Young Cayman Islands v Bullmore, In the Matter of Bristol Fund Limited [2008] CILR 317.

4.15 However, even a statutory auditor may not be an ‘officer’ for all purposes. In Aquachem Ltd v Delphis Bank,1 the Privy Council had to consider whether a partner of a firm of accountants was disqualified from acting as receiver of Aquachem Ltd under a charge in favour of Delphis Bank on the ground that the same firm was auditor of Delphis Bank. This somewhat surprising proposition was based upon the Mauritius Companies Act 1984, s 189, which provided for a list of persons who were disqualified from appointment as receivers, including: ‘(d) an auditor of the company; or (e) an officer of the company or of any corporation which is mortgagee of the property of the company’. The Privy Council held that the separate reference to auditors in (d) made it clear that ‘officer’ in (e) was not intended to include an auditor. 1 [2008] UKPC 7, [2008] BCC 648.

4.16 The same result – that an auditor was not an ‘officer’ for the purpose of disqualifying the lender’s auditor from appointment as receiver – was reached on similar statutory wording in Australia in the case of Soltra Pty v Grant, a decision of the Supreme Court of Victoria.1 1 (1980) 5 ACLR 10.

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4.17 Characterising the auditor’s relationship with the company 4.17 Another context where ‘officer’ does not include auditor is Companies Act 2006, s 1214 which provides that ‘(1) A person may not act as statutory auditor of an audited person if … (2) the person is – (a) an officer or an employee of the audited person.’ In this section ‘officer’ cannot include ‘auditor’, since if it did, then an auditor would be prohibited from acting as auditor. The existence of this section may be part of the explanation for the somewhat unhelpful inclusive quasi-definition of ‘officer’ in s 1173. 4.18 In his dissenting speech in Stone & Rolls v Moore Stephens1 Lord Scott of Foscote relied on the principle that auditors were officers of the company as part of his reasoning that the wrongdoing of another officer should not be attributed to the company for the purpose of an action against the auditors. Indeed, he suggested that the insolvent company’s negligence action against the auditors could have been reframed as a misfeasance claim under Insolvency Act 1986, s 212. There is no reason to doubt that in general a liquidator can bring a claim for an auditor’s negligence through the procedural medium of an application under s 212: see for example the successful claim made in that way in Re Thomas Gerrard & Son Ltd.2 In Lord Scott’s view, an amendment to this effect would have made it openly apparent that the claim was for the benefit of the company’s creditors which could not, in that context, have been a matter of objection.3 1 [2009] 1 AC 1391 at [91], [111], [112], [118]. See also per Lord Mance at [265]. 2 [1968] Ch 455. 3 For discussion of this point see para 11.17, below.

4.19 In the same case, Lord Walker of Gestingthorpe, in one of the majority speeches, stated:1 ‘The law may now be taken as settled that for the purposes of a misfeasance summons under section 212 – a procedural provision – an auditor is an officer of a company. But he is in a quite different position from a director or manager … In short, even if an auditor is for some purposes an officer of the company for which he acts, he is in a totally different position from that of the directors and managers who are running its business. In my respectful opinion it does not assist the task of analysis to equate them.’ 1 [2009] AC 1391 at [189]–[190].

Servant 4.20 As the appointee of the company, acting by its shareholders, the auditor is the servant of the company. The practical relevance of that proposition is that the court will not enforce the auditor’s appointment as against the company by mandatory injunction: Cuff v London and County Land and Building Co Ltd.1 36

Auditor’s relationship with the company 4.24 The same case shows that where there is a dispute as to the auditor’s rights (in that case, the statutory right of access to books and records), the court will require the question of the auditor’s continued appointment to be addressed as a prior issue. 1 [1912] 1 Ch 440.

Agent of the company 4.21 Some UK company legislation deems a company’s auditor to be its agent for certain, limited, purposes. Companies Act 1985, s 434 provides that where inspectors of a company are appointed by the Secretary of State under ss 431 or 432, it is the duty of ‘all officers and agents of the company’ to assist the inspectors with documents, attendance, etc and that ‘“agents”, in relation to a company or other body corporate, includes its bankers and solicitors and persons employed by it as auditors, whether these persons are or are not officers of the company or other body corporate’.1 A very similar provision is contained at s 219 of the Insolvency Act 1986 in relation to an investigation by the Secretary of State into criminal misconduct by directors. This deemed agency confers upon the auditors only an obligation to co-operate with the inspectors. 1 The predecessors of this section include Companies Act 1948, s 167, which is referred to on this point in London & County Securities v Nicholson [1980] 1 WLR 948 at 951.

4.22 However, in general, an auditor is not the agent of the company. This was stated by Wynn-Parry J in In Re Transplanters (Holding Company) Ltd,1 in holding that an auditor’s certificate could not convert a set of accounts into an acknowledgment of debt for the purposes of the Limitation Act because the auditor was not the company’s agent with authority to give such acknowledgment. 1 [1958] 1 WLR 822.

4.23 In Westpac Banking Corporation v 789TEN Pty Ltd,1 Westpac argued that letters passing between its solicitors and its auditors concerning the company’s contingent liability arising from certain litigation were privileged. The issue under the relevant statute turned on whether the auditors were the company’s ‘agent’. The New South Wales Court of Appeal held that auditors were not agents of the company, but independent third parties and privilege could not be claimed in such material. 1 (2005) 55 ACSR 519.

4.24 By contrast, in Haque v BCCI,1 an appeal concerning a time bar issue, Chadwick LJ (with whom May and Henry LJJ agreed) had to consider whether 37

4.25 Characterising the auditor’s relationship with the company the plaintiff, BCCI SA, by the relevant limitation date ‘could with reasonable diligence have discovered’ the relevant fraud. He formulated the question thus: ‘Could the plaintiff, BCCI SA – for this purpose represented by some non-fraudulent officer or, perhaps, its auditor – have discovered the fraud with reasonable diligence between October 1986 and July 1991?’ 1 CA, 24 November 1999, Lexis.

4.25 The reference to ‘perhaps, its auditor’ in this passage is of course obiter and, it is respectfully submitted, erroneous. The inclusion of the auditor amongst the non-fraudulent officers of the company that might hypothetically have discovered a fraud with reasonable diligence would make a difference only in a case where the fraud was not discovered by the relevant date and where it could not reasonably have been discovered by the non-fraudulent management of the company, but only by the auditor. It is unlikely that the legislature could have intended that an inquiry would be required in such cases into whether an auditor should have discovered the fraud and, if so, when. It is even more unlikely that this approach could apply if the claim in question was one against the auditor for negligently failing to discover the same fraud. 4.26 In Canada, the conduct of an auditor cannot constitute the act or omission of the audited corporation for the purpose of statutory protection of minority shareholders: Glass v 618717 Ontario Inc.1 It is respectfully submitted that this is the correct approach. 1 [2012] ONSC 535 at [372]–[375].

Fiduciary 4.27 It has sometimes been assumed in passing or in obiter dicta that an auditor is a fiduciary of the audit client, simply because the auditor performs a professional function. This assumption bears closer examination.1 1 An accountant acting as a professional adviser will often owe fiduciary duties; see para 10.03, below. The present discussion solely concerns the role of the statutory auditor acting as such.

4.28 Most notably, Lord Millett seems to have assumed that an auditor would prima facie be subject to fiduciary duties in an important dictum from Prince Jefri Bolkiah v KPMG:1 ‘It is otherwise where the court’s intervention is sought by an existing client, for a fiduciary cannot act at the same time both for and against the same client, and his firm is in no better position. A man cannot

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Auditor’s relationship with the company 4.31 without the consent of both clients act for one client while his partner is acting for another in the opposite interest. His disqualification has nothing to do with the confidentiality of client information. It is based on the inescapable conflict of interest which is inherent in the situation. This is not to say that such consent is not sometimes forthcoming, or that in some situations it may not be inferred. There is a clear distinction between the position of a solicitor and an auditor. The large accountancy firms commonly carry out the audit of clients who are in competition with one another. The identity of their audit clients is publicly acknowledged. Their clients are taken to consent to their auditors acting for competing clients, though they must of course keep confidential the information obtained from their respective clients.’ 1 [1999] 2 AC 222 at 234–235.

4.29 In this passage, Lord Millett seems to assume that an auditor is a fiduciary, but one who is relieved of the duty not to act for and against the same client by reason of an implied consent by each client to the auditor also working for competitors. If this is the right reading of the passage, then it is flawed. If the same firm audits the competing companies producing CocaCola and Pepsi-Cola, it does not thereby ‘act … against’ each of its clients by ‘acting for’ the other. The audit is not carried out to assist the company in its competitive endeavours, but to assist the shareholders to supervise the management. In other words, it is an internal matter. Another way of testing the point is to ask whether any legitimate interest of either Coke or Pepsi would be damaged by a competent and thorough audit of the other, or served by an incompetent or corrupt one. The answer is plainly negative. 4.30 It follows that, even if an auditor is a fiduciary, there is no need to posit implicit consent to avoid a breach of fiduciary duty when an auditor audits two companies with competing businesses. No such breach would arise in any event. The fact that there is no clash of interests between clients who happen to have competing businesses raises the deeper question of whether there is any utility to holding that a fiduciary relationship exists at all. 4.31 The start of the examination is to identify what amounts to a fiduciary relationship. The classic definition was provided by Millett LJ in Bristol & West Building Society v Mothew:1 ‘A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence. The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has 39

4.32 Characterising the auditor’s relationship with the company several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977), p. 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary.’ 1 [1998] Ch 1 at 18.

4.32 In the same case, Millett LJ said: ‘not every legal claim arising out of a relationship with fiduciary incidents will give rise to a claim for a breach of fiduciary duty.’ As Robert Walker J said in Sasea Finance v KPMG: ‘That is a point of some significance. Although an auditor is an officer of a company, he does not constitute its controlling mind in the sense that one or more directors may.’1 1 [1998] BCC 216 at 223C.

4.32A In Sheikh Al Nehayan v Kent,1 Leggatt LJ stated that fiduciary duties typically arise where one person is entrusted with authority to manage the property or affairs of another and to make discretionary decisions on behalf of that person, or where advice is given in a context where the adviser has substantial power over the principal’s decision making. That authority or power is to be exercised solely in the interests of the principal to the exclusion of the fiduciary’s own interests. This was approved and applied by the Court of Appeal in A Company v Secretariat Consulting Pte Ltd,2 in which case, the Court declined to find the existence of a ‘free-standing fiduciary duty’ owed by a provider of litigation support services to the party instructing it, preferring to decide the case on the basis of express contractual terms dealing with conflicts of interest. Males LJ emphasised that ‘Although there are cases, for example in the context of secret commissions, where it has been said that the term “fiduciary” is used in a loose sense (eg Eze v Conway [2019] EWCA Civ 88 at [42]), that usage runs the risk of emptying the term of meaning and creating a distraction from the real issue.’ In other words, a relationship in which it would be improper for a professional to take a secret commission is not necessarily a fiduciary relationship properly so called. 1 [2018] EWHC 333 (Comm), [2018] 1 CLC 216. 2 [2021] EWCA Civ 6, [2021] 4 WLR 20.

4.33 The orthodox view (in England and Australia, though not in Canada or the United States) is that fiduciary duties are exclusively proscriptive rather 40

Auditor’s relationship with the company 4.34 than prescriptive. That view was stated in terms by the High Court of Australia in Breen v Williams,1 which statement was adopted by the English Court of Appeal in Attorney-General v Blake2 and reiterated by the High Court of Australia in Pilmer v Duke.3 The point was made succinctly by Gummow J in Breen: ‘Fiduciary obligations arise (albeit perhaps not exclusively) in various situations where it may be seen that one person is under an obligation to act in the interests of another. Equitable remedies are available where the fiduciary places interest in conflict with duty or derives an unauthorised profit from abuse of duty. It would be to stand established principle on its head to reason that because equity considers the defendant to be a fiduciary, therefore the defendant has a legal obligation to act in the interests of the plaintiff so that failure to fulfil that positive obligation represents a breach of fiduciary duty.’ 1 (1996) 186 CLR 71, 113, not following the approach of the Canadian Supreme Court in McInerney v MacDonald [1992] 2 SCR 138. 2 [1998] Ch 439 at 455. 3 [2001] HCA 31 at [74].

4.34 None of these decisions were cited in Item Software v Fassihi,1 in which the English Court of Appeal is widely thought to have held, controversially, that a director’s fiduciary duties include a positive obligation to disclose his own earlier breach of duty to the company. In the leading judgment in Fassihi, Arden LJ said this:2 ‘For my part, I do not consider that it is correct to infer from the cases to which I have referred that a fiduciary owes a separate and independent duty to disclose his own misconduct to his principal or more generally information of relevance and concern to it. So to hold would lead to a proliferation of duties and arguments about their breadth. I prefer to base my conclusion in this case on the fundamental duty to which a director is subject, that is the duty to act in what he in good faith considers to be the best interests of his company. … Furthermore, on the facts of this case, there is no basis on which Mr Fassihi could reasonably have come to the conclusion that it was not in the interests of Item to know of his breach of duty. In my judgment, he could not fulfil his duty of loyalty in this case except by telling Item about his setting up of RAMS, and his plan to acquire the Isograph contract for himself.’ 1 [2005] ICR 450. 2 At [41] and [44].

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4.35 Characterising the auditor’s relationship with the company 4.35 The better reading of the judgment in Fassihi is that there is no positive fiduciary duty of general application to disclose wrongdoing, but that on the facts of that case, the only explanation for non-disclosure was that Mr Fassihi had kept silent in pursuit of interests other than those of the company (his own), thus placing those interests above those which he had a fiduciary duty to pursue. Although the reasoning is compact, it is not necessarily contrary to the orthodox principle.1 1 Cf also Ranson v Customer Systems Plc [2012] EWCA Civ 841,[2012] IRPR 769 [52] to [53] and First Subsea v Balltec Ltd [2014] EWHC 866 (Ch) at [191]–[192], affirmed [2018] Ch 25.

4.36 Based on the dictum of Dr Finn adopted by Millett LJ in Mothew that ‘he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary’, it might be thought that the determinative question is whether or not a statutory auditor owes duties to the company not to make a secret profit from his position as auditor and not to place himself in the position of having interests that conflict with his duties as auditor. 4.37 Would it be permissible for an auditor to obtain a pecuniary interest (or some other ‘perverse incentive’1) in the outcome of his audit? The answer is obviously not. Similarly, an auditor could plainly not properly accept a secret commission from anybody for carrying out the audit or for ensuring a particular result. It follows from this that an auditor does owe at least some of the duties characteristic of a fiduciary. 1 Dennard v PricewaterhouseCoopers [2010] EWHC 812 (Ch), a valuation case, discussed further below at para 10.39.

4.38 To test this proposition, one may imagine a case in which an auditor unearths a material error in the accounts and the financial director offers the auditor payment to give an unqualified audit report notwithstanding the error. If the auditor were to accept the payment, would the company’s remedy be restricted to damages for negligence requiring the demonstration of loss caused by the error? It is submitted that in such a case, the company would be entitled to treat the auditor’s conduct as breach of fiduciary duty and to recover the payment as a bribe, in addition to claiming compensation for any resulting losses. 4.39 However, it also follows from the proper analysis that fiduciary duties are highly unlikely to be relevant in real world cases where an audit has gone wrong leading to loss. Dishonest directors and employees usually seek to hide their wrongdoing from auditors, rather than seeking to suborn them. Whilst it would be treated as a breach of fiduciary duty for an auditor to accept a bribe to overlook a misstatement in the accounts, such cases rarely, if ever, arise and

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Auditor’s relationship with the company 4.42 the authors are not aware of any that have been the subject of judgment in a civil case.1 1 For a criminal case showing that bribery of auditors is not altogether unheard of, see United States v Wenger (1972) 457 F2d 1082.

4.40 In State of South Australia v Peat Marwick Mitchell,1 Olsson J struck out a claim of breach of fiduciary duty against an auditor on the ground that an auditor did not owe such duties. He considered the arguments in some detail as well as the authorities as to when a fiduciary duty may arise. He held that the mere fact that a client relies on a professional to carry out his work with skill and care is not sufficient to found a fiduciary duty and pointed out that none of the breaches of duty alleged against the auditors were in reality breaches of any fiduciary duty. As Olsson J put it: ‘One searches in vain for the plea of a material fact to demonstrate that any defendant used the position of auditor to gain a personal profit or advantage at the expense of a plaintiff, or obtained some benefit in conflict with any fiduciary duty.’ His reasoning is convincing as to the absence of such a duty in the case of a straightforward audit appointment involving the usual kinds of allegation of breach of the duty to carry out the audit competently. 1 (1997) 24 ACSR 231.

4.41 In a short judgment, a Divisional Court of the Superior Court of Justice of Ontario has suggested, obiter, that the fiduciary duties of a statutory auditor may be limited to the duty of confidentiality.1 Although the equitable duty to maintain confidentiality is often described as a form of fiduciary duty,2 this is an unhelpful approach because such a duty is quite different from the general run of other fiduciary duties.3 Accordingly, this is in effect an opinion that a statutory auditor is not a fiduciary. 1 Drabinsky v KPMG 1999 OAC Lexis 363 at [5]. See also Re YBM Magnex (2000) 275 AR 352, in which this dictum was followed and the conclusion reached that any conflict of interest by an auditor was ‘less serious’ than conflict based on other accounting roles. 2 See, for example, the discussion by Etherton LJ in Generics v Yeda [2013] Bus LR 777 at [79]–[84]. 3 Confidentiality notably does not feature in the list of ‘defining characteristics’ of the fiduciary quoted above from Bristol & West v Mothew.

4.42 However, in another decision in the Ontario Superior Court of Justice, Commercial List, DM Brown J found a firm of auditors to be liable for nominal damages for breach of fiduciary duty for giving evidence against his former client.1 The basis of the decision is not completely clear because the judge relied on two factors: (i) the positive, prescriptive fiduciary obligation of

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4.43 Characterising the auditor’s relationship with the company loyalty as recognised in Canada but not elsewhere in the Commonwealth; and (ii) the fact that the evidence given by the auditor was contrary to the information of which he was well aware by virtue of his (former) position. The judge had already found that the auditor’s oral evidence at trial was not reliable. It is respectfully submitted that this reasoning is confused and would not be followed in England. 1 Glass v 618717 Ontario Inc [2012] ONSC 535.

4.43 In another Canadian case, Taiga v Deloitte & Touche, it was held that a statutory auditor did not breach any fiduciary duty by giving the audited corporation advice on a tax scheme for a contingent fee. However, the judge’s reasoning turned on whether or not the contingent fee was contrary to professional rules and he accepted that: ‘if there was such a prohibition, and if TBPL was not informed of it by the defendant, I agree the defendant would have breached a fiduciary duty and may be liable for losses the plaintiffs incurred by implementing the Finco Plan.’1 1 Taiga Building Products Ltd v Deloitte & Touche LLP [2014] BCSC 1083 at [69].

4.44 In distinguishing Stone & Rolls v Moore Stephens from the case before him, Patten LJ stated in Bilta v Nazir and others (No 2):1 ‘There is, however, a significant difference between the liability of an auditor for failing to notify the company about what was taking place and a conspiracy against the company by its directors and others to deprive it of its assets. The claim against the auditors was a claim against a third party who owed no fiduciary duties as such to the company or its creditors based on what in the context of that claim was secondary damage caused to the company by a separate breach of duty on the part of the company’s own director. It is therefore readily distinguishable from what we have to consider.’ 1 [2014] Ch 52, [81], affirmed [2016] AC 1.

4.45 In the United States, several courts have held that an auditor generally is not in a fiduciary relationship with its client.1 The basis of their reasoning is the argument that the auditor is required to be independent of the company audited and therefore cannot simultaneously be required to act loyally in its best interests. That view makes sense if the starting point is that a fiduciary owes positive duties to act in the interests of the principal, which is the generally preferred position in US law. However, where there are no such positive fiduciary duties, as in the law of England and Australia, auditor independence

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Elements of and defences to a claim for audit negligence 4.48 is consistent with, indeed supported by, the negative fiduciary duties not to prefer other interests to the proper and faithful performance of the audit. 1 See, for example, Resolution Trust Corp v KPMG Peat Marwick 844 F Supp 431 (ND Ill 1994) at 436; In re Cendant Corp Securities Litigation 139 F Supp 2d 585 (D NJ 2001) at 609; Micro Enhancement Intern v Coopers & Lybrand (2002) 110 Wn App 412 at 434.

4.46 In conclusion, therefore, at least in the common law of England, auditors do owe some of the basic forms of duty that distinguish a fiduciary, but genuine allegations of breach of such duties are very rare indeed. The ordinary run of claims against auditors does not involve any fiduciary issue. The weight of authority is to the effect that an auditor is not properly classified as a fiduciary and it is submitted that this is the correct conclusion. An auditor does not meet the description of a person entrusted with assets to deal with or discretionary power to exercise on behalf of another. That is the reason why the vast bulk of claims against auditors are not of a fiduciary nature and it demonstrates that an auditor is not a fiduciary in the classical sense, even though he may be subject to equitable remedies in the event of taking a bribe or breaching client confidentiality.

ELEMENTS OF AND DEFENCES TO A CLAIM FOR AUDIT NEGLIGENCE 4.47 If a claim is brought by the audited company, then it may be brought in contract and in tort concurrently. The duties of care owed are generally identical in the two causes of action and the rules of causation and remoteness are unlikely to differ materially. In relation to remoteness, the contractual rules apply also to parallel tortious claims. The one principal area where there may be a substantive difference between the causes of action in contract and in tort is limitation, as to which see Chapter 12, below. Occasionally, a client will also make a claim based on breach of fiduciary duty, although, as discussed above, such claims are the exception rather than the rule. If a claim is brought by any other person, then it will generally be based on a tortious duty of care. 4.48 The elements of claims for audit negligence, which must all be established by the claimant, are the following: (i)

Duty of care to the claimant: did the defendant owe a duty of care to the relevant claimant in respect of its audit work?

(ii) Breach of duty: did the defendant breach its duty of care? (iii) In relation to each head of loss claimed: (a) Factual causation: would that loss have been avoided but for the defendant’s breach of duty?

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4.49 Characterising the auditor’s relationship with the company (b) Legal causation: was the defendant’s breach of duty a legal, effective or substantial cause of that loss? (c)

Scope of duty: was that loss one which fell within the scope of the defendant’s duty to the claimant?

(d) Remoteness: was the loss of a type that (at the time of making the audit contract) would have been in the reasonable contemplation of the parties as being not unlikely to result from a breach of duty? 4.49 Where the elements of a claim are made out, then the defendant auditor may rely on the following defences: (i)

Policy defences: can the auditor rely on the principle ex turpi causa non oritur actio, or a possible defence that the duty is not owed for the benefit of creditors?

(ii) Limitation: is the claim time barred? (iii) Disclaimers and exemptions: does any express disclaimer negative or limit the duty or claims that might otherwise be made? (iv) Contributory fault of the claimant: was the damage suffered partly as the result of the fault of the plaintiff himself within the meaning of s 1 of the Law Reform (Contributory Negligence) Act 1945? (v)

Set off of counterclaim: does the auditor have a counterclaim against the claimant which may be set off, for example for the payment of fees or for the tort of deceit?

(vi) Failure to mitigate and credits: were some of the losses caused by the claimant’s failure to act reasonably in response to the negligence and/or were they offset by benefits gained as a result of the negligence? (vii) Statutory relief: did the defendant act ‘honestly and reasonably’ and having regard to all the circumstances of the case ought he ‘fairly to be excused’ within the meaning of s 1157 of the Companies Act 2006? 4.50 Each of the elements is considered in the remaining chapters of Part 2 of this work. We then consider their application to non-audit liabilities in Part 3 and review the available defences in Part 4.

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Chapter 5

Caparo: the objects and scope of the auditor’s duty of care in tort

CAPARO INDUSTRIES PLC V DICKMAN Introduction 5.01 Any discussion of the extent of liability of auditors in English law must start with the decision of the House of Lords in Caparo v Dickman.1 Caparo is generally understood to stand for the proposition that a statutory auditor, absent special facts, owes a duty of care in negligence only to the company itself and to its shareholders as a body, whose interest is represented for the purposes of any ordinary claim by the company itself. Caparo is a seminal decision in English law not only for its determination of the limits on who can sue auditors but also for its treatment of the more general question how the law determines to whom a duty of care is owed and what for. 1 Caparo Industries Plc v Dickman [1990] 2 AC 605.

5.02 Caparo was ultimately decided on the basis of the principle represented by the following statement of Lord Bridge, the fundamental importance of which became clear when it was taken up by Lord Hoffmann as the root of his reasoning in SAAMCO:1 ‘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 kind of damage from which A must take care to hold B harmless.’ 1 South Australia Asset Management Corporation v York Montague; Banque Bruxelles SA v Eagle Star [1997] AC 191.

The facts of Caparo 5.03 Fidelity was a public company whose shares were quoted on the London Stock Exchange. Its accounts for the year ended 31 March 1984 were audited by the defendant firm of auditors (Touche Ross) and the results for that year

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5.04 Caparo: the objects and scope of the auditor’s duty of care in tort were announced to the market on 22 May 1984. Reported profits fell short of market expectations and the share price fell dramatically. Caparo began to buy shares in the market shortly after the announcement and were shareholders by time of the annual general meeting of Fidelity at which the 1984 accounts were approved. Caparo continued to buy shares until they were close to the 30 per cent threshold, when they were required by Stock Exchange rules to make an offer for all the shares, which they duly did. By the end of 1984, Caparo had bought all of the shares in Fidelity. 5.04 Caparo alleged that they relied on the 1984 accounts in deciding to buy Fidelity shares, but that the accounts were overstated and showed a profit which should have been a loss. Caparo sued two of the Fidelity directors for fraudulently misstating the accounts and the auditors for negligently certifying that the accounts showed a true and fair view. In support of the allegation that the auditors owed them a duty of care, Caparo pointed to the auditors’ knowledge that reported results fell short of market expectations, leading to a steep share price fall and a requirement for financial assistance, with the result that Fidelity was vulnerable to a takeover bid. Any potential buyer would naturally rely on the audited accounts, as Touche Ross should have realised. 5.05 Accordingly, to recover the full amount of its claimed loss, Caparo had to rely on a duty of care owed by the auditors to any potential bidder for the company. However, Caparo was itself a shareholder before it bought most of the shares, so a significant part of the loss could have been recovered by Caparo if the auditors owed a duty at least to shareholders who made investment decisions based on the audited accounts. 5.06 It was common ground in the argument (at all three levels) that the auditor owes a duty of care to the company itself to exercise reasonable care and skill.1 This is the duty arising under the auditor’s contract with the company, although it will also be reflected in a similar duty in tort. The question in Caparo was only whether an additional duty of care is owed to shareholders and, if so, what was its scope and content. 1 Recorded by Bingham LJ at 682E.

The first instance decision of Sir Neil Lawson 5.07 The question of whether the auditors owed a duty of care to Caparo, either as potential investors or as shareholders, was tried as a preliminary issue in which the facts were assumed to be as alleged in the Statement of Claim.1 In the High Court, Sir Neil Lawson pointed out that the auditor’s contractual engagement was with the company itself and not with the shareholders either as a body or as individuals.2 The judge held there was no sufficient relationship between the auditor and potential investors to found any duty of care. 48

Caparo Industries Plc v Dickman 5.10 The statutory provisions relating to auditing made it clear that the auditor had a duty to report to the members. That created a ‘direct and close relationship between auditors and shareholders’, but that referred only to the ‘shareholders as a body’, not to individual shareholders like Caparo suing for its own loss. Even to the shareholders as a body, Sir Neil Lawson held that no duty of care was owed, on the basis that Parliament could have provided for such a duty (as it had in relation to prospectuses), but it had not done so. 1 No evidence was heard. The trial comprised legal argument alone. It was therefore equivalent to an application to strike out, or for summary judgment, on a point of law. 2 [1988] 4 BCC 144 at 147–148. The judge, Sir Neil Lawson, had been counsel for the plaintiff in Candler v Crane Christmas [1951] 2 KB 164.

The decision of the Court of Appeal 5.08 The Court of Appeal heard argument over six days and was divided as to the result.1 All three judges, O’Connor, Bingham and Taylor LJJ, held that no duty of care was owed to potential investors, but by a majority (Bingham and Taylor LJJ) the Court of Appeal held that an existing shareholder who suffered loss by selling, holding or buying shares in reliance on negligently audited accounts was owed a relevant duty of care by the auditors. 1 [1989] QB 653.

5.09 It is an unfortunate consequence of the overruling of the majority decision of the Court of Appeal in Caparo that the valuable judgment of Bingham LJ is rarely cited. In particular, the description of the modern auditor’s role and the effect of the statutory scheme between 680D and 682E repays study. In that passage Bingham LJ began by observing that the auditor’s role is ‘without close analogy’; he pointed out that ‘[T]he shareholders, despite their overall powers of control, are in most companies for most of the time, investors and little more.’ This paragraph concluded (at 680G) as follows: ‘In carrying out his investigation and in forming his opinion the auditor necessarily works very closely with the directors and officers of the company. He receives his remuneration from the company. He naturally, and rightly, regards the company as his client. But he is employed by the company to exercise his professional skill and judgment for the purpose of giving the shareholders an independent report on the reliability of the company’s accounts and thus on their investment.’ 5.10 Then, at 681, Bingham LJ noted: ‘It is pointed out, quite correctly, that the primary duty in and about the preparation of accounts is that of the directors. … The auditor’s 49

5.11 Caparo: the objects and scope of the auditor’s duty of care in tort role is secondary and accessory. His task is to vet the accounts, not to draw them in the first place or carry out the detailed accounting work necessary to draw them up.’1 1 When considering 19th-century case law on auditing it is sometimes relevant to recall that in early days, the auditor produced the company balance sheet, rather than just auditing it as today.

5.11 Some important points about the commercial background to auditing as it has developed in recent decades were made by Bingham LJ in the two paragraphs from 681E to 682D: ‘These provisions [Companies Act 1985 ss 221 to 245 and 709] show, as I think, a plain parliamentary intention that shareholders in a public company shall receive independent and reliable information on the financial standing of the company (and thus of their investment): cf In re London and General Bank (No 2) [1895] 2 Ch 673, 682, per Lindley LJ. For what purpose is this required? The company lawyer’s answer would, I think, be: to enable the members to make an informed judgment whether, and if so how, they should exercise the powers of control enjoyed by them as members. The commercial man’s answer would more probably be: to enable each shareholder to make an informed judgment whether he should retain or reduce or increase his holding of shares in the company. I see no reason to reject either of these answers. Successive Companies Acts have promulgated a detailed code designed to ensure that the ultimate powers of decision are vested in the members. But it is a truism that possession of adequate information is a necessary condition of effective decision-making. It would not be realistic to expect shareholders to exercise their powers of control on the basis only of such information as the directors chose to give them. But I think these provisions also reflect a wider and more commercial intention. The growth and development of limited liability companies over a relatively very short period have been phenomenal. Their proliferation and expansion have depended on their acceptance by the investing public as an advantageous and (on the whole) reliable medium of investment. The statutory requirements that companies account to their members and that auditors express an independent opinion to shareholders on the truth and accuracy of company accounts are in my view designed (in part at least) to fortify confidence in the holding of shares as a medium of investment by enabling shareholders to make informed investment decisions. There are obvious reasons, both economic and social, why this end should be regarded as desirable. The requirement that a company makes its accounts available for inspection by members of the public who are not shareholders is imposed for reasons which are in part the same and in part different

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Caparo Industries Plc v Dickman 5.12 from those just considered. Submission of accounts to the registrar could be required for purposes of official supervision and regulation, but this would not of itself require the accounts to be available for inspection by the public. This additional requirement must in my view be imposed (in part at least) for the protection of those dealing with the company as contracting parties, creditors, lenders and even, perhaps, defendants in litigation. But again I think that wider commercial considerations play a part. It would not be conducive to a flourishing and orderly market in company shares, which is plainly thought to be desirable, if reliable information of a company’s performance were restricted to its shareholders, directors and employees. The publication of accounts must limit, if it cannot eliminate, the scope for rumour-inspired speculation and thus promote an informed and orderly market. It enables prospective investors, like shareholders, to make informed decisions. For such prospective investors the independent opinion of the auditor has the same significance as for existing shareholders.’ 5.12 In addressing the argument that recognising a duty of care owed by auditors to shareholders would open the floodgates to unlimited claims, Bingham LJ set out some useful guidance on the requirements for claims against auditors, which remains relevant even though the House of Lords held that no duty was owed in that case. Having recited the Bolam principle that professional negligence only exists where the professional makes an error that no reasonably well informed and competent member of the profession would have made,1 Bingham LJ went on to say the following: ‘These principles afford special protection to auditors, whose task is not to draw the accounts nor to turn every stone and open every cupboard but to exercise their very considerable skill and judgment in carrying out checks and investigations in accordance with complex but nonetheless detailed and explicit professional standards. Many entries in the accounts will depend on the directors’ judgment, and here it is for the auditors not to satisfy themselves that the judgment is correct but that it is reasonable: “Two reasonable [persons] can perfectly reasonably come to opposite conclusions on the same set of facts without forfeiting their title to be regarded as reasonable … Not every reasonable exercise of judgment is right, and not every mistaken exercise of judgment is unreasonable:” per Lord Hailsham of St Marylebone LC in In re W (An Infant) [1971] AC 682, 700.

If, despite these obstacles, the shareholder can show a failure to exercise ordinary skill and care he must still show that he relied on the auditor’s report. Most shareholders will not do so. And,

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5.13 Caparo: the objects and scope of the auditor’s duty of care in tort “The longer the period which elapses prior to the accounts being relied on, from the date on which the auditor gave his certificate, the more difficult it will be to establish that the auditor ought to have foreseen that his certificate would, in those circumstances, be relied on:” per Woolf J in JEB Fasteners Ltd v Marks, Bloom & Co [1981] 3 All ER 289, 297.

If that obstacle also is overcome, the shareholder must then prove damage. That he can do only if the negligence complained of has had a significant effect on the share price. It is not every oversight or blunder, even if negligent, which will have that effect. Some error having a real and palpable effect on the value of the company will be called for. Not many claims by shareholders will, I think, fulfil these stringent requirements.’ 1 Bolam v Friern Hospital Management Committee [1957] 1 WLR 582.

5.13 The dissenting judge in the Court of Appeal, O’Connor LJ, held that the statutory duty of auditors to shareholders was owed to them as a body, not as individuals (save as members of the class of shareholders in relation to a class activity). Any loss suffered by the shareholders as a body would be recoverable by the company itself. O’Connor LJ could see no reason to impose any wider duty at common law than was imposed by the statute.

The decision of the House of Lords 5.14 Like the Court of Appeal, the House of Lords heard argument over six days. Unlike the Court of Appeal, the decision of the House of Lords was unanimous and favoured the auditors on both issues. It was held that no duty of care was owed by an auditor either to potential investors in the audited company or to individual shareholders in respect of their investment decisions.1 However, unlike Sir Neil Lawson, but in agreement with O’Connor LJ, the House of Lords held that auditors did owe a duty of care in tort to the shareholders of a company ‘as a body’ and it is that finding for which the case is now best known in the accountancy context. 1 [1990] 2 AC 605.

5.15 In referring to the, now famous, decision of the House of Lords in Caparo, it is important to bear in mind that throughout the proceedings it was common ground that the auditor owed a contractual duty to the audited company itself. The preliminary issue in Caparo was solely concerned with the question whether the auditor additionally owed a duty of care to investors and shareholders that would entitle them to sue if their investment in shares turned out to be less valuable than had appeared from the audited accounts.

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Caparo Industries Plc v Dickman 5.18 5.16 Three fully reasoned speeches were delivered in the House of Lords, by Lord Bridge, Lord Oliver and Lord Jauncey. Whilst they were in agreement on the key points of decision, there are differences of emphasis and each is worth analysing given the fundamental importance of the decision itself. Lord Roskill made a relatively short concurring speech and Lord Ackner agreed with all four speeches.

Lord Bridge 5.17 Lord Bridge reviewed the cases on duties of care in tort and then set out the ‘threefold test’:1 ‘What emerges is that, in addition to the foreseeability of damage, necessary ingredients in any situation giving rise to a duty of care are that there should exist between the party owing the duty and the party to whom it is owed a relationship characterised by the law as one of “proximity” or “neighbourhood” and that the situation should be one in which the court considers it fair, just and reasonable that the law should impose a duty of a given scope upon the one party for the benefit of the other.’ 1 [1990] 2 AC 605, 617–618.

5.18 He then added this important statement of when the element of proximity might be satisfied in the context of an audit report:1 ‘The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has

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5.19 Caparo: the objects and scope of the auditor’s duty of care in tort no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Cardozo CJ to “liability in an indeterminate amount for an indeterminate time to an indeterminate class:” see Ultramares Corporation v Touche (1931) 174 NE 441, 444; it is also to confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional expertise attributed to the maker of the statement. Hence, looking only at the circumstances of these decided cases where a duty of care in respect of negligent statements has been held to exist, I should expect to find that the “limit or control mechanism … imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence” rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the “proximity” between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (eg in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind.’ 1 [1990] 2 AC 605, 620H–621F.

5.19 Lord Bridge then approved the following important statement from the speech of Richmond P, dissenting from the majority decision of the New Zealand Court of Appeal in Scott Group v McFarlane:1 ‘All the speeches in Hedley Byrne seem to me to recognise the need for “special” relationship: a relationship which can properly be treated as giving rise to a special duty to use care in statement. The question in any given case is whether the nature of the relationship is such that one party can fairly be held to have assumed a responsibility to the other as regards the reliability of the advice or information. I do not think that such a relationship should be found to exist unless, at least, the maker of the statement was, or ought to have been, aware that his advice or information would in fact be made available to and be relied on by a particular person or class of persons for the purposes of a particular transaction or type of transaction. I would especially emphasise that to my mind it does not seem reasonable to attribute an assumption of responsibility unless the maker of the statement ought in all the circumstances, both in preparing himself for what he said and in saying it, to have directed his mind, and to have been able to direct his mind, to some particular and specific purpose for which he 54

Caparo Industries Plc v Dickman 5.22 was aware that his advice or information would be relied on. In many situations that purpose will be obvious. But the annual accounts of a company can be relied on in all sorts of ways and for many purposes.’ 1 Scott Group v McFarlane [1978] 1 NZLR 553, 566, quoted by Lord Bridge in Caparo at 624C to F.

5.20 Lord Bridge held that it was not sufficient to give rise to a duty of care by an auditor that it was foreseeable that a particular class of person (a corporate bidder) would rely on the audited accounts for a particular purpose (to price its take-over bid), contrary to the majority decision of the Court of Appeal of New Zealand in Scott Group v McFarlane and also contrary to the first instance decision of Woolf J in the English High Court in JEB Fasteners v Marks, Bloom & Co.1 Lord Bridge also made clear that the result would be the same regardless of the ‘degree of probability’ that there would be a takeover bid, just as a high degree of probability that a company would need to borrow money would not give rise to a duty of care to lenders.2 1 [1981] 3 All ER 289. 2 Caparo at 624G–625A.

5.21 However, there may be a thin line between: (i) ‘mere foreseeability’ of reliance which is insufficient however high the degree of probability; and (ii) actual knowledge that the accounts will be relied on by a particular class of persons for the purpose of a particular type of transaction, which may suffice according to the dictum of Richmond P. Indeed, while Lord Bridge disagreed with the reasoning of Woolf J in JEB Fasteners, he added: ‘It may well be, however, that the particular facts in the JEB case were sufficient to establish a basis on which the necessary ingredient of proximity to found a duty of care could be derived from the actual knowledge on the part of the auditors of the specific purpose for which the plaintiffs intended to use the accounts.’1 1 Caparo at 625C–D.

5.22 On that basis, Lord Bridge held that the auditors did not owe a duty of care to Caparo in its capacity as a potential investor or takeover bidder and moved on to consider the position of Caparo in its capacity as a shareholder.1 In this respect, Lord Bridge took a summary of the relevant statutory provisions straight from the judgment of Bingham LJ in the Court of Appeal, which he followed immediately by this important statement:2 ‘No doubt these provisions establish a relationship between the auditors and the shareholders of a company on which the shareholder is entitled to rely for the protection of his interest. But the crucial question concerns the extent of the shareholder’s interest which the 55

5.23 Caparo: the objects and scope of the auditor’s duty of care in tort auditor has a duty to protect. The shareholders of a company have a collective interest in the company’s proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company’s finances deprives the shareholders of the opportunity to exercise their powers in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy. But in practice no problem arises in this regard since the interest of the shareholders in the proper management of the company’s affairs is indistinguishable from the interest of the company itself and any loss suffered by the shareholders, eg by the negligent failure of the auditor to discover and expose a misappropriation of funds by a director of the company, will be recouped by a claim against the auditors in the name of the company, not by individual shareholders.’ 1 The dividing point of Lord Bridge’s speech between the two issues is not well signposted, but is at 625D of the report. 2 At 626C–E.

5.23 This passage contains several key points. The first sentence accepts a key finding of the majority in the Court of Appeal: that by virtue of the statutory scheme, an auditor does owe a duty of care to shareholders, not just to the company. The second sentence states the root of the scope of duty principle which will recur later: it is not enough to ask whether the defendant owes the claimant a duty of care; even if he does, it is also necessary to ask what kind of damage the duty covers. The third sentence applies this principle to a particular case of shareholders of an audited company: what the statutory scheme requires is that auditors are responsible to shareholders if a breach of duty deprives them of the opportunity to exercise their powers in general meeting. In other words, the type of ‘transaction’ for which the auditor knows his report will be relied upon is the exercise of the shareholders’ rights as a body to act in general meeting to protect their interests in the company as against the management. This could perhaps include the possibility of dismissing directors or passing a special resolution requiring them to act in particular ways, if the Articles of Association so allow.1 1 The possibility of a special resolution to direct the board is not one of the matters that Lord Oliver set out where he considered a similar aspect at 630E–G.

5.24 The fourth sentence of this passage is open to misinterpretation. Lord Bridge did not say that the shareholders’ action will be brought in the name of the company. Recalling that it was common ground in Caparo that the auditor owed a contractual duty to the company, quite apart from any duty that may have been owed to shareholders, Lord Bridge should be understood as making the point that the company will have its own cause of action for the same losses as the shareholders could claim.1 That cause of action would

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Caparo Industries Plc v Dickman 5.26 constitute a bar to any shareholder suing because of the principle against claims for reflective loss.2 Thus, Lord Bridge’s view, subject to a reservation discussed in the following paragraphs, was that whilst the shareholders as a body were owed a duty of care by auditors, that duty would not give rise to any enforceable cause of action because any conceivable loss would be merely reflective of a loss that the company could claim under its own contractual rights. 1 See the clear statement of this point by Moore-Bick LJ in MAN v Freightliner [2005] EWHC 2347 (Comm) at para 326, aff’d on other grounds at [2007] BCC 986. 2 For further discussion of the reflective loss principle, see below at 8.159–8.161.

5.25 The reservation that is discussed in the next two paragraphs of Lord Bridge’s speech relates to the possibility of a loss being suffered by a shareholder who sells shares in circumstances where their value is depressed by understated accounts. Lord Bridge said that such a loss would be referable not to any reliance by the shareholder on the audit report in deciding whether to sell, but to ‘the depreciatory effect of the report on the market value of the shares before ever the decision of the shareholder to sell was taken.’1 This contrasted with the loss on a purchase, which could only be referable to a buyer’s reliance on the audit report. This distinction is not an easy one to follow since any particular claimant might be able to assert reliance on the audit report in deciding whether the market price was a good one at which to buy or sell and there is no necessary asymmetry between the buying and selling situation. However, Lord Bridge went on: ‘Moreover, the loss in the case of the sale would be of a loss of part of the value of the shareholder’s existing holding, which, assuming a duty of care owed to individual shareholders, it might sensibly lie within the scope of the auditor’s duty to protect. A loss, on the other hand, resulting from the purchase of additional shares would result from a wholly independent transaction having no connection with the existing shareholding.’ 1 Caparo at 627A–B.

5.26 This was immediately followed by the much quoted dictum:1 ‘I believe it is this last distinction which is of critical importance and which demonstrates the unsoundness of the conclusion reached by the majority of the Court of Appeal. 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.’ 1 Caparo at 627D.

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5.27 Caparo: the objects and scope of the auditor’s duty of care in tort 5.27 Finally, on the subject of the possibility of claim from a selling shareholder, Lord Bridge said:1 ‘Assuming for the purpose of the argument that the relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds. As a purchaser of additional shares in reliance on the auditor’s report, he stands in no different position from any other investing member of the public to whom the auditor owes no duty.’ 1 Caparo at 627E.

5.28 In these latter passages, Lord Bridge did not exclude the possibility that a duty of care could be owed to individual shareholders for losses that would not be reflective of the company’s loss. In the context of the argument that there might be a claim for loss caused by selling shares at an undervalue, Lord Bridge was prepared to assume that was possible, though without deciding the point. However, contrary to the argument on behalf of Caparo, that possibility did not assist a shareholder who bought shares at an overvalue, because the former acted in his capacity as shareholder while the latter acted as merely a potential shareholder, even if he happened also to be an existing one.

Lord Oliver 5.29 Lord Oliver acknowledged at the start of his speech the common ground that the auditors owed a general duty to ‘the company which is their immediate employer’.1 The question whether they owed a duty to anybody else might depend on the purpose for which they made their report, which there was no reason to suppose to be anything other than ‘the purpose behind the legislative requirement for the carrying out of an annual audit and the circulation of the accounts.’ The question was then: ‘For whose protection were these provisions enacted and what object were they intended to achieve?’2 1 Caparo at 630B. 2 Caparo at 630C.

5.30 In Lord Oliver’s view the ‘primary purpose of the statutory requirement that a company’s accounts shall be audited annually is almost self-evident’.1 He referred to the statutory requirement for an annual account to be given by the directors to the shareholders in general meeting of their stewardship of the company and said this:2 ‘This is the only occasion in each year upon which the general body of shareholders is given the opportunity to consider, to criticise and to 58

Caparo Industries Plc v Dickman 5.32 comment upon the conduct by the board of the company’s affairs, to vote upon the directors’ recommendation as to dividends, to approve or disapprove the directors’ remuneration and, if thought desirable, to remove and replace all or any of the directors. It is the auditors’ function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, secondly, to provide shareholders with reliable intelligence for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided.’ 1 Caparo at 630C. 2 Caparo at 630E–G.

5.31 In this passage, Lord Oliver drew a distinction between: (i)

the auditor’s contractual (and simultaneous tortious) duty to the company itself; and

(ii) the tortious duty to shareholders arising from the statutory provisions which make clear that an important purpose for which the auditor’s report is made is to put the shareholders in a position to exercise their stewardship powers at the annual general meeting. 5.32 Having set out a brief summary of the history of the statutory provisions (which is quoted above at para 2.07), Lord Oliver explained:1 ‘Thus the history of the legislation is one of an increasing availability of information regarding the financial affairs of the company to those having an interest in its progress and stability. It cannot fairly be said that the purpose of making such information available is solely to assist those interested in attending general meetings of the company to an informed supervision and appraisal of the stewardship of the company’s directors, for the requirement to supply audited accounts to, for instance, preference shareholders having no right to vote at general meetings and to debenture holders cannot easily be attributed to any such purpose. Nevertheless, I do not, for my part, discern in the legislation any departure from what appears to me to be the original, central and primary purpose of these provisions, that is to say, the informed exercise by those interested in the property of the company, whether as proprietors of shares in the company or as the holders of rights secured by a debenture trust deed, of such powers as are vested in them by virtue of their respective proprietary interests. 59

5.33 Caparo: the objects and scope of the auditor’s duty of care in tort It is argued on behalf of the respondent that there is to be discerned in the legislation an additional or wider commercial purpose, namely that of enabling those to whom the accounts are addressed and circulated, to make informed investment decisions, for instance, by determining whether to dispose of their shares in the market or whether to apply any funds which they are individually able to command in seeking to purchase the shares of other shareholders. Of course, the provision of any information about the business and affairs of a trading company, whether it be contained in annual accounts or obtained from other sources, is capable of serving such a purpose just as it is capable of serving as the basis for the giving of financial advice to others, for arriving at a market price, for determining whether to extend credit to the company, or for the writing of financial articles in the press. Indeed, it is readily foreseeable by anyone who gives the matter any thought that it might well be relied on to a greater or less extent for all or any of such purposes. It is, of course, equally foreseeable that potential investors having no proprietary interest in the company might well avail themselves of the information contained in a company’s accounts published in the newspapers or culled from an inspection of the documents to be filed annually with the Registrar of Companies (which includes the audited accounts) in determining whether or not to acquire shares in the company. I find it difficult to believe, however, that the legislature, in enacting provisions clearly aimed primarily at the protection of the company and its informed control by the body of its proprietors, can have been inspired also by consideration for the public at large and investors in the market in particular.’ 1 Caparo at 631E–632C.

5.33 In the second sentence of this passage, Lord Oliver accepted that there were elements in the statutory scheme that could not be explained by the needs of shareholders exercising their powers at the annual general meeting. In addition to the provisions mentioned in that sentence, there could be added (at least in respect of companies not qualifying for any exemptions) the requirement for accounts to be filed with the Registrar of Companies for publication, a point mentioned by Richmond P in Scott Group v McFarlane in a passage quoted later in Lord Oliver’s speech.1 However, Lord Oliver’s view was that these elements were merely incidental to the ‘original, central and primary purpose of these provisions’, which remained the informed exercise by shareholders and debenture holders of their class rights. In this passage, there can be discerned the core policy aspect of the Caparo decision: the House of Lords easily could have found in the statutory provisions an intention that the audit should benefit much wider classes of persons than just the shareholders as a body, but to do so would have opened up ‘liability in an indeterminate amount for an indeterminate time to an indeterminate class’.2 In order to avoid 60

Caparo Industries Plc v Dickman 5.36 this result, the House of Lords instead focused on the original and primary purpose of the audit requirement, namely the protection of the owners of the company against the fraud, manipulation or error of those to whom they have entrusted its management. 1 Caparo at 645D–F. 2 Per Cardozo CJ in Ultramares Corporation v Touche (1931) 174 NE 441, 444.

5.34 As to the general requirements for a duty of care for negligent misstatement, Lord Oliver said this:1 ‘What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice (“the adviser”) and the recipient who acts in reliance upon it (“the advisee”) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice was given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry; and (4) it is so acted upon by the advisee to his detriment. That is not, of course to suggest that these conditions are either conclusive or exclusive, but merely that the actual decision in the case does not warrant any broader propositions.’ 1 Caparo at 638C–E.

5.35 After a very full review of authority, Lord Oliver concluded that there was no sufficient proximity between the auditors and potential investors to support a duty of care in tort. The contrary argument was based on the fallacious equation of foreseeability of reliance and loss with proximity.1 Lord Oliver (like Lord Bridge) held that the reasoning of Woolf J in JEB Fasteners fell into this error, but that his decision in that case was correct because ‘the facts were such as to justify a finding of a relationship of proximity without any extension of the criteria suggested by Denning LJ in his judgment in Candler’s case [1951] 2 KB 164.’2 1 The conclusion of Lord Oliver’s consideration of this point, before he goes on to the position of the plaintiffs as existing shareholders, is at 650C. 2 Caparo at 648F.

5.36 On the second issue, whether the auditor owed a duty of care to the plaintiff in its capacity as an existing shareholder, Lord Oliver’s reasoning was 61

5.37 Caparo: the objects and scope of the auditor’s duty of care in tort similar to Lord Bridge’s. The question was whether the fact that a shareholder had a statutory right to receive the audited accounts altered his position as regards whether he could rely on the audit report for a decision whether to buy shares. Lord Oliver adopted the example given by O’Connor LJ in the Court of Appeal of a shareholder who buys shares in reliance on accounts, then shows them to a friend who is not a shareholder, who does the same. It would be a capricious result if the former, but not the latter, was owed a duty of care by the auditor. 5.37 The core of Lord Oliver’s reasoning, like Lord Bridge’s, was the scope of duty point, in the sense of the type of damage and the capacity in which the claimant’s interest was to be served. As Lord Oliver put it at 651F and 652C: ‘It has to be borne in mind that the duty of care is inseparable from the damage which the plaintiff claims to have suffered from its breach. It is not a duty to take care in the abstract but a duty to avoid causing to the particular plaintiff damage of the particular kind which he has in fact sustained …. In seeking to ascertain whether there should be imposed on the adviser a duty to avoid the occurrence of the kind of damage which the advisee claims to have suffered it is not, I think, sufficient to ask simply whether there existed a “closeness” between them in the sense that the advisee had a legal entitlement to receive the information upon the basis of which he has acted or in the sense that the information was intended to serve his interest or to protect him. One must, I think, go further and ask, in what capacity was his interest to be served and from what was he intended to be protected?’ 5.38 Lord Oliver identified the difference between the view of Bingham LJ and his own as being that Bingham LJ discerned in the statutory provisions an intention to provide information for investment decisions whereas Lord Oliver did not:1 ‘In my judgment, accordingly, the purpose for which the auditors’ certificate is made and published is that of providing those entitled to receive the report with information to enable them to exercise in conjunction those powers which their respective proprietary interests confer upon them and not for the purposes of individual speculation with a view to profit. The same considerations as limit the existence of a duty of care also, in my judgment, limit the scope of the duty and I agree with O’Connor LJ that the duty of care is one owed to the shareholders as a body and not to individual shareholders.’ 1 Caparo at 652H–653G. The following quotation is from 654C.

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Caparo Industries Plc v Dickman 5.41 5.39 Lord Oliver was perhaps more open than Lord Bridge to the possibility that an auditor might owe a duty of care to a shareholder who sold his shares at an undervalue in reliance on an audit report:1 ‘It is unnecessary to decide the point on this appeal, but I can see more force in the contention that one purpose of providing the statutory information might be to enable the recipient to exercise whatever rights he has in relation to his proprietary interest by virtue of which he receives it, by way, for instance, of disposing of that interest.’ 1 Caparo at 653F.

Lord Jauncey 5.40 Lord Jauncey gave the third full-length speech in Caparo. He also reviewed the authorities relating to duties of care for negligent statements causing economic loss. Like Lord Bridge, Lord Jauncey concluded that a key question was the purpose for which the statement was made:1 ‘My Lords, in each of these cases where a duty of care has been held to exist, the statement in question has, to the knowledge of its maker, been made available to the plaintiff for a particular purpose upon which he has relied. In the present case, the auditors, by accepting office, came under a statutory duty to make their report to the members of the company. The crucial issue is the purpose for which the report was made. To quote the words of Denning LJ in the Candler case [1951] 2 KB 164, 183, what was the “very transaction” for which it was provided? To answer this question, it is necessary to look at the relevant provisions of Part VII of the Companies Act 1985.’ 1 Caparo at 658F–G.

5.41 Having reviewed the legislation as it then stood, Lord Jauncey concluded from it: ‘Three matters emerge from the statutory provisions, namely: (1) that the responsibility for the preparation of accounts giving a true and fair view of the company’s financial state is placed fairly and squarely on the shoulders of the directors; (2) that the role of the auditors is to provide an independent report to the members on the proper preparation of the balance sheet and profit and loss account, and as to whether those documents give a true and fair view respectively of the state of the company’s affairs at the end of the financial year and of the company’s profit and loss for that year. Their role is thus purely investigative rather than creative; (3) that the company’s accounts, 63

5.42 Caparo: the objects and scope of the auditor’s duty of care in tort including the auditors’ report, will be furnished to all members of the company as well as to debenture holders and any other persons entitled to receive notice of general meeting. The accounts will, of course, also be available to any member of the public who chooses to examine the company file in the office of the Registrar of Companies.’ 5.42 Lord Jauncey said that those conclusions did not resolve the question of the purpose, and thus the ‘very transaction’, for which accounts were provided to members of a company. The purpose was to be discerned from the detailed provisions that required accounts to be circulated in advance of the Annual General Meeting. This showed that the statutory purpose of the annual preparation and distribution of accounts was to enable members to exercise their class rights in general meeting. Lord Jauncey put it this way at 661G: ‘My Lords, Part VII of the Companies Act 1985 provides that the accounts of a company for each financial year shall be laid before the company’s general meeting, that is to say before the members in general meeting. Copies of the accounts must be sent to the members at least 21 days in advance, and it is obvious that the reason for this is to enable the members to prepare themselves for attendance at and participation in the meeting. The annual general meeting provides the opportunity for members to question the stewardship of the company during the preceding year, to vote for or against election or re-election of directors, to approve or disapprove the appointment or re-appointment of auditors and to take other decisions affecting the company as a whole or themselves as members of a particular class of shareholders. There is nothing in Part VII which suggests that the accounts are prepared and sent to members for any purpose other than to enable them to exercise class rights in general meeting. I therefore conclude that the purpose of annual accounts, so far as members are concerned, is to enable them to question the past management of the company, to exercise their voting rights, if so advised, and to influence future policy and management. Advice to individual shareholders in relation to present or future investment in the company is no part of the statutory purpose of the preparation and distribution of the accounts. It follows that I am in agreement with the views of O’Connor LJ as to the nature of the statutory duty owed by auditors to shareholders.’ 5.43 It followed that use of the accounts by shareholders for the purpose of making investment decisions was not use for the ‘very transaction’ for which the audit report had been supplied. Lord Jauncey went on: ‘Only where the auditor was aware that the individual shareholder was likely to rely on the accounts for a particular purpose such as his present or future investment in or lending to the company would a duty of care arise.’ 64

Caparo Industries Plc v Dickman 5.45

Summary of the decision in Caparo 5.44 The decision of the House of Lords may be summarised in the following propositions: (a) It was common ground that an auditor owes to the audited company a contractual duty to use all reasonable care and skill; this duty was not in issue and not the subject of the decision. (b) It was also common ground that it was at least arguably foreseeable to the auditors that existing shareholders, potential investors and potential takeover bidders would rely on the audited accounts in making decisions to buy shares in Fidelity. (c) The claimant was right to point out that the statutory provisions underpinning the audit requirement gave rise to a duty of care in favour of shareholders in addition to that owed in contract to the company itself. (d) The scope of the duty to shareholders arising out of the statutory provisions was to be determined by reference to those provisions and in particular by reference to the purpose for which the auditor was required to make his report to shareholders. (e) Construing the statutory provisions, the purpose for which the auditor was required to report to shareholders was to enable them to exercise their rights as a body of members to supervise the management of the company. (f)

It followed that the scope of the duty owed by auditors to shareholders was limited to the avoidance of such loss as could arise from the exercise on a false basis of class rights of the body of shareholders.

(g) Such losses as were within the scope of the duty owed by a statutory auditor to shareholders would be recoverable in an action by the company itself and would therefore not be claimable by shareholders in their own names. (h) Since the purpose of the audit under the legislation did not include the facilitation of investment decisions, losses caused by such decisions were outwith the scope of the auditor’s duty, whether or not the claimants were existing shareholders. 5.45 The foregoing summary should be qualified in two respects. First, in Caparo, there were no facts relevant to the existence or width of the alleged duty of care apart from the foreseeability of loss and the statutory audit requirement; the decision does not bar a duty arising from special facts. It is clear from Caparo that the kind of facts which might broaden the scope of the duty would be those which permitted an inference that the objective purpose for which the audit report was made or communicated was the protection of 65

5.46 Caparo: the objects and scope of the auditor’s duty of care in tort the claimant’s relevant economic interest. The most obvious type of fact that would potentially fall into this category would be that the auditor actually knew of the identified claimant’s particular intended reliance at the time when the auditor made or communicated his report so as to reach that claimant. 5.46 The second qualification is that Lord Bridge and, especially, Lord Oliver did not rule out the possibility that a statutory auditor, even without any additional facts, could owe a duty to a shareholder in respect of selling his shares at an undervalue. As a matter of authority, Caparo contains an obiter dictum by Lord Oliver that is open to such a duty and a rather reluctant refusal by Lord Bridge to rule it out in a case where the point did not arise. There is nothing in Lord Jauncey’s speech to give any encouragement to this form of duty. Adopting the Caparo approach of analysing the legislation to discern the purpose for which an auditor is required to report to shareholders, it is very hard to see how there could be identified a purpose of protecting a selling shareholder without also protecting a buying one. For this reason the better view is that the auditor does not owe a duty of care for the protection of a selling shareholder. 5.47 Since Caparo, although the precise issue of a share sale for an undervalue in reliance on negligently audited accounts does not seem to have arisen,1 it has been confirmed that an auditor does not generally owe a duty of care to a (sole) shareholder who relies on negligently audited accounts in negotiations with a purchaser and consequently incurs liability to that purchaser: see MAN v Freightliner.2 1 Hoffmann J noted that a duty ‘may possibly’ be owed in this situation in Morgan Crucible v Hill Samuel [1991] Ch 295 at 305A, reversed at the same reference. 2 [2005] EWHC 2347 (Comm) at [343]–[350], which are set out in the Court of Appeal’s reported judgment in the case at [2007] BCC 986, [2008] 2 BCLC 22 at [22]. On appeal, it was accepted that no general audit duty arose; the judgment was affirmed on other grounds.

THE PURPOSE OF THE AUDIT – OTHER VIEWS 5.48 Caparo does not purport to delimit all the purposes of the statutory audit. The issue in Caparo was whether the statutory provisions regarding auditing gave rise to a duty of care in favour of shareholders and, if so, for what purposes. In the context of that issue the House of Lords examined the statutory provisions in detail and held that the only duty to shareholders which was required as a result of them was a duty extending to the shareholders’ rights as a body to supervise the company’s management. However, Caparo was never directly concerned with the purposes for which the company (as opposed to the shareholders) contracted for an audit. Those purposes are at least potentially capable of extending beyond the statutory protection of the shareholders as a body. 66

The purpose of the audit – other views 5.53 5.49 The narrow conception of the purpose of the audit adopted in Caparo has been adopted by the accountancy profession as a vital bulwark against the encroachment of wider liability for defective audits. Thus, in the Auditing Practices Board Ethical Standard (ES1),1 para 3 stated: ‘The primary objective of an audit of the financial statements is for the auditor to provide independent assurance to the shareholders that the directors have prepared the financial statements properly. The auditor issues a report that includes an opinion as to whether or not the financial statements give a true and fair view. Thus the auditor assists the shareholders to exercise their proprietary powers as shareholders in the Annual General Meeting.’ 1 Updated December 2011 but now superseded, as to which see below.

5.50 The next paragraph of the same document recognised that in reality the audit has a far wider importance than that primary objective: ‘Public confidence in the operation of the capital markets and in the conduct of public interest entities depends, in part, upon the credibility of the opinions and reports issued by the auditor in connection with the audit of the financial statements. Such credibility depends on beliefs concerning the integrity, objectivity and independence of the auditor and the quality of audit work performed.’ 5.51 A similar view was expressed in a paper published in July 2006 by the Audit and Assurance Faculty of the Institute of Chartered Accountants in England and Wales called ‘Fundamentals – Audit Purpose’. The paper concluded: ‘The purpose of the statutory audit is to provide an independent opinion to the shareholders on the truth and fairness of the financial statements, whether they have been properly prepared in accordance with the Companies Act and to report by exception to the shareholders on the other requirements of company law such as where, in the auditors’ opinion, proper accounting records have not been kept.’ 5.52 However, the paper recognised that other stakeholders had an interest in the audit, which it considered to be ‘consequences, rather than the primary purpose, of the statutory audit’, and that ‘expectation gaps’ could arise whereby stakeholders might not realise that assurance to them was not the purpose of an audit. Such ‘expectation gaps’ are the logical consequence of the decision in Caparo that foreseeability of loss to a particular claimant in reliance on an audit report is not a sufficient basis for imposing a duty of care. 5.53 A somewhat broader view of the purpose of an audit is stated in International Standard on Auditing (UK) 200 at para 3: ‘The purpose of an 67

5.54 Caparo: the objects and scope of the auditor’s duty of care in tort audit is to enhance the degree of confidence of intended users in the financial statements.’ This statement is consistent with the Caparo approach only if ‘intended users’ is taken to be restricted to the shareholders as a body. This does not seem to be the intention of the authors of ISA 200, since at para A4 it is made clear that ‘general purpose financial statements’ will be designed to meet the information needs of ‘a wide range of users’. 5.54 The 2016 revision of the Ethical Standard published by the Financial Reporting Council no longer contained any statement of the ‘primary objective’ of an audit in terms of the exercise of the powers of shareholders in general meeting and instead stated, in words that are retained in the 2019 revision: ‘A fundamental objective of any such engagement is that the intended users trust and have confidence that the audit or assurance opinion is professionally sound and objective. … Although auditors and assurance practitioners are reporting to users, they are generally engaged to do so by the entity whose information they are reporting on. Accordingly their contractual “client” (the entity) is different to their beneficial “client” (the users).’ The new Ethical Standard reflects an increasing emphasis by regulators on the wider expectations of an audit as opposed to the narrower purpose recognised in Caparo, especially in the case of companies with public significance, called ‘public interest entities’ in the European legislation.

COMMONWEALTH AUTHORITY ON CAPARO 5.55 The restriction of auditor’s liabilities to the losses of the audited company itself in accordance with Caparo has been followed in all the main commonwealth jurisdictions, although there is no consensus about what the positive requirements are for a duty to be established. 5.56 The leading Australian High Court decision is Esanda Finance Corporation v Peat Marwick Hungerfords.1 The claimant, Esanda, was a finance company which had lent money to Excel in reliance on Excel’s audited accounts. Esanda pleaded that its reliance on the audited accounts and audit report for that purpose was reasonably foreseeable to the auditor, but did not plead any other factor that could found a duty of care owed by the auditor to Esanda. The High Court struck out Esanda’s claim as failing to disclose an arguable cause of action against the auditors of Excel. 1 [1997] HCA 8, 188 CLR 241, 142 ALR 750.

5.57 The essential point decided by the High Court in Esanda was that foreseeability of loss was not sufficient to found a duty of care.1 Caparo was 68

Commonwealth authority on Caparo 5.59 among the authorities considered in all the judgments as supporting a broad trend in common law jurisdictions to limit the liability of auditors to third parties. The judgments of McHugh J and Gummow J contain very helpful surveys of the law in the principal common law jurisdictions and also of the policy considerations which have led courts around the world to limit auditors’ liabilities to third parties. 1 Unlike Caparo, Esanda does not provide much indication of precisely what will suffice to create a duty of care, which remains a matter of considerable debate in Australia, for which see Perre v Apand [1999] HCA 36, 198 CLR 180, 64 ALR 606.

5.58 A New Zealand Court of Appeal case, Scott Group v McFarlane,1 was among those specifically disapproved by the House of Lords in Caparo, although the minority reasoning of Richmond P was cited and approved by both Lord Bridge and Lord Oliver. Today, New Zealand courts adopt a more restrictive approach to liability and it is tolerably clear that the Supreme Court of New Zealand would now decide Scott Group v McFarlane in accordance with the minority reasoning as approved in Caparo. Caparo was treated as representing the law of New Zealand, at last as far as concerns auditor’s duties of care, by the Court of Appeal of New Zealand in Boyd Knight v Purdue.2 In that case, the auditor was held to owe a duty of care to investors in respect of a prospectus, though it was not liable to an investor who had not relied on the content of the accounts. However, the reasoning was consistent with Caparo. More recently, in the Supreme Court of New Zealand in Body Corporate No 207624 (Spencer on Bryon) v North Shore City Council,3 William Young J stated that Scott Group was ‘practically overruled’ in Boyd Knight. 1 [1978] 1 NZLR 553. 2 [1999] 2 NZLR 278. 3 [2012] NZSC 83, [294].

5.59 In Canada, the courts continue to follow a revised version of the two-stage test set out by Lord Wilberforce in Anns v Merton, despite its abandonment in England. However, in Hercules Management v Ernst & Young,1 the Supreme Court of Canada held that policy considerations would be relevant to the application of the test and that ‘in the general run of auditors’ cases, concerns over indeterminate liability will serve to negate a prima facie duty of care.’ The case involved claims by shareholders against the company’s auditor. In that situation, the Court held, a prima facie duty of care existed, but it would be negatived unless the problem of indeterminate liability was adequately circumscribed on the facts. To adequately circumscribe the risk of indeterminate liability, it was necessary not only that the defendant should know that shareholders were likely to rely on the audit report, but also that ‘the statement itself was used by the plaintiff for precisely the purpose or transaction for which it was prepared.’ As to the question what was the purpose of an audit report, that was answered by the House of Lords in Caparo. 1 [1997] 2 SCR 165.

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5.60 Caparo: the objects and scope of the auditor’s duty of care in tort 5.60 The purposes of an audit report were reconfirmed by the majority of the Supreme Court in Deloitte & Touche v Livent Inc.1 The Court was divided as to whether, on the facts of the case, the claimant company had established that the shareholders did rely on the audit opinion for relevant purposes. In her powerful dissenting judgment, McLachlin CJ made the important point based on the speeches in Caparo that the primary purposes of the audit are twofold and that the two purposes should not be collapsed to one: first, assisting shareholders to hold management accountable; and second, to provide information for management decision making.2 1 [2017] 2 RCS 855 at [59]. 2 Livent at [163].

AFTER CAPARO: WHAT IS REQUIRED TO ESTABLISH A DUTY OF CARE? 5.61 In relation to the question to whom does a statutory auditor generally owe a duty of care, Caparo remains authoritative if not definitive. In relation to the question of what are the principles upon which a duty of care will be found or imposed going beyond the general audit duty, Caparo is an important decision, but by no means the last word. 5.62 A full discussion of the development of the law as to duties of care in negligence is outside the scope of this work. As noted above, it is an area in which the law of the various common law jurisdictions has diverged, although the ultimate effect of their analyses may not be very different. In this section, we set out the key principles and authorities in English law which are most relevant to this question in the accountancy context as the law stands today. 5.63 In contrast to cases of physical damage to the property or person of another, in cases of economic loss, the mere fact that damage was reasonably foreseeable by the defendant is not sufficient to give rise to a duty of care to avoid such loss. Three tests have been approved in the cases for the imposition of duties of care for economic loss. If properly applied, each test will often yield the same result, but need not necessarily do so. 5.64 After a long period of debate at the highest level, the leading case in English law on when the law will impose a duty of care in negligence for economic loss is now Customs & Excise Commissioners v Barclays Bank Plc (‘Customs’).1 In that case, each of the five members of the House of Lords gave a reasoned speech (reaching the same conclusion on the facts), so it is not straightforward to set out a single clear exposition of the principles. Nevertheless, there is little choice but to attempt it, which we do below in the particular context of accounting claims. 70

After Caparo: what is required to establish a duty of care? 5.69 1 [2007] 1 AC 181. Customs was treated as the leading guidance by the Court of Appeal in an audit case in MAN v Freightliner [2007] BCC 986, [2008] 2 BCLC 22.

5.65 First, at the highest level of abstraction, the framework for considering the duty of care issue incorporates the ‘threefold test’ expounded in Caparo: was there foreseeability of damage, and a proximate relationship between the parties, and is it fair, just and reasonable to impose the duty? 5.66 The ‘threefold test’ is the overarching test for the existence of a duty of care to prevent economic loss. Whether the relevant head of loss was foreseeable to the defendant is a question of fact. Since it is necessary to ask not merely whether A owes a duty of care to B, but also whether A owes a duty to prevent the particular loss claimed, the question of proximity should be addressed by reference to that loss.1 The third element – whether it is fair, just and reasonable to impose a duty – is at least in part a policy question.2 However, a plethora of subsequent Supreme Court authority has made clear that the threefold test is generally only applicable where the duty of care alleged is novel, because where there is an established category of duty, the principles applicable to that category should be applied.3 1 Per Lord Hoffmann in Customs at [35]. 2 Per Lord Bingham in Customs at [7] and [15]. 3 Michael v Chief Constable of South Wales [2015] AC 1732, Robinson v Chief Constable of West Yorkshire [2018] AC 736, NRAM v Steel [2018] 1 WLR 1190, James-Bowen v Commissioner of Police of the Metropolis [2018] 1 WLR 4021, Darnley v Croydon Health Services NHS Trust [2019] AC 831, Okpabi v Royal Dutch Shell Plc [2021] UKSC 3 at [25].

5.67 Second, especially in cases of economic loss caused by negligent misstatement, a core issue will often be the assumption of responsibility test: did the defendant assume responsibility to the claimant for undertaking a particular task with care with a view to saving the claimant from the type of loss claimed? If this is answered in favour of the claimant that may well be sufficient for a duty to be imposed. An assumption of responsibility must be ‘voluntary’ in the sense of a deliberate act and its existence is determined objectively, not by reference to the subjective intentions of the defendant.1 1 ‘Voluntary’ does not mean ‘conscious’, as the subjective intention of the defendant is not relevant here. For this point, see Electra v KPMG [2000] BCC 368 at 384A–B per Auld LJ and at 404D–H per Clarke LJ.

5.68 Thirdly, the ‘incremental’ approach may also be considered: is the precise duty contended for consistent with other duties which have been accepted by the courts? This is generally used more as a cross-check than a test in itself. 5.69 In the particular context of the statutory audit, the usual issue is that the auditor makes a statement (the audit opinion) to the client company and the shareholders for particular purposes (the statutory purposes, discussed in 71

5.70 Caparo: the objects and scope of the auditor’s duty of care in tort Caparo), but it is foreseeable that both the intended recipients and other people will rely on the accounts and the audit opinion for other purposes too and may suffer loss as a result. In that context, a key question that arises is whether the auditor’s purpose in giving or communicating the audit opinion included the protection of the particular claimant from the type of loss claimed. If not, that will generally be fatal to the imposition of a relevant duty of care.1 1 See Caparo, including the extracts quoted above; Morgan Crucible v Hill Samuel [1991] Ch 295 at 318; Reeman v Department of Transport [1997] 2 Lloyd’s Rep 648 at 676, 680 and 685; Barings v Coopers & Lybrand [2002] BCLC 364; MAN v Freightliner [2007] BCC 986, [2008] 2 BCLC 22 at [35]–[36].

5.70 Purpose in this sense is an objective concept. It does not turn on what the defendant (or the claimant) subjectively intended or wanted to achieve. The question is whether a reasonable person in the position of the claimant would conclude from the circumstances in which the statement was made or communicated to him that the purposes for which the statement was made or communicated to him included protecting him from the type of loss which he suffered in reliance upon the statement.1 The term ‘the type of loss’ is adopted from Caparo, but its use in this context bears further explanation. It refers to the loss which arises from reliance which is within the purpose for which the statement was communicated to the claimant. That is what Denning LJ in Candler meant by ‘the very transaction’: the duty of care covers the consequences of the reliance which the claimant reasonably places on the defendant’s statement, and not the consequences of any other reliance.2 1 MAN v Freightliner [2007] BCC 986, [2008] 2 BCLC 22 at [36]. 2 Recent decisions of the Supreme Court have stressed the centrality of reasonableness of reliance in assessing whether a particular duty of care arose: see NRAM v Steel [2018] 1 WLR 1190, Playboy Club v Banca Nazaionale del Lavoro [2018] 1 WLR 4041.

5.71 So long as they are both understood in this objective sense, the words ‘intention’ and ‘purpose’ can be used almost interchangeably in the analysis. If either is understood – perhaps wrongly – in its subjective sense, then an arid debate ensues. Thus, in BCCI v Price Waterhouse (No 2),1 Sir Brian Neill said: ‘It will be remembered that counsel for EW submitted that it was necessary for Overseas to plead and prove that EW knew and intended that Overseas would rely on its work and on statements made by it: see para 6.7 (supra). It seems that at one point at least in his judgment the judge accepted this submission: see [1997] BCC 584 at p 592H. In support of this submission counsel referred to some passages in the authorities including the following sentence in Lord Oliver’s speech in Caparo (supra) where he said at p 197F; 654D: “To widen the scope of the duty to include loss caused to an individual by reliance upon the accounts for a purpose for which they were not supplied

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After Caparo: what is required to establish a duty of care? 5.73 and were not intended would be to extend it beyond the limits which are so far deducible from the decisions of this House.”

But I am quite satisfied that the general trend of the authorities makes it clear that liability will depend not on intention but on the actual or presumed knowledge of the adviser and on the circumstances of the particular case. Indeed, elsewhere in his judgment in Caparo, Lord Oliver, having referred to Smith v Bush (supra) made it clear that an expressed intention that advice shall not be acted upon by anyone other than the immediate recipient “cannot prevail against actual or presumed knowledge that it is in fact likely to be relied upon in a particular transaction without independent verification”: see p l85E; 639A.’ The better view is that Lord Oliver meant the term ‘were not intended’ as shorthand for ‘would not have been considered by a reasonable claimant in the position of the actual claimant’ to have been intended by the defendant. On this basis, the knowledge of the defendant is part of the evidential material upon the basis of which the court ascertains the objective purpose or intention for which the statement was made.2 1 [1998] BCC 617 at [7.21] at 635D–G. See also Royal Bank of Scotland v Bannerman Johnstone Maclay [2006] BCC 148 at [47]–[51], a passage which similarly prefers ‘knowledge’ to either ‘intention’ or ‘purpose’ as the key question, but which seems to treat both ‘intention’ and ‘purpose’ as subjective concepts. 2 For authority that this passage from the judgment in BCCI does not undermine the importance of the purpose question, see Barings v Coopers & Lybrand [2002] 2 BCLC 364 at [75] at 392.

5.72 As noted above, there might appear to be a thin line between ‘mere foreseeability’ of loss by the claimant, which does not found a duty of care, and knowledge on the part of the defendant auditor that a statement will be used for a particular purpose by a particular claimant, which is a necessary (though not sufficient) requirement for the imposition of a duty. After all, if it is foreseeable to A that B may suffer loss in reliance on A’s statement, and B then does suffer loss, it will often be natural to say that A ‘knew’ that such reliance was intended or likely. 5.73 However, the two terms – ‘foreseeability’ and ‘knowledge’ – are used for different purposes and with a different emphasis. In this context (unlike many others), the word ‘knowledge’ does not direct attention to a particular degree of certainty, but to the specific subjects of the knowledge – the very claimant for the very transaction. ‘Mere foreseeability’ contrasts by referring to a more general risk of reliance and loss resulting from the defendant’s statement, even where that risk is highly likely to eventuate if the statement is wrong.1 1 ‘Knowledge … is the limiting case on the scale of foreseeability’ per Hoffmann J in Morgan Crucible v Hill Samuel [1991] Ch 295 at 305C.

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5.74 Caparo: the objects and scope of the auditor’s duty of care in tort 5.74 In the context of audit, the key to locating which side of the line a given case falls is the purpose question set out above. The issue of the defendant’s knowledge is a component of the purpose question: if the defendant did not know of the likely use of the statement by the claimant, then such use cannot be said to have been the defendant’s purpose; if the defendant did know, then such use may have been (but was not necessarily) the defendant’s purpose in making or communicating the audit statement. 5.75 Other indicia of a duty of care have been put forward in the case law, in particular in two lists provided by Neill LJ. These are generally consistent with the list of factors generally applicable to an issue of assumption of responsibility more recently proposed by Hamblen LJ in Seddon v DVLA.1 1 [2019] 1 WLR 4593 at [57].

5.76 James McNaughton v Hicks Anderson1 reached the Court of Appeal after final trial on a duty of care issue, shortly after the House of Lords had decided Caparo. The leading judgment was given by Neill LJ, who made the following statement as to relevant general factors:2 ‘I have considered the four propositions which have been distilled by Lord Oliver [1990] 2 AC 605, 638, from the speeches in the Hedley Byrne case. I have also considered the more recent authorities and, in particular, the speeches in the House of Lords in Smith v Eric S Bush [1990] 1 AC 831 and the Caparo case. From this scrutiny it seems to me to be clear (a) that in contrast to developments in the law in New Zealand, of which the decision in Scott Group Ltd v McFarlane [1978] 1 NZLR 553 provides an important illustration, in England a restrictive approach is now adopted to any extension of the scope of the duty of care beyond the person directly intended by the maker of the statement to act upon it; and (b) that in deciding whether a duty of care exists in any particular case it is necessary to take all the circumstances into account; but (c) that, notwithstanding (b), it is possible to identify certain matters which are likely to be of importance in most cases in reaching a decision as to whether or not a duty exists. I propose to examine these matters under a series of headings, though the headings involve a substantial measure of overlap. (1) The purpose for which the statement was made In some cases the statement will have been prepared or made by the “adviser” for the express purpose of being communicated to the “advisee,” to adopt the labels used by Lord Oliver. In such a case it may often be right to conclude that the advisee was within the scope of the duty of care. In many cases, however, the statement will have been prepared or made, or primarily 74

After Caparo: what is required to establish a duty of care? 5.76 prepared or made, for a different purpose and for the benefit of someone other than the advisee. In such cases it will be necessary to look carefully at the precise purpose for which the statement was communicated to the advisee. (2) The purpose for which the statement was communicated Under this heading it will be necessary to consider the purpose of, and the circumstances surrounding, the communication. Was the communication made for information only? Was it made for some action to be taken and, if so, what action and by whom? Who requested the communication to be made? These are some of the questions which may have to be addressed. (3) The relationship between the adviser, the advisee and any relevant third party Where the statement was made or prepared in the first instance to or for the benefit of someone other than the advisee it will be necessary to consider the relationship between the parties. Thus it may be that the advisee is likely to look to the third party and through him to the adviser for advice or guidance. Or the advisee may be wholly independent and in a position to make any necessary judgments himself. (4) The size of any class to which the advisee belongs Where there is a single advisee or he is a member of only a small class it may sometimes be simple to infer that a duty of care was owed to him. Membership of a large class, however, may make such an inference more difficult, particularly where the statement was made in the first instance for someone outside the class. (5) The state of knowledge of the adviser The precise state of knowledge of the adviser is one of the most important matters to examine. Thus it will be necessary to consider his knowledge of the purpose for which the statement was made or required in the first place and also his knowledge of the purpose for which the statement was communicated to the advisee. In this context knowledge includes not only actual knowledge but also such knowledge as would be attributed to a reasonable person in the circumstances in which the adviser was placed. On the other hand any duty of care will be limited to transactions or types of transactions of which the adviser had knowledge and will only arise where “the adviser knows or ought to know that [the statement or advice] will be relied upon by a particular person or class of persons in connection with that transaction:” per Lord Oliver in the Caparo case [1990] 2 AC 605, 641.

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5.77 Caparo: the objects and scope of the auditor’s duty of care in tort

It is also necessary to consider whether the adviser knew that the advisee would rely on the statement without obtaining independent advice.

(6) Reliance by the advisee In cases where the existence of a duty of care is in issue it is always useful to examine the matter from the point of view of the plaintiff. As I have ventured to say elsewhere the question “Who is my neighbour?” prompts the response “Consider first those who would consider you to be their neighbour.” One should therefore consider whether and to what extent the advisee was entitled to rely on the statement to take the action that he did take. It is also necessary to consider whether he did in fact rely on the statement, whether he did use or should have used his own judgment and whether he did seek or should have sought independent advice. In business transactions conducted at arms’ length it may sometimes be difficult for an advisee to prove that he was entitled to act on a statement without taking any independent advice or to prove that the adviser knew, actually or inferentially, that he would act without taking such advice.’ 1 [1991] 2 QB 113. For the issue in the case, see below at para 9.12. 2 [1991] 2 QB 113 at 125D–127B.

5.77 The same Judge, Sir Brian Neill, gave a subtly different list of general factors in another accountancy case a few years later, namely BCCI v Price Waterhouse (No 2):1 ‘The threefold test and the assumption of responsibility test indicate the criteria which have to be satisfied if liability is to attach. But the authorities also provide some guidance as to the factors which are to be taken into account in deciding whether these criteria are met. These factors will include: (a)

The precise relationship between (to use convenient terms) the adviser and the advisee. This may be a general relationship or a special relationship which has come into existence for the purpose of a particular transaction. But in my opinion counsel for Overseas was correct when he submitted that there may be an important difference between the cases where the adviser and the advisee are dealing at arm’s length and cases where they are acting “on the same side of the fence”.

(b) The precise circumstances in which the advice or information or other material came into existence. Any contract or other relationship with a third party will be relevant.

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After Caparo: what is required to establish a duty of care? 5.79 (c) The precise circumstances in which the advice or information or other material was communicated to the advisee, and for what purpose or purposes, and whether the communication was made by the adviser or by a third party. It will be necessary to consider the purpose or purposes of the communication both as seen by the adviser and as seen by the advisee, and the degree of reliance which the adviser intended or should reasonably have anticipated would be placed on its accuracy by the advisee, and the reliance in fact placed on it. (d)

The presence or absence of other advisers on whom the advisee would or could rely. This factor is analogous to the likelihood of intermediate examination in product liability cases.

(e) The opportunity, if any, given to the adviser to issue a disclaimer.’ 1 [1998] BCC 617 at [7.20].

5.78 Neill LJ’s lists both emphasise the importance of the purpose for which the statement was made or communicated to the claimant. As noted above, this will normally be the critical question in an audit case, because the audit report is given by the auditor for one purpose, namely the statutory purpose explained in Caparo, but is used for another purpose, namely the claimant’s reliance which led to the loss claimed. If all the circumstances show that a reasonable person in the position of the claimant would have understood the defendant auditor to be providing the audit report for the claimant’s relevant purpose, that will normally show that the auditor assumed responsibility for that purpose and a duty was owed, whereas if not, that will normally be enough to show that responsibility was not assumed and no duty arose. 5.79 The final two factors added to the second list (other advisers, opportunity to disclaim) are significant additions of which note should be taken. In corporate transactions, it is generally the case that the purchaser will have access to its own advisers. This will often be a significant factor detracting from the reasonableness of any reliance that such a purchaser might place on the target company’s auditors or accountants. As Sir Brian Neill put it in the same case:1 ‘In cases where parties are dealing at arm’s length the court is likely to be slow to extend the orbit of the duty of care to include persons other than the immediate client. There is a barrier which has to be overcome and this barrier will be strengthened or even duplicated if a third party is in receipt of independent advice.’ 1 BCCI v Price Waterhouse (No 2) [1998] BCC 617 at [8.3] at 636F.

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5.80 Caparo: the objects and scope of the auditor’s duty of care in tort 5.80 Recent case law has tended to emphasise the opportunity which an accountant has to disclaim responsibility for the claimant’s reliance on his work.1 This is because there is a close parallel between the existence of such an opportunity and the kind of circumstances that might suggest that the accountant intends the plaintiff to rely on his work. Thus any member of the public may choose to rely on a published audit report, for example to make an investment decision. In that situation, the auditor has no opportunity to disclaim responsibility for such reliance.2 On the other hand, where there is direct contact between the claimant and the defendant in which the claimant makes clear that it proposes to use the defendant’s audit report for some particular purpose, then the auditor is thereby given an opportunity to respond by disclaiming responsibility for such use. 1 See in particular the Scottish case of Royal Bank of Scotland v Bannerman Johnstone Maclay [2006] BCC 148 at [63]–[64]. 2 In fact, modern practice is for audit reports to contain a general disclaimer of responsibility to anybody other than the auditor’s client. However, the general principle remains that no specific opportunity exists for the auditor to make clear that particular reliance by an unknown claimant is not sanctioned.

5.81 The flipside of an opportunity to disclaim may be that the auditor has the opportunity to assent to the proposed use of the audit report. Any such positive assent or agreement will obviously be important to the question of assumption of responsibility and therefore duty of care. Without an explicit consent, the question of the purpose for which the audit report is given or communicated is very similar to the question whether his consent for the claimant’s relevant use can be implied from the circumstances. 5.82 In the light of these considerations we venture to suggest that the central factual inquiry is whether or not, on an objective assessment, the purposes for which the auditor (or accountant) made or communicated the statement complained of included the protection of the claimant from suffering the type of loss claimed as a result of the form of reliance which the claimant placed on the statement. This is closely related to whether the claimant’s reliance on the defendant’s statement was reasonable, which is a key issue in many duty of care inquiries. In making this inquiry, the court will consider: ●●

the primary purpose of the statement (for an example, a statutory audit report is always given for the primary purpose set out in Caparo);

●●

the circumstances in which the statement came to the notice of the claimant, including whether the claimant received the statement as part of a large or indefinite class of recipients;

●●

the type of loss claimed including the type of reliance on the defendant’s statement from which it resulted;

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After Caparo: what is required to establish a duty of care? 5.82 ●●

the relevant knowledge of the defendant at the time he made, repeated or communicated the statement, including knowledge concerning the claimant, the likely reliance on the statement and the likely types of loss that could result;

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any relationship or direct dealings or communications between the parties;

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whether the claimant had other sources of relevant information or advice;

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whether the defendant gave explicit or implicit consent for the claimant’s relevant reliance on the defendant’s statement; and

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whether the circumstances provided the defendant with an opportunity to disclaim responsibility.

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Chapter 6

Applications of the Caparo principle

THE GENERAL AUDIT DUTY IS NOT OWED TO A PURCHASER OF THE COMPANY 6.01 In Caparo the House of Lords decided that where a claimant purchases some or all of the shares in a company in reliance on negligently audited accounts, if there are not other relevant facts, then the auditor owes no duty of care to the claimant, even if that claimant was already a shareholder of the company before the share purchases in issue. As set out in the speeches in Caparo, the New Zealand case of Scott Group v McFarlane was one such case;1 the Scottish case of Twomax v Dickson McFarlane & Robinson2 was another. 1 [1978] NZLR 553. The claim in Scott Group was dismissed on other grounds; the majority reasoning as to the basis for assessing the existence of a duty of care was disapproved by House of Lords in Caparo; the minority reasoning of Richmond P was approved. 2 1982 SC 113. Overruled by House of Lords in Caparo.

THE GENERAL AUDIT DUTY IS NOT OWED TO INVESTORS, LENDERS, DIRECTORS OR EMPLOYEES 6.02 Under the principles which underlie the decision in Caparo, it is now clear that an auditor generally does not owe an actionable duty of care to any potential or actual stakeholders in the company, but only a contractual (and coextensive tortious) duty to the company itself and a tortious duty to the shareholders as a body which is not capable of supporting a claim separate from that of the company’s own claim. 6.03 Al Saudi Banque v Clarke Pixley (‘Al Saudi Bank’)1 was a claim by several banks that they had relied on negligently audited accounts in deciding to advance further loans to the audited company. The question whether the defendant auditor owed the banks a duty of care was decided as a preliminary issue by Millett J after the Court of Appeal had given judgment in Caparo, but before the House of Lords had done so. The claimants relied on it being foreseeable to the auditor that they would lend money to the company and on

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The general audit duty is not owed to investors, etc 6.06 the auditor having actual knowledge of the identities and exposure of those claimants who were existing lenders at the audit date. Millett J held that these factors were not sufficient to give rise to a duty of care and his decision was expressly approved by the House of Lords in Caparo. Millett J correctly judged the way the judicial wind was blowing at the highest level and in effect anticipated the House of Lords’ decision in Caparo. His reasoning in Al Saudi Bank has often been cited and has always been treated as highly authoritative. 1 [1990] 1 Ch 313.

6.04 Berg Sons & Co Ltd v Adams1 was a decision of Hobhouse J after a trial. Although relatively long and complex, the judgment is an important one to which this work will return on other issues. For present purposes, it is a case in which Caparo and Al Saudi Bank were followed in finding that there was no duty of care owed by an auditor to a lending bank. Hobhouse J explained the focus of the inquiry in this way:2 ‘The statements of principle in Caparo show that there must be a specific relationship between the function which the defendant is requested to perform and the transaction in relation to which the plaintiff says he has relied upon the proper performance of that function. It is not enough that there be a general potential for reliance or that there may be a class of transactions which may foreseeably be entered into. There must be a specific transaction which can be said to be the transaction, or among the transactions, to which the carrying out of the function was directed. The result of applying such a test is that it will only be in very clear and immediate circumstances that it will be possible to say that a statutory auditor owes a duty of care to a banker who may at some later date chose to lend money to a company.’ 1 [1992] BCC 661. 2 At 681G.

6.05 Galoo v Bright Grahame Murray1 is an important decision of the Court of Appeal which will be considered in this work under several different headings. Galoo Ltd was the audited company; all the shares in Galoo were held by Gamine Ltd. Hillsdown Holdings Plc purchased a majority shareholding in Gamine and made loans to both Gamine and Galoo. All three companies – Galoo, Gamine and Hillsdown – sued the auditors when the accounts were found to have been overstated. The auditors applied to strike out all of the claims on various grounds. 1 [1994] 1 WLR 1360.

6.06 For the purpose of this section, the relevant issue in Galoo was ‘Issue 3’ in the Court of Appeal. Under that heading, the Court of Appeal upheld the first 81

6.07 Applications of the Caparo principle instance judge’s decision to strike out the claim by Hillsdown for losses caused by making loans to Gamine and Galoo. This aspect was a straightforward application of Caparo and Al Saudi Bank. The claimants had not pleaded that the auditors knew or intended that the accounts should be relied upon by Hillsdown for the purpose of making such loans. It followed that their pleading on this point was inadequate and the Court of Appeal confirmed that it fell to be struck out. 6.07 Anthony v Wright was a claim by investors in an investment company, where the company held the investments on trust for the investors. Lightman J applied Caparo in holding that the auditor of the company owed no duty of care to the beneficiary investors.1 1 [1995] BCC 768.

6.08 MAN v Freightliner1 was a complex case about which more will be said below. For present purposes the relevant findings can be shortly stated. The auditor of a company which was sold on the basis of warranties as to the accuracy of its accounts did not generally owe a duty of care to the sole shareholder of the audited company in respect of loss suffered by giving the warranties, nor to the purchaser of the shares in the audited company who suffered loss by buying the company in the belief that the accounts were accurate. This result did not change even if it was foreseeable to the auditor when signing the audit report that the accounts would be relied upon for these purposes. These findings were made at first instance by Moore-Bick LJ and, ultimately, not challenged on appeal.2 1 [2005] EWHC 2347 (Comm). 2 [2007] BCC 986, [2008] 2 BCLC 22. See at [31] and [32] of the judgment of Chadwick LJ in the Court of Appeal and his earlier description of the findings of the judge at first instance.

6.09 The auditor’s general duty of care is not owed to the directors or employees of the audited company.1 In Coulthard v Neville Russell,2 Chadwick LJ put it this way: ‘For my part I would be inclined to accept the proposition that it is no part of the auditors’ statutory duties to protect directors personally from the consequences of their mistakes and wrongdoing.’ Rushmer v Mervyn Smith provides a further illustration that an auditor will not generally owe a duty of care to an individual who was (virtually) the sole shareholder and director and also guarantor of the audited company.3 See also Makar v PricewaterhouseCoopers.4 1 In Rihan v Ernst & Young Global [2020] EWHC 901 (QB), it has been held that an auditor owed a duty of care to an employee of the audit firm (not the client) to conduct the audit in an ethical and professional manner. 2 [1998] PNLR 276 at 284. 3 [2009] EWHC 94 (QB) at para 73. 4 [2011] EWHC 3835 (Comm).

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Assumption of responsibility cases: corporate transactions 6.14 6.10 The more unusual case of an employee arguing that the company’s auditor owed him a duty of care was put forward in Elton John v Price Waterhouse.1 In that case, Sir Elton John was the key employee of the audited companies and he was remunerated with 99 per cent of their profits. Even so, applying Caparo, the auditor of those companies did not, in that capacity, owe him a duty of care.2 1 Ferris J, 11 April 2001, [2001] WL 273028 (Westlaw). 2 See para [215] of the judgment.

6.11 Another less commonplace claim was made in Benjamin v KPMG by insurance companies who had suffered loss on the insolvency of certain captive reinsurers.1 The Supreme Court of Bermuda struck out their claim against the reinsurer’s auditor, following Caparo on the basis that the auditor owed no duty of care to persons who had bought reinsurance policies from the audited company. Similarly, in Lavender v Miller Bernstein LLP, the Court of Appeal for Ontario held that an auditor of a securities dealer owed no duty of care to persons who invested through that dealer.2 1 [2007] SC (Bda) 21 Com, [2007] BMSC 20. 2 [2018] ONCA 729.

6.12 The narrowness of the general audit duty as determined in Caparo is now well-known and increasingly the cases which are argued or reported concern the circumstances in which an auditor will be found to have assumed responsibility for purposes over and above the statutory purpose, rather than attempts by claimants to assert that the auditor owed additional duties simply as auditor.

ASSUMPTION OF RESPONSIBILITY CASES: CORPORATE TRANSACTIONS 6.13 Although the general audit duty does not extend beyond the company and the shareholders as a body, the House of Lords in Caparo made clear that an auditor can owe a duty of care to a third party under the general rules for the imposition of such a duty. As discussed above, in relation to auditors, the issue is normally whether the auditor has assumed responsibility to the claimant for the claimant’s use of the audit opinion, which involves an inquiry as to the purposes, if any, for which the auditor made or communicated the audit opinion over and above the statutory purpose. 6.14 This issue has arisen most frequently in claims by purchasers of companies. The detailed facts of many such cases (especially the successful claims) exhibit a common pattern where the auditor accedes to commercial pressure to communicate directly with the purchaser in order to assist the 83

6.15 Applications of the Caparo principle auditor’s client in finding new sources of funding or the client’s shareholder in selling its shares. 6.15 There is a similar line of cases where the defendant accountant prepares accounts (either in addition to or instead of auditing them) that are relied upon by the purchaser. These cases (including Candler v Crane Christmas) are discussed below at paras 9.10–9.19. 6.16 In JEB Fasteners v Marks Bloom & Co,1 Woolf J found that the defendant auditor owed a duty of care to the claimant who had purchased all the shares in the audited company. The judge held that the claimant would have purchased the company even if it had known of the flaws in the accounts, so the auditor’s negligence caused no loss. An appeal was heard only on the causation issue and the judge’s dismissal of the claim on that issue was upheld by the Court of Appeal.2 1 [1981] 3 All ER 289. 2 [1983] 1 All ER 583.

6.17 Woolf J’s reasoning in finding that a duty of care existed was disapproved in Caparo, but Lord Bridge said that: ‘It may well be, however, that the particular facts in the JEB case were sufficient to establish a basis on which the necessary ingredient of proximity to found a duty of care could be derived from the actual knowledge on the part of the auditors of the specific purpose for which the plaintiffs intended to use the accounts.’1 Lord Oliver quoted with approval from a part of Millett J’s judgment in Al Saudi Bank including the words: ‘The JEB Fasteners case can be supported only on the basis that the statement was impliedly confirmed directly to the plaintiff without any such intention, but with a particular transaction in contemplation, and it was foreseeable that the plaintiff would rely upon it in that transaction.’2 Lord Oliver also said: ‘as Bingham LJ observed in the instant case, the facts were such as to justify a finding of a relationship of proximity without any extension of the criteria suggested by Denning LJ in his judgment in Candler’s case’.3 1 Caparo [1990] 2 AC 605 at 625C. 2 Caparo at 642D.

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Assumption of responsibility cases: corporate transactions 6.19 3 Caparo at 648F. Bingham LJ’s narration of the facts which led him to that conclusion can be found in the report of the Court of Appeal’s judgments in Caparo at [1989] QB 653 at 692–693.

6.18 However, when the facts of JEB Fasteners are examined, it cannot be supported as an assumption of responsibility case on the basis apparently favoured by Bingham LJ and Lord Oliver. In the post-Caparo world, no duty of care would have been owed on the facts as found by Woolf J. At the time the audit report was given, the defendant auditor was aware that the company had financial difficulties and would require finance from some quarter. However, he was not aware of the claimant’s interest in purchasing the company, nor even that an outright sale was in contemplation. In that regard, the auditor should have been in no worse position than the defendant in Caparo who was assumed to be able to foresee that a takeover bid for Fidelity was on the cards. The only positive finding of any nexus between the auditor and the claimant was in these terms: ‘After the accounts had been certified there was first canvassed a proposal by the plaintiffs to take over BG Fasteners Ltd. Mr Marks [the auditor] was fully aware of the progress of the negotiations on which he advised [the selling shareholders]. He also supplied information to the plaintiffs at the request of [the purchaser].’1 It is possible that, in the course of supplying information, Mr Marks might have told the plaintiffs, or implied, that they could rely on the accounts in making their acquisition,2 but there is no finding to that effect in the judgment of Woolf J. Based only on the facts as set out in the judgment, JEB Fasteners is not a case where there was an assumption of responsibility. 1 JEB Fasteners v Marks Bloom & Co [1981] 3 All ER 289 at 299c. 2 As occurred in ADT v Binder Hamlyn, discussed immediately below.

6.19 ADT v Binder Hamlyn1 was another claim by a purchaser of a company against the target company’s auditor. The claimant accepted that the auditor owed no relevant duty when the audit report was first given. However, the claimant alleged, and May J accepted, that the claimant insisted on a meeting with the auditor where the purchaser asked whether the auditor stood by the accounts and the auditor confirmed that he did so. The judge held that in substance this amounted to a direct confirmation by the auditor to the purchaser that the accounts gave a true and fair view and that the auditor knew that the purchaser would rely upon that confirmation in deciding to proceed with the purchase. Accordingly, he held that the auditor did assume responsibility to the purchaser for the conduct of the audit, and owed a duty of care in negligence. 1 [1996] BCC 808.

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6.20 Applications of the Caparo principle 6.20 ADT v Binder Hamlyn was a somewhat borderline decision in that, as the judge recognised, the auditor gave an obvious and almost formalistic confirmation of his own work orally in the course of a few seconds and thereby became potentially liable to a purchaser for a very large sum (assessed as the difference between the price paid and the true value of the company). The judge recognised these aspects and set against them his finding that the meeting was understood by both parties to be an important one convened in order for the purchaser to obtain the confirmation that it required directly from the auditor. The auditor was not obliged to answer the question and in particular could have disclaimed responsibility or liability if it had wished to do so. Reading the judgment, it is hard to avoid the feeling that the claimant understood that it was setting a trap for the auditor in terms of potential liability to which the auditor was perhaps not alive. 6.21 ADT v Binder Hamlyn was very much noticed by the accountancy profession. The same message – that a disclaimer of responsibility is both possible and essential to protect accountants from this kind of liability – was delivered a few years later by the Scottish courts in the case of Royal Bank of Scotland v Bannerman Johnstone Maclay1 and confirmed in the successful strike out application in Barclays Bank v Grant Thornton.2 Disclaimers are now recommended by the main professional bodies: for example, the ICAEW technical release 01/03AAF, revised in May 2018, discusses these cases and their impact on the audit report. 1 [2006] BCC 148. 2 [2015] 2 BCLC 537. See discussion at para 13.05.

6.22 Yorkshire Enterprise v Robson Rhodes1 was another attempt by a purchaser of a company to sue the auditor of the company for negligence. In this case, on the judge’s findings, the auditors had extensive direct dealings with the purchasers including giving them written advice as to the figures in the accounts and signing off the relevant audit reports for the purpose of enabling the purchaser to rely on them. The judgment is long and it is not easy to extract from it the precise factors which were critical. However, when all the facts found are considered in the round, it is not surprising that Bell J had ‘no hesitation’ in finding that the auditors owed a duty of care to the claimant purchasers. This was a case that was clearly within the scope of Denning LJ’s dissenting judgment in Candler, as approved in Hedley Byrne and Caparo. 1 Bell J, 17 June 1998, Lexis.

6.23 MAN v Freightliner1 was a variation on the theme of auditors’ liabilities claimed to arise from their involvement in corporate transactions in that the auditors were sued by the vendor, not the purchaser. The central decision in

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Assumption of responsibility cases: corporate transactions 6.28 the case was on grounds that were quite specific to its facts, but the arguments raised led to some dicta with potentially wider implications. 1 [2005] EWHC 2347 (Comm), aff’d [2007] BCC 986, [2008] 2 BCLC 22.

6.24 In MAN v Freightliner, ERF was the target company. It was the subject of an accounting fraud, whereby its financial controller, Mr Ellis, dishonestly overstated the company’s accounts for the years ended 30 June 1998 and 30 June 1999. Ernst & Young (now known as EY) was the auditor of ERF and negligently failed to identify the errors in those accounts. In early 2000, ERF was sold by its owner, Western Star, to a subsidiary of MAN AG, MN. Freightliner then bought Western Star and took responsibility for its liabilities through a merger. When the fraud was discovered MAN and MN sued Freightliner/Western Star. Freightliner/Western Star sought to pass any liability on to EY. 6.25 The share purchase agreement contained the usual warranties that the accounts were materially accurate, and these had been breached. However, owing to a contractual time bar, MAN was not able to succeed on a simple breach of warranty claim, but had to show fraud. MAN’s primary case was that Mr Ellis himself made dishonest misstatements in the course of negotiations (principally the representation that the accounts had been prepared in good faith and were accurate as far as he knew), amounting to the tort of deceit, and that Freightliner/Western Star was vicariously liable for Mr Ellis’s deceit. The judge (Moore-Bick LJ sitting at first instance) held that MAN’s primary case succeeded and that MAN could recover all its resulting losses from Freightliner on this basis. 6.26 MAN also made an alternative case for breach of warranty on the basis that the breaches were fraudulent (and therefore not caught by the time bar) because Mr Ellis’s knowledge of their falsity was to be attributed to Western Star. This case failed because the judge held that Mr Ellis’s knowledge did not fall to be attributed to Western Star for this purpose. 6.27 Freightliner/Western Star claimed against EY on several bases. For present purposes, the most significant were claims that: (i)

EY was liable to Western Star for its losses suffered by relying on the audited accounts in negotiations with MAN and the Share Purchase Agreement; and

(ii) EY was liable under the Civil Liability (Contribution) Act 1978 as a party liable to MAN together with Freightliner for the ‘same damage’. 6.28 The first of these raised a similar issue to the second issue in Caparo itself: could shareholders in an audited company sue the auditor if they relied on the audit opinion for a particular purpose? In particular, could shareholders 87

6.29 Applications of the Caparo principle rely on the audit opinion in order to decide what warranties or representations to make about the company to a purchaser? 6.29 In relation to the 1998 audit opinion, that was given before the transaction was proposed. However, when EY signed the 1999 audit opinion and provided it to ERF, it did so knowing of the proposed sale and knowing that the accounts had to be signed urgently because MAN/MN required to see them before proceeding with the deal.1 Although EY gave the accounts only to its audit client, ERF, it did so knowing that ERF would pass them immediately to its parent, Western Star, which would rely on the accounts in its negotiations with MAN/MN as presenting a true and fair view.2 1 Man v Freightliner [2005] EWHC 2347 (Comm) at [345]. 2 Man v Freightliner [2005] EWHC 2347 (Comm) at [347].

6.30 Despite this knowledge, the judge held that the purpose for which the accounts were communicated by EY did not include any purpose beyond the statutory provisions. The judge found: ‘There is no evidence of anything passing between Western Star and E&Y (UK) to indicate that Western Star was intending to rely on the accounts for any particular purpose in its negotiations with MN or that it was seeking an assurance from her that it could safely do so, and although Mrs. Sinderson signed the audit certificate, she did nothing to indicate that E&Y (UK) were assuming responsibility for the accuracy of the accounts for any purposes of that kind.’1 1 Man v Freightliner [2005] EWHC 2347 (Comm) at [350].

6.31 The judge further pointed out that the cause of Western Star/Freightliner’s liability to MAN/MN was not the inaccuracy of the accounts but the fraud of Mr Ellis.1 Moreover, this approach reflected the correct approach to the question of recoverability of damages under the SAAMCO principle: Moore-Bick LJ took the view that if the auditor had assumed responsibility to the vendor for their use of the accounts, the damages recoverable could include any loss incurred by Western Star as a result of the difference between the true net asset value of the company and that shown in the accounts, for example, by reason of a breach of warranty, but not a loss caused by fraud on the part of a person for whom Western Star was vicariously liable.2 1 Man v Freightliner [2005] EWHC 2347 (Comm) at [351]. 2 Man v Freightliner [2005] EWHC 2347 (Comm) at [352].

6.32 When the case reached the Court of Appeal,1 Chadwick LJ took the clear view that the critical point was that the cause of Western Star/Freightliner’s loss was the fraud of Mr Ellis, rather than the inaccuracy of the accounts.

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Assumption of responsibility cases: corporate transactions 6.33 That was sufficient to dispose of the argument based on a duty of care arising from the 1999 audit opinion. In the course of so holding, Chadwick LJ said: ‘Although, on the facts found by the judge, E&Y might well have been found to have undertaken a special audit duty in that respect – and to have been in breach of that duty – it was not breach of that duty which gave rise to the loss which Freightliner has suffered and for which it seeks to hold E&Y liable.’2 This dictum was expanded later in the judgment thus: ‘If it were necessary to decide the point, I would accept that, in the present case, it was within a special audit duty owed by E&Y to Western Star to protect Western Star from the consequences of representations and warranties made in the share purchase agreement, including representations and warranties which, for the purposes of art 12.3(5) of that agreement, had been made fraudulently.’3 1 [2007] BCC 986, [2008] 2 BCLC 22. 2 [42] at 1009. 3 [54].

6.33 This dictum raises an interesting question: does an auditor who knows that the accounts will be relied upon by the shareholder(s) of the audit client in the course of a sale of the company undertake responsibility for losses that the shareholder(s) may suffer by virtue of giving representations and warranties as to the accuracy of those accounts? It is respectfully submitted that the negative answer given, or at least implied, by Moore-Bick LJ1 is to be preferred to the positive one suggested by Chadwick LJ in the Court of Appeal. The issue depends on the specificity with which the auditor’s knowledge of the ‘very transaction’ is described. If it is sufficient for an auditor to realise that standard form warranties are likely to be given, then it could be said that the auditor takes responsibility for losses incurred when the shareholder does just that. However, the auditor will not know when giving his report the precise terms of any warranties and will not generally have given the shareholders any reason to believe that he takes responsibility for such warranties. No duty of care arises in respect of such losses because: (i)

the auditor and the shareholder both know that the primary purpose for which the audit report is given, and must be given by the auditor, is the statutory purpose;

(ii) it is impossible to discern in the statutory scheme a purpose of assisting shareholders who wish to give warranties to purchasers; (iii) if the auditor is not asked to give express assent to this use of the audit report, then he will not generally have an opportunity to disclaim either; (iv) the auditor will not have any opportunity to consider or influence the precise terms of any warranties; and 89

6.34 Applications of the Caparo principle (v) it is well known in the corporate transactions market that auditors do not voluntarily take responsibility for losses arising in such transactions, which gives great importance to the lack of express consent by the auditor to such use of the report. 1 Man v Freightliner [2005] EWHC 2347 (Comm) at [350], set out at para 6.30 above.

6.34 The second of these claims – the contribution claim – involved the same issue as in the cases described above such as JEB Fasteners, ADT v Binder Hamlyn and Yorkshire Enterprise v Robson Rhodes: namely, did the auditor owe a duty of care to the purchaser of the audited company? As the judge held, the audit partner ‘must have known that MN would rely on them as providing a reliable statement of ERF’s financial affairs as at 30 June 1999’. 6.35 Despite this knowledge, the judge held that EY did not owe a duty of care to MAN or MN in respect of the 1999 accounts. The key factor in the judge’s consideration was that there was no direct relationship (nor any material communications) between EY and MAN/MN.1 A secondary factor was that MAN/MN had their own accounting advice from Deloitte & Touche. Moore-Bick LJ recognised that the auditor’s knowledge that the audited accounts would be passed by its client to a third party who would rely on them for a particular transaction was in substance ‘mere foreseeability’, where it was not conjoined with any indication from the auditor that such reliance was in some way sanctioned or accepted by the auditor.2 As a result of the lack of such indication, the judge held that it could not ‘be said that E&Y (UK) provided the accounts for the purpose of the transaction or otherwise acted in such a way as to assume a responsibility for their accuracy.’3 1 Man v Freightliner [2005] EWHC 2347 (Comm) at [477], quoted in the Court of Appeal judgment at [29]. 2 As the judge recognised, such an indication would not necessarily have to be given directly to the purchaser, since in Hedley Byrne v Heller, the reference was provided through an intermediary: see first instance judgment at [476] quoted in the Court of Appeal judgment at [29]. 3 Man v Freightliner [2005] EWHC 2347 (Comm) at [478] quoted in the Court of Appeal judgment at [29].

6.36 The acceleration of the audit because the purchaser required finalised accounts was a feature upon which Bell J had placed some emphasis in Yorkshire Enterprise v Robson Rhodes, which was not cited in MAN v Freightliner, but in the earlier case there had been other important factors in play in addition, including a great deal of direct contact between the auditor and the purchaser. 6.37 The holding of Moore-Bick LJ that EY did not assume responsibility to MAN/MN despite knowing of their likely reliance on audited accounts for a particular transaction is an illustration of the point made at para 5.73, namely that actual knowledge is a necessary, but not sufficient condition, for the imposition of a duty of care. 90

The auditor in the corporate group 6.41 6.38 Although the contribution question was the subject of appeal, the reasoning of the Court of Appeal on the point took the matter no further. Chadwick LJ simply held that he could not envisage circumstances in which EY could have owed a special audit duty to MAN/MN unless it also owed one to Freightliner/Western Star.1 1 [2007] BCC 986 at [32] at 1005.

THE AUDITOR IN THE CORPORATE GROUP 6.39 Corporate groups frequently involve several levels of shareholding. It may be thought that an ultimate parent company which is a merely indirect shareholder could have no greater rights against the auditor of an indirect subsidiary than a direct shareholder (like Caparo). However, the contrary has been argued. 6.40 The basis of the argument for a duty of care to the top company in a group is that the ultimate parent company generally has a statutory obligation to prepare group accounts. Similarly to the rules on preparing individual company accounts, the group accounting requirement has deep roots in English company law, but is now also subject to overriding requirements of European Union law, which have in turn been incorporated into the English statutory and extra-statutory provisions. It can therefore be said that the auditor of an individual company within a group may be taken to know that the audited accounts will be used by the directors of the parent company to prepare group accounts.1 1 See for example, per Moore-Bick LJ in Man v Freightliner [2005] EWHC 2347 (Comm) at [343]: ‘Given the nature of relationships between Western Star [parent] and ERF [subsidiary] and between E&Y (UK) [subsidiary auditor] and E&Y Canada [group auditor], E&Y (UK) must have realised that both the 1998 and 1999 audit reports would be passed to Western Star who could be expected to rely on them both for the purpose of producing consolidated accounts for the Western Star group as a whole and for the purposes of making decisions about the future conduct of ERF’s business.’

6.41 This point arose in the litigation that followed the collapse of Barings Bank in 1995. The losses that brought down the bank were incurred by Mr Nick Leeson through his employer, Barings Futures (Singapore) Pte Limited (BFS), a company incorporated in Singapore which was an indirect subsidiary of Barings Plc, the ultimate parent of the group. At all material times, Barings Plc was audited by Coopers & Lybrand (C&L), an English firm of chartered accountants. For some of the relevant period, BFS was audited by the Singapore firm, Deloitte & Touche (D&T). However, BFS switched to the Singapore firm known as Coopers & Lybrand (C&L(S)). Barings Plc claimed against all three firms of auditors in negligence. C&L, of course, were sued as

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6.42 Applications of the Caparo principle of right in England, while D&T decided not to challenge the jurisdiction of the English court. C&L(S), however, argued that the English court should not exercise jurisdiction over it. Among other reasons, C&L(S) contended that as a matter of law it owed no duty of care to Barings Plc. C&L(S) therefore argued that since the claim was demurrable in law, it was not a proper one for service out of the jurisdiction. 6.42 The forensic background for this argument by C&L(S) was about as unfavourable as could be. First, C&L(S) operated under the same brand name as C&L. It may be presumed that C&L(S) had won the audit of BFS at least in part because it was part of the same international auditing umbrella organisation as C&L. C&L and C&L(S) were represented by the same solicitors and counsel. Yet C&L(S) sought to take advantage of its separate legal status from C&L to avoid being sued in England. While this kind of structure has now been commonplace among international accounting firms for some years, it was not quite so widely known and accepted in the early 1990s and it might have struck a judge as adventitious that this argument was available to C&L(S) at all. Secondly, the fact that D&T did not join in C&L(S)’s application despite being in an apparently similar legal position to benefit from it was a very unpromising start.1 1 In a later decision in the same proceedings it was noted that D&T were opposed to the application: Barings Plc v Coopers & Lybrand [2002] BCLC 364 at [82].

6.43 Against this background, Chadwick J refused to strike out the claim against C&L(S).1 Chadwick J recited the statutory provisions requiring the preparation of group accounts and said: ‘It is not necessary or appropriate, on the present application, to examine, in abstract, the generic question whether auditors of subsidiary companies owe duties of care to the parents of those subsidiaries. I would not be prepared to hold, on an application of this nature, that such duties arose merely because the auditor of the subsidiary might be expected to know that this audit of the subsidiary’s accounts would or might be relied upon by the directors of the parent in preparing consolidated accounts for the group.’ 1 Barings Plc v Coopers & Lybrand [1997] I L Pr 12. Formally, the judge rejected an application to refuse jurisdiction, but the test applied was identical to a strike out on a point of law.

6.44 Chadwick J then set out a series of communications concerning the audit of BFS which passed between C&L as group auditor and C&L(S). These communications appeared to show that C&L(S) had been instructed to look with particular care at one of the key accounting entries which were used to

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The auditor in the corporate group 6.47 cover up Mr Leeson’s losses. Chadwick J did not analyse the communications beyond making the following points about them: ‘In my view it is clear, on the evidence set out in the documents to which I referred, that C&L(S) knew that the information which they were instructed to supply was required by Barings plc; and was required in order that the directors of Barings plc could comply with the obligation, imposed upon them by section 227 of the Companies Act 1985, to prepare consolidated accounts which showed a true and fair view of the financial affairs of the group. In those circumstances I am satisfied that this is not a case in which it can be said, at this stage, that there is no serious question of law to be tried as to the existence of a duty of care owed by C&L(S) to Barings plc.’ 6.45 The Court of Appeal upheld the decision of Chadwick J on this point.1 Leggatt LJ (with whom Mummery and Swinton Thomas LJJ agreed) said:2 ‘In my judgment the argument about duty of care is concluded by the simple fact that C&L(S) knew that their audit and report on the consolidation schedules were required so that the directors of Barings could comply with their obligation to provide accounts which showed a true and fair view of the financial affairs of the group.’3 1 [1997] BCC 498, [1997] BCLC 427. 2 At [1997] BCC 505C, [1997] BCLC 435f. 3 Leggatt LJ made clear at 506B that he was holding only that a duty of care was arguable, not that it existed. The early stage at which this decision was made was emphasised in the later judgment of Evans-Lombe J in the same proceedings at [2002] 2 BCLC 264 at [82].

6.46 It may be thought that this short ground of decision owed more to the overall forensic atmosphere than to detailed legal reasoning, although the somewhat more careful approach of Chadwick J based on special evidence in the particular case is easier to justify at the strike out stage. 6.47 Moreover, another ground exists for caution about the result in Barings, namely that it has been disapproved by the House of Lords on a different, but closely related point: the principle against reflective loss. On that point, the Court of Appeal in Barings held that there was no principle that a holding company is unable to recover damages for the loss in the value of its subsidiaries resulting directly from a breach of duty owed to the holding company. This holding was expressly disapproved by the House of Lords in the leading case on the reflective loss principle, Johnson v Gore Wood.1 In what is now the leading case on the reflective loss principle, Marex Financial Ltd v Sevilleja,2 the dicta from Johnson disapproving Barings were approved by the

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6.48 Applications of the Caparo principle majority in the Supreme Court, though this was a point on which the minority disagreed. While it was not stated in terms that the decision to permit the claim in Barings to continue was therefore wrong, that would appear to be the logical conclusion. 1 [2002] 2 AC 1, at 36A per Lord Bingham and at 65E per Lord Millett. 2 [2020] UKSC 31, [2021] AC 39.

6.48 The group audit situation arose again in relation to another high profile banking collapse, the Bank of Credit and Commerce International (BCCI). In the first strike out application in these proceedings, the EW defendants had been auditors of Holdings and one of its principal subsidiaries, known as SA. They did not audit another principal subsidiary, Overseas. However, all three companies – Holdings, SA and Overseas – brought claims against the EW defendants. The EW defendants applied to strike out the claims by Overseas on the ground that they owed no duty to a subsidiary or fellow subsidiary of their audit clients, Holdings and SA. At first instance, Laddie J struck out the claims on that basis, but the Court of Appeal permitted them to continue. However, even in the Court of Appeal it was recognised that in general, such a duty would not exist. The finding that such a duty was arguable in the particular case was based strongly on the special facts alleged that the three companies operated as a single bank with their businesses strongly intertwined to the knowledge of the auditors. In the final paragraph of his judgment, Sir Brian Neill said:1 ‘I would only add this. The facts of this case are most unusual, and I would not wish the conclusion which I have reached on the pleadings to be used in support of an argument in some other case that the court should be more ready than in the past to impose liability whenever a close relationship between adviser and advisee was established.’ 1 BCCI v Price Waterhouse (No 2) [1998] BCC 617 at [10.2] at 637E.

6.49 Five years after the Barings jurisdiction decision discussed above, C&L and C&L(S) settled the claims against them and D&T brought an application to strike out the continuing claims against D&T by Barings Plc and an intermediate holding company.1 On this occasion D&T conceded for the purpose of the strike out application that they (arguably) owed a duty of care to Barings Plc arising out of their acceptance of group audit instructions to audit BFS’s consolidation schedules, to report to the group auditors on those schedules and to give an audit report on those schedules to the directors of the parent company.2 The issues on this second strike out included the scope of that duty in terms of the heads of loss claimed. D&T were successful on grounds that are considered elsewhere in this work. In the course of considering

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The auditor in the corporate group 6.53 BCCI v Price Waterhouse (No 2), Evans-Lombe J commented on the group audit aspect of that case as follows: ‘In particular, this case [BCCI] is no authority for the proposition that a subsidiary auditor is to be treated as subject to the same duties to a parent company as those to which the group auditor would be subject as a result of his contractual relationship with that parent.’3 1 [2002] 2 BCLC 364. 2 [2002] 2 BCLC 364 at [27]. 3 [2002] 2 BCLC 364 at [76].

6.50 The conclusions from this line of cases may be stated as follows. 6.51 First, an auditor’s knowledge that the audited company is part of a group does not, without more, give rise to any duty of care to the ultimate parent company. Although the auditor may be taken to know of the statutory requirement for group accounts, the ultimate parent’s position is very different to that of the shareholders as a body, to whom the auditor is required to make his report. The auditor is not (without more) in a position to have any say over the precise way in which the audited accounts are used in preparation of the group accounts. Moreover, the parent company will have its own auditor who will have primary responsibility for auditing the group accounts. The group audit may include reliance on the audit of subsidiaries under ISA 600, but that is reliance by the group auditor in its capacity of a contractor of the parent company, not by the parent company itself. For the relationship between group and subsidiary auditors, see SI 2016/649, Sch 1, para 15. 6.52 Secondly, it is possible in principle for a subsidiary auditor to assume responsibility to the ultimate holding company through communications between the auditor and the holding company prior to the delivery of the audit report. It also appears to be arguable that a duty of care can arise between an auditor and other group companies in highly unusual circumstances of the sort canvassed in the BCCI litigation. 6.53 Thirdly, it is arguable on the basis of the Barings jurisdiction decision that a duty of care to the ultimate holding company can arise through communications between the auditor and the group auditor as part of the preparations for the audit. Although in that case the court had strong forensic reasons to reject the attempt of C&L(S) to make an early exit from the litigation, the decision is not binding as to any proposition of law in other cases. It is submitted that in any ordinary case, communications between the different auditors should not suffice without more to establish a duty unless, perhaps, the group auditor can be seen as speaking in this respect on behalf of the holding company itself.

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6.54 Applications of the Caparo principle 6.54 The treatment of the Barings case by the House of Lords in Johnson v Gore Wood illustrates that where a duty of care might otherwise arguably arise between a subsidiary auditor and a parent company, the issue of reflective loss should always be considered.

FAILED APPLICATIONS TO STRIKE OUT Introduction to failed strike outs 6.55 An application to strike out a claim is made on the basis that the claimant’s pleading does not disclose reasonable grounds for bringing the claim.1 Because the ground of such an application is purely legal, no substantive evidence is admissible. The classic exposition of the Court’s approach to such applications, which has regularly been cited in accountancy cases is the following passage from the judgment of Sir Thomas Bingham MR in E v Dorset County Council, X v Bedfordshire County Council:2 ‘It is clear that a statement of claim should not be struck out under RSC, Ord 18, r 19 as disclosing no reasonable cause of action save in clear and obvious cases, where the legal basis of the claim is unarguable or almost incontestably bad. It was argued by Mr. Ter Haar, for Richard, that this procedure was inappropriate in a case such as his, raising issues which were novel and difficult. Relying in particular on Lonrho Plc v Fayed [1992] 1 AC 448, 469–470, he urged the undesirability of courts attempting to formulate legal rules against a background of hypothetical facts and pointed to the potential unfairness to plaintiffs if their cases were finally ruled upon before they were able, with the benefit of discovery, to refine their factual allegations. If a summary procedure for determination of legal issues were to be adopted at all, it should (he submitted) follow joinder of issues on the pleadings and discovery, and should be by decision of an issue of law suitable for determination without a full trial under RSC, Ord 14A. The defendants answered that their applications do in effect raise an issue of law for decision by the court: if they cannot show the plaintiffs’ claims to be plainly bad, then their applications must fail; but if they can show that, then it is preferable in the interests of all concerned that the claims should be dismissed now before the costs of a full trial are incurred. There is great force in both these arguments. I share the unease many judges have expressed at deciding questions of legal principle without knowing the full facts. But applications of this kind are fought on ground of a plaintiff’s choosing, since he may generally be assumed to plead his best case, and there should be no risk of injustice to plaintiffs if orders to strike out are indeed made only in plain and 96

Failed applications to strike out 6.57 obvious cases. This must mean that where the legal viability of a cause of action is unclear (perhaps because the law is in a state of transition), or in any way sensitive to the facts, an order to strike out should not be made. But if after argument the court can be properly persuaded that no matter what (within the reasonable bounds of the pleading) the actual facts the claim is bound to fail for want of a cause of action, I can see no reason why the parties should be required to prolong the proceedings before that decision is reached. The court is of course bound to approach each pleaded cause of action separately, and need not reach the same decision on each.’ 1 CPR 3.4(2)(a), formerly RSC Ord 18, r 19. 2 [1995] 2 AC 633 at 693–694.

6.56 Up until the change from the Rules of the Supreme Court to the Civil Procedure Rules in 1998, such an application was the only one that a defendant could bring as of right (though the Court had power to order the trial of preliminary issues). Since that date, a defendant has also been able to bring an application for summary judgment under CPR Pt 24 on the ground that the claim has no real prospect of success.1 On that application, evidence is admissible. Under the CPR, the two applications are frequently combined, though doing so where no factual point is taken has been deprecated.2 The term ‘strike out application’ is often used loosely to cover these two applications by a defendant and we adopt that usage in this section. 1 For the authoritative exposition of the way that this test should be applied and its relationship with the test for striking out under CPR 3.4(2)(a) see Three Rivers DC v Bank of England (No 3) [2003] 2 AC 1 especially per Lord Hope at [87] to [107]. A helpful (and oft cited) checklist of the principles applicable to a defendant’s application for summary judgment in particular may be found in the judgment of Lewison J in Easy Air v Opal Telecom [2009] EWHC 339 (Ch) at [15]. 2 See per Chadwick LJ in Independents Advantage v Cook [2004] PNLR 3 at [8].

6.57 As Laddie J explained in BCCI v Price Waterhouse,1 accountancy litigation regularly involves applications to strike out but, if the application fails, then it is far less common for the claim to reach final trial.2 As he put it: ‘The result is that a significant part of the case law consists of cases concerning applications to strike out.’ This part of the case law is of limited utility since of course ‘caution must be exercised in seeking to apply a decision which in fact decided no more than a claim should not be struck out as being determinative of a substantive issue.’3 1 [1999] BCC 351 at 355, [16]. 2 For a rare exception, see MAN v Freightliner, in which the auditors succeeded at trial [2005] EWHC 2347 (Comm) and in the Court of Appeal [2007] BCC 986, [2008] 2 BCLC 22 in part on the very grounds which had been rejected on a strike out application [2004] PNLR 19. 3 Law Society v KPMG [2000] 1 WLR 1921 at [20].

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6.58 Applications of the Caparo principle 6.58 Several successful strike out applications are discussed above in the context of showing how Caparo has been applied. However, many strike out applications have failed; so many that they justify a section of their own in this work to illustrate the strong view taken by many courts, especially in England the Court of Appeal, of the difficulty of being certain, short of full trial, of the outcome of arguments as to duties of care. Some other failed strike out applications are not considered in this section as they are less material to that particular issue, but are nevertheless mentioned in relation to other specific points made in the judgments: examples include Temseel v Beaumonts,1 MAN v Freightliner,2 and Royal Bank of Scotland v Bannerman.3 1 [2002] EWHC 2642 (Comm). 2 [2004] PNLR 19. 3 [2006] BCC 148.

The failed strike out cases 6.59 In Morgan Crucible v Hill Samuel,1 a successful takeover bidder sued the directors, auditors and other advisers of the target company alleging various misstatements in their financial statements and other statements made during the course of the contested takeover battle. The original cause of action was based on little more than foreseeability and the claimants accepted that they had to amend their claim following the House of Lords’ judgments in Caparo. Their application for permission to amend the claim was opposed on the ground that even the amended claim would not be arguable; it was therefore treated as a striking out application. At first instance, Hoffmann J held that the defendants all aimed their statements at existing shareholders (in respect of their decision whether to sell to the bidder), not at the bidder, and owed the bidder no duty of care. Applying Caparo, he refused permission to amend and struck out the claim. 1 [1991] Ch 295.

6.60 On appeal, the claimants, now represented by Jonathan Sumption QC, refined their case, explained by Slade LJ thus:1 ‘Mr. Sumption, on their behalf, has expressly accepted that, in view of Caparo’s case, in general terms the directors and financial advisers of a target company owe no duty of care to safeguard the interests of a potential bidder in their conduct of a contested take-over. The proposition of law on which they rely is a much narrower one. If during the conduct of a contested take-over, after an identified bidder has emerged, the directors and financial advisers of a target company choose to make express representations with a view to influencing the

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Failed applications to strike out 6.64 conduct of the bidder, then, it is submitted, they owe him a duty not negligently to mislead him.’ 1 [1991] Ch 295 at 314F.

6.61 On this basis, the Court of Appeal held that it was arguable that the directors in making representations in the target company’s defence document after the claimants had emerged as bidders, intended that the claimants would rely on those representations in deciding whether or not to increase their bid and therefore arguable that they owed the claimants a duty to exercise reasonable care in the making of such representations.1 1 [1991] Ch 295.

6.62 With rather shorter reasoning the Court of Appeal held that both the financial advisers, Hill Samuel and the auditors, Judkins, were arguably liable to the claimants for providing information to the target company for inclusion in the defence documents. Given that the information was addressed by the advisers and auditors solely to the company and it was the company which chose to publish them to the public, including the bidder, this would appear to be a borderline decision at best. 6.63 Glidewell LJ said this about Morgan Crucible in Galoo v Bright Grahame Murray:1 ‘The distinction between the set of facts which it was held in Morgan Crucible Co Plc v Hill Samuel & Co Ltd [1991] Ch 295 would suffice to establish a duty of care owed by auditors from those facts which it was held in the Caparo Industries case [1990] 2 AC 605 would not have this effect is inevitably a fine one. In my judgment that distinction may be expressed as follows. Mere foreseeability that a potential bidder may rely on the audited accounts does not impose on the auditor a duty of care to the bidder, but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditor, and intends that the bidder should so rely, the auditor will be under a duty of care to the bidder for the breach of which he may be liable.’ 1 [1994] 1 WLR 1360 at 1382C.

6.64 This formulation should be qualified recalling that the issue in Morgan Crucible was not whether a duty was owed, but whether it was arguable at trial that a duty was owed. It is therefore wrong to take from the decision any conclusion that duty would be owed if a particular condition was met.

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6.65 Applications of the Caparo principle 6.65 In Galoo itself, issue 2 concerned a claim which the defendants tried unsuccessfully to strike out. This was a claim that the auditors were liable to the claimants for the increased purchase price paid for Galoo on the basis of overstated audited accounts. The basis for the duty of care in this respect was an allegation that when the auditors reported on the 2006 accounts of Galoo they knew that the purchase price of the company was to be calculated by reference to these accounts. The defendants were therefore taken to know that the accounts and their audit report were required for the purpose of calculating the purchase consideration in addition to the statutory purposes. 6.66 A particular argument raised by the defendants on this point is worth noting. The acquisition agreement (the terms of which it was alleged were known to the auditors) provided that the accounts could be adjusted after delivery and provided for a dispute resolution process in the event of disagreement. The auditors argued that in these circumstances the purchaser was not intended to rely on the audited completion accounts without independent inquiry and that therefore a duty of care could not arise. The court agreed with the judge that the different functions of the auditors and the purchaser’s own accountants with respect to the completion accounts would require investigation at trial. This aspect could usefully have been considered under the rubric of causation: what would require disentangling at trial would be what loss exactly was caused by the errors in the accounts and by the incorrect audit opinion as opposed to having been caused by any failure by the claimants or their own accountants to take advantage of their right of review. 6.67 Coulthard v Neville Russell1 raised an important issue concerning the potential liability of auditors to directors of the audited company. As set out in the judgment of Chadwick LJ (Kennedy and Judge LJJ agreeing), it is part of the ordinary process of corporate life that directors will discuss with auditors the way that they propose to account for important transactions, with a view to drawing out any disagreement that may exist and if possible resolving it before the accounts are finalised. In this case, there were discussions of the proposed treatment of certain intra-group payments in which the auditors confirmed that the treatment preferred by the directors was acceptable. That treatment was erroneous and caused the company to breach Companies Act 1985, s 151, which prohibited companies from giving financial assistance for the purchase of their own shares. In consequence of that breach, the directors were held personally to be unfit to be company directors and disqualified from such office for a period. 1 [1998] PNLR 276.

6.68 The auditors took the point in reliance on Caparo that: ‘it is no part of the auditors’ statutory duties to protect directors personally from the consequences of their mistakes or wrongdoing: the work done by auditors is not done for the benefit of directors 100

Failed applications to strike out 6.70 personally, but solely for the company of which they are the directors (and through the company for the benefit of the shareholders collectively).’1 Chadwick LJ said: ‘For my part I would be inclined to accept the proposition that it is no part of the auditors’ statutory duties to protect directors personally from the consequences of their mistakes and wrongdoing. But breach of statutory duty is not alleged in the present case. The plaintiffs put their claim on the basis of a duty of care at common law.’2 This is not comprehensible as a distinction from Caparo since, in Caparo itself, the question was whether a duty of care at common law arose in favour of the claimants. The relevance of the statutory duties was that their satisfaction was the principal purpose for which the auditors did their work and they were therefore highly relevant to the question of to whom and for what losses the auditors owed any duty of care. 1 [1998] PNLR 276 at 284E–F. 2 [1998] PNLR 276 at 284F–G.

6.69 Chadwick LJ then referred to the claimants’ allegation that the auditors knew that the claimants would rely on their advice and said: ‘The duty at common law arose, if at all, because, in advance of the audit report in respect of the 1989 accounts, the defendants had, quite properly, entered into discussion with the directors as to the way in which they, as directors, were to perform their duties in relation to the preparation and approval of accounts. In the course of those discussions, so it is alleged, the defendants advised that the proposed treatment of the payments to Hendal was unexceptional; or, at the least, said nothing to suggest that it would give rise to any difficulty when they, as auditors, came to give their audit report.’ 6.70 He then cited various passages from Caparo and BBL and a well-known passage from the judgment of Sir Thomas Bingham MR in E v Dorset County Council1 on the subject of the caution required before striking out a claim. He then said, without further reasoning about the details of the claim before the court:2 ‘In my view the liability of professional advisers, including auditors, for failure to provide accurate information or correct advice can, truly, be said to be in a state of transition or development. As the House of Lords has pointed out, repeatedly, this is an area in which the law is developing pragmatically and incrementally. It is pre-eminently an 101

6.71 Applications of the Caparo principle area in which the legal result is sensitive to the facts. I am very far from persuaded that the claim in the present case is bound to fail whatever, within the reasonable confines of the pleaded case, the facts turn out to be. That is not to be taken as an expression of view that the claim will succeed; only as an expression of my conviction that this is not one of those plain and obvious cases in which it could be right to deny the plaintiffs the opportunity to attempt to establish their claim at a trial.’ 1 [1995] 2 AC 685 at 693H. 2 [1998] PNLR 276 at 289E–F.

6.71 In Makar v PricewaterhouseCoopers, Teare J said of Coulthard, having cited the above passages:1 ‘It is, therefore, easy to see why, in that case, the application to strike out failed because there was a pleading of meetings between the directors and the auditor and a request for advice from the auditors on specific matters.’ Despite that, Coulthard is not an easy case to understand, for two reasons. First, there is no analysis in the judgment of whether the pleading contained any element that would justify a finding that the auditors went beyond advising the Company (acting by its directors) as to the proper treatment of the impugned transactions so as to assume responsibility to the directors personally for any losses they might suffer if the treatment was wrong. In relation to this point, the essential reasoning of the Court of Appeal appears to be in the passage quoted immediately above: in short, duties of care to third parties fall within a difficult and developing area of the law and the claimants had done enough in their particulars of claim to show that their case was not completely hopeless. On this basis, the decision seems to be a marginal one. 1 [2011] EWHC 3835 (Comm) at [24].

6.72 The second difficulty with Coulthard is that is hard to understand how the auditors could have been responsible for the losses claimed, which were ‘the loss … which they have suffered as a result of the Secretary of State’s decision to seek disqualification orders against them.’1 In directors’ disqualification proceedings, the nature of any external advice received by the directors is relevant to the issue of unfitness. In that regard, Sir Richard Scott V-C had held:2 ‘the s 151 matter is in my view the most important of the three [matters said to demonstrate the directors’ unfitness]. The facts which constitute the breach of s 151 were facts known to each of the three respondent directors. I accept that none was aware at the time that what was being done in advancing monies to Hendal Ltd did constitute 102

Failed applications to strike out 6.76 a breach of s 151, but I would conclude without difficulty, and it is indeed accepted by each of the respondents, that each ought to have known that that was so. It is important however that I should record that the making of the loans was not done for any personal gain which it was thought might thereby be obtained by any of the directors. It was not accompanied by any want of probity or dishonesty.’ 1 [1998] PNLR 276 at 278F–G. 2 As the same judge recorded in a later judgment in the proceedings: Re Dawes & Henderson (Agencies) Limited [1999] 3 BCLC 317.

6.73 In these circumstances, the auditors would seem to have had a powerful argument that the consequences of the disqualification were neither within the scope of any duty of care they may have owed to the directors nor legally caused by their negligence; since the cause of the disqualification – insofar as it related to the s 151 issue – was the directors’ personal fault, not the simple fact of the breach of the statute. This issue is not discussed in the reported Court of Appeal judgment, but on the basis of the facts as reported, no answer to it is apparent. 6.74 The next strike out application to come to the Court of Appeal after Coulthard was Siddell v Smith Cooper.1 In Siddell, the auditor of a company was also engaged to produce its quarterly management accounts and its annual accounts. The same firm was also engaged by the individual claimants who were the beneficial owners of the company to provide personal financial and taxation advice. It was alleged that the firm advised the claimants that a bank financing the company would look more favourably on it if they lent personal funds to the company (which they had to borrow on mortgage) to reduce its bank borrowings. This advice was followed. It later transpired that the accounts and management accounts were overstated, with the result that the claimants lost those loans and were also called upon to honour personal guarantees. 1 [1999] PNLR 511.

6.75 At first instance, the judge struck out the claimants’ claim on two grounds. The first ground was that Caparo applied with the effect that the defendant firm’s duties as auditors and accountants to the company were not owed for the benefit of the claimant shareholders. Secondly, the judge applied Galoo and held that the losses claimed were not caused by the defendant’s alleged negligence. 6.76 The Court of Appeal (Clarke LJ with whom Mummery LJ agreed) adopted the approach set out by Chadwick LJ in Coulthard and held, first, that it was at least arguable that in advising the claimants to lend to the company, the defendant firm owed them a duty of care, the breach of which caused the loss of this loan. That was an unsurprising finding on these facts. If an auditor gives advice to other clients (including shareholder and lenders), such advice is 103

6.77 Applications of the Caparo principle likely to be the subject of an arguable duty of care, notwithstanding the Caparo principle that such a duty does not arise merely from its position as auditor. 6.77 Secondly, the Court of Appeal overturned the striking out of additional heads of loss based on the contention that if the defendants had not been negligent then the company would have been liquidated sooner than it was and the claimant shareholders would not have suffered the losses which they in fact suffered when the company did go into liquidation. On this point, the reasoning of Clarke LJ was very brief.1 He held that it was arguable in all the circumstances, especially the relationship between the claimants and the defendants, that a duty of care was owed in this regard. As to causation, Clarke LJ said of this head of loss that ‘it may be much more difficult to establish the alleged loss’ but that the case ‘cannot be said to be doomed to failure on these facts’. 1 [1999] PNLR 511 at 527.

6.78 The holding as to the second (and larger) head of loss is harder to justify analytically, but it illustrates two important practical factors which recur in these strike out applications: (i)

First, if one part of the claim is to proceed to trial, then the court will be slow to strike out another part unless it is wholly unrelated. Experience suggests that the detailed connections between factual matters to be investigated at trial can be unpredictable and that it is often impracticable to confine disclosure and evidence to just one part of a single factual picture.

(ii) Secondly, if the auditor has taken on several roles related to the same business then at the strike out stage, it will find it difficult to rely on a clear separation between those roles or engagements to deny a crossover duty of care. At trial, the terms of separate engagement letters – especially if they reflect the reality of the way the accountant undertook its tasks – may well provide important protection. But on a strike out, the court is sometimes unwilling to reach a firm conclusion, especially where the claimant is a relatively unsophisticated individual. 6.79 Apart from the lack of detailed reasoning involved in the refusal to strike out the second head of loss, it is also notable that the Court of Appeal did not seek to analyse at all several of the heads of loss claimed, which seem to have included the claimants’ loans to the company and the diminution of the value of their shareholdings. Whatever the position as to duty of care and causation, it is hard to see why these heads of loss did not fall foul of the principle against reflective loss.1 1 The heads of loss are set out at 520B–D. There is no suggestion in the report that an attack on reflective loss formed any part of the application.

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Failed applications to strike out 6.82 6.80 The next important failed strike out application was Electra v KPMG.1 Electra was a venture capital fund manager. It purchased an Irish leasing company, Cambridge Group plc and lost its entire investment, allegedly because of misstated accounts. Electra received due diligence services on the transaction from KPMG in the UK, who were the first defendant to their claims. The second defendant was KPMG Stokes Kennedy Crowley (SKC), the Irish partnership within the KPMG international umbrella organisation, who were the auditors of Cambridge. SKC sought to strike out the claims against them. They took the obvious Caparo point: as auditors, SKC owed no duty of care to a potential buyer of the company. The application succeeded at first instance, but was rejected by the Court of Appeal. 1 [2000] BCC 368, [2001] 1 BCLC 589, [2000] PNLR 247, [1999] Lloyd’s Rep PN 670.

6.81 The alleged facts as set out in the Court of Appeal judgments amply justified the rejection of the application. In particular, it was the claimant’s case that SKC themselves provided (or agreed to the provision of) draft accounts to Electra and knew that the placing agreement was then held in escrow pending Electra’s receipt of signed accounts in accordance with the draft. There was also disputed factual evidence about meetings where Electra said they had made SKC aware that satisfactory audited accounts were a precondition of their investment. Moreover, after the application had succeeded at first instance, the first defendant, KPMG, gave disclosure which showed that SKC were aware that KPMG had told Electra that it would be liaising closely with ‘our Dublin office’ [ie SKC] ‘to obtain maximum benefit from the knowledge built up during the audit process’. 6.82 The Court of Appeal adopted again the statements made in Coulthard as to the need for caution before striking out and held that the case was not clearly doomed to fail. Auld LJ made this important statement about the treatment of disputed factual evidence on an application to strike out:1 ‘It is true that a judge may reject pleaded allegations if he is satisfied that they are manifestly incapable of proof; see Morgan Crucible Co plc v Hill Samuel & Co Ltd [1991] BCC 82 at p 87C; [1991] Ch 295 at p 314B per Slade LJ and that he has some latitude as to inferences to be drawn from pleaded allegations of primary fact; see BCCI v Price Waterhouse, per Sir Brian Neill at [1998] BCC 617, 620B; [1998] PNLR 564, 567–G. However, he should always beware of attempting to determine the issue solely on the evidence before him without regard to what other evidence might emerge when discovery has been given and the issues of fact are subjected to the rigorous scrutiny of a full trial.’ 1 [2000] BCC 368 at 387E.

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6.83 Applications of the Caparo principle 6.83 The last sentence of that passage from the judgment of Auld LJ was amplified in the judgment of Clarke LJ:1 ‘an action should only be struck out as bound to fail on the facts if two requirements are met. The first is that it is bound to fail on the material available at the time the application is heard and the second is that there is no reasonable possibility that evidence which might be sufficient to support the plaintiffs case and to give it some prospect of success might become available to the plaintiff in the future, whether by further investigation, cross-examination, discovery or otherwise.’ 1 [2000] BCC 368 at 405C.

6.84 In Andrew v Kounnis Freeman,1 the auditor of a company trading as an air travel organiser was held to be arguably liable to the Civil Aviation Authority (CAA) for compensation payable to travellers when the company became insolvent. The CAA had refused to renew the company’s licence unless it received a series of confirmations from the auditor including receipt of the next audited accounts. The auditor directly gave these confirmations to the CAA and sent it a copy of the audited accounts drawing attention to the auditor’s report. In the light of this direct communication between the parties, it was held to be arguable that a duty of care arose in respect of the audit. This was plainly correct. Although not a factor strongly emphasised in the judgments, this was a case in which the auditor had a clear opportunity to disclaim responsibility which it did not take. 1 [1999] 2 BCLC 641.

6.85 Sasea v KPMG1 was a claim brought against an auditor by the audited company itself. The essence of the claim was that the auditor should have blown the whistle on dishonest dealings by the company’s management and if it had done so then further losses caused by four further transactions and a dividend would have been saved. The basis of the strike out application was: (i)

KPMG’s duty to blow the whistle did not arise until after the first three further transactions had been completed;

(ii) it would have made no difference what KPMG had said; and (iii) KPMG’s breach of duty merely provided the occasion for the losses and were not their cause, following Galoo. 1 [2000] 1 All ER 676, [2000] BCC 989, [2000] 1 BCLC 236, [2000] Lloyd’s Rep PN 227.

6.86 The first two points – timing and factual causation – were issues of fact upon which Collins J at first instance and the Court of Appeal had no difficulty in holding that an arguable case had been pleaded by the claimant.

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Failed applications to strike out 6.88 6.87 The third point – legal causation of the heads of loss – was more difficult. At first instance,1 Collins J held that two of the four further transactions were transactions ‘which were normal for’ the company and which therefore could not be claimed under the Galoo principle of causation.2 The other two were improper transactions not in the ordinary course of business which were at least arguably caused by the auditor’s failure to blow the whistle on that dishonesty. As to the dividend, Collins J held that claim failed because there was no evidence that the dividend entered in the company’s books was ever actually paid. In the Court of Appeal, however, it was held that each of the four transactions ‘in its own way was fraudulent or irregular’ and the claim was reinstated in respect of all four of them. There was no detailed reasoning for this decision, but it could be justifiable on the basis that the two transactions struck out by Collins J ‘may have been carried out to try to continue to conceal the position’,3 which could have drawn a causative link between the negligence and the loss. There was no appeal in relation to the striking out of the claim for the dividend.4 1 [1999] BCC 857. 2 See below at para 8.57. 3 Per Collins J at [1999] BCC 857 at 868G. 4 The fact that there was no appeal on the dividend is not expressly stated by the Court of Appeal but it was recorded by Hart J in a later decision in the same case: Sasea Finance v KPMG [2002] BCC 574 at [5].

6.88 Independents’ Advantage v Cooke1 was a claim by a lender against an auditor who had no direct contact with the lender, nor even knew the lender’s identity. As such, the defendant auditor naturally argued that the case fell clearly within the principle of Al Saudi Banque v Clarke Pixley2 as approved in Caparo. The defendant both prepared accounts and audited them for Swift Travel, which was a partnership trading as a travel agent and tour operator that was a member of both ABTA and IATA. Those two organisations undertook obligations to compensate customers in the event of an insolvency of one of their members. To cover those obligations, ABTA and IATA required their members to submit accounts and to provide security. The claimant’s business included the provision of bond facilities to ABTA and IATA members to satisfy these requirements. In the present case, the claimant had given such bonds on behalf of Swift Travel. The claimant also lent money to Swift Travel directly. Before incurring each new exposure to Swift Travel’s credit, the claimant required Swift Travel to provide it with the latest accounts. Swift Travel became insolvent and the claimant claimed to have lost £31,668 which it had paid to IATA on behalf of Swift Travel and £144,000 which it had lent Swift Travel and not recovered and investigation fees of £15,876.3 1 [2003] EWCA Civ 1103; [2004] PNLR 3. 2 See above at para 6.03. 3 [2(7)] in the Court of Appeal judgment.

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6.89 Applications of the Caparo principle 6.89 The Court of Appeal upheld the refusal by the judge at first instance to strike out this claim. The Court held it was significant that Andrew v Kounnis Freeman1 and Law Society v KPMG2 showed that it was arguable that the auditor would owe a duty of care to ABTA and IATA themselves. From there it was apparently only a small step to find it arguable that the auditor could owe a duty to the claimant who had provided bonds to ABTA and IATA and thereby ultimately suffered the loss in their place. Chadwick LJ (with whom Cresswell J and Potter LJ agreed) recited his own strictures against striking out duty of care cases from Coulthard and their approval in Siddell and Andrew v Kounnis Freeman and said ‘In my view the law in this field has not yet reached a point where it can be said to be no longer in a state of development or transition.’3 1 Above, para 6.82. 2 Below, para 9.29. 3 At [17].

6.90 Having noted the argument based on Al Saudi Banque v Clarke Pixley, Chadwick LJ then set out his reasoning for distinguishing the case before him thus:1 ‘The particulars of claim in the present case contain the assertion, at paragraph 39, that the firm knew (i) that Swift Travel’s audited financial statements and the auditors’ reports would be (and were) provided by Swift to institutions such as IAIC [the claimant] to support applications for the provision of bond facilities and other financial support and (ii) that such institutions would rely on those financial statements and reports when deciding whether to provide such facilities and support. It is said that the firm knew of those matters both because it had been told by Swift Travel (Mr Emery) – para [40(b)] – and because (as the firm knew) it was common practice within the travel industry – para [40(d)]. Those assertions, as it seems to me, take the present case outside the factual situation which Millett J had to consider in the Al Saudi Banque case. At the least, it cannot be said that the facts of the present case – as they appear from the particulars of claim – are so plainly and obviously covered by the decision in that case that the claim is bound to fail. To my mind the present case is at or near to the margin of existing decisions. I express no view as to which side of the line it will fall, when the facts have been examined in detail at a trial. I have no doubt that – as the judge held – the right course is to allow the claim to proceed to trial, so that that decision can be taken in the light of a full understanding of the facts.’ 1 At [20]–[21] of the judgment.

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Failed applications to strike out 6.93 6.91 This reasoning was thin because the allegation that the auditor knew that persons like the claimant would be likely to rely on the financial statements to take lending decisions was no more than an allegation of foreseeability of reliance and loss. Exactly the same could have been – and was – said in both Al Saudi Banque and Caparo. The real question should have been whether the auditor did anything to assume responsibility to the claimant or should be treated as having done so. In circumstances where the auditor had no communications with the claimant and had no actual knowledge of the claimant’s particular reliance (or even the specific claimant’s existence), the answer was clearly not. Even if the provision of bond funding to ABTA and IATA was sufficient to create an arguably different situation, the major part of the claim was for simple lending to Swift Travel and was indistinguishable from earlier authorities.1 1 Just as in Coulthard, it does not seem that a reflective loss point was taken on the strike out application.

6.92 In Equitable Life Assurance Society v Ernst & Young,1 Equitable Life was a mutual life assurance and pension company which issued of policies with a ‘guaranteed annuity rate’ option. These options were in the money after about 1993 and Equitable Life instituted a differential terminal bonus policy which effectively neutralised the benefit of the option.2 In 1998 Equitable Life decided to test the legality of this differential bonus policy and in 2000, the House of the Lords held it be unlawful.3 This resulted in massive liabilities and financial difficulties for Equitable Life which sued its auditor, Ernst & Young. The alleged negligence was: (i)

failing to ensure that sufficient provisions were made in its accounts between 1997 and 1999 for these liabilities; and

(ii) failing to require that the accounts included a note disclosing the dire consequences for Equitable Life if it lost the litigation concerning the legality of its bonus policy. 1 [2003] EWCA Civ 1114, [2004] PNLR 16. 2 The policies worked by building up value over the life of the policy, but critically a large portion of the total benefit was incorporated in a discretionary ‘terminal bonus’ which the Society added to each policy at maturity. 3 Equitable Life v Hyman [2002] 1 AC 408.

6.93 Equitable Life claimed that if Ernst & Young had insisted on the inclusion of the necessary provisions, then the directors would have appreciated that the society was in difficulties and arranged an orderly sale, recovering up to £2.6 billion for the society’s goodwill, the loss of which was claimed as damages (the ‘Lost Sale Claim’). Alternatively, Equitable Life claimed that it would have reduced its bonus declarations by around £0.4 billion in each of four relevant years and claimed up to £1.6 billion from Ernst & Young on this basis (the ‘Bonus Declarations Claims’). 109

6.94 Applications of the Caparo principle 6.94 At first instance,1 Langley J held that the Lost Sale Claim amounted to a claim for the all the losses which the society suffered after the date when it would have been sold on the claimant’s case, which he held to be irrecoverable in law under the principles set out in BBL/SAAMCO2 and Galoo.3 Langley J held that the bonus declaration claims were arguably within the scope of Ernst & Young’s duty, but that they were unsustainable for various factual reasons. In a subsequent judgment, Langley J allowed amendments to reintroduce a more specific form of bonus declaration claim which totalled some £500 million.4 1 [2003] PNLR 23. 2 See below at paras 8.06 et seq. 3 See below at para 8.57. 4 [2003] EWHC 804 (Comm).

6.95 On appeal, the Court of Appeal (Brooke, Rix and Dyson LJJ) reinstated the claims in full. First the Court of Appeal considered the various factual issues that had been canvassed in the application. In that respect, at [57], the Court of Appeal held that issues as to whether certain heads of loss were suffered in fact, or caused in law by the defendant’s negligence or were losses for which the defendant was responsible in law (scope of duty) were ‘all essentially issues of quantum’. Then at [59]: ‘in our judgment a court should be cautious, particularly in a complex case, about claiming to foresee, especially at the very outset of proceedings, a clear path to the summary dismissal of a case on the ground that, even though the issue of liability needs to go to trial, all issues of quantum must go against the claimant. This is particularly so when one considers that there are other mechanisms available, such as the ordering of preliminary issues, for judging whether a case, or part of a case must fail so far as matters of quantum are concerned.’ 6.96 However, the Court did go on in the same paragraph to acknowledge that: ‘There are cases whose structure may make it sensible to reverse the normal order of things and to take an issue or issues of quantum first. This may either be because the argument on quantum is relatively brief and, if decided against the claimant, determinative of the case; or it may be because such an issue or issues will determine whether the case is worth a great deal or comparatively little, and that may assist the parties to know whether it requires litigation at all, or can be mediated or settled.’ 6.97 The Court of Appeal determined that the case was of the first type rather than the second and that all factual matters were better left to trial than determined on the application for summary judgment. Turning to the issues 110

Failed applications to strike out 6.100 of scope of duty and legal causation, the Court of Appeal confirmed that the law remained in a state of development and flux and reiterated that such issues are sensitive to the facts and therefore rarely suitable for determination on an application to strike out.1 The Court of Appeal then held that the ‘line drawn by the judge’ between the two major claims was ‘a fine one and too fine for summary disposal’. Even though Ernst & Young did not advise on the desirability of a sale of the Society, if they had not been negligent in their audit, then such advice might have been sought from them.2 1 See at [107] and specifically in relation to the SAAMCO issue of scope of duty, see [128]. For more recent confirmation, see the solicitors’ case of Williams v HCB Solicitors [2017] EWCA Civ 38 at [27] where Longmore LJ said ‘controversial points about scope of duty should, in principle, be decided at trial once the full facts are known rather than by way of summary judgment’. 2 At [129].

6.98 The Court of Appeal held that: ‘once the judge’s analysis and decision in terms of SAAMCO have been departed from then the support for his decision on causation also fails. … If the loss of a chance of sale claims are within the scope of E&Y’s duties then the quantum of those claims becomes a matter of fact.’1 1 At [133].

6.99 It is of historical rather than legal interest to note what happened after the failed strike out. The trial commenced in 2005 of Equitable Life’s claims against its own former directors and its auditors. After the directors’ evidence, the claims against Ernst & Young were withdrawn. It was reported in the media that the basis for the withdrawal was the evidence of the directors that they would not have changed course in the face of different reports from Ernst & Young. In other words, factual or ‘but for’ causation could not be made out. This is an argument that was raised by Ernst & Young on the strike out, but neither Langley J nor the Court of Appeal was willing to determine it summarily. This was not the end of the matter for Ernst & Young: in 2010, Ernst & Young paid a fine and costs as a regulatory sanction imposed by the Joint Disciplinary Scheme for flaws in the audit of Equitable Life. 6.100 In the Guernsey case of Providence Investment Funds PCC Ltd v PricewaterhouseCoopers CI LLP,1 the Bailiff refused to strike out, on grounds of lack of legal causation, an audit claim brought by an insolvent investment company. He held that the point raised could be cured by an amendment to the pleadings (though it was a reasonable one for the auditor to raise in circumstances where they had given the claimant previous opportunity to amend on the point) and that the question of the auditor’s duty specifically to a regulated entity, where the protection of investors and the role of the regulator 111

6.101 Applications of the Caparo principle were relevant considerations, may still be a developing area. He also noted that there was no previous case concerning an auditor’s duty in Guernsey. 1 [2020] GRC021.

Conclusions regarding failed strike out applications 6.101 The overriding theme in strike out applications relating to auditors which reach the Court of Appeal in England is caution. Time and again, the Court of Appeal has recited its view that the duties of care owed by auditors and accountants falls within a developing area of the law which should develop further only on the basis of full factual findings. That seems to have been at the heart of the reasoning of the court in Coulthard, Siddell¸ Independents’ Advantage and Equitable Life. 6.102 Between the last of these decisions in 2005 and the date of this work in 2021, there have been only a small number of further final decisions after trial in auditors’ cases, but there has been a clarification of the general law on duties of care in the House of Lords’ decision in Customs & Excise v Barclays Bank, which was applied in a post-trial appellate decision on auditor’s duties in MAN v Freightliner. Customs was also applied in successful strike out applications by accountants (though not in their role as auditors) in Arrowhead v KPMG1 and by non-statutory auditors in Barclays Bank v Grant Thornton.2 Two significant audit cases have proceeded not just to final trial, but on to the Court of Appeal: Manchester Building Society v Grant Thornton3 and AssetCo v Grant Thornton.4 It could be said that the law is now in a more secure state of development than it was in 2005, but it remains to be seen whether the ‘developing area’ mantra will be applied less readily in relation to some of the issues discussed in this section. 1 [2012] PNLR 30, discussed below at para 12.10. 2 [2015] EWHC 320 (Comm), discussed below at paras 13.09–13.12. 3 [2018] PNLR 27 (Teare J); [2019] 1 WLR 4610 (CA). 4 [2019] Bus LR 2291 (Bryan J); [2021] PNLR 1 (CA).

6.103 The need for caution was also strongly emphasised in Electra, where the important additional point was made that the court would give to the claimant the benefit of any doubt as to what further evidence might be available at trial that was not available at the strike out stage. Of course, there is a limit to the application of this principle: there must be some reasonable basis for forming the view that further evidence might affect the outcome of the issue which the court is being asked to decide. 6.104 Several cases show that if the auditor has diluted the purity of its own Caparo position by taking part in direct communications with the claimant, that

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Failed applications to strike out 6.106 will generally be fatal to its prospects of striking out the claim: see Coulthard, Siddell, Electra and Andrew v Kounnis Freeman. 6.105 Morgan Crucible and Electra illustrate that where the claim against auditors is intertwined with more promising claims against other parties, the court might not be astute to disentangle them. Similarly, where the auditors themselves take on dual roles, Siddell and Electra illustrate that the court will not lightly strike out the pure audit claims. Even more often, the Court of Appeal has refused to get involved in disentangling individual heads of loss, even on scope of duty grounds: Siddell, Sasea, Equitable Life. 6.106 As appears from the above analysis of the individual cases, the view of this work is that the Court of Appeal has sometimes taken the theme of caution too far and refused to strike out claims, or heads of claim, that were plainly doomed to fail. As far as concerns the scope of duty principle, its operation is clearer at the time of this second edition than it was before, especially as a result of the Supreme Court’s decision in Hughes-Holland v BPE Solicitors and the Court of Appeal’s decision in Manchester Building Society v Grant Thornton.1 The latter case is awaiting a final decision from the Supreme Court and it will have to be seen whether that contributes to the growing clarity in this field.2 1 Both discussed below in Chapter 8. 2 The question whether a dividend falls within the scope of the auditor’s duty is an exception to the general trend towards clarity as reflected in the decision of Fancourt J in BTI 2014 v PricewaterhouseCoopers [2020] PNLR 7 to refuse to strike out a claim on that ground and the comments made on that point by the Court of Appeal in AssetCo v Grant Thornton [2021] PNLR 1 at [102]. The AssetCo decision, which is discussed in more detail in Chapter 8, could be said to re-open the difficulty about identifying precisely how the scope of duty principle applies to audit cases, but it does at least clarify that the principle does apply (especially at [100]–[103]).

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Chapter 7

Breach of duty and the auditor’s standard of care

THE STANDARD OF CARE IN GENERAL The standard of care in professional negligence 7.01 The overarching standard of care in the law of negligence is reasonableness. Where the law imposes a duty of care upon the defendant to act in a way that does not cause damage to the claimant, the standard of care which the defendant is required to meet is reasonableness. What is reasonable in a particular case is measured against all the circumstances of the case as they would have appeared to a reasonable person in the position of the defendant at the time when the act or omission complained of took place. 7.02 In professional negligence, the position of the defendant includes the fact that he holds himself out as having professional expertise of a particular type. Accordingly, the standard that the defendant has to meet is that of a reasonable member of the relevant profession. That standard remains essentially as described in Tindal CJ’s classic direction to the jury in the medical case of Lanphier v Phipos:1 ‘Every person who enters into a learned profession undertakes to bring to the exercise of it a reasonable degree of care and skill. He does not undertake, if he is an attorney, that at all events you shall gain your case, nor does a surgeon undertake that he will perform a cure, nor does he undertake to use the highest possible degree of skill. There may be persons who have higher education and greater advantages than he has but he undertakes to bring a fair, reasonable, and competent degree of skill, and you will say whether, in this case, the injury was occasioned by the want of such skill in the defendant.’ 1 (1838) Car & P 745, 173 ER 581.

7.03 Thus, the standard for a professional is the standard of reasonable care and skill, meaning the care and skill that would be applied by any competent 114

The standard of care in general 7.05 member of the relevant profession. The standard is not that of the highest possible degree of care and skill, still less a warranted result, but it is that which a reasonably competent professional would have applied. It has been said that: ‘The duties owed by an auditor to its client are high in the sense that the auditor holds itself out as practising a highly skilled and exacting profession.’1 1 Per Clarke JA in AWA v Daniels [1955–95] PNLR 727 at 769.

7.04 The principal gloss on that standard that has been applied arises from another direction to the jury, given by McNair J in Bolam v Friern Hospital Management Committee:1 ‘he is not guilty of negligence if he has acted in accordance with a practice accepted as proper by a responsible body of medical men skilled in that particular art. I do not think there is much difference in sense. It is just a different way of expressing the same thought. Putting it the other way round, a man is not negligent, if he is acting in accordance with such a practice, merely because there is a body of opinion who would take a contrary view.’ 1 [1957] 1 WLR 582 at 587, applied to auditors by Woolf J in Lloyd Cheyham v Littlejohn & Co [1987] BCLC 303 and by Bingham LJ in Caparo [1989] QB 653 at 689. Also referred to in the audit context in Cook v Green [2009] BCC 204 at [60]–[61].

7.05 Modern authority has tended to place increasing emphasis on the word ‘responsible’ in the famous dictum of McNair J, in that the court is perhaps more willing than it once was to examine and find wanting the practices of a profession, or a section of the profession, if they cannot be rationally justified. That trend is represented by the ‘Bolitho addendum’ to the Bolam test, namely:1 ‘the court has to be satisfied that the exponents of the body of opinion relied upon can demonstrate that such opinion has a logical basis. In particular in cases involving, as they so often do, the weighing of risks against benefits, the judge before accepting a body of opinion as being responsible, reasonable or respectable, will need to be satisfied that, in forming their views, the experts have directed their minds to the question of comparative risks and benefits and have reached a defensible conclusion on the matter’. 1 Per Lord Browne-Wilkinson in Bolitho v City & Hackney HA [1998] AC 232 at 241–242, applied to auditors by the Singapore Court of Appeal in JSI Shipping v Teofoongwonglcloong [2007] 4 SLR 460 at [51] and in PlanAssure PAC v Gaelic Inns [2007] 4 SLR 513 at [81].

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7.06 Breach of duty and the auditor’s standard of care 7.06 Another important trend in modern cases of professional negligence is towards the recognition that a professional often has a duty to advise the client not only as to the most likely outcome of an issue (for example, the interpretation of a tax statute) or a course of action (such as entering into a transaction), but also as to the significant risks that such an opinion may be wrong, or that may attend the course of action. This has always been the position in relation to taxation advice,1 but it has now come to the fore in other fields, including medical negligence2 and financial advice.3 1 See below at paras 9.90–9.112. 2 Montgomery v Lanarkshire Health Board [2015] AC 1430. 3 O’Hare v Coutts & Co [2016] EWHC 2224 (QB).

The standard of care in auditing 7.07 In the case of auditing in the modern world, and the other professional activities of accountants, liability for negligence will arise in contract as well as in tort. The scope of what the auditor undertakes to do will generally be determined by the contract.1 Naturally, ‘the court must beware of imposing upon the auditor duties which go beyond the scope of what it is requested and undertakes to do’.2 1 The general requirement for an express contract, usually in the form of an agreed engagement letter, is set out at para 10 of ISA 210. 2 Per Clarke JA in AWA v Daniels [1955–95] PNLR 727 at 769.

7.08 If the contract is silent on the standard of care, then it will be implied that the contractual standard is the tortious standard of reasonable care and skill. That standard is often expressed in the contract. In addition, contracts for audit generally make clear that the audit will be carried out in accordance with a particular framework of auditing standards. In the case of England and Wales, the applicable standards are International Standards on Auditing (UK) (ISAs). The audit report itself is required by the Companies Act 2006, s 459(2) (and also by ISA 700, para 15) to confirm which auditing standards were applied.1 Moreover, since 15 June 2016, there has been an express requirement under SI 2016/649, para 4 that an audit must be conducted in accordance with auditing standards and other requirements imposed by the Financial Reporting Council. 1 This statutory requirement has been in place since 2005.

7.09 In practice, therefore, in present-day audits, the required standard of care will generally be represented by compliance with ISAs. Even in the absence of a contractual commitment to such standards, they would be compelling evidence of the standard of a reasonably competent member of

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The standard of care in general 7.11 the auditing profession.1 As the Singapore Court of Appeal in JSI Shipping v Teofoongwonglcloong put it:2 ‘Whilst the standards provided therein will not always be conclusive or determinative of negligence, they are highly persuasive signposts in so far as they represent some form of professional consensus on the standard of care to be expected from an auditor.’ Whilst it is theoretically possible that ISAs could be found by a court to set the bar too low in some particular respect, given the well-developed nature of the ISAs in most jurisdictions, this is unlikely to occur other than very exceptionally. 1 Lloyd Cheyham v Littlejohn & Co [1987] BCLC 303 at 313a–c. In Hong Kong, see Extramoney v Chan Lai Pang & Co HKCFI 361 at [139]. 2 [2007] SGCA 40 at [34]. In Canada, see Livent v Deloitte & Touche [2016] ONCA 11 at [198]–[200].

7.10 In the same case,1 the Court of Appeal of Singapore adopted the following helpful formulation of the role of auditing standards from Bingham LJ in Caparo:2 ‘These principles [the Bolam gloss on the standard of care] afford special protection to auditors, whose task is not to draw the accounts nor to turn every stone and open every cupboard but to exercise their very considerable skill and judgment in carrying out checks and investigations in accordance with complex but nonetheless detailed and explicit professional standards.’ 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [45]. 2 [1989] QB 653 at 690.

7.11 In addition to ISAs, reference is sometimes made to the defendant auditor’s own internal manual of auditing as indicating a generally accepted practice. This is not a principled approach, since it is at least possible that an auditor’s own manual represents either too high or too low a standard of care. In practice, however, it has been taken as setting a floor on the standard to be applied to a particular defendant. Thus, in Dairy Containers v AuditorGeneral, Thomas J said: ‘Finally, the Auditor-General’s own office manuals set a standard of care which the Auditor-General must be presumed to accept is reasonable.’1 1 [1995] 2 NZLR 30 at 54, applied in Canada by the Ontario Court of Appeal in Livent v Deloitte & Touche [2016] ONCA 11 at [216]. For another example of this approach, where it was used to establish a duty to report on weaknesses in internal controls, see AWA v Daniels [1955–95] PNLR 727 at 744 and cf at 775, also reported at (1995) 16 ACSR 607 and 37 NSWLR 438.

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7.12 Breach of duty and the auditor’s standard of care 7.12 The most difficult points in auditing generally arise from the exercise of professional judgment rather than measurable compliance with auditing standards. There is rarely only one way of obtaining audit evidence on a given matter and there is rarely an absolute terminus reached on the process that precludes further work being done. Judgment is required as to which of several approaches to take and as to how far to push the verification process in respect of each relevant item. As it has been said: ‘Admittedly an audit allows abundant scope for discretion. However, whether or not such discretion is reasonably exercised is ultimately a matter for the court to determine.’1 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [114].

7.13 The precise requirements which the contract, applicable auditing standards and (in forensic reality if not in principle) the auditor’s own manual impose on a given factual situation in a particular audit are the stuff of expert opinion evidence, which is discussed below at Chapter 18. The identification of the relevant auditing practice is an issue of fact based on the evidence of the experts.1 However, the existence of that practice is only part of the material upon which the Court determines as a matter of law the standard in given circumstances.2 1 See JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [57]. 2 See JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [52].

7.14 Bringing the various sources of the standard in a given case together, it has been said:1 ‘The nature and extent of an auditor’s professional obligations in any given matrix is, therefore, to be assessed by a composite review of the precise contractual obligations undertaken, the duties imposed by statute, the auditing standards reflected in the SSAs [the Singapore equivalent of the ISAs] and the expert evidence adduced in relation to the conduct of the audit. The multiplicity of criteria is an inevitable function of the dynamic interface between the various interpretative processes which interact in an audit. There is no single all-embracing rule or criterion that consistently or exclusively predominates.’ 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [35].

7.15 The same court accurately summarised the duty of care itself as follows:1 ‘Stripped of all verbiage, it can be said that the demarcation of the boundaries of professional liability remains the judicially determined standard of reasonable care. In other words, the auditor must exercise the reasonable care and skill of an ordinary skilled person embarking on the same engagement. His duty is not to provide a warranty 118

The standard of care in general 7.17 that the company’s accounts are substantially accurate, but to take reasonable care to ascertain that they are so. The precise degree of scrutiny and investigative effort which constitutes reasonable care is to be determined on the facts of each individual case.’ 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [47].

7.16 Because detailed auditing standards are now available in many jurisdictions and expert evidence will be called in most cases, historic legal authorities will be far less relevant than they were in the past to the assessment of whether any given audit was up to the relevant standard or not. Nevertheless, a legal textbook in this field would not be complete without reference to two famous cases decided in 1895 and 1896 and an assessment of their relevance today.

Historical development of the auditor’s standard of care 7.17 In Re London and General Bank (No 2),1 the Court of Appeal (Lindley, Lopes and Rigby LJJ) upheld a judgment of Vaughan Williams J on a misfeasance summons2 requiring an auditor of a bank to make good a dividend paid out of capital.3 In relation to the auditor’s standard of work, Lindley LJ (with whom Lopes LJ agreed) said this: ‘His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that. But then comes the question, How is he to ascertain that position? The answer is, by examining the books of the company. But he does not discharge his duty by doing this without inquiry and without taking any trouble to see that the books themselves shew the company’s true position. He must take reasonable care to ascertain that they do so. Unless he does this, his audit would be worse than an idle farce. Assuming the books to be so kept as to shew the true position of a company, the auditor has to frame a balance-sheet shewing that position according to the books and to certify that the balance-sheet presented is correct in that sense. But his first duty is to examine the books, not merely for the purpose of ascertaining what they do shew, but also for the purpose of satisfying himself that they shew the true financial position of the company. This is quite in accordance with the decision of Stirling J in Leeds Estate Building and Investment Co v Shepherd. An auditor, however, is not bound to do more than exercise reasonable care and skill in making inquiries and investigations. He is not an insurer; he does not guarantee that the books do correctly shew the true position of the company’s affairs; he does not even guarantee that 119

7.18 Breach of duty and the auditor’s standard of care his balance sheet is accurate according to the books of the company. If he did, he would be responsible for error on his part, even if he were himself deceived without any want of reasonable care on his part, say, by the fraudulent concealment of a book from him. His obligation is not so onerous as this. Such I take to be the duty of the auditor: he must be honest – ie he must not certify what he does not believe to be true, and he must take reasonable care and skill before he believes that what he certifies is true. What is reasonable care in any particular case must depend upon the circumstances of that case. Where there is nothing to excite suspicion, very little inquiry will be reasonably sufficient, and in practice I believe business men select a few cases at haphazard, see that they are right, and assume that others like them are correct also. Where suspicion is aroused more care is obviously necessary; but, still, an auditor is not bound to exercise more than reasonable care and skill, even in a case of suspicion, and he is perfectly justified in acting on the opinion of an expert where special knowledge is required.’ 1 [1895] 2 Ch 673. 2 For an explanation of the misfeasance summons see above at paras 4.10 to 4.19. 3 Dividends were (and are) permitted only if they can be met from accumulated profits, so that they do not reduce the capital of the company.

7.18 The first three parts of the above quotation remain good – indeed basic – law in relation to auditing, save only that it is no longer the auditor’s role to frame or draw up the balance sheet. That is now done by the company’s management and the auditor only reports on its accuracy. The auditor now reports in addition on the profit and loss account or income statement. The fourth part of the quotation states some key points: namely that the auditor must take more care once suspicion is aroused and that in appropriate circumstances he can take into account a relevant expert opinion. However, the emphasis on the limited duty even in a case of suspicion is outdated and it will be seen below how the matter is addressed in modern authorities and standards. 7.19 The auditor was liable in London and General. He correctly ascertained that the value stated for the most important asset on the balance sheet – loans receivable – was misleading in that the loans were uncertain of realisation. In modern accounting language, a provision was required against the receivables. The auditor correctly reported on the true position to the directors of the company. However, in his report to shareholders, the auditor said only that ‘[T]he value of the assets as shewn on the balance-sheet is dependent upon realization.’1 The auditor contended that these words were sufficient to excite suspicion, but as Lindley LJ said: ‘the duty of an auditor is to convey information, not to arouse inquiry.’ 1 See at 685.

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The standard of care in general 7.24 7.20 These key points from London and General remain salutary today. First, the auditor must not forget that his overriding duty is to report to the shareholders. On an important matter, especially any material misstatement in the accounts, it will not sufficiently discharge the auditor’s duty for him to report it only to the directors. Secondly, a cryptic or enigmatic reference to the misleading part of the accounts will not suffice: the auditor must convey information, not merely arouse inquiry. 7.21 Another judgment of Vaughan Williams J against an auditor came before the Court of Appeal in Re Kingston Cotton Mill Company (No 2).1 This time, the Court of Appeal overturned the finding that the auditor was liable to make good dividends paid out of capital, on the ground that the auditor had not acted in breach of duty in failing to detect the fraud. This was a classic accounting fraud of a type that was to become very familiar over the next century or so. The managing director of the Kingston Cotton Mill deliberately overstated the stock balance at the end of each year in order to make the company appear profitable when in fact it was loss making. As a result, the company continued in business and paid dividends for several years that were not supported by genuine profits. Through a misfeasance summons, the liquidator sought an order that the auditor make good the moneys paid away as dividends out of capital. 1 [1896] 2 Ch 279.

7.22 In those days, the auditor compiled the balance sheet and the figure for stock was stated on its face to be ‘as per manager’s certificate’, which was true. Everybody trusted the manager and the auditor did not have any reason to suspect him, nor did they in fact suspect him. The case for the liquidator included evidence that if the auditor had checked the underlying books, it could have been ascertained from the figures for sales and purchases during the year that the stock figure certified by the manager was higher than those other figures would suggest it should have been. 7.23 Disagreeing with the judge, the Court of Appeal held that the auditor had no duty to inquire into the stock figures. These were stated on the face of the balance sheet to be as per the manager’s certificate and neither the auditors nor the directors had any reason to suspect wrongdoing on the part of the manager. Nobody contended that it was the auditor’s duty to take stock and the auditor would not have the expertise required to count and value stock in any event. 7.24 It was in this context that Lopes LJ set out a description of the duties of auditors that has become probably the most quoted text in the law of auditor’s negligence:1 ‘It is the duty of an auditor to bring to bear on the work he has to perform that skill, care, and caution which a reasonably competent, 121

7.25 Breach of duty and the auditor’s standard of care careful, and cautious auditor would use. What is reasonable skill, care, and caution must depend on the particular circumstances of each case. An auditor is not bound to be a detective, or, as was said, to approach his work with suspicion or with a foregone conclusion that there is something wrong. He is a watch-dog, but not a bloodhound. He is justified in believing tried servants of the company in whom confidence is placed by the company. He is entitled to assume that they are honest, and to rely upon their representations, provided he takes reasonable care. If there is anything calculated to excite suspicion he should probe it to the bottom; but in the absence of anything of that kind he is only bound to be reasonably cautious and careful.’ 1 At 288–289.

7.25 Towards the end of his judgment, Lopes LJ said this: ‘The duties of auditors must not be rendered too onerous. Their work is responsible and laborious, and the remuneration moderate. I should be sorry to see the liability of auditors extended any further than in In re London and General Bank. Indeed, I only assented to that decision on account of the inconsistency of the statement made to the directors with the balance-sheet certified by the auditors and presented to the shareholders. This satisfied my mind that the auditors deliberately concealed that from the shareholders which they had communicated to the directors. It would be difficult to say this was not a breach of duty. Auditors must not be made liable for not tracking out ingenious and carefully laid schemes of fraud when there is nothing to arouse their suspicion, and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors. So to hold would make the position of an auditor intolerable.’ 7.26 A large part of these two passages remains good law today. As set out above, the formulation of the ultimate standard of reasonable care and skill in all the circumstances has not changed.1 It is also right to say, indeed to restate and to emphasise, that an auditor does not warrant that the accounts are free of material error and is accordingly not an insurer.2 1 As noted by the Ontario Court of Appeal in Livent v Deloitte & Touche [2016] ONCA 11 at [190]. 2 As, for example, was emphasised by the Singapore Court of Appeal approving parts of this passage from In re Kingston Cotton Mill in JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [38].

7.27 However, in the modern era, Kingston Cotton Mill itself would be decided differently. First, it is inconceivable that the balance sheet of a corporation could properly state that the stock (or inventory) figure is ‘as per manager’s certificate’. Secondly, ISA 501 makes clear (as have auditing standards for 122

The standard of care in general 7.29 many years) that an auditor is required to attend stocktakes wherever that is practical and to carry out review procedures to determine if the figures are correct. No competent auditor who ignored inconsistency between sales, purchases and stock figures would now be held to have exercised reasonable care and skill.1 Thirdly, while an auditor remains entitled to treat a statement by management as audit evidence, auditors are now required to assess the reliability of such evidence, bearing in mind that its source is not independent from the figures that they seek to verify. Fourthly and most fundamentally, the increasing size of companies and changes to the structure of capital markets have meant that shareholders often have little personal knowledge of management and rely much more on the audit report to determine whether management deserve their trust and their continuing investment. 1 Apart from many other considerations, auditors now audit the profit and loss account (or income statement) and not just the balance sheet, so such an inconsistency could not remain hidden away in unaudited books.

7.28 Against that changed background, the oft cited quip that an auditor ‘is a watchdog, but not a bloodhound’ is nowadays more apt to mislead than to point the way to the right conclusion. While it remains true that an auditor is not required to assume that management is dishonest, it is no longer fair to say that ‘he is entitled to assume that they are honest’. A competent auditor in the modern day approaches management’s figures and explanations with an open mind, not expecting them to be disproved, but also not accepting them without evidence which goes beyond mere assertion from management. This is the approach described throughout auditing standards as ‘professional scepticism’.1 1 Eg ISA 200, para 7. This approach is now also a statutory requirement: SI 2016/649, Sch 1, para 2.

7.29 A possible trap set by the first passage from Lopes LJ quoted above is to treat it as a fundamental, and binary, question whether or not ‘there is anything calculated to excite suspicion’. It is not a proper approach to breach of duty in a modern audit to assume that the auditor is entitled to believe a statement from management unless there are grounds for suspecting that statement to be false, but that if there are such grounds, then the issue must be ‘probed to the bottom’. Instead, the proper approach is to ask whether the audit was carried out with reasonable care and skill, including proper professional scepticism, in all the circumstances including the totality of the audit evidence supporting the financial statements and all the matters that should have given rise to suspicion. As it was put by Moffitt J in Pacific Acceptance Corp v Forsyth:1 ‘If, during an audit, there are a substantial number of irregular or unusual matters encountered by audit clerks and some, singly or in combination, indicate the real possibility that something is wrong,

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7.30 Breach of duty and the auditor’s standard of care then to separate each into watertight compartments and pose the question whether it individually raises a suspicion of fraud and, on receiving a negative reply, asserting that it follows that the clerk does his duty if he does nothing further, is a misuse of the dictum of Lopes LJ and denies both the true tests of legal duty of care and of common sense.’ 1 (1970) 92 WN (NSW) 29 at 62.

7.30 It is clear from In re City Equitable Fire Insurance Company Limited that auditing, and the standard expected of an auditor, had changed materially by 1924.1 In that case, the Court of Appeal upheld the findings of the trial judge, Romer J, that the auditor had been negligent in accepting the word of a stock broker that he held substantial quantities of securities on behalf of the audited company, but held that he was not liable owing to a provision in the Articles of Association of the company which limited the auditor’s liability to cases of ‘wilful neglect or default’, which was not established. The judgments in the case make it clear that the practice of auditing had already come a very long way from the decisions in the 1890s when an auditor could accept without question the word of the managing director as to stock levels. 1 [1925] 1 Ch 407.

7.31 Two of the three judgments in In re City Equitable Fire Insurance Company Limited confirmed that the relevant law as to the standard of care was stated in In re Kingston Cotton Mill Co (No 2).1 However, Sir Ernest Pollock MR also said this:2 ‘“He is a watchdog, but not a bloodhound.” That metaphor was used by Lopes LJ in In re Kingston Cotton Mill Co. (No 2). Perhaps, casting metaphor aside, the position is more happily expressed in the phrase used by my brother Sargant LJ, who said that the duty of an auditor is verification and not detection. The Kingston Cotton Mill case is important, because expansion is given to those rather epigrammatic phrases.’ 1 See per Pollock MR at 509 and per Warrington LJ at 519–520. 2 At 509.

7.32 Sargant LJ also made the following important point, which somewhat contrasts with the approach taken in the 1890s:1 ‘In the next place, I desire to say this, that in my opinion it would not be right that auditors should deliberately adopt a standard of verification below the ordinary standard, because the persons with whom they are dealing are persons of specially high reputation. 124

The standard of care in general 7.34 It would be dangerous to adopt any such lower standard on account of that circumstance.’ 1 At 531.

7.33 Lord Denning emphasised that In re Kingston Mill Co (No 2) was not to be treated as narrowing the auditor’s role in Fomento (Sterling Area) v Selsdon Fountain Pen.1 Although that was a case concerning a contractual audit under a license agreement, Lord Denning took the opportunity to make the following general statement about the nature of an audit,2 which is sometimes quoted in the context of statutory audits: ‘An auditor is not to be confined to the mechanics of checking vouchers and making arithmetical computations. He is not to be written off as a professional “adder-upper and subtractor.” His vital task is to take care to see that errors are not made, be they errors of computation, or errors of omission or commission, or downright untruths. To perform this task properly he must come to it with an inquiring mind – not suspicious of dishonesty, I agree – but suspecting that someone may have made a mistake somewhere and that a check must be made to ensure that there has been none. I would not have it thought that the Kingston Mill case relieved an auditor of his responsibility for making a proper check.’ 1 [1958] 1 WLR 45. 2 At 61.

7.34 The question whether the standards expected of an auditor had changed since 1896 was raised directly in 1967 in In re Thomas Gerrard & Son Ltd, decided by Pennycuick J. Like Kingston Cotton Mill, this was a case where the managing director had falsified stock balances in order to improve reported results. In addition, he altered purchase invoices to make it appear that they related to later periods and altered sales records to bring forward sales from the next period into the current one. Pennycuick J found that the auditors had seen the altered purchase invoices and this should have raised their suspicions and put them on inquiry. The auditor’s response to the altered invoices was inadequate and fell below the relevant standard. On the question whether standards had changed since 1896, Pennycuick J was cautious. He held that since there was a clear breach of duty in relation to the second method of misstating results, there was no need for him to make a separate finding in relation to the first and third. On the issue of principle, having cited several passages from Kingston Cotton Mill, Pennycuick J said this:1 ‘This case appears, at any rate at first sight, to be conclusive in favour of Kevans [the auditors] as regards the falsification of the stock taken in isolation. Mr Walton, for the liquidator, pointed out 125

7.35 Breach of duty and the auditor’s standard of care that before 1900 there was no statutory provision corresponding to section 162 of the Companies Act, 1948. That is so, but I am not clear that the quality of the auditor’s duty has changed in any relevant respect since 1896. Basically that duty has always been to audit the company’s accounts with reasonable care and skill. The real ground on which In re Kingston Cotton Mill Co (No 2) is, I think, capable of being distinguished is that the standards of reasonable care and skill are, upon the expert evidence, more exacting today than those which prevailed in 1896. I see considerable force in this contention. It must, I think, be open, even in this court, to make a finding that in all the particular circumstances the auditors have been in breach of their duty in relation to stock. On the other hand, if this breach of duty stood alone and the facts were more or less the same as those in In re Kingston Cotton Mill Co (No 2), this court would, I think, be very chary indeed of reaching a conclusion different from that reached by the Court of Appeal in In re Kingston Cotton Mill Co (No 2).’2 1 In re Thomas Gerrard & Son Ltd [1968] 1 Ch 455 at 475. 2 For the reasons noted above, it is highly unlikely that any case under modern conditions would ever be factually on all fours with In re Kingston Cotton Mill.

7.35 The status of the dicta from Kingston Cotton Mill was raised in Australia in the mammoth case of Pacific Acceptance v Forsyth. Moffitt J cited the old cases and In re Thomas Gerrard and said this:1 ‘Since the classic statements concerning the auditors were made last century there have been considerable changes in the organization of the affairs of companies either operating singly or as groups, in their merger or takeover and in their accounting systems, and there have been continuing and increasing experience of and notoriety of danger signs in respect of mismanagement, fraudulent or otherwise, of companies often brought to light by “economic squeezes” as they are termed. By way of example, some company collapses in this country have revealed, or at least emphasized, the dangers of the true financial position of a company being concealed behind erroneous stock valuations or erroneous provisions concerning bad and doubtful debts, or the dangers of the true financial position of a group being concealed within the accounting system of a group of companies. Although there have been such instances in recent times, including some revealed after 1960, there have been other not altogether dissimilar experiences earlier, and the correct view is probably rather that recent events have tended to give greater emphasis of what was not unknown and to some extent had been revealed earlier. The legal duty, namely, to audit the accounts with reasonable skill and care, remains the same, but reasonableness and skill in auditing must bring to account and be directed towards the changed circumstances 126

The standard of care in general 7.38 referred to. Reasonable skill and care calls for changed standards to meet changed conditions or changed understanding of dangers and in this sense standards are more exacting today than in 1896. This the audit profession has rightly accepted, and by change in emphasis in their procedures and in some changed procedures have acknowledged that due skill and care calls for some different approaches. It is not a question of the court requiring higher standards because the profession has adopted higher standards. It is a question of the court applying the law, which by its content expects such reasonable standards as will meet the circumstances of today, including modern conditions of business and knowledge concerning them. However, now as formerly, standards and practices adopted by the profession to meet current circumstances provide a sound guide to the court in determining what is reasonable.’ 1 Pacific Acceptance v Forsyth (1970) 92 WN (NSW) 29 at 73–74.

7.36 The approach of Moffitt J was generally approved by Thomas J in the High Court of New Zealand in Dairy Containers v Auditor-General, who said that the question of the auditor’s duty ‘cannot be dismissed by reference to well known dicta and metaphors concerning dogs and detectives’.1 Similarly, in AWA v Daniels the New South Wales Court of Appeal cited Pacific Acceptance for the proposition that ‘The standards of reasonable care and skill are more exacting today than those which prevailed in 1896 when Re Kingston Cotton Mill Co (No 2) was decided.’2 1 [1995] 2 NZLR 30 at 55. 2 AWA v Daniels [1955–95] PNLR 727 at 769.

7.37 In similar vein the Court of Appeal of Singapore said in 2007:1 ‘It goes without saying that the principles enunciated by older case law should be treated with a degree of wariness to the extent that it must be acknowledged that the standards of auditing which prevailed more than a century ago have evolved into more exacting ones today (see In re Thomas Gerrard & Son Ltd [1968] Ch 455 at 475).’ 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [65].

7.38 In conclusion, it is respectfully submitted that it is no longer instructive or useful to hark back to the metaphors used in the 1890s. The essential formulation of the standard of care has not changed and was pellucidly expressed by those great judges, Lindley and Lopes LJJ. However, the purpose and practice of auditing has changed out of all recognition in the years since the turn of the 20th century. For guidance on what a reasonably competent auditor must do in particular circumstances, courts will turn to the relevant 127

7.39 Breach of duty and the auditor’s standard of care statutes, contract, auditing standards and expert evidence and will only very rarely find it useful to consider factual findings in earlier cases.

SPECIFIC ISSUES IN THE STANDARD OF CARE Introduction 7.39 In this section, we introduce some of the most significant specific aspects of the standard of care expected of an auditor. In accordance with the above analysis, we do so partly by reference to legal authorities, but also by reference to auditing standards. In that regard, we refer to the UK ISAs, but similar standards have been promulgated in all major jurisdictions. It is important to appreciate that this treatment is selected with litigation in mind and is far from comprehensive. If more detail is required, reference may be made to auditing standards themselves or to a handbook on auditing. A general introduction to the principal auditing standards may be found at Chapter 3 above.

The audit task 7.40 The principal statutory requirement on an auditor is to make a report in the prescribed form. As Warrington LJ pointed out in Re City Equitable Fire Insurance Co,1 the statute: ‘says nothing as to what they are to do in order to form that opinion, or to ascertain the truth of the facts to which they are to certify. That is left to be determined by the general rules which, in point of law, are held to govern the duties of the auditors, whether those rules are to be derived from the ordinary law, or from the terms under which the auditors are to be employed.’ 1 [1925] 1 Ch 407 at 525.

7.41 In addition to the obligation to make the statutory report, an auditor will also necessarily undertake an obligation to carry out an audit.1 The terms of engagement of an auditor will invariably contain an agreement for the auditor not merely to make the statutory report, but also to carry out an audit in accordance with auditing standards.2 The auditor’s responsibility to carry out an audit is also confirmed in the audit report.3 1 Derived from the statutes alone by Moffitt J in Pacific Acceptance v Forsyth (1970) 92 WN 29 at 51. See also per Denning LJ in Candler v Crane Christmas [1951] 2 KB 164 at 179: ‘Their duty is not merely a duty to use care in their reports. They also have a duty to use care in their work which results in their reports.’ 2 ISA 210, example engagement letter. Cf also SI 2016/649, Sch 1, para 4. 3 ISA 700, para 15.

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Specific issues in the standard of care 7.45 7.42 The objectives of an auditor in carrying out an audit are:1 ‘(a) To obtain reasonable assurance about whether the financial statements as a whole are free from material misstatement, whether due to fraud or error, thereby enabling the auditor to express an opinion on whether the financial statements are prepared, in all material respects, in accordance with an applicable financial reporting framework; and (b) To report on the financial statements, and communicate as required by the ISAs (UK), in accordance with the auditor’s findings.’ 1 ISA 200, para 11.

7.43 It follows that an audit (not itself defined in the standards, nor in the case law) is the process of seeking reasonable assurance as to the accuracy and completeness of a set of financial statements and communicating the results of that search, including by way of a formal audit report. The definition more usually given is that an audit is the examination and verification of accounts and records of a business. That is a shorthand approximation of the task, but it is simplistic: if verification is not possible, because the accounts are erroneous, the audit is neither impossible nor complete at that point. 7.44 It follows also that the principal areas in which an auditor can meet or fail to meet the required standard of care are: (i)

the process of seeking reasonable assurance;

(ii) the formation of an opinion as to whether reasonable assurance has been obtained; (iii) the appropriate communication of the results of the process; and (iv) making a formal report in accordance with the auditor’s findings. 7.45 What audit evidence amounts to ‘reasonable assurance’ in any given case is of course a matter of judgment. It is clear, however, that in general an auditor is not required to examine every transaction or eliminate every risk. See ISA 200, para 5, quoted at para 3.08 above. The Court of Appeal of Singapore has expressed it thus:1 ‘In the light of the fact that an audit is not expected, as a matter of course, to involve an examination of every item or class of transactions, the inherent limitations of any accounting and internal control system, as well as the fact that most audit evidence is persuasive rather than conclusive (SSA 1 at para 9), an auditor is not

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7.46 Breach of duty and the auditor’s standard of care required to eliminate audit risk, but to reduce it to an acceptable level. This is an exercise that mandates a prudent assessment of the risks and benefits of a company’s financial accounting and bookkeeping. It requires a proper assimilation and an adequate appreciation of the relevant audit evidence in order to obtain reasonable assurance of the matters that ought to be verified.’ 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [46].

Professional responsibility – experience, time, remuneration 7.46 It is an auditor’s responsibility to allocate sufficient time and appropriately competent staff to a given audit. Neither client pressure to complete the audit by a given date nor a low audit fee can excuse inadequate performance. The standard of care required is the standard of a competent auditor, which means a person sufficiently experienced to sign off an audit report.1 The reality that most audit work is carried out by more junior members of an accounting firm will not affect the standard required. The audit firm is therefore required to have in place procedures, including training and review processes, to ensure that its audit meets the relevant standard, viewing the whole audit in the round.2 1 An auditor is not expected to be a lawyer. An auditor is expected to understand the audit requirement in the companies legislation, but not necessarily to know other aspects of the law: In re Republic of Bolivia Exploration Syndicate [1914] 1 Ch 139 at 171–177. The scope of the matters of law (especially company law) which an auditor would be expected at least to recognise as requiring investigation may have increased in the century since that case. 2 ‘It may be possible to get by with inexperienced staff (a problem that no doubt exists with large firms today) provided the inexperience and risks of error associated with it are understood and compensated for by appropriate supervision and review’: per Moffitt J in Pacific Acceptance v Forsyth (1970) 92 WN 29 at 79E.

7.47 As to time pressure, see In re Thomas Gerrard & Son Ltd where Pennycuick J said:1 ‘The auditors of the company owe a statutory duty to make to the members a report containing certain statements. If the directors do not allow auditors time to conduct such investigations as are necessary in order to make these statements, the auditors must, it seems to me, either refuse to make a report at all or make an appropriately qualified report. They cannot be justified in making a report containing a statement the truth of which they have not had an opportunity of ascertaining.’ 1 [1968] 1 Ch 455 at 477E.

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Specific issues in the standard of care 7.51 7.48 As to the audit fee, see PlanAssure v Gaelic Inns where the Singapore Court of Appeal said:1 ‘The appellant should not be entitled, in the circumstances of this case, to water down its responsibilities by claiming that it had not been paid enough to perform the necessary work. Indeed, it would be wholly untenable from the viewpoint of policy and market discipline if the appellant were to be held to a lower standard simply on the basis that it had not been remunerated sufficiently for its services.’ 1 [2007] SGCA 41 at [41].

Professional scepticism and independence 7.49 At the heart of the proper modern approach to the task of auditing is an attitude of ‘professional scepticism’. Professional scepticism is defined in ISA 200 and in SI 2016/649, Sch 1, para 2 as: ‘An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of audit evidence.’ 7.50 This means that an auditor is required to maintain an open mind as to the possibility that fraud or error may be present until he has sufficient evidence to the contrary. Conversely, an auditor should not presume that accounts are complete or accurate unless and until sufficient evidence is obtained.1 Professional scepticism should inform every stage of the audit, from planning to reporting.2 It applies in particular when reviewing management estimates of fair values, impairment of assets, provisions and future cash flow relevant to the audited company’s ability to continue as a going concern.3 Professional scepticism entails independence, especially from the management of the company. An auditor should not forget that the essence of an audit is to perform a check on management for the benefit of shareholders. 1 The position appears to be to the contrary in Canada: see Livent v Deloitte & Touche [2016] ONCA 11 at [206]–[210]. However in the same case at [217] the court relied on the auditor’s own manual to increase the standard to that prevailing elsewhere. 2 See ISA 200, para 15. 3 SI 2016/649, Sch 1, para 2(b)(ii).

7.51 Statements of the importance of professional scepticism and independence are legion, though the language of ‘professional scepticism’ is relatively modern. Reference should be made to the historical development of the standard of care for auditors discussed above at paras 7.17 to 7.38 and to the Auditing Practices Board Paper dated March 2012 entitled ‘Professional

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7.52 Breach of duty and the auditor’s standard of care Scepticism. Establishing a Common Understanding and Reaffirming its Central Role in Delivering Audit Quality’. 7.52 Some particularly clear statements may be taken from the judgments of the Singapore Court of Appeal in JSI Shipping v Teofoongwonglcloong and PlanAssure v Gaelic Inns: ‘The essence of an audit is to obtain and provide reasonable assurance that a company’s accounts provide a true and fair view of the financial position of the company. The duty to verify and to be generally sensitive to the possibility of fraud is an inescapably inherent feature of an audit.’1 ‘Subject to the practical limitations of an audit, items that can be directly verified should, whenever practical, be in fact directly verified; such verification goes to the core of an auditor’s skill and competence and is a function of the appropriate degree of professional scepticism which all auditors must adopt.’2 ‘The SSAs similarly reiterate that an auditor is expected to take a balanced approach when performing an audit. SSA 11 and SSA 240 provide that an auditor should plan and perform the audit with “an attitude of professional scepticism”. Put another way, an auditor would not be expected to wholly obliterate audit risk in the discharge of his duties. Rather, what the law mandates is for him to minimise audit risk to an acceptable level by obtaining reasonable assurance of the matters which ought to be verified.’3 1 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [107]. 2 JSI Shipping v Teofoongwonglcloong [2007] SGCA 40 at [111]. 3 PlanAssure v Gaelic Inns [2007] SGCA 41 at [53].

7.53 In Dairy Containers v Auditor-General, the judge was especially scathing about the auditor’s complete lack of scepticism and raised an interesting point about excessive social interaction between auditors and management:1 ‘It seems to me that the audit was regarded as something of a formality, with the possibility of anything being seriously amiss being but lightly regarded. The apparent assumption was that everything would be regular and in order as befitted a subsidiary of a statutory board. As a result, the audit work and audit testing seems to have been carried out mechanically with the objective of getting the working papers, and the audit itself, completed without disruption or delay. Undoubtedly, a number of the actual audit staff were conscientious, but they appear to have approached their task without a trace of scepticism. They seemingly lacked all rudiments of an inquiring mind. 132

Specific issues in the standard of care 7.56 Nothing, however unusual, appears to have excited their suspicion, and the possibility of fraud seems to have been remote from their minds. To the contrary, considerable trust seems to have been reposed in the management of DCL, particularly Mr Rose. On more than one occasion the audit work papers indicate a staff member’s preference for an explanation proffered by Mr Rose to that of a third party. The audit officers’ independence from the management of DCL must also be questioned. While I consider that Mr Rose’s account of the extent of the social interaction between the audit staff and himself was exaggerated, it is probable that the relationship was such that their independence was impaired, and that the convivial atmosphere which Mr Rose created added to the Audit Office’s seeming assumption that the audit of DCL was something of a ritual. I find it difficult to account for this lack of ‘bite’ in the audit. In the absence of direct evidence, I can only conclude that it reflected a predisposition to believe that nothing untoward would be found and that, as a result, the Audit Office was simply going through the motions. This approach is contrary even to the most conservative statements of an auditor’s duty. The process of audit verification was, I believe, defeated before it really began.’ 1 Dairy Containers v Auditor-General [1995] 2 NZLR 30 at 58–59.

7.54 The requirement to be both independent and professionally sceptical means that an auditor should not place undue reliance on the uncorroborated word of management in forming the audit opinion. Of course, the difficult question is how much reliance is permissible in any given circumstances. Auditors routinely, and properly, require from management written representations as to various audit issues. However, ISA 580, para 3 makes clear that ‘[Al]though written representations provide necessary audit evidence, they do not provide sufficient appropriate audit evidence on their own about any of the matters with which they deal.’ 7.55 ISA 580 is stronger than the earlier guidelines quoted by Hobhouse J in Berg Sons & Adams.1 It does, however, reflect what Hobhouse J himself said by reference to earlier authority: ‘It is also the law that an auditor must not form an opinion on unverified representations.’2 1 [1992] BCC 661 at 685F. 2 Ibid at 686B.

7.56 To similar effect, see JSI Shipping v Teofoongwonglcloong:1 ‘An auditor exercising the requisite level of skill and judgment cannot abdicate his core responsibility of verification by simply relying on 133

7.57 Breach of duty and the auditor’s standard of care management representations to the same effect, particularly if the item in question relates to a matter in which the representor has a direct interest. It is also plain common sense that an auditor should seek independent objective verification of any controversial item that causes him concern.’ 1 [2007] SGCA 40 at [100].

Planning the audit 7.57 An audit must always be properly planned. ISA 300 explains at A2 that: ‘Planning is not a discrete phase of an audit, but rather a continual and iterative process that often begins shortly after (or in connection with) the completion of the previous audit and continues until the completion of the current audit engagement.’ ISA 300 sets out what audit planning involves in its main operative paragraphs, 7 to 11, thus: ‘7. The auditor shall establish an overall audit strategy that sets the scope, timing and direction of the audit, and that guides the development of the audit plan. 8.

In establishing the overall audit strategy, the auditor shall: (a)

Identify the characteristics of the engagement that define its scope;

(b) Ascertain the reporting objectives of the engagement to plan the timing of the audit and the nature of the communications required; (c) Consider the factors that, in the auditor’s professional judgment, are significant in directing the engagement team’s efforts; (d)

Consider the results of preliminary engagement activities and, where applicable, whether knowledge gained on other engagements performed by the engagement partner for the entity is relevant; and

(e) Ascertain the nature, timing and extent of resources necessary to perform the engagement. 9.

The auditor shall develop an audit plan that shall include a description of: (a)

The nature, timing and extent of planned risk assessment procedures, as determined under ISA (UK) 315. 134

Specific issues in the standard of care 7.60 (b) The nature, timing and extent of planned further audit procedures at the assertion level, as determined under ISA (UK) 330. (c) Other planned audit procedures that are required to be carried out so that the engagement complies with ISAs (UK). 10. The auditor shall update and change the overall audit strategy and the audit plan as necessary during the course of the audit. 11. The auditor shall plan the nature, timing and extent of direction and supervision of engagement team members and the review of their work.’ 7.58 ISA 300 makes clear in its Appendix the detailed matters that are considered at the planning stage. These include the identification of areas of particular risk in the financial statements (the subject of ISA 315) and the preliminary assessment of audit materiality levels (see also ISA 320). It is only with an assessment of risk levels and risky areas that the audit firm can properly budget for appropriate team members and time allocations. 7.59 Lack of attention to planning was at the heart of what went wrong in the audit considered in Dairy Containers v Auditor-General, where Thomas J referred to the applicable auditing standards, saying ‘Planning an audit is recognised as being of crucial importance.’1 1 [1995] 2 NZLR 30 at 56.

Responsibilities relating to fraud 7.60 In an audit ‘fraud’ is not a legal term of art, but is defined in ISA 240 at para 11 as: ‘An intentional act by one or more individuals among management, those charged with governance, employees, or third parties, involving the use of deception to obtain an unjust or illegal advantage’. It is important not to be too legalistic about the phrase ‘to obtain an unjust or illegal advantage’ – any deliberate conduct which is intended to and does lead to a misstatement of accounts (for example for the purpose of making a company appear profitable when in fact it is not) is ‘fraud’ for audit purposes, whether or not the perpetrator gains a direct or pecuniary advantage from it.

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7.61 Breach of duty and the auditor’s standard of care 7.61 Auditors regularly point out and emphasise that: (i)

the primary responsibility for preventing and detecting fraud rests upon the directors of a company; and

(ii) an audit is designed with a view to reducing the risk of material misstatement, not the detection of fraud. ISA 240 confirms that fraud may be very difficult for even a competent auditor to detect, especially if the perpetrator is skilful and/or senior within the organisation and/or prepared to go to the length of forging documentation and most of all if there is collusion between several perpetrators. 7.62 All these things are true, but they are often not properly understood by users of financial statements and audit reports, giving rise to a major component of the ‘expectation gap’ between what auditors in fact do and what users expect them to have done. 7.63 Although it is clear law that an auditor who fails to detect fraud is not necessarily thereby negligent, there is nevertheless a link between competent auditing and the detection of fraud. That arises because an attempt to verify the financial statements with an attitude of professional scepticism inevitably involves considering the possibility of fraud at every stage. If an audit is planned and performed well, it is generally possible to detect material errors and if they have been caused deliberately, that will usually become apparent too.1 1 Thus said Leggatt LJ in Barings v Coopers & Lybrand [1997] BCLC 427 at 435: ‘The primary responsibility for safeguarding a company’s assets and preventing errors and defalcations rests with the directors. But material irregularities, and a fortiori fraud, will normally be brought to light by sound audit procedures, one of which is the practice of pointing out weaknesses in internal controls. An auditor’s task is so to conduct the audit as to make it probable that material misstatements in financial documents will be detected. Detection did not occur here, and there therefore is a case for [the defendants] to answer.’

7.64 ISA 240 is a lengthy standard which sets out in some detail the way that auditors are required to assess the risk of fraud, design procedures to respond to those risks, evaluate audit evidence with proper professional scepticism and if a misstatement is identified, consider whether it might be caused by fraud. Thus, the detection of fraud is part of the auditor’s concern even though it is not a primary goal of an audit and it is not guaranteed to be successful. 7.65 In Dairy Containers v Auditor-General, Thomas J said:1 ‘In addition, I agree with Moffitt J (as he then was) in Pacific Acceptance Corporation Ltd v Forsyth (1970) 92 WN (NSW) 29 that, in planning and carrying out their work, auditors must be mindful of the possibility of fraud. Indeed, many of the tests which auditors 136

Specific issues in the standard of care 7.66 habitually apply proceed on the assumption that some person or persons may have been dishonest or fraudulent. As the Judge observes with complete logic (at p 63): “Once it is accepted that the auditor’s duty requires him to go behind the books and determine the true financial position of the company and so to examine the accord or otherwise of the financial position of the company, the books and the balance sheet, it follows that the possible causes to the contrary, namely, error, fraud or unsound accounting, are the auditor’s concern.”

I also agree that the question cannot be dismissed by reference to well-known dicta and metaphors concerning dogs and detectives. Such dicta are generally directed to the state of mind of the auditors, such as whether they were sufficiently sceptical or suspicious – or should have been sceptical or suspicious. The questions tend to obscure the auditor’s basic duty to plan and carry out the audit of the company cognisant of the possibility of fraud. If and when the auditors discover an apparent irregularity, they must carry out such further tests or make such further inquiries as may be required to be satisfied that, in fact, no irregularity exists. If an irregularity is found to exist they must be satisfied, or take such further steps as may be necessary to be satisfied, that the irregularity will not affect the truth of the accounts. If the circumstances are such as to give rise to a reasonable suspicion of fraud, they must necessarily proceed further and either determine that no fraud exists or report their suspicion to the general manager, or the board, or even the shareholders of the company, as may be appropriate in the circumstances of the case.’ 1 [1995] 2 NZLR 30 at 55.

7.66 In JSI Shipping v Teofoongwonglcloong the Singapore Court of Appeal said:1 ‘Such negligent omissions often come to light only in situations after the loss has been realised and the fraudulent perpetrator has absconded. If the auditor has genuinely exercised reasonable care in verification and still fails to detect a fraud …, liability would not invariably attach, for the detection and prevention of fraud per se is not typically within the scope of an auditor’s duty. However, liability may be imposed in the absence of such reasonable care if the negligent failure to obtain reasonable assurance regarding the accuracy of the accounts, which would or could have prevented the fraud, is attributable to a lack of skill and/or competence manifested by an auditor in the discharge of his duties.’ 1 [2007] SGCA 40 at [117].

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7.67 Breach of duty and the auditor’s standard of care

Reporting to shareholders and/or those concerned with governance and/or authorities 7.67 Following on from the recognition that a competently conducted audit will be calculated to uncover material fraud if it is present, there arises a duty to report any such fraud to an appropriate organ of the company (‘those charged with governance’ in the language of auditing standards). This duty goes beyond ensuring that the audit report takes account of what the auditor has found and has developed into a free-standing duty to warn which can arise before the audit report is signed. In contrast to earlier times, the existence of the duty to report and warn can no longer be doubted; it is now explicit in ISA 240 at paras 40 to 42: ‘40. If the auditor has identified a fraud or has obtained information that indicates that a fraud may exist, the auditor shall communicate these matters on a timely basis to the appropriate level of management in order to inform those with primary responsibility for the prevention and detection of fraud of matters relevant to their responsibilities. 41. Unless all of those charged with governance are involved in managing the entity, if the auditor has identified or suspects fraud involving: (a) management; (b)

employees who have significant roles in internal control; or

(c)

others where the fraud results in a material misstatement in the financial statements,

the auditor shall communicate these matters to those charged with governance on a timely basis. If the auditor suspects fraud involving management, the auditor shall communicate these suspicions to those charged with governance and discuss with them the nature, timing and extent of audit procedures necessary to complete the audit. 41R-1 For audits of financial statements of public interest entities, when an auditor suspects or has reasonable grounds to suspect that irregularities, including fraud with regard to the financial statements of the entity, may occur or has occurred, the auditor shall, unless prohibited by law or regulation, inform the entity and invite it to investigate the matter and take appropriate measures to deal with such irregularities and to prevent any recurrence of such irregularities in the future.1 42. The auditor shall communicate with those charged with governance any other matters related to fraud that are, in the auditor’s judgment, relevant to their responsibilities.’ 138

Specific issues in the standard of care 7.70 1 The designation ‘R’ indicates that a paragraph in the standard is derived from the EU Audit Regulation, (EU) 537/2014.

7.68 Further, auditors may have obligations to report certain matters to regulators, to which ISA 240 refers at paras 43 and 43R-1, the latter dealing with the enhanced duty in relation to public interest entities pursuant to the EU Audit Regulation. 7.69 The requirement to report to ‘those charged with governance’ reflects the rather unusual position of the auditor as being appointed by the company as a check on behalf of one of the company’s own organs (the shareholders in general meeting) upon another (the management). ‘Those charged with governance’, as defined at para 10 of ISA 260, is a deliberately flexible term, which requires the auditor to make a judgment as to whom any particular matter should be reported to. In the first instance, executive management could be the appropriate recipient, but if they are themselves implicated in the matter to be reported, then the entire board of directors, the audit committee or appropriate non-executives may have to be informed. If appropriate action is not possible or does not result from the warning, then the auditor might have to consider whether to resign as auditor, bringing with it the right and obligation to make certain statutory reports. 7.70 The above extract from Dairy Containers (at para 7.65) refers to the duty to warn, as does the following well known passage from Sasea v KPMG:1 ‘As mentioned, solely for the purposes of this application KPMG accepts that in certain circumstances a different type of obligation can arise. If, for example, the auditors discover that a senior employee of a company has been defrauding that company on a grand scale, and is in a position to go on doing so then it will normally be the duty of the auditors to report what has been discovered to the management of the company at once, not simply, when rendering the auditors report, to record what has been discovered weeks or months later. In that we endorse the view of the judge. The conclusion is supported by the Auditing Guidelines. We quote from the February 1990 edition: “If during the course of his work the auditor identifies the possible existence of a fraud, other irregularity or error the following action should be taken. The auditor should endeavour to clarify whether a fraud, other irregularity or error has occurred … unless fraud by senior management is suspected, the auditor should inform senior management of his suspicions.”

The guidelines also acknowledge that there may be occasions when it is necessary for an auditor to report directly to a third party without the knowledge or consent of the management. Such would be the case if the auditor suspects that management may be involved in, or is

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7.71 Breach of duty and the auditor’s standard of care condoning, fraud or other irregularities and such would be occasions when the duty to report overrides the duty of confidentiality. Among the relevant considerations would be the extent to which the fraud or other irregularity is likely to result in material gain or loss for any person or is likely to affect a large number of persons and the extent to which the non-disclosure of the fraud or other irregularity is likely to enable it to be repeated with impunity.’ 1 [2000] BCC 989 at 993E–H.

7.71 Moffitt J expressed it as follows in Pacific Acceptance v Forsyth:1 ‘The auditors perform their duty to the company and safeguard the interest of the shareholders by making communication, properly called for, to the appropriate level of management or the directors, during the course of the audit, with an appropriate report to the shareholders at the annual general meeting. They do not perform such duty if, having uncovered fraud or having suspicion of fraud in the course of the audit, they fail promptly to report it to the directors and perhaps in the first instance, according to the circumstances, immediately to management. If it involves a senior executive or a director or implicates one of them it is difficult to imagine a case where the board should not be informed without delay.’ 1 (1970) 92 WN 29 at 53D.

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Chapter 8

Scope of auditor’s duty – for what losses is the auditor liable?

GENERAL PRINCIPLES Scope of duty, causation and remoteness – the framework 8.01 An auditor, like any other defendant to a claim for breach of contract and/or negligence, is potentially liable only for losses suffered by the claimant in consequence of the defendant’s breach of duty. Apart from the requirement that the losses claimed have been suffered by the claimant, there are four potential restrictions on recoverability. 8.02 The first restriction on recoverability is factual causation. This is the requirement that if the defendant had not breached its duty then the losses would not have occurred. The same idea is sometimes called ‘but for causation’, ‘causa sine qua non’ or a ‘necessary cause’. Conceptually, this is a simple idea, but in practice, it can be complex to apply. To establish factual causation requires the correct identification of: (i)

precisely what the breach of duty consists in; and

(ii) what are the relevant surrounding circumstances which continue to exist in the hypothetical world in which the defendant did not breach its duty. For this reason, it may matter greatly what the precise negligence is that an auditor admits or is found to be liable for. As an example of the importance of this concept, see Deloitte v National Mutual Life Nominees1 in which the Privy Council overturned the first instance judge and the New Zealand Court of Appeal on an issue of factual causation. 1 [1993] AC 774.

8.03 The second restriction on recoverability is legal causation. A loss is only recoverable if the defendant’s breach of duty was a legal cause of that loss. A legal cause is also known as a ‘substantial cause’, a ‘proximate cause’, an ‘effective cause’ or a ‘causa causans’. The basic idea is that for any given fact (such as a loss) there will be an infinity of necessary causes without which 141

8.04 Scope of auditor’s duty – for what losses is the auditor liable? that loss would have been different, but only a few of these necessary causes are effective, substantial or proximate causes of the loss. Which causes are identified as effective causes of a given fact can vary with the purpose for which the analysis is made. It is not necessarily a straightforward matter to determine whether a given breach of duty was a legal cause of a given loss, even if factual causation is made out. The classic instance of difficulty here is the one thrown up by the case of Galoo v Bright Grahame Murray:1 if the auditor had not been negligent then the company would have gone into liquidation and ceased trading. In this event, the trading losses which it actually incurred would not have been suffered. However, the Court of Appeal held that the negligence was not a legal cause of the trading losses. 1 [1994] 1 WLR 1360, discussed in more detail below at para 8.20.

8.04 Thirdly, losses are not recoverable if they are too ‘remote’. The applicability of remoteness in cases of professional liability is complicated by the fact that the rule is different in contract and in tort. In contract, the test of remoteness is whether the loss claimed is of a type which at the time the contract was made, a reasonable person in the position of the contract breaker would have thought was not unlikely to result from such a breach. In the tort of negligence, the traditional rule is that a tortfeasor is liable for any types of damage which are among the reasonably foreseeable consequences of his wrongdoing. Although the two rules sound similar, there is ample authority that the rule in contract is narrower than that in tort. 8.05 Fourthly, a claimant’s loss may not be recoverable (in whole or part) if it falls outside the ‘scope of duty’ of the defendant. This is an unhelpful label1 for a concept that is of the first importance, especially in cases of accountants’ (and other professionals’) liability. In Caparo Lord Bridge said:2 ‘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.’ This statement was taken up by Lord Hoffmann in SAAMCO,3 where he held that the scope of a valuer’s duty of care to a lender (who lent money secured on the valued property) included loss represented by the extent of overvaluation, but not loss represented by later falls in the market value of the property, even though those losses would not have been suffered by the lender were it not for the valuer’s breach of duty (because the lender would not have lent at all) and were foreseeable. The principle of scope of duty as now understood is that the defendant is liable only for those types of loss for which he assumed responsibility, whether as a matter of interpretation of the contract or as a matter of the imposition of a duty of care. To distinguish the types of loss that are within the scope of the defendant’s duty from those that are outside it, the claimant has to show that its position would have been improved to the 142

General principles 8.08 claimed extent if the information negligently supplied by the defendant had been accurate. This approach is now firmly established, but lacks immediate intuitive appeal, so considerable care is needed in application. 1 Lord Hoffmann recanted of the terminology of ‘scope of duty’ in his article on ‘Causation’ in [2005] LQR 592 at 596. 2 Caparo v Dickman [1990] 2 AC 605 at 627D. 3 South Australia Asset Management Corp v York Montague [1997] AC 191, sometimes called ‘BBL’ after another of the conjoined appeals.

Factual causation 8.06 Any claimant in negligence must show that the loss claimed would not have been suffered if the defendant had satisfied the required standard of care.1 It has been said that ‘particularly in cases of professional negligence, particular care needs to be given to the pleading of causation’ on the basis that causation may raise more complex questions in these cases.2 1 For confirmation by the Supreme Court that ‘but for’ causation is an essential requirement of a claim in negligence, see Tiuta International Ltd v De Villiers Surveyors Ltd [2017] 1 WLR 4627. 2 Guang Xin Enterprises v Kwan Wong Tan & Fong [2003] HKCU 248 at [26].

8.07 Thus, in JEB Fasteners v Marks Bloom & Co,1 the claimant ‘relied’ on a negligent audit report in the sense that the picture presented by the accounts encouraged the claimant in its decision to take over the audited company. However, Woolf J held that the claimant believed that the key misstated figures were doubtful and that if the claimant had known the true position it would still have proceeded with the acquisition. On this basis, factual causation was not satisfied and the claim failed. The Court of Appeal upheld the judge’s decision while noting that it could be confusing to use ‘relied’ in the weaker sense of considering a factor as part of the decision-making process, rather than the stronger sense of a decisive influence on the decision. 1 [1983] 1 All ER 583.

8.08 Similarly, in Berg Sons & Adams,1 where the sole directing mind of the audited company knew the true position, it could not be established that the inaccurate audit certificate made any difference to the company’s activities, nor to its eventual insolvency.2 In Boyd Knight v Purdue the New Zealand Court of Appeal confirmed that ‘It must be proved that, if the true and fair view in that regard had been known to the plaintiff, the investment decision would have been different’: see also the longer passage quoted below at para 9.67. Similarly in the South African case of PricewaterhouseCoopers v National Potato Co-operative, where members of a company did not react to adverse audit reports, they failed to demonstrate that they would have reacted differently to a still more alarmist report if that had been given.3 143

8.09 Scope of auditor’s duty – for what losses is the auditor liable? 1 [1992] BCC 661. 2 This approach was followed in Hong Kong in Extramoney v Chan Lai Pang [1994] HKCFI 361 at [186]–[188]. 3 [2015] ZASCA 2 at [137]–[138].

8.09 In a case where at least some directors of the audited company knew of the irregularities which an auditor had negligently failed to identify, it was essential for a claimant to plead out the case on causation, including ‘precisely who would have taken what steps had the matters, which were alleged to have been deficient in the auditors’ report and accounts, been revealed’.1 1 Guang Xin Enterprises v Kwan Wong Tan & Fong [2003] HKCU 248 at [23].

8.10 While factual causation always has to be proved, elements of it can occasionally be assumed in audit cases. In Re London and General Bank (No 2), the loss claimed was the payment of an unlawful dividend out of capital based on inaccurate audited accounts. Lindley LJ said:1 ‘It was wholly unnecessary for the official receiver to call a shareholder to say that he was induced by the auditors’ certificate to concur in the resolution to pay a dividend. As to this part of the case res ipsa loquitur.’ The rationale of this approach is that (then as now) payments of dividends out of capital were unlawful and could only be made with the approval of the shareholders, against whom no suggestion of knowledge of the true position was made. 1 [1895] 2 Ch 673 at 688.

8.11 Similarly, in MAN v Freightliner, Moore-Bick LJ was prepared to assume without direct evidence that ‘as a matter of commonsense’ the seller of company shares must have relied on an unqualified audit opinion in deciding to warrant that the company’s audited accounts gave a true and fair view.1 Such an assumption can only be made where there is no reason to suspect that the individual concerned might have realised that the accounts were inaccurate. 1 [2005] EWHC 2347 (Comm) at para 359, aff’d on other grounds [2007] BCC 986, [2008] 2 BCLC 22.

8.12 In AssetCo v Grant Thornton,1 Bryan J held that it followed from the above dictum of Moore-Bick LJ that a claimant ‘does not need to show reliance in the sense of its board or shareholders subjectively having the audits in mind when they made decisions, which would be unrealistic; rather it must show reliance in the sense that it would have acted differently but for GT’s breach, and in that regard it can point to how it did act when it discovered the fraud’. 1 [2019] Bus LR 2291 at [918].

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General principles 8.15 8.13 An issue of factual causation that is regularly raised by audit claims is whether the audit procedures of a reasonably competent auditor (insofar as those differed from the actual audit procedures in a given case) would have resulted in detection of the relevant material misstatements and/or fraudulent conduct. In cases of sophisticated and collusive fraud, the auditor may have a credible argument to make that even if its audit procedures had met the required standard, dishonest management would have responded by manufacturing audit evidence that could have satisfied a reasonably competent auditor. While that argument may be credible in cases where dishonest accounting is the manifestation of a complex fraud involving several individuals, it is unlikely to persuade the tribunal in other cases.

Legal causation 8.14 Despite the bringing to bear on the problem of almost limitless intellectual firepower, no satisfactory definition of legal causation has been discovered.1 The short point is that a claimant must always demonstrate that the defendant’s breach of duty was a substantial, effective, proximate or legal cause of losses claimed (these terms all referring to the same concept), as well as being a factual or ‘but for’ cause of them.2 From among the complex web of factual causes of any event, the selection of effective causes is made by the exercise of judgment by the Court. 1 In the insurance case of Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1 at [168], the Supreme Court has suggested that a proximate cause is one that renders the loss inevitable in the ordinary course of events. It remains to be seen whether this approach can be applied more generally. 2 Legal causation ‘involves the relationship between the loss or damages suffered by the plaintiff and the fault of the defendant’: per Hobhouse J in Berg Sons v Adams [1992] BCC 661 at 682D.

8.15 In a different context, Lord Hoffmann has pointed out several features of the legal analysis of causation which are of some relevance to claims against accountants. In Environment Agency v Empress Car Co, Lord Hoffmann said this:1 ‘The courts have repeatedly said that the notion of “causing” is one of common sense … The first point to emphasise is that common sense answers to questions of causation will differ according to the purpose for which the question is asked. Questions of causation often arise for the purpose of attributing responsibility to someone, for example, so as to blame him for something which has happened or to make him guilty of an offence or liable in damages. In such cases, the answer will depend upon the rule by which responsibility is being attributed … one cannot give a common sense answer to a question of causation for the purpose of attributing responsibility under some rule without knowing the purpose and scope of the rule. Does the 145

8.16 Scope of auditor’s duty – for what losses is the auditor liable? rule impose a duty which requires one to guard against, or makes one responsible for, the deliberate acts of third persons? If so, it will be correct to say, when loss is caused by the act of such a third person, that it was caused by the breach of duty … Before answering questions about causation, it is therefore first necessary to identify the scope of the relevant rule. This is not a question of common sense fact; it is a question of law.’ 1 [1999] 2 AC 22.

8.16 In cases of negligent misstatement, including audit negligence, legal causation is only satisfied if the chain of factual causation from breach of duty to loss includes reliance by the claimant upon the defendant’s statement. As we have seen in the above discussion of factual causation, reliance is often part of the chain of events from the defendant’s breach of duty to the claimant’s loss. However, even where some other factual chain can be traced, reliance is always required because, without it, legal causation will not be satisfied. This principle has been particularly developed in audit cases where claimants sometimes demonstrate a chain of factual causation without establishing that the claimant itself was misled by the auditor’s misstatement. Such claims fail. 8.17 An important example of this approach is found in the valuable decision of Hobhouse J in Berg Sons v Adams. Hobhouse J cited from Lord Bridge from Caparo and put the point in terms of ‘scope of duty’, but this decision preceded SAAMCO and Galoo and should now be understood as referable to legal causation. He said:1 ‘In the present case the first plaintiff has based its case not upon any lack of information on the part of Mr Golechha but rather upon the opportunity that the possession of the auditor’s certificate is said to have given for the company to continue to carry on business and to borrow money from third parties. Such matters do not fall within the scope of the duty of the statutory auditor.’ 1 [1992] BCC 661 at 677D–F.

8.18 In Berg Sons v Adams, Mr Golechha was the only active director of the company and was ‘effectively the ultimate beneficial owner of all the shares in the company’.1 The judge found that the auditor had been negligent in certifying the relevant accounts of the company. However, the company, operating solely through the person of Mr Golechha, was not misled by the audit certificate in any way. It followed that whatever losses may have eventuated were not legally the consequence of the inaccuracy of the information provided by the auditor. 1 See at 664G–H.

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General principles 8.21 8.19 Berg Sons v Adams thus illustrates the principle that a claim by a company against its auditor can only succeed where a relevant decision maker on behalf of the company relies on the auditor’s certificate (or on the auditor’s silence as to fraud)1 for information, and not where the company uses the audit certificate as a means to facilitate transactions through reliance by third parties on the fact that the company has audited accounts. The correctness and importance of this analysis is confirmed by a dictum in the (unanimously agreed) judgment of Lady Hale in Singularis Holdings v Daiwa:2 ‘The auditor’s duty is to report on the company’s accounts to those having a proprietary interest in the company or concerned with its management and control. If the company already knows the true position (as in Berg) then the auditor’s negligence does not cause the loss.’ 1 The words ‘(or on the auditor’s silence as to fraud)’ were adopted by Bryan J in AssetCo v Grant Thornton [2019] Bus LR 2291 at [981]. 2 [2019] UKSC 50, [2020] AC 1189 at [36].

8.20 In the auditing context, the best known (but also widely misunderstood) illustration of the requirement of legal causation is Galoo v Bright Graeme Murray.1 The finding for which the case is primarily known is that the trading losses of the audited companies were not legally caused by the auditor’s (assumed) negligence and thus could not be claimed. Galoo was a strike out application, so it was decided on a point of law on the basis of assumed facts. The pleaded claim was that over a period of several years, the directors of Galoo falsely overstated stock balances in the financial statements by an amount which increased each year. The auditors failed to identify the overstatements. If they had uncovered the true position, then it would have been apparent that Galoo was insolvent and it would have ceased to trade immediately. The company suffered loss and damage ‘as a result of continuing to trade after [it] would otherwise have done’.2 The claim was for the further losses which accumulated between the date when the company would have been liquidated on the claimant’s case and the date when it was actually liquidated. 1 [1994] 1 WLR 1360. There were four issues in the appeal. The present discussion concerns the second head of loss considered within issue 1. Issue 2 is discussed above at para 6.65 and issue 3 is referred to at para 6.05. 2 Quoted at 1368F.

8.21 In his leading judgment in Galoo, Glidewell LJ quoted extensively from several authorities, including most notably the judgments given by members of the Court of Appeal of New South Wales in Alexander v Cambridge Credit Corporation,1 which was also a claim against auditors to recover trading losses. Adopting the reasoning from that case, Glidewell LJ held that the relevant question was: ‘How does the court decide whether the breach of duty was the

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8.22 Scope of auditor’s duty – for what losses is the auditor liable? cause of the loss or merely the occasion for the loss?’ and that: ‘The answer in the end is “By the application of the court’s common sense.”’2 Glidewell LJ then decided the issue in Galoo thus: ‘Doing my best to apply this test, I have no doubt that the deputy judge arrived at a correct conclusion on this issue. 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.’ In this context, a breach of duty may be ‘merely the occasion for the loss’, or giving the ‘opportunity’ to incur loss, when the breach is among the factual (‘but for’) causes of the claimant’s loss, but is not selected as a legal cause. 1 (1987) 9 NSWLR 310. 2 At 1374H–1375A.

8.22 This decision on the particular issue of trading losses has been the subject of much debate and it will be considered in further detail below. As we demonstrate in that further discussion, the true rationale for the decision is the lack of reliance by the Company on the auditor’s misstatement. The Court of Appeal’s reliance on ‘common sense’ has also been controversial,1 but it remains firmly part of the English law of causation.2 It is plainly right that legal causation does require a connection between breach of duty and loss that goes beyond mere factual causation. It is also correct that at least on some facts, the question formulated in Galoo – distinguishing between a cause of the loss and a ‘mere occasion’ for it – can be a helpful question. 1 See in particular Lord Hoffmann’s lecture, ‘Common Sense and Causing Loss’, 15 June 1999. 2 See ENE 1 Kos Ltd v Petroleo Brasileiro SA Petrobras (The Kos) (No 2) [2012] 2 AC 164 at [48] (Lord Mance) and [74] (Lord Clarke). Cf also Financial Conduct Authority v Arch Insurance (UK) Ltd [2021] UKSC 1 at [167]–[168].

8.23 An interesting application of legal causation as a limiting factor can be found in the judgment of Evans-Lombe J in Barings v Coopers & Lybrand.1 In that case, the judge held that the negligence of the auditor was a cause of Mr Leeson being allowed to continue with loss-making unauthorised trading (because a competent auditor would have uncovered his conduct which would have led to its cessation). The auditor was therefore liable, prima facie, for the further losses that were incurred after the date of the audit report. However, the judge held that another cause of the failure to stop Mr Leeson was serious management failings, in particular by way of the provision of ‘the dollar funding’. The judge held that the management fault amounted to significant contributory negligence,2 but that there came a time when the accumulation of management fault eclipsed the auditor’s negligence as a cause of further loss and broke the chain of causation.3 1 [2003] EWHC 1319 (Ch).

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General principles 8.26 2 See Chapter 14 below. 3 [2003] EWHC 1319 (Ch) at [843].

8.24 As to the test for breaking the chain of causation, the judge said this at [838]: ‘Mr Gaisman for D&T cited a number of authorities as defining the test for what may constitute a breaking of the chain of causation from a particular act of negligence, by a claimant or by a third party. It seems to me that what will constitute such conduct is so fact-sensitive to the facts of any case where the issue arises that it is almost impossible to generalise. If one must do so, I would say that it must be some unreasonable conduct, not necessarily unforeseeable (see McKew v Holland and Hannen [1969] 3 All ER 1621, per Lord Reid), a new cause coming in and disturbing the sequence of events (The Oropesa (1942) 74 Lloyd’s Rep. 86 per Lord Wright), not necessarily reckless (Lambert v Lewis per Roskill LJ in the Court of Appeal, [1982] AC 227 at page 252), which may result from an accumulation of events which in sum have the effect of removing the negligence sued on as a cause (Knightley v Johns [1982] 1 WLR 349), which accumulation of events may take place over time (see Schering Agrochemicals Ltd v Resibel NVSA, unreported, in the Court of Appeal 26 November 1992).’ 8.25 This aspect of Barings raised another causation issue that will commonly occur in audit cases: the ‘very thing’ or ‘Reeves’ principle,1 namely that ‘the occurrence of the very thing which it was the defendant’s duty to the claimant to prevent ought not to negate a causal connection between the breach of duty by the defendant and the loss to the claimant’.2 The claimant in Barings argued that the auditor could not rely on a break in the chain of causation in circumstances where the facts constituting the break were part of the very thing from which the auditor was under a duty to protect the claimant. This argument failed because on the facts of Barings, the particular management faults which had been established and which broke the chain of causation were not those which it had been alleged the auditor should have reported. In particular, the dollar funding issue had arisen after the last audit had been signed off and in those circumstances it was not one of the ‘very things’ that the auditor had a duty to report. 1 Reeves v Commissioner of Police of the Metropolis [2000] 1 AC 360. 2 Barings at [874].

8.26 Another illustration of the importance of legal causation, and the importance of careful analysis of the breach of duty and the loss in order to assess the connection between them, may be found in the judgment of the Singapore Court of Appeal in JSI Shipping v Teofoongwonglcloong. In this

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8.27 Scope of auditor’s duty – for what losses is the auditor liable? case, the auditor’s negligence as found by the Court of Appeal consisted in its failure to take proper steps to detect that some of the remuneration paid to the company’s managing director was unauthorised. The same director had also extracted monies from the company by fraudulently encashing cheques and certain forged invoices. The Court of Appeal held that the auditor was not negligent in failing to detect those frauds as it had properly carried out sample testing which happened not to alight upon the fraudulent transactions. It is not clear whether the Court held that on a ‘but for’ basis, the disclosure of the unauthorised remuneration would have led to the discovery and termination of the other frauds, but in any event, it held that such losses were not legally caused by the auditor’s negligence:1 ‘In this context, we find the respondent’s failure to verify Riggs’ entitlement to remuneration an insufficiently “effective cause” of the latter two categories of losses occasioned by the fraudulently encashed cheques and forged invoices, the detection of which was not sufficiently within the “scope of duty” envisioned. Indeed, the attribution of the entire extent of Riggs’ misappropriations to the respondent appears intuitively unfair as it imposes seamless causal liability for all consequential losses flowing from a single technical breach. This seems wholly disproportionate to the respondent’s error of judgment and would in effect turn the respondent into insurers for the appellant.’ 1 JSI Shipping v Teofoongwonglcloong [2007] 4 SLR 460 at [145]. The English Court of Appeal made a very similar finding denying a head of loss relating to misappropriations in AssetCo v Grant Thornton [2020] EWCA Civ 1151, [2021] PNLR 1 at [111].

Remoteness 8.27 Commentators have long debated whether cases of concurrent liability should be governed by whichever rule favours the claimant who can choose his cause of action (by analogy, for example, with limitation) or by the contract rules on the basis that the duty of care is parasitical on the contract and should be concurrent with it as far as possible. The Court of Appeal has ruled in favour of the latter approach in Wellesley Partners LLP v Withers.1 While the issue will no doubt continue to be debated and may be tested in the Supreme Court in due course, this work favours the Wellesley approach and believes it is likely to be upheld. In other words, in cases of concurrent liability, or tortious liability where the duty of care arises directly from a contract, losses will be too remote if damage of that type would not have been contemplated by a reasonable person in the position of the defendant at the time the contract was made. 1 [2016] Ch 529.

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General principles 8.32 8.28 The traditional test of remoteness in cases involving breaches of contract (including claims for professional negligence based on a contractual relationship) is whether the loss claimed is of a kind or type which would have been within the parties’ reasonable contemplation at the time that they entered into the relevant contract. This test stems from the classic statement of Alderson B in Hadley v Baxendale:1 ‘where two parties have made a contract which one of them has broken, the damages which the other party ought to receive in respect of such breach of contract is such as may fairly and reasonably be considered either arising naturally, i.e. according to the usual course of things, from such breach of the contract itself, or such as may reasonably be supposed to have been in the contemplation of both parties, at the time they made the contract, as the probable result of the breach of it.’ 1 (1854) 9 Exch 341 at 354.

8.29 This test was refined by the House of Lords in Czarnikow v Koufos (The Heron II) where Lord Reid clarified the degree of likelihood required for a particular type of loss to be recoverable and not too remote. In a well-known passage Lord Reid said that the proper test is whether the loss in question is:1 ‘of a kind which the defendant, when he made the contract, ought to have realised was not unlikely to result from the breach … the words “not unlikely” … denoting a degree of probability considerably less than an even chance but nevertheless not very unusual and easily foreseeable.’ 1 [1969] 1 AC 350 at 382G–383A.

8.30 In the light of these authorities, the generally accepted test for remoteness is whether the loss claimed was of a kind or type which would have been within the reasonable contemplation of the parties at the time that the contract was made as being not unlikely to result. 8.31 One particular issue has arisen in audit claims which has been analysed in terms of remoteness. That is the question of the recoverability of losses that arise remotely in time from the relevant accounts date or the date of the audit report. This question has been commented on in several cases, with apparently very little reference on each occasion to the previous dicta. 8.32 In JEB Fasteners v Marks, Bloom & Co, Woolf J said:1 ‘The longer the period which elapses prior to the accounts being relied on, from the date on which the auditor gave his certificate, the more 151

8.33 Scope of auditor’s duty – for what losses is the auditor liable? difficult it will be to establish that the auditor ought to have foreseen that his certificate would, in those circumstances, be relied on.’ 1 [1981] 3 All ER 289 at 297. This passage was cited with approval by Bingham LJ in Caparo v Dickman [1989] QB 653 at 690. The reasoning of both Woolf J in JEB Fasteners and Bingham LJ in Caparo was disapproved of by the House of Lords in Caparo, on the basis that they were too expansive as to when a duty of care arose. That lessens the authority of this dictum, but does not eliminate it, since there is no reason why it should not be correct in situations where the auditor does owe a duty of care.

8.33 In Berg Sons v Adams, Hobhouse J said:1 ‘With the passage of time thereafter, the role of the audited accounts becomes progressively less important and other more up-to-date information, including up-to-date references and up-to-date experience of transactions and accounts of whatever kind, covering later periods, become progressively more important. By August 1983 it was not reasonably foreseeable, nor was it foreseen by Dearden Farrow, that any material reliance would be placed by a banker or discount house upon the audited accounts of Berg for the year ending March 1982, except possibly for the purposes of historical comparison.’ 1 [1992] BCC 661 at 669. The issue was also argued by reference to Berg in BCCI v Price Waterhouse [1999] BCC 351 at [47], but the Judge in BCCI held he did not need to consider it: [67].

8.34 In Law Society v KPMG per Lord Woolf CJ:1 ‘The second limiting factor was that the consequences of the negligent preparation of the report would, for the purposes of tortious recovery, be spent within a relatively short time by the receipt by the Law Society of the following year’s report. As Sir Richard Scott V-C [2000] 1 All ER 515, 522 explained, the “continuing damage after receipt by the Law Society of the year two report would not be damage reasonably foreseeable as likely to be caused by negligence in the preparation of the year one report.”’ 1 [2000] 1 WLR 1921 at [15]. This case concerned whether a reporting accountant owed a duty of care to the Law Society, rather than statutory audit, but there is no reason why the approach should be different in this situation. The South African Supreme Court of Appeal similarly took the view that the actionable consequences of a negligent audit would be spent following receipt of the next year’s report in PricewaterhouseCoopers v National Potato Co-operative [2015] ZASCA 2 at [61]–[62]. Similarly, the majority of the Supreme Court of Canada described the purpose of an audit as being ‘superseded by an audit one year later’ as part of its reasoning for rejecting the charge of ‘indeterminate liability’: Deloitte & Touche v Livent [2017] 2 RCS 855 at [74].

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General principles 8.37 8.35 A contrasting approach to this issue was taken by Evans-Lombe J in Barings v Coopers & Lybrand. He approached the matter in terms of causation rather than foreseeability and emphasised that an auditor could be liable for loss continuing long after the audit even if another audit intervenes:1 ‘It is not in issue that liability for continuing loss resulting from a negligent audit continues after the audit work is complete (see Sasea Finance Ltd v KPMG [2000] 1 All ER 676). It seems to me that the appointment of fresh auditors, who themselves do not discover the cause of the continuing loss, cannot break the chain of causation of that loss flowing from the original auditor’s negligence, although the fresh auditors may become liable to contribute to any claim for damages by the audit client. Undoubtedly there will come a time when an auditor’s negligence will be held to cease to be causative of such continuing loss, as a result, usually, of an accumulation of acts or defaults of the client’s management over time. Eventually limitation will bar any claim against the original auditors.’ 1 [2003] EWHC 1319 (Ch) at [789].

8.36 In relation to the choice of analytical framework, there is much to be said for treating the issue of continuing loss as an issue of causation rather than foreseeability, as was done in Barings. As a matter of legal causation, it makes sense to say that once a second audit has reported, the effective cause of further losses is the defect in the second audit rather than any continuing causative impact of the first. However, in terms of foreseeability, if an auditor misses some error in the accounts, is it really outside the bounds of reasonable contemplation that the same point may be missed in the next audit? 8.37 On the other hand, in relation to the substance of the dicta on this point, the approach of the earlier cases (and of the senior courts of South Africa and Canada) is to be preferred to that in Barings. The statement quoted above from Law Society v KPMG should apply as much to contractual liability as to tortious. On the face of it, the statement quoted above from Barings is potentially inconsistent with that from Law Society v KPMG (although the former deals with causation and the latter with remoteness). The statement in Barings is plainly an obiter dictum and it does not appear that Law Society v KPMG was cited. It may also be said that the statement in Barings is very dependent on the facts of that case, where it was the faults of management that eventually outweighed causally the faults of the auditors and where the claim was for losses from a single continuing source of loss that was missed by successive auditors. It is at least arguable that the statement in Law Society v KPMG is part of the ratio decidendi of that case and in any event it is more likely to be applicable to ordinary situations than the apparently contrary statement of Evans-Lombe J in Barings.

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8.38 Scope of auditor’s duty – for what losses is the auditor liable?

Scope of duty 8.38 While the scope of duty was identified in the case law more recently than remoteness and legal causation as a limiting factor on professional damages claims, Lord Hoffmann suggested in SAAMCO that it logically fell for consideration prior to remoteness and causation. We examine it after causation because the later development of the principle has made clear that it is a separate limit on the ‘basic loss’ that is identified by reference to causation. However, the scope of duty principle is an important factor in many claims against accountants and in appropriate cases, it might be considered first. To explain the principle, in the light of its relatively recent development, it is necessary to consider the key authorities from outside of the accountancy context in reasonable detail before addressing the way that it affects auditor’s liability.

Key (non-accountancy) authorities on scope of duty 8.39 So far as the authorities are concerned, the starting point is the principle affirmed by the House of Lords in Caparo that it is always necessary to consider whether the loss suffered by the claimant falls within the scope of the auditor’s duty:1 Lord Bridge ‘I believe it is this last distinction which is of critical importance and which demonstrates the unsoundness of the conclusion reached by the majority of the Court of Appeal. 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. “The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it:” see Sutherland Shire Council v Heyman, 60 ALR 1, 48, per Brennan J. Assuming for the purpose of the argument that the relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds. As a purchaser of additional shares in reliance on the auditor’s report, he stands in no different position from any other investing member of the public to whom the auditor owes no duty.’ Lord Oliver ‘It has to be borne in mind that the duty of care is inseparable from the damage which the plaintiff claims to have suffered from its breach. 154

General principles 8.40 It is not a duty to take care in the abstract but a duty to avoid causing to the particular plaintiff damage of the particular kind which he has in fact sustained. I cannot improve on the analysis which is to be found in the judgment of Brennan J. in the High Court of Australia in the Shire of Sutherland case, 60 ALR 1 to which I have already referred. After citing the speech of Viscount Simonds in The Wagon Mound [1961] AC 388, 425, where he observed that it was vain to isolate the liability from its context and to say that B is or is not liable and then to ask for what damage he is liable, Brennan J continued, at p 48: “The corollary is that a postulated duty of care must be stated in reference to the kind of damage that a plaintiff has suffered and in reference to the plaintiff or a class of which the plaintiff is a member. I venture to repeat what I said in John Pfeiffer Pty Ltd. v Canny (1981) 148 CLR 218, 241–242: ‘His duty of care is a thing written on the wind unless damage is caused by the breach of that duty; there is no actionable negligence unless duty, breach and consequential damage coincide … for the purposes of determining liability in a given case, each element can be defined only in terms of the others.’ It is impermissible to postulate a duty of care to avoid one kind of damage – say, personal injury – and, finding the defendant guilty of failing to discharge that duty, to hold him liable for the damage actually suffered that is of another independent kind – say, economic loss. Not only may the respective duties differ in what is required to discharge them; the duties may be owed to different persons or classes of persons. That is not to say that a plaintiff who suffers damage of some kind will succeed or fail in an action to recover damages according to his classification of the damage he suffered. The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it.”

In seeking to ascertain whether there should be imposed on the adviser a duty to avoid the occurrence of the kind of damage which the advisee claims to have suffered it is not, I think, sufficient to ask simply whether there existed a “closeness” between them in the sense that the advisee had a legal entitlement to receive the information upon the basis of which he has acted or in the sense that the information was intended to serve his interest or to protect him. One must, I think, go further and ask, in what capacity was his interest to be served and from what was he intended to be protected?’ 1 Caparo v Dickman [1990] 2 AC 605 at 627 per Lord Bridge and at 651 per Lord Oliver.

8.40 Development of the scope of duty principle was taken further by the House of Lords in SAAMCO. In SAAMCO the House of Lords emphasised the need in every case to determine the scope of the duty owed by the negligent

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8.40 Scope of auditor’s duty – for what losses is the auditor liable? professional in order to determine for what losses that professional may be held liable. See in particular per Lord Hoffmann:1 ‘A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of a duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that the duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. Both of these requirements are illustrated by Caparo Industries Plc v Dickman [1990] 2 AC 605. … I can illustrate the difference between the ordinary principle and that adopted by the Court of Appeal by an example. A mountaineer about to undertake a difficult climb is concerned about the fitness of his knee. He goes to a doctor who negligently makes a superficial examination and pronounces the knee fit. The climber goes on the expedition, which he would not have undertaken if the doctor had told him the true state of his knee. He suffers an injury which is an entirely foreseeable consequence of mountaineering but has nothing to do with his knee. On the Court of Appeal’s principle, the doctor is responsible for the injury suffered by the mountaineer because it is damage which would not have occurred if he had been given correct information about his knee. He would not have gone on the expedition and would have suffered no injury. On what I have suggested is the more usual principle, the doctor is not liable. The injury has not been caused by the doctor’s bad advice because it would have occurred even if the advice had been correct. … Your Lordships might, I would suggest, think that there was something wrong with a principle which, in the example which I have given, produced the result that the doctor was liable. What is the reason for this feeling? I think that the Court of Appeal’s principle offends common sense because it makes the doctor responsible for consequences which, though in general terms foreseeable, do not appear to have a sufficient causal connection with the subject matter of the duty. The doctor was asked for information on only one of the considerations which might affect the safety of the mountaineer on the expedition. There seems no reason of policy which requires that the negligence of the doctor should require the transfer to him of all the foreseeable risks of the expedition.

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General principles 8.42 I think that one can to some extent generalise the principle upon which this response depends. It is that a person under a duty to take reasonable care to provide information on which someone else will decide upon a course of action is, if negligent, not generally regarded as responsible for all the consequences of that course of action. He is responsible only for the consequences of the information being wrong. A duty of care which imposes upon the informant responsibility for losses which would have occurred even if the information which he gave had been correct is not in my view fair and reasonable as between the parties. It is therefore inappropriate either as an implied term of a contract or as a tortious duty arising from the relationship between them.’ 1 South Australia Asset Management Corp v York Montague [1997] AC 191 at 211 and 213–214.

8.41 The question at issue in the various appeals that fell for determination in and alongside SAAMCO was the extent to which valuers who had negligently overvalued property provided as security for loans were liable for the losses suffered by lenders consequent on the crash of the property market. The House of Lords held that the valuers were only liable for the consequences of their information having been wrong; they were not liable for the additional losses suffered by lenders as a result of the crash in the property market even though, as a matter of factual causation, those losses would not have been suffered but for the negligence of the valuers. The method of distinguishing between the types of loss was to ask the question whether they would have been suffered if the information provided by the valuers (the valuation) had been correct. It is important to appreciate that the hypothesis for this ‘SAAMCO counterfactual’ is that the information actually given (the higher valuation) was correct, and not that the valuer had given the correct information (the lower valuation). The latter is the counterfactual which is used to establish causation. But the former is used to identify the scope of duty. 8.42 The House of Lords subsequently distinguished SAAMCO in Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd.1 In Aneco the defendant was a broker who had been instructed by the claimant insurer to obtain reinsurance for it for an insurance treaty to which it planned to subscribe. The reinsurance which the defendant obtained was avoided for material nondisclosure and the defendant was found to have acted negligently in advising the claimant that reinsurance was available, for it was found that reinsurance was not available on any commercial terms and that the defendant should have advised the claimant of that fact. The unavailability of reinsurance would have demonstrated to the claimant the view of the market as to the unacceptable risks involved in the treaty to which it was then proposing to subscribe. 1 [2002] 1 Lloyd’s Rep 157, [2002] PNLR 8.

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8.43 Scope of auditor’s duty – for what losses is the auditor liable? 8.43 The issue in the House of Lords was the extent of the loss for which the defendant broker was responsible. The claimant sought to recover the total loss which it had incurred as a result of entering into the treaty ($35 million) on the basis that it would not have entered into the treaty if it had been advised by the defendant that no reinsurance cover was available. This was even though, had the defendant’s advice been correct and had the reinsurance been valid, the claimant would only have recovered $11 million of the loss (with the claimant having retained the rest of the risk itself). 8.44 The majority of the House of Lords held that SAAMCO was distinguishable because the scope of the duty owed by the defendant broker to the claimant was not confined to obtaining reinsurance and informing the claimant that reinsurance had been obtained. On the contrary, the scope of the duty was wider and extended to advising the claimant generally, including whether to enter into the insurance treaty. Accordingly, the majority held that the claimant was entitled to recover damages representing the full extent of its loss rather than simply the value of the reinsurance cover which it had lost. The difference between the majority in Aneco and the dissenting speech of Lord Millett was not as to any principle of law. The difference between them was as to the correct analysis of the facts, in particular as to the nature of the duty undertaken by the defendant brokers. 8.45 Lord Steyn, who gave one of the two leading judgments for the majority, said at [41]: ‘The contrary reasoning of Aldous LJ, and the arguments of counsel for the brokers, are in my view based on an artificial and unrealistic distinction between reporting on the availability of reinsurance in the market and reporting on the assessment of the market on the risks inherent in the Bullen treaty. These are two sides of the same thing: they are inextricably intertwined. If the brokers had advised Aneco of the non availability of reinsurance cover in the market, that would inevitably have revealed to Aneco the current market assessment of the risk.’ 8.46 Thus the distinction between SAAMCO and Aneco is that in the former case the defendant valuers were held only to have owed a limited duty to provide information, whereas in the latter case the defendant broker owed a broader duty to advise the claimant insurer on what course of action to take. 8.47 This distinction between ‘information’ and ‘advice’ cases was considered by the Court of Appeal in Haugesund Kommune v Wikborg Rein & Co.1 In Haugesund a firm of Norwegian lawyers had advised the claimant bank in relation to swap contracts into which the bank proposed to enter with two Norwegian local authorities. The lawyers advised the bank that the swap contracts were not loans for the purposes of Norwegian law and that the local 158

General principles 8.48 authorities had full capacity to enter into them. They also advised the bank that a claim against a Norwegian local authority could not be enforced. The contracts were entered into and substantial sums were advanced under them to the local authorities. For a while the local authorities performed their payment obligations under the contracts, but when questions were raised in Norway as to the validity of the transactions, no further payments were made. The local authorities commenced proceedings in the English High Court for a declaration that the contracts were invalid because they had lacked the capacity to enter into them. The bank counterclaimed in restitution for the return of the sums advanced. It also commenced Part 20 proceedings against its Norwegian lawyers, alleging that it had entered into the transactions in reliance on their negligent advice. The judge held that the local authorities were not bound by the swap contracts but that they were liable to make restitution to the bank. The judge also found that the lawyers had been negligent when they advised the bank that the local authorities had had the capacity to enter into the swap contracts. The local authorities, who had obtained disastrous results from investing the moneys advanced, were only able to repay the bank to the extent that they had any funds left over. The bank therefore sought to recover the total sum advanced from their lawyers. The Court of Appeal held that: ●●

in order for the bank to recover in respect of the incorrect advice it had to be shown that the loss suffered fell within the scope of the lawyers’ duty;

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the sole issue within the scope of the lawyers’ duty had been the validity of the transaction;

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the local authorities’ failure to satisfy the judgment debt had not been due to the invalidity of the agreement, but rather political difficulties and their own impecuniosity; accordingly

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the lawyers were not responsible for any loss with respect to the advances made by the bank to the local authorities.

1 [2011] 3 All ER 655, [2011] PNLR 14, [2012] Bus LR 230.

8.48 The key part of the Court of Appeal’s reasoning is contained in the judgment of Rix LJ at [75]–[76]: ‘It is of course true that Depfa would not have entered into the transactions at all unless it could be advised that the contracts were valid and within the kommunes’ capacity. In effect, that causal connection between advice and loss goes without saying in all such cases. It is not in itself the reason for finding that the scope of duty concerned embraces all the loss consequential upon entering into the transaction concerned. For these reasons it does not seem to me that it is a sufficient explanation for characterising a case as a category 2 case to say that, without the forthcoming albeit negligent advice, the transaction concerned would not have been ‘viable’. That is simply 159

8.49 Scope of auditor’s duty – for what losses is the auditor liable? another way of saying that, if the claimant had not received the advice it did, it would not have entered into the transaction. A lender who is given a negligent overvaluation does not know that his transaction is not viable on the basis of the true value of the property concerned: but if he would not have gone ahead had he known the truth, it is because the transaction was not commercially viable, or not safely so. Alternatively, if he would have gone ahead even on the basis of that true value, for instance because he was content to rest on the safety of the borrower’s covenant alone and was not concerned with the passing value of the property, then there has been no reliance and for that separate reason no relevant loss. I therefore do not consider Wikborg Rein’s retainer to have been of a general kind. It was not like the examples of general retainers which have been considered in the authorities discussed above. Wikborg Rein had no general responsibility to advise Depfa on whether to proceed with the transactions or not. It did not share the same markets, in the way that insurers and insurance brokers do. It was not acting as lawyers sometimes do, as hommes des affaires. It was giving a specific piece of legal advice. The judge, citing the Bristol & West case [1997] 4 All ER 582, the Portman case [2000] PNLR 344 and the Aneco case [2001] 2 All ER (Comm) 929, appears to have considered otherwise (see at para 31 of his judgment), but essentially on the ground that the South Australia Asset Management principle applies only to cases where a transaction (albeit on different terms) would still have occurred if the claimant had known of the true position, and does not apply where, but for the negligence, no transaction would have occurred at all. In my judgment, however, that involves a misreading of the principle, which takes as its starting-point that, but for the negligence, the transaction would not have occurred, and then asks whether, even so, all the loss caused by entering into the transaction is within the scope of the defendant’s duty.’ 8.49 The scope of duty principle was re-examined by the Supreme Court in the solicitors’ case of Hughes-Holland v BPE Solicitors where a single judgment was given by Lord Sumption.1 The claimant invested in a property development project, relying upon a negligently given indication from his solicitor that his investment would be used to assist with the costs of development. In fact, the solicitor knew that the promotor of the investment would use the claimant’s money to pay for the property itself to be transferred from one of his own vehicles to another, so that he was not contributing anything of substance. The claimant, who would never have invested had he known the truth, lost all his money. However, the scope of duty principle resulted in the claim failing. 1 [2018] AC 599.

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General principles 8.51 8.50 Lord Sumption analysed the facts as proved at trial and concluded that they showed that the development had never been viable even if the scheme had been as the claimant understood it to be. In other words, the loss of his investment was not attributable to the negligent information provided by the solicitor, but to the flaws in the scheme in which the claimant planned to invest. In terms of the SAAMCO counterfactual, even if the solicitor’s information had been accurate, the claimant would still have ended up in the same position, so there was nothing that he could recover from the defendant. 8.51 The decision in Hughes-Holland clarified the law in several respects. ●●

First, in the first sentence of the judgment, Lord Sumption set out the situation in which the scope of duty principle is applicable, saying: ‘The issue on this appeal is, in summary, what damages are recoverable in a case where (i) but for the negligence of a professional adviser his client would not have embarked on some course of action, but (ii) part or all of the loss which he suffered by doing so arose from risks which it was no part of the adviser’s duty to protect his client against.’

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Secondly, the Supreme Court considered, and rejected, the main academic criticisms which had been made of the scope of duty principle. It was thus cemented as part of the fabric of English common law.

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Thirdly, the Court rejected as a misunderstanding the suggestion that the principle is part of the law of causation of loss ‘as that expression is usually understood in the law’.

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Fourthly, the decision in Aneco was held not to be authority for any general proposition of law beyond the particular factual context of that case.

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Fifthly, and perhaps most importantly, in the course of defending the results reached in SAAMCO itself, Lord Sumption said this: ‘It is fair to say that as a tool for relating the recoverable damages to the scope of the duty the SAAMCO cap or restriction may be mathematically imprecise. But mathematical precision is not always attainable in the law of damages. As Lord Hobhouse observed in Platform Home Loans Ltd v Oyston Shipways Ltd [2000] 2 AC 190, 207, the principle is essentially a legal rule which is applied in a robust way without the need for fine tuning or a detailed investigation of causation.’

Read in its context, this was a statement that the SAAMCO counterfactual would be applied to restrict damages in all cases where the principle applies, even though it may be ‘mathematically imprecise’. It was emphatically not a statement that the restriction based on the SAAMCO

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8.52 Scope of auditor’s duty – for what losses is the auditor liable? counterfactual was ‘only’ or ‘merely’ a ‘tool’ to be applied where appropriate.1 ●●

Sixthly, it was held that the claimant bears the burden of proof of showing that the losses claimed fall within the defendant’s scope of duty; ie that the restriction obtained from the counterfactual analysis does not exclude them.

1 The obiter statement of David Richards LJ in AssetCo v Grant Thornton [2021] PNLR 1 at [102] to the contrary is not supportable when Lord Sumption’s words are looked at in their context in Hughes-Holland.

Scope of duty: the modern principle summarised 8.52 The phrase ‘scope of duty’ has the potential to confuse. It has been used in many different senses in the case law. The term ‘scope of duty principle’, or ‘SAAMCO principle’ has now come to refer to the principle that was recognised for the first time in SAAMCO and definitively re-stated in HughesHolland. It is the principle that a defendant who provides some, but not all, of the material in reliance upon which the claimant decides to act, is potentially liable only for the loss that is attributable to the incorrectness of that material and not for the whole loss that may flow from the claimant’s act of reliance. The principle is to be applied by using the ‘tool’ of the SAAMCO counterfactual (even though that may be imprecise in some situations), by asking whether the claimant’s position would have been different if the information as supplied by the defendant had been correct. It is only to the extent that the claimant’s position would have differed on that counterfactual hypothesis that the loss caused by the claimant’s reliance is recoverable. 8.53 To reduce the potential for confusion, it is helpful to put the scope of duty principle as now understood into the context of other restrictions on liability for negligent misstatement. First, the defendant is only liable to a claimant to whom the defendant owes a duty of care (whether in contract or in tort) in respect of the statement. Secondly, the liability only relates to transactions, or forms of reliance, which are within the purposes for which the statement was made or communicated to the claimant. It is this second point which was confirmed by Caparo. Thirdly, liability is only for loss that is both factually and legally caused by the defendant’s breach of duty. Fourthly, liability is only for loss that is not too remote. Fifthly, liability is limited to the loss that is attributable to the inaccuracy of the statement, not to the whole loss caused to the claimant by reliance on the misstatement. It is this fifth limitation which was established by SAAMCO and which is now the usual meaning of the term ‘scope of duty’.

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General principles 8.56

Application of scope of duty principle to audit cases 8.54 Audit liability has always been treated as an example of negligent misstatement. The information which the auditor has a duty to provide has two main components. First, the auditor opines expressly as to whether the financial statements are materially misstated. Secondly, because the auditor has a duty to report to those charged with governance any suspected fraud, the effect of the auditor’s silence is implicitly to provide information that no such fraud has been uncovered during the audit. 8.55 The purpose of the provision of this information is to provide part of the material upon which the company and its shareholders may take decisions in their respective capacities as organs of the company. Thus, damages recoverable from a negligent auditor may include losses arising from management or governance decisions which would have been different if the auditor had not been negligent, insofar as such cause loss. However, the auditor’s function is not to advise the company as to whether to undertake any trade or transaction. Thus, the scope of duty principle must be applied to limit recoverable loss to that which is attributable to errors in the information provided. 8.56 An early clear statement of what the auditor was – and was not – required to do may be found in the judgment of Lindley LJ in Re London & General Bank (No 2):1 ‘It is no part of an auditor’s duty to give advice, either to directors or shareholders, as to what they ought to do. An auditor has nothing to do with the prudence or imprudence of making loans with or without security. It is nothing to him whether the business of a company is being conducted prudently or imprudently, profitably or unprofitably. It is nothing to him whether dividends are properly or improperly declared, provided he discharges his own duty to the shareholders. His business is to ascertain and state the true financial position of the company at the time of the audit, and his duty is confined to that.’ The above statement from Re London & General Bank (No 2) was echoed in modern times by Hobhouse J in Berg v Adams, where he said:2 ‘It also follows that 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

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8.57 Scope of auditor’s duty – for what losses is the auditor liable? exhausted. What those persons do with the information is a matter for them and falls outside the scope of the statutory purpose.’ 1 [1895] 2 Ch 673 at 682. 2 [1992] BCC 661 at 677D–F.

8.57 The scope of an auditor’s duty was at the heart of the second strike out application in BCCI v Price Waterhouse. In that case, the allegation was that if the EW defendants’ audit of Holdings had been carried out with all due care and skill, then numerous ‘imprudences’ and frauds would have been disclosed and the company would have ceased to make further investments in subsidiaries and to give guarantees of the indebtedness of subsidiaries, all of which proved to be loss making when the subsidiaries were later revealed as being insolvent. 8.58 In his judgment on that application, Laddie J cited the passages from Caparo concerning the purpose of the audit and explained Lord Bridge’s reference to ‘errors in management’ thus:1 ‘I do not read Lord Bridge as saying in the passage quoted above that the auditor has a duty to report on whether one or more of the directors is a good manager. It seems to me that the “errors in management” he refers to are the errors in drawing up the company’s accounts and covers also such of the imprudences and wrongdoings which, in the course of carrying out the audit, come to or should come [to] the auditor’s attention. That is the thrust of all three speeches. The auditor’s primary function is to give a clean bill of health in relation to the company’s figures for the previous year. The matter may be looked at in the following way. As Bingham LJ said in the passage quoted by Lord Bridge, the auditor is employed by the company to exercise his professional skill and judgment for the purpose of giving the shareholders an independent report on the reliability of the company’s accounts. In the course of the professional life of an average auditor he will carry out audits for numerous clients involved in widely differing businesses. The skill he offers and for which he is paid is the skill in looking at the company’s accounts and the underlying information on which they are or should be based and telling the shareholders whether the accounts give a true and fair view of the company’s financial position. He is not in possession of facts nor qualified to express a view as to how the business should be run, in the sense of what investments to make, what business to undertake, what prices to charge, what lines of credit to extend and so on. Not only does he not normally have the necessary expertise but those are areas in respect of which his advice is not sought. When the company engages an auditor, it is not seeking his help in steering

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General principles 8.61 the management into making better management decisions. There are others who hold themselves out as able to give that sort of assistance. To adopt the approach of Lord Hoffmann in BBL [ie SAAMCO], the auditors were not asked to advise on what investments or loans to make or guarantees to assume.’ 1 [1999] BCC 351 at [56]–[57].

8.59 In BCCI, it followed that it was not arguable that the scope of the auditor’s duty of care extended to losses incurred by the company in carrying out legitimate, but loss-making business. Laddie J explained: ‘In my view there is no arguable case that the EW defendants’ duty of care to Holdings, whether arising out of its appointment to audit the consolidated or unconsolidated accounts, extends as far as to cover a liability for deficits arising out of legitimate but loss-making business activities, such as investing in subsidiaries and guaranteeing loans. None of those activities was asserted as being either touched by fraud or imprudence. They are not pleaded as being a continuation of a type of business which was touched by fraud or imprudence which the EW defendants should have discovered and disclosed. They are simply losses occasioned by BCCI’s continuing in trade. This conclusion can be expressed in alternative ways. The EW defendants’ duty of care did not extend this far. This is not the kind of damage from which they had to take care to save Holdings harmless.’ 8.60 BCCI thus exemplifies the principle that the scope of an auditor’s duty does not include saving the company from unwise commercial transactions, even if they would not have been entered into if the company had realised its true financial state. On the other hand, as Laddie J recognised at [63]: ‘the auditors might be liable for losses flowing from a continuation of the same type of wrongful business which, according to the pleadings, they should have but did not discover and report to the company, for example the corrupt loans’. 8.61 The positive point acknowledged by Laddie J in that last quoted sentence above was also made by the Court of Appeal in Sasea v KPMG:1 ‘It is accepted for present purposes that it was KPMG’s duty to warn either the directors or some relevant third party of any fraud or irregularity likely to result in material loss to the company with a reasonable degree of promptitude. Why should that be? The obvious and common-sense answer is that by so doing the company may be spared such losses.’ 165

8.62 Scope of auditor’s duty – for what losses is the auditor liable? Although both of these dicta were in the context of decisions as to arguability rather than on the merits, it is difficult to see any basis for a contrary argument at trial. 1 [2000] 1 All ER 676 at 682e.

8.62 In Barings Plc v Coopers & Lybrand,1 the issue of scope of duty was considered after the final trial. The auditor had been found liable in negligence for failing to expose unauthorised trading by Mr Leeson which resulted in massive losses for the audited bank. The judge noted that the auditor’s negligence was one of the causes of Mr Leeson being allowed to continue his unauthorised activities after the audit date. Other causes were failures of the company’s own management including the improvident provision of what was called the ‘dollar funding’. The dollar funding was held to be something that the auditor could not reasonably have been expected to foresee. Evans-Lombe J held that the relevant type of damage was loss caused by Mr Leeson’s unauthorised trading and that the entirety of that loss was the foreseeable consequence of the information provided by the auditor being wrong. The judge declined to find that trading facilitated by the dollar funding fell outside the scope of the auditor’s duty, essentially because the existence of the dollar funding did not create a separate type of damage that could be carved out from the foreseeable consequence of the information in the audit report being wrong. 1 [2003] EWHC 1319 (Ch) at [806]–[825].

8.63 At [818], Evans-Lombe J considered the SAAMCO counterfactual question as follows: ‘Lord Hoffmann’s test, to enquire whether the losses funded by the Dollar Funding “would have occurred even if the information which [D&T] gave had been correct” does not assist. If the 1993 audit certificate had been correct, it would mean that there had been no unauthorised trading up to 31 December 1993. In those circumstances it must be most unlikely that Leeson would have started unauthorised trading in 1994. It would be unwarranted speculation to assume that Leeson would have done so.’ 8.64 As David Richards LJ pointed out in AssetCo v Grant Thornton, what Evans-Lombe J meant by ‘does not assist’ is that the answer to the question did not assist the auditor’s defence.1 The question invites the tribunal to focus on the hypothetical world in which the audit report was correct. In that world, the one thing that is known to be different from the actual world is that Mr Leeson would not have been engaged in any unauthorised trading up to the accounts date. Then the question is whether the court can find that he would have started those activities later. If there is no special 166

General principles 8.67 factor which would have triggered the activities at a later date if they had not already commenced, then, as Evans-Lombe J said: ‘it would be unwarranted speculation’ to assume that Mr Leeson would have done so. The hypothetical question thus points to the right answer: the losses would not have occurred if the auditor’s information had been correct and were therefore within the scope of the auditor’s duty of care. 1 [2021] PNLR 1 at [103].

8.65 To test this further, it is worth thinking about how the opposite conclusion could be reached. This would depend on there being some additional fact which showed that Mr Leeson’s later unauthorised trading was triggered by some new factor that was not present before the relevant accounts date. The evidence would have to persuade the court that even if Mr Leeson had not engaged in any such activity up until the accounts date, he would still have done so later. On that basis, the new trading would be a separate source of loss rather than being a continuation of the same course of conduct as the auditor had a duty to uncover. 8.66 An austere approach to the specification of the hypothetical world in which the auditor’s information was correct is consistent with the decision in SAAMCO itself. In SAAMCO, if the valuation had been correct, then the assumption of the House of Lords was that the lender would still have suffered a loss represented by the fall in market value of the properties. It is implicit in that view that the hypothetical exercise of constructing the possible world in which the defendant’s information was correct does not involve speculation as to possible scenarios which might explain why the information has become correct. If it did involve such speculation, then it would have been quite possible to conclude that if the valuation had been correct, then the market would have been in a different state and might well not have suffered further falls. However, such speculation would make the defendant responsible for far more than the information he actually provides and would effectively make all information equivalent to advice. The contrasting decision of Aneco also illustrates the analysis. The implication of the majority decision in terms of the SAAMCO counterfactual question is that if it had been true that reinsurance was available, then the treaty would not have been loss making. That involves a more expansive approach to the adjustments to be made in the hypothetical world where the defendant’s information was correct which is justified only by the view that the defendant’s information in fact amounted to advice about the advisability or riskiness of entering into the treaty. 8.67 In Equitable Life v Ernst & Young,1 the auditor of a mutual life insurance society sought to strike out claims brought against it by the society. The negligence alleged against the auditor was its failure to identify that the society’s provisions against future bonus payments to policyholders were inadequate and its failure to require disclosure of the potential adverse 167

8.68 Scope of auditor’s duty – for what losses is the auditor liable? consequences if the society lost certain test litigation concerning the payments due to a particular class of policyholder. The society alleged that if these matters had been corrected then the society’s board would have sought a sale of the society itself (demutualisation). Such a sale became impossible later (or at least would have realised far less money) because the society’s value, especially the value of its goodwill, declined dramatically after it lost the test litigation. 1 [2004] PNLR 16. See also the discussion of this case generally at para 6.92 above.

8.68 At first instance,1 Langley J acceded to the auditor’s submission that the claim for a lost sale was outwith the scope of the auditor’s duty. He noted that there was no allegation that a sale was in contemplation at the time of the audit or that the auditor was asked for any advice on raising capital or preserving goodwill. Goodwill was not even an asset included in the audited accounts. Importantly, the factors causing the decline in the value of goodwill after the audit were not matters for which the auditor bore any responsibility. Langley J thus held that the lost sale claim was barred by the principle in SAAMCO and granted summary judgment to the auditor. 1 [2003] Lloyd’s Rep PN 88.

8.69 The Court of Appeal reversed the judge on this point and permitted the lost sale claim to proceed to trial. Confusingly, the Court of Appeal used the term ‘scope of duty’ to mean the range of things which the auditor was to do and separately considered the question of the kind of harm from which the society was to be protected. The Court of Appeal followed the view expressed in Coulthard v Neville Russell that questions of the kind of damage covered by a duty of care were fact sensitive and generally unsuitable for summary determination.1 Having described Aneco, the Court of Appeal stated at [129]: ‘When auditors undertake for reward to perform services such as those listed in para [111] above and are found to be negligent in the way they perform those services we do not understand the law to require the client to ask for specific advice before it can recover damages for the foreseeable losses it later suffers.’ 1 [1998] 1 BCLC 143. See above at para 6.67.

8.70 In response to the specific factors which the judge held showed that a lost sale was not within the scope of the auditor’s duty, the Court of Appeal said (also at [129]): ‘because E&Y must be taken to have failed in their duty of care to report to Equitable on material errors in its accounts, the directors 168

General principles 8.73 of Equitable did not think that it needed to seek advice from E&Y about the advisability of a sale. If, however, they had known what it is said they would have known had E&Y performed their duty, it is well arguable that the consequences, not only for bonus distribution, but also for the factors affecting the Society’s capital base generally, would have had to have been discussed with the auditors and considered at large and as a whole.’ 8.71 Thus the Court of Appeal considered it to be arguable that the scope of an auditor’s duty includes the proceeds which a company would have realised by selling its business if the auditor had not failed to advise that the accounts understated the company’s liabilities. The decision was clearly based in large part on the Court of Appeal’s caution about striking out claims on the basis of a developing principle of law and without full factual findings. 8.72 In Manchester Building Society v Grant Thornton,1 the auditor gave negligent advice to the claimant Building Society about the accounting treatment (‘hedge accounting’) that it was entitled to apply in relation to a book of fixed rate lifetime mortgages and interest rates swaps. The negligent advice was initially given expressly and then repeated by implication in successive years’ audit reports which failed to point out that the accounts were not in accordance with accounting standards by reason of the use of hedge accounting. Some years later, the error came to light at a time when the swaps were substantially ‘out of the money’. The consequence was that the Society had to sell the mortgages and break the swaps, crystallising its losses. At trial, the Society established that if it had received correct advice (that hedge accounting was not available), it would not have entered into or retained the swaps and mortgages. The trial judge held that the cost of breaking the swaps was legally, as well as factually, caused by the auditor’s negligence and was not too remote. However, he held that the loss was not recoverable because it fell outside of the scope of the auditor’s duty. The judge’s approach to this question was to ask whether such losses were among those for which the auditor had assumed responsibility. 1 [2018] PNLR 27 (Teare J); affirmed on other grounds at [2019] 1 WLR 4610; appeal to Supreme Court outstanding when this edition went to press.

8.73 The Court of Appeal agreed with the judge that the swap break costs were not within the scope of the auditor’s duty, but disagreed with his approach to that issue. Hamblen LJ (with the agreement of Males LJ and Dame Elizabeth Gloster) set out a clear statement of the step-by-step approach that was required by the Supreme Court authorities. It is to be hoped that the Supreme Court endorses this clear and helpful summary: ‘In summary, in the light of the clarification provided in HughesHolland and subject to the full exposition there provided, the 169

8.74 Scope of auditor’s duty – for what losses is the auditor liable? application of the SAAMCO principle may generally be addressed by considering the following: (1) It is first necessary to consider whether it is an “advice” case or an “information” case. This is a necessary first step because the scope of the duty, and therefore the measure of liability, is different in the two cases. (2) It will be an “advice” case if it can be shown that it has been “left to the adviser to consider what matters should be taken into account in deciding whether to enter into the transaction”, that “his duty is to consider all relevant matters and not only specific matters in the decision” and that he is “responsible for guiding the whole decision making process”. (3) If it is an “advice” case, then the negligent adviser will have assumed responsibility for the decision to enter the transaction and will be responsible for all the foreseeable financial consequences of entering into the transaction. (4)

If it is not an “advice” case, then it is an “information” case and responsibility will not have been assumed for the decision to enter the transaction.

(5) If it is an “information” case, the negligent adviser/information provider will only be responsible for the foreseeable financial consequences of the advice and/or information being wrong. (6) This involves a consideration of what losses would have been suffered if the advice and/or information had been correct. It is only losses which would not have been suffered in such circumstances that are recoverable.’ 8.74 As we have explained above, audit cases are invariably ‘information’ rather than ‘advice’ cases in the sense used in the scope of duty authorities. The steps set out by Hamblen LJ therefore reduce to the last two, including consideration of the SAAMCO counterfactual question: what losses would have been suffered if the information had been correct? 8.75 Unlike Manchester Building Society, which concerned advice about an accounting treatment, AssetCo v Grant Thornton was a case of general audit negligence, in which the auditor negligently failed to ascertain that ‘AssetCo’s business was ostensibly sustainable only on the basis of the dishonest representations or unreasonable decisions made and taken by [management]’. At first instance, the judge held that all the losses that were incurred by the company after the negligent audit were recoverable from the auditor. Other aspects are discussed further below, but for present purposes, it is notable that the judge dealt with scope of duty as if it was of a piece with legal causation and without reference to the SAAMCO counterfactual question. 170

General principles 8.78 8.76 On appeal, there was more extensive argument about the application of the scope of duty principle to audit and reference to the Manchester Building Society Court of Appeal judgment, which had been handed down the day before the first instance judgment in AssetCo. The Court of Appeal confirmed that the principle would normally apply to audit negligence and that the SAAMCO counterfactual question would normally give the ‘right’ answer in audit cases. Despite these correct conclusions and the citation of the relevant cases, the Court of Appeal gave its answer in respect of the bulk of the losses in the case without considering the counterfactual question, on the basis that the true distinction being made by the principle was between negligence which was ‘merely the occasion for the losses’; and that which was their ‘substantial cause’.1 This approach would extinguish scope of duty as an independent check on liability and it is impossible to reconcile with the clear decision of the Supreme Court in Hughes-Holland that ‘the principle has nothing to do with the causation of loss as that expression is usually understood in the law.’ 1 [2021] PNLR 1 at [101] and [109], and in relation to a head of loss that was disallowed, [111].

8.77 It seems that the Court of Appeal in AssetCo may have been encouraged to depart from the clarity of the principle as explained in Hughes-Holland and Manchester Building Society by its concern about the possibility that a dividend would fall outside the scope of an auditor’s duty if the counterfactual question was applied to that issue.1 But that concern is misplaced as we explain below and the suggested response of holding that the counterfactual question is a merely optional tool is not reconcilable with either Hughes-Holland or Manchester Building Society. As a matter of authority, the key point is that the dividend example did not arise in AssetCo, so what is said about it there is merely obiter. The Court of Appeal’s erroneous approach to scope of duty on the issues which did arise is also obiter because, on the basis of its characterisation of the facts found by the judge, it would have reached the same result by asking the proper question. 1 At [102].

Relationship between the principles 8.78 Remoteness, scope of duty and legal causation are closely related. Each of them can be used to exclude some of the same matters from any given claim. As Lord Sumption put it in Hughes-Holland, ‘Ultimately, all of them depend on a developed judicial instinct about the nature or extent of the duty which the wrongdoer has broken.’ That said, it is clear that the application of the three principles to a given set of facts is not necessarily – or even normally – duplicative. All three must be considered and if any one of them excludes a given loss, then that loss is not recoverable. In other words, 171

8.79 Scope of auditor’s duty – for what losses is the auditor liable? a claimant who can show factual causation between breach of duty and loss must also establish that such loss was: (i)

caused in law by the breach of duty;

(ii) of a type that was within the reasonable contemplation of the defendant at the time the contract was made; and (iii) within the scope of the defendant’s duty. 8.79 It is possible to develop an analysis which seeks to assimilate causation and scope of duty. Several judicial dicta can be identified which suggest that one of these concepts may be seen as a facet of the other. These were discussed in the first edition of this work. However, following Hughes-Holland, it is clear that no such analysis is part of the common law. The fundamental reason is that causation in the law is approached in a relatively straightforward way as explained in this chapter above. The law recognises that the factual causes of any given subsequent fact are very numerous and interact in complex ways.1 Using judicial common sense, the chain of relevant causes is picked out from that complex web and effective or legal causes are selected from that chain. In the case of a reliance-based tort such as negligent misstatement, the relevant chain starts from the defendant’s breach of duty. From there, it passes through the claimant’s act of reliance and on to the claimant’s loss. On this view of causation, if the act of reliance is caused by the breach of duty, then the consequences of that reliance will also be so caused, unless the effects are causally subsumed (the ‘chain is broken’) by some later event. The scope of duty principle is an essential additional check on recoverability of loss, which becomes relevant precisely when the legal causation test is satisfied. 1 See per Lord Shaw of Dunfermline in Leyland Shipping v Norwich Union Fire Insurance [1918] AC 350 at 368–369.

8.80 The scope of duty analysis is especially important in professional negligence claims because those are the types of claim where it is common for a defendant to provide information to the claimant which is only one factor in the claimant’s decision to undertake a particular transaction or other course of action. It is in such cases that scope of duty may result in the exclusion of loss that the traditional test of causation (and, for that matter, remoteness) would not have excluded. 8.81 On this basis, a way of relating the principles in professional negligence cases could be proposed as follows. For each head or distinguishable type of loss, a claimant must show factual causation. A claimant must also show legal causation of each head of loss claimed, by demonstrating that the defendant’s breach of duty was at least one of the effective, substantive or legal causes of that head of loss. Each head of loss must be shown not to be too remote in the traditional sense of being within the reasonable contemplation of the defendant

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Losses claimable by the company 8.84 at the time of contracting. Separately, scope of duty must be considered. This may result in excluding some or all of the loss which would otherwise be recoverable in cases where the defendant’s duty was to provide information contributing to the claimant’s decision to undertake a transaction or other relevant action. 8.82 The method of calculating that exclusion is to ask the SAAMCO counterfactual question, namely: ‘Would the loss have been suffered even if the information provided by the defendant had been correct?’ In answering that question, an austere approach should be taken to constructing the hypothetical world where the information was correct, involving the minimum possible speculation as to what else might have been different in that world, so as to confine the comparison to matters that are properly the responsibility of the defendant.

LOSSES CLAIMABLE BY THE COMPANY Overpaid dividends 8.83 Companies are prohibited from paying dividends otherwise than out of accumulated net profits (known as ‘distributable profits’).1 Breaching this prohibition is called payment of a dividend out of capital. If accounts show a better financial position than the true position, then a company may pay a dividend without realising that it is doing so out of capital. By the end of the nineteenth century it was well established that dividends paid out of capital were not too remote and were recoverable from an auditor who had negligently certified the accounts that misled the company into believing that distributable profits were available.2 The point was again argued and again decided the same way in the 20th century in Re Thomas Gerrard & Son Ltd.3 In Caparo, Lord Oliver described the auditor’s function as including the protection of the company from ‘wrongdoing (by, for instance, declaring dividends out of capital)’.4 1 This principle was established by the common law, but was codified in 1980 following Directive 77/91/EEC. See now Companies Act 2006, s 830. 2 Leeds Estate, Building and Investment Co v Shepherd (1887) 36 Ch 787 at 809, Re London and General Bank (No 2) [1895] 2 Ch 673 at 686–688. 3 [1968] Ch 455 at 477–478. 4 Caparo v Dickman [1990] 2 AC 605 at 630G.

8.84 The fullest judicial discussion of the recoverability of dividends from an auditor is in the judgment of Giles J in the Supreme Court of New South Wales in Segenhoe v Akins.1 The context for the discussion was an argument run by the auditor that if the company was solvent, then permitting recovery of a dividend paid away would in effect be to permit double recovery by or on behalf of the 173

8.84 Scope of auditor’s duty – for what losses is the auditor liable? shareholders who had received the dividend and who would benefit from any damages awarded against the auditor. Giles J rejected the auditor’s argument after a full discussion of early case law, especially a controversial dictum of Cotton LJ from Flitcroft’s Case.2 Giles J held as follows: ‘As a matter of principle, it does not seem to me that it matters for present purposes that the company paying a dividend is solvent rather than insolvent. In either case the company as a separate entity is out of pocket to the extent of the money paid away. The effect of the company being out of pocket may be different: those who ultimately suffer may be the shareholders rather than the creditors. But the effect in the case of a solvent company may vary according to whether or not the company is trading profitably; not having the money paid away may be what takes a solvent company into insolvency; or an insolvent company may nevertheless trade out of its difficulties. To investigate and forecast these effects would be to embark upon a never-ending process. It is a process which is not undertaken when, for example, the loss of the company is not payment of a dividend but a payment to a third party (not a shareholder) in reliance upon a negligent misstatement. A line is drawn: the claimable loss is the amount of the money paid away. Equally, it does not seem to me that in principle the company is unable to recover the money so paid away because it was paid to shareholders rather than to a third party or third parties. That would negate the company’s status as a legal entity separate from its shareholders and the shareholders’ lack of any proprietary interest in the company’s assets. Further, recovery of the money paid away does not necessarily mean that shareholders will be paid twice over. Even if the shareholders remain the same, the company may or may not distribute the amount recovered by way of further dividend; it may or may not make profits from the use of that amount; it may have suffered in its trading between payment out and recovery such that the recovery only restores its position. Inquiry into these matters would be akin to the never-ending process to which I previously referred. Changes in shareholding may mean that there is a real loss to shareholders occasioned by the company being out of pocket which is not matched by receipt of the dividend wrongly paid. An incoming shareholder will not necessarily pay a price for his shares discounted so as to reflect the company being out of pocket, and thus will not necessarily receive a benefit, or the equivalent of a benefit, twice over if the company recovers the money paid away. If the submission for DHS were to be accepted incoming shareholders may be disadvantaged, and it can not be that the result should differ according to when in relation to changes in shareholding the proceedings were brought to a

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Losses claimable by the company 8.85 successful conclusion, or according to an investigation of the position of each of the shareholders.’ 1 (1990) 1 ACSR 691, [2002] Lloyd’s Rep PN 435. 2 Re Exchange Banking Co (1882) 21 Ch D 519 at 536: ‘If the corporation were suing for the purpose of paying over again to shareholders what the shareholders had already received the court would not allow it.’

8.85 There is little doubt that the approach of Giles J is correct in principle and would be followed in England. Cotton LJ’s dictum from Flitcroft’s Case was held by the Court of Appeal in England not to apply to protect directors from having to restore to the company dividends wrongfully paid out of capital. The reasoning of Robert Walker LJ (with the agreement of Sir Andrew Morritt V-C and Sedley LJ) in Bairstow v Queens Moat Houses would apply equally in a claim against auditors:1 ‘In my judgment the point must be decided by reference to principle rather than authority. Queens Moat’s case is founded on the fundamental proposition (which was affirmed by the House of Lords in Saloman v A Salomon & Co Ltd [1897] AC 22 and which Cotton LJ had well in mind in Flitcroft’s Case) that a corporation is a legal person separate from the persons who are from time to time its members (in the case of a company limited by shares, the shareholders). The basic rules about lawful and unlawful dividends, developed from the earliest days of company law and now elaborated in accordance with European Community legislation, exist not only for the protection of creditors but also for the protection of shareholders. If directors cause a company to pay a dividend which is ultra vires and unlawful because it infringes these rules, the fact that the company is still solvent should not be a defence to a claim against the directors to make good the unlawful distribution. Against that both Mr Purle and the litigants in person pressed the court with the prospect of shareholders receiving an unmerited windfall, if the amounts of unlawful dividends which they have received in the past were now restored to Queens Moat by the former directors and were again to be distributed (this time lawfully) by way of dividend. In considering this windfall objection it is no doubt right to ignore the fact that the appellants are in practice unlikely, in view of the very large sums involved and the costs orders already made against them, to be able to meet even a small part of any judgments against them. It is not so easy to ignore the fact that the present shareholders in Queens Moat are probably a very different body of investors than those who received the unlawful dividends ten years ago. Some of those early investors may have cut their losses by selling their shares at the bottom of the market. Some of the present investors may have been astute enough or lucky enough to have bought their shares at 175

8.86 Scope of auditor’s duty – for what losses is the auditor liable? the bottom of the market. Some may even have formed a view, in deciding to invest in Queens Moat, as to the prospects of a successful recovery on the counterclaim. These considerations put some flesh on the Saloman v Saloman point. They are matters which the court cannot easily take into account, however strong its instinct to achieve a fair result and avoid anything which resembles double recovery. Nevertheless it may be assumed that some of the present shareholders did receive and benefit from unlawful dividends paid between 1991 and 1993. Even in relation to those long-term investors the objection taken by Mr Purle and the litigants in person is in my judgment misconceived. If there is any unfairness in the situation it does not arise from the socalled windfall which (if and so far as it occurs) will be a distribution lawfully made on the basis of properly prepared accounts for 2001 or some later accounting period. It will be made out of distributable profits which are disclosed in those accounts. Any unfairness would, on the contrary, arise from long-term investors not being required to account for the unlawful dividends which they received in the past.’ 1 [2002] BCC 91 at [44]–[46].

8.86 Controversially, a claim for a dividend payment was struck out along with the trading losses claim in Galoo.1 It seems clear from the description of the facts given in Galoo that the dividend in question was paid at a time when the company was at least arguably balance sheet insolvent and therefore was most likely paid out of capital. On that basis, it should have been recoverable from the auditor. In Sasea v KPMG at first instance Collins J said: ‘I confess that I have some difficulty with this aspect of Galoo. It seems to me that common sense does suggest that a negligent failure to spot that a company is insolvent so that a dividend is paid when it should not have been should result in the amount of that dividend being recoverable.’2 That is plainly right. The Court of Appeal’s decision in Galoo to strike out the dividend claim seems to have been based on the narrow way that it was pleaded as being a consequence (together with the trading losses) simply of the fact that the company had not been liquidated. There is no indication that it was pleaded as a dividend unlawfully paid out of capital. The Court of Appeal’s decision that this causal chain was not adequate is defensible, but it is surprising for a claim that could perhaps have been rescued by a pleading amendment to have been struck out.3 1 Galoo v Bright Graeme Murray [1994] 1 WLR 1360. 2 [1999] BCC 857 at 869H.

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Losses claimable by the company 8.89 3 The dividend is not referred to at all in the unreported first instance judgment, nor in the notice of appeal as reported at [1994] 1 WLR 1360 at 1363–1364. It may be a fair inference that there was limited argument about it.

8.87 On the facts of Sasea, Collins J held that the dividend claimed by Sasea had not actually been paid and was represented by a mere book entry. On that basis, he struck out the claim for the dividend as having caused no actual loss. Although some of the claims struck out were restored by the Court of Appeal,1 there was no appeal in relation to the dividend.2 1 [2000] 1 All ER 676. 2 It does not appear from the Court of Appeal judgment itself what happened in relation to the dividend (which is mentioned in passing at 684d), but it is recorded that there was no appeal in the subsequent decision of Hart J at [2002] BCC 574 at [5].

8.88 The above claims all concerned dividends which were unlawful as being paid out of capital. In such cases, a possible answer to the potential injustice referred to by the defendants in Segenhoe v Akins and in Bairstow v Queens Moat Houses lies in the potential recoverability of overpaid dividends from the members. By Companies Act 2006, s 847, a dividend paid out of capital is recoverable from a member who has reasonable grounds for knowing it was so made. The same is true at common law because a payment out of capital is ultra vires and therefore recoverable from a member who knows the facts.1 Where the member does not have such knowledge it might be arguable that a claim could be made in unjust enrichment, though the argument faces obstacles.2 In addition, a company which pays an unlawful dividend has a claim in breach of trust against any directors who knew the relevant facts when they approved the dividend.3 A point that remains untested is whether an auditor who pays damages to the company for an overpaid dividend may claim subrogation to the company’s rights of recovery against members, or its claim against the directors. In principle such a claim should be available and it would be an obvious answer to the windfall concern about this form of auditor’s liability, especially in a case where the dividend was approved by directors or received by a major shareholder who were personally responsible for the accounting misstatements which made it possible. 1 Precision Dippings Ltd v Precision Dippings Marketing Ltd [1986] Ch 477. 2 See In re Burnden Holdings (UK) Ltd [2019] Bus LR 2878. 3 See Chee Ho Tham, ‘Unjust enrichment and unlawful dividends: a step too far?’ (2005) 64(1) CLJ 177.

8.89 In Segenhoe v Akins, the claimant only claimed the relatively small part of the dividend which turned out to have been paid from capital. In Equitable Life v Ernst & Young, one of the claims by the claimant mutual life assurance society was that as a result of its auditor’s negligent failure to identify that its reserves were understated, the society paid out more by way of discretionary bonuses to members than it would have done. There was an obvious analogy

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8.90 Scope of auditor’s duty – for what losses is the auditor liable? between this claim and a claim for overpaid dividends. As part of its application to strike out the claims, the auditor argued that the analogy failed because the bonuses were not unlawful even if the society succeeded in showing that they would not have been paid had it been aware of the true position. Langley J refused to strike out these claims and the Court of Appeal agreed with him. The reasoning is contained in Langley J’s judgment as follows:1 ‘But I do not see why in the context of a negligent audit the law should in principle draw so radical a distinction between payment of unlawful dividends and lawful dividends which would not have been declared had the accounts shown a correct profit figure. Profits usually do not have to be distributed either at all or at any particular date or rate. They may of course be seen as a source of capital to invest in profit-earning assets or to discharge onerous liabilities. More importantly I do not think Mr Hapgood’s submission is established by the authorities to which I was referred. They are cases where the claim made was in fact only for unlawful dividends and the wider issue did not need to be addressed. But they also serve to establish, as Mr Milligan submitted, that other payments such as tax or bonuses made on the basis of falsely stated profits, albeit lawful, may be recovered from a negligent auditor. Leeds Estate Building and Investment Company v Shepherd (1887) 36 Ch D 787 concerned both dividends and bonuses as appears from p 809. In re London and General Bank (No 2) [1895] 2 Ch 673 concerned a claim which was only for an unlawful dividend. In re Westminster Road Construction & Engineering Co Ltd (1932) Acct LR 38 concerned the recovery of both an unlawful dividend and sums lawfully paid as commission on the basis of a false profit figure. In In re Thomas Gerrard & Son Ltd [1968] Ch 455 a company paid tax on an inflated profit figure in audited accounts as well as dividends. It was held that the auditors were liable to the company both for the amount of the dividends and the costs of recovering the excessive tax and any tax not recovered.’ 1 Equitable Life v Ernst & Young [2003] PNLR 23 at [88], affirmed on this point by the Court of Appeal at [2004] PNLR 16 at [96].

8.90 It is thus established in English law that it is at least arguable that a company which was at the relevant time both solvent and in possession of distributable profits may reclaim a dividend from a negligent auditor to the extent that it can establish that it would not have paid the same dividend if it had known the true position of its finances. Moreover, in a New South Wales case, Stanilite Pacific v Seaton, it seems to have been assumed that such a claim was viable.1 Although this prospect raises in a stark way the potential injustice referred to by the defendants in Segenhoe v Akins and in Bairstow v Queens Moat Houses, the answer to it is likely to be the same: namely that the

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Losses claimable by the company 8.93 company is a separate legal person and that principle must be upheld despite the potential for anomalous results. 1 [2005] NSWCA 301 at [172]–[174] per Hodgson JA.

8.91 In BTI v PricewaterhouseCoopers LLP,1 the defendant auditor argued on a strike out application that dividends were not recoverable as a result of the scope of duty principle. The argument was that if it had been true that the accounts were accurate, the dividend would still have been paid and would still have been irrecoverable, so that the loss of the dividend was not the result of the inaccuracy of the information. Fancourt J refused to grant summary judgment on the point, in part in reliance on the statements of the law in the first edition of this work. He pointed out that the argument was a novel one and that the correct application of the scope of duty principle was ‘notoriously difficult’. 1 [2020] PNLR 7 at [108]–[121]. Although other aspects of that decision went to the Court of Appeal at [2021] EWCA Civ 9, no application was made to appeal this issue.

8.92 In the course of considering this argument Fancourt J said: ‘Even if one were to apply [counsel for PwC’s] counterfactual approach, the position would then have been not only that the dividend would have been paid but also that AWA would still have had a positive value and been able to meet its liabilities. Instead, it was left with insufficient assets to do so.’1 It is submitted that this dictum contains the key to this point: the correct counterfactual inquiry is as to the position of the claimant if the auditor’s information had been accurate. In that case, the dividend would have been paid, but the final position of the claimant after making the payment would have been better than its actual position. In effect, therefore, the scope of duty principle limits the recovery from the auditor of an overpaid dividend to the extent to which the net assets in the accounts were overstated because of the auditor’s breach of duty. 1 At [117].

8.93 This aspect of the decision in BTI v PwC was noted by the Court of Appeal in AssetCo, even though the issue did not arise in the latter case (because the trial judge had held that the dividend claim failed for other reasons). Like Fancourt J, David Richards LJ clearly disliked the possibility that dividends might not be recoverable in general and he suggested that the response to the argument in BTI should be to treat dividends as an exception to the applicability of the scope of duty principle.1 This obiter dictum is wrong: the scope of duty principle does apply as set out in the preceding paragraph, which does not have the unintuitive consequence that a dividend claim can never succeed, but does result in a sensible restriction on its quantum.2 1 AssetCo at [102].

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8.94 Scope of auditor’s duty – for what losses is the auditor liable? 2 The question of dividends was also discussed in argument before the Supreme Court in Manchester Building Society v Grant Thornton and at the time this edition went to press it remains to be seen whether that Court would make any comment upon it.

Overpaid bonuses 8.94 An auditor may be liable for bonuses paid to executives which would not have been paid had the accounts been correctly stated. In Leeds Estate, Building and Investment Co v Shepherd, Stirling J ordered a negligent auditor to repay to a company not only directors’ fees but also the bonuses paid to a manager which were only properly payable if the company paid a dividend of five per cent (which it would not have done if the accounts had been prepared accurately).1 Similarly in Re Westminster Road Construction & Engineering Co Ltd Bennett J held that a company was entitled to recover from a negligent auditor commissions it had paid on the basis of a wrongly stated profit figure.2 1 (1887) 36 Ch. 787. 2 (1932) Acct LR 38.

8.95 These older cases do not address whether a purely discretionary bonus could be recovered from an auditor. In principle, the answer ought to be that if the decision maker as to the bonus was misled by the accounts, then the amount of the overpayment (as compared to what would have been paid if the true position had been known) should be claimable from the auditor. Just as discussed above in relation to dividends, the question would arise whether the company could reclaim any such sums from the employee in question (especially if the employee had knowledge of the misstatement of the accounts) and whether the auditor could be subrogated to such a claim.

Overpaid tax 8.96 If accounts are overstated, that will foreseeably lead to the company paying more tax than it should have paid. In many cases such tax will be recoverable from the government and will therefore not represent a loss. However, the costs of recovery and any tax which is not reasonably recoverable will be claimable from a negligent auditor. Thus, in re Thomas Gerrard & Son Ltd, Pennycuick J awarded a company as against its negligent auditor both the cost of recovering excessive tax paid on wrongly stated profits and also any tax not in the event recovered.1 1 [1968] 1 Ch 455.

8.97 If a negligent audit causes a company to underpay tax, then it might be appropriate for an auditor to be liable for any resulting interest or penalties 180

Losses claimable by the company 8.100 (subject to credit for any benefit obtained by the company from not paying over the tax earlier).

Continuing defalcations 8.98 If audit negligence consists in failing to draw attention to improper activity, then any losses flowing from the same course of improper activity that would have been stopped if the auditor had reported properly will be recoverable. Sasea v KPMG is an illustration of this principle.1 Another illustration is Barings v Coopers & Lybrand, where a particular course of unauthorised trading was permitted to continue because an auditor failed to identify and reveal it.2 Difficult questions of fact could easily arise as to whether a particular course of conduct post-dating the audit is sufficiently closely related to the activity that the auditor should have identified to establish legal causation or that the loss was within the scope of the auditor’s duty. For example, in AssetCo v Grant Thornton,3 the Court of Appeal held that there was no sufficient link between the auditor’s failure to identify dishonest statements made by management to the auditors and the later misappropriation of funds by one of the executives. 1 [2000] 1 All ER 676. 2 [2003] EWHC 1319 (Ch) at [783]. 3 [2021] PNLR 1 at [111].

Investigation costs 8.99 The costs of investigating and resolving the issues which an auditor failed to identify are regularly claimed. This is legitimate if it can be shown that the costs actually incurred are greater than they would have been if the auditor had reported appropriately. This might well be the case if the auditor’s negligence permitted a course of fraud or improper conduct to go unchecked for many years. However, in more run of the mill cases it might be hard for a claimant to show that the actual costs were any greater than would have been incurred if the auditor had reported competently.1 1 For an example see Manchester Building Society v Grant Thornton [2018] PNLR 27 at [232].

Audit fees 8.100 In general a negligent professional is not obliged to return his fees on top of paying damages, as that would amount to double recovery.1 That is especially true in a claim against auditors because the company would always have required an audit in any event. Even in the unlikely event that a plaintiff could show that the audit fees were returnable on a restitutionary basis such 181

8.101 Scope of auditor’s duty – for what losses is the auditor liable? as total failure of consideration, credit would still have to be given in any damages claim for the cost of the competent audit which would have been required in any event. 1 Lowes v Clarke Whitehill CA, 21 November 1997, Lexis.

Trading losses The case law on trading losses before Galoo 8.101 Two of the early misfeasance summons cases against auditors contain dicta which are arguably relevant to the trading losses debate. The first is Leeds Estate v Shepherd. In that case, the following dictum of Stirling J could give some support to an argument that trading losses might be recoverable:1 ‘if the annual accounts of income and expenditure had year after year shewn, in accordance with the fact, that no profit was earned, it is impossible to suppose that the attention of members, probably of creditors of the company, would not have been directed to the question whether or not dividends could under those circumstances be properly paid, and the crisis in the company which occurred in 1882 would in all likelihood have arisen at a much earlier period, with the probable result that either a sounder mode of carrying on business would have been adopted, or else that the company would have been wound up before great loss was incurred.’ 1 (1887) 36 Ch D 787 at 803.

8.102 The above statement is of very little direct value as authority, however, since there is no suggestion in the report of Leeds Estate that any attempt was made to claim trading losses, so it cannot be assumed that Stirling J was addressing his mind to any question of legal causation or remoteness. The issue was raised, however, in Re Kingston Cotton Mill (No 2) at first instance. This was a misfeasance summons against both directors and auditors. In the following passage, Vaughan Williams J referred to an unidentified passage from Leeds Estate, presumably the passage quoted above. He said:1 ‘The remaining charge against the directors is that they, by the misstatements in the balance sheets as to the assets of the company in regard to the mill and machinery and the stock-in trade, were guilty, at all events in respect of the mill, of making a statement as to the value of the assets which they knew to be untrue, and that the company has been damaged thereby by continuing to trade on the assumption that the assets were of the value stated in the balance sheet, and that the directors are liable to make good the losses of the company while 182

Losses claimable by the company 8.104 it continued so to trade. It seems to me that the directors are not so liable, because, in my judgment, the damages are too remote, and are not proved in fact to have been the consequence of the misstatement in question. The suggestion that such damages may be treated as resulting from the overstatement of the value of the assets seems to be based principally on a passage in the judgment of Stirling J in Leeds Estate Building and Investment Co v Shepherd; but Stirling J arrived at no such finding in fact, and in the present case I do not think I can do so. The company, if one takes the stock-in-trade on the manager’s statement and then calculates the assets with the mill, &c, at their true value, does not seem to me to have been insolvent until the last year of its existence; and it is to be remembered that so long as the mill was a going concern the mortgagees were not likely to call in their debt. I know it is said that the mortgagees would have called in the debt but for having the accounts shewn to them with the inflated value of the mill; but I think that there is no proof of this in fact. I therefore hold that the directors are not liable, in respect of any of the charges mentioned in the misfeasance summons. … With regard to the auditors the case is more difficult. They are, of course, entitled to the benefit of my decision … in regard to the remoteness of the damage; …’ 1 [1896] 1 Ch 331 at 349 (reversed on other grounds at [1896] 2 Ch 279).

8.103 This passage from Re Kingston Cotton Mill is a direct comment on a claim that auditors (and directors) could be liable for losses caused to a company merely by its continuing to trade. The judge rejected that claim on the grounds that ‘the damages are too remote, and are not proved in fact to have been the consequence of the misstatement in question’. The supporting reasoning all appears to be directed to the lack of proof of factual, but for, causation. On the face of the judgment, ‘remoteness’ was a separate reason for the judge’s finding in this regard, but it is not clear what principle was thereby referred to and his finding was not supported by any reasoning over and above the reasoning in relation to factual causation. 8.104 The key authority relied on in Galoo was Alexander v Cambridge Credit, a decision of the Court of Appeal of New South Wales.1 In Cambridge Credit, the auditor negligently certified the accounts of Cambridge Credit for the year ended 30 June 1971. At first instance, Rogers J held that were it not for the auditor’s negligence, the company would have been put into receivership in 1971 at a time when its liabilities exceeded its assets by some AU$10 million. In fact, a receiver was appointed in 1974, by which date the deficiency of assets to meet liabilities was around AU$180 million. After making certain allowances in favour of the auditors, Rogers J awarded damages against the auditor of AU$145 million. In the New South Wales Court of Appeal, the 183

8.105 Scope of auditor’s duty – for what losses is the auditor liable? award was reversed by a majority (Mahoney JA and McHugh JA, Glass JA dissenting). 1 (1987) 9 NSWLR 310.

8.105 Mahoney JA emphasised the complex procedural history of the Cambridge Credit litigation, which meant that several potential arguments of causation were not available to the claimants. In particular, Mahoney JA pointed out that:1 ‘There was, at the least, an arguable issue as to reasons why the net worth of the company fell in the 1971–1974 period. The defendants contended, and contended on this appeal that the fall was due to factors such as the “boom” and “bust” in the market, the intervention of the government, and generally the factors referred to in the documents to which I have referred. The plaintiffs took the contrary position. It is clear that the causality issue is to be determined upon the basis that these factual questions remain undetermined. In particular, no determination is to be made as to whether the fall in value was produced by the lack of the provisions to which his Honour referred in the 1971 accounts, to the underlying condition of the company which the need for those conditions demonstrated, to the state of the market or the government intervention, or to the other matters canvassed at the trial. The causality issue is to be determined upon the basis simply that the fall in the net worth of the company in fact took place.’ 1 At 328–329.

8.106 The narrow basis of the available arguments were again stressed in the following key passage in the judgment of Mahoney JA:1 ‘To allow the company to continue in existence is, in a sense, to expose it to all the dangers of being in existence. But allowing the company to remain in existence does not, without more, cause losses from anything which is, in that sense, a danger incident to existing. There are some dangers loss from which will raise causal considerations and some will not. But the company’s case has been conducted on the basis that there is not to be – and there has in fact not been – a detailed examination of what particular things caused the fall in net value of the company between 1971 and 1974 and the nature for this purpose of them. In the end, the company’s case has been that the loss it claims was caused by the breach because, and because alone, the breach allowed the company to continue in existence. Some of the incidents flowing from its existence during 1971–1974 may be the results of the breach; 184

Losses claimable by the company 8.109 some, for example, those flowing from earthquakes or the like, will not be. But the basis of the plaintiffs’ claim has been such that no inquiry is to be or has been pursued, for this purpose, into what in fact happened, why and the relationship of what happened to the breach. I do not think that that is enough to establish a causal relationship.’ 1 At 334–335.

8.107 McHugh JA, referring to an earlier decision of his own, held that in general the ‘but for’ test was sufficient to determine causation but that the test was ‘only a guide’ and ‘The ultimate question is whether, as a matter of common sense, the relevant act or omission was a cause’.1 For McHugh JA, the remarkable factor in the case was that Cambridge itself was well aware of the facts that gave rise to the finding of negligence against the auditor. The ‘but for’ chain of causation existed only because the trustee under a trust deed under which the company issued debentures would have put the company into receivership if the accounts had been corrected, but the trustee was not a party to the proceedings and made no claim.2 On this basis, to assert that the issue of the audit certificates was a cause of the company’s trading losses would be ‘to depart from the commonsense notion of causation which the common law champions.’3 1 At 358C. 2 At 358E–G. 3 At 359D.

8.108 Glass JA dissented on the basis of the earlier decision of McHugh JA that ‘but for’ causation was the key test limited only by remoteness, not by any further conception of effective or dominant cause. 8.109 As already noted above, Berg Sons v Adams illustrates the Court’s approach to legal causation in audit claims. More particularly, the following (obiter) statement of Hobhouse J from that case shows why an auditor will not generally be liable for trading losses which would not have been incurred if an accurate audit certificate had brought all trading to an end at an earlier date:1 ‘As regards the claim of the first plaintiff, Berg, there can in my judgment be no causal relationship between the breach of contract and the alleged losses. If the contract had been fully performed by the inclusion of a qualification of uncertainty in the certificate, it would not have affected the knowledge of the company and its members. Since the provision of knowledge to the company and its members is the subject matter of the contract, unless it can be shown that the company or its members were in some way misled or left in ignorance of some material fact, the breach of contract lacks significance and has no legal consequence. Accordingly, even if the first plaintiffs had 185

8.110 Scope of auditor’s duty – for what losses is the auditor liable? been able to show a factual connection between the certification of the 1982 accounts and the collapse of Berg in 1984, that would not have enabled them to show legal causation. However, as previously stated, the certification of the 1982 accounts was not as a matter of fact a cause of the collapse of Berg.’ 1 [1992] BCC 661 at 682F.

8.110 This passage is authority for the proposition that where the inaccuracy in the audit report does not actually mislead the relevant decision makers as to the true state of the company’s affairs (be they directors or shareholders), the consequences of that true state of affairs will not be visited on the auditor in damages. In other words, the fact that an accurate audit report might have brought the company’s activities to a swifter end than they actually met with, is not a sufficient causal connection to make the auditor responsible for ongoing losses. Something more is needed.

Galoo v Bright Graeme Murray 8.111 The essential facts of Galoo are set out above at para 8.20. The short point was that if the audit had been non-negligent, then the company would have been liquidated sooner than it actually was. The company claimed the difference in its net liabilities between the date on which it would have been liquidated and the actual date of liquidation, in other words its trading losses between those two dates. 8.112 At first instance, as recorded in the Court of Appeal judgment of Glidewell LJ:1 ‘In the court below, only one authority was cited to the deputy judge2 on this issue,3 and that was more concerned with remoteness of damage than with causation. Without the benefit of reference to the authorities to which we have been referred, he concluded: “Trading losses … are losses which by their nature do not flow from whatever statement appears in the accounts as to the state of the company’s assets or profits; they flow from trading. If a company trades, it may suffer losses or it may enjoy profits, and those losses or gains depend upon a number of factors such as the prudence of the trading, market conditions, and so on. It does not seem to me that trading losses as such can possibly be attributed to statements as to the status of the company before that trading ever takes place … it seems to me that, for the reasons I have given … trading losses as such cannot arguably be said to be damages which flow from the auditors’ negligence.”’

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Losses claimable by the company 8.114 1 [1994] 1 WLR 1360 at 1374. 2 Ronald Walker QC. His judgment dated 17 May 1993 is unreported. 3 The ‘one authority’ was the first instance decision in Kingston Cotton Mill (No 2), which was discussed in the first instance judgment in Galoo, but which is not otherwise referred to in the Court of Appeal.

8.113 The authorities to which the Court of Appeal had been referred included general authorities on legal causation and Alexander v Cambridge Credit. After extensive citation, the reasoning of the Court of Appeal is short: ‘The passages which I have cited from the speeches in Monarch Steamship Co Ltd v Karlshamns Oljefabriker AIB [1949] AC 196 make it clear that if a breach of contract by a defendant is to be held to entitle the plaintiff to claim damages, it must first be held to have been an “effective” or “dominant” cause of his loss. The test in Quinn v Burch Bros (Builders) Ltd [1966] 2 QB 370 that it is necessary to distinguish between a breach of contract which causes a loss to the plaintiff and one which merely gives the opportunity for him to sustain the loss, is helpful but still leaves the question to be answered “How does the court decide whether the breach of duty was the cause of the loss or merely the occasion for the loss?” The answer in my judgment is supplied by the Australian decisions to which I have referred, which I hold to represent the law of England as well as of Australia, in relation to a breach of a duty imposed on a defendant whether by contract or in tort in a situation analogous to breach of contract. The answer in the end is “By the application of the court’s common sense.” Doing my best to apply this test, I have no doubt that the deputy judge arrived at a correct conclusion on this issue. 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.’ 8.114 On this basis, the claims by the audited companies in Galoo were struck out. The case is therefore authority for the propositions that: (i)

legal causation is a requirement of a claim in breach of contract;

(ii) whether the test of legal causation is satisfied on particular facts is to be determined by the application of the court’s common sense; and (iii) legal causation is not satisfied where the only causal link that the claimant can draw from breach of duty to loss is that if the breach of duty had not occurred then the company would have ceased to trade and for that reason it would not have made the trading losses that it in fact made.

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8.115 Scope of auditor’s duty – for what losses is the auditor liable? 8.115 There are two important points of context in the background of Galoo. First, the claim was based on an allegation that the accounts were deliberately falsified by one individual, Mr Michael Sanders, who was chairman and managing director of the audited companies and also the principal shareholder, with other shareholders being ‘members of his immediate family and … [the] trustee of the Sanders family settlement’.1 In this respect, the case was similar to Berg Sons v Adams and to Cambridge Credit (especially in the view of McHugh JA) in that no natural person acting on behalf of the company was – or could have been – alleged to have been misled by the inaccuracies in the accounts. If the company would have been put into liquidation (as the claimants alleged), it would not have been because the company would have realised something about its own financial position of which it was ignorant, but, presumably, because a creditor would have taken action through the courts. The second relevant background matter – which appears only from the unreported first instance judgment – is that the claimants had amended the claim shortly before the first instance hearing and proposed two further sets of amendments to meet issues that arose during the first instance hearing. In short, the claimants had been given every opportunity to plead further relevant facts if they were able to do so. This second matter links Galoo to Alexander v Cambridge Credit – in both cases the court could safely conclude (though for different reasons) that no further causal links were available to support the claimant’s case. 1 At 1366–1367.

Reaction to Galoo 8.116 This sub-section discusses the principal cases which have considered, distinguished or applied Galoo. Threads are then drawn together as to where the Alexander/Galoo principle now stands. 8.117 Sew Hoy v Coopers & Lybrand came before the New Zealand Court of Appeal in 1995.1 The judge at first instance had struck out claims against the plaintiff’s auditor upon an application which had been prompted by the decision in Galoo. Sew Hoy had made inadequate provisions for the obsolescence of stock, resulting in overstatements of profits, so that the accounts showed profits which should have been losses. The plaintiff pleaded that: ‘[H]ad the defendant properly audited the plaintiff’s 1987 accounts, and advised the plaintiff of the matters referred to in paragraph 8 hereof, as from September 1987 the plaintiff would have been able to take such steps as were necessary to avoid or minimise further trading losses.’

188

Losses claimable by the company 8.118 Particulars were given of the steps that would have been taken and the further trading losses said to have been incurred following the audit. The plaintiff further pleaded: ‘As a result of the defendant’s audit of the 1987 and 1988 annual accounts confirming the profitability indicated in those accounts, the above steps were not taken and the plaintiff continued to trade and to incur further losses.’ 1 [1996] 1 NZLR 392.

8.118 McKay J said at p 399: ‘Galoo does not lay down any new principle of law, nor does Glidewell LJ purport to do so. Causation has always been an essential element in the recovery of damages for breach of duty, whether in contract or in tort. Causation means more than the mere creation of the opportunity to incur loss. The difficulty is in the application of the principle to the particular facts. To say one decides by the application of common sense is not to provide a test, but rather to say it is a jury question. That being so, it must be rare that a Court will be able to strike out an allegation that a particular loss was caused by a particular breach. That can only be appropriate where on the facts alleged the argument for causation is untenable.’ Then, at p 400, he said: ‘The plaintiff asserts that the negligence of the defendant caused its decision to continue trading in what was in fact a substantial lossmaking situation, and that this decision was in itself a cause of loss. I see nothing untenable or unarguable in that situation. Only the losses so caused are claimed. No other causative links are relied upon, so it is unnecessary to plead other links. What has been pleaded will, if established, be sufficient to support a claim to damages. … I do not think this conclusion conflicts with any principle laid down in Galoo. Without having access to the full text of the statement of claim in Galoo, it is impossible to form a view as to the correctness of the application of the law to the pleading in that case, and it is unnecessary and would be presumptuous to do so. I do not think Galoo can be regarded as deciding, as a matter of law, that a decision by a company trading at a loss that it will continue trading can never, without something more, be a cause of further loss. The contrary is a familiar fact of commercial experience.’

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8.119 Scope of auditor’s duty – for what losses is the auditor liable? 8.119 On this basis, McKay J held that the pleading was sufficient to disclose an arguable case as to causation, but that further particulars had to be given of the steps that the plaintiff would have taken to minimise further losses and the losses that would and would not have been saved as a result. 8.120 Henry J said at p 403: ‘The “but for” test is not in my view appropriate. Failure to meet it must of course negate causation, but what must still be established by a plaintiff is that in a commonsense practical way the loss claimed was attributable to the breach of duty, and thus justifies the Court in imposing responsibility on the defendant for the loss.’ And at p 404: ‘The question which arises is whether a bare allegation that trading continued as a result of the breach is sufficient to link the breach with the trading loss subsequently incurred. It is this step in the plaintiff’s case which I think causes difficulty. Profits and losses from trading are not caused by the fact that trading is undertaken, which does no more than present the opportunity to make profits or incur losses. Profits and losses result from, and adopting a commonsense viewpoint are caused by, the incidents of trading and the circumstances which affect it. The plaintiff was trading at a loss for the year ending 31 March 1987. It is not suggested that loss was in any way due to the actions or omissions of the auditors. To incur trading losses for the ensuing years means in general terms that again expenditure exceeded income. The factors which caused or contributed to that result are not asserted. What the appellant must allege in an informative way is that the loss suffered is to be attributed, not merely to having traded, but to the breach of contract or duty of care. If it is to be contended that one of the causes of loss was a mistaken belief either as to the stock value or as to the trading profitability in the preceding year, then that contention must be established, and therefore alleged, before liability will follow. For example it may be said the mistake led to some course of action being either taken or rejected, which then brought about a particular identified loss. But in my view to say that a decision by a person trading at a loss to continue trading can itself in the legal sense cause a further trading loss does not follow unless there is something more (such as inevitability) to link the loss to the fact of trading. It is the cause of the loss, and its relationship to the breach which is critical and which must be spelt out. If as was discussed in argument it is to be claimed that the loss is due to the decision to continue trading as before, ie in what unknowingly was a loss-making manner, then that must be pleaded 190

Losses claimable by the company 8.123 and particulars given of the manner of trading persisted in which relate it to the alleged negligence. In my view unless and until some further allegation is made linking the loss to the breach of duty the pleadings do not sufficiently disclose how the claimed loss has been caused by the defendant’s negligence.’ 8.121 Henry J concluded: ‘I agree that in the circumstances a conditional striking out is not appropriate and a preferable course is to require adequate particulars of the matters relied upon to establish causation to be given. I am therefore in agreement with the orders proposed by McKay J.’ It is not easy to understand how this conclusion is consistent with the reasoning of Henry J, which was to the effect that causation had not been sufficiently pleaded in that case. Moreover, the particulars required by McKay J might well not have addressed the concerns expressed by Henry J in that regard. It may be appropriate to view Henry J’s judgment as effectively a dissent, though not pressed to the extent of formally objecting to the majority’s proposed order. 8.122 Thomas J stressed the general need for caution before striking out a case on an issue law, stating: ‘Questions of causation are probably particularly unsuitable for consideration on the basis of the pleading alone. … exercising the caution of which I have spoken, I am not satisfied that the company’s claim in this case is one which is so clearly untenable on the pleading that it should be struck out or that the question of law can properly be determined in advance of the evidence.’1 1 At p 407. The first part of this dictum about the unsuitability of questions of causation for strike out applications was adopted in England by Cooke J in MAN v Freightliner [2004] PNLR 19 at 364 and by the Full Court of the Supreme Court of South Australia in Harris Scarfe Ltd v Ernst & Young [2005] SASC 255.

8.123 Thomas J agreed with McKay J that Galoo did not establish any new principle of law and accepted that it was ‘undoubtedly correct in confirming that the “but for” test is not a definitive test of causation’.1 Thomas J deprecated the ‘mistake’ of looking to answer a ‘single question’ as to the relevant causal connection and suggested that a series of steps might provide a more plausible basis. Importantly for this type of case, he said this at p 409: ‘it can be argued that the negligent audit led the company to believe that it was profitable when that was not the case and, as a result of 191

8.124 Scope of auditor’s duty – for what losses is the auditor liable? that belief, to continue to trade. The company was given no cause to cease trading or to modify its trading pattern or activities. It therefore continued to trade in that manner, or on that basis, with the result that it incurred losses which it would not otherwise have incurred. Such a chain of causation is tenable and only requires proper particulars to constitute a reasonable cause of action.’ 1 At p 408. Further confirmed by the New Zealand Court of Appeal in Price Waterhouse v Kwan [2000] 3 NZLR 311 at [28].

8.124 Similarly, at 410, Thomas J said: ‘It must, I consider, be open to a company to assert that, in circumstances where the auditor’s negligent audit has misled the company into believing that it was operating at a profit, the only viable option open to it to avoid continuing losses would have been to cease trading altogether, or that its trading losses would have continued without significant or any improvement until such time as it had the opportunity to restructure the business.’ 8.125 Thomas J examined the reasoning in Galoo and held that it ‘is not to be construed as necessarily meaning that trading losses are never recoverable following a faulty audit.’1 He said that he was ‘troubled’ ‘that in Galoo there appears to have been no real attention directed to the question whether the defect in the pleading could be rectified by way of amendment or further particulars’.2 As we have seen above, that concern can be seen to be misplaced from consideration of the unreported first instance judgment in Galoo: in fact, the claimants had had every opportunity, and made every attempt, to add to their pleading of causation. Moreover, in contrast with Sew Hoy, on its facts Galoo was not a case where it could have been said that the company was ‘misled into believing’ it was operating at a profit, because it seems to have been a one-man company, or very close to it, in which the sole relevant natural person had deliberately misstated the accounts. Accordingly, neither he, nor the company, was misled by the auditor’s allegedly negligent failure to uncover the misstatements. 1 At p 409. Also stated in England by Floyd J in Tom Hoskins v EMW [2010] ECC 20 at [147]. 2 At p 411. The same point concerned Deemster Corlett in the Isle of Man High Court in Heather Capital v KPMG, 17 November 2015.

8.126 Thomas J’s most dramatic statement about Galoo was at p 411: ‘I do not therefore construe Galoo as compelling authority for the proposition that a company’s trading losses, or the resulting deficit, following a breach of the auditor’s duty to exercise professional care and skill in carrying out the audit can never be recovered. Providing the claim is advanced on a basis which discloses the causal connection 192

Losses claimable by the company 8.129 between the breach and the loss it may stand. If this interpretation of Galoo is not correct, then I would respectfully suggest that, apart from the enunciation of the general principles applicable to the question of causation, Galoo is wrongly decided and need not be followed.’ 8.127 Thomas J’s first alternative is correct: Galoo does not stand for the principle that trading losses can never be recovered, but only for the narrower propositions formulated above at para 8.114. The suggestion that Galoo might have been wrongly decided therefore does not arise. Thomas J’s ‘concerns’ about the decision are understandable in the light of the conciseness of the reasoning in the Court of Appeal, but can be seen to be misplaced when the full circumstances of the case are considered. 8.128 The idea that Galoo might be best treated as a case on scope of duty was introduced by Lord Hoffmann in his lecture to the Chancery Bar Association on 15 June 1999 entitled ‘Common Sense and Causing Loss’. After summarising the facts of Galoo, Lord Hoffmann said this: ‘The real question, as it seems to me, was the scope of the duty owed by the auditors. Did they owe a duty to future creditors of the company to protect them against the possibility that they were unwittingly trading with an insolvent company or did they not? If they did, then their negligence caused the losses. If they did not; then it did not. The question came before the court as one of causation rather than duty of care because technically the plaintiff was the company suing by its liquidator and the company was undoubtedly owed a duty of care. But the damages which it sought to recover were claimed on behalf of creditors and so the question of substance was whether the duty of the auditors should be regarded as protecting the interests of the creditors. There are, I think, quite powerful arguments for saying that it should not; arguments which underlay the decision of the House of Lords in Caparo. But these are questions of remedial justice and economic policy which cannot be submerged under an appeal to common sense.’ 8.129 In BCCI v Price Waterhouse,1 the relevant claimant was BCCI Holdings, known as ‘Holdings’. Holdings’ subsidiaries included companies known as ‘Overseas’ and ‘SA’. It was alleged that the auditors of all three companies over several years negligently failed to identify ‘[F]raudulent transactions [which] were conducted on a grand scale resulting in enormous losses.’ The strike out application was concerned only with the claim by Holdings against its auditor. The losses claimed by Holdings were investments made in its subsidiaries and affiliates and guarantees issued in support of its subsidiaries and affiliates: ‘which transactions have proved loss making by reason of the insolvency of SA, Overseas and the Group and the manner in which 193

8.130 Scope of auditor’s duty – for what losses is the auditor liable? SA, Overseas and other members of the Group continued to conduct their business.’ 1 [1999] BCC 351.

8.130 Laddie J emphasised that the transactions were not impugned of themselves: there was no allegation that the investments and guarantees were improper or disadvantageous when made, but only that they became lossmaking when their objects became insolvent. Laddie J struck out the claims, principally on the basis of the SAAMCO scope of duty principle, but in the alternative on the basis of causation as explained in Galoo and Alexander. 8.131 In Sasea v KPMG the Court of Appeal distinguished Galoo. The Court of Appeal’s reasoning in Sasea is even shorter than in Galoo itself. Sasea was not a case concerning trading losses, but concerning certain individual lossmaking transactions. In overturning a decision to strike out some of those transactions, the Court of Appeal stated: ‘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.’1 Thus, Sasea illustrates that specific trading losses may be recoverable from an auditor if the specific form of loss-making trading was the particular matter to which the auditor should have drawn attention. 1 [2000] 1 All ER 676 at 683. Exactly the same could be said – albeit on a larger scale – of Barings v Coopers & Lybrand [2003] EWHC 1319 (Ch), in which a rogue trader was carrying on unauthorised trades which incurred massive losses. The auditor negligently failed to identify the unauthorised trading and, had it done so, the ‘campaign of unauthorised trading would have been smothered in infancy’. In these circumstances, the losses from such trading after the date of the audit report was recoverable from the auditor, though only for a certain period, after which it was held that other causes (in particular, management fault) broke the chain of causation. In one sense, the recoverable losses in Barings could be called ‘trading losses’, but they were also losses arising from a particular course of improper conduct or type of improper transaction which auditors should have revealed.

8.132 In Hong Kong, Deputy Judge Tong SC firmly preferred Galoo over Sew Hoy in Guang Xin Enterprises v Kwan Wong Tan & Fong, going so far as to say that Sew Hoy ‘went against well established principles of causation in this area of the law and should not be relied on’.1 The deputy judge treated causation as an aspect of the scope of duty issue and held at [62] that ‘trading losses flowing from a decision to trade based on inaccurate financial information provided by the auditors’ were not ‘the kind of damage which the auditors had promised to save the company from harmless’. The facts of 194

Losses claimable by the company 8.135 Guang Xin were somewhat unusual in that the company – even on its reported results – had been trading at a loss for many years before the defendant became auditor, with capital support from its shareholder. As in Galoo, the causal chain relied on by the claimant was that if the accounts had been correct, then the claimant would have been liquidated sooner and thus avoided its latest losses. 1 [2002] 2 HKLRD 319 at [54] (this point was not the subject of the appeal reported at [2003] 3 HKLRD 527).

8.133 In Temseel Holdings v Beaumonts, the claimant alleged that its directors relied on the audited accounts in reaching the view that a new pricing structure introduced during the year in question had been successful and thus in deciding ‘to continue trading on the same basis’ in the following years. Tomlinson J refused the defendant’s application to strike out the claim in reliance on Galoo (among other authorities). Tomlinson J held that there was a distinction between cases like Alexander and Galoo where the only basis for the claim was that the company would have ceased trading altogether and cases like Sew Hoy and Temseel, where the allegation was that the claimant traded in a particular way in reliance on audited accounts.1 1 [2003] PNLR 27. Contrary to the view of the Ontario Court of Appeal in Livent v Deloitte & Touche [2016] ONCA 11 at [348], Tomlinson J did not ‘decline to follow’ Galoo, by which he was bound.

8.134 Galoo was raised in the strike out application in Equitable Life v Ernst & Young, where the Court of Appeal (Brooke, Rix and Dyson LJJ) said:1 ‘Although Galoo was a case of summary disposal, the facts of the case were idiosyncratic. Since, ex hypothesi, the company was insolvent, the losses suffered by continuing to trade were really suffered by the creditors (or by the company’s parent), and so, although the case was not argued in that way, the real question may well have been whether the auditors owed any duty to the creditors (see Lord Hoffmann’s lecture to the Chancery Bar Association, June 15, 1999, Common Sense and Causing Loss, at pp 22–23)’ 1 [2004] PNLR 16 at [133].

8.135 This dictum is misconceived in several respects. First, it is not seriously arguable that the real question was whether the auditors owed a duty to creditors: the auditor’s primary duty is owed to the company as a legal entity. Secondly, if that was the real question, then it makes no sense to lump in ‘the company’s parent’ (ie its sole shareholder) with its creditors as if they were equivalent. Thirdly, there is nothing ‘idiosyncratic’ about a situation where a company claiming against its auditor is insolvent: all of the early misfeasance summons cases were of this type. Fourthly, as discussed further below, it is a wrong-headed idea that an auditor might be liable for certain 195

8.136 Scope of auditor’s duty – for what losses is the auditor liable? losses suffered by the company if solvent, but not for the same losses if the company is insolvent. 8.136 Another case where it was alleged that auditors failed to reveal that a company was insolvent came before the Supreme Court of South Australia in 2005: Harris Scarfe v Ernst & Young.1 Bleby J refused to strike out the claim and the Full Court refused leave to appeal from his decision. As the judge said, it is important to see what exactly was pleaded: ‘Paragraph 54 is important. It pleads that by reason of the breaches of contract, negligence and misleading conduct of the first defendants, the directors of Harris Scarfe believed that the relevant audited financial statements were true and correct, that they continued to employ, trust and rely upon the chief financial officer who had been responsible for the mis-statements in the accounts and continued to trust and rely upon Harris Scarfe’s management in managing the business of Harris Scarfe. There follows a detailed pleading as to the state of belief of the directors as a consequence of the first defendant’s audit report. In short, it is alleged that the directors believed that Harris Scarfe was in a sound financial position, with good financial performance, that it was achieving certain gross profit margins, that it was achieving positive store contributions for most stores, that Harris Scarfe’s net asset value was substantially more than it was in fact and that there was sufficient profit and retained profit to declare and pay dividends to shareholders. It is also alleged that the directors continued to rely upon the auditors to confirm the information provided to the board by management. Paragraph 55 is also important. It alleges that by reason of the matters pleaded in paragraph 54 the directors continued to trade all aspects of Harris Scarfe’s business in the same manner as previously. Particulars are given. …’ 1 [2005] SASC 113, aff’d [2005] SASC 255.

8.137 In the light of the pleadings in Harris Scarfe, Bleby J distinguished both Alexander v Cambridge Credit and Galoo. As far as Galoo is concerned, he said at [50]: ‘I do not consider that Galoo establishes any new principle. In that I am supported by the decision of the New Zealand Court of Appeal in Sew Hoy & Sons Ltd (In Receivership and in Liquidation) v Coopers & Lybrand [1996] 1 NZLR 392, McKay J at 399 and Thomas J at 408. The fact of the matter is that the pleadings, so far as they were quoted and paraphrased in the reasons for judgment, did not allege

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Losses claimable by the company 8.140 any causal connection between the negligence of the defendants and the losses sustained by Galoo and Gamine.’ 8.138 As set out above, in AssetCo v Grant Thornton, substantial losses in the nature of trading losses were recovered by the claimant. At trial, the auditor ran an argument that trading losses were inherently outside the scope of an auditor’s duty, which was analysed and rejected at length.1 This way of putting the case was not renewed by the auditor on appeal. 1 [2019] Bus LR 2291 at [919]–[966].

Conclusions on trading losses and Galoo 8.139 The law on whether trading losses can be recovered from a negligent auditor is less complex and difficult than the plethora of authorities might make it appear. The key point to bear in mind is the one made by Hobhouse J in Berg Sons v Adams: ‘Since the provision of knowledge to the company and its members is the subject matter of the contract, unless it can be shown that the company or its members were in some way misled or left in ignorance of some material fact, the breach of contract lacks significance and has no legal consequence.’ In Berg the claimant company was not able to prove, and in Galoo it could not plead, that any relevant decision-making organ of the company was misled by the information supplied by the auditor. The same is true of Cambridge Credit. The fact that that information was wrong therefore caused no legally relevant loss. The principle exemplified by those cases is that a chain of factual causation that does not involve reliance on the audit report by a person to whom the auditor owed a duty of care is unlikely to qualify as a sufficient chain of legal causation.1 1 This paragraph appeared in the first edition of this work and was adopted by Bryan J in AssetCo v Grant Thornton [2019] Bus LR 2291 at [977].

8.140 By contrast, in cases like Sew Hoy, Temseel and Harris Scarfe, it was properly and sufficiently pleaded that relevant decision makers in the company were misled by the certified accounts and would have acted differently had the auditor reported without negligence. In those circumstances, the losses that flowed from the difference between the actual audit report and hypothetical competent audit report were at least potentially within a sufficient chain of legal causation from the breach of duty. Whether such losses were actually caused by the auditor’s breach of duty is a question of fact which remained to be answered at trial in each case. 197

8.141 Scope of auditor’s duty – for what losses is the auditor liable? 8.141 The factual nature of the inquiry is well illustrated by one reported case in which trading losses have been awarded at trial: Barings. There, the auditor’s breach caused such losses for a certain period, after which the causal potency of the breach was overtaken by other factors. That case also shows that the distinction between trading losses and losses from defalcations is a difference of degree not of type. In Barings, the auditor should have identified Mr Leeson’s unauthorised trading and, if it had done so, the organs of the company would have acted to stop it. Whether the label placed on the results of further such trading is ‘trading loss’ or ‘defalcations’ does not assist in the analysis. 8.142 Alexander v Cambridge Credit is an important decision as to principle because it established in New South Wales that ‘but for’ causation was not sufficient. Similarly, Galoo is important for demonstrating that English law requires that a legally relevant causal link must be made between breach and loss. Factually, Galoo, Cambridge Credit and Berg Sons v Adams, all represent a particular kind of auditing case, where there are no independent organs of the company capable of being misled by a negligent audit report or reacting to a competent one. In these cases, it is not sufficient for the company (acting through its liquidator) to say that some other person (eg a creditor) would have ensured the company’s earlier liquidation in order to claim intervening trading losses: that causal chain is ‘mere but for’, because the auditor’s responsibility is not to provide information to such other persons for the protection of their interests as creditors, but to the company itself as a separate legal entity. 8.143 However, in cases where the company has at least some directors or significant shareholders who are not aware of the matters which the auditors ought to have identified, it will normally be possible for a claimant to plead an arguable chain of legal causation via the reaction of such individuals to a correct audit report. The essential allegation is that some such individual would have acted differently in her or his capacity as an organ of the company and that action would have led to a financially better result for the company. Contrary to the views expressed by the Court of Appeal in Equitable Life v Ernst & Young, there is no reason to inquire into whether that financial benefit would ultimately have accrued to shareholders, creditors, employees, tax authorities or anybody else: the company is a legal person capable of suffering loss and making gains on its own account. 8.144 A separate issue is apt to get confused with the causation point – namely whether the auditor who fails to spot defalcations which would have led, if spotted, to the company’s insolvency or the dismissal of relevant management – is also liable for loss caused by ‘legitimate’ business. In BCCI v Price Waterhouse,1 Laddie J recited an example he had put in argument of a company with two businesses: one fraudulent and another a proper business which happens to be loss making, but which directors believe will become profitable in future; the auditors fail to point out the fraud and if they had done, 198

Losses claimable by the company 8.147 then the company would have been put into liquidation, saving the company the intervening losses on the proper business as well as the improper one. As Laddie J rightly held, the auditor is not liable for the losses on the proper business. The reason for that is to be found in the SAAMCO principle: it is because the consequences of the inaccuracy of the information provided to the auditor are limited to the continuation of the fraud; the proper business would have been carried on even if the auditor’s certificate had been correct (the SAAMCO counterfactual question). 1 [1999] BCC 351 at [49].

8.145 The distinction between the issue raised in BCCI and that raised by Galoo can be demonstrated by asking the ‘mountaineer’s knee’ question of the facts in Galoo: if Galoo’s accounts had been correct, then would the future trading losses have been suffered? The answer to that hypothetical question is capable of argument either way, but the better answer is that the future losses would not have been suffered because if the accounts were correct then what Galoo was doing both before and after the accounts date would not have been loss-making. Thus the SAAMCO principle does not explain why there was no liability in Galoo. This thought experiment shows that there is nothing inherently non-claimable about trading losses. The reason for non-liability in Galoo was that on the pleadings in Galoo, there was no legally relevant causal link between the breach of duty and the losses. In a case like that pleaded in Sew Hoy or Temseel where a relevant link can be made, trading losses may be recoverable, though they may still be subject to restriction by reference to the SAAMCO principle.

Taking a loan or issuing shares is not loss 8.146 Accepting a loan and incurring liability to repay it does not, of itself, constitute damage for the purpose of a claim against auditors: Galoo v Bright Graeme Murray,1 Cossey v Lonnkvist,2 Harris Scarfe v Ernst & Young.3 The liability to repay the loan is not damage because it is necessarily offset by the monies received. Any damage is incurred later, if and when the money borrowed is lost. The question will be whether that loss is one that is recoverable from the auditor. 1 [1994] 1 WLR 1360 at 1369D–E. 2 [2000] Lloyd’s Rep PN 885 at [66]. 3 [2005] SASC 113 at [67], aff’d [2005] SASC 255.

8.147 Some decisions in other contexts have gone further and held that giving security for a loan is also not capable of constituting actionable damage: Saddington v Colleys Professional Services,1 Moore v Zerfahs.2 Whether this is a hard and fast principle is perhaps questionable. However, it makes sense

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8.148 Scope of auditor’s duty – for what losses is the auditor liable? as a practical rule of thumb because any relevant loss arising from the giving of security will crystallise when the security is called in which presupposes that the loan cannot be repaid, because the loan monies have been lost in the interim. 1 (1995) [1999] Lloyd’s Rep PN 140. 2 [1999] Lloyd’s Rep PN 144, also reported with other appeals sub nom Royal Bank of Scotland v Etridge (No 2) [1998] 4 All ER 705 at 733.

Loss of chance 8.148 As in other fields, damage in an audit context can take the form of a loss of a chance. This is not the place for an extensive discussion of that principle, but the short point is that where a claimant has lost a substantial chance of avoiding a loss or obtaining a benefit and that chance depends on the actions of third parties (ie not just the claimant or defendant), then the court will value the chance rather than determining what would have happened on the balance of probabilities.1 Such issues have arisen in the audit context: see for example Elton John v Price Waterhouse,2 Equitable Life v Ernst & Young.3 The application of loss of chance principles was considered in more detail in the audit claim of AssetCo v Grant Thornton where it was held that a series of counterfactual events were all 100% certain to have occurred if the audit had been competent.4 The principles would also have been applied (had not the claim failed for lack of a relevant duty of care) in the context of a claim for negligent tax advice where the advice that it was claimed should have been given would have required the co-operation of third parties to implement.5 1 Allied Maples Group v Simmons & Simmons [1995] 1 WLR 1602, approved by the Supreme Court in Perry v Raleys Solicitors [2020] AC 352. 2 Ferris J, 11 April 2001 at [326]–[337]. 3 [2004] PNLR 16 at [83]–[88]. 4 [2019] Bus LR 2291, where there is a very detailed discussion of the principles and earlier case law at [361]–[460], the decision on loss of chance being affirmed at [2021] PNLR 1 at [115]–[211]. 5 McMahon v Grant Thornton [2020] CSOH 50.

8.149 A potentially significant issue is raised in passing in the judgment of the Court of Appeal of Singapore in JSI Shipping v Teofoongwonglcloong:1 if a competent audit would have led to an investigation, do the results of that investigation have to be proved on the balance of probabilities, or is the chance of different outcomes to be evaluated? It is submitted that in any ordinary case (contrary to what is perhaps implied at para 148 of the judgment) this will be determined on the balance of probabilities, because it will relate to the actions of the claimant (including its employees) and defendant rather than anything that is properly classified as an external chance.2 1 [2007] 4 SLR 460 at [148].

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Losses claimable by the purchaser or vendor 8.151 2 For these purposes, the defendant is not a ‘third party’: Hirtenstein v Hill Dickinson LLP [2014] EWHC 2711 (Comm) at [85], PCP Capital Partners LLP v Barclays Bank Plc [2021] EWHC 307 (Comm) at [533]–[553].

LOSSES CLAIMABLE BY THE PURCHASER OR VENDOR WHERE A SPECIAL DUTY OF CARE IS ESTABLISHED 8.150 In those cases where an auditor or another accountant owes a duty of care to a buyer of a company, there are some subtleties to consider in the measure of loss. For example in ADT v Binder Hamlyn, May J held that the auditor assumed responsibility to the buyer by stating at a meeting on 5 January 1990 that it stood by the already audited accounts. May J accordingly held that the loss which the buyer could claim from the auditor depended on an assessment of what would have happened if the auditor had revealed on 5 January 1990 the deficiencies in the audit (and not what would have happened if the audit had been competently conducted). The judge held that in these circumstances the buyer would have retreated from the offer it had made and that they would either have withdrawn altogether from the purchase or carried out a full investigation so that they ended up paying the true value of the company. In either case, the measure of their loss was the difference between the price they paid and the true worth of the company.1 1 [1996] BCC 808 at 843–844.

8.151 In Downs v Chappell,1 the accountant had provided a letter to the buyer to verify some accounting information that the seller had provided fraudulently. The judge held that the buyer would not have proceeded without verification, but that even if the buyer had known the true financial position, he would have proceeded with the purchase and dismissed the claims against both the seller and the accountant. The Court of Appeal reversed this result, holding that the judge had asked the wrong question. In relation to the accountants, Hobhouse LJ held that the true position at the time they had written to the buyer was that nobody knew what the accurate figures were. It followed that the correct counterfactual was not that the accountants provided accurate figures, but instead that they did not know the true figures. He held: ‘what the judge should have done is to ask simply whether the plaintiffs entered into the contract in reliance upon the second defendants’ letter. He answered that question in the affirmative. The causative relationship between the second defendants’ tort and the entry into the contract was established. That leaves the question what loss did the plaintiffs suffer as a result of entering into the contract.’ This paragraph was perhaps influenced by the context of the first defendant’s fraud and the temptation of a simple solution in which the measure of damages 201

8.152 Scope of auditor’s duty – for what losses is the auditor liable? for both defendants was the same, as the Court of Appeal held it to be. It is a little too simple to be applied in most cases, because while this dictum addresses the issue of factual causation, it would not be applicable in a case where legal causation, scope of duty or remoteness were in issue. Indeed, on a proper analysis, Downs was such a case. While the Court of Appeal was right to reverse the judge in relation to the claim against the fraudulent seller, it erred in lumping in with the fraudster the merely negligent accountants. The claim against the accountants should have been dismissed on the basis of the scope of duty principle, essentially for the reason given by the judge at first instance, as quoted in the Court of Appeal judgment: ‘… in my judgment the plaintiffs have failed to establish as loss attributable to the alleged tortious acts or omissions on the parts of the defendants whether assessed by the diminution of value or by reference to the alternative approach urged by their counsel.’ In this context, it is important to notice that the decision in SAAMCO postdated that in Downs v Chappell. 1 [1997] 1 WLR 426. Note that some aspects of the decision in relation to the fraud claim were disapproved by the House of Lords in Smith New Court v Scrimgeour Vickers [1997] AC 254 at 267D and 283G.

8.152 In Yorkshire Enterprise v Robson Rhodes,1 Bell J held that the auditor owed a duty of care to an investor who invested £125,000 in equity and £125,000 in loans in the audited company. The company became insolvent and the investments were lost save that £51,810 of the loan was recovered. The basic loss was therefore £198,190. Bell J cited at length from SAAMCO and Nykredit. He held that in effect the auditor had provided information amounting to a valuation of the target company’s assets, debtors and invoiced sales and profit dependent thereon, upon which the claimant investor relied in making the investments. However, other factors, including the way the company was managed after the acquisition, were alleged to have contributed to the claimant’s loss. 1 Bell J, 17 June 1998, Lexis.

8.153 Bell J said that he found the question of what part of the basic loss of £198,190 was attributable to the auditor’s inaccurate information to be the most difficult question in the case.1 He said: ‘The equivalent issue in BBL [SAAMCO] and especially Nykredit where the borrower defaulted immediately, was comparatively easy to decide once the true principle had been decided. It is far less easy in a case where negligent information results in investment in and lending to a company which then trades on with increasing problems until a receivership nineteen months later, as happened in the present case.’ 1 Neuberger J agreed that this was a difficult type of issue in Harrison v Bloom Camillin [2000] Lloyd’s Rep PN 89 at 116.

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Losses claimable by the purchaser or vendor 8.156 8.154 Bell J held that the object of the information given by the auditor to the investor was for the purpose of avoiding the risk of losing the investment if the company was not in a position to trade profitably. In the event, the investment was lost because the company was not in the position that it appeared to be and other proposed causes of the loss (such as post-acquisition mismanagement) were not proved. In doing so, he placed the burden of proof on the defendant, which is now known to have been erroneous, following the decision of the Supreme Court in Hughes-Holland. That said, if Bell J had asked the right counterfactual question – what would have been the claimant’s position if the information had been true? – he could have reached the same result. In the alternative, Bell J held that the same figure was recoverable on the basis that the value of the investment when made was no more than the £51,810 that was eventually recovered. 8.155 In MAN v Freightliner, Moore-Bick LJ said this about the scope of an auditor’s duty of care to a shareholder in relation to the sale of his shares:1 ‘As Lord Hoffmann pointed out in South Australia Asset Management Corporation v York Montague Ltd at page 214, the law normally limits liability for wrongful acts to those consequences which are attributable to that which made the act wrongful, which in the case of liability in negligence for providing inaccurate information means liability for the consequences of the information being inaccurate. An auditor can reasonably expect, therefore, that if he negligently certifies that a company’s accounts give a true and fair view of its financial position, the scope of his liability to anyone to whom he owes a duty of care in making that statement will be limited to the loss flowing from the inaccuracy of his audit certificate. If E&Y (UK) had undertaken a special audit duty to Western Star [the seller of the audited company], the consequences of their negligence would no doubt extend to such loss as it might have incurred in respect of the difference between the true net asset value of the company and that shown in the accounts, for example, by reason of a breach of warranty. They would not extend, however, to losses caused by fraud on the part of a person for whom the Western Star was vicariously liable.’ 1 [2005] EWHC 2347 (Comm) at 352.

8.156 This obiter passage is interesting because it suggests that an auditor might normally expect its liability to be limited to the difference between the true net asset value of the company and that shown in the accounts. In a corporate transaction situation, this is rarely the measure of loss that a claimant seeks, because the shortfall in value of the company may well be much greater than the shortfall in net assets, represented for example by a multiple of the company’s profits. In each case, to assess the limitation on damages imposed by the scope of duty principle, it is necessary to go back to the question of what 203

8.157 Scope of auditor’s duty – for what losses is the auditor liable? exactly the auditor stated to the claimant and what difference it would have made to the claimant’s position if that information had been true.

REFLECTIVE LOSS 8.157 Where an auditor owes a duty of care to a third party, and also in a group audit situation, reflective loss should always be considered. Where the claimant is a shareholder, the question must be asked whether the claimant’s loss is merely reflective of a loss for which the company itself has a right to claim against the auditor. As Moore-Bick LJ stated in Man v Freightliner:1 ‘The duty of care owed by the auditors to the shareholders is unusual in a number of respects. It is not owed to shareholders as individuals, but to the shareholders as a body, and is a duty which has as its object the protection of their interest in the proper management of the company. The damage from which the auditors must take care to protect the shareholders is a diminution in the value of their interest in the company, that is, in the value of their shares, but as Lord Bridge pointed out at page 626D–E, the interest of the shareholders in the proper management of the company is indistinguishable from the interest of the company itself and therefore any loss falling within the scope of this duty that is suffered by the shareholders will be recouped by a claim against the auditors in the name of the company. It follows that neither individual shareholders, nor for that matter the shareholders as a body, can bring an action in their own names to recover that loss. This was one of the points made by the House of Lords in Johnson v Gore Wood & Co [2002] 2 AC 1 and may explain why there appears to be no reported case in which shareholders individually or as a body have succeeded in recovering damages for a breach of this duty.’ 1 [2005] EWHC 2347 (Comm) at [326].

8.158 The leading authority on the reflective loss principle is now the majority decision of the Supreme Court in Marex Financial v Sevilleja.1 The principle is that the law does not recognise as recoverable any loss suffered by a shareholder in that capacity, in the form of diminution in share value or distributions, which is the consequence of loss sustained by the company in respect of which the company has a cause of action against the same wrongdoer. Translating that into audit terms, a shareholder (including a parent company) cannot sue the auditor of the company for the company’s lost value following a negligent audit, because that loss is recoverable by the company itself from the same defendant. In Marex, the Supreme Court majority confirmed the authority of the speech of Lord Bingham in Johnson v Gore Wood.2 For present purposes, it is of particular relevance to note that Johnson v Gore Wood overruled the decision 204

Avoided loss and benefits 8.160 of the Court of Appeal in Barings v Coopers & Lybrand in which the Court of Appeal had accepted an argument that the bar on reflective loss did not apply to a claim by a parent company against a subsidiary’s auditor.3 Later in the Barings saga, the principle against reflective loss was applied to strike out another aspect of the claims, confirming that the fact that the auditor has a defence to the claim of the company does not defeat the application of the principle.4 1 [2020] 3 WLR 255. See in particular the summary in the judgment of Lord Reed at [79]–[89]. 2 [2002] 2 AC 1. 3 At 36A per Lord Bingham (and also at 65E per Lord Millett, though his speech is no longer generally authoritative following Marex), overruling Barings v Coopers & Lybrand [1997] 1 BCLC 427. There is further discussion of Barings in the dissenting speech of Lord Sales in Marex. While Lord Sales would have restored to favour the decision of the Court of Appeal in Barings, the majority view in Marex implicitly confirmed Lord Bingham’s overruling of it in Johnson v Gore Wood. 4 Barings v Coopers & Lybrand [2002] 2 BCLC 364.

8.159 The point that the existence of a defence, such as limitation, to the company’s claim does not prevent the application of the reflective loss principle was also made in Elton John v Price Waterhouse.1 In that case, the judge found ‘compelling’ an argument that an employee whose salary was 99 per cent of the net income of the audited company was barred from recovering against the auditor by reason of the reflective loss principle.2 As acknowledged there, the position is different if the company has no relevant cause of action at all,3 but that is unlikely in an audit claim. Since Marex it is clear that the principle applies only to restrict claims by shareholders and not those by employees or creditors. 1 Ferris J 11 April 2001 at [223]. 2 At [220]. 3 As in the tax advice claim of Dhillon v Siddiqui [2008] EWHC 2020 (Ch) at [74].

AVOIDED LOSS AND BENEFITS 8.160 It is very well established that a claimant must give credit for benefits which avoid or reduce a loss or otherwise arise from the consequences of the breach which is the subject of the claim. These principles apply as much to claims against accountants as they do to other claims for breach of contract and in tort.1 Indeed, the leading case on avoided loss is now the accountants’ case of Swynson v Lowick Rose.2 A defendant can claim credit for a benefit that accrued to the claimant if and only if the benefit was both factually and legally caused by the defendant’s breach of duty.3 Cases of transferred loss can be exceptions to this principle.4 1 See, for example, the avoided loss case of Murfin v Ford Campbell [2011] PNLR 28. An avoided loss case of this sort can also be analysed as one where the claimant fails to show factual causation because his position would not have been any better had the accountants’ alleged negligence not occurred.

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8.161 Scope of auditor’s duty – for what losses is the auditor liable? 2 [2018] AC 313. 3 Fulton Shipping v Globalia Business Travel: the New Flamenco [2017] 1 WLR 2581, explained in the context of an audit claim by the Court of Appeal in AssetCo at [232]–[233]. 4 In a tax advice context, see Pegasus v Ernst & Young [2012] PNLR 24, but this decision cannot stand with the decision of the Supreme Court in Swynson v Lowick Rose [2018] AC 313 (in which Pegasus was not cited), which restricted the doctrine of transferred loss to cases where the contract in issue (eg for taxation advisory services) had as its object and intended effect the benefit of a third party or class of third parties, which was not the position in Pegasus.

8.161 A context in which the question of benefits may arise acutely is where the company turns out to have been run in a dishonest way with the effect of transferring funds from (innocent) investors to (dishonest) directors or associates of the latter. In its most extreme form, the company can be in substance little more than a ‘Ponzi’ scheme for extracting assets from investors for the personal benefit of members of the company’s executive management. In such cases, if the auditor negligently fails to bring the fraud to light, then it can be liable for all the company’s subsequent losses, as explained above in relation to ‘trading losses’. If the factual chain of events post-dating the negligence includes the raising of further funds from investors, then the question arises whether the auditor can claim credit for the benefit of those further fund raisings. 8.162 The essential answer in principle is that such credit is available to the auditor. But there are a number of qualifications that have to be given to that essential answer, several of which require further working out in case law. The issue was raised directly in AssetCo v Grant Thornton UK LLP.1 In that case, the Court of Appeal held that the essence of the audit negligence as found by the judge was a failure to detect that management was fraudulently presenting the company as profitable when in fact it was insolvent. As a result, the company continued to waste money on loss making subsidiaries which it would have stopped doing if it had known that its business was not sustainable. The Court of Appeal (overturning the judge on this point) permitted the auditors to claim a credit for the proceeds of a share issue which was factually and legally caused by the same negligence.2 1 [2021] PNLR 1. 2 At [236]–[246]. The finding at [247] that a second share issue was relevantly different is impossible to follow, since the facts relied upon would have made that second share issue a successful act of mitigation of loss, for which the defendant should also have been able to claim credit.

8.163 In making the finding that the proceeds of a share issue were available to reduce the claim, the Court of Appeal dismissed an argument that credit should be withheld for reasons of ‘justice, fairness and public policy’, which was advanced on the basis that there would otherwise be a gap in the remedies available to shareholders. As David Richards LJ pointed out, investors who were misled would have a remedy against AssetCo and AssetCo’s liability for such claims would reduce the credit. But in fact, no such claims had been 206

Avoided loss and benefits 8.165 brought and they would have been time barred by the date of the trial. This was the correct approach to this issue. 8.164 The more difficult question is whether a share issue should be treated as having any cost to the company (which would reduce the credit) and, if so, how such a cost should be measured. In pure cash terms, from the perspective of the company, a share issue does not have any cost (other than minor administrative expenses). In Pilmer v Duke,1 by a majority, the High Court of Australia held that for the purposes of a damages claim the issue of new shares should be treated as being without cost to the issuing company. In doing so, the High Court of Australia distinguished English tax cases, especially Osborne v Inspector of Taxes,2 which had treated new shares as being issued at a cost of their par value. In AssetCo, at first instance, the effect of this was raised but the judge held that on his findings it was academic and had not been fully argued, so he gave no indication of a view on it.3 In the Court of Appeal, the point was not taken and the appeal proceeded on the basis that the receipt of proceeds of a share sale was an unmitigated benefit.4 There is a passing obiter suggestion (in a different context) in favour of the earlier English approach in Sharp v Blank.5 1 [2001] HCA 31, [2001] 2 BCLC 773. See below at paras 9.44–9.48. 2 [1942] 1 All ER 634. 3 [2019] Bus LR 2291 at [1081]. 4 [2021] PNLR 1 at [236]. 5 [2019] EWHC 3096 (Ch) at [975]–[977].

8.165 If funds are raised by a fraudulent company by debt instruments, this is likely to have different consequences for its claim against a negligent auditor. That is because the funds raised by debt (which benefit the company) are on their face offset by an equal and opposite liability to repay them (unlike the position with ordinary shares). It is possible that an auditor might be able to argue that the value of the liability to repay is smaller than the benefit of the loan on the basis that the company was never going to be able to do so. It remains to be seen how such an argument might fare.

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Part 3

Other liabilities of accountants

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Chapter 9

Non-audit liability of accountants

INTRODUCTION AND GENERAL PRINCIPLES 9.01 Away from the statutory company audit, accountants get involved in a wide variety of business activities, which may lead to liability under several legal categories. A very general introduction to such liabilities was given in Chapter 1.1 The essential principles governing those possible liabilities are no different to those which apply in the context of the statutory audit, in which context they have been discussed above. 1 See above, paras 1.03–1.09.

9.02 In this chapter, we introduce briefly again the main heads of liability, recognising that each of them could (and does) fill specialist works. We explain the relationship between the principles applicable to audit work, which have been discussed in detail above, and those applicable to other types of accountancy work. We then address the issues that have arisen in relation to each of the various different activities undertaken by accountants. 9.03 Much of the work that accountants do is carried out pursuant to a contract, generally between the accountant and its client. The accountant will therefore be subject to the general law of contract including in particular a liability to pay damages for any breach of the contract. Where a contract exists, other forms of legal relationship between the same parties (eg a fiduciary relationship or a duty of care) can run in parallel, but they will generally be found to be shaped by the contract so as – at least – not to contradict it. 9.04 A particular incident of most contracts to which accountants are party as professional advisers is that a term will be implied, if not expressed, that the accountant will perform its tasks under the contract with all reasonable care and skill. It is alleged breach of this term which will form the basis of many claims against accountants whether within or outside of the context of statutory audit. 9.05 Even where there is no contract an accountant may be found to have assumed legal responsibility to the claimant for undertaking a given task, or making a given statement, with reasonable care and skill. Where there is a 211

9.06 Non-audit liability of accountants contract between the parties, the duty of care will generally be coextensive with the duty that is either express or to be implied in the contract. Where there is no relevant contract, then the question whether there is a duty of care at all and, if so, its scope, can be a difficult one to answer. 9.06 We have set out a summary of the law in relation to duties of care with particular reference to auditors above at paras 5.60 to 5.82. The same principles apply to accountants in their other roles, where the accountant may make a statement which is relied upon by a person who is not the accountant’s client. These cases are determined under the same principles as set out above in relation to auditors. 9.07 Where the mechanism by which a duty is arguably assumed is something other than the making of a statement in circumstances where it is likely to be reasonably relied upon by a claimant, the considerations that go into a determination of whether a duty of care exists may differ. However, the fundamental legal question remains the same, and the approach will remain that approved by the Supreme Court in HM Customs & Excise v Barclays Bank plc.1 1 [2007] 1 AC 181. See above at paras 5.63–5.67.

9.08 We have discussed above the question whether an auditor owes fiduciary duties to its client.1 That issue is less troublesome in accountants’ other roles. Where the accountant acts as professional adviser, as opposed to mere provider of specific information, there he will generally owe fiduciary duties. However, the stricture that not every breach of duty by a fiduciary amounts to a breach of fiduciary duty remains important. We return in more detail to fiduciary duties in Chapter 10, concerning conflicts of interest.2 1 See paras 4.27–4.46 above. 2 See in particular the summary of our views at para 10.28.

9.09 We discuss below the types of issue that arise in non-audit accountancy cases. In some cases, of course, an accountant may have – or be alleged to have – more than one role. An example is Siddell v Smith Cooper, which is discussed in detail above at paras 6.74–6.79. Another example can be found in Elton John v Price Waterhouse, where an accountant was held not to owe a duty of care to the claimant as auditor of the claimant’s company, but nevertheless to do so in its separate capacity as financial adviser.1 In cases where dual capacity is in issue, it may be important to analyse carefully the duties owed in relation to each capacity and how they might interact with one another. As Siddell illustrates, this is an analysis which the court is unlikely to be willing to grapple with until the material facts have been found. 1 Ferris J, 11 April 2001, [216]–[217].

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Accounting, non-statutory auditing and reporting 9.13

ACCOUNTING, NON-STATUTORY AUDITING AND REPORTING Preparing or verifying accounts in a takeover situation 9.10 Accountants may prepare accounts themselves, as opposed to merely auditing accounts prepared by their client. There are very few reported claims by clients against accountants acting as such. Perhaps rather fewer errors are made where accounts preparation is entrusted to independent professionals. Where issues do arise, it is often the result of the accountant being misled in a very similar way to that which may occur in an audit. Even then, the claims that arise are often in the context of corporate transactions and are generally brought by a party who has been disappointed in the purchase of a business. In this respect, the claims follow the pattern of the audit claims discussed above at paras 6.13–6.38. 9.11 The classic of such cases is Candler v Crane Christmas.1 This case is famous for the dissenting judgment of Denning LJ which was later approved by the House of Lords in Hedley Byrne v Heller.2 The defendant accounting firm was retained by the main shareholder and director of a tin mine to prepare its accounts and to provide an audit certificate on them. They were asked to do so quickly as a potential investor required to see them. The accountant went to see the potential investor and showed him the draft accounts and also confirmed that the draft audit certificate would shortly be signed (as it later was). The main issue in the Court of Appeal was whether the court was bound by earlier authority to hold that no duty of care arose for negligent misstatements. The majority held that it was so bound and therefore dismissed the claim. Denning LJ held that an accountant does owe a duty of care when ‘the accountant prepares his accounts and makes his report for the guidance of the very person in the very transaction in question’.3 1 [1951] 2 KB 164. 2 [1964] AC 465. 3 Candler at 183.

9.12 James McNaughton v Hicks Anderson1 was a similar case factually to Candler. It was also the first post-Caparo claim by a takeover bidder against an accountant to reach a reported final decision. The case is best known for providing a template of relevant factors to consider in assessing whether a duty of care arises: see above at para 5.75. 1 [1991] 2 QB 113.

9.13 As in Candler so in McNaughton, the accountant was instructed by the owner of the company to draw up accounts in the context of a proposed sale of the company to a new owner. The buyer arranged to meet the accountant, 213

9.14 Non-audit liability of accountants together with the seller, and they reviewed the draft balance sheet for the company. The buyer asked the accountant whether he was right in saying that the company was now breaking even or doing marginally worse, which the accountant confirmed. The takeover proceeded; it transpired that the accounts were significantly overstated; the buyer sued the accountant. 9.14 The trial judge, giving judgment shortly after Caparo had been decided by the Court of Appeal, found that a duty of care existed and that the defendants were liable. After the Court of Appeal’s decision in Caparo had been reversed by the House of Lords, Judge Lipfriend’s decision in James McNaughton was overturned by the Court of Appeal on the issue of the existence of the duty of care. The leading judgment was given by Neill LJ who admitted that he had ‘not found this to be an easy case’1 and that the arguments for the plaintiff, based on the meeting between accountant and buyer were ‘persuasive’.2 Neill LJ set out his reasons for holding that there was no duty of care, which included that: (i)

the accounts were initially produced for the vendor;

(ii) they were merely draft accounts which meant that the buyer was not entitled to treat them as final accounts; (iii) it was to be anticipated that the buyer would consult with his own accountancy advisers; (iv) the answer given by the accountant was a very general one that did not affect any specific figure in the draft accounts and which the accountant could not have expected the buyer to rely on without further inquiry or advice. 1 At 128G. 2 At 127F.

9.15 The comparison of Candler against James McNaughton illustrates how very fact sensitive these cases can be.1 Superficially they are very similar cases, but the right result in the former is now known to be that a duty was owed, whereas the Court of Appeal held to the contrary in the latter. The core inquiry is whether a reasonable person in the position of the buyer would understand from all the circumstances that the accountant realises and intends that the buyer will rely on the information the accountant gives. If so, then that becomes one of the objective purposes for which the information is given. 1 Compare also ADT v Binder Hamlyn [1996] BCC 808, which we describe as a somewhat borderline decision at para 6.20 above. In that case, May J said at 833E ‘I read the McNaughton case as a decision on its own facts.’

9.16 In Downs v Chappell,1 a firm of accountants were the second defendants. At the request of the first defendant seller of a bookselling business, they had sent a letter to potential buyers giving particulars of the performance of the 214

Accounting, non-statutory auditing and reporting 9.18 business in order to verify the figures that the seller (fraudulently as it later turned out) had provided. In those circumstances, the judge had no hesitation in finding that a duty of care was assumed to the buyers.2 1 Mr R Owen QC, 13 May 1994, [1994] Lexis 3502. 2 The judge held that the claimant had failed to establish causation against either defendant, a finding reversed by the Court of Appeal without further consideration of the duty of care issue at [1997] 1 WLR 426. See discussion of the causation and damages aspects of the case at 8.151.

9.17 A similar issue arose again in Peach Publishing v Slater & Co and again a finding made at final trial that an accountant owed a duty of care to a purchaser was reversed by the Court of Appeal.1 The proposed purchaser of ASA wanted to see recent accounts and the seller asked their accountant to produce management accounts. There was a meeting between seller, buyer and accountant at which, as the judge found, the buyer sought and received an assurance from the accountant that the accounts were ‘right’, which conveyed that they were essentially reliable, subject to the qualification that they were not audited.2 In fact the accounts were overstated and the misstatement that they were reliable induced the buyer to buy the company on the terms that it did so. An unusual feature of the case is that in a separate trial of quantum, the judge held that the company was in fact worth more than the buyer had paid for it, so that the buyer had suffered no loss from its reliance on the accountant’s misstatement. The buyer appealed from that finding and the accountant appealed against the finding that there was a duty of care. 1 [1998] PNLR 364. 2 See at 376A.

9.18 After examining the authorities, including James McNaughton, Morritt LJ held that: ‘the question to be answered is whether having regard to all the circumstances of the case and looking at the matter objectively it can be said that [the accountant] undertook responsibility to [the buyer] for the substantial accuracy of the Management Accounts.’ Reversing the judge, the Court of Appeal took the view that the reason that the buyer was pressing the accountant for a statement as to the accuracy of the accounts was in order to obtain a warranty from the seller and not in order to rely upon the direct statement itself. In fact the accountant had advised that the unaudited accounts should not be warranted and the Court of Appeal referred more than once to evidence that the buyer considered the accountant to be incompetent. The buyer was not looking to rely on the accountant, but to push the accountant to make a statement that would encourage the seller to give a warranty. The statement was thus made for the benefit of the seller, not directly for that of the buyer.

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9.19 Non-audit liability of accountants 9.19 Morritt LJ said this at 385F: ‘It is plain … that the judge placed great weight on the fact that such a direct statement had been voluntarily made. But it does not, and this is where I part company from the judge, follow from the fact that a statement was made both voluntarily and directly by A to B that A is assuming responsibility to B. The circumstances in which the statement was made must also be considered in order to evaluate the significance of the facts that the statement was both voluntary and direct.’ 9.20 Candler, James McNaughton and Peach Publishing thus represent a trio of cases in which the accountant engaged by the seller made a direct statement to the buyer that the accounts of the target were reliable. In all three cases, the issue of duty of care divided judicial opinion. In all three cases, the answer lay in a very close examination of the facts against the test for finding a duty of care.1 It can only be concluded that cases where this fact pattern occurs are likely to be difficult and unpredictable. Accountants who would prefer not to feature in the law reports should take every care to disclaim responsibility (preferably in writing) if they are required to make a statement in the presence of a buyer. 1 The same may be said of audit cases like JEB Fasteners and ADT v Binder Hamlyn [1996] BCC 808, which we discuss at paras 6.16–6.20 above.

Due diligence work 9.21 Accountants are frequently instructed by buyers of businesses to conduct due diligence work and to report on the finances of the target enterprise.1 Where the acquisition turns out to be unprofitable, the buyer may allege that the due diligence report received from the accountants was negligently made. If so, then in terms of the SAAMCO principle, the due diligence report will generally constitute information which is one factor in the buyer’s decision to buy the target rather than advice to proceed with the transaction. However, an accountant may stray into the realms of ‘advice’ for this purpose depending on precisely what it says. Both of these points are illustrated by Harrison v Bloom Camillin.2 An accountant can similarly provide due diligence services upon a borrower for a prospective lender, as in Swynson v Lowick Rose LLP.3 1 For an example where, on the facts, the accountant’s due diligence work did not fall below the required standard of care and skill, see Nederlandse Reassurantie Groep Holding v Bacon & Woodrow and Ernst & Young [1997] LRLR 678. The accountant was also held to have met the relevant standard in Barclays Trust Company (Jersey) v Ernst & Young LLP [2016] EWHC 869 (Comm), where the claim would also have failed on factual causation and want of any loss. 2 [2000] Lloyd’s Rep PN 89, 116–117. 3 [2016] 1 WLR 1045.

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Accounting, non-statutory auditing and reporting 9.23

Assisting in the raising of finance 9.22 Accountants are sometimes asked to provide information to assist their client to obtain or maintain finance from lenders. In general, the information will be provided to the client in the first instance, but in the knowledge that the client will pass it on to the lender. In such cases, the question often arises whether a duty of care is owed by the accountant to the lender. Thus, for example, in Barclays Bank v Grant Thornton, the accountant audited accounts for the specific purpose of satisfying certain loan covenants and the lender sued the accountant alleging a duty of care in tort. The claim was summarily dismissed on the basis of the disclaimer that was part of the audit report itself.1 1 [2015] 2 BCLC 537. See below at paras 13.09–13.12.

9.23 In HIT v Cohen Arnold,1 the defendant accountant provided to his client’s lender a letter stating: ‘… we have been asked to provide information concerning the personal net worth of the above named. We can confirm that according to the information provided to us the net asset worth of [the client], including properties at valuation, is in excess of £3.3m. As previously advised, [the client] has been known to us as a client for many years.’ The lender advanced funds, the client turned out to have very little net worth and the lender sued the accountant. On these facts the judge and the Court of Appeal held that the accountant owed a duty of care to the lender. However, judicial opinion was divided as to the meaning of the letter and the nature of the duty. The judge and one member of the Court of Appeal held that the letter amounted to a statement of what the client’s net worth actually was and that accordingly the accountant’s duty was to exercise reasonable care and skill in forming and giving that statement. That he had failed to do and he was thus liable for the lender’s losses (subject to the application of the SAAMCO principle). However, the majority in the Court of Appeal held that the meaning of the letter was that the information supplied to the accountant indicated a net asset value as stated and not that the accountant had taken care to assess the net asset value himself. The exact duty of care that the accountant owed had not been examined at trial and there was therefore no basis for holding that he had failed in it. Clarke LJ stated at [38] that: ‘The exercise of reasonable care would no doubt have involved taking care to ensure that the information was consistent with other information available to [the accountants] as [the client’s] accountants and indeed to ensure that the information was passed on accurately, but it is difficult to see how much further the reasonable accountant should have gone.’ 217

9.24 Non-audit liability of accountants The accountants were therefore not liable. 1 [2000] Lloyd’s Rep PN 125.

9.24 Cossey v Lonnkvist was a procedurally complex case which divided the Court of Appeal and which, when reduced to essentials, provides a good illustration of the application of the SAAMCO principle.1 The accountant, Mr Lingham, was a long standing adviser to Mr and Mrs Cossey, who sold their butcher’s shop to Mr Lonnkvist. The buyer asked the accountant to act for him in relation to the purchase, but the accountant correctly refused on the ground that he would be subject to conflicting interests if he acted for both seller and buyer. The accountant did agree, however, to act for the buyer in assisting him to find finance for the purchase. In the course of that retainer, the accountant sent a letter to a bank which was held to be misleading and to give an overstated view of the turnover of the shop. The finance and the purchase proceeded and the business lost money. The loan and its security was called in and the sellers succeeded in their claim against the buyer for the price. 1 [2000] Lloyd’s Rep PN 885.

9.25 The buyer sued the accountant alleging a breach of duty by virtue of the accountant’s letter to the bank being misleading. It was ultimately held that the accountant had acted in breach of his contractual duty to the buyer in so doing. As a matter of ‘but for’ causation, if the accountant had asked the necessary questions about turnover, he and the buyer would have discovered a downturn in the business and the purchase would not have gone ahead. Sir Anthony Evans, dissenting in the Court of Appeal, held that since a consequence of the accountant’s breach of contract was to deprive the buyer of the opportunity to reconsider the purchase, it was at least arguable that the accountant was liable for the losses incurred by the buyer in proceeding with the purchase. The conclusion was put in terms of arguability because the evidence at trial had not been directed to the issue and Sir Anthony Evans’ conclusion was that no final conclusion should be reached until such evidence was given. 9.26 The majority in the Court of Appeal (Sedley and Thorpe LJJ) held that there was no possibility that the accountant could be liable for the buyer’s loss, because to hold him so liable would be to contradict the clear line that he had drawn in refusing to act for the buyer in the purchase itself. The duty of care owed to the buyer was in respect of assisting him to obtain finance and was not to protect him from any loss he might suffer by paying too much for the business. It is respectfully submitted that the majority were right on this point.

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Accounting, non-statutory auditing and reporting 9.29

Contractual audits 9.27 Accountants are sometimes required to carry out audits of particular amounts under agreements. Cases which have discussed the role of the accountant in such contracts include Fomento v Selsdon Fountain Pen1 and Inveresk v Tullis Russell Papermakers,2 but neither involved litigation against the accountants. 1 [1958] 1 WLR 45. 2 [2010] UKSC 19.

Public sector audits 9.28 In addition to audits under the Companies Acts, there are numerous statutory requirements for audits of public bodies, some of which are carried out by external accountancy firms.1 These raise rather different issues to company audits because statutory auditors of governmental bodies will not always have a contractual relationship with the audited entity. Instead, the legislation has been held to give rise to a cause of action by the audited body against a negligent auditor for breach of statutory duty. In so holding the Court of Appeal in West Wiltshire DC v Garland2 followed the decision of the High Court of Australia in Shire of Frankston and Hastings v Cohen.3 It was further held in the same case that it was at least arguable that there was a coexistent remedy for negligence. However, there was no arguable duty of care owed to the council officers who were criticised in an auditor’s report. In relation to the quasi-judicial functions which a local authority auditor sometimes has to perform, no action for damages will lie.4 1 The line of these statutes may have started with the Poor Law Amendment Act 1834. 2 [1995] Ch 297. An express statement that no contractual duty is owed may be found at 308E. 3 102 CLR 607. See also the later statement in the New Zealand Court of Appeal in Controller and Auditor-General v Davison [1996] 2 NZLR 278, 303 that the Auditor-General of the Cook Islands was an ‘integral part of the constitutional arrangements’ and ‘may perhaps be described as an organ of state’. 4 West Wiltshire DC v Garland [1995] Ch 297, 310.

9.29 On the other hand, where a statute creates an audit requirement in similar terms to that applicable to a private company, especially where it is to be carried out by a private auditor selected by the entity (in contrast to West Wiltshire DC, where the auditor was itself a governmental body), there a contractual relationship may well be held to exist, as in PricewaterhouseCoopers Inc v National Potato Co-Operative Ltd.1 1 [2015] ZASCA 2 at [57]–[61].

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9.30 Non-audit liability of accountants

Reporting to regulators 9.30 As noted at para 6.84 above, it was rightly held in Andrew v Kounnis Freeman that an auditor who directly sent the audited accounts to an oversight body (in that case, an agency overseeing travel agents) at least arguably owed a duty of care to that body. In Law Society v KPMG, the Court of Appeal held that duty of care was owed by a reporting accountant under solicitors’ client money rules to protect the Law Society from loss that it would incur if it compensated the solicitor’s clients for fraudulent conduct which would have been stopped if the accountant had reported correctly.1 1 [2000] 1 WLR 1921.

9.31 The Solicitors Act 1974, s 34 required every solicitor to deliver to the Law Society annually a report signed by an accountant giving such information as the Society prescribed. Under s 35, the Society had power to intervene in a solicitor’s practice in various circumstances, including if the Society had reason to suspect dishonesty on the part of the solicitor. Section 36 provided for a ‘compensation fund’ to be administered by the Society as trustee. If a person suffered loss in consequence of a solicitor’s dishonesty or failure to account for client money, then the Society had a discretion to relieve that loss out of the compensation fund. 9.32 The Court of Appeal (Lord Woolf CJ, Ward and Clarke LJJ), agreeing with Sir Richard Scott V-C at first instance,1 held that the accountant who made such a report owed a duty of care to the Law Society in its capacity as trustee of the compensation fund. Lord Woolf accepted that the existence of a duty was not ‘self-evident’2 but relied essentially on the fact that the accountants would know that their report is required to protect the public and the compensation fund via the mechanism of the Solicitors Act. 1 [2000] 1 All ER 515. 2 Lord Goldsmith QC for the Law Society (the successful advocate for the defendant auditors in Caparo) had submitted that the duty was ‘self-evident’.

9.33 On the basis of the Solicitors Act as it stood at the relevant time, the decision in Law Society v KPMG was wrong. The Act created no direct relationship between the reporting accountant and the Law Society, but rather required the solicitor to procure the accountant’s report and send it to the Society. This was in contrast with the way that the Companies Act creates a direct line of report from a statutory auditor to shareholders. The decision was no doubt a pragmatic one, but in the end there was nothing that properly founded a duty of care over and above the foreseeability of reliance and loss, which should have been held to be insufficient.1 1 Support for this view may be found in the judgment of Lightman J in Anthony v Wright [1995] BCC 768, 772, where he implied that no private law duty was owed to the regulator.

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Accounting, non-statutory auditing and reporting 9.37 Anthony v Wright is recorded in the report of Law Society v KPMG as having been referred to in the skeleton arguments, but not cited orally.

9.34 The Solicitors Act has been amended since the decision in Law Society v KPMG. It now provides at s 34(9) for a direct report by an accountant to the Society of any fraud or other relevant matter discovered by the accountant in the course of preparing its report. Moreover, Law Society v KPMG itself was treated as a test case: the limitation issue in Law Society v Sephton arose because the Law Society delayed commencing proceedings pending the decision in Law Society v KPMG.1 In Sephton, in the House of Lords, the correctness of Law Society v KPMG was not in issue, but nor was it questioned and Lord Mance said: ‘Accountants such as Sephtons owe the Law Society a duty of care when preparing reports under section 34 of the Solicitors Act 1974’.2 1 Law Society v Sephton [2006] 2 AC 543, [5], [39]. For the limitation issue, see below at para 12.06. 2 Ibid at [59]. Lord Mance again cited Law Society v KPMG as good authority in his dissenting speech in Stone & Rolls v Moore Stephens [2009] 1 AC 1391, [259].

9.35 Thus, any accountant making a report under the Solicitors Act should now know that the Law Society will reasonably understand the accountant to have assumed responsibility to the Law Society (unless it disclaims such responsibility). In this way, the decision is self-validating. Accordingly, while our view is that the decision was wrong in principle, if it were to be tested again at appellate level, we would expect the duty of care between reporting accountant and the Law Society to be reaffirmed. 9.36 In New Zealand, a converse case arose in Stringer v Peat Marwick Mitchell,1 in which it was held that an auditor appointed by the New Zealand Law Society to audit the books of a solicitor’s firm owed a duty of care to that firm as well as to the Law Society. Chisholm J pointed out that: ‘While arguably the relationship between the auditor and solicitor is not contractual, it must come very close to that situation. The solicitor pays the audit fees, receives a copy of the report and the statutory audit regime expressly acknowledges that the auditor owes responsibilities to the solicitor.’ 1 [2000] 1 NZLR 450.

9.37 In the earlier English case of Luscombe v Roberts, an individual solicitor failed in a claim of this nature against the accountant who had negligently provided the certificate to the Law Society, on the basis that the solicitor’s losses arose from his own dishonesty.1 The situation in Stringer was different because in that case there were innocent partners. Indeed, in Luscombe, Megaw J held that if the solicitor had been merely negligent rather than dishonest, then he would have had a claim against the accountant. 1 (1962) 106 SJ 373.

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9.38 Non-audit liability of accountants 9.38 By contrast, in Saunders v Bank of New Zealand the Canterbury District Law Society had appointed an accountant, Mr England, as an inspector on its behalf to examine the books of a law firm, Saunders & Co.1 Mr England failed to identify that an employee of the firm was stealing from the firm’s trust (client) account. The solicitor’s claim against the inspector was struck out on the ground that no duty of care was owed. In contrast to the position in Stringer, the inspector considered in Saunders reported only to the Law Society and was prohibited from disclosing his or her report to the solicitor. In those circumstances, it followed that the solicitor could not have relied upon the inspector’s report. 1 [2002] 2 NZLR 270.

9.39 Similar issues could arise – but have not as yet been tested in the courts – in relation to: (i)

auditors’ reports to the UK Financial Conduct Authority in relation to client assets (‘CASS audit’) which are contracted by the regulator; and

(ii) ‘skilled person reviews’ under Financial Services Act 2000, ss 166 and 166A, where the contract with the ‘skilled person’ may be made either by the regulator or by the regulated firm; and (iii) the duty of an auditor of a public interest entity to report to relevant authorities if there is a suspected irregularity which the entity itself fails to investigate, stated in ISA 240 (June 2016 revision) at para 43R-1, reflecting the EU Audit Regulation.

Whitewash reports 9.40 Under earlier versions of UK companies legislation, private companies could purchase, or give financial assistance for the purchase of, their own shares only if they had adopted a ‘whitewash’ procedure involving certain reports being given by their auditors. Under the Companies Act 2006, these requirements are largely obsolete. An auditor’s report on a director’s statement of solvency is still required under Companies Act 2006, s 714 where a private company redeems or purchases its own shares out of capital. 9.41 Where an auditor gives a report under a whitewash procedure, it will generally owe a duty to the company in both contract and tort to do so with reasonable care and skill.1 There are at least two decisions in which the auditor’s work of this type was held to be inadequate: Re In a Flap Envelope Co Ltd2 and Cook v Green.3 Where a negligently given certificate permits the company to pay out moneys which should not have been paid out, those sums will be recoverable as damages from the auditor subject of course to any specific causation issues arising on the facts.4

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Accounting, non-statutory auditing and reporting 9.44 1 Cook v Green [2009] BCC 204 at [48]. 2 [2003] BCC 487. 3 [2009] BCC 204. 4 Cook v Green, ibid, at [65].

9.42 In Cook v Green, the auditors were held to owe a duty of care in tort to the two individuals who were both shareholders and directors, in addition to their duty to the company. It was held that the directors/shareholders were entirely reliant on the auditors in deciding to proceed with the transaction which turned out to be unlawful. The shareholders were held to be entitled to recover the loss in the value of their shareholding. There is no reference in the reported judgment to any point having been taken on reflective loss.

Other reports required by legislation 9.43 The New Zealand case of Deloitte v National Mutual Life Nominees concerned a specific requirement in the New Zealand Securities Act 1978, s 50, under which the auditor of a company which issued debt securities by public offering was required to report to the trustee of the securities concerned if he became aware of any matter that in his opinion was relevant to the performance of the duties of the trustee. The New Zealand High Court and Court of Appeal held the auditor liable to the trustee for a failure to report certain matters of which the auditor would have been aware if the audit had been competently performed. The Privy Council agreed that the legislation created a relationship of proximity between auditor and trustee. However, the Privy Council construed the legislation more narrowly as requiring the report to be made only if the auditor had actually formed the requisite opinion. Since the auditor had not formed the opinion, there was no breach of its duty.1 1 [1993] AC 774 at 786–787. This decision has been treated with caution in New Zealand: see Boyd Knight v Purdue [1999] 2 NZLR 278 per Gault J at [11] and per Blanchard J at [49].

9.44 In Pilmer v Duke,1 the High Court of Australia was divided about the consequences of a seriously inadequate report given by the defendant firm of accountants to the shareholders in general meeting of Kia Ora Gold Corp NL to the effect that the consideration which the directors of Kia Ora proposed to offer for the shares in Western United Limited was fair and reasonable in the circumstances. Under the Listing Rules of the Australian Stock Exchange, such a report was required, together with the approval of Kia Ora’s shareholders, for the transaction to proceed. The requirement arose because the consideration for the transaction exceeded five per cent of Kia Ora’s shareholders’ funds and the two companies were ‘associated’ because several directors of Kia Ora were also directors and shareholders of Western United. 1 [2001] HCA 31, [2001] 2 BCLC 773.

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9.45 Non-audit liability of accountants 9.45 The background to the claims was that the acquisition turned out to have been made at a massive overvalue, to the detriment of the shareholders and creditors of Kia Ora which went into liquidation. Moreover, the Kia Ora directors who promoted the transaction were the major shareholders of Western United and as such benefited personally from the transaction. Finally, undisclosed to the shareholders, the accountants giving the required independent expert report as to the reasonableness of the consideration had various connections to the directors. 9.46 The claimants in Pilmer included Kia Ora itself, but not its shareholders. It was clear by the time the case reached the High Court that the accountants owed a duty of care at common law in respect of their report, both in contract and in tort.1 There was also no doubt that such duty had been breached.2 The two issues which divided opinion in the High Court were whether the accountants owed a fiduciary duty not to act if subject to a conflict of interest and what loss the company could claim representing the shares which it had issued and allotted in part payment for the shares in Western United. 1 Ibid at [9]. 2 Ibid at [10].

9.47 As to fiduciary duty, the majority (McHugh, Gummow, Hayne and Callinan JJ) held: (i) the nature of the accountant’s duty was to provide information, not advice and that therefore no fiduciary obligations arose;1 and (ii) all that had been proved were past associations between the accountants and the Kia Ora directors which did not amount to a ‘real or substantial possibility of conflict’.2 Kirkby J dissented on both of these points. As to the first of these points, there is much to be said for the dissenting view of Kirkby J. As noted above in the context of auditors, if the question is asked whether an accountant giving such an independent report has a duty to do so without a relevant conflict of interest or a secret profit, it seems almost obvious that the answer must be positive. If, to take an extreme case, the accountants had accepted (and not disclosed to shareholders) an additional fee payable by the directors personally only if their report was favourable, then it is hard to see that a court would not find that to be a breach of fiduciary duty. As to the second question – whether on the facts there was a substantial conflict of interest – that depends on a close analysis of precisely what facts were proved. The majority were surely right to insist upon a real or substantial possibility of conflict not merely a hope of future work. 1 Ibid at [73]–[74]. 2 Ibid at [83].

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Accounting, non-statutory auditing and reporting 9.50 9.48 As to the loss from issuing and allotting new shares (which formed part of the consideration for the acquisition), the same majority held that the company (as opposed to its innocent shareholders) suffered no loss from doing so, other than the administrative costs which it incurred. The courts below had found a loss based on the value of the new shares when issued, but the High Court held that this made no sense, because if the accountants had performed their duty, the transaction would not have gone ahead and the shares would never have been issued. The technicalities of this question are complex and the majority and dissenting judgments repay study in this regard. In the end, however, the issue comes down to the question whether to recognise and consistently apply the separate legal personality of the company. The majority did so and, on that basis, it was right to say that the company itself could suffer no loss from issuing new shares and allotting them for inadequate consideration. Existing shares in a company become more or less valuable every time it issues a new share.1 That increase or decrease in value affects all the existing shareholders (a decrease is sometimes called ‘dilution’). But the only impact on the net assets of the company itself is to increase them by whatever consideration is received for the new issue. That consideration is represented by an increase in the capital of the company. 1 Except in the event that the consideration received for each new share is the exact figure that is its true value per share immediately after the new issue.

Prospectuses and listing particulars 9.49 A new issue of company shares or debt securities may be supported by a prospectus, listing particulars or similar document.1 The nature of such document will depend on the particular legislation and regulations that apply to the issue in question.2 A prospectus will contain financial information and it will often incorporate a form of certification from the company’s auditor or other accountant, which may be a reprint of the statutory audit report, or a bespoke certificate. The key question that may arise is whether the accountant owes a duty of care to investors either in the new share issue or in the aftermarket. There is no single answer to this question, because the form of certification and the regulations under which it is given will vary from market to market. 1 Such documents are collectively called ‘Investment Circulars’ in the Standards for Investment Reporting (SIRs) promulgated by the Auditing Practices Board in 2005. 2 A summary of the principal relevant regulations as they stood in 2005 is set out at Appendix 2 of SIR 1000, available from the Financial Reporting Council website.

9.50 The history of the English legislation concerning responsibility for prospectuses is traced by Lightman J in Possfund v Diamond.1 As he explained, the Directors Liability Act 1890 provided that directors and others who authorised the issue of a prospectus would be liable to compensate persons 225

9.51 Non-audit liability of accountants who subscribed for shares in reliance on the prospectus for any loss they suffered by reason of any untrue statement in the prospectus. That approach remains the core of the statutory protection for investors to this day. The question for claims against accountants is often whether, and to what extent, the accountants are persons who have authorised or become responsible for the prospectus in question or its relevant part. 1 [1996] 1 WLR 1351 at 1358–1361.

9.51 The present English legislation is primarily found in the Financial Services and Markets Act 2000, s 90,1 which provides (in part) that: ‘(1) Any person responsible for listing particulars is liable to pay compensation to a person who has– (a)

acquired securities to which the particulars apply; and

(b) suffered loss in respect of them as a result of– (i) any untrue or misleading statement in the particulars; or (ii) the omission from the particulars of any matter required to be included by section 80 or 81. (2)

Subsection (1) is subject to exemptions provided by Schedule 10.’

1 See previously Financial Services Act 1986, s 150.

9.52 The exemptions in Sch 10 are principally for persons who reasonably believe that the statement in question was true or that it had been authorised by a competent expert. 9.53 The persons responsible for listing particulars under s 90(1) are defined in the Financial Services and Markets Act 2000 (Official Listing of Securities) Regulations 2001, SI 2001/2956, reg 6, which provides that they include: ●●

the issuer;

●●

the directors;

●●

‘each person who accepts, and is stated in the particulars as accepting, responsibility for the particulars’; and

●●

‘each person not falling within any of the foregoing sub-paragraphs who has authorised the contents of the particulars’.

However, by reg 6(4): ‘Nothing in this regulation is to be construed as making a person responsible for any particulars by reason of giving advice as to their contents in a professional capacity.’ 226

Accounting, non-statutory auditing and reporting 9.56 These key provisions are not materially different to those prevailing under the preceding 1986 legislation. It is unusual for an accountant to be among the persons who are stated as accepting responsibility for the particulars, so the question that can arise is whether an auditor or other accountant has ‘authorised the contents of the particulars’ over and above ‘giving advice as to their contents in a professional capacity’. 9.54 The issue of an auditor’s liability for inaccuracies in the prospectus was raised obliquely in Axa Equity & Law v National Westminster Bank Plc.1 The plaintiffs had subscribed for debt securities in Resort Hotels which later transpired to be the victim of a fraud by its managing director. The plaintiffs issued a writ against the auditors, Coopers & Lybrand, alleging liability in tort and under the Financial Services Act 1986, s 150,2 but they did not serve the writ. Instead, the plaintiffs sought orders against various other parties to disclose documents to assist them in formulating their case against Coopers & Lybrand. This was said to be under the court’s Norwich Pharmacal jurisdiction to make orders against non-parties for disclosure. While the orders were formally sought against the third parties, it was Coopers & Lybrand who intervened to oppose them. 1 The Court of Appeal decision is reported at [1998] CLC 1177, affirming Rimer J’s decision at [1998] PNLR 433. 2 Section 150 was the predecessor of Financial Services and Markets Act 2000, s 90.

9.55 The application for documents was refused at first instance and in the Court of Appeal. The reasoning of the two courts was different, but both held that the application failed to meet the tests required for non-party disclosure under the Norwich Pharmacal jurisdiction and would therefore offend the ‘mere witness’ rule. 9.56 For present purposes, what is more important is the contrasting dicta at each level about the cause of action. At first instance, Rimer J said this (at 437–438): ‘It is, however, far from clear that Coopers could be held to have accepted responsibility for the particulars. The particulars nowhere refer to Coopers as assuming responsibility for them, and they are in fact only mentioned once, as the auditors of Resort’s accounts. They do not obviously fall within the class of persons referred to in section 152(1) as being responsible for the particulars. Their role in the matter probably went no further than advising BZW and Resort in connection with the particulars and, on the face of it, they would have a good case for relying on section 152(8), which provides: “Nothing in this section shall be construed as making a person responsible for any particulars by reason of giving advice as to their content in a professional capacity.”

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9.57 Non-audit liability of accountants I take the view, therefore, that any claim against Coopers based on section 150 is extremely weak. I do not say that it is bound to fail but I do conclude that it is substantially less than a prima facie case or a good arguable case. It may be arguable but it appears to me to be more likely to fail than to succeed. … I consider, however, that the plaintiffs’ prospects of establishing the existence of the necessary duty of care are at least rather better than their section 150 prospects.’ 9.57 However, in the Court of Appeal, Morritt LJ with whom Brooke and May LJJ agreed, said at [15]–[16]: ‘The judge thought, in the light of the provisions of that subsection, that the prospects of establishing a liability under s 150 were “extremely weak”. I can only say that I disagree. Consideration of the instructions to Coopers and the documents provided by them in the knowledge of the purpose for which they were required indicate to me a good prima facie case that the part of the particulars relied on as being false was authorised by Coopers. It is at the very least reasonably arguable that the information provided was factual and not advice given in a professional capacity so that liability could not be excluded by s 152(8). In the case of the claim in negligence the judge considered the investors’ prospects of success in establishing the existence of the necessary duty of care to be rather better than their prospects of success under s 150. For Coopers counsel sought to argue that the judge was wrong in that respect. … But in this case, for the reasons already given, I consider that there is a good arguable case that Coopers are responsible for the statements relied on for they authorised them.’ 9.58 These dicta in the Court of Appeal are arguably ratio decidendi rather than mere obiter dicta, because the basis of the Court’s decision was that the plaintiffs were already in a position to plead an arguable claim against Coopers & Lybrand and therefore had no need of further disclosure. However, they only go to arguability and do not decide whether any of the claims were actually right. In the end, however, it is impossible to assess the decision without considering the factual material which influenced the views of the Court of Appeal. This decision does perhaps confirm that it will be necessary for the auditor to have had at least some involvement in the production of the prospectus in question before it will be found to have ‘authorised’ the relevant aspects. 9.59 The position on this important issue may also have changed as a result of the introduction of standard form ‘Bannerman’ disclaimers into audit 228

Accounting, non-statutory auditing and reporting 9.61 reports. To the extent that audited accounts are incorporated wholesale into a prospectus, there is no good reason why the disclaimer should not be effective in this context to negative any duty of care in tort that could otherwise arise.1 If on particular facts, the auditor would otherwise have ‘authorised’ the figures in the prospectus, then a more difficult question could arise as to the effect of the Bannerman disclaimer on the right of action that might otherwise arise under Financial Services and Markets Act 2000, s 90. 1 For discussion of these disclaimers, see below at paras 13.03–13.15.

9.60 The claims of investors in the Resort Hotels rights issue gave rise to a second reported decision in the same month (May 1998): Abbott v Strong.1 In Abbott v Strong, Ferris J refused permission to the plaintiff investors to plead an additional claim against Coopers & Lybrand. The existing claims were based largely on the one express statement of Coopers & Lybrand which was contained in the prospectus as a quotation from a letter from Coopers & Lybrand to the company’s directors, which read as follows:2 ‘We have reviewed the accounting policies and calculations for the forecast of profit before taxation and earnings per Ordinary share of Resort Hotels PLC (“the Company”) and its subsidiaries (together, “the Group”) for the year ending 30 April 1992 (“the Forecast”), as set out on page 7 of the circular to the shareholders of the Company dated 30 April 1992. The Forecast, for which the Directors of the Company are solely responsible, includes published unaudited interim results for the six months ended 31 October 1991, the results shown by unaudited management accounts for the four months ended 27 February 1992, and the Directors’ forecast of the results for the two months ending 30 April 1992. In our opinion, the Forecast, so far as the accounting policies and calculations are concerned, has been properly compiled and is presented on a basis consistent with the accounting policies normally adopted by the Group.’ 1 [1998] 2 BCLC 420. 2 Ibid at 422–423.

9.61 The proposed new claim was that Coopers & Lybrand owed a duty of care to the investors not only in respect of the statement itself, but also in relation to work which they had carried out for the company to ascertain and/ or verify the figures to be included in the prospectus as the forecast for profit for the year ending 30 April 1992. After setting out the proposed new pleas, Ferris J stated:1 ‘The issue which has been argued before me as an issue of principle can, I think, be stated as follows: “is it arguable that Coopers owed a duty of care to the plaintiffs in respect of the accuracy of the figures 229

9.62 Non-audit liability of accountants stated in the circular beyond the duty of care (if any) which, on the true construction of Coopers’ letter Coopers owed to the plaintiffs by reason of the representations contained in the Coopers’ letter?”’ 1 Ibid at 426a.

9.62 Having thus formulated the issue before him, Ferris J held the claim to be unarguable on the basis of the following reasoning:1 ‘I do not find it comprehensible that a person (X) who makes a statement or gives advice to another (Y) for the purpose of assisting Y to make representations to a third party (Z), is to be regarded as owing a duty of care to Z when the participation of X in the preparation of Y’s statement is unknown to Z. It does not seem to me that, in these circumstances, X is assuming any degree of responsibility for Z, although he may, and probably will, be assuming responsibility for Y. So far as Z is concerned the statement which he receives and acts upon is the statement of Y alone. It cannot be said that he relies upon X, of whose part in the matter he is wholly ignorant.’ 1 Ibid at 428b–d.

9.63 The judgment in Abbot v Strong does not suggest that it was argued that whether the words ‘We have reviewed …’ at the start of the letter quoted in the prospectus changed the position as to the auditor’s responsibility. It may be that it was accepted that a clear line could be drawn between the ‘accounting policies and calculations’ which the auditors had reviewed and the forecast itself which was the sole responsibility of the directors. 9.64 The judge’s reasoning as quoted above is in any event not entirely satisfactory because the essence of the proposed amendment was that it did not allege a duty in respect of any statement; it sought instead to allege a duty in respect of the task of review. 9.65 In Possfund v Diamond,1 the issue raised was not as to the accountant’s responsibility for the prospectus, but as to whether the law’s protection extended to securities purchased on the aftermarket. The issue was whether the various persons responsible for a prospectus, including the company’s auditors and reporting accountants, owed a tortious duty of care in respect of the information contained in it to buyers of the shares in the aftermarket (as opposed to buyers in the issue itself). On an application to strike out the claim, Lightman J noted that there was House of Lords authority in the form of Peek v Gurney2 for the proposition that the purpose of a prospectus was limited to investors’ decisions whether to invest in the original issue and that ‘the representations contained within the prospectus were exhausted upon the allotment being completed’. On that basis there would have been no liability 230

Accounting, non-statutory auditing and reporting 9.67 to investors in the aftermarket. Indeed, in Al-Nakib v Longcroft,3 Mervyn Davies J had struck out a claim against directors on exactly that basis. 1 [1996] 1 WLR 1351. 2 (1873) LR 6 HL 377. 3 [1990] 1 WLR 1390.

9.66 However, Lightman J received expert evidence which supported a case that the purpose of a prospectus had changed in the 120 years since Peek v Gurney had been decided and that it now included inducing the public to make aftermarket purchases. On that evidence, it was arguable that the defendants objectively intended such reliance and that they owed a duty of care. There was no separate analysis of precisely what the auditors and reporting accountants had said to make them arguably responsible for representations made to any member of the public who purchased shares in the aftermarket.1 1 In this respect, Possfund is reminiscent of Morgan Crucible v Hill Samuel (see above at 6.59); in both cases, the claim against the accountants was permitted to proceed with very little analysis, influenced by the fact that similar claims against other potentially liable defendants were also going to trial.

9.67 The New Zealand Court of Appeal in Boyd Knight v Purdue held that where an auditor gave a report for inclusion in a prospectus upon the figures in that prospectus, a duty of care was owed to investors. However, the Court reversed the trial judge’s finding that the auditor was liable to investors, on the basis that the investors had failed to show sufficient reliance on the figures to justify their claim to have relied on the audit report. Blanchard J said:1 ‘When auditors furnish a report for inclusion in a prospectus they express an opinion about the financial statements of the company which they have audited: they confirm the accuracy of those statements, in the sense of that word used above. However, they are not called upon to make any comment on the state of the company’s affairs. They undertake no duty to assess for would-be investors whether it is creditworthy. Their duty is to inform, not to give advice. The record shown by the financial statement speaks for itself. The true and fair view may be one of prosperity or poverty. The report therefore has no context for anyone who has not read the accounts. Without such a reading the report tells the reader nothing except that the company has a set of accounts which comply with the regulations and present a true and fair view. In so far as such a report refers to a true and fair view, it is almost meaningless unless read in conjunction with the figures in the accounts. It must follow, it seems to me, that in so certifying the accounts the auditors cannot be taken to have accepted an obligation to an investor who has not read and relied upon them. Reliance, and a consequential duty of care, cannot be asserted, as it were, in a vacuum. There must first have been a specific influence of 231

9.67 Non-audit liability of accountants the financial statements on the mind of the investor. It is not enough for the investor to say that, without troubling to look at the accounts, he or she relied in a general way upon the statutory scheme, making an assumption that an investment is sound or the issuer creditworthy because there was a trustee playing a supervisory role in connection with the prospectus and an auditor had furnished the report required by the regulations. It would be casting upon an auditor a burden going even beyond anything suggested for the unsuccessful plaintiff in Caparo if this Court were to hold careless auditors liable for the accuracy of figures which were not directly relied upon by plaintiff investors. Since the purpose of the legislation is to ensure information is available to investors, so that they can make their own assessment of the prospects of the issuer, it would be exceeding the statutory scheme if the Court were to find auditors responsible for inaccuracies in information which was not utilised by an investor. … In circumstances in which, if the true position had been revealed, the accounts could have been corrected and a prospectus would probably still have issued seeking the investment a plaintiff investor must, I think, show reliance on a particular item or items in the financial statements which were inaccurate. It must be proved that, if the true and fair view in that regard had been known to the plaintiff, the investment decision would have been different. For, if the inaccurate material was not an influence on the investor, how can it be alleged that the investor would not have gone ahead with the investment? … A broader approach is permissible where it is proved or, as here, admitted that if the accounts had been accurate no prospectus would have been issued and no investment could then have been made – in other words, that “but for” the inaccuracy there could have been no loss to a new investor. But even in such circumstances the limited scope of the duty of care must be remembered. In such a case there must at least be a reliance on the basic features of the financial statements – the results they show (profit level, balance of shareholders’ funds and, perhaps, the current assets/liability ratio). There must be evidence that these features were considered by the plaintiff and, taken as a whole relied upon. The investor must prove that he or she paid attention to the content of the financial statements and noted these basic features – that it was not simply a case of glancing at the accounts, but in reality failing to consider them and, instead, relying in a general way on the fact that the investment offer was being made pursuant to a prospectus and that the regulations put some safeguards in place.’ 1 [1999] 2 NZLR 278 at [54]–[57]. These paragraphs apply to the prospectus situation the principle that was applied to an auditor in Berg Sons v Adams (see above at paras 8.17–8.19): ‘Since the provision of knowledge to the company and its members is the subject matter of the

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Accounting, non-statutory auditing and reporting 9.69 contract, unless it can be shown that the company or its members were in some way misled or left in ignorance of some material fact, the breach of contract lacks significance and has no legal consequence.’

9.68 The New South Wales Court of Appeal considered allegations relating to a prospectus in Stanilite Pacific v Seaton and others.1 This was a case in which the claimants were not investors, but the company which had issued the prospectus (‘Pacific’) and one of its subsidiaries (‘Electronics’). The company’s auditor had given formal consent to the inclusion of their audit report in a prospectus for a rights issue. The nature of the auditor’s duty to the company in giving such consent was described thus by Hodgson JA (with whom McColl JA and Bryson JA agreed):2 ‘I accept that the respondents’ obligation in relation to the giving of consent did not involve repeating the audit that had been completed on 16 March 1995, and did not involve investigation to the same extent as would an audit of accounts. However, I do not accept that the respondents did not have a duty to Pacific and Electronics, or that the duty extended only to what they actually knew. In my opinion, they had a duty to these companies to exercise reasonable skill and care in giving consent, inter alia with a view to avoiding exposure of Pacific (at least) to claims for misleading statements in the prospectus. In particular, it was their duty to exercise reasonable skill and care in conducting the subsequent events review on 18 April 1995, in participating in the Due Diligence Committee and in giving the consent on 3 May 1995. However, the extent of the duty is to be assessed having regard to the circumstance that the accounts for the half year ended 30 December 1994 had been audited and given an unqualified certificate, and that there was no requirement to re-audit those accounts.’ 1 [2005] NSWCA 301. 2 Ibid at [97]–[98]. Hodgson JA also held (at [128]) that statutory liability for misleading conduct was possible if it was proved that the respondents did not exercise skill and care at the time of the audit itself, in contrast to what he held to be the position at common law. In the event, the court held there was no breach of duty in relation to the prospectus consent or the preceding audit in any event. There is a brief discussion of the difficult question whether the companies’ claims for trading losses following the successful fundraising were barred for lack of causation at [133]–[149]. That discussion is inconclusive and also expressly not joined in with by the two concurring Justices of Appeal.

9.69 In British Columbia, Canada, an auditor was held liable (by a majority of the British Columbia Court of Appeal, reversing the judge) to an investor in debt securities on the basis of an audit report included in a prospectus with the auditor’s consent.1 In the light of the statutory provisions prevailing,2 the unanimous decision of the judge and the Court of Appeal that the auditor owed a duty of care may well have been right, but on the issues of breach of duty and 233

9.70 Non-audit liability of accountants reliance, the dissenting judgment of Ryan JA in favour of the auditors better reflects the common law at least in England. 1 Kripps v Touche Ross (1997) 89 BCAC 288; 145 WAC 288. 2 Summarised at [6]–[7].

Valuation work General introduction to valuation issues 9.70 Accountants are often called upon to conduct valuations of shares or other assets in various factual contexts. This may arise by way of a binding determination under a contract between two other parties, or by way of advising one party as the accountant’s client. The report produced in Pilmer v Duke (see above at paras 9.44–9.48) was in effect a valuation of the target company. Valuation work seems to be especially prone to draw forth allegations that the accountant owed and breached fiduciary duties as well as the duty to use reasonable care and skill. There is also a special rule for assessing liability in negligence which applies only to valuation work. 9.71 When an accountant values shares under an agreement between shareholders (including Articles of Association) as expert valuer rather than arbitrator, the accountant may be sued for negligence and is not granted the immunity of a judge or arbitrator: Arenson v Casson Beckman Rutley.1 Where the Articles permit the company to appoint its auditor (or another accountant) to give a value that will be binding on the selling shareholder, including where the shares are compulsorily acquired, the auditor will owe a duty of care to the shareholders affected by the valuation.2 Where the Articles require that a binding valuation is performed by the company’s auditor, the standard of care expected of the auditor may not be as exacting as that required from a specialist valuer.3 However, any chartered accountant who is willing to undertake share valuation is expected to have basic share valuation skills.4 1 [1977] AC 405. 2 Killick v PricewaterhouseCoopers [2001] PNLR 1, [2001] Lloyd’s Rep PN 17. 3 Whiteoak v Walker [1988] 4 BCC 122. 4 Goldstein v Levy Gee [2003] PNLR 35 at [74].

The ‘bracket approach’ in valuers’ negligence cases 9.72 Before describing the special rule for assessing negligence in valuation work it is convenient to set out the basic approach which would apply were it not for the special rule. The basic approach – following the lines of other types of claim for negligence – is that if it can be demonstrated that a valuer fell below the requisite standard in a particular respect, that would be negligence 234

Accounting, non-statutory auditing and reporting 9.72 and the loss would be measured by reference to the valuation that the defendant valuer would have produced had that error not been made. This basic approach is exemplified in this field by the example given by Lord Hoffmann delivering the advice of the Privy Council in Lion Nathan v C-C Bottlers (in relation to a financial forecast warranted to have been made with due care):1 ‘As has been said, a forecast is always the forecaster’s estimate of the most probable outcome, the mean figure within the range of foreseeable deviation. The judge appears to have assumed that if a figure would have been within the range of foreseeable deviation from the mean of a properly prepared forecast, it must follow that it would have been proper to put that figure forward as the mean. This proposition has only to be stated to be seen to be fallacious. There is no connection between the range of foreseeable deviation in a given forecast and the question of whether the forecast was properly prepared. Whether a forecast was negligent or not depends upon whether reasonable care was taken in preparing it. It is impossible to say in the abstract that a forecast of a given figure “would not have been negligent.” It might have been or it might not have been, depending upon how it was done. Assume, for example, that the vendor had forecast $1.25m and that the limits of foreseeable deviation would have been regarded as $50,000 either way. Assume that the forecast was unexceptionable in every respect but one: there had been a careless double counting of sales which, if noticed, would have reduced the estimate by $25,000. To that extent, the estimate has not been made with reasonable care. If on account of some compensating deviation the outcome is $1.25m or more, the purchaser will have suffered no loss and the vendor will incur no liability. But if the outcome is less than $1.25m, their Lordships think that the purchaser is entitled to say that if the estimate had been made with reasonable care, the figure put forward by the vendor as the mean and upon which he relied in fixing the price, would have been $25,000 lower. To this extent, he has suffered loss by reason of the breach of warranty. It is nothing to the point that the outcome is still within what would have been predicted as the limits of foreseeable deviation. His complaint is that the whole range of possible outcomes would have been stated as $25,000 lower. The purchaser has accepted the risk of any deviation attributable to factors which were unforeseeable, unknown or incalculable at the time of the forecast. He has accepted the risk of such deviation whether its true extent would have been foreseeable at the time of the forecast or not. But he has not accepted the risk of any deviation which is attributable to lack of proper care in the preparation of the forecast. The only tolerable forecast is one which, on its facts, was prepared with reasonable care.’ 1 [1996] 1 WLR 1438 at 1445.

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9.73 Non-audit liability of accountants 9.73 Despite this powerful dictum, the very fallacy condemned in it has become part of the English law of valuers’ negligence below the level of the Supreme Court. The special rule for assessing negligence in valuation work may be stated thus: there is no liability for negligent valuation unless the value produced is outside the bracket within which all reasonably competent valuations would have fallen. In other words, to demonstrate valuation negligence there is an additional requirement over and above showing that the valuer’s methods or execution fell below the standard of his profession: it is also necessary to show that the result fell outside the acceptable range. 9.74 The bracket is identified by the court assessing (based on the expert evidence) the ‘correct’ or most likely competent valuation and how great is the margin for reasonable disagreement around that central point. The bracket may be expressed as a percentage margin for error around a mean average value or as a range from a low figure to a high one. 9.75 If it is demonstrated that the valuation at issue fell outside of the bracket, then that shifts the evidential burden of proof to the valuer to justify his valuation as not having involved negligence. If he fails to do so, and the court finds the valuation was negligent, then for the purpose of assessing causation and loss, the court assumes that the value that would have been given without negligence would have been the mean average value within the bracket, which is deemed to be the ‘correct’ valuation. 9.76 In relation to accountants conducting share valuations, the bracket approach was established following the thorough review of authorities (mainly from cases concerning property valuation) by Lewison J in Goldstein v Levy Gee.1 Lewison J himself seems to have preferred the more strictly logical approach exemplified by the dictum of Lord Hoffmann from Lion Nathan cited above. However, Lewison J held himself bound to adopt the bracket approach by the decision of the Court of Appeal in the surveyor’s case of Merivale Moore plc v Strutt & Parker.2 1 [2003] PNLR 35. 2 [2000] PNLR 498.

9.77 The correctness of Lewison J’s conclusion that Merivale Moore is binding authority in favour of the bracket approach was challenged unsuccessfully in K/S Lincoln v CBRE,1 where Coulson J also gave reasons for positively preferring the bracket approach in any event.2 Lewison J’s conclusion was also adopted by Vos J in Dennard v PricewaterhouseCoopers,3 where the parties had accepted it. These authorities were noted and adopted by Eder J in Capita v Drivers Jonas in a passage that was expressly approved in the Court of Appeal,

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Accounting, non-statutory auditing and reporting 9.79 though again apparently without contrary argument.4 In Capita Gross LJ again stated the law in terms of the bracket approach:5 ‘In order to establish negligence, it must be shown both that the valuer failed to exercise reasonable skill and care and that the result was “wrong” – ie, outside the permissible range or bracket.’ 1 [2010] PNLR 31 at [145], [148]. See also Webb Resolutions v E Surv [2013] PNLR 15 for confirmation of the views of Coulson J. 2 [2010] PNLR 31 at [149]–[152]. 3 [2010] EWHC 812 (Ch). 4 [2011] EWHC 2336 (Comm), rev’d on other points at [2012] EWCA Civ 1417 – see at [43(ii)] for endorsement of Eder J’s approach to the law on valuation. 5 [2012] EWCA Civ 1417. Moore-Bick LJ agreed with Gross LJ (see at [71]) and Lloyd LJ did not disagree with it (see at [118]). A differently constituted Court of Appeal accepted the bracket approach which was not in dispute in Titan Europe v Colliers International [2016] PNLR 7.

9.78 In the light of the weight of consistent recent authority, it would be surprising if a first instance judge felt able to do other than adopt the bracket approach to a valuation case. There are at least two possible routes by which the Court of Appeal could shift the position somewhat. 9.79 The first potential route to a shift in the position would arise if the Court of Appeal were to accept the argument that the statement in Merivale Moore was not ratio, which would have the radical consequence that the bracket approach could be discarded altogether, though it could also allow the court to confirm the approach instead. While both Lewison J and Coulson J have held that the relevant passage in Merivale Moore was indeed part of the ratio decidendi, neither judge gave any convincing reason for that view. It is therefore necessary to look again at that question. In Merivale Moore, the trial judge held that the valuation in issue was negligent both because the figure was negligently arrived at and because the valuation report omitted a vital qualification. The Court of Appeal reversed the judge’s finding that the figure was negligent partly on the basis that he had failed properly to apply the bracket approach,1 but upheld the judge’s finding on the missing qualification. The latter negligence was sufficiently causative to justify the judge’s finding as to loss, so the appeal was dismissed. The question, then, is whether reasoning which is relevant to reversing a finding which is ultimately irrelevant to the judge’s order amounts to ratio decidendi. It is submitted that the better view is that such reasoning is obiter dicta not ratio. The decision of the Court of Appeal was that the appeal was dismissed and the order of the judge upheld. The reasoning about the bracket approach was not necessary to that decision, as the order would have been the same even if the judge’s view on that issue had been upheld.2 1 The key finding in the judgment of Buxton LJ was dissented from by Sir Christopher Staughton giving only very brief reasons given the irrelevance of the issue. To ask whether it was agreed by Nourse LJ, who agreed with Buxton LJ’s reasons for dismissing the appeal, begs the question whether the finding was obiter or ratio.

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9.80 Non-audit liability of accountants 2 However, it is rather more arguable that the bracket approach was ratio in the Court of Appeal’s less well known later decision in Michael v Miller [2004] EWCA Civ 282, especially at [143].

9.80 The second opening to a possible rebalancing of the authorities in this field is provided by a dictum of Mance LJ in Arab Bank v John D Wood.1 In this case of surveyor’s negligence, in the Court of Appeal the defendant cited Merivale Moore and counsel for the claimant ultimately accepted that there was indeed a pre-condition for negligence that the valuation fell outside the bracket.2 Mance LJ (with whom Mantell and Nourse LJJ agreed) nevertheless examined the doctrine and referred to the example given in Lion Nathan of a discrete error in the valuation process. Mance LJ said: ‘After reviewing the authorities the Court of Appeal in Merivale Moore Plc v Strutt & Parker expressed the view that a valuation outside the acceptable “bracket” was a necessary condition of liability, but not itself sufficient.’3 Mance LJ then said this at [23]: ‘Where, as in the present case, criticism is addressed to factors such as rental value and yield which bear proportionately on the ultimately assigned value, the issues of the permissible range and of negligence are on any view inseparably linked. The value estimated results from the estimated rental values and yields. Where there is some discrete error, like that postulated in Lion Nathan Ltd v C-C Bottlers Ltd, it may be appropriate to examine more closely the nature of the valuer’s engagement. Is it simply to produce an end result and to do so within the range of “reasonable foreseeable deviation?” Or may it be to exercise reasonable skill and care in the circumstances (including whatever instructions may have been given) both in forming and in expressing an opinion on value? In Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd when it was before this court the judgment given by Sir Thomas Bingham MR, at pp 403–404, lends some support to the latter analysis. On that basis, if, as a result of clearly identifiable negligence, a valuer arrives at a figure lower than he would otherwise have put forward, the line of reasoning indicated in the Lion Nathan Ltd case might still be applicable, although the end figure could not itself be said to fall outside the margin of legitimate valuation by valuers generally. It is however unnecessary to consider this point further on this appeal.’ 1 [2000] 1 WLR 857. 2 Ibid at [20]. 3 Ibid at [22].

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Accounting, non-statutory auditing and reporting 9.83 9.81 This passage was cited by Lewison J in Goldstein (at [68]), where he said that it was obiter, but that the relevant part of Merivale Moore was ratio. Lewison J therefore considered himself bound to apply Merivale Moore. On the other hand, in Dennard, Vos J’s comment (at [137]) was: ‘If I were, for example to hold that PwC’s ultimate value fell within a reasonable range, I would still have to ascertain whether any loss could nonetheless be said to have been caused by any other breach of duty (if any is found) affecting the valuation process or the advice given arising from it, as Mance LJ alluded to in his judgment in Arab Bank plc v John D Wood supra, in explaining how Lord Hoffmann’s reasoning in Lion Nathan Ltd v. C-C Bottlers supra might still be applicable even whilst one was applying the decision in Merivale Moore.’ 9.82 This dictum of Mance LJ in Arab Bank as interpreted by Vos J in Dennard may foreshadow a possible change of direction in that in the right case, these dicta could show that even if a valuation falls within the bracket, a further examination could proceed as to whether there was negligence in the process which should or would have led to an outcome more favourable to the claimant. The difficulty with such a change of direction is that it is hard to know where to draw the line without discarding the bracket approach altogether in favour of the rigorous logic of Lion Nathan. It is plain that the policy of the bracket approach – recognising as it does the judgmental and complex nature of valuation – meets with the approval of most judges. On the other hand, it is equally plain that the fully principled version of the bracket approach may appear unjust to a claimant in a case where a discrete and palpable error was made which did not take the valuation outside the bracket, but only to its edge. Moreover, the bracket approach can also create unfairness to a defendant: in a case where the valuer would properly and competently have valued at the edge of the bracket but a small error took the result outside it, the measure of the claimant’s loss is the difference between the actual valuation and the ‘correct’ or mean average valuation, which may be far greater than the difference between the actual valuation and the result which the defendant would have produced without negligence.1 1 This last point may be elucidated by figures. Say the ‘true’ valuation is 90, with a bracket from 80 to 100. The defendant had proper reasons to support a valuation of 100, but made an error which took it to 105. He was thus negligent. The measure of loss in such a case (under the bracket approach) is 105 – 90 = 15. However, the negligent error only made a difference of 5 and in any other field, such would be the measure of loss.

9.83 In Australia, the bracket approach is said to give a prima facie indication of negligence or competence, but it is not elevated to a principle that a valuation within the bracket can never be negligent.1 That formulation gives the court sufficient flexibility to avoid at least some of the injustices which could arise

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9.84 Non-audit liability of accountants from the more rigid bracket principle which seems to apply in England. Such a flexible approach may in practice be similar to the Arab Bank gloss on the bracket principle. 1 Adwell Holdings v Mark Smith [2003] NSWCA 103; Propell National Valuers (WA) Pty v Australian Executor Trustees [2012] FCAFC 31.

9.84 The special rule was first established in cases of surveyors’ negligence in valuing real property. The policy justification for the rule is easiest to comprehend in such cases, especially the simpler ones: ●●

the essential output from the valuation is a figure;

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there is no one correct figure which any competent valuation would arrive at;

●●

if the valuer arrives at a valuation within the competent range, then he has performed his engagement and an aggrieved party should not be able to sift through the weeds of the valuation process to find an argument that the valuer would have reached a different figure if he had not made this mistake or that mistake.

9.85 Accountants’ cases more often involve the valuation of shares which is frequently a complex undertaking. A consequence of the logic of the bracket approach in such cases is the need for what might be called ‘internal brackets’. This was recognised by Lewison J in Goldstein and followed by Vos J in Dennard. To begin with a simple example, if a company is to be valued on the basis of a multiple of maintainable profits, then the valuer must estimate separately the multiple and the level of maintainable profits. To arrive at the acceptable bracket for the valuation, the experts and the court must consider separately the acceptable range for the multiple and the acceptable range for the maintainable profits. Thus, if the former is, say, 4 to 6 and the latter is, say, £400,000 to £500,000, then the overall bracket will be from 4 × £400,000 = £1.6m to 6 × £500,000 = £3m. In this way, two apparently modest ranges can give rise to an overall bracket which looks very wide. 9.86 The issue of internal brackets is, however, potentially even more complex than such an example. For example, within the category of ‘maintainable profits’, there may be any number of potential variables. As Lewison J concluded in Goldstein v Levy Gee, the logic of the bracket principle requires that a bracket be estimated for each such variable, whether or not any allegation of negligence is made in respect of that variable.1 Vos J in Dennard was concerned about the consequences of doing so and sought to rein them in in the following passage:2 ‘It seems to me that I must embark on the same exercise as Lewison J undertook. But before doing so, a question arises as to

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Accounting, non-statutory auditing and reporting 9.88 whether I should be looking for the range within which a reasonably competent valuer could have assessed each factor in the valuation process, or whether I should be looking to establish the figure which I judge a reasonably competent valuer would have arrived at, and then establish the range within which the reasonably competent valuer might have departed from that mean. The former process in this case would risk arriving at a conclusion for discount factors that might vary widely. Indeed, Mr Fenwick submitted that the range for discount rates for projects under construction was between 14.5% and 23%, when he adopted this process. This kind of wide range was described as absurd by Staughton LJ in Nykredit Mortgage Bank plc v Edward Erdman Group Limited [1996] 1 EGLR 119 at pages 120 and 121. It seems to me that there is a danger also in treating every factor identically, because the evidence has been different in relation to different aspects of the valuation. In my judgment, there are two aspects to the process. First, since the main allegation is that PwC’s valuation was wrong, I must establish what I find to be the value that a reasonably competent valuer would have advised, and the range of values around that value that could have also been reached by a reasonably competent valuer in the position of PwC. In ascertaining the range, as appears hereafter, the methodology may have to be different in relation to different aspects, because of the nature of the particular valuation process with which I am dealing in this case. Secondly, I need to consider any allegations that go beyond the simple case that the value was wrong.’ 1 Goldstein at [63]. 2 Dennard at [136]–[137].

9.87 Despite this apparent statement of principle, Vos J’s judgment in Dennard does use the internal bracket approach (in relation to the most important variables in any event) to arrive at the overall bracket. As a result, the final bracket in that case was very wide – over 35 per cent above or below the mean.1 1 Dennard at [175].

9.88 In principle, there is no escape from internal brackets in a complex valuation process. The principled check on their potential excess is that a point may be reached where each decision is not independent of the others. If a valuer chooses the highest (or lowest) possible figure in every internal bracket, a point may be reached where there is an inference that the valuation is skewed. That consideration will of course be very fact sensitive and it may have been at the root of Vos J’s apparent concern to avoid a mechanistic application of internal brackets. However, in a case (like Dennard) where there is genuine room for 241

9.89 Non-audit liability of accountants disagreement about a number of independent variables, there the right result may be a very wide overall bracket.

Allegations of breach of fiduciary duty in valuation cases 9.89 We have discussed above at paras 9.44–9.48 the High Court of Australia’s decision in Pilmer v Duke. In essence that was a case concerning share valuation. It is also a clear illustration of the reason that valuation often proves a tricky activity for accountants and often raises allegations of breach of fiduciary duty: namely, the conflicting interests of the buyer and seller under the valuation. A valuation is often required in a situation where the parties have strongly differing views about what its outcome should be. In that situation it is all too likely that one party will be aggrieved at the result produced by the accountant as valuer. Where the aggrieved party also believes that the valuation may have been influenced by the interests of the other party, there is scope for an allegation of breach of fiduciary duty. These cases are discussed below in Chapter 10, ‘Conflicts of interest’.

Taxation agency and advice 9.90 A core area of work for accountancy firms is in relation to taxation. Work on taxation may be broadly divided into compliance and advisory work. Compliance work involves assisting the client taxpayer to prepare necessary returns, communicate with taxation authorities and pay the correct amount of tax that is due by the deadline for payment. Advisory work involves advising the client on how to arrange her, his or its affairs with a view to minimising or at least reducing the tax that will be due. This latter kind of work can encompass a wide range of activity including structuring commercial transactions in a way that is tax efficient1 or at least not tax punitive and also including advising on aggressive tax schemes designed simply to create a tax benefit. 1 Thus, in Owen Investments v Bennett Nash Woolf & Co 30 March 1984, Lexis, the accountants were liable for the consequences of a mistake in advising their client as to the tax effective structuring of a corporate transaction.

9.91 The perceived line between tax planning that is seen as legitimate and tax avoidance schemes that are open to attack has been shifting in recent times, as epitomised by the introduction of the General Anti-Abuse Rule which aims to counteract advantages which would otherwise by gained from ‘abusive’ tax arrangements.1 Other core documents of the new approach to tax avoidance are the HMRC Guidance on Disclosure of Tax Avoidance Schemes (DOTAS), and the updated version of the Guidance on Professional Conduct in Relation to Taxation published jointly by the ICAEW, AAT, ACCA, ATT, CIOT, ICAS and STEP. 1 Finance Act 2013, ss 206–215.

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Accounting, non-statutory auditing and reporting 9.95 9.92 In relation to tax compliance retainers, specific issues can arise where the question is how a taxpayer’s affairs should be disclosed to the authorities. In such cases, reference may be made to the dictum of HHJ Keyser QC in Altus Group v Baker Tilly:1 ‘… evidence was given … concerning the duties of an accountant or tax specialist who is engaged to prepare tax returns. The gist of that evidence is that such a professional would be expected to adopt any filing position that was properly arguable and was in the client’s best interests, while at the same time making full disclosure of any matter that would be necessary for HMRC to understand and appraise the filing position. That seems to me to be a fair summary of the duties of such a professional for present purposes.’ 1 [2015] STC 788 at [64].

9.93 Broadly consistently with the above dictum, the profession’s guidance on the subject provides:1 ‘A member must act in good faith in dealings with HMRC in accordance with the fundamental principle of integrity. In particular the member must take reasonable care and exercise appropriate professional scepticism when making statements or asserting facts on behalf of a client. Where acting as a tax agent, a member is not required to audit the figures in the books and records provided or verify information provided by a client or by a third party. A member should take care not to be associated with the presentation of facts he knows or believes to be incorrect or misleading nor to assert tax positions in a tax return which he considers have no sustainable basis.’ 1 ‘Professional Conduct in Relation to Taxation’, joint guidance published on 1 May 2015 by several UK institutes, para 3.6.

9.94 However, the question of disclosure is more open to doubt than was allowed in Altus Group. The guidance states:1 ‘When advocating fuller disclosure than is strictly necessary a member should ensure that his client is adequately aware of the issues involved and their potential implications. Fuller disclosure should not be made unless the client consents to the level of disclosure.’ 1 ‘Professional Conduct in Relation to Taxation’, para 3.14.

9.95 In compliance work, issues of loss are generally relatively straightforward. An example is the New South Wales case of Pech v Tilgals,1 in which the accountant was liable for the penalties, interest and extra tax payable by his client after he negligently missed an item off the client’s tax return, subject to a deduction of 20 per cent for contributory negligence and to a set 243

9.96 Non-audit liability of accountants off for the interest value gained by the claimants by the delay in paying the tax due. 1 (1994) 28 ATR 197.

9.96 It was argued in Moon v Franklin that an accountant’s liability for damages to compensate his client for interest payable to the tax authorities could be extinguished or reduced by reference to the benefit which the claimant had received from use of the money in the meantime.1 The Court of Appeal held that this argument was ‘potentially sound’, but would require proof that the claimant had in fact derived measurable benefit from the use of the money. On the other side of the coin, in Hungerfords v Walker, the High Court of Australia held that compound interest at a rate actually incurred could be awarded as damages for negligence which led to overpayment of tax.2 1 19 December 1991, Lexis. 2 (1989) 171 CLR 125. This decision was held to represent the common law of England by the Court of Appeal in Parabola Investments v Browallia Cal [2011] QB 477.

9.97 Another case concerning compliance work was United Project Consultants v Leong Kwok Onn,1 where the Singapore Court of Appeal held that a firm which acted as tax agents to a company (and also as the company’s auditor and tax agent to the individual directors) had a duty to warn the company of any inaccuracy in its tax returns if it became aware of facts showing such inaccuracy. A defence of ex turpi was run in this case, which is discussed below at para 11.40. 1 [2005] 4 SLR 214.

9.98 Taxation advice is such a core area of work that in a suitable case where an existing client seeks advice on a proposed transaction, an accountant may have a duty of care to advise on obvious tax risks unprompted.1 This principle was applied where the accountant was acting as tax agent, submitting the client’s tax return in Altus Group v Baker Tilly.2 In Altus Group it was held that the accountant ought to have been aware of a proposal for legislative change, which reflected the Revenue’s view of the existing law and which had a potential impact on the risks associated with the tax return they were filing and also on future tax returns. This part of the decision in Altus Group was marginal at best. The finding that any reasonably competent accountant would have known of a draft provision in a bill to simplify (but not substantively change) tax law is surprising. The holding that it required disclosing mainly because it was potentially relevant to future returns3 is also questionable, as that was a matter that could await instruction on such a future return.4 1 This was the finding in Carmody v Priestly & Morris Perth [2005] WASC 120. 2 [2015] STC 788. At [69], the judge cited from the solicitor’s case, Credit Lyonnais v Russell Jones & Walker [2003] Lloyd’s PN 7, the principle that if a professional actually becomes aware of a risk to his client, it is his duty to warn him of the same.

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Accounting, non-statutory auditing and reporting 9.101 3 See at [81], where this seems to be the primary basis for this part of the decision. These criticisms of Altus in the first edition of this work were noted by Green J in the financial adviser’s case of Denning v Greenhalgh Financial Services [2017] PNLR 19 at [56], where he applied the general principle that ‘for an extended duty and liability to arise there has to be a close factual and legal nexus between the retainer and the matter that it is alleged the adviser omitted to provide advice upon.’ 4 However, the claim foundered on causation (see at [94]) so the questionable findings on negligence were ultimately irrelevant.

9.99 Another, related, aspect of the decision in Altus Group is that the judge held that while it was not necessary to do so, he would if necessary hold the defendants to a higher standard of care because they were ‘a large firm of tax and accountancy specialists’ who ‘put themselves forward as providing a toplevel specialist service’.1 HHJ Kayser QC said this in relation to the finding of negligence by failing to identify a relevant section in a bill that had not yet been passed:2 ‘The defendants are and hold themselves out as being a top-end and very large firm of specialist advisers. It is that standing that brings clients to them and those with whom they are in competition. They are reasonably to be judged by the standards appropriate to that standing. The defendants are reasonably to be expected to have much greater technical resources than an ‘ordinary’ firm of accountants and as a result to be aware of relevant impending changes to tax legislation.’ 1 Altus Group v Baker Tilly [2015] STC 788 at [82]. 2 Ibid at [82].

9.100 The right principle is that a defendant who professes a particular specialism is to be judged by the standards of such specialists. That of course includes taxation advice. What is not correct is to suggest that a firm that holds itself out as being ‘very large’ or ‘top-end’ thereby incurs a higher standard of care. If that were right, then every advertising puff by which a firm sought to market its services would be admissible as evidence of the standard of care. Expert evidence of the standard would be almost impossible to give because it would depend on the court’s view of the level of ability which the firm claimed to have relative to its competitors. A firm which professes to do certain work, including complex tax advice, must do it competently by the standards of that specialism, but it has no obligation to do it better than another specialist firm. 9.101 Whether an obligation to advise on tax risks or opportunities arises from a compliance retainer will depend on the facts as courts are generally vigilant to avoid imposing a ‘general retainer’ on a professional.1 In particular, a typical accountant’s retainer to act as a tax agent does not carry with it an obligation to give tax planning advice unless specifically requested. In Mehjoo v Harben Barker, the Court of Appeal reversed the finding of the trial judge that such a retainer had been varied by the accountant having volunteered tax

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9.102 Non-audit liability of accountants advice on several occasions: even then specific planning advice remained outside the scope of the retainer. Patten LJ (with whom Sharpe and Lewison LJJ agreed) formulated the distinction between the duty to advise on routine tax risks and the lack of a duty to give more specialist advice on opportunities to save tax thus:2 ‘It is clear from this evidence and the various occasions when Mr Purnell did proffer unprompted advice to Mr Mehjoo about the tax consequences of particular financial and other transactions that Mr Purnell did consider that he owed a duty to his client to avoid unnecessary (and perhaps unforeseen) adverse tax consequences when it was possible to do so. None of this is surprising or particularly controversial. An accountant who is retained by a client to deal with his personal financial affairs will inevitably have to point out what might be the hidden tax consequences of any particular proposal. This may well arise in the context of carrying out general accounting services such as preparing tax returns or more general discussions about the client’s business plans. Similarly, in handling the client’s tax affairs the client can expect his accountant to advise on any available tax reliefs under the relevant fiscal charge which may be available to him to reduce his tax liabilities. But routine tax advice of this kind, though an important part of an accountant’s ordinary duties, is not what this case is about. And Mr Stewart is, I think, right in his submission that much of the difficulty with the judge’s analysis of the scope of HB’s retainer and duty of care stems from a failure to differentiate between the tax advice of the kind which Mr Purnell gave to Mr Mehjoo on the occasions referred to by the judge and the much more sophisticated form of tax planning exemplified by the BWS3 which often involves a re-formulation of the transaction in order to bring about particular tax consequences rather than a mitigation of the tax liability which the transaction will otherwise produce.’ 1 This sentence in the first edition was cited with approval by Green J in in Denning v Greenhalgh Financial Services Ltd [2017] EWHC 143 (QB) at [55]. The locus classicus of this principle is the judgment of Oliver J in the solicitor’s case of Midland Bank Trust Co v Hett Stubbs & Kemp [1979] Ch 384 at 402. These cases were cited and applied to deny a duty to give tax planning advice under a compliance retainer in the Scottish case of McMahon v Grant Thornton UK LLP [2020] CSOH 50. 2 [2014] PNLR 586 at [39]–[40]. The Court of Appeal also rejected a claim that the accountant had a duty to advise the claimant to seek specialist advice: [62]–[66]. 3 Bearer Warrant Scheme.

9.102 Taxation advice claims can be especially complex owing to the interaction of commercial considerations as to the underlying transactions,

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Accounting, non-statutory auditing and reporting 9.103 the sometimes lengthy development of the transactions, the uncertainties of tax law, the wide variety of possible options in some cases and the difficulty of giving comprehensive advice as to risks of challenge. These complexities emerge in relation to both breach of duty and causation. Claimants in this field need to take particular care to identify early in a claim precisely what would have been the advice that a competent practitioner would have given and also what they would have done as a result.1 1 In determining what the claimant would have done, a court will often place considerable weight upon what the claimant actually did when the error was corrected if such evidence is available: Midland Packaging v HW Accountants [2011] PNLR 1 at [43], [54].

9.103 A good illustration of difficulty of the issues that can arise in this field is given by Grimm v Newman. The claimant sought and received advice on whether a particular course of action relating to the remittance of certain monies to the jurisdiction would give rise to tax liability. The advice was positive but challenged by the Revenue. The claimant then received negative advice from counsel and settled the Revenue’s claim by agreeing to make a significant payment. He sued the accountant who had given positive advice, contending that the advice was wrong. At trial, Etherton J noted that the way the case was argued appeared to be an invitation to him to determine whether the advice was right or wrong as a matter of law, which he preferred not to do in the absence of the Revenue itself.1 The judge held that he had no need to do so because it was sufficient for him to find that a reasonably careful tax adviser would have recognised that the proposed scheme: ‘ … ran a high risk of being challenged by the Revenue and stood a significant prospect of giving rise to a charge to tax on a constructive remittance by the taxpayer.’ As to what would have happened if fuller advice had been given as to the risk, the judge said that the claimant’s pleadings and evidence failed to ‘provide a clear statement as to precisely what alternative arrangements could and would have taken place’ without giving rise to a charge to tax.2 However: ‘At the very end of his submissions in reply, at the very end of the trial, [counsel for the claimant] sought to deal with this problem by saying that the taxpayer could have [executed a particular alternative transaction]. [Counsel for the defendant], not surprisingly, protested at the way this vital part of the case had developed. He submitted that this was all inadmissible evidence, which had not been pleaded, nor been articulated in the taxpayer’s witness statement[s], and was not the subject of oral evidence by the taxpayer ….’3 Nevertheless, Etherton J held that the claimant should be entitled to rely on this alternative transaction which would have saved the tax and would have 247

9.104 Non-audit liability of accountants been undertaken. On that basis, he awarded damages in the amount of the tax paid. 1 [2002] STC 84 at [60]. 2 Ibid at [88]. 3 Ibid at [92].

9.104 In the Court of Appeal, the majority (Sir Andrew Morritt V-C and Potter LJ) held that the claimant’s only pleaded case was that the original advice was wrong in law. Their view was that it had not been sufficiently alleged that the defendant should have advised that even if his advice was correct, there was a serious risk of challenge which would be costly to resist.1 Accordingly, it followed that in order to determine the issue of negligence, it was necessary to determine whether the advice was in point of law correct.2 The majority held that the advice was in fact correct and the tax had never been due. It followed that no breach of duty was established.3 Moreover, the majority also made clear that it was for the claimant to plead and prove that the advice he should have received should have been to pursue the alternative scheme that was ultimately relied upon.4 They allowed the appeal on this basis too.5 Finally, for good measure the majority held that the alternative scheme would not have succeeded as a matter of tax law, so if there had been a further application to amend and for a new trial, this would have been refused.6 Carnwath LJ differed from the majority on the question whether the pleadings included an allegation that the defendant should have advised as to the risk of challenge: he held that they did (and this justified the judge in refusing to determine the point of tax law as to whether the advice was correct) and that negligence had been correctly established on the basis of a lack of proper advice as to risk. However, Carnwath LJ agreed with the majority that the appeal should be allowed on both grounds relating to the alternative scheme: it should not have been allowed to be relied upon and it would not have succeeded in any event; it followed that the negligence which he would have found did not cause any loss. 1 [2003] 1 All ER 67 at [20]. 2 Ibid at [45]. 3 Ibid at [65]. 4 Ibid at [71]–[72]. 5 Ibid at [74]. 6 Ibid at [78].

9.105 As Grimm v Newman illustrates, issues in tax law are rarely clear cut and there may be several possible alternative courses of action thrown up by expert evidence. Where such complexities do arise, an adviser’s duty may be to explain risk factors or available options rather than to advise that a particular course should be taken.1 Claimants will often find it easier to establish that advice did not properly cover all relevant risks than that it was wrong in law.

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Accounting, non-statutory auditing and reporting 9.107 However, the causal chain from negligence of that nature to loss must be given equal care and attention if a claim is to succeed.2 1 Dhillon v Siddiqui [2008] EWHC 2020 (Ch) at [105]–[108]; Midland Packaging v HW Accountants [2011] PNLR 1 at [36]. 2 See for example BE Studios v Smith & Williamson [2006] STC 358 where negligence was admitted, but the claim for loss emphatically failed. Similarly, in Altus Group v Baker Tilly [2015] STC 788, the claimant succeed on all other points, but failed to establish the causal chain upon which it relied. Chandrasekaran v Deloitte & Touche [2004] EWHC 1378 (Ch) is another tax negligence claim that foundered on causation.

9.106 How far a competent adviser is required to go in terms of knowledge of risks or options will depend on the expert evidence in a given case and the court’s view of whether the risk of challenge was ‘significant’. For example, in Lowes v Clarke Whitehill,1 it transpired at trial that there was an undocumented practice of the Inland Revenue which might have made a certain course of action more attractive for the claimant. The Court of Appeal reversed the trial judge’s finding of negligence in part on the basis that it was never pleaded or proved that any reasonably competent chartered accountant would know of this practice. 1 CA 21 November 1997, Lexis.

9.107 The principles in this area were stated by Asplin LJ in the solicitors’ tax advice case of Barker v Baxendale-Walker,1 in terms which are equally applicable to accountants giving tax advice and consistently with the above discussion. She summarised them as follows: ‘It seems to me that the following principles are likely to apply: (i)

The question of whether a solicitor is in breach of a duty to explain the risk that a court may come to a different interpretation from that which he advises is correct is highly fact-sensitive [citation omitted];

(ii) If the construction of the provision is clear, it is very likely that whatever the circumstances, the threshold of significant risk will not be met and it will not be necessary to caveat the advice given and explain the risks involved; (iii) However, depending on the circumstances, it is perfectly possible to be correct about the construction of a provision or, at least, not negligent in that regard, but nevertheless to be under a duty to point out the risks involved and to have been negligent in not having done so [citation omitted]; (iv) It is more likely that there will be a duty to point out the risks, or to put the matter another way, that a reasonably competent

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9.108 Non-audit liability of accountants solicitor would not fail to point them out when advising, if litigation is already on foot or the point has already been taken, although this need not necessarily be the case [citation omitted]; and (v)

The issue is not one of percentages or whether opposing possible constructions are “finely balanced” but is more nuanced.’

1 [2017] EWCA Civ 2056, [2018] 1 WLR 1905 at [61].

9.108 On difficult questions of tax advice it is not unusual for counsel to be consulted. Where that happens, it is submitted that a specialist accounting firm cannot be in a worse position than a solicitors’ firm with a specialist taxation department, namely that they are entitled to rely on counsel’s advice, but they are required to speak out if there is an important point upon which they regard counsel’s advice as being seriously wrong.1 1 See on this the solicitor’s tax case of Matrix-Securities v Theodore Goddard [1998] STC 1 at 27.

9.109 A case in which the required tax advice was clear was Slattery v Moore Stephens,1 where the accountants were liable for failing to advise the highly paid claimant (domiciled overseas) to take a simple step to ensure his salary as an investment banker was paid into an offshore bank account. The main interest of the case is the finding of contributory negligence, which arose as follows. The accountants prepared the claimant’s tax return on the basis that he was paid offshore, resulting in a substantial tax refund. The claimant knew this was surprising, but did not query it and had no convincing explanation for failing to do so. If he had, then the accountants would have realised the true position and the loss for the second year could have been avoided. The judge assessed contributory negligence in respect of that second year at 50 per cent. 1 [2003] STC 1379.

9.110 Reflective loss and related duty of care issues sometimes arise in tax cases, especially where the tax advice concerns corporate and group structures. Thus, in Dhillon v Siddiqui,1 a reflective loss argument was rejected where the advice was given only to the claimant shareholder and not to the company. In Pegasus v Ernst & Young,2 a claim by a company was struck out on the basis that the relevant advice was given only to its founder at a time when the company did not yet exist. 1 [2008] EWHC 2020 (Ch). 2 [2010] 3 All ER 297, [2010] PNLR 23. But cf Cramaso LLP v Ogilvie-Grant [2014] AC 1093 in which the House of Lords held that a claimant which did not exist at the time when a representation had first been made could nonetheless sue upon it where it was a continuing representation foreseeably relied upon by the claimant in deciding to enter into a contract.

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Accounting, non-statutory auditing and reporting 9.113 9.111 In tax advice claims, the core claim for loss is often the additional tax for which the claimant became liable as a result of the negligent advice. In more complex tax advice claims, the question may arise as to what would have been the outcome of the alternative approach which the claimant says it would have taken on proper advice. In principle, the approach to such questions is the ‘loss of chance’ approach definitively explained in Allied Maples Group v Simmons & Simmons.1 This requires that the claimant establishes on the balance of probabilities what its own actions would have been if given competent advice (in this context, whether the claimant would have proceeded with the recommended scheme or other action to mitigate tax) and the court then assesses the chance that such action would have produced savings and if so how much they would have been. Damages are awarded for the loss of that chance. It was argued in Altus Group v Baker Tilly that where the effectiveness of a course of action that would have been taken turns on tax law, the court should determine that issue of law. However, HHJ Keyser QC rejected that argument, holding that the outcome of a dispute should be assessed as a chance, even where ultimately – if litigated – it could have been decided as a point of law.2 While there are considerations going the other way, it is submitted that this decision was correct because of the clear analogy with claims for loss of a chance by reason of litigation lost through solicitors’ negligence. In all such cases, the evaluation of issues of law forms part of the overall assessment of the value of the chance lost. 1 [1995] 1 WLR 1602 at 1609–1611. 2 [2015] STC 788 at [58]–[66]. This approach was common ground between the parties, and approved by Roth J in Barker v Baxendale-Walker [2016] EWHC 664 (Ch) (reversed on other grounds at [2018] 1 WLR 1905).

9.112 Lowes v Clarke Whitehill provides clear Court of Appeal authority for the principle that even a negligent accountant is entitled to their fees unless ‘it was proved that the defendants breach of duty was so fundamental and their advice so ineffective that it amounted to a total failure of consideration.’1 1 CA 21 November 1997, Lexis.

Expert witness and forensic work 9.113 Accountants frequently act as forensic accountants and also as expert witnesses in accountancy issues. We discuss expert evidence in accountancy cases below in Chapter 18, including the abolition of their immunity from suit by the majority decision of the Supreme Court in Jones v Kaney.1 Apart from issues of conflicts of interest, which are discussed in Chapter 10 below, this kind of work has not given rise to much by way of reported disputes. 1 [2011] 2 AC 398.

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9.114 Non-audit liability of accountants

Investment advice 9.114 Investment advice has become a specialist profession with its own regulation and qualifications. Nonetheless, accountants have often given investment advice that has found its way into the law reports. A large number of these cases have concerned allegations of conflict between the accountant’s duty as adviser to his client and his personal interest in the investment recommended by him. These cases are discussed in Chapter 10 below. 9.115 A case of plain negligence in relation to investment advice was Fawkes-Underwood v Hamiltons, in which an accountant undertook to advise the claimant on which Lloyd’s syndicates he should participate in as a ‘name’ and was found liable for having done so without due care and skill.1 1 24 March 1997, James Goudie QC, Lexis.

9.116 In Goldberg v Miltiadous, an accountant gave fraudulent investment advice and was liable in deceit as well as negligence.1 Tugendhat J held that giving investment advice was in the course of the ordinary business of the accountancy firm within the meaning of Partnership Act 1890, s 10, so that the innocent partners of the firm were jointly liable. 1 [2010] EWHC 450 (QB).

Insolvency liabilities 9.117 Accountants frequently act as insolvency advisers or insolvency office holder. These roles often lead to issues relating to conflicts of interest, which are considered in Chapter 10 below. They can also lead to other forms of potential liability, which are considered in this section. For a concise summary of the status of a liquidator with references to authority, see In re Stanford International Bank.1 1 [2011] Ch 33, Annex to judgment of Arden LJ, para (4).

9.118 Insolvency office holders are subject to detailed statutory and extrastatutory rules as to their duties. In the event of the default in those duties, liquidators and administrative receivers (like officers of the company, including auditors) are subject to a misfeasance action under Insolvency Act 1986, s 212 for the benefit of the company. The section provides that the court may examine the conduct of such a person on the application of the official receiver or the liquidator or any creditor or contributory. Since s 212 does not create a new remedy, this implies (unsurprisingly) that such office holders owe a duty to the company to carry out their statutory duties properly.

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Accounting, non-statutory auditing and reporting 9.121 9.119 What is much more controversial is under what conditions individual creditors may sue an office holder for breach of statutory duty in carrying out their role. Sometimes, the answer to such a claim may lie in the principle against reflective loss: if the primary loss was suffered by the company, then the company is the proper claimant to recover it. However, if an individual creditor or group of creditors is aggrieved then in some cases, the result will be that the company as a whole has no loss to claim because it is better off by the sums not paid to the aggrieved creditor(s). 9.120 In Pulsford v Devenish,1 Farwell J held that a voluntary liquidator of a solvent company which transferred its business to another company was personally liable to creditors for his failure to ensure that they were paid which amounted to a breach of statutory duty. The result in Pulsford was confirmed and applied by the Court of Appeal in James Smith & Sons (Norwood) Limited v Goodman.2 In A&J Fabrications (Batley) Limited v Grant Thornton,3 Jacob J refused to strike out a claim by the principal creditor of a company. The creditor wanted the conduct of the directors of the company to be investigated and it made an agreement with an accountancy firm that if a partner in the firm was appointed as liquidator, then the firm would investigate the affairs of the company and would advise the claimant on potential claims. The creditor duly procured the appointment of the firm’s partner as liquidator and was unhappy with the services provided. Jacob J held that the claim in contract was arguable and also that a claim in tort was available against the firm as well as the individual liquidator. In relation to the claim in tort, Jacob J relied on Pulsford and James Smith. 1 [1903] 2 Ch 625. 2 [1936] 1 Ch 216. 3 [2000] Lloyd’s Rep PN 565.

9.121 The tide turned back towards the office holders with the Court of Appeal’s decision in Kyrris v Oldham. The Court of Appeal (Jonathan Parker LJ, with whom Dyson and Thorpe LJJ agreed) held that ‘absent some special relationship, an administrator appointed under the 1986 Act owes no general common law duty of care to unsecured creditors in relation to his conduct of the administration’.1 As to the earlier cases, Jonathan Parker LJ held that in both Pulsford and James Smith, the critical factor was that the company had been dissolved before the claim was brought. As to A&J Fabrications, the contractual claim was a separate matter, but if that decision left open the question whether a liquidator owed a general tortious duty of care to creditors, that question had now been decided in the negative by the decision of the Court of Appeal in Peskin v Anderson,2 which decided that directors did not in general owe fiduciary duties to shareholders. 1 [2004] 1 BCLC 305 at [141]. 2 [2001] 1 BCLC 372.

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9.122 Non-audit liability of accountants 9.122 A different explanation than that found in Kyrris itself for the distinction between Pulsford and James Smith on the one hand and Kyrris on the other was given by David Richards J in Re HIH Casualty and General.1 David Richards J said at [118]: ‘It is important to distinguish between the claims made in cases such as Pulsford v Devenish and those made in Kyrris v Oldham. The former were personal claims for breach of statutory duty and the latter were class claims available to all the unsecured creditors.’ and at [120]: ‘claims in cases such as Pulsford v Devenish are personal to the creditor and relate to a breach of statutory duty as regards that particular creditor. The appropriate procedure for seeking redress may depend on whether the company has been dissolved, but the nature of the right as a personal right of the individual creditor to have his own claim treated in accordance with the statutory scheme remains the same’ 1 [2006] 2 All ER 671 at [115]–[126]. The decision itself was affirmed by the Court of Appeal, but reversed by the House of Lords, but without further discussion of this point.

9.123 Kyrris has been followed and applied several times. Most notably, Kyrris was applied by the Privy Council in Hague v Nam Tai Electronics.1 In Hague v Nam Tai, Lord Scott giving the advice of the Board did not refer to Pulsford or James Smith, or to Re HIH, but appeared to favour the explanation given by David Richards J in Re HIH, stating:2 ‘It is well arguable that the duties owed by a liquidator in an insolvent liquidation are owed also to the creditors as a class. Nam Tai may be the most substantial creditor of TAI by some distance but is nonetheless only one member of the class. A culpable failure by a liquidator to collect in or preserve or take control of the assets of a company in liquidation may diminish the value of the fund available for distribution pro rata among the creditors but is not, in their Lordships’ opinion, a breach of a duty owed to each creditor as an individual.’ 1 The Privy Council also approved the decision of Gordon J in Grand Gain Investment v Borrelli [2006] HKCU 872. 2 [2008] PNLR 27 at [13].

9.124 Liquidators and administrators are generally treated for contractual purposes as agents of the company in which they hold such office.1 For this

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Accounting, non-statutory auditing and reporting 9.126 reason, they will not generally be liable as a party to contracts which they make for the company.2 For example, in Stewart v Engel,3 a liquidator was granted summary judgment on the basis that he was not personally liable on a contract and owed no duty of care arising out of it. The reasoning in that case illustrates a few further points. First, the non-liability of the office holder under a contract is not a universal rule of law and could be circumvented if the contract so provides. Secondly, in a contractual case, an argument for potential personal liability in tort on the principle of Williams v Natural Life4 is likely to be decided in the same way as the contractual issue. Thirdly, liquidators are well advised to include express provision in the contract making clear that they undertake no personal responsibility, which proved an effective prophylactic in Stewart v Engel. 1 The position of administrative receivers is more complex: see Insolvency Act 1986, s 44. 2 In re Anglo-Moravian Hungarian Junction Railway Co (1875-1876) LR 1 ChD 130; Stead Hazel v Cooper [1933] 1 KB 840; Gregory v Wallace [1998] IRLR 387 at [6]. A further consequence is that such office holders are not data controllers under the Data Protection Act: Oakley Smith v Information Commissioner [2014] Ch 426. 3 [2000] Lloyd’s Rep PN 234, [2000] 2 BCLC 528. 4 [1998] 1 WLR 830.

9.125 The contractual position of agency does not have any protective effect for office holders who commit torts while acting in that capacity.1 Like company directors, office holders may incur personal liability for their torts even if the company is also vicariously liable on the basis that they were committed in the course of the individual defendant’s office or employment. As noted above, where the tort concerned (such a negligent misstatement) requires a duty of care to be established, the approach of Williams v Natural Life applies and an office holder who has conducted himself with appropriate caution ought not to have assumed personal responsibility. However, an officer holder may still be liable for other torts. Indeed, in the sequel to Stewart v Engel, the claimant sought to plead a claim in conversion, but was too late.2 1 Save where the tort itself cannot generally be committed by an agent under the rule in Said v Butt [1920] 3 KB 497, applied to administrators in Lictor Anstalt v MIR Steel UK [2012] 1 All ER (Comm) 592, aff’d but without this point being determined on appeal at [2013] 2 BCLC 76 (see at [42]). 2 [2000] 1 WLR 2268. However, a statutory defence is available to office holders who seize the tangible property of third parties without personal negligence: Insolvency Act 1986, s 234(3).

9.126 Accountants may also act as receivers or administrative receivers appointed by a creditor as to which there is much specialist law. In general a receiver owes a duty of care to all persons interested in the property which he controls: Medforth v Blake.1 1 [2000] Ch 86.

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9.127 Non-audit liability of accountants 9.127 An accountant acting as a personal insolvency adviser was liable for general damages of £6,000 when he negligently failed to advise his client that his bankruptcy could be annulled if he entered into an insolvency voluntary arrangement.1 1 De Marco v Bulley Davey [2006] PNLR 27.

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Chapter 10

Conflicts of interest and confidential information

INTRODUCTION The general law of conflicts of interest and confidential information as it applies to accountants 10.01 The general law of England includes protection for confidential information. This protection applies as against, and for the benefit of, all persons, including accountants. In short, where a defendant receives information in circumstances which require him to recognise its confidentiality to the claimant, the claimant has a cause of action to protect such confidentiality. Thus, if a breach of confidence is threatened, then a quia timet injunction may issue to restrain such breach; if a breach has occurred, then damages or equitable compensation may be awarded.1 1 See generally Toulson & Phipps on Confidentiality, 4th edn, (Sweet & Maxwell, 2020).

10.02 Stronger rules relating to confidential information and a prohibition of conflicts of interest apply to fiduciaries, but only to fiduciaries. The starting point for any analysis of conflicts of interest is to consider whether the accountant is a fiduciary. As we noted at para 1.20 above, a fiduciary relationship arises when one person – the fiduciary – is required in equity to act in the interests of another person – the principal. In the words of Millett LJ in Bristol & West Building Society v Mothew:1 ‘A fiduciary is someone who has undertaken to act for or on behalf of another in a particular matter in circumstances which give rise to a relationship of trust and confidence.’ 1 [1998] Ch 1, 18.

10.03 There is room for debate as to whether an auditor is generally a fiduciary, which we consider in detail at paras 4.27–4.46 above. Where not acting as auditor, the accountant will be giving professional advice of one sort or another. In many cases, where relevant, it has been assumed that an 257

10.04 Conflicts of interest and confidential information accountant acting as such is a fiduciary in the same way as other professional advisers, like lawyers. Most notably in the present context, the accountants in Prince Jefri Bolkiah v KPMG conceded in the House of Lords that ‘an accountant who provides litigation support services of the kind which they provided to Prince Jefri must be treated for present purposes in the same way as a solicitor’.1 However, it should not be assumed that any accountant acting as such is without more a fiduciary of his client. As we have seen,2 in Pilmer v Duke the High Court of Australia divided on whether a reporting accountant under certain rules was a fiduciary, with the majority holding that the accountant was merely providing information rather than advice and was therefore not a fiduciary. The Supreme Court of Canada divided 4:3 in Hodgkinson v Simms on the question whether an accountant who gave investment advice was a fiduciary.3 It is also important to bear in mind that a professional may owe fiduciary obligations in respect of some activities without necessarily owing them in respect of others.4 1 [1999] 2 AC 222 at 234D. 2 Above at para 9.44. 3 [1994] 3 SCR 377, discussed further below at para 10.25. 4 See: Pavan & Gowshan v Ratnam [1996] NSWSC 571 (below at para 10.32); Townsend v Roussety & Co [2007] WASCA 40; Sliteris v Ljubic [2014] NSWSC 1632; Meara v Fox [2002] PNLR 5 (below at para 10.33).

10.04 If an accountant is a fiduciary, then he will be subject to the stronger protection of a client’s confidential information that was required by the House of Lords in Prince Jefri Bolkiah v KPMG. Generally, at this stage, the client has become a former client. The stronger protection is that the former client is entitled to restrain any action of the accountant (such as acting for a new client) that creates any real risk of misuse of his confidential information. This type of protection of a former client’s information may be called a ‘former client conflict’. A possible former client conflict may be precipitated for an accountant by a desire to take on a new client with conflicting interests to a former client (as in Prince Jefri), or by a merger of accountancy firms. These cases and scenarios are discussed in more detail below. 10.05 Turning to conflicts of interest proper,1 it is convenient to set out the classic statement of fiduciary duties from the judgment of Millett LJ in Bristol & West Building Society v Mothew, the first part of which we quoted in Chapter 4:2 ‘The distinguishing obligation of a fiduciary is the obligation of loyalty. The principal is entitled to the single-minded loyalty of his fiduciary. This core liability has several facets. A fiduciary must act in good faith; he must not make a profit out of his trust; he must not place himself in a position where his duty and his interest may conflict; he may not act for his own benefit or the benefit of a third person without the informed consent of his principal. This is not intended to be an 258

Introduction 10.05 exhaustive list, but it is sufficient to indicate the nature of fiduciary obligations. They are the defining characteristics of the fiduciary. As Dr Finn pointed out in his classic work Fiduciary Obligations (1977), p 2, he is not subject to fiduciary obligations because he is a fiduciary; it is because he is subject to them that he is a fiduciary. (In this survey I have left out of account the situation where the fiduciary deals with his principal. In such a case he must prove affirmatively that the transaction is fair and that in the course of the negotiations he made full disclosure of all facts material to the transaction. Even inadvertent failure to disclose will entitle the principal to rescind the transaction. The rule is the same whether the fiduciary is acting on his own behalf or on behalf of another. …) A fiduciary who acts for two principals with potentially conflicting interests without the informed consent of both is in breach of the obligation of undivided loyalty; he puts himself in a position where his duty to one principal may conflict with his duty to the other: see Clark Boyce v Mouat [1994] 1 AC 428 and the cases there cited. This is sometimes described as “the double employment rule.” Breach of the rule automatically constitutes a breach of fiduciary duty. Even if a fiduciary is properly acting for two principals with potentially conflicting interests he must act in good faith in the interests of each and must not act with the intention of furthering the interests of one principal to the prejudice of those of the other: see Finn, p 48. I shall call this “the duty of good faith.” But it goes further than this. He must not allow the performance of his obligations to one principal to be influenced by his relationship with the other. He must serve each as faithfully and loyally as if he were his only principal. Conduct which is in breach of this duty need not be dishonest but it must be intentional. An unconscious omission which happens to benefit one principal at the expense of the other does not constitute a breach of fiduciary duty, though it may constitute a breach of the duty of skill and care. This is because the principle which is in play is that the fiduciary must not be inhibited by the existence of his other employment from serving the interests of his principal as faithfully and effectively as if he were the only employer. I shall call this “the no inhibition principle.” Unless the fiduciary is inhibited or believes (whether rightly or wrongly) that he is inhibited in the performance of his duties to one principal by reason of his employment by the other his failure to act is not attributable to the double employment. Finally, the fiduciary must take care not to find himself in a position where there is an actual conflict of duty so that he cannot fulfil his obligations to one principal without failing in his obligations to the other: see Moody v Cox and Hatt [1917] 2 Ch 71; Commonwealth 259

10.06 Conflicts of interest and confidential information Bank of Australia v Smith (1991) 102 ALR 453. If he does, he may have no alternative but to cease to act for at least one and preferably both. The fact that he cannot fulfil his obligations to one principal without being in breach of his obligations to the other will not absolve him from liability. I shall call this “the actual conflict rule.”’ 1 For detailed consideration of conflicts of interest generally, see Hollander and Salzedo, Conflicts of Interest, 6th edn, (Sweet & Maxwell, 2020). 2 [1998] Ch 1 at 18.

10.06 It is important to notice here that conflicts of interest are actionable without proof of damage because the nature of fiduciary obligations is to be prophylactic through proscription.1 An accountant must not place himself in the prohibited position and, if he does so, the client may obtain suitable relief.2 As Millett LJ pointed out in the above passage, a fiduciary who puts himself in a position where his duty to one principal may conflict with his duty to another automatically breaches the double employment rule and his fiduciary duty to both clients. Of course, the word ‘may’ is not to be read too widely here: a remote risk of conflict arising if the facts change later is not what this principle is concerned with. Instead it relates to the need to avoid acting in a situation of potential conflict where there is an apparent inherent risk (but no necessary requirement) of an actual conflict arising. 1 For the proscriptive nature of fiduciary duties, see above at 4.33. 2 It is only the person who is owed the relevant duty who can seek relief and not anybody else: Deloitte & Touche v Johnson [1999] 1 WLR 1605.

10.07 Among these principles, three stand out as the ones that are engaged in the majority of the cases concerning accountants. 10.08 First, self-dealing is a risk for accountants giving investment advice. There have been cases, which we discuss below, where an accountant has advised clients to invest in something in which the accountant himself has an interest. In these cases, the accountant must show that full disclosure of all relevant circumstances was given to the client, but the authorities demonstrate a very strict approach to that requirement. 10.09 Secondly, breaches of the double-employment rule have been alleged against accountants in various situations where they act for parties with dealings among themselves, especially where the accountant acts as valuer. The double employment rule has been invoked in the very different context of insolvency practice, where the potential conflict is often inherent in a single appointment. These situations all may morph into allegations of breach of the duty of good faith if an aggrieved party believes that the accountant’s conduct has actually been influenced by his duties to another client. 260

Introduction 10.14 10.10 Thirdly, an accountant may be alleged to be in a position of conflict between his duty to his client and his own interest. This allegation is most often made through media or political commentary in relation to perceptions of auditor independence and only rarely has found its way into decided cases. However, it is an increasingly important concern especially in relation to the audit of public interest entities, as referred to above at Chapter 2. It has also arisen in relation to corporate finance advisory work. 10.11 In the following sections of this chapter we will consider the main types of case where conflict issues have been litigated in relation to accountants: former client conflicts, investment advice, valuation engagements, corporate finance advice and insolvency work. Before turning to these, it is necessary to identify the approach to these matters taken in accountants’ professional standards.

Accountants’ professional standards relevant to conflicts of interest and confidential information 10.12 Standards of independence for audit engagements are now largely to be found in the FRC’s Revised Ethical Standard 2016, which is promulgated as part of the new regime of audit regulation under the Audit Directive 2014/56/EU and the Audit Regulation 537/2014, which are also reflected in SI 2016/649, Sch 1 (‘SATCAR’). The Ethical Standard is subtitled ‘Integrity, Objectivity and Independence’ and these are the guiding principles for the work of accountants under it, especially auditors. The scope of the document is not entirely restricted to audit work and includes also, for example, investment circular reporting engagements. 10.13 The International Federation of Accountants (IFAC) facilitates the International Standards Board of Accountants (IESBA) which publishes the Code of Ethics for Professional Accountants. The UK accountancy bodies are members of IFAC and, as such, are obliged to promulgate codes of ethics which are no less stringent than those in the IESBA code. The IESBA code establishes five fundamental principles for professional accountants: integrity, objectivity, professional competence and due care, confidentiality and professional behaviour. 10.14 In the Code of Ethics of the Institute of Chartered Accountants in England and Wales (ICAEW), conflicts of interest are dealt with at section 220. Following the IESBA Code of Ethics, the ICAEW code deals with conflicts in terms of ‘threats’ to ‘objectivity’ or ‘confidentiality’. The accountant is required to evaluate the significance of any such threats. At 220.2, it is suggested that: ‘[A] test is whether a reasonable and informed observer would perceive that the objectivity of professional accountants or their firms is likely to be

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10.15 Conflicts of interest and confidential information impaired.’ That may be ‘a test’, but it is not one that English law recognises as being apt to determine whether a professional is in breach of his fiduciary duty to avoid conflict of interest. Various suggestions are made for managing conflicts. Ultimately, sections 220.5 and 220.6 provide that an accountant must refuse to accept a new engagement, or resign from one, if a threat to any of the fundamental principles cannot be reduced to an acceptable level or if a client from whom consent is required to act for a conflicting interest has refused consent. These are perhaps useful rules of thumb, and of course they must be complied with to avoid disciplinary action. However, accountants will also be required to comply with the general law which is framed in rather different terms as set out above.1 1 Guidance at section 221.16 states: ‘Where there appears to be a conflict of interest between clients but after careful consideration the professional accountant in public practice believes that either the conflict is not material or is unlikely seriously to prejudice the interests of any of those clients and that its safeguards are sufficient, the professional accountant in public practice may accept or continue the engagement.’ This is misleading in that if it is followed, there is no guarantee that the accountant will not be in breach of fiduciary duty to one or both clients, since the law of equity does not recognise ‘unlikely seriously to prejudice the interests of’ the clients as a defence.

10.15 The IESBA Code and those following it emphasise that ‘[A] distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest’, from which it follows that ‘[T]herefore, a professional accountant’s responsibility is not exclusively to satisfy the needs of an individual client or employer.’1 In general, this is a very difficult principle to make sense of, because for nearly all purposes, it is in the wider public interest for an accountant to perform his retainer properly and in compliance with the other fundamental principles. An FRC Accountancy Scheme Appeal Tribunal has gone so far as to hold that ‘the requirements in the Guide as to the public interest cannot alone form the basis of any charge that an accountant has been guilty of misconduct.’2 Nevertheless, there is perhaps one area where the positive duty on accountants to consider the ‘public interest’ could make a difference, which is the disclosure of confidential information. In the general law, it is a defence to an action for breach of confidence to show that the disclosure was made in the public interest.3 However, the ICAEW Guidance on ‘Professional Conduct in relation to Defaults or Unlawful Acts’ states at 2.24: ‘A distinguishing mark of the accountancy profession is its acceptance of the responsibility to act in the public interest. Hence, a member should disclose confidential information, when not obliged to do so by law or regulation, if the disclosure can be justified in the “public interest” and is not contrary to laws or regulations.’4 Thus it seems that an accountant, perhaps uniquely, may have a disciplinary duty to breach his client’s confidentiality if that can be justified by the public 262

Former client conflicts 10.17 interest defence.5 An accountant should take legal advice if confronted with a situation in which this obligation could apply. 1 ICAEW Code of Ethics, section 100.1. 2 Deloitte & Touche v Executive Counsel to the FRC, 28 January 2015 at [85] (the MG Rover Appeal Tribunal). 3 Toulson & Phipps on Confidentiality, 4th edn (Sweet & Maxwell, 2020), Ch 6. 4 Emphasis added. This statement goes slightly further than the Code itself which, at section 140.7 states that an accountant may disclose in such circumstances. 5 The FRC Code of Ethics defines ‘Integrity’ as including ‘respecting confidentiality except where disclosure is in the public interest or is required to adhere to legal and professional responsibilities’.

FORMER CLIENT CONFLICTS Prince Jefri Bolkiah v KPMG 10.16 Former client ‘conflicts’ are not in strict terms conflicts of interest at all. Lord Millett set this out in Prince Jefri Bolkiah v KPMG thus:1 ‘Where the court’s intervention is sought by a former client, however, the position is entirely different. The court’s jurisdiction cannot be based on any conflict of interest, real or perceived, for there is none. The fiduciary relationship which subsists between solicitor and client comes to an end with the termination of the retainer. Thereafter the solicitor has no obligation to defend and advance the interests of his former client. The only duty to the former client which survives the termination of the client relationship is a continuing duty to preserve the confidentiality of information imparted during its subsistence.’ 1 [1999] 2 AC 222, 235C.

10.17 The following passages in Lord Millett’s speech set out the test for fiduciary professional to be restrained from acting for a new client: ‘Accordingly, it is incumbent on a plaintiff who seeks to restrain his former solicitor from acting in a matter for another client to establish (i) that the solicitor is in possession of information which is confidential to him and to the disclosure of which he has not consented and (ii) that the information is or may be relevant to the new matter in which the interest of the other client is or may be adverse to his own. … Whether founded on contract or equity, the duty to preserve confidentiality is unqualified. It is a duty to keep the information confidential, not merely to take all reasonable steps to do so. Moreover, it is not merely a duty not to communicate the information 263

10.18 Conflicts of interest and confidential information to a third party. It is a duty not to misuse it, that is to say, without the consent of the former client to make any use of it or to cause any use to be made of it by others otherwise than for his benefit. The former client cannot be protected completely from accidental or inadvertent disclosure. But he is entitled to prevent his former solicitor from exposing him to any avoidable risk; and this includes the increased risk of the use of the information to his prejudice arising from the acceptance of instructions to act for another client with an adverse interest in a matter to which the information is or may be relevant. It follows that in the case of a former client there is no basis for granting relief if there is no risk of the disclosure or misuse of confidential information. … In my view no solicitor should, without the consent of his former client, accept instructions unless, viewed objectively, his doing so will not increase the risk that information which is confidential to the former client may come into the possession of a party with an adverse interest.’ 10.18 Although Lord Millett couched his words in authorities and principles derived from solicitors’ cases, Prince Jefri itself concerned accountants, so there is no doubt that these words apply equally to accountants where they act as fiduciaries. 10.19 In the Prince Jefri case, KPMG acted for many years as auditor of the Brunei Investment Agency (BIA), whose chairman was Prince Jefri. For about 18 months, KPMG’s forensic accounting department provided litigation support services to Prince Jefri and one of his companies in connection with major litigation, known as ‘Project Lucy’. As a result of Project Lucy and other personal assignments for Prince Jefri, KPMG had obtained extensive confidential information about Prince Jefri’s affairs and, especially, his assets including the legal structure of their ownership. Shortly after Project Lucy concluded, KPMG accepted instructions from the BIA to investigate certain transfers of assets away from the BIA (‘Project Gemma’). Around the time of the formal instructions ‘it became clear that the assignment was at least in part adverse to Prince Jefri’s interests’. It was common ground that confidential information received by KPMG in the course of Project Lucy was relevant to Project Gemma and that in relation to Project Gemma the interest of BIA was adverse to that of Prince Jefri. KPMG recognised these facts and put in place information barriers to try to ensure that no confidential information derived from Project Lucy could leak to the Project Gemma team.1 1 This summary of the facts derives from Lord Millett’s speech at 228E–232C. The details of the information barriers are set out at 231E–232B.

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Former client conflicts 10.20 10.20 Having set out the law as quoted above and the facts, Lord Millett then turned to the question of the effectiveness of the arrangements made by KPMG to protect Prince Jefri’s information. What he said was specific to (large) accountancy firms so it merits setting out in full here: ‘KPMG insist that, like other large firms of accountants, they are accustomed to maintaining client confidentiality not just within the firm but also within a particular team. They stress that it is common for a large firm of accountants to provide a comprehensive range of professional services including audit, corporate finance advice, corporate tax advice and management consultancy to clients with competing commercial interests. Such firms are very experienced in the erection and operation of information barriers to protect the confidential information of each client, and staff are constantly instructed in the importance of respecting client confidentiality. This is, KPMG assert, part of the professional culture in which staff work and becomes second nature to them. Forensic projects are treated as exceptionally confidential and are usually given code names. In the present case KPMG engaged different people, different servers, and ensured that the work was done in a secure office in a different building. KPMG maintain that these arrangements satisfy the most stringent test, and that there is no risk that information obtained by KPMG in the course of Project Lucy has or will become available to anyone engaged on Project Gemma. I am not persuaded that this is so. Even in the financial services industry, good practice requires there to be established institutional arrangements designed to prevent the flow of information between separate departments. Where effective arrangements are in place, they produce a modern equivalent of the circumstances which prevailed in Rakusen’s case [1912] 1 Ch 831. The Chinese walls which feature in the present case, however, were established ad hoc and were erected within a single department.1 When the number of personnel involved is taken into account, together with the fact that the teams engaged on Project Lucy and Project Gemma each had a rotating membership, involving far more personnel than were working on the project at any one time, so that individuals may have joined from and returned to other projects, the difficulty of enforcing confidentiality or preventing the unwitting disclosure of information is very great. It is one thing, for example, to separate the insolvency, audit, taxation and forensic departments from one another and erect Chinese walls between them. Such departments often work from different offices and there may be relatively little movement of personnel between them. But it is quite another to attempt to place an information barrier between members all of whom are drawn from the same

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10.21 Conflicts of interest and confidential information department and have been accustomed to work with each other. I would expect this to be particularly difficult where the department concerned is engaged in the provision of litigation support services, and there is evidence to confirm this. Forensic accountancy is said to be an area in which new and unusual problems frequently arise and partners and managers are accustomed to share information and expertise. Furthermore, there is evidence that physical segregation is not necessarily adequate, especially where it is erected within a single department. In my opinion an effective Chinese wall needs to be an established part of the organisational structure of the firm, not created ad hoc and dependent on the acceptance of evidence sworn for the purpose by members of staff engaged on the relevant work.’ 1 The term ‘Chinese wall’ has been replaced in more recent authorities and writings by ‘information barrier’.

10.21 In the Prince Jefri case, an important factor was the sheer number of employees who had worked on Project Lucy and who would be required to work on Project Gemma. Despite every effort that KPMG could realistically make, there would always be a risk of disclosure, especially inadvertent disclosure. The sensitivity of the matters involved and the directly adverse relationship between Project Gemma and KPMG’s former client, Prince Jefri, were such that the risk could not be dismissed as insignificant. Nevertheless, the effect of Prince Jefri is to raise a high hurdle on a firm that wishes to act in a new matter adverse to a former client where the firm has received information from that former client that is relevant to the new matter. In such circumstances, care should always be taken to erect information barriers that are as robust as possible. However, in the light of the Prince Jefri decision, accountants must also be alert to the possibility that in some cases no possible barrier will be sufficient.

Merger cases 10.22 Three months after the House of Lords handed down judgment in Prince Jefri, an accountants’ merger case came before the High Court.1 Two firms, Robson Rhodes and PKF, planned a merger. Robson Rhodes was instructed as experts for a Lloyd’s Syndicate which was suing PKF for negligent auditing. Robson Rhodes informed the syndicate that they would cease acting as expert for them after the merger. The syndicate complained that Robson Rhodes was in possession of confidential information about their claim against PKF which would be at risk of passing to PKF. Robson Rhodes offered to put in place information barriers, but these were ad hoc rather than structural.

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Former client conflicts 10.24 The syndicate brought a claim for an injunction to restrain the merger. Laddie J held that the undertakings offered by the firms were not sufficient, but also that it was not necessary to restrain the merger, which would obviously cause substantial harm to the firms without commensurate benefit to the syndicate. Instead, he proposed a detailed set of undertakings and safeguards, on the basis of which the merger could proceed. In doing so, he applied the Prince Jefri test of reducing the risk of disclosure, including inadvertent disclosure, to the merely fanciful rather than real. 1 Young v Robson Rhodes (a firm) [1999] 3 All ER 524.

10.23 A few years later, something very similar occurred. Robson Rhodes was now planning a merger with Grant Thornton.1 Robson Rhodes was acting as expert for Akai Holdings Plc in an action that Akai was pursuing in the courts of Hong Kong against its former auditors. The auditors (Ernst & Young) had retained Grant Thornton to assist them in the Hong Kong litigation. The two firms, Grant Thornton and Robson Rhodes, both sought to terminate their retainers in the Akai litigation. Akai sought to insist that Robson Rhodes continue to act for them on the basis that Grant Thornton would cease acting for Ernst & Young and that undertakings would protect their confidential information. The basis of this was a provision in the Robson Rhodes retainer that they would not terminate it without Akai’s consent save in ‘unforeseeable circumstances beyond our control and not of our making’. Briggs J refused Akai an injunction restraining Robson Rhodes from terminating their retainer on the basis of the principle that the court would not grant a mandatory injunction requiring the defendant to perform personal services.2 However, the merger itself would have breached another express term of Robson Rhodes’ retainer by which they undertook not to put themselves into a position of conflict. Briggs J held that this breach would be restrained if necessary pending trial, but that it could be avoided by Robson Rhodes giving the undertakings which Akai had requested, essentially that the merged firm would give up the Ernst & Young retainer and create suitable information barriers. He therefore granted an order restraining the merger unless undertakings were given to that effect. 1 Akai Holdings v RSM Robson Rhodes LLP [2007] EWHC 1641 (Ch). 2 See at [42].

10.24 Where accountancy firms merge, they will need to take care to examine the potential conflicts which may arise in any part of their businesses from the merger. Where potential conflicts are identified, it will be important to examine carefully the terms of all relevant retainers and then to seek a resolution. As the cases indicate, courts will be reluctant to stand in the way of important commercial transactions, but they will equally be concerned to ensure that contractual obligations are complied with in accordance with general principles.

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10.25 Conflicts of interest and confidential information

INVESTMENT ADVICE 10.25 In Hodgkinson v Simms,1 the Supreme Court of Canada divided over the consequences of some investment advice given by an accountant to his client. The accountant, Mr Simms, specialised in advising on tax efficient and tax sheltering investments. He recommended to his client, Mr Hodgkinson, investments in multi-unit residential buildings (MURBs), as meeting Mr Hodgkinson’s requirements. Mr Hodgkinson made the investments and lost substantially all his money when the real estate market crashed. It was not suggested that the advice to invest in MURBs was such that no adviser in Mr Simms’ position could have given, nor that Mr Hodgkinson paid any more than a fair market value for his investments. Mr Hodgkinson’s complaint was that Mr Simms did not disclose to him that Mr Simms also acted for the promoters of the MURBs and charged them additional fees for every client of his who invested in the MURBs. It was held at trial that if disclosure had been made then Mr Hodgkinson would not have made the investments. 1 [1994] 3 SCR 377.

10.26 La Forest J for the majority held that professional advisory relationships were generally fiduciary, stating: ‘In sharp contrast to arm’s length commercial relationships, which are characterized by self-interest, the essence of professional advisory relationships is precisely trust, confidence, and independence.’1 The majority set out several policy reasons for financial advisers to be subject to fiduciary obligations and also relied on the fact that accountants’ professional rules required disclosure of conflicts of interest. 1 Ibid at 415i.

10.27 The dissenting justices held that the hallmark of a fiduciary relationship was that one party is dependent upon or in the power of another. For example, one party may possess power or discretion over the property of another. The question was whether one could be said to be ‘peculiarly vulnerable’ or ‘at the mercy’ of the other. On the facts, Mr Hodgkinson looked to Mr Simms for advice and accepted that advice, but he did not do so unreflectively; he met with the developers himself and took time for consideration and made his own decision to invest. Accordingly, there was no fiduciary relationship. The minority said that each relationship must be viewed on its own facts:1 if one party unreflectively and automatically accepted the advice of the other, that situation might be different. 1 The view that the majority was incautious in stating an overall principle, rather than looking at the particular factors present in each case was also expressed by the New South Wales Court of Appeal in Pavan & Gowshan v Ratnam [1996] NSWSC 571.

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Investment advice 10.31 10.28 It seems to us that the majority conclusion on the issue of fiduciary obligations was more satisfactory than that of the dissenters. A professional who gives formal advice as to a matter like investments is expected by his client to be advising in that client’s interest and not to have an undisclosed interest of his own in the advice. If that expectation is reasonable, then it implies that the professional is subject to fiduciary obligations. It is hard to see why the fact that the client gives consideration to the advice should relieve the professional of an obligation to disclose which would otherwise exist. It was not suggested that Mr Hodgkinson was somehow at fault for not making specific inquiry as to whether Mr Simms might stand to benefit financially from the investments he was recommending. Moreover, it would be poor policy to treat a client who gives proper consideration to the advice he receives less favourably than an otherwise identical client who chooses not to do so. Finally, we note that this does not imply that all professionals are always fiduciaries. The view of the majority in Hodgkinson v Simms is consistent with the decision of the majority of the High Court of Australia in Pilmer v Duke that a professional who agrees simply to provide information, rather than wider advice, may not be a fiduciary.1 Moreover, there are several cases where an adviser has been held not to owe a fiduciary duty in respect of transactions where he was not giving formal advice in respect of that particular transaction.2 1 See above at para 9.44. 2 See: Pavan & Gowshan v Ratnam [1996] NSWSC 571 (below at para 10.32); Townsend v Roussety & Co [2007] WASCA 40; Sliteris v Ljubic [2014] NSWSC 1632; Meara v Fox [2002] PNLR 5 (below at para 10.33).

10.29 The next question in Hodgkinson v Simms was as to damages. La Forest J held that the investor was entitled to be compensated for all his losses from entering into the investments – that is, the return of his capital and all his costs and expenses. He took the view that it had been proved at trial that the investments would not have been made if disclosure had been given and that the defendant had failed to establish that any similarly loss making investment would have been made instead. The majority rejected the argument that market losses were not for the defendant’s account essentially on the basis that the nature of investment advice was to expose the claimant to all the risks of an investment, including the risk of market loss. 10.30 The dissenting justices, anticipating the decision of the House of Lords in SAAMCO, held that Mr Hodgkinson received investments which were worth what he had paid for them and that subsequent market falls were not the consequence of Mr Simms’ non-disclosure. In agreement with the British Columbia Court of Appeal, the minority would have awarded only the amount of the fees paid by the developer to Mr Simms in respect of the investments made by Mr Hodgkinson. 10.31 On this second point, it is submitted that an English court ought to prefer the minority view. It is important to recall that it was not established 269

10.32 Conflicts of interest and confidential information that the investment advice was negligent, but only that it was flawed by lack of disclosure of Mr Simms’ personal interest in it. In those circumstances, it is too harsh to visit on the defendant all the consequences of the investment as if he had procured the investment by a fraudulent misrepresentation. The orthodox remedy for a fiduciary having made a secret profit is that the profit is forfeit to the principal. That would have been appropriate in Hodgkinson v Simms. 10.32 In other cases, an accountant has become involved in his client’s investments without incurring fiduciary obligations or liability. In Pavan & Gowshan v Ratnam the accountant was the claimant’s ‘tax accountant’.1 In the course of that relationship, the accountant had from time to time advised the claimant on ‘appropriate financial structures and investment directions’. Separately from his accountancy practice, the accountant pursued a land development opportunity through a corporate vehicle. The accountant introduced the claimant to this project and the claimant invested in it. The New South Wales Court of Appeal distinguished Hodgkinson v Simms and held that this situation disclosed none of the indicia of a fiduciary relationship relating to the relevant investment. In essence, on the facts, the investment was not made in reliance to any professional advice given by the accountant, but with the accountant acting, overtly in the capacity of counterparty to the client’s investment rather than an adviser on it. 1 [1996] NSWSC 571. Other Australian cases where an accountant was held not to owe fiduciary duties extending to matters beyond his retainer include Townsend v Roussety [2007] WASCA 40 and Sliteris v Ljubic [2014] NSWSC 1632.

10.33 The English case of Meara v Fox was not dissimilar to Pavan.1 There, the defendant accountant acted as accountant and tax adviser to the claimants. However, in relation to the relevant investment, the parties entered into it as co-venturers. The defendant was therefore not retained as a professional business adviser in respect of the relevant business. Even if the defendant had been a fiduciary, there was no allegation that any particular material facts had not been disclosed. 1 [2002] PNLR 5.

10.34 On the other hand, the fact that the accountant has a conflict of interest in relation to investment advice because, for example, he represents the party seeking the investment, does not make it necessarily unreasonable for the advisee to rely on what the accountant says.1 Moreover, if he takes on fiduciary duties to the investor while labouring under a disclosed conflict of interest, the requirement to obtain informed consent can be very onerous indeed. This is illustrated by the decision of the Full Court of the Federal Court of Australia in Australian Breeders Co-Operative Society v Jones.2 In this case, the accountant acted for the founder and promoter of a bloodstock syndicate. He then came to advise the potential investors in the syndicate. They were well 270

Valuation engagements 10.36 aware of his role for the promoter. The accountant informed the investors that he could give them no advice about the value or prices of bloodstock at which their investment would be made, but took part in the selection of a valuer. The investors were comforted by the involvement of the accountant, especially after the upright way he had refused to advise them on price due to the conflict of interest. However, what they did not know was that level of profit being extracted by the promoter in selling the horses to the syndicate was beyond the reasonable and cast doubt on the viability of the venture. The Court held that this fact was one that the accountant would have had to have disclosed in order to obtain fully informed consent to acting despite the conflict. As a fiduciary, the accountant owed to the investors a duty to disclose any fact which made the transaction disadvantageous to them.3 1 An ambitious argument to the effect that ‘it is never reasonable to rely on the advice of a person who has a conflict of interest against you’ was rejected by the Court of Appeal in Berry Taylor v Coleman [1997] PNLR 1, 7D. However, where there is real doubt as to whether the defendant is assuming responsibility to the claimant, the fact that the defendant owes conflicting duties to a third party can be a significant factor in showing that it would be unreasonable for the law to impose a duty of care: Huxford v Stoy Hayward [1989] 5 BCC 421 at [5.345]. This point has more often arisen in solicitors’ cases and the authorities are collected in Jaison Property Development v Howard Swinhoe [2010] EWHC 2467 (QB) at [112]. 2 (1997) 150 ALR 488. 3 Similarly, in Canadian courts, even where the accountant makes clear his involvement as principal in a proposed investment, he is at risk of liability if any relevant fact is not disclosed: see for example Madhani v Pirani British Columbia Supreme Court 16 October 1997, Lexis; Zivadinovich v Mehta (1997) 25 OTC 198, aff’d (1999) 117 OAC 328.

VALUATION ENGAGEMENTS 10.35 In the Scottish case of Mitchell or Anderson v Pringle and Watt,1 the defenders were auditors and accountants to a family company and also to the individual shareholders. The company wanted to consider purchasing one of the minority shareholdings and sought a valuation from the defenders. They reported that the value of the relevant holding was between £180,000 and £220,000. A few months later, the company offered the minority shareholder concerned (the pursuer in the action) the sum of £180,000 for her shares. She was not keen to sell and was concerned that the price was not sufficient. She went to the defenders for advice, which they gave. Without mentioning their own earlier advice to the company, the defenders said that ‘she would be a fool not to take the money as it was a lot of money’ and that it represented the ‘true value’ of her shares. 1 3 May 1991, Outer House, Lexis.

10.36 The pursuer’s case was that she should have been advised to seek independent advice and that she would then have been advised that the true value was at least £312,000 and she could have sold her shares for that sum. 271

10.37 Conflicts of interest and confidential information The judge held that the accountants were plainly under a duty to advise the pursuer to take independent advice and they acted in breach of that duty. However, he held that the defenders’ valuation of between £180,000 and £220,000 was appropriate and that it followed that a reasonably competent accountant could have advised the pursuer that £180,000 was a reasonable value for her shares. On this basis, the claim failed. The judge stated that he was not invited to award damages on the basis of a lost chance to achieve a better price by refusing the initial offer as no such case was pleaded. 10.37 In effect, the court in Mitchell applied the bracket approach: since the value given was within the acceptable bracket, there was no liability. However, the defenders were fortunate to escape all liability. One route to recovery would have been the loss of a chance case that the judge referred to. A related approach would have been a claim that, once they accepted a duty to advise the pursuer, the defenders came under a duty to inform their client of the advice they had given to the company (even though to do so would have been in breach of their duty to the company1) and this would have given her a substantial chance to achieve a higher price. 1 As in Hilton v Barker Booth & Eastwood [2005] 1 WLR 567.

10.38 In Simpson v Harwood Hutton,1 the defendant accountants acted as accountants to a partnership and also to each of the partners personally. When a partner retired from the partnership, he was entitled under the partnership agreement to his share of the partnership assets, including goodwill, as valued by the partnership accountants. One of the partners was thinking of retiring and the defendants advised him in detail on the approach which might be adopted to valuing his share. The defendants then gave a formal valuation which determined the price under the partnership agreement. The retiring partner considered the figure too low and there was a dispute about it. The remaining partners considered the value too high and sued the accountant. The judge was not satisfied on the evidence either that the formal valuation was wrong, or that it was conducted in a negligent manner, so the claim in negligence failed. The claim for breach of fiduciary duty was that, as partnership accountants, the defendants placed themselves in a position of conflict by advising the retiring partner and that the consequence was to inflate his expectations as to value causing the legal costs incurred by the remaining partners in the dispute with the retiring partner. This claim was dismissed on the ground that all partners had given informed consent to the conflict by consenting to the defendants acting for each of them. 1 [2008] EWHC 1376 (QB).

10.39 Dennard v PricewaterhouseCoopers1 has been mentioned above in connection with the bracket principle. It also illustrates the prevalence of fiduciary allegations in valuation cases. In this case, the valuation was 272

Corporate finance advisory work 10.40 performed for the sellers of shares in a company which held certain public finance initiative projects. The sellers sold their shares at a price a little higher than the valuation to the buyer who later resold them for far more. The sellers claimed against the accountants that they had negligently undervalued the shares leading to the loss of a chance to negotiate a higher price. That claim was upheld, but an additional claim based on conflict of interest was dismissed by Vos J. The allegation was that the accountants had done other work for the buyers (including as their auditors) and had hopes of obtaining further work from the buyers if they proceeded with the purchase; thus, it was alleged, the accountants had an interest in the deal proceeding and therefore in undervaluing the shares so that the sellers did not ask more than the buyers were willing to pay. Indeed, the allegation went further and claimed that the accountants had an interest in assisting their prospective clients (the buyers) to acquire the shares for the lowest possible price. This claim failed on the bases that: (i)

there was no allegation of actual corruption and the accountants did not have a ‘perverse incentive’ merely because they might have hoped to get future work from the buyers; and

(ii) the fact that the accountancy firm (a major one) did other work for the buyer (a major bank) was public knowledge and actually known to the claimants. 1 [2010] EWHC 812 (Ch).

CORPORATE FINANCE ADVISORY WORK 10.40 Accountants performing corporate finance advisory work should take special care in relation to conflicts of interest. This is a field in which it is all too easy for a firm to slip into two or more roles, or into advising multiple parties, without realising the potential for breach of professional or equitable rules. The common practice in corporate finance work is for payment by success fee. Success fees give rise to inevitable personal interests on the part of the adviser. Although these are patent and generally understood by a sophisticated client, if all goes wrong and the success fee is significant, allegations can be made that the accountant either was in a position of conflict or was actually influenced by the fee structure in the advice it gave. A high profile example was provided by the collapse of MG Rover in which Deloitte & Touche were found to have acted for several parties in relation to a key transaction (‘Project Platinum’) without being clear as to who their clients were and to have failed to ensure that the board of MG Rover received a fair presentation in relation to the project. The accountants were also found to have failed adequately to consider the self-interest threat posed by the contingent fee that they had agreed.1 1 FRC Accountancy Scheme, Report of the Appeal Tribunal, 28 January 2015.

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10.41 Conflicts of interest and confidential information 10.41 Harlequin Property (SVG) Ltd v Wilkins Kennedy provides an example of the risks where an accountant takes on multiple roles in related matters.1 The claimant companies were developers of a luxury Caribbean resort. One partner in the defendant accountancy firm acted as de facto Chief Financial Officer to the claimant, with a general retainer to advise on its business. Another partner advised the claimant on tax issues, but also acted as financial adviser to the main contractor on the development. As Coulson J held, the result was a ‘clear and obvious conflict of interest’. Coulson J found the defendant firm liable for negligently failing to advise the claimant to enter into a formal contract with the main contractor. However, he rejected a further claim for failing to inform the claimant of facts that showed that the contractor was an unsuitable counterparty, on the basis that an accountant, unlike a solicitor, owed no fiduciary duty to deploy confidential information of one client for the benefit of another. This part of the decision was wrong, because even though Lord Millett made clear in Prince Jefri that an auditor did not have a duty to pass on information from one audit client to another, where accountants act as general business advisers rather than auditors, they should be subject to the same fiduciary requirement to deploy their knowledge as well as their skill for the sole benefit of each client as would any other adviser.2 1 [2017] 4 WLR 30. 2 The judge was wrong to distinguish, and should have applied, Hilton v Barker Booth & Eastwood [2005] 1 WLR 567.

INSOLVENCY PRACTICE Introduction 10.42 Insolvency practice seems to generate more than its fair share of conflict of interest disputes. This reflects in part the potentially uncomfortable position of the insolvency practitioner as ring-holder between the different stakeholders in a situation where everybody involved is likely to suffer loss. In part, the concentration of the accountancy market in a small number of firms means that large group insolvencies are almost impossible to manage without any hint of conflict. Moreover an office holder has a quasi-judicial role in which he is required to be impartial and to satisfy the Porter v Magill test for judicial conflict: whether a fair-minded and informed observer would conclude that there was a real possibility that the officer was biased.1 1 Porter v Magill [2002] 2 AC 357 at [102]. See Hollander & Salzedo Conflicts of Interest, 6th edn (Sweet & Maxwell, 2020), Ch 11 for a full discussion of the test of bias.

10.43 The court tends to take a pragmatic, or proportionate, approach to issues of conflict in the context of insolvency, which is primarily directed 274

Insolvency practice 10.45 towards efficient conduct of the insolvency rather than strict application of equitable rules. As Warren J put it his monumental judgment in Sisu v Tucker:1 ‘There is a, sometimes difficult, balance to be held. On the one hand, the court expects any liquidator to be efficient, vigorous and unbiased in his conduct of the liquidation and should have no hesitation in removing him if satisfied that he has failed to live up to those standards unless it can reasonably confidently be said that he will live up to those requirements in the future. On the other hand, the court must think carefully before removing him, otherwise similar applications by disgruntled creditors in other cases would be encouraged; and there would, of course, be likely to be cost implications … Perhaps one can say that this is another area of the law where one’s flexible friend, proportionality, is to be found at work and the matter should simply be approached on a proportionate basis.’ 1 [2006] BCC 463 at [85].

10.44 According to the ICAEW Code of Ethics, section 400.31 and the Insolvency Practitioners Association (IPA) Code of Ethics, para 31,1 examples of where a conflict of interest may arise for an insolvency practitioner include where: (i)

an insolvency practitioner has to deal with claims between the separate and conflicting interests of entities over whom he is appointed;

(ii) there are a succession of or sequential insolvency appointments; and (iii) a significant relationship has existed with the entity or someone connected with the entity. In the remainder of this section we will consider each of these three situations and then consider a fourth, which is where an accountant is appointed as a receiver by a creditor and there is an alleged conflict with the interests of the company. 1 These two sets of guidance are almost identical on material points.

Insolvency practitioner appointed to entities with conflicting interests 10.45 It frequently happens that several companies in a group, or otherwise related, go into insolvency procedures at the same, or similar, times. When that occurs, there is an obvious practical benefit to the appointment of the same individuals as insolvency office holders in all the companies, or at least of individuals from the same firm who can be expected to co-operate easily.

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10.46 Conflicts of interest and confidential information 10.46 The practical benefits will be apparent at the outset. However, disputes may arise in the course of the insolvencies between the related companies, leading to conflicts of interest for the office holders who have been appointed to more than one such company. Again, this is very common in large insolvencies, where relations between related companies may have been complex. 10.47 Common law courts have developed an approach to this problem which is overwhelmingly pragmatic. In short, the benefits of common office holders within a group are not to be lightly lost; instead, conflicts are to be managed in the way most appropriate to the situation in a given case. The position was neatly summarised by Lord Hoffmann giving the judgment of the Privy Council in Parmalat Capital Finance v Food Holdings:1 ‘It is not unusual for the same liquidators to be appointed to related companies, even though the dealings between them may throw up a conflict of interest. It avoids the expense of having different liquidators investigate the same transactions. The attitude of the court has been that any conflicts of interest can be dealt with by the court (on the application of the liquidators) when they arise.’ 1 [2009] 1 BCLC 274 at [13].

10.48 The earlier English authorities (and the ICAEW guidance) were helpfully reviewed in Sisu v Tucker.1 In Re York Gas Ltd,2 Newey J built on the authorities reviewed in Sisu to conclude that: ‘the appointment of an additional insolvency practitioner from the same firm as existing office-holders can potentially be an acceptable way to manage a conflict of interest such as the one in the present case.’ 1 [2006] BCC 463 at [91]–[123]. 2 [2011] BCC 447.

10.49 Similarly, in Re Nickel Mines Ltd, Needham J in the Supreme Court of New South Wales held that it was usually sensible for the same liquidator to be appointed to related companies, but that when an actual conflict crystallised, then the liquidator should apply to the court to step down from one of the appointments.1 1 (1978) 3 ACLR 686. Other Australian authorities on this issue include Re Bruton Pty Ltd (1990) 2 ACSR 277 and Re Nida Pty Ltd (1993) 10 ACSR 195. Re Nickel Mines was cited in Hong Kong in Re Perak Pioneer Ltd (No 2) [1985] HKC 430. In Hong Kong, see also Re Luen Cheong Tai Construction Co Ltd [2002] 1354 HKCU 1.

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Insolvency practice 10.56

Succession of or sequential insolvency appointments 10.50 The professional guidance of the ICAEW and the IPA set out the following points about sequential appointments. 10.51 First, if an individual within the practice has been an administrative or other receiver to the entity, then the insolvency practitioner should not accept any insolvency appointment. An exception is possible where the earlier appointment was as a court appointed receiver, in which case consideration should be given to the conflicts position (as it is put in the guidance: ‘whether [there are] any other circumstances which give rise to an unacceptable threat to compliance with the fundamental principles.’) 10.52 Secondly, where an individual within the practice has been supervisor of a company voluntary arrangement, then the insolvency practitioner may normally accept an appointment as administrator or liquidator. 10.53 Thirdly, an insolvency practitioner may normally accept appointment as a liquidator where an individual within the practice has been administrator. 10.54 Fourthly, where a members voluntary liquidation is converted into a creditors voluntary liquidation, if there has been a ‘significant professional relationship’,1 an insolvency practitioner should only continue as liquidator if he concludes that the company will be able to pay its debts in full with interest. 1 See the next section for further discussion of ‘significant relationships’ in this context.

10.55 Finally, where an individual in the practice has been supervisor of an individual voluntary arrangement, the insolvency practitioner may normally accept appointment as trustee in bankruptcy.

Significant relationship with the entity or someone connected with the entity 10.56 A regular issue that arises is whether an insolvency practitioner is compromised or conflicted by reason of the relationship which he, or his firm, has already developed with the company, a creditor or another stakeholder. The ICAEW and IPA guidance identify categories of person with whom a relevant relationship might exist which are both numerous and wide1 and give guidance as to the factors which might be relevant in evaluating the significance of the relationship in the sense of whether it creates a threat to fundamental principles. The factors set out in the guidance are as follows:2 ‘(a) The nature of the previous duties undertaken by a practice during an earlier relationship with the entity. 277

10.57 Conflicts of interest and confidential information (b)

The impact of the work conducted by the practice on the financial state and/or the financial stability of the entity in respect of which the insolvency appointment is being considered.

(c)

Whether the fee received for the work by the practice is or was significant to the practice itself or is or was substantial.

(d)

How recently any professional work was carried out. It is likely that greater threats will arise (or may be seen to arise) where work has been carried out within the previous three years. However, there may still be instances where, in respect of non-audit work, any threat is at an acceptable level. Conversely, there may be situations whereby the nature of the work carried out was such that a considerably longer period should elapse before any threat can be reduced to an acceptable level.

(e)

Whether the insolvency appointment being considered involves consideration of any work previously undertaken by the practice for that entity.

(f)

The nature of any personal relationship and the proximity of the Insolvency Practitioner to the individual with whom the relationship exists and, where appropriate, the proximity of that individual to the entity in relation to which the insolvency appointment relates.

(g) Whether any reporting obligations will arise in respect of the relevant individual with whom the relationship exists (eg an obligation to report on the conduct of directors and shadow directors of a company to which the insolvency appointment relates). (h) The nature of any previous duties undertaken by an individual within the practice during any earlier relationship with the entity. (i) The extent of the insolvency team’s familiarity with the individuals connected with the entity.’ 1 The entity, any present or former director or shadow director of the entity, shareholders of the entity, any principal or employee of the entity, business partners of the entity, companies or entities controlled by the entity, companies under common control, creditors (including debenture holders) of the entity, debtors of the entity, close family of the entity or its officers, others with commercial relationships with the practice. 2 ICAEW Code of Ethics, section 440.44; IPA Code of Ethics para 44. Similar Australian professional guidance was considered in Re Hurt (1988) 80 ALR 236.

10.57 Two specific circumstances are considered in the guidance. First, where the insolvency practitioner’s firm has carried out audit related work for the entity, that gives rise to a threat to compliance with fundamental principles which should be considered. If the audit related work was within the previous 278

Insolvency practice 10.59 three years, then the guidance requires that the insolvency appointment be refused. Secondly, where the practitioner’s firm has been instructed by a creditor to investigate or monitor the entity or advise on its affairs, the question will arise whether there is a significant relationship with that creditor that might preclude accepting an insolvency appointment. The guidance provides: ‘A Significant Professional Relationship would not normally arise in these circumstances provided that:(a)

there has not been a direct involvement by an individual within the practice in the management of the entity; and

(b)

the practice had its principal client relationship with the creditor or other party, rather than with the company or proprietor of the business; and

(c)

the entity was aware of this.

An Insolvency Practitioner should however consider all the circumstances before accepting an insolvency appointment, including the effect of any discussions or lack of discussions about the financial affairs of the company with its directors, and whether such circumstances give rise to an unacceptable threat to compliance with the fundamental principles. Where such an investigation was conducted at the request of, or at the instigation of, a secured creditor who then requests an Insolvency Practitioner to accept an insolvency appointment as an administrator or administrative receiver, the Insolvency Practitioner should satisfy himself that the company, acting by its board of directors, does not object to him taking such an insolvency appointment. If the secured creditor does not give prior warning of the insolvency appointment to the company or if such warning is given and the company objects but the secured creditor still wishes to appoint the Insolvency Practitioner, he should consider whether the circumstances give rise to an unacceptable threat to compliance with the fundamental principles.’ 10.58 The situation where a request to accept appointment follows work for a creditor is ‘not unusual’.1 The guidance quoted above makes it clear that the situation may be a marginal one in terms of whether there is a conflict of interest (or ‘Significant Relationship’) which should preclude acceptance of the appointment. 1 Sisu v Tucker [2006] BCC 463 at [114].

10.59 If the accountant or insolvency practitioner has bound themselves not to accept such an appointment, that will override other considerations. 279

10.60 Conflicts of interest and confidential information In Sheppard & Cooper v TSB Bank Plc,1 the bank required the company to appoint Smith & Williamson to investigate the company’s financial affairs. The terms of the appointment, dated 1 February 1993, included: ‘So that there should not be any conflict of interest between the company, yourselves and the bank and for the avoidance of doubt, you will not undertake any responsibility for the management of the company’s affairs either now or in the future.’ Three years later, in 1996, the bank demanded payment under a debenture, which the company could not pay, and then appointed two partners in Smith & Williamson as receivers of the company. The Court of Appeal held that the contractual undertaking was clear and granted an injunction restraining the receivers from acting. Sir John Balcombe suggested that after another 20 years, such an agreement might have ‘spent its force’, but not after only three. 1 [1997] 2 BCLC 222.

10.60 If there is no contractual impediment, then the court is likely to adopt a pragmatic approach. Thus in Re Maxwell Communications Corp Plc,1 Hoffmann J approved the appointment as administrators of members of the firm which had investigated the company on behalf of creditors despite the opposition of directors, on the basis that their knowledge of the company’s affairs was a positive benefit. As to specific potential conflicts which were alleged, these could be dealt with if and when they crystallised into actual conflicts. Similarly in cases where a conflict arises at a late stage of an insolvency process, for example owing to a merger of firms, the court is likely to be sympathetic to avoiding disruption.2 1 [1992] BCLC 465, [1992] BCC 372. In Hong Kong, see Re Orient Power Holdings [2008] HKCU 200. 2 See Scarth v Northland Bank, Manitoba Queen’s Bench, 6 December 1996, Lexis.

10.61 On the other side of the line is the Australian case of Advance Housing Pty Ltd v Newcastle Classic Developments Pty Ltd.1 In that case, the court accepted that there should be an investigation of certain payments received by the firm whose partner was acting as liquidator when that firm had been accountants for the company, pre-liquidation. That gave the liquidator a conflict of interest and he was, in effect, required to resign. 1 (1994) 14 ACSR 230.

10.62 In Wade v Poppleton & Appleby, insolvency practitioners were appointed by the company and its directors (rather than any creditor) to advise on a potential insolvency situation that had arisen. They were not able to

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Insolvency practice 10.65 save the company and were then appointed by the creditor bank as receivers. The company and directors alleged that the acceptance of appointment as receivers was a breach of fiduciary duty. This claim was dismissed by David Richards J, both because there was consent to the appointment and because once the bank had decided to appoint receivers, the practitioners’ work as advisers to the company was over and there was no conflict between the second appointment and the first.1 1 [2004] 1 BCLC 674 at [150].

10.63 In Bloomsbury International v Holyoake,1 Floyd J held that where the administrator’s firm previously acted for a former director of the company, it no longer owed fiduciary duties to the former director so there could be no relevant conflict of interest if the company under the control of the administrator sued the former director. The former director’s confidential information remained relevant to the Prince Jefri test, but on the facts there was no real risk of it passing. 1 [2010] EWHC 1150 (Ch).

10.64 Even if the potential conflict is not a bar to appointment, the practitioner should always make full disclosure of the facts. Where an accountant accepted appointment by the court as receiver and manager without disclosing his firm’s earlier involvement with relevant companies he was not only removed but also deprived of his fees.1 By contrast, in another Canadian case, where the accountant appointed as receiver and managed had disclosed at the outset that an affiliated firm was auditor to several of the company’s creditors, an application by the audit client creditors to remove him was dismissed.2 1 Canadian Co-operative Leasing Services v Price Waterhouse (1992) 128 NBR (2nd) 1. 2 Re YBM Magnex International Inc (2000) 275 AR 352.

Accountant is appointed receiver by a creditor and there is a conflict with other interests of the company 10.65 There is debate in the common law world about the consequences of the conflict between the interests of a secured creditor who appoints a receiver under a debenture or charge and those of the company represented by the directors. The issue arises acutely when the directors believe that the company has a cause of action against the secured creditor which, naturally, is not generally one that the receiver wishes to pursue. This is more a matter for the realms of insolvency law than for a work on accountants so we summarise it only very briefly here.1 The majority view, and the better view, is that the directors may only pursue proceedings against the wishes of the receiver if and to the extent that doing so does not prejudice the creditor’s interest in 281

10.65 Conflicts of interest and confidential information the charged property. In practice, this will usually mean that the directors must give or procure an indemnity for the costs of the proceedings, secured if necessary.2 1 For further detail, see Hollander & Salzedo, Conflicts of Interest, 6th edn (Sweet & Maxwell, 2020), Ch 17. 2 Newhart Developments v Co-operative Commercial Bank Ltd [1978] QB 814; GE Capital Commercial Finance v Sutton [2004] 2 BCLC 662 at [44]–[51]; Levy-Russell v Tecmotiv Inc (1994) 54 CPR 3d 161; Australia & New Zealand Banking Group Ltd v P De Burgh Day, 6 May 1994, Supreme Court of Victoria, Lexis; Deangrove Pty Ltd (Receivers and Managers Appointed) v Commonwealth Bank of Australia (2001) 108 F.C.R. 77; [2001] FCA 173; Gartner v Ernst & Young [2003] FCA 152; Re Geneva Finance Ltd (1992) 7 ACSR 415; 7 WAR 496; Oswal v Burrup Fertilisers [2013] FCAFC 9; Re Charmae Investments Pty Ltd, 12 November 1990, Lexis; Shanks v Central Regional Council [1987] SLT 1105; Lascomme v UDT (Ireland) [1993] 3 IR 412; Paramount Acceptance Co v Souster [1981] 2 NZLR 38.

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Part 4

Defences

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Chapter 11

Policy defences – ex turpi and insolvency

INTRODUCTION 11.01 The principle expressed in latin as ex turpi causa non oritur actio (from an evil cause, no action originates) is an ancient one. Even today, there is regularly cited the statement of the principle by Lord Mansfield in a case he decided in 1775.1 Yet it is only recently that the potential application of the principle has been raised in relation to claims against auditors. The issue is: where a company alleges that its auditor should have acted to stop its own unlawful activities, does the principle of ex turpi causa prohibit an action by the company for damages to compensate it for the losses it incurred by continuing with that unlawful conduct? That apparently simple question turned out to raise some of the most difficult questions in company law and remains unresolved despite full consideration by the House of Lords in 2009 and reconsideration by the Supreme Court in 2015. 1 Holman v Johnson (1775) 1 Cowper 341, 343; 98 ER 1120, 1121: ‘The objection, that a contract is immoral or illegal as between plaintiff and defendant, sounds at all times very ill in the mouth of the defendant. It is not for his sake, however, that the objection is ever allowed; but it is founded in general principles of policy, which the defendant has the advantage of, contrary to the real justice, as between him and the plaintiff, by accident, if I may so say. The principle of public policy is this; ex dolo malo non oritur actio. No Court will lend its aid to a man who founds his cause of action upon an immoral or an illegal act.’

11.02 In the course of failing to resolve the issue of the scope of the application the ex turpi doctrine to audit claims, the dicta of several appellate judges has given rise to a further potential policy defence based on the idea that the auditor’s duty is not owed for the benefit of creditors and therefore gives rise to no action where the company is insolvent. 11.03 In this chapter we consider these two possible policy defences.

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11.04 Policy defences – ex turpi and insolvency

ILLEGALITY Introduction 11.04 As set out by Lord Mansfield in the dictum cited above, the principle is that the court will not lend its aid to a claimant whose cause of action is founded upon an immoral or illegal act.1 The English law on the subject was re-cast by the majority of a nine-Justice panel of the Supreme Court in Patel v Mirza.2 The former approach of asking whether a claimant had to rely on his own illegality to establish his claim has been replaced. The new approach is based on the identification of the essential public interest behind the principle as being the protection of the integrity of the legal system. In each case where illegality is raised, the court must assess whether denying the claim would enhance the purpose of the prohibition which has been transgressed, whether doing so would affect any other public policy and whether it would be a proportionate response to the illegality. 1 For what counts as an illegal or immoral act for this purpose, see Les Laboratoires Servier v Apotex [2015] AC 430. 2 [2017] AC 467. The key statement of the law by Lord Toulson for the majority is at [120].

11.05 One facet of the principle – arguably the most relevant one for present purposes – is that a claimant may be barred from claiming damages for loss which he suffered as a result of his own illegal act. Thus, if a defendant tortfeasor is responsible for psychological injury, which causes the claimant to commit the offence of manslaughter, the claimant cannot claim damages for the consequences to himself of having committed manslaughter, because those are the consequences of his own illegal act, not the defendant’s tort. In Gray v Thames Trains,1 the House of Lords held that this result could be reached either by application of the ex turpi principle, or as a matter of causation. 1 [2009] 1 AC 1339.

11.06 The question of the applicability of the principle to a claim against auditors was raised squarely in Stone & Rolls v Moore Stephens. It is notoriously difficult to identify precisely what that case decided. We describe it below and then set out what the Supreme Court has said about it since, before seeking to draw some conclusions about the right analysis.

Stone & Rolls v Moore Stephens Facts and issues 11.07 Stone & Rolls Ltd was a ‘one-man company’, meaning that it was entirely owned, controlled and managed by one individual, Mr Stojevic, and 286

Illegality 11.10 had no independent shareholders or directors. The company was used by Mr Stojevic to commit fraud (based on false letter of credit documentation) against banks. Stone & Rolls obtained monies from the banks by the fraud, which were paid away at the direction of Mr Stojevic. The company and Mr Stojevic were both found liable to the principal defrauded bank for the tort of deceit.1 That left Stone & Rolls with liabilities to the bank, but no assets to meet them (since the proceeds of the fraud against the banks had been paid away and dissipated). The company was therefore insolvent and entered liquidation. 1 For the details of the fraud, see Komercni Banka AS v Stone & Rolls [2003] 1 Lloyd’s Rep 383.

11.08 The liquidator of Stone & Rolls alleged that its auditors, Moore Stephens, were negligent in not detecting the fraud and that had they acted competently, then by way of their resignation as auditors and/or reporting to relevant authorities, the company would no longer have been able to participate in the fraud and would therefore not have incurred further losses after the relevant audit dates. 11.09 Moore Stephens applied to strike out the claim against them on the basis that Stone & Rolls had to rely on its own fraud to establish its claim, which was therefore barred by the illegality principle. Although the arguments developed somewhat as the application made its way through three levels of decision, in each court the liquidator took the same two points in opposition to the application: (i)

Stone & Rolls was a victim of the fraud and therefore Mr Stojevic’s knowledge which rendered the transactions fraudulent should not be attributed to Stone & Rolls;1 and

(ii) even if the fraud is attributed to Stone & Rolls, fraud of this type was the ‘very thing’ which the auditors had a duty to detect and – in effect – prevent, which was an answer to the application of the ex turpi principle.2 1 This was generally described as ‘the Hampshire Land principle’, after In re Hampshire Land Co [1896] 2 Ch 743. 2 This was often called ‘the Reeves principle’, after Reeves v Commissioner of Police [1999] QB 169, reversed in part on other grounds at [2000] 1 AC 360.

First instance and Court of Appeal 11.10 At first instance,1 Langley J held that the fraud did fall to be attributed to Stone & Rolls on the basis that it was ‘in a real sense the perpetrator of the fraud on’ the banks. On the facts of the case, it would be artificial to describe Stone & Rolls as even a secondary victim of the fraud. As to the ‘very thing’ 287

11.11 Policy defences – ex turpi and insolvency issue, Langley J said it was the ‘key question’; however, he did not answer it in terms. What he said was that the objective of the ex turpi maxim could be sufficiently fulfilled by precluding any recovery that would enure to the benefit of Mr Stojevic, but to permit the action to proceed for the benefit of the creditors. 1 [2008] Bus LR 304.

11.11 The Court of Appeal unanimously reversed Langley J’s judgment.1 The leading judgment was given by Rimer LJ, who agreed with Langley J that the company was the perpetrator of the fraud against the banks and not its victim. As to the ‘very thing’ argument, Rimer LJ agreed with the submission on behalf of Moore Stephens, that the ‘very thing’ principle was ‘all about causation’. The ex turpi principle operated at a different, higher, level to bar any claim in which a party had to rely on its own illegality. Thus, if ex turpi applied, the ‘very thing’ principle could not have any application. 1 Reported with the House of Lords decision at [2009] 1 AC 1391.

11.12 Mummery LJ gave a succinct concurring judgment in which he said that it was clear that the company was a fraudster and that ‘it would turn the world upside down’ to describe it as a victim and as a result the auditors owed no duty of care to the company to detect its fraud.

House of Lords 11.13 The House of Lords affirmed the decision to strike out the claim by a majority of three to two.1 All five judges gave speeches and no two followed exactly the same line of reasoning. 1 [2009] 1 AC 1391.

11.14 Lord Phillips held that the fraud must be attributed to the company in circumstances where there was only one natural person who was managing all aspects of the company’s activities. In approaching the ‘very thing’ point, Lord Phillips formulated the question as being whether the company’s fraud was one of the things which the auditors had a duty to prevent. Lord Phillips said he was sympathetic to the view of Mummery LJ that the auditors owed no duty at all to the company because they had been retained on a false basis. However, that point was disavowed by Mr Sumption QC representing the auditors, so Lord Phillips said he would assume that Moore Stephens undertook a contractual duty to Stone & Rolls to exercise due care in auditing its accounts. Even on that basis, Lord Phillips was of the view that the scope of the auditors’ duty

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Illegality 11.17 would not extend to any duty ‘for the benefit of those that the company might defraud’. He therefore said: ‘I have reached the conclusion that all whose interests formed the subject of any duty of care owed by Moore Stephens to S&R, namely the company’s sole will and mind and beneficial owner Mr Stojevic, were party to the illegal conduct that forms the basis of the company’s claim.’ For that reason, ex turpi provided a defence. 11.15 Lord Walker held that there was a ‘sole actor’ principle that the fraud should be attributed to the company where the company had no innocent persons involved in its management or ownership. This principle applied in a claim against auditors, because if there were no innocent managers or owners, there was no protection that the auditors could provide. Lord Walker agreed with Rimer LJ that the ‘very thing’ principle was a principle of causation which could never trump ex turpi where that would otherwise apply. 11.16 Lord Brown began by referring to Luscombe v Roberts as being a case illustrating the ex turpi principle.1 That was a case of a sole trader and Lord Brown said that it should make no difference to the failure of such a claim if the sole trader becomes bankrupt and the claim is vested in his trustee, or if he incorporates his practice as a one-man company. In Lord Brown’s view, it was clear that Mr Stojevic was completely identified with Stone & Rolls; there were no innocent directors, shareholders or employees. In that situation, there was no possible scope for the application of the Hampshire Land principle. 1 Luscombe v Roberts (1962) 106 SJ 373, referred to above at para 9.36 was a case where a solicitor practicing as a sole trader deliberately misstated his accounts for tax purposes and his accountant negligently failed to identify the misstatement. Megaw J held that the accountant had no liability. No explicit reference was made to the ex turpi principle, but Megaw J is reported as concluding thus: ‘However, in view of the finding that the solicitor knew that what he was doing was wrong, not only a technical breach of professional rules but against the law of the land, his claim failed.’

11.17 Lord Scott said that even though the fraud was properly attributed to the company for the purposes of the bank’s action against the company, it did not follow that it would be so attributed for all purposes. In particular, if the liquidator issued a misfeasance summons against Mr Stojevic,1 he could hardly contend that his fraud should be attributed to the company to give himself a defence. If so, Lord Scott reasoned, why should another officer of the company, namely the auditor, be in a different position? The claim that had been brought as an ordinary action against Moore Stephens could equally well have been brought as a misfeasance summons, in which case the fact that the

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11.18 Policy defences – ex turpi and insolvency action was for the benefit of creditors could not be the subject of complaint. In substance, Lord Scott held that the fraud should not be attributed to the company because: (i)

in the strike out application, the facts were not sufficiently clear as to Mr Stojevic’s alleged ownership of the company, which was asserted to operate through unspecified trusts; and

(ii) there was no public policy basis for applying the ex turpi rule, since even if the company had been solvent, the fraudulent individuals could be deprived of any benefit through contribution proceedings. 1 Under Insolvency Act 1986, s 212, see above at para 4.10.

11.18 The longest and most closely reasoned speech was the dissent of Lord Mance. He pointed out that the auditor’s statutory duty includes a duty on resignation to make a statement of circumstances which the auditor considers should be brought to the attention of members or creditors,1 which the company was required to send to members and debenture holders.2 He quoted auditing standard SAS 110 which provided that: ‘When a suspected or actual instance of fraud casts doubt on the integrity of the directors auditors should make a report direct to a proper authority in the public interest without delay and without informing the directors in advance.’ One of the very things that an auditor undertook to take care over was the detection of managerial fraud. It could not be an answer to a claim against an auditor for the auditor to point to knowledge by senior management, even if that management was the company’s directing mind. Thus in the context of an audit, the fraud could not be attributed to the company itself. Nevertheless, if all the shareholders know the true position, and the company is solvent, then Lord Mance accepted that there could be no claim against auditors because ‘the straightforward analysis is that there is nothing to report, no-one to complain and no loss’. In his view, the critical factor was that the company was insolvent at the audit date. In that situation, the directors and auditors take responsibility for the interests of creditors as well as shareholders. The auditors had an express contractual duty under SAS 110 to report to a proper authority where suspected or actual fraud cast doubt on the integrity of the directors. Where the company was insolvent at the date of the audit report, that duty was owed for the benefit of creditors and the auditor ‘cannot invoke the maxim ex turpi causa or deny causation by reference to the knowledge and involvement in the fraud of Mr Stojevic’. 1 Companies Act 1985, s 394(1), now Companies Act 2006, s 519. 2 Companies Act 1985, s 394(3). See now Companies Act 2006, s 520.

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Illegality 11.21

Summary of Stone & Rolls v Moore Stephens 11.19 The majority of the House of Lords held that in a case where a company was used as a vehicle of fraud by its sole owner and had no innocent directors or shareholders, an action by that company against its auditor for negligence would fail on the ground of ex turpi. Two of the majority – Lord Walker and Lord Brown – founded their decision on the analysis that in the absence of any innocent participants, the fraud had to be attributed to the company itself, which could not therefore recover damages from a negligent auditor to compensate itself for its own fraud. The other concurring speech, by Lord Phillips, decided the case on the basis that the auditor’s duty was not owed for the benefit of third parties who dealt with the company as creditors or victims of its fraud and that those for whose benefit the duty was owed – the shareholders – were all implicated in the fraud, so a claim for their benefit must fail as arising ex turpi causa. 11.20 The analysis of Lord Phillips was novel and is impossible to square with the general principles of the law of contract and tort. The enforceability of a contractual duty, such as that owed by an auditor to its client, does not depend upon any quality of the persons for whose benefit enforcement is sought. If it were otherwise, then a company in liquidation would lose any ability to sue its auditors and quite likely to enforce many other contracts too. The analysis of Lord Walker and Lord Brown – at least in its essentials – is more orthodox. But it implies that the fraud of a ‘one-man company’ was attributed to that company for all purposes. This seems to overlook the general principle that attribution is to be determined by reference to the context in which the question is asked.1 That lacuna led inevitably and swiftly to the issue that came to the Supreme Court in Bilta v Nazir, which we discuss below. 1 Meridian Global Funds Management Asia v Securities Commission [1995] 2 AC 500 and see now (post-dating Stone & Rolls) Singularis v Daiwa [2020] AC 1189 at [34].

11.21 As Briggs J said in Lexi Holdings v Pannone & Partners,1 ‘it is no secret that the profession have found it very difficult to understand what the precise ratio of the decision in the Stone & Rolls case is’. By March 2014, Lord Walker was able to say judicially: ‘The decision of the House of Lords in Stone & Rolls, to which I was a party, has been the subject of a good deal of academic commentary, mostly critical’, and to recant of one key paragraph of his own reasoning in Stone & Rolls, thereby casting further doubt upon it.2 1 [2009] EWHC 3507 (Ch) at [13].

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11.22 Policy defences – ex turpi and insolvency 2 Moulin Global Eyecare Trading v Commissioner of Inland Revenue (2014) 17 HKCFAR 218 at [100]–[101].

Bilta v Nazir 11.22 Bilta (UK) Ltd was a company whose business was to take part in a VAT ‘missing trader’ fraud against HM Revenue and Customs.1 Bilta was in insolvent liquidation (at the suit of HMRC) and sued its officers (for breach of fiduciary duty and conspiracy) and other participants in the fraud (for dishonest assistance and conspiracy). The other participants sought to strike out the claim on the ground of ex turpi, applying the majority reasoning in Stone & Rolls. This case was nothing directly to do with accountants, so we will treat it as briefly as possible. However, its importance for our purposes is that the Supreme Court, which sat in a bench of seven justices, reviewed Stone & Rolls.2 1 Goods or services are bought and sold by connected entities, one of which recovers input tax from the authorities, while the one with the corresponding liability for output tax is rendered deliberately insolvent so it cannot pay. The insolvency is created by the promoters abstracting the money in breach of their duties to the company and of insolvency law. 2 Bilta (UK) Ltd v Nazir [2016] AC 1.

11.23 Bilta was in a sense a far easier case than Stone & Rolls. All 11 judges who decided it at all three levels held that the ex turpi defence must fail. It is not hard to state shortly the ratio that as between the company and its dishonest officers or agents, the dishonesty and fraud should not be attributed to the company (with the consequence that a defendant who dishonestly assists the officers may also be liable as an accessory). What cannot be stated so shortly is where that reasoning leaves the decision in Stone & Rolls, since it (at least arguably) undermines the reasons of the two most plausible majority speeches. 11.24 The seven justices of the Supreme Court handed down four judgments between them. It is convenient to start with the judgment of Lord Sumption, who had been successful counsel for Moore Stephens in Stone & Rolls. He stated at [80] that there were three points upon which the majority in Stone & Rolls were agreed and for which that case therefore stands as authority. First, the illegality defence was available to a company only where it was directly, rather than vicariously, responsible for the illegality. Secondly, it was not sufficient for the auditor to show that the directing mind and will of a company was responsible for the fraud, because that proposition would provide a defence even where there innocent directors or shareholders. The defence would not run if the claimant were not a ‘one-man company’. Thirdly, if the claimant was a ‘one-man company’, then a third party which was not

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Illegality 11.25 involved in the dishonesty, such as an auditor, could rely on the illegality defence to defeat a claim by the company. After stating these three points, Lord Sumption said at [81]: ‘There are difficulties about treating Stone & Rolls as authority for any wider principles than these. There are two main reasons for this. The first is that Lord Phillips and Lord Walker differed in their reasons for holding that the illegality defence could be taken against a oneman company. Lord Walker adopted the “sole actor” principle, a label which he derived from the case law of the United States, but which he supported by reference to ordinary principles of English company law. Lord Phillips on the other hand was guided by the principle that a loss is recoverable only if the relevant duty was to protect against loss of that kind: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191. He regarded this as expressing a rule of policy, which led him to conclude that Mr Stojevic constituted the entire constituency whose interests the auditors were bound to protect. It followed in his opinion that there was no reason not to attribute his state of mind to the company for the purposes of the illegality defence. The second reason is that Lord Phillips’s view that it was no part of the purpose of an audit report to protect the interests of current or prospective creditors was peculiarly his own. Although Lord Walker agreed with it (see para 168), the proposition was not part of his reasoning on the impact of illegality. This has proved more controversial than any other feature of the reasoning in the case: see, for example, Eilis Ferran, “Corporate Attribution and the Directing Mind and Will” (2011) 127 LQR 239, paras [sic] 251–257.1 The scope of an auditor’s duty and its relationship to the illegality defence may one day need to be revisited by this court, but it is not an issue in this appeal.’ 1 The clear-headed analysis of Professor Ferran at 127 LQR 251–257 was cited by Lord Mance and Lord Neuberger as well as by Lord Sumption.

11.25 Lord Mance dealt with Lord Sumption’s three propositions from Stone & Rolls at [50]. He did not agree that the case was authority for the first proposition, which derived from the concession of counsel (Mr Jonathan Sumption QC) and was not necessary to the decision. He did agree that the House of Lords rejected the auditor’s argument that merely because Mr Stojevic was the company’s mind and will and sole owner, his conduct fell to be attributed to the company as against the auditors. As to the third point, that ‘appears a factually correct representation of the outcome of Stone & Rolls, though the present appeal does not raise the correctness in law of that outcome, which may one day fall for reconsideration’.

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11.26 Policy defences – ex turpi and insolvency 11.26 Lords Toulson and Hodge stated that it would be easy to distinguish Bilta from Stone & Rolls on the ground that Bilta concerned directors who plainly did owe duties for the protection of creditors (unlike auditors according to the majority in Stone & Rolls), but ‘the case has caused so much difficulty that it would be wrong for us to leave it there’. They therefore analysed the speeches in Stone & Rolls at some length. At [151] they stated that the ‘critical features of the case’ were: ‘the scope of the auditors’ duty and the inability of the company to show that anyone who had any part in the ownership or management of the company was misled by the auditors’ negligence, which was a prerequisite for the company’s claim to succeed.’ The case was therefore parallel to Berg v Adams1 and the real issue was whether Lord Mance was right to distinguish it on the basis of the company having been insolvent at the audit date. They concluded at [152]: ‘We are not of course concerned in this case to revisit the point of disagreement between Lord Mance and the majority on that question. The finding that all whose interests were the subject of the auditors’ duty of care knew the facts which the auditors failed to detect was dispositive. The conclusion of the majority that the claim was therefore barred by illegality may be seen as a reflection on the illegal nature of the conduct as a matter of fact and perhaps a perceived need to bring their conclusion within the scope of the issues as argued, but it was not the illegality which on a proper analysis of their reasoning drove the conclusion. As Lord Phillips observed, the fundamental proposition which underlay the reasoning of Lord Walker, Lord Brown and himself was that the auditors owed no duty for the benefit of those for whose benefit the claim was brought. It necessarily followed that the claim should be struck out.’ 1 For Berg v Adams, see above at paras 8.17–8.19, 8.56, 8.109 and 8.139. The case was referred to extensively in Stone & Rolls by Lord Phillips, Lord Walker and Lord Mance.

11.27 Finally, Lords Toulson and Hodge said at [154]: ‘We conclude that Stone & Rolls should be regarded as a case which has no majority ratio decidendi. It stands as authority for the point which it decided, namely that on the facts of that case no claim lay against the auditors, but nothing more.’ 11.28 Lord Neuberger with the agreement of Lord Clarke and Lord Carnwath said at [24]: ‘subject to what I say in the next four paragraphs, I am of the view that, so far as it is to be regarded as strictly binding authority,

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Illegality 11.30 Stone & Rolls is best treated as a case which solely decided that the Court of Appeal was right to conclude that, on the facts of the particular case, the illegality defence succeeded and that the claim should be struck out.’ 11.29 Like Lord Mance, Lord Neuberger agreed with the second and third propositions that Lord Sumption derived from Stone & Rolls, but not with the first. In relation to the third proposition Lord Neuberger agreed with Lords Toulson and Hodge that it was supported (at least in relation to a solvent company) by Berg v Adams, but he stated the qualification to the third proposition that the defence would be available ‘only on some occasions’ where there were no innocent shareholders or directors. As to the actual result in Stone & Rolls, Lord Neuberger said this at [28]: ‘However, I note that Lord Mance suggests that it should be an open question whether the third proposition would apply to preclude a claim against auditors where, at the relevant audit date, the company concerned was in or near insolvency. While it appears that the third proposition, as extracted from three judgments in Stone & Rolls, would so apply, I have come to the conclusion that, on this appeal at least, we should not purport definitively to confirm that it has that effect. I am of the view that we ought not shut the point out, in the light of (a) our conclusion that attribution is highly context-specific (see para 9 above), (b) Lord Walker’s change of mind (see para 22 above), (c) the fact that the three judgments in Stone & Rolls which support the third proposition) are not in harmony (in the passages cited at the end of para 27 above), and (d) the fact that the third proposition is in any event not an absolute rule (see the end of para 26 above).’ 11.30 Finally, with the flourish of a memorable soundbite, Lord Neuberger said at [30]: ‘Subject to these points, the time has come in my view for us to hold that the decision in Stone & Rolls should, as Lord Denning MR graphically put it in relation to another case in In re King, decd [1963] Ch 459, 483, be put “on one side in a pile and marked ‘not to be looked at again’”. Without disrespect to the thinking and research that went into the reasoning of the five Law Lords in that case, and although persuasive points and observations may be found from each of the individual opinions, it is not in the interests of the future clarity of the law for it to be treated as authoritative or of assistance save as already indicated.’

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11.31 Policy defences – ex turpi and insolvency

Singularis Holdings Ltd v Daiwa 11.31 The Supreme Court returned to the vexed issues raised by Stone & Rolls in Singularis v Daiwa.1 Singularis v Daiwa was a case where the sole shareholder and only active director of a company had perpetrated a fraud and the company’s banker had negligently permitted his activities to go unchecked. The only judgment was delivered by Baroness Hale of Richmond, who agreed with both lower courts that the company was not a ‘one-man company’, because there were also innocent, though inactive, directors.2 She also held that there was no principle that the acts of a sole actor must always be attributed to that actor’s ‘one-man company’; instead, attribution always depended on the context; and, accordingly ‘Stone & Rolls can finally be laid to rest’.3 1 [2020] AC 1189. 2 At [33] and [34] (‘I agree.’). 3 At [34].

11.32 The Bank argued that it was an odd result if a claim against a negligent banker succeeded in circumstances where a claim against a negligent auditor would fail (as in Stone & Rolls). Lady Hale’s response to this argument is significant: ‘But (quite apart from the difficulties of Stone & Rolls) this ignores the fact that the duties of auditors are different from the duties of banks and brokers. The auditor’s duty is to report on the company’s accounts to those having a proprietary interest in the company or concerned with its management and control. If the company already knows the true position (as in Berg) then the auditor’s negligence does not cause the loss.’ This statement is an important confirmation of the Berg/Galoo principle as explained above in Chapter 8 and again below. It is also an indication of where Stone & Rolls now stands as a matter of binding precedent, to which we now turn.

Ex turpi causa – where are we now as a matter of precedent? 11.33 As a matter of English law, the judgments in Bilta appeared to have clarified what propositions of law may be taken as having been decided by Stone & Rolls. In this regard, there was a majority, consisting of Lords Neuberger, Clarke, Carnwath, and Mance for the proposition that Stone & Rolls is authority for the second and third of the three propositions stated by

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Illegality 11.36 Lord Sumption at [80], but not for his first. That is to say, in English law Stone & Rolls is authority for the following two propositions (and no others): (i)

It is not sufficient for an auditor to show that the directing mind and will of a company was party to relevant illegality in order for a claim for audit negligence to be barred by ex turpi.

(ii) A defendant third party, including an auditor, who deals with a claimant ‘one-man’ company (ie a company with no innocent shareholders or directors) can rely on the dishonesty of the company to defeat its claim, at any rate where the auditor is not itself involved in the dishonesty and at least ‘on some occasions’, including on the facts of Stone & Rolls. 11.34 In Singularis v Daiwa, the Supreme Court emphasised that the dishonesty of the single actor would be attributed to the ‘one-man company’ only ‘on some occasions’, but accepted (as had the majority in Bilta) that such occasions would include the facts of Stone & Rolls, subject to reconsideration of that case. The sense of the statement that ‘Stone & Rolls can finally be laid to rest’ is not that its result should no longer be seen as correct, but that it should not be taken to stand for any wider principle applicable beyond the facts of that case. 11.35 It seems to us that the result of Bilta and Singularis is that Stone & Rolls is authority binding on English courts below the level of the Supreme Court for the two propositions set out above. While Lords Toulson and Hodge would have gone further and effectively deprived Stone & Rolls of any binding effect, and despite Lord Neuberger’s memorable application of Lord Denning’s sound bite about ‘never to be looked at again’, there was, as we have stated above, a majority in the Supreme Court for the view that Lord Sumption’s second and third propositions may be properly derived from the decision in Stone & Rolls, which therefore stands as authority for them, as confirmed in Singularis. 11.36 It is also significant that there was a majority in the Supreme Court in Bilta for the view that even the actual result of Stone & Rolls – and therefore the two binding propositions – might have to be revisited by the Supreme Court. That was the express view of the same majority – Lords Neuberger, Clarke, Carnwath and Mance – and it is also implicit in the stronger view of Lords Toulson and Hodge that Stone & Rolls should be treated as a case on its own facts. Moreover, it seems to have been implicit in Lady Hale’s reference in Singularis to ‘the difficulties of Stone & Rolls’ that it might not have been correctly decided, though an alternative reading would be that these words denoted the problems with the reasoning rather than the result.

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11.37 Policy defences – ex turpi and insolvency 11.37 If the essential facts of Stone & Rolls were to arise again, it seems to us that as a matter of binding precedent, the duty of a first instance judge in England will be to strike out the claim, but that permission for a leapfrog appeal to the Supreme Court should be granted if the claimant wished to invite that court to reconsider the decision. A court elsewhere in the common law world should consider itself free to reconsider the issue from first principles.

Stone & Rolls reconsidered in principle 11.38 The courts in Stone & Rolls were unduly focused on the issues run by the claimant as responses to the auditor’s ex turpi defence, namely attribution and the ‘very thing’ principle and, as a result, gave insufficient attention to the specific context of the audit. On this point, Lord Mance in Stone & Rolls itself, Professor Eilis Ferran in ‘Corporate Attribution and the Directing Mind and Will’1 and Lords Toulson and Hodge in Bilta, have most usefully and clearly identified what the real issues are. Of those authorities, only Lord Mance gave what he considered to be the outcome of those issues, an outcome from which we respectfully differ for reasons that we now explain. 1 (2011) 127 LQR 239, 251–257.

11.39 The core duties of the auditor under its contract with the company are to audit competently and to make a formal report to shareholders on the opinion formed as a result of that audit. In relation to those duties, an important principle was stated by Hobhouse J in Berg Sons v Adams in passages we have set out above at paras 8.17, 8.56, 8.109 and 8.139. As Hobhouse J set out, the auditor is engaged by the company to provide information about the accounts. If he provides inaccurate or incomplete information, in the ordinary course the company may rely on that and perhaps suffer loss. However, if all the directors and shareholders actually know that the information is inaccurate or incomplete (for example, because they are all party to the falsification of the accounts), then the company will not be misled by anything done or said by the auditor and will be incapable of suffering loss as a result of the auditor’s negligence. It is possible that the company will suffer loss which would not have occurred but for the auditor’s negligence, for example by being able to continue to trade, but that loss is not legally caused by the auditor’s breach of duty. The factual causal chain in such a case requires reliance by persons to whom the auditor owes no duty of care and such reliance is not part of a chain of legal causation. 11.40 This principle from Berg Sons v Adams is also the essential teaching of Galoo and several other cases we have discussed in Chapter 8 above. As we have noted above, it has now been endorsed unanimously (if obiter) by the

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Illegality 11.44 Supreme Court in Singularis v Daiwa. There is no real doubt that it forms part of English law. It might aptly be called ‘the Berg/Galoo principle’. 11.41 A ‘one-man company’ whose sole director and shareholder knows that the accounts are wrong will generally have no claim against a negligent auditor who fails to identify the dishonesty because the Berg/Galoo principle bars such a claim. This is a wider principle than ex turpi, because it would apply even if the company’s wrongdoing was not sufficiently illegal or immoral to engage the ex turpi defence. Even if ex turpi covers all the same ground on the basis that false accounting is itself a sufficient criminal act to engage that defence, it does not add anything to the Berg/Galoo principle in any ordinary case. 11.42 Luscombe v Roberts was treated by Lord Brown in Stone & Rolls as an illustration of the application of ex turpi to an audit case, but it is also a clear illustration that the Berg/Galoo principle is sufficient to cover the issue in such cases, because the report of Luscombe does not refer to ex turpi in terms and is unclear as to what principle is being applied. 11.43 A different field where ex turpi could be raised is tax advice.1 Where it transpires that a tax adviser or agent negligently permits incorrect returns to be submitted to tax authorities, in some circumstances, the client will be committing an offence for which he may suffer adverse consequences. If the client knew that his returns are inaccurate, then the legal cause of the consequences that befall him will be his own deliberate wrongdoing rather than the tax adviser’s failure to advise him of that which he already knew; if the client did not realise his mistake, then it may be that the legal cause of the consequences will be the adviser’s negligence. The Berg/Galoo principle is all that is needed to reach the right result in these cases. 1 Ex turpi was raised in the Singapore tax advice case of United Project Consultants v Leong Kwok Onn [2005] 4 SLR 214, but the reasoning of the Singapore Court of Appeal on the issue is not good law at least in England for the reasons explained in Stone & Rolls v Moore Stephens by Rimer LJ in the Court of Appeal at [102]–[105] and by Lord Walker in the House of Lords at [180]–[182].

11.44 There is one remote scenario in which the application of ex turpi could in theory give rise to a different outcome to the Berg/Galoo principle. Gray v Thames Trains was decided by the House of Lords just a few weeks before the speeches in Stone & Rolls were handed down.1 Three members of the House – Lords Phillips, Scott and Brown – were party to both decisions. Gray concerned a claim by a claimant psychologically injured by the defendant’s negligence, leading him to commit an act of manslaughter. Lord Hoffmann in the House of Lords identified two relevant sub-rules of ex turpi. The ‘narrow form’ is that ‘you cannot recover for damage which is the consequence of a sentence imposed upon you for a criminal act’.2 This is in order to protect the consistency of the law: the sentence is deemed to be a

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11.45 Policy defences – ex turpi and insolvency reflection of the claimant’s personal responsibility for his own act and cannot be blamed by another court on some other person in priority to the claimant. This narrow version of the rule could apply in a tax case to prevent recovery by a claimant who would otherwise have a good claim against his accountant, but it would only arrive at a different result from the Berg/Galoo principle if the sentence in question was imposed for an offence which was committed without actual knowledge of the key facts, which is why we describe the scenario as ‘remote’. 1 [2009] 1 AC 1339. The Supreme Court has confirmed that Gray remains good law following Patel v Mirza in Henderson v Dorset Health Care [2020] 3 WLR 1124. 2 [2009] 1 AC 1339, per Lord Hoffmann at [32].

11.45 The ‘wider form’ of the rule in Gray was that ‘you cannot recover for damage which is the consequence of your own criminal act.’1 As Lord Hoffmann held in Gray, with the agreement of the other members of the House, that wider rule could be expressed simply as part of the law of causation. His finding that there was such a wider rule was part of the ratio of the case and all of their Lordships agreed with the reasoning that the wider rule could equally be expressed in terms of causation. This ‘wider form’ is the very sub-rule of the ex turpi principle which was arguably applicable in Stone & Rolls. It is surprising that Gray received no more than a passing mention in the speeches in Stone & Rolls.2 Gray could have been cited as authority that showed that the Berg/Galoo principle of legal causation was coterminous with ex turpi in a case like Stone & Rolls, but unencumbered by the issue of attribution which so diverted their Lordships in Stone & Rolls. 1 [2009] 1 AC 1339, per Lord Hoffmann at [32]. 2 See the speech of Lord Phillips at [25]. The reference to Gray in the report of the claimant’s argument can only be a reference to the Court of Appeal decision.

11.46 As we have noted above, Lord Mance in Stone & Rolls did hold (rightly in our view) that the case did not turn on complexities of attribution or illegality, but instead on the applicability of the Berg/Galoo principle to the case at hand. Lord Mance gave two reasons for finding that the Berg/Galoo principle did not bar the claim of Stone & Rolls: (i)

the company’s insolvency at the audit date; and

(ii) an auditor’s duty to report to an outside authority if fraud was uncovered. Both of these points raise fundamental issues about auditing and company law. We consider them in turn below. 11.47 Lord Mance’s first reason seeks to assimilate an auditor with directors of the company inasmuch as their duties shift upon insolvency from being owed solely to shareholders to being owed at least partly to creditors. In this context, creditors are not outsiders from the company, but take the place of 300

Illegality 11.49 shareholders as the principal beneficiaries of the insolvent company. On this basis, if a company is insolvent at the audit date, then the auditor may be treated as auditing for the benefit of creditors as stakeholders in the company and their reliance on the audit report would then become legally relevant to establishing the company’s loss. There is no question here of the auditor being directly liable to creditors; the argument is that the creditors stand in the shoes of the shareholders as representatives of the company who are potentially liable to be misled by an inaccurate audit report. 11.48 The shift in directors’ duties takes place only when the director concerned has actual knowledge of the facts that render the company insolvent or of doubtful solvency.1 It would be too harsh to impose a requirement on directors to consider creditors if the directors in all honesty did not realise that the company might be insolvent, even if they were negligent in that regard. The same is true of auditors: if the auditor does an honest but negligent job and genuinely believes that the company is solvent, it would be very harsh to impose upon it a duty to treat the company as if it were insolvent and to consider creditors in deciding what report to make and to whom. One reason this would be too severe is because it would put the cart before the horse: when the auditor commences work, its duty is owed to the company which it reasonably believes to be solvent. The breach of duty committed when an audit failure occurs is a breach of a duty owed to the apparently solvent company. It is backwards reasoning to say that because the result of that breach is that the auditor fails to discover that the company is insolvent, the auditor should be treated as if it had known all along that it was auditing an insolvent company. 1 See re HLC Environmental Projects [2014] BCC 337, [94]–[95] and the authorities cited there at [95]. The proximity of the company’s finances to actual insolvency is the subject of detailed consideration by the Court of Appeal in BTI v Sequana [2019] Bus LR 2178, which is under appeal to the Supreme Court at the time of writing, but this decision does not focus on the directors’ requisite state of mind.

11.49 Lord Mance’s second reason was founded upon the claim that an auditor owes a duty of care to the company to report fraud to a regulator or other body outside the company. The principal basis of that claim in Lord Mance’s speech was the express terms of auditing standard SAS 110, especially at 110.12: ‘When a suspected or actual instance of fraud casts doubt on the integrity of the directors auditors should make a report direct to a proper authority in the public interest without delay and without informing the directors in advance.’ Lord Mance viewed that as being consistent with Companies Act 1985, s 394, which required an auditor who resigned to make a statement of any matters which the auditor considered should be brought to the attention of members or 301

11.50 Policy defences – ex turpi and insolvency creditors and which required the company to send that statement to members and debenture holders. 11.50 Companies Act 1985, s 394 (now Companies Act 2006, ss 519–520) provides very little support for the idea of a duty owed by auditors for the benefit of creditors. First, it is a stretch to suggest that these provisions are intended to create or extend a duty of care in tort owed to the company. If an auditor failed to deposit the statement, then that might be a breach of statutory duty, which could be actionable at the suit of any interested party. But if the auditor negligently fails to realise that the circumstances require it to resign, this section has no relevance. Secondly, the House of Lords in Caparo noted that the Companies Acts made the audit report publicly available through deposit with the Registrar of Companies, but took the view that this did not influence the scope of the auditor’s duty of care. It is hard to see that the limited duty to deposit a statement on resignation should be analysed in a different way. 11.51 As to SAS 110, it is possible to read the standard as imposing a duty on auditors to report ‘direct to a proper authority’. Since auditors invariably contract to carry out their audit in accordance with auditing standards, it is arguable that this amounted to a duty owed to the company in contract to make such a report to a ‘proper authority’. This duty could then, on Lord Mance’s view, be aggregated with the duty to carry out the audit competently to arrive at a duty of care owed to the company to report to a proper authority whenever a competent audit would have revealed fraud, casting doubt on the integrity of the directors. Although dishonest directors and shareholders could not claim to rely on that duty being properly carried out, because they already know of the fraud, innocent creditors can do so if the company was insolvent at the audit date, because in an insolvent company, the creditors’ interest is recognised in the same way as, and alongside, the shareholders’ interest. 11.52 One answer to Lord Mance’s second argument is the same as the answer to his first: unless the auditor actually knows of the insolvency, there is no principle which brings the innocent creditors within the company as if they were themselves an organ of the company. While such a principle could be justified on policy grounds for reasons given by Lord Mance, it is not currently part of English law and would be an extension with far-reaching implications for audit work. If such an extension of the protection of creditors is to be made, then it should be made deliberately and openly by Parliament or audit regulators, rather than by judicial development of the common law. 11.53 A second answer is that on its true construction, SAS 110 was not imposing a duty to the company, but reciting the existence of the auditor’s duties under UK money laundering law. Whether or not this was the right construction of SAS 110, it seems clearly to be the better reading of International Auditing Standard 240, which replaced SAS 110 in 302

Illegality 11.57 October 2009, as we discuss immediately below. If the issue of SAS 110 comes up again, we would suggest that ISA 240 should be treated as clarifying the way that SAS 110 was always to be read rather than changing the position. 11.54 ISA 240 requires the auditor to report any fraud to ‘those charged with governance’. As to outside reporting, ISA 240 says only the following, at para 43: ‘If the auditor has identified or suspects a fraud, the auditor shall determine whether there is a responsibility to report the occurrence or suspicion to a party outside the entity. Although the auditor’s professional duty to maintain the confidentiality of client information may preclude such reporting, the auditor’s legal responsibilities may override the duty of confidentiality in some circumstances.’ Since June 2016, a new paragraph, 43R-1, provides: ‘For audits of financial statements of public interest entities, where the entity does not investigate the matter referred to in paragraph 42R-1, the auditor shall inform the authorities responsible for investigating such irregularities.’ 11.55 The application guidance to ISA 240, para 43 points out that the auditor’s legal responsibilities vary by country and that in certain circumstances, the auditor’s duty of confidentiality may be overridden by law. A footnote in the UK version of ISA 240 points out that in the UK anti-money laundering legislation imposes a duty on auditors to report suspected money laundering activity and ‘[S]uspicions relating to fraud are likely to be required to be reported under this legislation’. We consider the money laundering rules and guidance for auditors at Chapter 20 below. 11.56 ISA 240 thus clarifies the nature of the auditor’s responsibility for reporting fraud or illegality outside the entity in an important respect. It is a responsibility arising under statute (and, in relation to public interest entities, under EU regulation), independently of the auditor’s duty to the company itself. If the auditor has not actually identified a fraud or other matter that requires reporting to an outside authority, then it cannot be in breach of this duty. For this purpose, the aggregation of the duty to the company to audit competently with the statutory duty to report illegality under money laundering (or other) laws is an illegitimate step. The reporting duty arises only in respect of matters actually known to the auditor, not in relation to matters which an auditor failed to discover owing to defects in the audit. 11.57 For these reasons, the result in Stone & Rolls was right and should be confirmed if it is ever revisited. However, the reasoning in the case is unsatisfactory as has been acknowledged by the Supreme Court in Bilta and 303

11.58 Policy defences – ex turpi and insolvency again in Singularis v Daiwa. The important issues raised by Lord Mance’s speech deserve consideration, although for our part, we believe that the view he put forward is not part of English law and should not become so, at least without overt and carefully considered statutory or regulatory change.

Ex turpi causa – conclusion 11.58 For the reasons we have set out above, the scope of operation of ex turpi in accountancy cases is for practical purposes no wider than the Berg/Galoo principle. While Stone & Rolls was rightly decided, the issues discussed at length in the majority speeches form a blind alley in the law. If the auditor has an ex turpi defence, it should be capable of recognition on the basis of the wider principle in Gray v Thames Trains and it should be parallel to an equally effective defence based on legal causation.

THE ‘NO DUTY FOR THE BENEFIT OF CREDITORS’ DEFENCE 11.59 It is possible to collect several statements of high authority to the effect that the auditor’s duty of care is not owed for the benefit of creditors such that it could be a defence for the auditor to aver that the company is insolvent at the date of trial or perhaps at some relevant earlier date. In our view, these statements are wrong and no such defence exists. Nevertheless, given the high places from which these statements have fallen, such a defence appears to be presently properly arguable and it is right to explain it here. 11.60 The originating source for the idea that such a defence might exist appears to be Lord Hoffmann’s lecture to the Chancery Bar Association entitled ‘Common Sense and Causing Loss’. After describing the facts of Galoo, though not naming the case, Lord Hoffmann said this: ‘The real question, as it seems to me, was the scope of the duty owed by the auditors. Did they owe a duty to future creditors of the company to protect them against the possibility that they were unwittingly trading with an insolvent company or did they not? If they did, then their negligence caused the losses. If they did not; then it did not. The question came before the court as one of causation rather than duty of care because technically the plaintiff was the company suing by its liquidator and the company was undoubtedly owed a duty of care. But the damages which it sought to recover were claimed on behalf of creditors and so the question of substance was whether the duty of the auditors should be regarded as protecting the interests of the creditors. There are, I think, quite powerful arguments for saying that it should 304

The ‘no duty for the benefit of creditors’ defence 11.64 not; arguments which underlay the decision of the House of Lords in Caparo. But these are questions of remedial justice and economic policy which cannot be submerged under an appeal to common sense.’ 11.61 As we have set out above both in Chapter 8 and again in the present chapter in relation to the ex turpi defence, the decision in Galoo is indeed properly viewed as a decision about causation and is consistent with the principle in Berg Sons v Adams which has always been treated as correct. Lord Hoffmann’s real target in his lecture was the appeal to ‘common sense’ in Galoo. Whether or not he was right to criticise that approach to causation, there was no real basis for his suggestion that the ‘question of substance’ in Galoo was whether the auditors’ duty should be regarded as protecting the interests of the creditors. 11.62 In Caparo, as we have explained above in Chapter 5, it was common ground that the auditors owed a duty to the company. The question was whether it also owed a duty of care in tort to investors and shareholders and, if the latter, to protect what interests. In holding that the tortious duty was not owed to investors or to shareholders in their capacity as investors, the House of Lords made it clear that there was also no tortious duty to creditors, approving Millett J’s decision in Al Saudi Bank v Clarke Pixley. But the lack of a duty owed to individual shareholders as investors did not detract from the duty to the company, insofar as that might inure to the benefit of shareholders while the company was solvent. Similarly, there is nothing in the speeches in Caparo to suggest that the lack of a duty owed to individual creditors detracted from the duty to the company, insofar as that might inure to the benefit of creditors if the company was insolvent. 11.63 It is important to recall that the audit duty is first and foremost a contractual duty owed to the company. For that purpose, the legal personality of the company must be respected. A party who contracts with a company cannot seek to cut down his contractual obligation (or his secondary obligation to pay damages for breach) on the basis that he intended to benefit only the shareholders of the company and not its creditors. That approach would do massive damage to the protection of creditors in company insolvency and is not justified by any legal principle. Nor, as we have explained above, is it properly justified by appealing to Caparo. 11.64 In Equitable Life v Ernst & Young,1 the Court of Appeal (Brooke, Rix and Dyson LJJ) had plainly reached a clear view that the claim should be permitted to proceed to trial. It was concerned in that context to distinguish Galoo. In doing so, the Court stated thus: ‘Although Galoo was a case of summary disposal, the facts of the case were idiosyncratic. Since, ex hypothesi, the company was insolvent, the losses suffered by continuing to trade were really suffered by the 305

11.65 Policy defences – ex turpi and insolvency creditors (or by the company’s parent), and so, although the case was not argued in that way, the real question may well have been whether the auditors owed any duty to the creditors (see Lord Hoffmann’s lecture to the Chancery Bar Association, 15 June 1999, Common Sense and Causing Loss, at pp 22–23).’ 1 [2004] PNLR 16 at [133].

11.65 This dictum took Lord Hoffman’s suggestion a step further by proposing that the ‘real question’ in Galoo was whether the auditors owed any duty to the creditors. That would involve lifting or ignoring the corporate veil altogether and it would take a heretical, indeed revolutionary, approach to contractual and tortious duties owed to companies. 11.66 Moreover, the Court of Appeal in Equitable Life conflated the creditors with the company’s parent, ie, its shareholder. This makes no sense if the intention was to draw a distinction between creditors who are not owed a duty and shareholders who are. 11.67 This line of reasoning was taken up in some of the speeches in Stone & Rolls, especially that of Lord Phillips. At [19] Lord Phillips said: ‘The leading authority is Caparo Industries plc v Dickman [1990] 2 AC 605. The duties of an auditor are founded in contract and the extent of the duties undertaken by contract must be interpreted in the light of the relevant statutory provisions and the relevant auditing standards. The duties are duties of reasonable care in carrying out the audit of the company’s accounts. They are owed to the company in the interests of its shareholders. No duty is owed directly to the individual shareholders. This is because the shareholders’ interests are protected by the duty owed to the company. No duty is owed to creditors – Al Saudi Banque v Clarke Pixley [1990] Ch 313. … The scope of the duty of care owed by auditors is a matter to which I shall return later in this opinion. For present purposes it suffices to note that the duty is unquestionably imposed in the interests of, at least, the shareholders of the company.’ 11.68 This paragraph contains several questionable ideas. First, Lord Phillips seems to suggest that the reason that the House of Lords in Caparo held that no duty of care was owed to individual shareholders was that their interests were protected by the duty owed to the company. Of course they were not, which is why the issue arose as it did in Caparo. The reasons that no duty was owed to shareholders had nothing to do with whether their interests were already protected: they were to do with the limited scope of the duty that could be inferred from the legislation requiring auditors to report to shareholders. Secondly, the final sentence of the paragraph misses the point that the auditor’s 306

The ‘no duty for the benefit of creditors’ defence 11.72 principal duties are not imposed by law at all, but are voluntarily assumed by the auditor by entering into a contract with the company. The company as a legal person has its own interests and it is those which are protected by the contract. Caparo did recognise an additional duty of care owed to shareholders as a body, but the House of Lords held that any cause of action to enforce this duty would be better pursued by the company in its own name under the primary contractual (and coextensive tortious) duty. 11.69 At the end of his speech, at [85], Lord Phillips said: ‘The exercise of an auditor’s duties to a company will, in some situations, have the effect of preserving the assets of the company. Such preservation will, whenever there is a risk that the company’s assets may prove inadequate to meet its liabilities, protect not merely the interests of the shareholders but those of the creditors. It is arguable that the scope of the duty undertaken by the auditors of a company should extend to protecting the interest that the creditors have in the preservation of the assets of the company. So to hold would involve departing from, or at least extending, the reasoning of this House in Caparo. Such an extension would not, however, assist S&R in this case. To recover damages in this case S&R would have to establish that the scope of the duty undertaken by Moore Stephens extended to taking reasonable care to ensure that the company was not used as a vehicle for fraud and that this duty was owed for the benefit of those that the company might defraud. I see no prospect that such a duty could be established.’ 11.70 This passage also engenders confusion. Nothing in the reasoning of Caparo addresses the question what natural persons might benefit from the primary contractual duty owed by an auditor to a company. That is partly because the primary contractual duty was not in issue in Caparo and partly because there is no principled basis for defining or restricting a contractual duty of care owed to a company on the basis of whether shareholders, debenture holders, employees, general creditors or others will ultimately benefit from such a duty or from damages awarded for its breach. 11.71 Similar dicta suggesting that the principles established by Caparo operate to bar a claim by an insolvent company can be found in the speech of Lord Brown at [202]–[203]. We respectfully disagree with them for the same reasons. 11.72 The orthodox and correct legal analysis on this point was stated by Lord Scott in Stone & Rolls at [119] thus: ‘Caparo Industries plc v Dickman [1990] 2 AC 605 established that auditors who prepare and submit to the company of which they are 307

11.73 Policy defences – ex turpi and insolvency auditors negligently prepared accounts and reports may be in breach of the duty they owe to the company but are not in breach of any duty they owe to the shareholders. The company can recover in damages any loss caused by the breach of duty and the shareholders have no independent cause of action. Where a company is insolvent, loss caused to the company by a similar breach of duty by its auditors can similarly be remedied by an action in damages brought by the company. Its creditors, like the shareholders of a solvent company, are owed no duty of care by the auditors and can have no independent cause of action. None of this is in doubt. There is, however, a difference between a cause of action in negligence brought by a solvent company and a similar cause of action brought by an insolvent company. In the former case any damages recovered will benefit the shareholders; in the latter case the damages will benefit the creditors.’ 11.73 In conclusion, there are dicta of Lord Hoffmann (extra-judicially only), the Court of Appeal (Brooke, Rix and Dyson LJJ), Lord Phillips and Lord Brown all of which could be taken to support a principle that the auditor’s duty to the company is not owed for the benefit of creditors. This would seem to mean that to the extent that the company is and remains insolvent (at what relevant date would have to be explored), it cannot claim against its auditors. In our view, these dicta should be seen in context. In the case of the first two, they were reactions, perhaps over-hasty, to a desire to explain or distinguish Galoo; in the case of the second two, they were part of flawed reasoning in the confusing case of Stone & Rolls. In our view there is no such principle as this, and it is irrelevant to any claim against an auditor whether the company making the claim is, or was, insolvent.

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Chapter 12

Limitation

INTRODUCTION 12.01 In this chapter we explain how the rules on limitation, as contained in the Limitation Act 1980, apply to claims against accountants. 12.02 As has been stated on many occasions, limitation periods exist in order to protect defendants from having to defend stale proceedings and to promote legal certainty. However, a balance has to be struck between the interests of claimants and defendants. As Lord Scott stated in Haward v Fawcetts (a firm):1 ‘It is important, in my opinion, to keep in mind that limitation defences are creatures of statute. The expression “statute-barred” makes the point. And, in prescribing the conditions for the barring of an action on account of the lapse of time before its commencement, Parliament has had to strike a balance between the interests of claimants and the interests of defendants. It is a hardship, and in a sense an injustice, to a claimant with a good cause of action for damages to which, let it be assumed, there is no defence on the merits to be barred from prosecuting the cause of action on account simply of the lapse of time since the occurrence of the injury for which redress is sought. But it is also a hardship to a defendant to have a cause of action hanging over him, like the sword of Damocles, for an indefinite period. Lapse of time may lead to the loss of vital evidence; it is very likely to lead to a blurring of the memories of witnesses and to the litigation becoming even more of a lottery than would anyway be the case; and uncertainty as to whether an action will or will not be prosecuted may make a sensible and rational arrangement by the defendant of his affairs very difficult and sometimes impossible. Each of the various statutes of limitation that over the years Parliament has enacted, starting with the Limitation Act 1623 (21 Jac 1 c 16) and coming down to the 1980 Act, represents Parliament’s attempt to strike a balance between these irreconcilable interests, both legitimate.’ 1 [2006] 1 WLR 682 at [32].

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12.03 Limitation 12.03 Notwithstanding the public policy of ensuring that defendants do not have proceedings hanging over them indefinitely, the courts will not take limitation points of their own motion. In general, therefore, it is incumbent on defendants to plead the expiry of a relevant limitation period in their defence.1 1 CPR PD 16, para 3.1. Where limitation defences are pleaded, they should be tried on a preliminary basis wherever feasible: see KR v Bryn Alyn Community (Holdings) Ltd (In Liquidation) [2003] QB 1441 at [74] per Auld LJ.

12.04 Pursuant to the Limitation Act 1980, claims in contract and tort are subject to a six-year limitation period from the date on which the cause of action accrued.1 In the context of claims against accountants, the question of when the cause of action accrued has proved to be complicated and the issues that have arisen in that regard are discussed below. We then go on to consider the operation of ss 14A and 32 of the Limitation Act 1980, which extend the primary limitation period of six years in cases of latent damage (s 14A) and fraud, deliberate concealment, or mistake (s 32). We then explain how the rules on limitation apply when a claimant seeks to amend its statement of case after the expiry of a relevant limitation period and, at the end of the chapter, we deal briefly with claims for contribution. 1 Section 2 (in the case of tort claims) and s 5 (in the case of contract claims).

WHEN TIME STARTS TO RUN 12.05 In claims for breach of contract, the cause of action accrues for limitation purposes on the date of breach, irrespective of when the claimant suffered any loss.1 In contrast, in tort claims time starts to run from the date on which damage was sustained by the claimant. The effect of this is that in many claims against accountants, where concurrent liability in contract and tort is alleged, it will be advantageous for claimants to sue in the tort of negligence in order to benefit from a later start date for the six-year limitation period.2 1 When computing time, parts of a day are excluded so the time runs from the day following the day on which the cause of action arose: Marren v Dawson Bentley and Co Ltd [1961] 2 QB 135. 2 The House of Lords accepted in Henderson v Merrett Syndicates Ltd (No 1) [1995] 2 AC 145 that claimants in such cases are entitled to pursue whichever cause of action is most beneficial to them.

12.06 Where a claimant has suffered economic losses, the task of identifying the date on which a claimant sustained actionable damage is easy in some cases, but more difficult in others. A particular issue which has arisen in the case law is whether a cause of action accrues when a claimant is, as the result of a professional’s negligence, exposed to a contingent (as opposed 310

When time starts to run 12.06 to an actual) liability. This was the issue before the House of Lords in the well-known case of Law Society v Sephton & Co.1 The facts were as follows. The Law Society brought a negligence claim against a firm of accountants which had been responsible for preparing accounts for a fraudulent solicitor. The solicitor had made various misappropriations from his client account as a result of which the Law Society had been required to make payments out of the Solicitors Compensation Fund (‘the Fund’) to his former clients. The defendant firm of accountants applied to strike out the claim on the basis that it was time-barred; in particular, they argued that the Law Society had sustained damage whenever the solicitor had misappropriated a client’s money because each misappropriation had given the relevant client of the solicitor a right to make a claim for compensation out of the Fund. The House of Lords unanimously rejected that argument and held that the claim was not time-barred because the Law Society had only sustained damage when each client actually made a claim for compensation; until that point, the Law Society had only incurred a contingent liability to pay compensation to that client and such a liability was insufficient to constitute the accrual of the cause of action. In the words of Lord Hoffmann:2 ‘In my opinion, therefore, the question must be decided on principle. A contingent liability is not as such damage until the contingency occurs. The existence of a contingent liability may depress the value of other property, as in Forster v Outred & Co [1982] 1 WLR 86, or it may mean that a party to a bilateral transaction has received less than he should have done, or is worse off than if he had not entered into the transaction (according to which is the appropriate measure of damages in the circumstances). But, standing alone as in this case, the contingency is not damage. … No doubt in most cases in which a party incurs a contingent liability as a result of entering into a transaction, that liability will result in damage for the reasons already discussed in relation to bilateral transactions. But I would prefer to put my decision on the sole basis that the possibility of an obligation to pay money in the future is not in itself damage.’ Earlier in his judgment Lord Hoffmann said he agreed with the analysis of the High Court of Australia in Wardley Australia Ltd v State of Western Australia where it had said:3 ‘If … the English decisions properly understood support the proposition that where, as a result of the defendant’s negligent misrepresentation, the plaintiff entered into a contract which exposes him or her to a contingent loss or liability, the plaintiff first suffered loss or damage on entry into the contract, we do not agree with them. In our opinion, in such a case, the plaintiff sustains no actual damage 311

12.07 Limitation until the contingency is fulfilled and the loss becomes actual; until that happens the loss is prospective and may never be incurred.’ 1 [2006] 2 AC 543. 2 At [30]–[31]. 3 (1992) 175 CLR 514 at 532.

12.07 In Sephton the House of Lords distinguished the earlier decision of the Court of Appeal in Forster v Outred & Co.1 In that case the claimant entered into a mortgage deed in reliance upon negligent advice from the defendant solicitors. It was held that the claim was time-barred because the claimant had suffered loss at the time she entered into the mortgage and not at the later date when a demand for payment was made under the deed. The decision in Sephton has proved to be controversial and in Axa Insurance Ltd v Akther & Darby Arden LJ even stated that it should be revisited by the Supreme Court.2 In Axa, Arden LJ (with whom Longmore LJ agreed) identified two categories of case where a possible future liability may give rise to an actual present liability and loss being suffered immediately:3 ‘… there can be cases, like that of Mrs Forster, where a contingent liability is incurred but it does not crystallise into an actual liability until a future date but where damage occurs for the purposes of the commencement of the limitation period at the time when the transaction is entered into so that time starts running from that time. I will call this “the damaged asset rule” …’ [cases where] there was a bilateral transaction under which the claimant should have received certain benefits but owing to the negligence of his professional adviser did not do so. I will refer to this situation as “the package of rights rule” …’ Arden LJ went on to describe what she saw as the ‘central idea’ in Sephton and in particular the need for some immediate measurable loss for time to start running:4 ‘In my judgment, the damaged asset rule and the package of rights rule are best regarded not as a series of independent qualifications on the basic rule in the Sephton case that the assumption of a “contingent liability” does not cause the limitation period to start to run, but as different cases in which the courts have tried to express a central idea. That idea has to be found by seeking the ultimate ratio in the Sephton case, that is, a ratio which expresses the reason for the decision on which, despite the differences in expression, all the members of the House in that case were agreed. As I see it, the concept on which all the members of the House agreed was that there had to be measurable loss before time began to be run, that is to say, loss which is additional to the incurring of a purely contingent liability. In my judgment, for 312

When time starts to run 12.08 this purpose, rights of contribution or subrogation must be ignored because those rights arise by operation of law, unless excluded by agreement or statute. If they were taken into account, they would undermine the basic rule which is clearly established in [Sephton] that a pure contingent liability is not damage. In my judgment, the central idea in Sephton is that there has to be loss additional to that resulting from the incurring of a purely contingent liability. This reflects the formulation in Wardley with which Lord Hoffmann expressly agreed … In my judgment, the true ratio of Sephton is that there has to be measurable loss as defined in Wardley for time to begin to run for limitation purposes. On this basis what has to be shown is additional loss, and that loss does not have to be of a kind previously considered in the case law. Types of damage considered in the case law thus far include damage to existing property (my damaged asset rule) or a failure to obtain the hoped-for benefits under a bilateral transaction (my package of rights rule).’ On the facts of Axa, the majority of the Court of Appeal distinguished Sephton. Solicitors had been negligent in vetting personal injury claims to determine whether they should be accepted into an ATE legal expenses insurance scheme. It was held by Longmore and Arden LJJ that actionable damage was suffered, and the cause of action accrued, when the claims were accepted into the scheme (or when the solicitors failed to advise that claims already accepted should no longer be covered) and not merely when a claim could have been made under the policy. The case was held not to involve a purely contingent liability because the claimant insurer incurred liability to policyholders which was immediately more burdensome, and the package of rights it acquired was less valuable, than should have been the case if the negligent vetting had not occurred. 1 [2006] 2 AC 543. 2 [2010] 1 WLR 1662 at [28] per Arden LJ. In the event, the case settled before the appeal to the Supreme Court (for which the Court of Appeal had given permission) was heard. 3 At [30]–[31]. 4 At [32]–[35].

12.08 The distinction between Sephton and Axa is a fine one and consequently it is difficult to state definitively how in future cases the courts will approach the question of whether actionable damage has been suffered. Some useful guidance was, however, provided by Rimer LJ in Pegasus Management Holdings SCA v Ernst & Young.1 In that case,2 Rimer LJ proposed that the cases in this area may helpfully be divided into three categories: (1)

‘no transaction’ cases, being those in which the claimant asserts that, but for the negligence, it would not have entered into the transaction at all; 313

12.09 Limitation (2) ‘wrong transaction’ cases, or ‘flawed transaction’ cases,3 being those in which, had there been no negligence, the claimant would have entered into a transaction similar to the one into which it entered by reason of the negligence; and (3) other cases not falling within either class, called ‘category 3’ cases. 1 [2010] 2 All ER 297. 2 At [28]. 3 ‘flawed transaction’ was stated to be better terminology by the majority of the Privy Council in Maharaj v Johnson [2015] PNLR 27 at [19].

12.09 In category (1) cases, ‘the inquiry is whether, and if so at what point, the transaction into which the claimant entered caused his financial position to be measurably worse than if he had not entered into it.’1 The date when actionable damage is sustained is often later than the date of the transaction. This is because in many such cases the claimant will not have been immediately worse off as a result of entering into the transaction. An example of a category (1) case is Nykredit Mortgage Bank Plc v Edward Erdman Group Ltd (No 2)2 where the claimant bank’s case was that but for the defendant’s negligent overvaluation it would not have made a loan to the borrower. The House of Lords held that actionable damage was suffered by the lender at the first date when the combined value of the borrower’s covenant to repay and the security was less than the sum lent. 1 Maharaj v Johnson [2015] PNLR 27 at [19]. 2 [1997] 1 WLR 1627.

12.10 On the facts of Nykredit, the loss was suffered at the date when the loan was made, because the borrower’s covenant was valueless and the security was worth less than the loan from the outset. The same result was reached in the accountancy case of Arrowhead Capital v KPMG LLP.1 The claimant had advanced loans to a company whose ability to repay those loans turned on whether it would be able to recover its VAT input on purchases of mobile telephones. The input VAT would not be recoverable unless the company could show HM Customs & Excise (HMCE) that it had taken reasonable steps to check the integrity of the sellers. For this purpose, the company engaged KPMG to conduct due diligence. In the event, the company’s suppliers were involved in a ‘missing trader’ fraud and HMCE rejected all of its VAT input claims (which decision was upheld by the VAT & Duties Tribunal). The company was subsequently wound up and it failed to repay the loans. As a result, the claimant lender brought a negligence claim against KPMG. It was held that any claim was time-barred because actionable damage had been suffered by the claimant as soon as it had advanced the loans: there was never any possibility that the company would be able to repay them because its attempts to recover its input VAT were always doomed to failure in the light of the ‘missing trader’ fraud that was being conducted (but which had not been detected) by its suppliers. 314

When time starts to run 12.13 1 [2012] EWHC 1801 (Comm), [2012] PNLR 30. The claim was struck out both for lack of a relevant duty of care and on time bar grounds.

12.11 In contrast, in category (2) cases, ‘the inquiry is whether the value to the claimant of the flawed transaction is measurably less than what would have been the value to him of the flawless transaction.’1 The strong tendency of the courts is to hold that actionable damage was suffered at the time that the transaction was entered into, since the claimant will have obtained less from the actual transaction than it would have obtained from the ‘flawless’ transaction. Pegasus itself was an example of a category (2) case because the complaint by the claimant was that it had entered into a transaction on the basis of negligent tax advice from Ernst & Young; if the advice had been non-negligent, the claimant would still have entered into a similar transaction but it would have done so through a different structure. The Court of Appeal held that actionable damage had been suffered by the claimant at the date of the transaction because, on the assumption that Ernst & Young had acted negligently as alleged, then the position was that the claimant had not got what it should have got and there was no need for the claimant to show that it was immediately financially worse off if it got something materially different from what it was entitled to expect, even if what it got was equally valuable in monetary terms. The essential reasoning was that the claimant had suffered actual damage because it was in a materially worse commercial position by virtue of the fact that it had been exposed to a future tax liability to which it should not have been exposed if Ernst & Young had not acted negligently. 1 Maharaj v Johnson [2015] PNLR 27 at [19].

12.12 In Maharaj v Johnson, the Privy Council stated that that the observations of Rimer LJ in Pegasus that it is sufficient in a flawed transaction case to show that the claimant did not receive that which he should have received ‘go too far’ because:1 ‘The fact that the transaction was flawed does not by itself mean that the claimant suffered actual damage on entry into it. Although in the words of Lord Hoffmann in The Law Society v Sephton & Co [2006] UKHL 22; [2006] 2 AC 543, at [21], “it may be relatively easy … to infer that the plaintiff has suffered some immediate damage, simply because he did not get what he should have got”, there is no substitute for attending to the particular facts and deciding whether such an inference is properly to be drawn from them.’ 1 [2015] PNLR 27 at [26].

12.13 It is right that the identification of a case as being a flawed transaction case is not the end of the inquiry as a matter of principle. However, in practice,

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12.14 Limitation cases will be very rare which exhibit both an arguable case that the defendant was negligent for advising or permitting the claimant to enter a particular flawed transaction, and a resulting position that was not measurably worse for the claimant than the unflawed transaction would have been. The only way that such a combination could occur would seem to be if the flaw in the transaction was a risk which the defendant had a duty to guard against but which was incapable in principle of monetary valuation until it eventuated. 12.14 In other cases (category (3)), where the loss does not arise from the claimant’s entry into any transaction, no rules of thumb have yet been developed for assessing the date when damage was suffered and each case will have to be assessed on its own factual merits.1 1 By way of example, difficult issues can arise in cases where the allegation is that the defendant’s negligence left the claimant exposed to the risk of litigation being brought against it in the future. This issue arose in Linklaters Business Services v Sir Robert McAlpine Ltd [2010] EWHC 2931 (TCC) where Akenhead J (obiter) applied Sephton. However, the reasoning of Akenhead J was disapproved by Stuart-Smith J in Co-operative Group Ltd v Birse Developments Ltd (In Liquidation) [2014] EWHC 530 (TCC) who distinguished Sephton and held that he did not consider that the ‘package of rights rule’ as described by Arden LJ in Axa should be confined to cases where the claimant acquired an asset in reliance upon the defendant’s negligence.

12.15 In Evans v PricewaterhouseCoopers LLP1 the claimants brought a claim in negligence and for breach of statutory duty against the defendant accountants arising out of tax advice given in 2001 in connection with the claimants’ disposal of shares from a trust of which they were both trustees and beneficiaries. Many years later, following closure notices issued by HMRC in 2013, it transpired that the claimants’ attempt to reduce their capital gains liability had been unsuccessful. The defendants applied to strike out and/or sought summary judgment in respect of the claim on limitation grounds, arguing that time had started to run in 2001 when the advice was given and the claimants had disposed of their shares. However, the Deputy High Court Judge declined to dismiss the claim, holding that it was arguable that Sephton applied and that the claimants’ loss had been a pure contingency until 2013 when the tax demand was made by HMRC because until that point the scheme might have worked. In particular, she noted that, in contrast to earlier cases such as Forster v Outred and Pegasus, the case before her was not one in which the claimants had entered a flawed transaction or changed their position and thereby suffered an immediate loss in 2001. She reasoned that nothing was acquired by the claimants in 2001:2 ‘Certainly the comparison with Pegasus is enticing. Pegasus was a case, like this one, where the wrong tax advice was given and the Claimant got the wrong package. And in general in the “wrong transaction” cases damage is suffered when the transaction is entered into. However, I am not convinced that this case is on all fours with those “wrong transaction” cases. In all those cases there was a measurable 316

When time ceases to run 12.16 loss, even if the full extent of the loss was not clear. A pension scheme was not going to deliver what was wanted. A mortgage was unsecured. A company, or an interest in land, was acquired in a form that could not deliver the benefits sought. These are actual losses and are to some extent measurable. There need not be finally quantifiable damages, but there must be actual damage. By contrast, in the present case nothing was acquired; it has not been shown that what happened in 2001 restricted commercial options for the future (although it may be that after full argument at trial it can be shown that that was the case). Shares were sold, cash was released, and all that the Claimants took on was a risk. Tax might or might not be charged, depending upon the agreement of the two revenue authorities. Arguably that is a pure contingency. No suggestion has been made as to how the situation in which the Claimants were placed after December 2001 could be valued. A risk can be valued, but a risk by itself is not damage. It is said that the uncertainty as to the tax charge in Pegasus did not matter, and that the damage had accrued because commercial flexibility had been lost. But the uncertainty in Pegasus was of a different order from that seen in this case; in Pegasus it was certain, because of the corporate structure adopted, that there would be a tax charge if the shares in the healthcare businesses were sold unless different measures were taken before the end of the tax year; and the resulting loss of commercial flexibility is obvious. But in the present case it could not have been known until 2013, or perhaps 2014, that tax would be charged. Until then the outcome was unknown because it depended upon the unpredictable outcome of a future conversation between the CRA and HMRC.’ The Deputy High Court Judge went to say that another way of considering the issue was to ask whether the claimants could have brought a claim before 2013; she held that it was not at all clear they could have, because until 2013 there was no sign of them incurring any liability to tax.3 1 [2019] EWHC 1505 (Ch). An appeal is pending. 2 At [50]–[52]. 3 Further and in any event, on the facts the Deputy High Court Judge declined to dismiss the claim on the grounds that the claimants had an arguable case that the defendant remained in continuing breach of duty until 2011 when their retainer ended and the claimants had an arguable case for extending time pursuant to s 14A of the Limitation Act 1980.

WHEN TIME CEASES TO RUN 12.16 Time ceases to run when proceedings are commenced. The general rule is that this is when the court issues a claim form at the request of the claimant.1

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12.17 Limitation However, if the claim form as issued was received in the court office on a date earlier than the date on which it was issued by the court, then time will cease to run on the earlier date.2 To this extent, therefore, there is a distinction between the date on which a claim is ‘brought’ for the purposes of the Limitation Act 1980 and the date on which proceedings are commenced (ie the date of issue).3 1 CPR 7.2(1). 2 CPR PD 7A, para 5.1. 3 Barnes v St Helens Metropolitan Borough Council [2007] 1 WLR 879.

SECTION 14A 12.17 In Pirelli General Cable Works Ltd v Oscar Faber and Partners,1 a claim concerning the allegedly negligent design of a factory chimney, the House of Lords held that time started to run when the damage first developed and not when the damage could have been or was in fact discovered by the claimant. It was plain that such an approach could lead to injustice in a number of contexts, including (but not limited to) professional negligence claims where it is often the case that claimants do not realise that they have suffered loss until more than six years after their cause of action accrued. It was in order to remedy this injustice that s 14A was inserted into the Limitation Act 1980 by the Latent Damage Act 1986. Section 14A provides as follows: ‘14A Special time limit for negligence actions where facts relevant to cause of action are not known at date of accrual (1) This section applies to any action for damages for negligence, other than one to which section 11 of this Act applies, where the starting date for reckoning the period of limitation under subsection (4)(b) below falls after the date on which the cause of action accrued. (2) Section 2 of this Act shall not apply to an action to which this section applies. (3) An action to which this section applies shall not be brought after the expiration of the period applicable in accordance with subsection (4) below. (4) That period is either – (a) six years from the date on which the cause of action accrued; or (b)

three years from the starting date as defined by subsection (5) below, if that period expires later than the period mentioned in paragraph (a) above. 318

Section 14A 12.17 (5) For the purposes of this section, the starting date for reckoning the period of limitation under subsection (4)(b) above is the earliest date on which the plaintiff or any person in whom the cause of action was vested before him first had both the knowledge required for bringing an action for damages in respect of the relevant damage and a right to bring such an action. (6) In subsection (5) above ‘the knowledge required for bringing an action for damages in respect of the relevant damage’ means knowledge both – (a)

of the material facts about the damage in respect of which damages are claimed; and

(b)

of the other facts relevant to the current action mentioned in subsection (8) below.

(7) For the purposes of subsection (6)(a) above, the material facts about the damage are such facts about the damage as would lead a reasonable person who had suffered such damage to consider it sufficiently serious to justify his instituting proceedings for damages against a defendant who did not dispute liability and was able to satisfy a judgment. (8) The other facts referred to in subsection (6)(b) above are – (a) that the damage was attributable in whole or in part to the act or omission which is alleged to constitute negligence; and (b) the identity of the defendant; and (c)

(9)

if it is alleged that the act or omission was that of a person other than the defendant, the identity of that person and the additional facts supporting the bringing of an action against the defendant.

Knowledge that any acts or omissions did or did not, as a matter of law, involve negligence is irrelevant for the purposes of subsection (5) above.

(10) For the purposes of this section a person’s knowledge includes knowledge which he might reasonably have been expected to acquire – (a)

from facts observable or ascertainable by him; or

(b) from facts ascertainable by him with the help of appropriate expert advice which it is reasonable for him to seek;

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12.18 Limitation but a person shall not be taken by virtue of this subsection to have knowledge of a fact ascertainable only with the help of expert advice so long as he has taken all reasonable steps to obtain (and, where appropriate, to act on) that advice.’ 1 [1983] 2 AC 1.

12.18 Thus s 14A provides that in any action for damages, other than in relation to death or personal injury, the limitation period is the later of (a) the ordinary limitation period, ie six years from the date on which the cause of action accrued and (b) three years after the ‘starting date’, which is defined as the earliest date on which the claimant had the knowledge – actual or constructive – required for bringing an action for damages and a right to bring such an action. The extended limitation period provided for by s 14A is subject to a long-stop of 15 years from the allegedly negligent act or omission. This long-stop is established by s 14B and exists in order to protect defendants and to promote legal certainty. 12.19 Seven preliminary points should be noted about s 14A. First, it has been held that s 14A only applies to claims in the tort of negligence; it does not extend to claims for breach of a contractual duty of care.1 Secondly, once limitation has been raised as a defence by a defendant, the burden of proof lies on the claimant to prove that he first had the requisite knowledge three years or less before the proceedings were brought.2 Thirdly, the operation of s 14A can be excluded by agreement.3 Fourthly, arguments in relation to s 14A often turn on factual issues and therefore may not be amenable to summary determination.4 Fifthly, s 14A does not apply to cases of fraud, deliberate concealment or mistake, which cases are governed by s 32(1)(b).5 Sixthly, for the purposes of constructive knowledge, the test is an objective one, so the court will have regard to the characteristics of a reasonable person in the position of the claimant.6 Seventhly, there is an open question as to whose knowledge counts for the purposes of s 14A. On the basis of the primary rules of attribution of knowledge, the knowledge of any one director or officer would count as knowledge of the company.7 However, there is a well-known exception to the primary rule of attribution, known as the ‘fraud exception’, under which the knowledge of an officer may not be attributed to the company if that officer has the knowledge as part of his own conduct in fraud of the company. An issue therefore arises as to whether this exception applies in the context of s 14A. It was assumed that the fraud exception would apply under s 32 in Haque v BCCI, where Chadwick LJ formulated the question arising under s 32 thus: ‘Could the plaintiff, BCCI SA – for this purpose represented by some non-fraudulent officer or, perhaps, its auditor – have discovered the fraud with reasonable diligence between October 1986 and July 1991?’8 320

Section 14A 12.19 The issue arose directly in a Hong Kong case concerning a claim by a company against its auditors where an application was made to strike out the claim and the issue was held to be ‘fact-sensitive’.9 In another Hong Kong case concerning an arguably similar provision,10 emphasis was placed by the Court of Final Appeal on the fact that the underlying rationale of the fraud exception is ‘to avoid the injustice and absurdity of directors or employees relying on their own awareness of their own wrongdoing as a defence to a claim against them by their own corporate employer’.11 The latter decision provides some support for the view that the fraud exception should not apply in relation to s 14A and the general rule of attribution should instead be applied uniformly. Where a company wishes to bring a claim against its auditors for failing to identify a fraud perpetrated by its management, the harsh logic of this result could prove unpalatable. 1 Société Commerciale de Réassurance v ERAS (International) Ltd [1992] 2 All ER 82. 2 See Haward v Fawcetts [2006] 1 WLR 682 at [23]–[24] per Lord Nicholls and [128] per Lord Mance. See also Jacobs v Sesame Ltd [2014] EWCA Civ 1410 at [4] per Tomlinson LJ. In Cole v Scion Limited [2020] EWHC 1022 (Ch) Nugee J remarked at [16(2)] that this: ‘… seems a little odd. Limitation is a defence, and normally one would have thought it was for a defendant to make out a defence. I can see that there may be pragmatic reasons why it is appropriate to require the claimant to establish when he first had actual knowledge of something, as this is something which (by definition) is peculiarly within the claimant’s own knowledge and about which the defendant will usually be in the dark; but is it not clear why the same should be the case where a defendant is relying not on actual knowledge but on constructive knowledge, which is an objective question … One might have thought that if a defendant wished to allege that the claimant had constructive knowledge, it would be for him to establish what a reasonable person would have known. But the authorities are clearly to the contrary, and it was common ground that the burden was on the claimant, and I will therefore proceed on this basis.’ 3 As was the case for example in Halsall v Champion Consulting Ltd [2017] PNLR 32. In that case it was argued that the relevant provision, contained in the defendant accountants’ standard terms of business, was unreasonable and contrary to the Unfair Contract Terms Act 1977 but this was rejected. See Chapter 13. On the facts, the claimants’ attempted reliance upon s 14A failed in any event: see para 12.21 below. 4 See for example Denning v Greenhalgh Financial Services Ltd [2017] EWHC 143 (QB) at [66]–[73]. There it was held that the issue of when the claimant had sufficient knowledge was essentially one of fact and evidence and Green J declined to strike out the claim, albeit he noted that the claimant’s arguments were substantially weaker than those of the defendant and he did not preclude the possibility that the defendant might be able to obtain summary relief at a later stage of the proceedings once the facts had become clearer. 5 See s 32(5) of the Limitation Act 1980 and paras 12.23–12.28 below. 6 See Gravgaard v Aldridge & Brownlee [2004] EWCA Civ 1529 at [22] per Arden LJ and Cole v Scion Limited [2020] EWHC 1022 (Ch) at [16(7)] per Nugee J. 7 In PricewaterhouseCoopers Inc v National Potato Co-operative Ltd (451/12) [2015] ZASCA 2 (4 March 2015) the Supreme Court of Appeal of South Africa allowed an appeal against a judgment in which it had been held by the trial judge that it was the knowledge of the shareholders which was relevant for the purpose of a statutory provision equivalent to s 14A. 8 Court of Appeal, 24 November 1999, Lexis. The reference to ‘perhaps, its auditor’ would presumably not be applied in a claim against an auditor. 9 Topping Chance Development Ltd v CCIF CPA Ltd [2015] 3 HKC 71. The Hong Kong provision under consideration was s 31 of the Limitation Ordinance.

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12.20 Limitation 10 Moulin Global Eyecare Trading Ltd v Commissioner of Inland Revenue [2014] HKCFA 22. The case concerned a statutory provision which allowed extensions of time to be granted for taxation assessments to be challenged if a taxpayer made an error or was prevented from objecting within time owing to a reasonable cause. 11 Moulin Global at [106(4)] per Lord Walker NPJ.

12.20 There have been numerous professional negligence claims, including against accountants, in which claimants have sought to place reliance upon s 14A. 12.21 Perry v Moysey1 was one such case. There the claimant took advice from his accountant, the defendant, concerning his entry into certain contracts of employment. The contracts provided for the claimant to receive salaries net of income tax but he was subsequently met with a substantial tax demand because under s 311 of the Companies Act 1985 it was unlawful for a company director to be paid remuneration free of income tax. The claimant then brought a claim in negligence against the defendant, and when the defendant argued that the claim was time-barred the claimant sought to rely upon s 14A on the basis that he did not have the relevant knowledge until the tax demand was made. In reply, the defendant contended that s 311 was a matter of law and the claimant should be deemed to know the law. However, this was rejected by the High Court which held that the maxim ignorantia iuris neminem excusat does not apply to a situation in which a person is seeking advice as to the law. 1 [1998] PNLR 657.

12.22 In Skipton Building Society v Sorsky1 it was held that the claimant in an action against a firm of accountants was not entitled to rely upon s 14A because a reasonable building society in the position of the claimant would have considered the possibility of pursuing the defendants, who had provided references in reliance upon which the building society had advanced certain loans, as soon as the loans defaulted. In Halsall v Champion Consulting Ltd2 it was held that the claimants were not entitled to rely upon s 14A in a claim against the defendant accountants and tax advisers for negligent advice in reliance upon which the claimants had entered into two failed tax-saving schemes. Not only was s 14A excluded by the defendant’s standard terms of business, but in any event it was held that once the claimants knew that HMRC had opened an investigation, they had enough knowledge ‘to start asking questions about the advice which they had been given’ and ‘to justify setting about investigating the possibility that [the defendant’s] advice was defective’.3 Since the claimants had that knowledge more than three years before the claim was commenced, s 14A did not assist them. This was the case even though the claimants received reassurances from the defendant during HMRC’s investigation that HMRC’s challenge would fail and that the full tax relief would ultimately still be available. 1 [2003] EWHC 930 (QB).

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Section 32 12.24 2 [2017] PNLR 32. 3 At [245].

12.23 But the leading case on s 14A remains the decision of the House of Lords in Haward v Fawcetts.1 The claimants brought an action in December 2001 against a firm of accountants in respect of certain advice and financial forecasts which they alleged had been negligently provided to them and had caused them to make loss-making investments in 1994 and 1995. The defendants denied negligence and also pleaded that the early parts of the claim were time-barred. In reply, the claimants relied upon s 14A. However, the House of Lords dismissed their reliance upon s 14A, holding that on the facts of the case the claimants had had the relevant knowledge more than three years before they had commenced proceedings. More generally, the House of Lords held that: (a) ‘knowledge’ for the purposes of section 14A means knowing with sufficient confidence to justify embarking on the preliminaries to the issue of a claim form, such as submitting a claim to the proposed defendant, taking advice and collecting evidence. The claimant must know enough for it to be reasonable to begin to investigate further;2 and (b) knowledge that the damage is ‘attributable’ to the defendant’s allegedly negligent acts or omissions within s 14A(8)(a) means broad knowledge of the facts on which the claimant’s complaint is based and knowing that there is a real possibility that the defendant’s acts or omissions caused the damage;3 the claimant does not need to know that the defendant’s acts or omissions would be characterised in legal terms as having been negligent.4 1 [2006] 1 WLR 682. 2 See Lord Nicholls at [8]–[10] and Lord Mance at [112]. See also AB v Ministry of Defence [2012] UKSC 9 at [12] where Lord Wilson said that the investigation upon which the claimant should reasonably embark is into whether he has a valid claim in law and if so how that claim can be established in court. Lord Wilson also expressly recognised that it is possible that the claimant will take legal advice before his belief is held with sufficient confidence to make it reasonable to do so. 3 See Lord Nicholls at [11] and [19] and Lord Mance at [122]. See also Cole v Scion Limited [2020] EWHC 1022 (Ch) per Nugee J at [16(6)]. At [28]–[29] Nugee J emphasised that a claimant entering into a financial transaction needs to know that he has suffered damage in that he is worse off than if he had never entered the transaction in the first place; it is not sufficient that a claimant knows that he has not received the full benefits from the transaction that he was promised by the defendant. 4 This is made clear by s 14A(9).

SECTION 32 12.24 Where there is fraud, concealment or mistake, the six-year limitation period which applies to claims for breach of contract and claims 323

12.24 Limitation in tort is extended by s 32 of the Limitation Act 1980. Section 32 provides as follows: ‘32. Postponement of Limitation Period in Case of Fraud, Concealment or Mistake (1) Subject to subsections (3) and (4A) below, where in the case of any action for which a period of limitation is prescribed by this Act, either – (a)

the action is based upon the fraud of the defendant; or

(b)

any fact relevant to the plaintiff’s right of action has been deliberately concealed from him by the defendant; or

(c)

the action is for relief from the consequences of a mistake;

the period of limitation shall not begin to run until the plaintiff has discovered the fraud, concealment or mistake (as the case may be) or could with reasonable diligence have discovered it.

References in this subsection to the defendant include references to the defendant’s agent and to any person through whom the defendant claims and his agent.

(2)

For the purposes of subsection (1) above, deliberate commission of a breach of duty in circumstances in which it is unlikely to be discovered for some time amounts to deliberate concealment of the facts involved in that breach of duty.

(3) Nothing in this section shall enable any action –

(a)

to recover, or recover the value of, any property; or

(b)

to enforce any charge against, or set aside any transaction affecting, any property;

to be brought against the purchaser of the property or any person claiming through him in any case where the property has been purchased for valuable consideration by an innocent third party since the fraud or concealment or (as the case may be) the transaction in which the mistake was made took place.

(4) A purchaser is an innocent third party for the purposes of this section— (a)

in the case of fraud or concealment of any fact relevant to the plaintiff’s right of action, if he was not a party to the fraud or (as the case may be) to the concealment of that fact and did not at the time of the purchase know or have reason to believe that the fraud or concealment had taken place; and 324

Section 32 12.26 (b) in the case of mistake, if he did not at the time of the purchase know or have reason to believe that the mistake had been made. (4A) Subsection (1) above shall not apply in relation to the time limit prescribed by section 11A(3) of this Act or in relation to that time limit as applied by virtue of section 12(1) of this Act. (5) Sections 14A and 14B of this Act shall not apply to any action to which subsection (1)(b) above applies (and accordingly the period of limitation referred to in that subsection, in any case to which either of those sections would otherwise apply, is the period applicable under section 2 of this Act).’ 12.25 Thus the effect of s 32 is to postpone the commencement of the primary limitation period until the date on which the claimant discovered, or could with reasonable diligence have discovered, the relevant fraud, concealment or mistake. 12.26 The proper interpretation of s 32(1) has been considered in a number of cases. The principles were helpfully summarised by Simon J in Arcadia Group Brands Ltd v Visa Inc.1 What is meant by ‘reasonable diligence’ in s 32(1) depends on the context of a particular case. A claimant is not required to use all means of discovery available to it, but only to do that which an ordinary prudent person would do, having regard to all the circumstances.2 The issue of constructive notice was also considered by Millett LJ in Paragon Finance plc v DB Thakerar & Co (A Firm)3 where he said as follows (in a passage relating specifically to s 32(1)(c) but which has subsequently been treated as an authoritative statement in all s 32(1) cases): ‘The question is not whether the plaintiffs should have discovered the fraud sooner; but whether they could with reasonable diligence have done so. The burden of proof is on them. They must establish that they could not have discovered the fraud without exceptional measures which they could not reasonably have been expected to take. In this context the length of the applicable period of limitation is irrelevant. In the course of argument May LJ observed that reasonable diligence must be measured against some standard, but that the six-year limitation period did not provide the relevant standard. He suggested that the test was how a person carrying on a business of the relevant kind would act if he had adequate but not unlimited staff and resources and was motivated by a reasonable but not excessive sense of urgency. I respectfully agree.’4 1 [2014] EWHC 3561 (Comm) at [23]–[24]. Simon J’s approach was endorsed on appeal: [2015] EWCA Civ 883.

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12.27 Limitation 2 Peco Arts Inc v Hazlitt Gallery Ltd [1983] 1 WLR 1315 at 1322–1323. The meaning of ‘reasonable diligence’ was considered in Gresport Finance Limited v Battaglia [2018] EWCA Civ 540 at [48]–[50] per Henderson LJ. See also a helpful discussion of the key authorities relevant to the ‘reasonable diligence’ requirement by Foxton J in Granville Technology Group Limited (in liquidation) v Infineon Technologies AG [2020] EWHC 415 (Comm) at [39]–[56]. 3 [1999] 1 All ER 400 at 418. 4 In Biggs v Sotnicks [2002] EWCA Civ 272 the Court of Appeal rejected a suggestion that the word ‘exceptional’ should be removed from this formulation.

12.27 The provisions relating to fraud and mistake, ie ss 32(1)(a) and (c), are relatively straightforward to interpret and to apply. In contrast, the provisions relating to concealment, ie ss 32(1)(b) and 32(2) have given rise to a significant body of case law. For present purposes, it is sufficient to make the following points about those provisions. First, the reference to a ‘right of action’ in s 32(1)(b) includes reference to a ‘cause of action’.1 Second, the phrase ‘fact relevant to the plaintiff’s right of action’ in s 32(1)(b) means a fact without which the cause of action would be incomplete.2 This is sometimes referred to as the ‘statement of claim’ test because the critical question in practice is: at what stage did the claimant have knowledge (either actual or constructive) of facts which, by themselves, would have enabled it to produce an adequate statement of case? Third, time runs from the date on which the claimant was aware (either actually or constructively) of the defendant’s breach and not from the date on which it first comes to understand why the defendant acted in breach.3 Fourth, concealment requires something more than silence, and a mere failure to disclose should not be treated as concealment except where there is a positive duty on the defendant to disclose.4 Fifth, in order to be ‘deliberate’ within the meaning of s 32(1)(b), the relevant concealment must be intended by the defendant.5 Finally, as an alternative to proving deliberate concealment of relevant facts, it is sufficient for a claimant to establish a ‘deliberate commission of a breach of duty’ pursuant to s 32(2). This requires the claimant to show that the defendant was guilty of deliberate wrongdoing, ie that the defendant was aware that what it was doing was a breach of duty.6 1 See s 38(9)(a) of the Limitation Act 1980. 2 Johnson v Chief Constable of Surrey, The Times, 23 November, 1992, CA; C v Mirror Group Newspapers [1997] 1 WLR 131 (CA) at 138H per Neill LJ; AIC Ltd v ITS Testing Services (UK) Ltd (‘The Kriti Palm’) [2007] 1 Lloyd’s Rep 555 at [307] and [323]–[325] per Rix LJ; and Arcadia Group Brands v Visa Inc [2015] EWCA Civ 883. 3 Ford & Warren v Dr Kenneth Warring-Davies [2012] EWHC 3523 (QB) at [50]–[56] per Coulson J. 4 Williams v Fanshaw Porter & Hazelhurst (a firm) [2004] 1 WLR 3185. 5 Cave v Robinson, Jarvis & Rolf [2003] 1 AC 384 at [15] and [60] per Lord Scott. Whilst not a formal requirement, in practice there probably needs to be an element of unconscionability in the defendant’s conduct: see [64]–[65] of Lord Scott’s judgment and also The Kriti Palm at [365] per Rix LJ. 6 Cave v Robinson, Jarvis & Rolf at [25] per Lord Millett.

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Amendments after expiry of the limitation period 12.30 12.28 In Cunningham v Ernst & Young1 a claim was brought against Ernst & Young and others in fraud and for conspiracy to injure by unlawful means. The claimant was the former majority shareholder in a company in respect of which Ernst & Young had conducted an independent business review. Subsequent to the review, the company had entered into administration and its business and assets had been sold to the directors in circumstances which the claimant alleged were illegitimate. Teare J struck out the claim both on the merits and on the basis that it was time-barred. Teare J rejected the claimant’s attempt to extend the ordinary limitation period by relying upon s 32(1)(a) and s 32(1)(b). He held that the claimant was unable to establish that he could not with reasonable diligence have discovered the matters complained of until less than six years before the claim was commenced; nor could the claimant establish that there had been any deliberate concealment by the defendants. 1 [2018] EWHC 3188 (Comm).

AMENDMENTS AFTER EXPIRY OF THE LIMITATION PERIOD 12.29 Section 35(1) and (2) of the Limitation Act 1980 provide that when a party makes an amendment to add or substitute a new party or a new cause of action, the amendment shall be deemed to be a separate action and to have been commenced on the same date as the original action. This is known as ‘relation back’. However, s 35(3)–35(5) impose significant limitations on the entitlement of a party to make such amendments where a limitation period has expired. In particular, s 35(3) and (4) provide that rules of court may provide for such amendments to be made after the expiry of a limitation period only if, in the case of an amendment to add or substitute a new party, the addition or substitution is ‘necessary for the determination of the original action’ or, in the case of an amendment to add or substitute a new cause of action, ‘the new cause of action arises out of the same facts or substantially the same facts as are already in issue on any claim previously made in the original action’. The relevant rules of court are Civil Procedure Rules (CPR) 19.5 and 17.4 respectively. 12.30 As regards the addition or substitution of new parties under CPR 19.5, the key provision is CPR 19.5(3). This defines ‘necessary’ as meaning that: (a)

the new party is to be substituted for a party who was named in the claim form in mistake for the new party;1 or

(b) the claim cannot properly be carried on by or against the original party unless the new party is added or substituted as claimant or defendant;2 or (c) the original party has died or has had a bankruptcy order made against him and his interest or liability has passed to the new party.3 327

12.31 Limitation It is clear, therefore, that the courts will only permit the addition or substitution of new parties after the expiry of a limitation period where it is necessary to cure a defect in the constitution or the formality of the action. 1 The leading case on this provision is Adelson v Associated Newspapers [2008] 1 WLR 585, where the Court of Appeal held that the mistake must be as to the name of the party and not as to the identity of the party. In Lockheed Martin Corp v Willis Group Ltd [2010] PNLR 34 the Court of Appeal declined to impose a requirement that applicants under CPR 19.5 must be able to show that the correct defendant was aware of the complaint before the expiry of the limitation period, but in practice this will often be a factor that weighs heavily in the court’s exercise of discretion. 2 See Roberts v Gill and Co [2011] 1 AC 240 where the claimant beneficiary originally brought a personal claim but subsequently sought to join the personal representative in order to continue the claim on a derivative basis. The Supreme Court held that the addition of the personal representative was not necessary for the original claim to be continued. 3 This provision has also been applied to permit the addition of a claimant to whom a claim had been assigned: Morgan Est (Scotland) Ltd v Hanson Concrete Products Ltd [2005] 1 WLR 2557.

12.31 A successful application under CPR 19.5 was brought in Insight Group Ltd v Kingston Smith (a firm),1 a negligence claim against a firm of chartered accountants. By the time that the claim was brought, the firm had become an LLP but most of the alleged acts of negligence predated the existence of the LLP and had been committed by members of the earlier partnership trading under the same name. After the limitation period in respect of some of the claims had expired, the claimants applied for permission to substitute the former partnership as defendant in place of the LLP on the grounds that the LLP had been named in the claim form in mistake for the former partnership. Leggatt J acceded to the application. In particular, Leggatt J rejected an argument by the defendants that the claimants’ mistake was an error of law as to the legal liability of the LLP for prior negligence of the former partnership. Instead, he held that in the context of a professional negligence claim the relevant description was of professional adviser since it was that capacity which was material from a legal point of view. The claimants’ mistake was merely as to which body satisfied the description of professional adviser and therefore the mistake could be characterised as a mistake as to name rather than description. 1 [2014] 1 WLR 1448.

12.32 So far as CPR 17.4 is concerned, the following principles can be derived from the case law. First, the party seeking permission to amend bears the burden of proving that the defendant does not have a reasonably arguable case that a relevant limitation period has expired.1 Secondly, a ‘cause of action’ carries the meaning given by Diplock LJ in his classic judgment in Letang v Cooper,2 namely ‘a convenient and succinct description of a particular category of factual situation which entitles one person to obtain from the court a remedy against another person’. Thirdly, in assessing whether the effect of an amendment is to add a new cause of action, it is necessary to consider whether the amendment involves the addition or substitution of an allegation 328

Contribution claims 12.34 of new facts.3 Put differently, the exercise to be undertaken in deciding whether there is a new cause of action is to compare the essential factual elements in a cause of action already pleaded with the essential factual elements in the cause of action as proposed: if they are the same, there is no new cause of action.4 It has also been said that whether a new cause of action arises out of the same or substantially the same facts ‘may in a borderline case essentially be a matter of impression but in others it must be a matter of analysis’.5 1 Welsh Development Agency v Redpath Dorman Long [1991] WLR 1409 at 1423H–1425H. 2 [1965] 1 QB 232 at 242–243. See also Berezovsky v Abramovich [2011] 1 WLR 2290 at 2309. 3 Lloyd’s Bank plc v Rogers [1999] 38 EG 83 at 85F per Auld LJ. 4 HMRC v Begum [2010] EWHC 1799 (Ch) at [32] per David Richards J. 5 Seele Austria GmbH & Co KG v Tokio Marine Europe Insurance Ltd [2009] EWHC 2066 (TCC) per Christopher Clarke J at [49].

12.33 An example of a negligence claim against accountants in which amendments were permitted under CPR 17.4 is The Convergence Group plc v Chantrey Vellacott.1 The claim arose out of allegedly negligent advice given by Chantrey Vellacott in relation to a proposed reorganisation of the claimant’s group structure. The claimant sought permission to amend to allege breaches of duty in the first and second years of the retainer. The Court of Appeal held that these new allegations arose out of substantially the same facts as those already pleaded. It was considered relevant that by their proposed amendments the claimants did not allege any new duties or claim any new heads of loss: they simply sought to allege new breaches of duty in a period of time which would have been under scrutiny at trial in any event because the first and second years of the retainer formed the beginning of the advice which was the subject of the claim as originally brought. 1 [2005] EWCA Civ 290. Another example is the unreported decision of Mr Robin Hollington QC sitting as a Deputy High Court Judge in JJ Coughlan Ltd v Charterhouse (Accountants) LLP Unreported, 23 November 2016.

CONTRIBUTION CLAIMS 12.34 Pursuant to s 10(1) of the Limitation Act 1980, the limitation period for bringing a claim for contribution under the Civil Liability (Contribution) 1978 is two years. Section 10(3) provides that where the contribution claimant has been held liable by a judgment in civil proceedings or by an award made in arbitration, then time shall start to run from the date of the relevant judgment or award. Section 10(4) provides that for all other contribution claims, where the claimant has agreed to settle the underlying claim, irrespective of whether it has admitted liability, time starts to run from the date of settlement.1 1 Where a settlement agreement is later embodied in a Consent Order, s 10(4) applies rather than s 10(3) and the relevant date is the date of the agreement: Knight v Rochdale Healthcare NHS Trust [2004] 1 WLR 371.

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Chapter 13

Disclaimers and exclusions of liability

INTRODUCTION 13.01 Accountants, like other providers of professional services, often wish to take steps to manage the extent of any potential liability that they might incur to their clients or to third parties. To this end, the use of disclaimers in reports signed by accountants, the production of ‘hold harmless’ letters, and the incorporation of exclusion or limitation clauses in engagement letters is now commonplace. Indeed, there is specific guidance from the Financial Reporting Council (FRC) and the Institute of Chartered Accountants in England and Wales (ICAEW) on these subjects.1 1 See, for example the ‘Guidance on Auditor Liability Limitation Agreements’ published by the FRC in June 2008 and the ICAEW’s Technical Releases entitled ‘Reporting to Third Parties’, issued in November 2012, ‘Managing the Professional Liability of Accountants’, first issued in February 2011 and updated in October 2015, and ‘The Audit Report and Auditors’ Duty of Care to Third Parties’, last updated in May 2018.

13.02 In this chapter, we first consider disclaimers and ‘hold harmless’ letters, which play an important role in managing the potential liability of accountants to third parties. We then examine the types of provision which accountants frequently use in their engagement letters to exclude or limit liability to their own clients, including so-called ‘proportionate liability’ clauses, the objective of which is to limit the liability of the relevant accountant to its proportionate share of the overall loss suffered by the client and thereby exclude any joint liability which the accountant might otherwise have had with others. We go on to consider the main provisions in the Unfair Contract Terms Act 1977 and how the requirement of reasonableness therein has been applied in cases involving accountants. Finally, we explain the extent to which it is possible for an accountant to exclude or limit liability for statutory audits, the law having changed in this area following the entry into force of the Companies Act 2006.

DISCLAIMERS 13.03 Accountants often sign reports that are later relied upon by third parties. This can expose accountants to potential liability to those third parties. 330

Disclaimers 13.06 It is in order to manage this risk of liability to third parties that accountants often use disclaimers. In this context, it is useful to distinguish between the disclaimers that are used in audit reports and other forms of reports.

Audit reports 13.04 As explained in Chapter 6, an auditor may be held to owe a duty to a third party in respect of an audit report. The starting point in any assessment of whether the auditor owes a duty to third parties is the House of Lords’ judgment in Caparo Industries Plc v Dickman.1 That case concerned whether an auditor of a company owed a duty of care in tort to the shareholders of and/or potential investors in a company in respect of that company’s statutory audit. Ultimately, the House of Lords concluded that the auditor did have a general audit duty to shareholders, but only as a body in relation to the exercise of their powers in general meeting and not for any other purpose. Consequently, the claim on behalf of both existing and potential shareholders was struck out. However, as the House of Lords’ reasoning in Caparo made clear, an auditor may owe a duty to a third party other than a shareholder in a general meeting in certain special circumstances. This was referred to in MAN v Freightliner Ltd2 as a ‘special audit duty’. 1 [1990] 2 AC 605. 2 [2007] BCC 986 at [31].

13.05 The possibility of an auditor being held to owe a special audit duty to third parties was considered by the Inner House of the Scottish Court of Session in Royal Bank of Scotland Plc v Bannerman Johnstone Maclay.1 That case concerned the use of a company’s audited accounts by a firm of lenders when making decisions about the provision of overdrafts and loans to the company. On a Scottish equivalent of a strike out application, the Inner House held that a duty of care may exist in those circumstances and that the case should therefore proceed to a trial on the merits. For present purposes, what is significant is the view expressed by the Inner House that there was no reason why an auditor could not disclaim responsibility to third parties and that the absence of such a disclaimer could in appropriate circumstances be a factor pointing to an assumption of responsibility by the auditor to third parties in respect of an audit report.2 1 [2006] BCC 148. 2 Ibid at [63]–[64].

13.06 Perhaps unsurprisingly, the decision in Bannerman led to a widespread practice of auditors including in their audit reports a clause disclaiming liability

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13.07 Disclaimers and exclusions of liability to third parties. The ICAEW itself reacted by publishing standard wording for use by its members:1 ‘This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006. Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions we have formed.’ 1 This wording has been revised by the ICAEW over time. It was originally published in 2003 within guidance entitled ‘The Audit Report and Auditors’ Duty of Care to Third Parties’ following the decision in Bannerman. The wording of the disclaimer was slightly amended by the ICAEW in 2008 following the introduction of the Companies Act 2006 and then amended again with effect from January 2010.

13.07 An English case with a similar implication to Bannerman is ADT v Binder Hamlyn, where an auditor was held liable at trial to an acquirer of a company after confirming to the acquirer that the accounts were reliable and May J said that the duty could have been negatived by the use of a disclaimer:1 ‘It is well-recognised that these matters can be guarded against by a Hedley Byrne disclaimer. If for commercial reasons those who give advice do not want to give disclaimers or otherwise limit their liability, then I see no reason why they should not have to live with the consequences.’ 1 [1996] BCC 808 at 834D. Note also that in BCCI v Price Waterhouse [1998] BCC 617, Sir Brian Neill (with whom the two other members of the Court of Appeal agreed) set out five factors which were relevant to whether an adviser would owe a duty of care to a person relying on advice. The fifth factor was ‘the opportunity, if any, given to the adviser to issue a disclaimer’. This clearly implies that a disclaimer will be relevant if made.

13.08 Even before Bannerman it was well established that a disclaimer could serve to negative a duty of care that might otherwise be held to exist. Indeed, the lender’s claim in Hedley Byrne & Co Ltd v Heller & Partners Ltd1 failed precisely because the bankers who had been asked to provide a reference about the financial stability of one of their customers had disclaimed responsibility. As Lord Devlin explained: ‘A man cannot be said voluntarily to be undertaking a responsibility if at the very moment when he is said to be accepting it he declares that in fact he is not’.2 This principle was later affirmed by Lord Goff in Henderson v Merrett Syndicates Ltd who stated that ‘an assumption of responsibility may be negatived by an appropriate disclaimer’.3 Pursuant to this principle, a disclaimer was held to have prevented a duty arising in

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Disclaimers 13.11 McCullagh v Lane Fox & Partners Ltd where Hobhouse LJ, having noted that the trial judge had avoided this conclusion ‘by approaching the disclaimer as if it were a contractual exclusion’, went on to observe as follows:4 ‘On such an approach it would need to be strictly construed and the argument was available that it did not as such cover an oral statement. But that is not, in my judgment, the right approach. It is not an exclusion to be construed. The right approach, as is made clear in Hedley Byrne, is to treat the existence of the disclaimer as one of the facts relevant to answering the question whether there had been an assumption of responsibility by the defendants for the relevant statement. This question must be answered objectively by reference to what a reasonable person in the position of [the plaintiff] would have understood at the time that he finally relied upon the representation.’ 1 [1964] AC 465. 2 Ibid at 533. 3 [1995] 2 AC 145 at 181E. 4 [1996] PNLR 205 at 237.

13.09 The precise standard disclaimer wording published by the ICAEW in reaction to the decision in Bannerman has never been tested in the courts. However, in Barclays Bank plc v Grant Thornton1 a strike out and/or summary judgment application was brought by the defendant auditors on the basis of a disclaimer which exactly followed the then applicable standard wording of the ICAEW save that the audit report was stated to have been provided solely to the relevant company’s director as opposed to the company’s members. 1 [2015] 1 CLC 180.

13.10 The claim by Barclays Bank concerned audit services provided by Grant Thornton to Von Essen Hotels Limited in the form of non-statutory audit reports. There was no direct engagement between Barclays Bank and Grant Thornton, but Grant Thornton knew that the main purpose for which the company required the audit report was to satisfy their lenders’ requirements. In those circumstances, Barclays Bank argued that Grant Thornton owed it a duty of care in tort in relation to the contents of the audit reports and that Grant Thornton had breached that duty in failing to uncover the alleged fraud of two employees of Von Essen. Grant Thornton contended that the claim was bound to fail because its audit reports contained the disclaimer. 13.11 The Court acceded to Grant Thornton’s application. For the purposes of the application, Grant Thornton accepted that the Unfair Contract Terms Act 1977 applied and in his judgment Cooke J held that the disclaimer satisfied the requirement of reasonableness (for reasons which are considered further below at para 13.48) and that the existence of the disclaimer was sufficient

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13.12 Disclaimers and exclusions of liability to negative any duty of care which might otherwise arguably have arisen as between Grant Thornton and Barclays. 13.12 Barclays Bank represents a significant endorsement of the ICAEW disclaimer and indeed the ICAEW has stated that it believes that the decision ‘provides strong support for the approach which it has been recommending to members since 2003’.1 However, Barclays Bank leaves open the question of whether the 1977 Act does in fact apply to the precise ICAEW disclaimer wording. In the light of the Court of Appeal’s decision in First Tower Trustees Ltd v CDS (Superstores International) Ltd,2 and in particular the judgment of Leggatt LJ, it is suggested that if that point were ever to arise in a future case (which it would not in any case similar to Barclays Bank on its facts because in such a case the disclaimer would probably satisfy the reasonableness test in the 1977 Act in any event and therefore the question of the applicability of the Act would be academic), then it would likely be held that the 1977 Act does apply where, but for the disclaimer wording, a tortious duty of care would be found to exist as a matter of common law since in such a scenario the ICAEW disclaimer wording would operate as a clause which excludes or restricts liability. This issue and the First Tower case are considered below at paras 13.34–13.40. 1 See the ICAEW’s Technical Release entitled ‘The Audit Report and Auditors’ Duty of Care to Third Parties’, last updated in May 2018, para 3. 2 [2019] 1 WLR 637.

Other forms of reports 13.13 There are a multitude of other forms of reports which accountants frequently sign in addition to audit reports. It is common for accountants to be asked by their clients to sign reports that have been requested by third parties with whom the client has a relationship. An agreed upon procedure report is just one example of such a report. An accountant who knows that a third party has asked for a report and intends to rely upon it runs the risk of being held to owe a duty of care to the third party, even though there is no direct engagement between them. Accordingly, as with audit reports, accountants frequently take steps to negative the existence of such a duty through the use of an appropriate disclaimer. 13.14 The ICAEW has again provided standard disclaimer wording for an accountant’s report which is produced for a third party:1 ‘Our Report is prepared solely for the confidential use of [insert name of client] and solely for the purpose of [describe the purpose]. It may not be relied upon by [insert name of client] for any other purpose whatsoever. Our Report must not be recited or referred to in 334

‘Hold harmless’ letters 13.17 whole or in part in any other document. Our Report must not be made available, copied or recited to any other party [without our express written permission]. [Insert name of professional accountants] neither owes nor accepts any duty to any other party and shall not be liable for any loss, damage or expense of whatsoever nature which is caused by their reliance on our Report.’ 1 See the ICAEW’s Technical Release entitled ‘Reporting to Third Parties’, Appendix 5.

13.15 The same legal principles apply in relation to this type of disclaimer as have already been considered in relation to disclaimers in respect of audit reports. Thus, if the disclaimer is valid it will very likely operate to negative the existence of a duty of care as between the accountant and any third party recipient of the report (irrespective of whether the accountant knew that the third party intended to rely upon it); it is, however, likely that the 1977 Act would be held to apply to such a disclaimer because it effectively operates as an exclusion clause in that it excludes a liability in tort which would otherwise arise; but in any event, by analogy to the decision of Cooke J in Barclays Bank it is likely that the disclaimer will be held to satisfy the reasonableness test in the 1977 Act at least where the third party concerned is a sophisticated commercial entity.

‘HOLD HARMLESS’ LETTERS 13.16 Another way in which accountants can manage the risk of potentially incurring liability to third parties is through the use of ‘hold harmless’ letters. These are commonly used by accountants when releasing to third parties information that is confidential to their client (for example the auditor’s own working papers). Typically, a ‘hold harmless’ letter will stipulate various conditions which must be accepted by the third party before the accountant will release the information. Once a ‘hold harmless’ letter has been signed by the third party, and the accountant’s conditions accepted, the letter will have contractual effect. This is an important point of distinction as between hold harmless letters and disclaimers. 13.17 There is guidance from the ICAEW as to the terms usually contained in ‘hold harmless’ letters.1 These include terms that: ●●

the information to be disclosed was not prepared for the third party;

●●

the third party will verify the information with the client and not the accountant;

●●

the accountant does not owe the third party a duty of care or assume any responsibility to it in relation to the information;

●●

the third party will rely on the information at its own risk; 335

13.18 Disclaimers and exclusions of liability ●●

the third party will not assert any rights or bring any claims against the accountant in connection with the information;

●●

the accountant will incur no liability to the third party arising from disclosure; and

●●

the third party will keep the information confidential.

1 See the ICAEW’s Technical Release entitled ‘Managing the Professional Liability of Accountants’, Appendix 2.

PROPORTIONATE LIABILITY CLAUSES 13.18 Proportionate liability clauses (sometimes referred to as ‘net liability’ or ‘net contribution’ clauses) have been included by accountants in their engagement letters for many years. A proportionate liability clause is a provision that if a client suffers a loss as a result of wrongdoing committed by not only the accountant but also by others, then the accountant’s liability will be limited to the share of the overall loss for which the accountant was itself responsible. In the absence of such a clause, the accountant would be jointly and severally liable for the entirety of the loss suffered by the client (subject to a right to claim to contribution from the other wrongdoers under the Civil Liability (Contribution) Act 1978).1 1 See Chapter 14.

13.19 There are various forms that a proportionate liability clause can take. Some specimen wording has been published by the FRC.1 Although it is now very common in the industry for accountants to include proportionate liability clauses in their engagement letters, to date there are no reported decisions in which a client has sought to challenge the validity of such a clause. Indeed, the only reported English case in which a proportionate liability clause has been tested is the decision of the Court of Appeal in West v Ian Finlay & Associates (a firm).2 That was a case in which an architect sought to rely upon a proportionate liability clause to avoid liability for a part of the claimant’s loss which was attributable to the defective work of the building contractor (which had become insolvent). The wording of the clause was as follows: ‘We confirm that we maintain professional indemnity insurance cover of £1,000,000.00 in respect of any one event. This will be the maximum limit of our liability to you arising out of this Agreement. Any such liability will expire after six years from conclusion of our appointment or (if earlier) practical completion of the construction of the Project. Our liability for loss or damage will be limited to the amount that it is reasonable for us to pay in relation to the contractual

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Exclusion and limitation clauses 13.23 responsibilities of other consultants, contractors and specialists appointed by you.’ 1 See the FRC’s ‘Guidance on Auditor Liability Limitation Agreements’. 2 [2014] EWCA Civ 316. For an earlier Scottish case see Langstane Housing Association Ltd v Riverside Construction (Aberdeen) Ltd [2009] CSOH 52.

13.20 A number of arguments were advanced by the claimant as to why the clause fell foul of the requirement of good faith in the Unfair Terms in Consumer Contracts Regulations 1999 and the requirement of reasonableness in the Unfair Contract Terms Act 1977. All of those arguments were rejected by the Court of Appeal and the validity of the clause was upheld. Although questions of reasonableness under the 1977 Act are inherently fact-sensitive, it is submitted that in the light of the Court of Appeal’s judgment it will be a rare case in which an accountant is held not to be entitled to rely upon a proportionate liability clause incorporated in its engagement letter, especially where the client is a sophisticated commercial party because in such a case the position will be a fortiori from West v Finlay where the client was a consumer and the challenge to clause nonetheless failed.

EXCLUSION AND LIMITATION CLAUSES 13.21 There is a wealth of case law concerning exclusion and limitation clauses and a detailed exposition of the law in this area is beyond the scope of this work. For present purposes, it is sufficient to make five points.1 1 The ICAEW provides guidance on limitation of liability clauses in its Technical Release entitled ‘Managing the Professional Liability of Accountants’, Section D and Appendix 1. Specimen wording for limitation of liability clauses is provided by the FRC in its ‘Guidance on Auditor Liability Limitation Agreements’.

13.22 First, it is rare for an accountant (or indeed any other professional) who has charged a fee for the provision of its services to seek to exclude liability altogether. Although there is no case law directly on this point, it is likely that a clause purporting to exclude liability altogether would be held to be unreasonable under the Unfair Contract Terms Act 1977. It is also unattractive from a commercial perspective for an accountant to suggest the incorporation of such a term to a client. Accordingly, it is much more common for accountants to seek to limit their liability. 13.23 Second, there are various different ways in which an accountant could limit its liability. The market practice is for accountants to impose a monetary limit on its liability, but it is also possible to limit the types of loss for which the accountant will be liable. Limitations on the time period in which any claim

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13.24 Disclaimers and exclusions of liability must be brought by the client are also fairly commonplace in accountants’ standard terms.1 1 See, for example Inframatrix Investments Limited v Dean Construction Limited [2012] EWCA Civ 64 on limitations as to time. In Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch) the engagement letter contained a clause that purported to limit both the extent of the accountant’s liability and the time period in which any claim had to be brought by the client. See also Halsall v Champion Consulting Ltd [2017] PNLR 32 where the defendant’s standard terms of business contained a provision which excluded the operation of s 14A of the Limitation Act 1980.

13.24 Third, for an exclusion or limitation clause to be effective in any given case, it is necessary for the loss claimed to fall within the scope of the clause as a matter of construction. The usual principles of contractual construction1 apply to exclusion and limitation clauses, with two qualifications. The first qualification is that, pursuant to the contra proferentem rule, any ambiguity in an exclusion or limitation clause will be resolved against the party seeking to rely upon it (ie the accountant). The second qualification is that in relation to clauses which purport to exclude or limit liability for negligence, the courts will apply the specific guidelines which first emerged in the judgment of Lord Morton in Canada Steamship Lines Ltd v The King.2 Those guidelines are reflective of the fact that the courts were traditionally wary of holding that one party to a contract had agreed to allow the other to exclude liability for negligence. Following Canada Steamship the courts will give effect to a clause which clearly excludes or limits liability for negligence, but if there is any doubt about the wording or the wording could cover a form of liability other than negligence, then the courts will hold that the clause does not cover liability for negligence. Although it is a somewhat controversial decision Canada Steamship remains good law, subject to recognition that its guidelines date from a time before the Unfair Contract Terms Act 1977 and that they are not to be applied mechanistically.3 In practice, however, the exclusion and limitation clauses incorporated by professionals in their engagement letters tend not to leave any doubt about whether liability for negligence is being excluded or limited and therefore it is rare for the courts to need to have regard to the Canada Steamship principles. 1 See Rainy Sky SA v Kookmin Bank [2011] 1 WLR 2900, Arnold v Britton [2015] AC 1619, and Wood v Capita [2017] AC 1173. 2 [1952] AC 192. 3 HIH v Chase Manhattan Bank [2003] 2 Lloyd’s Rep 61, Lictor Anstalt v Mir Steel UK [2013] 2 BCLC 76.

13.25 University of Keele v Price Waterhouse1 is an example of a case in which a substantial head of loss being claimed against an accountant was held to fall outside the scope of the exclusion clause which had been incorporated by the accountant in its engagement letter. Price Waterhouse had advised the University of Keele regarding the establishment of a profit-related pay scheme

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Exclusion and limitation clauses 13.27 for its employees that was intended to achieve significant tax savings. It was a statutory requirement for such schemes that 80 per cent or more of the employees should participate and Price Waterhouse negligently advised the university that this threshold had been met. Some years later it was discovered that the scheme did not meet the 80 per cent threshold and the scheme was cancelled. The university sued Price Waterhouse claiming various heads of loss including the savings that it would have made if the scheme had been valid. Price Waterhouse argued that this head of loss was excluded by a clause in its engagement letter which provided as follows: ‘we accept liability to pay damages in respect of loss or damage suffered by you as a direct result of our providing the Services. All other liability is expressly excluded, in particular consequential loss, failure to realise anticipated savings or benefits and a failure to obtain registration of the scheme’. At first instance Hart J held that this clause was self-contradictory in that the first sentence implicitly accepted liability for direct losses suffered by the university, but the second sentence purported to exclude that liability. Accordingly, Hart J applied the contra preferentem principle and held that Price Waterhouse could not rely upon the clause. The Court of Appeal agreed with the result, but for a different reason: they held that on a plain reading of the clause the first sentence took precedence over the second sentence, with the first sentence identifying the liability which Price Waterhouse accepted and the second sentence making clear that any liability falling outside the scope of the first sentence was excluded. 1 [2004] PNLR 43.

13.26 Fourth, there is a question which has arisen in a number of cases as to the extent to which an auditor can rely upon an exclusion or limitation clause in its engagement letter with its client when defending a claim brought by a third party, in particular to negative or restrict the existence of a duty of care owed to the third party. 13.27 At first blush it might seem odd that an accountant can rely upon a contractual provision as a defence to a claim by a non-party to the contract. However, some support for the view that this is legitimate can be derived from the judgment of Robert Goff LJ in Leigh and Sillivan Ltd v Aliakmon Shipping Co Ltd (The Aliakmon) where he said as follows:1 ‘Indeed the case can be simplified into one in which A breaks his duty to B, and the question is whether a third party, C, can proceed directly against A in respect of damage thereby suffered by him. In such circumstances (and in this I find myself differing from Lloyd J in The Irene’s Success [1982] QB 461) it seems to me unthinkable 339

13.28 Disclaimers and exclusions of liability that, if C is to have a direct cause of action against A, that right of action should be uncontrolled by those provisions which regulate A’s liability to B.’ 1 [1985] QB 350 at 396F.

13.28 On the facts of The Aliakmon the House of Lords ultimately held that the claimant buyers had no claim in tort against the defendant shipowners for damage to goods caused by bad stowage, because at the relevant time the goods were owned by the sellers.1 However, Lord Brandon specifically addressed an argument that was made by the defendants that even if the buyers had title to sue, they would be bound by the limitation clause in the contract between the defendants and the sellers. In doing so, Lord Brandon expressed disagreement with the view that had been expressed by Robert Goff LJ.2 Subsequently Lord Goff (as he had then become) returned to this issue in White v Jones3 where he held that a solicitor’s assumption of responsibility towards a disappointed beneficiary would be subject to any term of the contract between the solicitor and the testator which may exclude or restrict the solicitor’s liability to the testator.4 1 [1986] 1 AC 785. 2 Ibid at 817F–H. 3 [1995] 2 AC 207. 4 Ibid at 268.

13.29 The issue has arisen in a number of cases involving accountants since White v Jones, but no final ruling has been given on it. In Killick v PricewaterhouseCoopers,1 Neuberger J left open the question, holding that it was not fit for summary determination; in Man Nutzfahrzeuge AG v Freightliner Ltd,2 Moore-Bick LJ described this as ‘an important and potentially farreaching issue’ and expressed a provisional view that ‘it is more appropriate to treat the existence and terms of the contract between A and B as part of the circumstances in which the relationship between A and C falls to be assessed’;3 in Arrowhead Capital Finance Ltd v KPMG,4 the Deputy High Court Judge proceeded on the basis that it was relevant (and indeed highly material) when assessing whether KPMG owed a duty of a care to a third party to take account of the fact that KPMG’s engagement letter with its client contained a limitation of liability clause; and most recently in Barclays Bank plc v Grant Thornton,5 Cooke J refused to decide this question (which he described as a ‘vexed’ one) but expressed a preference for the view that the accountant should be entitled to rely upon the terms of its engagement as against the third party.6 1 [2001] PNLR 1. 2 [2007] BCC 986. 3 Ibid at [411]. 4 [2012] PNLR 30. 5 [2015] EWHC 320 (Comm). 6 Ibid at [60].

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The Unfair Contract Terms Act 1977 13.33 13.30 Finally, it is of course necessary for any exclusion or limitation clause which might be contained in an accountant’s engagement letter to be compliant with the Unfair Contract Terms Act 1977 or (where it is applicable) the Consumer Rights Act 2015. The legislative regime is discussed in more detail below.

THE UNFAIR CONTRACT TERMS ACT 1977 Introduction 13.31 The Unfair Contract Terms Act 1977 restricts the ability of accountants to exclude or limit their liability for any economic losses that might be incurred by their clients by making any exclusion or limitation provisions subject to a requirement of reasonableness. 13.32 In summary, the structure of the material parts of the Act is as follows: s 1(3) makes clear that the provisions relating to contract and tort (ie ss 2 and 3 respectively) in the Act only apply to ‘business liability’;1 in relation to economic losses2 s 2 prohibits any provision which excludes or limits liability for negligence3 save insofar as the provision satisfies the requirement of reasonableness; s 3 provides that where one party deals on the other party’s standard terms then any exclusion or limitation clause must meet the requirement of reasonableness; s 11 defines the requirement of reasonableness;4 and Sch 2 to the Act contains guidelines for the application of the reasonableness requirement. 1 ‘Business liability’ is defined in s 1(3). 2 So far as death or personal injury is concerned, s 2(1) prohibits any exclusion or limitation of liability. 3 ‘ Negligence’ is defined in s 1(1). See also s 1(4). 4 ‘the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.’

13.33 Where an accountant enters into an engagement with a consumer, any exclusion or limitation provisions contained in the engagement letter will be subject to the standard of fairness in the Consumer Rights Act 2015, which has replaced the 1977 Act for consumer contracts. Whether a term meets the standard of ‘fairness’ in the 2015 Act depends on whether ‘contrary to the requirement of good faith, it causes a significant imbalance in the parties’ rights and obligations under the contract to the detriment of the consumer’.1 It is of course possible for accountants to be engaged by consumers, for example where they are asked to provide tax advisory services to individuals. However, it seems unlikely that any exclusion or limitation of liability provision which satisfies the requirement of reasonableness in the 1977 Act will be held to be unfair under the 2015 Act.2 Accordingly, the discussion that follows focuses on 341

13.34 Disclaimers and exclusions of liability the 1977 Act. In particular, it considers two main issues: first, the nature of the clauses that fall within the scope of the 1977 Act, and secondly, the meaning of the requirement of reasonableness. 1 Section 62(4) of the 2015 Act, the equivalent of what used to be art 5(1) of the Unfair Terms in Consumer Contracts Regulations 1999. 2 For the approach to the standard of fairness, which is similar to the Unfair Terms in Consumer Contracts Regulations 1999, see Cavendish Square Holding v Makdessi [2015] UKSC 67, [2015] 3 WLR 1373. For an illustration that the same factors will be relevant under both regimes, see West v Ian Finlay & Associates [2014] EWCA Civ 316.

Exclusion clause or duty defining clause? 13.34 The 1977 Act applies to clauses which seek to exclude or restrict liability. By virtue of s 13, it also applies to contractual terms and notices which exclude or limit ‘the relevant obligation or duty’: this means that parties cannot evade the statutory regulation through clever drafting. But it does not necessarily follow that the Act applies to clauses which define the parties’ obligations in a way which prevents liability from arising. This distinction is easy to state but has given rise to difficulties in practice. 13.35 The scope of s 13 was considered by the House of Lords in Smith v Eric S Bush (A Firm). There Lord Griffiths stated that the 1977 Act would apply if a duty of care would be held to exist ‘but for’ ‘the notice excluding liability’.1 However, not all subsequent cases applied the ‘but for’ test. 1 [1990] 1 AC 831 at 857.

13.36 For example, in IFE Fund SA v Goldman Sachs International1 the claimant alleged (amongst other things) that the defendant owed it a duty to provide certain information. Toulson J observed at [71]: ‘IFE relies on the publication of the SIM [Syndicate Information Memorandum] to give rise to the alleged duty of care. The relevant paragraphs of the SIM are not in my view to be characterised in substance as a notice excluding or restricting liability for negligence, but more fundamentally as going to the issue whether there was a relationship between the parties (amounting to or equivalent to that of professional advisor and advisee) such as to make it just and reasonable to impose the alleged duty of care.’ Therefore Toulson J held that the 1977 Act did not apply to the provision in question. The judge’s reasoning was accepted by the Court of Appeal.2 1 [2007] 1 Lloyd’s Rep 264. 2 [2007] 2 Lloyd’s Rep 449 at [18], [28] (per Waller LJ with whom Gage and Collins LJJ agreed).

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The Unfair Contract Terms Act 1977 13.38 13.37 In JP Morgan Chase Bank v Springwell Navigation Corp1 Gloster J endorsed Toulson J’s reasoning and drew the same distinction between ‘exclusion clauses’ and ‘clauses which defined the nature of the services which Chase was rendering to Springwell and which confirmed the basis on which the parties were transacting business’. She held at [602] that: ‘terms which simply define the basis upon which services will be rendered and confirm the basis upon which parties are transacting business are not subject to section 2 of UCTA. Otherwise, every contract which contains contractual terms defining the extent of each party’s obligations would have to satisfy the requirement of reasonableness.’ 1 [2008] EWHC 1186 (Comm).

13.38 In Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc1 Christopher Clarke J (as he then was) was concerned with s 3 of the Misrepresentation Act 1967, which concerns contract terms excluding liability for misrepresentation. The question was whether a particular provision excluded liability so as to fall within s 3, or whether it prevented a representation being made in the first place, such that s 3 was not engaged at all. The judge said this at [313]: ‘If sophisticated commercial parties agree, in terms of which they are both aware, to regulate their future relationship by prescribing the basis on which they will be dealing with each other and what representations they are or are not making, a suitably drafted clause may properly be regarded as establishing that no representations (or none other than honest belief) are being made or are intended to be relied on. Such parties are capable of distinguishing between statements which are to be treated as representations on which the recipient is entitled to rely, and statements which do not have that character, and should be allowed to agree among themselves into which category any given statement may fall. Per contra, to tell the man in the street that the car you are selling him is perfect and then agree that the basis of your contract is that no representations have been made or relied on, may be nothing more than an attempt retrospectively to alter the character and effect of what has gone before, and in substance an attempt to exclude or restrict liability.’ 1 Raiffeisen Zentralbank Osterreich AG v The Royal Bank of Scotland plc [2010] EWHC 1392 (Comm); [2011] 1 Lloyd’s Rep 123.

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13.39 Disclaimers and exclusions of liability 13.39 Christopher Clarke J concluded that the provisions in question in that case defined the relationship of the parties and therefore did not fall within s 3. This part of Christopher Clarke J’s judgment was cited when Springwell reached the Court of Appeal.1 The Court of Appeal endorsed the distinction between clauses that prevent a representation or duty arising and those that exclude liability for that representation or duty, as had been explained in Raiffeisen.2 However, these cases now need to be considered in the light of the judgment of the Court of Appeal in First Tower Trustees Ltd v CDS (Superstores International) Ltd,3 a case which on its facts concerned a claim under the Misrepresentation Act 1967 and not at common law. There the Court of Appeal held that a contractual clause in which one party acknowledged that the contract had not been entered into in reliance upon any statement or representation made by the other party was effectively an exclusion clause and therefore was subject to s 3 of the 1977 Act, because in the absence of the clause there would have been liability. First Tower supports a return to the ‘but for’ approach that was adopted in Smith v Bush. Leggatt LJ in particular emphasised that the relevance of the distinction between an exclusion clause and a clause which defines the parties’ obligations in a way that prevents liability from arising is ‘limited to a situation in which there is an issue about the extent of the primary obligations undertaken by a contracting party’4 and he held that the position is different where an attempt is made to avoid liability in tort: ‘Where a duty is imposed by law and not because it is a term of a contract agreed between the parties, the distinction between a contract term which excludes liability and one which prevents liability from arising by giving rise to a contractual estoppel is a distinction without a difference. In such circumstances it cannot be said that the contract term is merely creating and defining the extent of the parties’ obligations. The term is seeking to exclude a liability which would otherwise be there.’5 Whilst on its facts First Tower was concerned only with a claim for misrepresentation and the applicability s 3 of the 1977 Act, it is likely to have far-reaching ramifications. This is especially so because, at the end of his judgment, Leggatt LJ briefly addressed the issue of whether a contractual disclaimer which seeks to negate the existence of a duty of care at common law falls within s 2 of the 1977 Act. Referring to Smith v Bush, Leggatt LJ reaffirmed that the correct approach in such cases is first to consider whether there would be a tortious liability in the absence of the contractual term and then to enquire whether the term operates to excludes that liability. Although the relevant part of the judgment was obiter, it is suggested that it will be followed in future cases with the result that the 1997 Act will be held to apply to disclaimers. 1 Springwell Navigation Corp v JP Morgan Chase Bank [2010] 2 CLC 705.

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The Unfair Contract Terms Act 1977 13.42 2 Ibid at [180]–[181] per Aikens LJ, with whom Rimer and Rix LJJ agreed. This distinction was subsequently adopted and applied in the context of the 1977 Act by Newey J in Avrora v Christies [2012] PNLR 35 at [144], by Mr Tim Kerr QC (sitting as a Deputy Judge of the High Court) in Crestsign Ltd v National Westminster Bank PLC [2014] EWHC 3043 (Ch) at [113] and [119], and HHJ Moulder (as she then was) in Thornbridge Limited v Barclays Bank plc [2015] EWHC 3430 (QB) at [105]–[112]. 3 [2019] 1 WLR 637. 4 At [96]. 5 At [97].

13.40 There remains an open question as to how the distinction between ‘duty defining’ clauses and exclusion clauses would be applied to disclaimers used by accountants. Although disclaimers are non-contractual notices, unlike the contractual terms considered in the cases discussed above, that does not itself mean that they fall outside the scope of the 1977 Act; on the contrary, s 2 on its face applies to both contractual terms and non-contractual notices which exclude or limit liability of negligence. In Galliford Try Infrastructure Ltd v Mott MacDonald Ltd1 Akenhead J considered a non-contractual notice disclaiming liability to third parties and held that it fell outside the scope of the 1977 Act. However, it is submitted that in a future case, in the light of First Tower, it would likely be held that the 1977 Act does apply. Whilst at first blush the application of the 1977 Act to disclaimers would seem like a very significant encroachment on the freedom of parties to contract, in practice, at least in the context of sophisticated commercial parties, the disclaimers would likely be held to be reasonable. 1 [2009] PNLR 9 at [328]–[332].

The reasonableness requirement 13.41 Section 11(1) provides as follows: ‘In relation to a contract term, the requirement of reasonableness for the purposes of this Part of this Act … is that the term shall have been a fair and reasonable one to be included having regard to the circumstances which were, or ought reasonably to have been, known to or in the contemplation of the parties when the contract was made.’ 13.42 Section 11(3) establishes the reasonableness requirement in respect of non-contractual notices: ‘In relation to a notice (not being a notice having contractual effect), the requirement of reasonableness under this Act is that it should be fair and reasonable to allow reliance on it, having regard to all the circumstances obtaining when the liability arose or (but for the notice) would have arisen.’

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13.43 Disclaimers and exclusions of liability 13.43 In relation to contractual terms or non-contractual notices which purport to limit (as opposed to exclude) liability,1 s 11(4) provides that when assessing whether the term or notice satisfies the requirement of reasonableness, regard should be had in particular to ‘the resources which [the person seeking to rely upon the clause] could expect to be available to him for the purpose of meeting the liability should it arise’ and ‘how far it was open to him to cover himself by insurance’. 1 Although the factors relevant to reasonableness set out in s 11(4) apply only to contractual terms or non-contractual notices which seek to restrict liability to ‘a specified sum of money’, in Simpson v Harwood Hutton [2008] EWHC 1376 (QB) it was held (at [127]) that those factors also applied to a term which sought to restrict liability through a formula for calculation of an amount.

13.44 Section 11(5) makes clear that the burden of proof of showing that the requirement of reasonableness is satisfied lies upon the person seeking to rely upon it. This creates a potential trap for the unwary, for a defendant should plead reasonableness when it pleads reliance on the term and should also lead evidence on the issue.1 1 In Simpson and others v Harwood Hutton [2008] EWHC 1376 (QB) the defendant failed to lead any evidence on the issue of reasonableness and it was held (at [128]) not to have to discharged the burden of proof as a result.

13.45 Schedule 2 to the 1977 Act contains further guidelines in relation to the reasonableness requirement, by listing a number of factors to which regard must be had:1 ‘(a) The strength of the bargaining positions of the parties relative to each other, taking into account (among other things) alternative means by which the customer’s requirements could have been met; (b) Whether the customer received an inducement to agree to the term, or in accepting it had an opportunity of entering into a similar contract with other persons, but without having to accept a similar term; (c)

Whether the customer knew or ought reasonably to have known of the existence and extent of the term (having regard, among other things, to any custom of the trade and any previous course of dealing between the parties;

(d) Where the term excludes or restricts any relevant liability if some condition is not complied with, whether it was reasonable at the time of the contract to expect that compliance with that condition would be practicable; (e)

Whether the goods were manufactured, processed or adapted to the special order of the customer.’ 346

The Unfair Contract Terms Act 1977 13.47 1 On its face, Sch 2 provides that these are matters to which regard is to be had ‘in particular’ for the purposes of ss 6(3), 7(3), 7(4), 20, and 21 of the 1977 Act, but the factors have frequently been taken into account by courts for the purposes of other sections as well. See Overseas Medical Supplies Ltd v Orient Transport Services Ltd [1999] CLC 1243 at [10(2)] per Potter LJ (with whom Mantell LJ agreed); Dennard v PricewaterhouseCoopers LLP [2010] EWHC 812 (Ch) per Vos J at [226]; and Barclays Bank plc v Grant Thornton [2015] 1 CLC 180 per Cooke J at [43].

13.46 Before turning to two cases in which the reasonableness requirement has been applied to contractual terms and non-contractual notices relied upon by accountants, two preliminary points should be noted. It is well established that in assessing whether a given term or notice is reasonable, the courts will have regard to the term or notice as a whole; it is equally well established that the courts do not have the power to sever any unreasonable parts.1 1 Stewart Gill Ltd v Horatio Myer & Co Ltd [1992] QB 600.

13.47 In Dennard v PricewaterhouseCoopers LLP1 the defendant accountants had provided certain valuation advice to the claimants and in their defence the accountants sought (amongst other things) to rely upon a clause in their engagement letter which limited their liability both as regards the amount and time in which a claim had to be brought. Although it was not strictly relevant in light of his other findings on the facts, Vos J considered the reasonableness of the clause and held that it was reasonable. In particular, having regard to the factors listed in Sch 2 of the 1977 Act Vos J stated:2 ‘(i) The parties in this case were not of equal bargaining position. PwC was in the strongest position, but the Claimants were powerful and experienced business people, and their companies had considerable commercial influence. The Claimants were fully aware of the possibility of going elsewhere for their valuation advice and even contacted DWPF before deciding to instruct PwC. The Claimants were not in any sense presented with a fait accompli. They chose to use PwC, knowing that it employed limitation clauses, because they thought that it would be useful to them to have that firm undertaking the valuation they needed for a variety of reasons. (ii) The Claimants either knew or ought reasonably to have known of the limitation of liability term. Ms Montague was acting for them, and could very easily have considered the matter and realised that what was being offered was an extension to the Engagement Letter, which she knew contained the limitation on liability. The Claimants are not to be regarded as innocents abroad. They were entirely capable of protecting their own interests. They knew and understood that accountancy firms customarily limited their liability by clauses of this kind, but chose not to discuss or negotiate the limitation.’ 347

13.48 Disclaimers and exclusions of liability 1 [2010] EWHC 812 (Ch). The obiter conclusion reached by Vos J on reasonableness was discussed by HHJ Moulder (as she then was) in Halsall v Champion Consulting Ltd [2017] PNLR 32 at [293]–[299] where she held that a clause in the defendant accountants’ standard terms of business which (as she held) excluded the operation of s 14A of the Limitation Act 1980 satisfied the requirement of reasonableness since the claimants were ‘successful litigation solicitors’ and it could be inferred that they were more than capable of understanding the relevant provision. 2 Ibid at [226].

13.48 The issue of reasonableness arose again in Barclays Bank plc v Grant Thornton.1 As explained at para 13.10 above, that case concerned the validity of a non-contractual disclaimer which had been applied by Grant Thornton to a non-statutory audit, the wording of which was almost identical to the then standard wording published by the ICAEW. Barclays Bank contended that it was at least arguable that the disclaimer was unreasonable, but Cooke J rejected this argument.2 The judge reasoned as follows at [89]–[91]: ‘The disclaimer of responsibility was clear on its face and would have been read and understood by anyone at Barclays who had read the two page reports for the years ending 2006 and 2007. These reports should have been read and the terms of the disclaimer observed. The disclaimer could not have been misunderstood. Furthermore, Barclays, having in other circumstances deliberately engaged Grant Thornton to provide services to it so that it would be responsible to it for them, even when it was fulfilling the self-same functions for the company (the Brandchart engagement), did not seek such an engagement or assumption of responsibility in relation to these particular reports. In the face of an express disclaimer it is not enough to say that both Grant Thornton and Barclays expected Barclays to rely upon the terms of the report in the context of the 2006 facility. Barclays was being told expressly that it relied on the reports at its own risk. Grant Thornton made it clear that it was not prepared to assume responsibility to Barclays in respect of these reports. There was nothing unreasonable in that stance, as between two sophisticated commercial parties, where the approach of auditors limiting their responsibilities is well known and, in the statutory context, is the subject of a standard form ICAEW clause. Barclays should have anticipated the existence of such a clause and, in my view, must have expected some such clause to be present. Earlier in this judgment at paragraph 37 I set out the key competing factors in the context of determining the existence of a duty of care. In the face of a clear disclaimer, the absence of any letter of engagement or any fee paid by Barclays to Grant Thornton, the factors upon which Barclays relies both in that paragraph and as set out elsewhere in this judgment cannot outweigh the points that negate the existence of such 348

Excluding or limiting liability for statutory audits 13.51 a duty. The court here can be confident of its answer in circumstances where sophisticated business parties are able to protect their own interests and do not require the protection of the 1977 Act in the same way as small companies or consumers.’ 1 [2015] 1 CLC 180. 2 Barclays Bank is notable for the fact that Grant Thornton succeeded in relation to the reasonableness issue on a strike out/summary judgment application. In this respect, Cooke J was prepared to adopt a more robust approach than Neuberger J in Killick v PricewaterhouseCoopers [2001] PNLR 1 where he held at [19] that: ‘Reasonableness in each case is a question of fact or inference from fact and, save in a clear case, I would have thought it inappropriate to decide a question of reasonableness at an interlocutory stage’.

EXCLUDING OR LIMITING LIABILITY FOR STATUTORY AUDITS 13.49 Historically it was not permissible for auditors to exclude or limit liability for any negligence or other breach of duty in connection with a statutory audit. Pursuant to s 310 of the Companies Act 1985, any such exclusion or limitation provision was void. Similarly, any provision by which a company agreed to indemnify the auditor in respect of any liability for negligence or breach of duty occurring in the course of a statutory audit was void. It was, however, possible for an auditor found to have acted negligently or otherwise in breach of duty to seek relief under s 727 of the 1985 Act: see Chapter 19. 13.50 As the number of claims brought against auditors increased in the 1990s, so this absolute prohibition on the right of auditors to exclude or limit their liability became increasingly controversial. It was thought, for example, that auditors might increase their fees, refuse to accept engagements with higher risk entities, and adopt a more defensive approach to auditing. Following an extensive consultation process, the Companies Act 2006 brought about a significant change. 13.51 The position is now that for audit engagements entered into after 6 April 2008, s 532 of the 2006 Act provides that any exclusion clauses or indemnity provisions are void subject to two exceptions. The first exception, contained in s 533, is that a company is entitled to indemnify an auditor against the costs incurred by the auditor in successfully defending proceedings, whether civil or criminal, or in applying for statutory relief under what is now s 1157. The second exception is that under s 534 of the 2006 Act a ‘limitation of liability agreement’1 is valid as long as it is limited to one financial year2 and is authorised by the shareholders.3 Even then, s 534(3) provides that the agreement will be effective only to the extent that it complies with the requirement of fairness and reasonableness that is laid down in s 537.

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13.52 Disclaimers and exclusions of liability 1 Defined in s 534(1) of the 2006 Act as ‘an agreement that purports to limit the amount of a liability owed to a company by its auditor in respect of any negligence, default, breach of duty or breach of trust, occurring in the course of the audit of accounts, of which the auditor may be guilty in relation to the company’. 2 Section 535 of the 2006 Act. 3 Section 536 of the 2006 Act.

13.52 Section 537 has not yet been tested in any reported cases. It provides in sub-s (1) that in assessing whether a limitation liability agreement is effective, regard is to be had to the auditor’s responsibilities, the nature and purpose of the auditor’s contractual obligations to the company, and the professional standards expected of him. This is a non-exhaustive list of factors. Section 537(3) also provides that no account is to be taken of any matters arising after the loss or damage in question has been incurred or matters (whenever arsing) affecting the possibility of recovering compensation from other persons liable in respect of the same loss or damage.1 1 For more on this topic, see the FRC’s ‘Guidance on Auditor Liability Limitation Agreements’.

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Chapter 14

Contributory negligence and contribution

CONTRIBUTORY NEGLIGENCE Introduction 14.01 Contributory negligence is a defence which operates to reduce the amount of damages for which a defendant is liable where the loss in respect of which the claim is made was partly the result of the claimant’s own fault. In broad terms, the defence involves the court assessing the parties’ relative culpability for the loss suffered by the claimant and then apportioning liability as between them, usually in percentage terms. 14.02 Historically, contributory negligence afforded either a complete defence or no defence at all. However, the defence was modified by statute such that it now provides a reduction of liability rather than a complete defence:1 ‘Where any person suffers damage as the result partly of his own fault and partly of the fault of any other person or persons, a claim in respect of that damage shall not be defeated by reason of the fault of the person suffering the damage, but the damages recoverable in respect thereof shall be reduced to such extent as the court thinks just and equitable having regard to the claimant’s share in the responsibility for the damage’. 1 Law Reform (Contributory Negligence) Act 1945, s 1(1).

14.03 Contributory negligence overlaps with certain other defences and arguments that are available to defendants. For example, a claimant’s own fault may be so significant that it breaks the chain of causation between the defendant’s fault and the claimant’s loss; in certain circumstances, fault on the part of the claimant may give rise to a defence of ex turpi causa; and there may be cases where the loss suffered by the claimant was caused partly by the claimant’s agents (including, for example, a company’s directors and officers) such that the defendant wishes to claim a contribution from those agents as well as running a defence of contributory negligence. 351

14.04 Contributory negligence and contribution 14.04 In relation to the SAAMCO cap on damages recoverable where the duty breached was of more limited scope than the damage suffered as a but for cause of the breach, the House of Lords has held that the reduction for contributory negligence must be made before applying the cap: Platform Home Loans v Oyston Shipways.1 1 [2000] 2 AC 190 at 211 per Lord Hobhouse.

Scope of the defence Claims for breach of contract 14.05 At common law the defence of contributory negligence was not available in claims for breach of contract. As regards claims for breach of strict contractual duties, the 1945 Act has not changed the position. However, in Forsikringsaktieselskapet Vesta v Butcher,1 the Court of Appeal held that the 1945 Act does apply where the defendant’s liability in contract is the same as its liability in the tort of negligence, independent of the existence of any contract. Thus in most negligence claims against accountants, since it will usually be the case that the defendant owed (and will be said to have breached) concurrent duties of care in contract and tort to the claimant, contributory negligence will be available as a defence.2 1 [1988] 3 WLR 565. 2 At first instance in Manchester Building Society v Grant Thornton [2018] PNLR 27 the claimant reserved the right to contend in a higher court that the 1945 Act does not apply to claims in contract, as recorded by Teare J at [257], but the point was not in the event taken in the claimant’s appeal to the Supreme Court on other issues.

14.06 However, in certain other Commonwealth jurisdictions doubt has been expressed as to whether the defence applies to claims brought in contract as well as in tort. For example, in Astley v Austrust Ltd,1 the High Court of Australia reached the opposite view to the Court of Appeal in Vesta in relation to s 27A(3) of the South Australian Wrongs Act 1936, which was in materially identical form to s 1(1) of the 1945 Act. In doing so, the High Court overruled several earlier Australian decisions, which had either followed Vesta or had reached the same conclusion. The basis for the High Court’s conclusion was a strict interpretation of the legislation against the background that contributory negligence had never traditionally been available at common law as a defence to claims for breach of contract. The decision in Astley has been reversed by statute in each Australian state.2 1 (1999) 197 CLR 1. 2 For example, the New South Wales Law Reform (Miscellaneous Provisions) Amendment Act 2000 allows contributory negligence to be raised as defence to claims for breach of a contractual duty of care that is concurrent and coextensive with a duty of care in tort.

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Contributory negligence 14.09 14.07 The position in other Commonwealth jurisdictions is divided and developing, generally towards greater availability of contributory fault for negligence liability. Vesta has been followed in New Zealand.1 Likewise, the Court of Appeal of Singapore has preferred Vesta to Astley.2 The Court of Appeal in Hong Kong has left the point open,3 but there is at least one earlier authority in which a first instance judge held that he found the reasoning in Astley to be so compelling that he was bound to adopt it.4 In most parts of Canada, it is even available in contract cases.5 1 Dairy Containers v NZI Bank Ltd [1995] 2 NZLR 30. 2 Jet Holding Ltd v Cooper Cameron (Singapore) Pte Ltd [2006] SGCA 20. See also PlanAssure PAC v Gaelic Inns Pte Ltd [2007] SGCA 41. 3 Hondon Development Ltd v Powerwise Investments Ltd [2005] HKCA 37. 4 International Trading Co v Lai Kam Man [2004] HKCFI 361. 5 For a summary of the position in Canada, and a wider discussion of the issues, see Sirko Harder, ‘Contributory Negligence in Contract and Equity’ [2014] OtaLawRw 4; (2014) 13 Otago LR 307.

Claims in deceit 14.08 Following the decision of the House of Lords in Standard Chartered Bank v Pakistan National Shipping Corp (Nos 2 and 4),1 it is now well established that the defence of contributory negligence does not apply to claims in deceit. In that case the House of Lords held that the definition of ‘fault’ in the 1945 Act applies to claimants and defendants in different ways. ‘Fault’ is defined as meaning ‘negligence, breach of statutory duty or other act or omission’ which gave rise to a liability in tort in the case of a defendant and a defence of contributory negligence in the case of a claimant. According to the House of Lords, it followed from this that conduct by the claimant could not amount to ‘fault’ within the 1945 Act unless it gave rise to a common law defence of contributory negligence and, since there was no common law defence of contributory negligence in the case of fraudulent misrepresentation, no discount could be made under the 1945 Act in such claims. 1 [2003] 1 AC 959.

Claims for breach of fiduciary duty 14.09 Contributory negligence also does not apply to claims based on breach of fiduciary duty. The 1945 Act does not apply because, under s 4, ‘“fault” means negligence, breach of statutory duty or other act or omission which gives rise to liability in tort or would, apart from this Act, give rise to the defence of contributory negligence’. It has also been held in England that equity does not recognise any reduction for contributory fault, which is said to follow from the fact that it is usually necessary, in order to establish a breach of fiduciary duty, to prove that the fiduciary was consciously disloyal to the 353

14.10 Contributory negligence and contribution person to whom his duty was owed and that to allow the fiduciary to advance a defence of contributory negligence under general equitable principles would risk ‘subverting the fundamental principle of undivided and unremitting loyalty which is at the core of the fiduciary’s obligations’.1 1 Nationwide Building Society v Balmer Radmore (A Firm) and others [1999] PNLR 606 at 676–677 per Blackburne J, which discusses Commonwealth authority. See also De Beer v Kanaar & Co [2002] EWHC 688 (Ch) at [92] per Patten J.

Identifying fault by the claimant 14.10 The defence of contributory negligence will only be available where the defendant can establish (a) some fault on the part of the claimant and (b) that that fault was causative of the loss and damage suffered. The burden of proof is on the defendant both as to blameworthiness and causation. The most straightforward case is where the claimant itself acted in breach of duty, but importantly it is not necessary for the defendant to prove a breach of duty by the claimant in every case: for the defence to apply it is sufficient that the claimant acted in a way which failed to protect its own interests.1 Thus in a well-known dictum in MAN v Freightliner Ltd Moore-Bick LJ said that in order for a finding of contributory negligence to be made, the defendant must persuade the court that the claimant has been guilty of ‘an act or omission … of a kind that was blameworthy, in the sense that it involved a failure to take reasonable care for its own interests, and was a contributory cause of [its own] loss’.2 1 Barings plc v Coopers & Lybrand [2003] PNLR 34 at [896]. 2 [2005] EWHC 2347 (Comm) at [418]. The case went on appeal ([2008] PNLR 6) but not in relation to contributory negligence.

14.11 It has been also said in relation to claims against auditors that contributory negligence can arise in two respects: first, where the claimant has, by its acts, positively prevented or hindered the auditor from carrying out his duty with due skill and care; and, second, when there has been such negligence that the claimant may be found to have failed to look after its own interests even though it has appointed an auditor.1 It is therefore clear that, while contributory negligence has to be a cause of the same damage as the defendant’s negligence, the former does not need to be otherwise connected to the latter. Contributory negligence does, however, require foreseeability of harm to the claimant.2 1 PlanAssure PAC v Gaelic Inns Pte Ltd [2007] SGCA 41 at [118]. 2 See, for example, AssetCo plc v Grant Thornton [2019] EWHC 150 (Comm) at [1099].

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Contributory negligence 14.15

Claimant’s failure to spot the defendant’s negligence 14.12 In the professional negligence context, a common example of a failure by a claimant to protect its own interests is a situation in which a client fails to check or challenge the work that is carried out on its behalf by a professional. If the client subsequently brings a negligence action against the professional, the question arises as to whether any liability incurred by the professional should be reduced to reflect the client’s failure to check the work done and to spot the negligence, or whether such a reduction would be unfair and inappropriate because the client was entitled to rely upon the professional. 14.13 Several cases illustrate that clients are not entitled to place uncritical reliance upon its professional advisers, but instead must usually be able to show that they took some steps to check the work done in order to avoid contributory negligence applying. 14.14 For example, in De Meza v Apple1 the claimant firm of solicitors instructed the defendant accountants to complete consequential loss insurance certificates to be sent to the solicitors’ insurers. The certificates as prepared by the defendant contained errors, understating the sum to be insured. When a fire occurred at the solicitors’ premises, the solicitors suffered a loss through being underinsured. Brabin J found that although the accountants had been negligent, the error in the certificate was obvious and therefore the claimants were at fault for failing to notice and correct the error: ‘It is surprising that Mr. De Meza did not spot the mistake, for I have little doubt that he would have done so if looking through the same documents for a client. The reason is, I suppose, but another example of the cobbler’s children being the worst shod’.2 A 30 per cent reduction was applied. 1 [1974] 1 Lloyd’s Law Rep 508. 2 At p 516.

14.15 A more recent example of the same point is Slattery v Moore Stephens (A Firm).1 There the claimant sued his accountants for negligent tax advice, arising from the accountants’ failure to advise him to consider arranging for his employer to pay his earnings into an offshore bank account. If such an arrangement had been implemented, the claimant’s tax liability would have been substantially reduced. The accountants proceeded to prepare tax returns on the mistaken understanding that the claimant had in fact been paid offshore. The claimant was therefore assessed as being entitled to a large refund of tax. The accountants notified the claimant of this refund, and in doing so asked

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14.16 Contributory negligence and contribution him to satisfy himself that the tax return was correct. Despite the large and unexpected refund, the client raised no issue at all with the accountants. Robert Englehart QC, sitting as a Deputy High Court Judge, held that the defence of contributory negligence applied because, although the client was entitled to look ‘in the first instance’ to his accountants calculating the tax liabilities properly, nonetheless the taxpayer bore ‘some responsibility himself for checking that the calculations on [the] tax return are correct’.2 A 50 per cent reduction in damages was applied. 1 [2003] PNLR 14. 2 At [35]. An anterior argument by Moore Stephens was that Mr Slattery’s failure to check the calculations was so reckless that it constituted the sole cause of his loss; however, that argument was rejected.

14.16 These cases involved errors that would have been clear to the claimant. However, if the claimant is commercially sophisticated, it will be expected to identify errors that, even though not obvious on their face, would have been clear to that particular claimant.1 Likewise, a claimant to whom potential risks have been disclosed by a defendant prior to a transaction might reasonably be expected to ask for further explanation and to make appropriate enquiries; on the other hand, however, a claimant will not be guilty of contributory negligence for failing to do so if it received from the defendant a guarantee or absolute assurance (for example that a particular tax scheme would be successful).2 1 See, for example, Duke Group Ltd v Pilmer (1999) 31 ACSR 213 (Supreme Court of South Australia) where the claimant received a valuation that the trial judge held it ‘must have known … was grossly inflated and unjustified’: see [661] and also [1080]. An appeal was allowed in part but on other issues: [2001] 2 BCLC 773. 2 See, for example, Halsall v Champion Consulting Ltd [2017] PNLR 32 at [217]–[219].

The ‘very thing’ issue 14.17 Another question which often arises in the professional negligence context is whether contributory negligence is available as a defence in cases where accountants or other professional advisers have failed to detect wrongdoing (causing loss) in the claimant’s own business. Such claims present an apparent paradox. In general, a company is vicariously liable for the acts of its officers and employees, even if the acts are fraudulent, provided that they are carried out in the course of their office or employment. How can a company which has suffered loss for which it is itself legally responsible bring a claim against a professional adviser for failure to spot the wrongdoing? The paradox is resolved by the well-established principle that a defendant may be held liable for loss suffered by a claimant where that loss was the ‘very thing’ which the defendant was under a duty to protect against.1 1 Reeves v Commissioner of Police [2000] 1 AC 360. The facts of this case are set out at para 15.09, below.

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Contributory negligence 14.20 14.18 This being the general principle, the question then arises whether the defence of contributory negligence should be available at all in cases where it is established that the defendant owed a duty to protect against the particular loss suffered by the claimant. In the field of professional negligence, some authorities indicate that contributory negligence is unlikely to apply in these circumstances. Thus in MAN Nutzfahrzeuge AG v Freightliner Ltd Moore-Bick LJ observed that:1 ‘there may be cases in which the nature of the duty owed by the defendant to the claimant may be such as effectively to exclude the possibility of contributory fault’. 1 [2005] EWHC 2347 (Comm) at [419].

14.19 A Hong Kong authority goes further, expressing the point (ie the unavailability of contributory negligence) essentially as a rule of law,1 whilst in the Australian case of AWA Ltd v Daniels Rogers CJ referred to the existence of a respectable body of authority for the proposition that:2 ‘a defence of contributory negligence against a company, based on the allegedly negligent conduct of a servant or director, is not available to an auditor whose duty it is to check the conduct of such persons.’ In Canada the Supreme Court has held that, because the very purpose of a statutory audit is to provide a means by which fraud and wrongdoing may be discovered, if liability were denied on the basis that an individual within the company had engaged in such conduct, then this would render the statutory audit meaningless.3 1 Extramoney Limited v Chan, Lai Pang & Co [1994] HKCFI 361 at [164]–[165], citing New Plymouth Borough v The King [1951] NZLR 49 and Leeds Estate Building and Investment Co v Shepherd (1887) 36 Ch D 787. 2 (1992) 7 ACSR 759 at 842. 3 Livent Inc v Deloitte LLP [2016] ONCA 11 at [103]–[104].

14.20 Current authority in England does not approach the point in this way. The extent to which contributory negligence applies in a case where a client relies upon a professional adviser was considered in detail in Barings plc v Coopers & Lybrand.1 In that case the immediate cause of the claimant bank’s losses and eventual collapse was unauthorised trading conducted on a Singapore-based exchange by Mr Leeson, the general manager of Barings’ Singapore subsidiary. The trading was funded by other members of the Barings group. Mr Leeson effectively worked unsupervised and managed to conceal his unauthorised trading from the bank’s management for several years. Barings sued its auditors, who were found to be negligent in having failed to identify inconsistencies in the accounts which, if they had been investigated further,

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14.21 Contributory negligence and contribution would have revealed the losses incurred through the trading. The auditors advanced a defence of contributory negligence. 1 Barings plc v Coopers & Lybrand [2003] PNLR 34. In fact, the provision applied by Evans-Lombe J was s 3(1) of the Singaporean Contributory Negligence and Personal Injuries Act, but this is in identical terms to the 1945 Act and the parties therefore agreed that it should be treated as being the same as English law.

14.21 The starting point was that Evans-Lombe J held that Mr Leeson’s wrongdoing was to be attributed to Barings for the purposes of contributory negligence. However, he held that whilst Mr Leeson’s fault was to be attributed to Barings for the purposes of contributory negligence, this was subject to the ‘very thing’ principle, namely that a defendant can be held liable in negligence for loss which it owed a duty to the claimant to protect against. On that basis, it could not be said that Mr Leeson’s wrongdoing had such an overwhelming causative influence as to permit the auditors to escape liability altogether: rather, Mr Leeson’s fraud only justified a discount in the damages recoverable. In addition to Mr Leeson’s wrongdoing, the auditors pointed to deficiencies in Barings’ management and internal controls and the judge accepted that contributory negligence should be applied on that basis because the directors of Barings were responsible for managing the bank’s business and their failure (and that of the employees to whom the board had delegated specific tasks) to detect Mr Leeson’s fraudulent conduct amounted to a failure by Barings to protect its own interests. On account of both Mr Leeson’s wrongdoing and the failure of Barings’ internal controls, the reductions granted ranged from 50 per cent to 80 per cent. 14.22 Until recently, Barings was the only case in England in which a defence of contributory negligence has succeeded in an auditor’s negligence claim. It is submitted that the judgment is something of a curate’s egg. In so far as Evans-Lombe J held that Mr Leeson’s own wrongdoing could be attributed to Barings for the purposes of contributory negligence, it is submitted that the judgment gives rise to difficulties in that it is not clear how the relative fault of the primary wrongdoer and the other officers of the company is to be apportioned. It would be far more straightforward to say that in light of the ‘very thing’ principle the wrongdoer’s conduct is not to be attributed to the company for this purpose. But leaving this point aside, we consider that Evans-Lombe J was correct as a matter of principle in concluding that the defence of contributory negligence is available as regards any failures in the claimant company’s management and internal controls. We say this because of the importance of the role played by company directors in managing the business of a company; if in a given case they have not performed that role competently and have consequently failed to detect a fraud, then even though an external adviser may be held liable in negligence pursuant to the ‘very thing’ principle, why should all of the consequences be visited upon that external adviser? 358

Contributory negligence 14.24 14.23 In this regard, it is relevant to note certain dicta, which were cited by Evans-Lombe J with approval. The first is a passage from the judgment of Jonathan Parker J in Re Barings plc (No 5):1 ‘Directors have, both collectively and individually, a continuing duty to acquire and maintain a sufficient knowledge and understanding of the company’s business to enable them properly to discharge their duties as directors. Whilst directors are entitled (subject to the articles of association of the company) to delegate particular functions to those below them in the management chain, and to trust in their competence and integrity to a reasonable extent, the exercise of the power of delegation does not absolve a director from the duty to supervise the discharge of the delegated functions.’ The second is a passage from the judgment of Thomas J in the New Zealand case of Dairy Containers v NZI Bank:2 ‘it is the fundamental task of the directors to manage the business of the company. Theirs is the power and the responsibility of that management. To manage the company effectively, of course, they must necessarily delegate much of their power to executives of the company, especially in respect of its day to day operations. Although constantly referred to as ‘the management’, the executives’ powers are delegated powers, subject to the scrutiny and supervision of the directors. Responsibility to manage the company in this primary sense remains firmly with the directors. The directors may delegate powers and functions, using that term in a broad sense, but they cannot delegate the management function itself. If a director negligently disregards the obligation to oversee the conduct of the company’s business, he or she has manifestly failed to perform that function with reasonable care.’ 1 [1999] 1 BCLC 410 at p 489. 2 [1995] 2 NZLR 30 at p 79. On the facts of Dairy Containers, Thomas J held that the ‘the fundamental failure of the directors to oversee or monitor the company created an environment in which unauthorised expenditure, unauthorised investments and other defalcations could thrive. Perpetrators contemplating something more than acquiring petty advantages at their employers’ expense, could pursue their fraudulent purpose in the knowledge that the directors’ scrutiny and supervision of management was extremely lax’.

14.24 In line with these dicta, it is submitted that the management function of the directors, who are – like the auditors – appointed by shareholders and answerable to the company for breach of duty, means that it is appropriate as a matter of policy as well as authority that, even if an auditor has a duty to take steps to protect a client from suffering loss, the court should not automatically

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14.25 Contributory negligence and contribution regard the auditor as being solely responsible, but should be willing to entertain a defence based on contributory fault, which may require an investigation whether on the facts the responsibility for the loss suffered was shared with the management. Such an approach was adopted in both Manchester Building Society v Grant Thornton and Assetco plc v Grant Thornton (considered further at paras 14.35 and 14.36 below) where the defence of contributory negligence succeeded to different extents. In the latter case, Bryan J cited the judgment of Evans-Lombe J with approval1 and held that as a matter of law the dishonesty of management can be attributed to the company for the purpose of contributory negligence; notwithstanding this, as explained below, when carrying out an apportionment on the facts, Bryan J was heavily influenced by the ‘very thing’ principle and the notion that Grant Thornton’s failings went to the very heart of an auditor’s duties. 1 [2019] EWHC 150 (Comm). In support of this view, at [1105]–[1111] Bryan J also cited the judgment of the Court of Appeal in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd [2018] 1 Lloyd’s Rep 472 at [94]. Contributory fault was not in issue in the appeal against the judgment of Bryan J.

Apportionment 14.25 Once a claimant has been found to have been partly blameworthy for its own loss, then the court will apportion responsibility as between the claimant and the defendant. The statutory wording of the 1945 Act requires the court in any given case to achieve a result it considers to be ‘just and equitable having regard to the claimant’s share in the responsibility for the damage’. It has been said that the nature of the task is such that there is no demonstrably correct apportionment.1 1 See, for example, AssetCo plc v Grant Thornton [2019] EWHC 150 (Comm) at [1101].

14.26 If the court chooses to reduce the level of damages recoverable by the claimant, it usually does so by making a percentage discount. Such discounts can range from 0 to 100 per cent,1 even though arguably it is illogical to apply a 100 per cent reduction because that would imply that the negligence of the defendant was not causative of the loss suffered by the claimant. 1 For an example of a 100 per cent discount being applied, see Jayes v IMI (Kynoch) Ltd [1985] ICR 155. That decision has subsequently been criticised: see, eg Anderson v Newham College of Further Education [2003] ICR 212. In Wynbergen v Hoyts Corp Pty Ltd (1997) 149 ALJR 25 the High Court of Australia also took the view that it was wrong in principle to make a 100 per cent discount.

14.27 The court’s assessment of the parties’ respective degrees of fault is not a purely mathematical process. Rather, the analysis is evaluative and qualitative. In the words of Evans-Lombe J in Barings, reductions must

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Contributory negligence 14.30 necessarily be done ‘with a broad brush’.1 More recently, Lord Reed has said as follows (albeit in a case far removed from auditor’s negligence on its facts):2 ‘It is not possible for a court to arrive at an apportionment which is demonstrably correct. The problem is not merely that the factors which the court is required to consider are incapable of precise measurement. More fundamentally, the blameworthiness of the pursuer and the defender are incommensurable. The defender has acted in breach of a duty (not necessarily a duty of care) which was owed to the pursuer; the pursuer, on the other hand, has acted with a want of regard for her own interests. The word ‘fault’ in section 1(1), as applied to “the person suffering the damage” on the one hand, and the “other person or persons” on the other hand, is therefore being used in two different senses. The court is not comparing like with like. It follows that the apportionment of responsibility is inevitably a somewhat rough and ready exercise (a feature reflected in the judicial preference for round figures), and that a variety of possible answers can legitimately be given. That is consistent with the requirement under section 1(1) to arrive at a result which the court considers “just and equitable”. Since different judges may legitimately take different views of what would be just and equitable in particular circumstances, it follows that those differing views should be respected, within the limits of reasonable disagreement.’ 1 [2003] Lloyd’s Rep IR 566 at [1060]. 2 Jackson v Murray [2015] UKSC 5 at [27]–[28]. These dicta of Lord Reed were cited by Bryan J in AssetCo plc v Grant Thornton [2019] EWHC 150 (Comm) at [1101].

14.28 In the same case Lord Reed cited earlier authority under the 1945 Act which makes clear that there are two aspects of apportioning liability between a claimant and a defendant: first, the respective causative potency of their conduct and second their respective blameworthiness.1 1 See the cases cited by Lord Reed in Jackson v Murray [2015] UKSC 5 at [20]–[26].

14.29 The level of apportionment in any given case will turn on the facts and it is therefore difficult to derive much guidance from the authorities. It is, however, interesting to conduct a brief comparative exercise. 14.30 As already stated, in Barings Evans-Lombe J reduced the auditors’ liability by between 50 per cent and 80 per cent over various periods.1 This was on the basis of a series of fairly serious failings by the bank, including: ●●

its failure to ensure adequate segregation between its front and back offices;

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14.31 Contributory negligence and contribution ●●

the failure of its management to supervise properly its settlement and financial functions and to supervise Mr Leeson;

●●

its failure to undertake an internal audit upon Mr Leeson reporting unusual profits; and

●●

its failure to question Mr Leeson’s activities.

1 50 per cent between November 1992 and mid-August 1993; 60 per cent between mid-August 1993 and the end of December 1993; and 80 per cent between the end of December 1993 and the end of April 1994. As for the period from the end of April 1994 to the end of December 1994, on the facts the judge concluded that the only cause of Barings’ loss in that period was its own fault and that the appropriate reduction for that period was therefore 100 per cent: see [873] and [1066].

14.31 A discount of 80 per cent is obviously at the high end of the scale. Discounts in cases in other Commonwealth jurisdictions, and more recently in England and Wales, have generally been lower. We give some examples from well-known cases below. 14.32 In the Australian case of AWA Ltd v Daniels1 – which pre-dates the decision in Astley – the claimant had incurred substantial losses on foreign currency transactions, which were effectively operated by a single employee who managed the record-keeping so as to show a significant profit. Although serious failings on the part of the company were found – amongst other things, it had failed to create internal checks and controls, failed to create records, and failed to provide a system for reporting to the board – the trial judge only reduced the liability of the auditors by 33 per cent. That was upheld by the New South Wales Court of Appeal. 1 [1955–1995] PNLR 727.

14.33 In the New Zealand decision of Dairy Containers Ltd v NZI Bank Ltd,1 the claimant company had suffered loss through the fraudulent misappropriation of funds by three senior executives. An action was brought against auditors for a negligent audit. It was alleged that a competent audit would have allowed the misappropriation to be identified. Despite finding very wide-ranging failings by the claimant, Thomas J was only prepared to reduce the liability of the auditors by 40 per cent. 1 [1995] 2 NZLR 30.

14.34 In PlanAssure PAC v Gaelic Inns Pte Ltd,1 the claimant company’s group finance manager had devised a scheme of misappropriating funds received from the company’s sales, which she concealed by depositing funds received for sales at a later date, and by withdrawing and then banking cash again. The company brought a negligence claim against its auditors and in response the auditors sought a reduction in their liability on the grounds of 362

Contributory negligence 14.36 contributory negligence, specifically based on omissions by the non-executive directors in not having investigated further irregularities arising from the prepared accounts. The Singapore Court of Appeal accepted that the nonexecutive directors had breached their duties to manage the business and to remain alert and watchful, but in the result was only prepared to reduce the liability of the auditors by 50 per cent. 1 [2007] SGCA 41.

14.35 In Manchester Building Society v Grant Thornton1 Grant Thornton admitted that it had given negligent advice in relation to the application of the hedge accounting rules to the claimant’s entry into certain long-term swaps, but Teare J also held that the claimant was guilty of contributory negligence in two respects, namely (a) in purchasing the long-term swaps and (b) devising the inappropriate hedge accounting policy in the first place. So far as (a) was concerned, Teare J held that the purchase of long-term swaps required the claimant to make judgments about interest rates in the far distant future and this was ‘unwise’ and an ‘unnecessary and imprudent risk to take’. In relation to (b), the claimant in fact admitted that it had been negligent in so far as its finance director had had a defective understanding and knowledge of the hedge accounting rules. Overall, having regard to the relative blameworthiness and causative potency of Grant Thornton’s negligence and the claimant’s own negligence in relation to the particular heads of loss which he had found to be otherwise recoverable, Teare J held that a 25% reduction was appropriate. In reaching this conclusion, Teare J stated that Grant Thornton’s negligence was both more culpable and of greater causative potency since it was the specialist which had been enlisted by the claimant to provide advice. 1 [2018] PNLR 27 at [236]–[255]. The judgment went on appeal to the Court of Appeal, and there is a further appeal to the Supreme Court pending, but not on this issue.

14.36 In AssetCo plc v Grant Thornton1 Bryan J considered a number of different matters which Grant Thornton contended amounted to contributory negligence by the claimant. In the result, Bryan J granted a discount of 25% in relation to two of the heads of loss which he had held to be recoverable and 35% in relation to a third head of loss. Bryan J regarded as especially important the facts that: (a) the senior management of the company, in the form of the CEO, CFO, and Financial Controller, had been managing the business dishonestly which dishonesty was to be attributed to the company as a matter of law; (b) there was a lack of management control by the non-executive directors (whom Bryan J described as ‘supine’2); and (c) management had made dishonest representations and assumptions during the course of the audit so as artificially to inflate the company’s financial position and to mislead Grant Thornton. For these reasons Bryan J held that there had been a failure by the claimant to look after its own interests and the dishonest conduct gave rise to blameworthiness on the part of the company and also had causative potency 363

14.37 Contributory negligence and contribution in allowing the company to continue to trade. As against these points, however, Bryan J emphasised that Grant Thornton’s (admitted) negligence had been very serious (indeed he referred to it as negligence ‘of the highest order short of recklessness’ which ‘would (at the very least) be expected to undermine public confidence in accountancy firms’3) and its failings had gone to the ‘very thing’ which it had been responsible for as auditor, namely the detection of dishonesty and prevention of fraud by management.4 For this reason, Bryan J held that Grant Thornton’s negligence was of ‘very high relative causal potency in relation to the loss and they also bear the lion’s share of relative blameworthiness’.5 1 [2019] EHWC 150 (Comm) at [1091]–[1190]. See also the further judgment addressing issues of quantum: [2019] EWHC 191 (Comm). 2 At [1188]. 3 At [1185]. 4 See [1115]–[1118]. 5 At [1189].

CONTRIBUTION Introduction 14.37 Unlike contributory negligence, contribution does not reduce the defendant’s liability to the claimant. Rather, it is a statutory right conferred upon a defendant to claim contribution against other parties who are responsible for a proportion of the damage suffered by the claimant. Specifically, the right to claim contribution arises under s 1(1) of the Civil Liability (Contribution) Act 1978:1 ‘(1) Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).’ 1 The 1978 Act was enacted following a 1977 Law Commission Report on Contribution (Law Com No 79).

14.38 Contribution may be claimed by a defendant irrespective of whether he is liable in ‘tort, contract, breach of trust or otherwise’.1 Further, references to a person’s liability in s 1(1) mean:2 ‘any such liability which has been or could be established in an action brought against him in England and Wales by or on behalf of the person who suffered the damage; but it is immaterial whether any issue arising in any such action was or would be determined

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Contribution 14.42 (in accordance with the rules of private international law) by reference to the law of a country outside England and Wales.’ 1 Section 6(1). 2 Section 1(6).

14.39 The 1978 Act makes clear that a party to a settlement may recover contributions from others that are liable in respect of the damage for which he has agreed under the terms of settlement to compensate the victim.1 The settlement must, however, have been entered into bona fide and the party claiming contributions must be able to demonstrate that if the factual basis of the claim had been established then he would have been liable for the damage as a matter of law.2 1 Section 1(4). 2 Ibid. There is no requirement on the party claiming contribution to prove that he is or ever was liable in respect of the damage. In Dubai Aluminium Co Ltd v Salaam [2002] 2 AC 366 the question of whether a number of partners in a firm of solicitors were vicariously liable for the fraudulent conduct of one of their partners was held to be a question of law which could be challenged by the party against whom contribution was claimed pursuant to s 1(4).

14.40 Pursuant to s 1(2), even if the party claiming contribution has ceased to be liable in respect of the damage in question since the time when the damage occurred (for example because he has discharged his liability), he shall nonetheless be entitled to claim contribution provided that he was liable immediately before he made or was ordered or agreed to make the payment in respect of which the contribution is sought. 14.41 If a defendant can establish that another person is liable in respect of the ‘same damage’ then pursuant to s 2(1) ‘the amount of the contribution recoverable from any person shall be such as may be found by the court to be just and equitable having regard to the extent of that person’s responsibility for the damage in question’.

Overlap with contributory negligence 14.42 As noted above, in certain cases there may be an overlap between contributory negligence and contribution. For example, it may be that the claimant’s loss was caused partly by the defendant’s wrongdoing but also partly by the wrongdoing of its own agents. In such a scenario, the defendant may wish to advance a defence of contributory negligence and claim contribution from the claimant’s agents. But how do the two concepts interrelate? It is now well established that: (i)

contributory negligence should be considered before contribution; and

(ii) the courts will not permit double-counting. 365

14.43 Contributory negligence and contribution Thus, if a court were to hold that the damages recoverable by a claimant company should be reduced on account of contributory negligence, for example because the officers of the company were at fault and that fault is attributable to the company, then the court would not allow the defendant to reduce its liability further by claiming contribution from the officers in question. Whilst this is a principle of general application, it has been specifically recognised in the context of auditor’s negligence claims both in England1 and in other Commonwealth jurisdictions.2 It could be argued that this is an unprincipled outcome because it permits a party who would, if sued, have been liable to the claimant to ‘leave the arena virtually unscathed’3 in that no contribution claim can be brought against him. However, the solution is a pragmatic one: the courts have taken the view that it is difficult to conceive of a situation in which it would be just and equitable to grant a defendant who has already received a discount on the grounds of contributory negligence a further award in the form of contribution against another party. 1 Barings plc v Coopers & Lybrand [2003] PNLR 34 at [1073]. 2 AWA Ltd v Daniels [1955–1995] PNLR 727 at 878–880. 3 Ibid at 880. It is also interesting to note that in the New Zealand case of Dairy Containers Ltd v NVI Bank Ltd [1995] 2 NZLR 30, Thomas J held that he would not allow the defendant auditors to bring a contribution claim against the directors of the claimant company reasoning that to do so would unnecessarily complicate the proceedings and that the right to claim contribution is a matter within the court’s discretion.

‘The same damage’ 14.43 Section 1(1) provides that contribution may be claimed from another person who is liable in respect of ‘the same damage’. In Royal Brompton Hospital NHS Trust v Hammond1 the House of Lords held that this phrase must be given its natural and ordinary meaning, without any restrictive or expansive gloss. On the facts of that case, the defendants were architects who were sued by the hospital for negligently issuing certificates to building contractors, the effect of which was to give the contractors a defence to a claim the hospital had against the contractors for breach of contract for delays in completing building work. It was held that the hospital’s claims against the contractors and against the architects were different, so the architects could not claim a contribution against the contractors. The House of Lords made clear that the phrase ‘the same damage’ did not cover damage that was merely substantially or materially similar. 1 [2002] 1 WLR 1397.

14.44 Interpretation of the phrase ‘the same damage’ has given rise to difficulties in practice.

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Contribution 14.48 14.45 It is, however, now clear that there is no requirement that the party against whom contribution is sought should be culpable by reason of the same fault, or to the same extent as the party claiming contribution. Thus, for example, Moore-Bick LJ in MAN Nutzfahrzeuge AG v Freightliner Ltd1 considered whether the liability in deceit of a vendor of a company to the purchaser would constitute the ‘same damage’ as the liability of the accountants of the company for negligent auditing, which failed to detect the falsification of VAT returns. The judge held that the same damage was present, even though the accountants and the vendor were not liable to the same extent.2 By the same token, an accountant who prepared a valuation of a business for a purchaser that overstated the business’s value was held liable to contribute to the defendant vendor, where the vendor was also found liable for breach of warranty.3 1 [2005] EWHC 2347 (Comm). 2 Ibid at [495]. 3 Eastgate Group Ltd v Lindsey Morden Group Inc [2002] 1 WLR 642 at [17].

14.46 A particular issue has arisen in recent years as to whether a defendant who is held liable to compensate a claimant may seek contribution from another party whose own liability to the claimant is restitutionary. Some uncertainty was created by the decision of the Court of Appeal in Niru Battery Manufacturing Co v Milestone Trading Ltd (No 2)1 which essentially left the point open. However, it arose again and was determined in Charter Plc v City Index Ltd.2 1 [2004] EWCA Civ 487. 2 [2008] Ch 313.

14.47 In Charter v City Index a director had misappropriated money from the claimant company and had transferred it to the defendant to finance his personal betting transactions. The defendant had received the money with knowledge that the director had acted in breach of fiduciary duty in transferring the money and it was therefore liable to the claimant in knowing receipt. The defendant claimed contribution from the other directors of the claimant and the claimant’s auditors. The directors and auditors applied for summary judgment of the contribution claim, arguing that the defendant’s liability was restitutionary rather than compensatory and therefore fell outside the scope of the 1978 Act. That argument was rejected by the Court of Appeal, which held that there is no general principle that a defendant who has received a benefit is unable to claim contribution from another party who has not received a benefit. Permission to appeal to the House of Lords was granted, but the case subsequently settled. 14.48 It is submitted that the Court of Appeal fell into error: if one of two defendants liable for damage suffered by a claimant received a benefit and still remains liable to the claimant to restore that benefit at the time of trial then it

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14.49 Contributory negligence and contribution should be required to disgorge that benefit before any question of contribution can arise. Such an outcome seems correct as a matter of principle since it would prevent one of the defendant wrongdoers obtaining a windfall. It would also be consistent with the decision of the House of Lords in Dubai Aluminium Co Ltd v Salaam.1 There a partner in a firm of solicitors had taken part in a fraud, but had received no proceeds, unlike two other fraudsters. The firm paid the victim $10m in settlement and the two recipient fraudsters also made payments, which were held to be less than their receipts from the fraud. There were multiple claims for contribution between the firm, the partner and the two other fraudsters. The House of Lords held that the firm was liable for the fraud of its partner, but required contribution from the two recipient fraudsters to cover the whole of the $10m settlement paid by the firm, on the basis that as between wrongdoers receipts must be disgorged before compensation is paid. 1 [2003] 2 AC 366.

Apportionment 14.49 Section 2(1) of the 1978 Act provides the court with a broad discretion to determine, in any given case, the amount of contribution that should be recovered. 14.50 In Downs v Chappell1 the Court of Appeal held that there are two key elements in the apportionment exercise: relative moral blameworthiness and the relative causal responsibility for the loss being apportioned. On the actual facts of the case, the decision is controversial. The vendor of a business lied to the purchasers about its income and profit margin, and when the purchasers asked for some independent support for the figures, the vendor’s accountants sent them a letter, which negligently provided such support. The purchasers sued both the vendor (in deceit) and the accountants (for negligence) and obtained judgment against both of them. The negligent accountants claimed contribution from their dishonest client. Despite the fact that the client was dishonest and the accountant was merely negligent, the trial judge held that liability should be apportioned on a 50/50 basis and this was upheld on appeal. 1 [1996] 3 All ER 344 (CA).

14.51 The question of apportionment is highly fact-sensitive. It is therefore difficult to derive guidance from the decided cases. For present purposes, it is sufficient to make two points. 14.52 First, it should be noted that in Cook v Green1 the court held that when apportioning liability as between certain parties who had personally benefited from their wrongdoing and other parties who had not, it was appropriate to add the whole value of the personal benefit to the amount of the contribution 368

Contribution 14.53 required from those who had received the benefit. It is submitted that this approach is correct as a matter of principle since it prevents some of the wrongdoers from obtaining a windfall through the retention of their benefit; indeed, this is precisely the same basis on which we have suggested above that the Court of Appeal fell into error in Charter v City Index. 1 [2009] BCC 204.

14.53 Second, it should be noted that where one of the wrongdoers has the benefit of a limitation on liability provision, such a provision is to be applied after the apportioning of responsibility.1 1 Nationwide v Dunlop Haywards (DHL) Ltd [2010] 1 WLR 258.

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Chapter 15

Counterclaims and mitigation of loss

COUNTERCLAIMS Introduction 15.01 Accountants often make counterclaims for unpaid fees. As to the recoverability of fees by a negligent accountant, this is generally the reverse side of the argument as to whether (paid) fees are recoverable as damages, discussed at para 8.103, above. Obviously, an accountant could in principle have other counterclaims against a claimant who sues the accountant. One particular type of counterclaim requires closer examination in the particular context of accountancy claims, namely an auditor’s counterclaim against the audited company for deceit. 15.02 At first blush it might seem surprising that an auditor being sued by a company for negligently auditing its financial statements might be entitled to counterclaim against the company in deceit and thereby defeat the negligence claim on the basis of circuity of action. Since two decisions of Evans-Lombe J in the Barings litigation, however, counterclaims of this nature have been commonly raised by auditors, although there are very few decided cases.

Barings 1 15.03 In the first of the Barings decisions (‘Barings 1’),1 the counterclaim in deceit was the subject of a preliminary issue trial. 1 [2002] PNLR 39.

15.04 The facts were as follows. Mr Simon Jones was a senior director, and later finance director, of Barings plc before the group collapsed in the aftermath of the unauthorised trading activities of Mr Leeson. When Deloitte & Touche were subsequently sued for negligently auditing the financial statements of one of the Barings subsidiaries, Barings Futures (Singapore) Pte Limited (BFS), they not only denied negligence but also contended that the claim failed for circuity of action.1 In particular, they relied upon the fact that before signing each of the relevant audit reports they had received representation letters from 370

Counterclaims 15.07 Mr Jones, written on behalf of BFS, in which he confirmed (amongst other things) that: ●●

there had been no irregularities involving management or employees with a significant role in the system of internal control;

●●

all books of account and supporting documentation had been made available to Deloitte & Touche in the course of their audit;

●●

BFS’s financial statements were free of material errors and omissions; and

●●

there were no material transactions or related issues or liabilities not properly recorded in the financial and accounting records.

Deloitte & Touche contended that Mr Jones had no actual knowledge of these matters and that therefore his statements in the representation letters were fraudulent; further, they contended that BFS was vicariously liable for the fraud and that the fraud had induced them to approve the financial statements and thus to incur liability in negligence to Barings. 1 As is clear from the judgment Deloitte & Touche also pleaded an estoppel but they did not pursue this argument at the preliminary issue trial.

15.05 On the facts Evans-Lombe J found that even though a number of the statements in the representations letters were false, Mr Jones had not acted fraudulently because he had an honest belief in the truth of the statements and he had honestly believed that he had reasonable grounds for making them. But what is significant about the judgment is the principle that emerged: Evans-Lombe J held that if Mr Jones had acted fraudulently, then the defence of circuity of action would have succeeded since BFS would have been vicariously liable for the fraud and there was no answer to Deloitte & Touche’s causation argument. 15.06 In relation to causation, citing the decision of the Court of Appeal in Standard Chartered Bank v Pakistan National Shipping Corp (No 4),1 Evans-Lombe J reasoned that Mr Jones’s representations had induced Deloitte & Touche to sign their audit reports and, if those representations had been proved to be fraudulent, they would have been treated as the sole cause of Deloitte & Touche being sued for negligence; that would have been so even though another cause of Deloitte & Touche’s exposure to suit was their own negligence in conducting the audit. 1 [2001] QB 167. The decision was subsequently reversed in part by the House of Lords ([2003] 1 AC 959) but without affecting the relevant part of the Court of Appeal’s judgment.

Barings 2 15.07 In Barings 21 Evans-Lombe J had to consider essentially the same issue. BFS and two of its parent companies with the Barings group sued 371

15.08 Counterclaims and mitigation of loss Deloitte & Touche for negligently auditing their financial statements and Deloitte & Touche responded by, amongst other things, bringing a counterclaim in which they alleged that certain fraudulent representations were made to them by Mr Leeson during the course of their audit work for which BFS was vicariously liable. According to Deloitte & Touche, they had relied upon the representations in signing their audit reports, and as a consequence they had suffered loss and damage in an amount equal to any liability which they might incur to BFS. 1 [2003] EWHC 1319 (Ch). See [693]–[767].

15.08 This time, the judge held that the representations were indeed fraudulently made. Despite the similarity on the facts to Barings 1, Evans-Lombe J distinguished his earlier decision. As he explained, he regarded the distinguishing feature between the two cases as being that in Barings 2 there was an allegation that Deloitte & Touche were negligent in failing to spot the very same fraud by Mr Leeson as that which they complained of, whereas in Barings 1 no such allegation had been made. According to Evans-Lombe J, this meant that in Barings 2 the counterclaim failed as matter of causation because, although the deceit was a ‘but for’ cause of the auditor’s exposure to suit, the auditor’s own breach was in failing to spot that very deceit: ‘D&T were negligent in failing to detect the falsity of the very representations which they now claim induced them to suffer loss. It would seem surprising if D&T were able to extinguish their liability for that failure by bringing a claim in deceit based on those representations and invoking Standard Chartered Bank. Almost any auditors’ negligence case based on a failure to detect fraud at an audit client will involve deception of the auditors by the fraudster. If the auditor has an automatic and complete defence to any negligence claim by bringing a counterclaim in deceit, it is surprising indeed that the auditors in none of the audit cases I referred to in this judgment took that course. Yet, as D&T admit, this argument “has not been run before”. This contrasts with the preliminary issue. In that, there was no allegation that D&T should have detected the falsity of Mr Jones’ representation letters. BFS could not argue that D&T’s loss was caused by their failure to do so. BFS could only point to D&T’s assumed negligence in the audit generally. That was undoubtedly a contributing factor to D&T’s loss, but it did not prevent the letters also being a cause.’1 1 At [729].

15.09 In reaching this conclusion on causation, Evans-Lombe J relied upon the decision of the House of Lords in Reeves v Commissioner of Police of the Metropolis.1 In that case, Mr Lynch had hanged himself in a police cell 372

Counterclaims 15.11 and the police were found to have been in breach of a duty of care to take reasonable steps to prevent Mr Lynch committing suicide. Had it not been for the existence and breach of that duty of care, the normal rule of novus actus interveniens would have meant that Mr Lynch’s own act was regarded as the only cause of his death. But the question for the House of Lords was whether that rule should be displaced by the nature and breach of the police’s duty. The House of Lords held that it should, with the essential reasoning of Lord Hoffmann being that ‘it would make a nonsense of the existence of such a duty if the law were to hold that the occurrence of the very act which ought to have been prevented negatived causal connection between the breach of duty and the loss’.2 Applying the ‘very thing’ analysis to the facts of the case before him, Evans-Lombe J held that Deloitte & Touche were in breach of duty to detect representations of the very type that were made (ie fraudulent ones). 1 [2000] 1 AC 360. 2 Ibid at 367.

15.10 The causation analysis of Evans-Lombe J in Barings 2 has been adopted in at least one Commonwealth jurisdiction.1 1 See the decision of the Singapore Court of Appeal in JSI Shipping v Teofoongwonglcloong [2007] 4 SLR 460 at [158].

Conclusion 15.11 As already noted, it is now commonplace for auditors to plead Baringstype counterclaims in deceit in response to claims in negligence. But such counterclaims have received very little judicial consideration since Barings. In the first edition of this work we stated that it remained to be seen whether and to what extent the obiter dicta of Evans-Lombe J in Barings 1 would be approved and applied in future cases. We submitted that it is natural for a tribunal to prefer to find ways in which to dismiss the auditor’s counterclaim, for example by finding that the auditor’s own negligence, rather than the company’s deceit, was the cause of the auditor’s loss. This is because the ‘all or nothing’ effect of the counterclaim on the auditor’s liability for negligence is unattractive from a policy perspective: the courts are likely to prefer to use the more flexible tool of contributory negligence to apportion liability as between the company and the auditor in cases where officers of the company are found to have been at fault. Indeed, even in Barings 1 Evans-Lombe J stated that he had reached his conclusion with ‘some regret’ and that it would have been a matter ‘of concern’ to him that Deloitte & Touche might have escaped liability completely if Mr Jones had been fraudulent.1 On this basis we expressed the view in the first edition that Evans-Lombe J’s approach in Barings 2 accorded with both principle and policy and was likely to be followed in other cases. 1 At [146] and [148].

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15.12 Counterclaims and mitigation of loss 15.12 Since the first edition of this work, the reasoning of Evans-Lombe J has been endorsed on two occasions, first by the Court of Appeal in Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd1 and then by Bryan J in AssetCo Plc v Grant Thornton.2 In the latter case it was common ground that a number of fraudulent misrepresentations had been made on behalf of AssetCo to Grant Thornton in representation letters, but Grant Thornton sought to distinguish the decision of Evans-Lombe J on the basis that it had only been negligent in failing to detect some, but not all, of the misrepresentations. Bryan J described this purported distinction as ‘fallacious’ and held that the application of the ‘very thing’ principle should not be restricted on this basis since otherwise the auditor would be able too easily to escape liability: in particular, it would be sufficient for the auditor to locate a single misrepresentation in relation to which it had not been negligent and thereby demonstrate a case in deceit and defeat a claim against it by the company with a circuity of action defence. Bryan J held that this would have the effect of emptying the auditor’s duty of all content and that the correct analysis was that:3 ‘… the cause of GT’s exposure to suit was not reliance upon the representation letters, but rather GT’s own (admitted) breaches of duty). GT’s submission also fails to focus on the true scope of GT’s duty … Part of GT’s duty was to exercise proper scepticism it being common ground that the exercise of such scepticism would have led to dishonesty being revealed (and with that the fact that the business was being carried on in a dishonest way) … The mere fact that GT might not be negligent in identifying a particular example of such dishonesty, when it was negligent in failing to identify many aspects of the dishonesty, ought to be, and in my view is, neither here nor there.’ Bryan J further noted that in any event, on the facts of the case before him, there was an ‘insuperable difficulty’ for Grant Thornton so far as causation was concerned, because Grant Thornton had been negligent not only in signing its audit reports but also in the performance of its audit work. Since the performance of the audit work pre-dated the representation letters, any liability which Grant Thornton incurred to AssetCo as a result of that was not caused by the deceit.4 1 [2018] 1 Lloyd’s Rep 472 (CA) at [75]–[80]. The case went on appeal to the Supreme Court where the deceit counterclaim was dismissed on the basis that the relevant director’s fraud was not attributed to the company: [2019] UKSC 50. 2 [2019] EWHC 150 (Comm) at [1191]–[1217]. 3 At [1207]–[1208]. 4 At [1216].

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Mitigation of loss 15.16

MITIGATION OF LOSS 15.13 It is often said that a claimant has a duty to take all reasonable steps to mitigate its loss.1 It has also been said that it is preferable to analyse this principle in terms of causation: mitigation is not in truth a ‘duty’, but it is an assumption that is applied in the causal analysis leading to the assessment of loss: ‘damages are calculated on the assumption that the claimant has taken reasonable steps in mitigation whether it has in fact done so or not.’2 1 British Westinghouse Co Ltd v Underground Railways Ltd [1912] AC 673 at 689 per Viscount Haldane LC. 2 Per Leggatt J in Thai Airways v KI Holdings [2015] EWHC 1250 (Comm) at [34].

15.14 The principle runs two ways. Expenses incurred in a reasonable attempt to mitigate loss can be claimed by a claimant: if the loss was or would have been caused by the defendant’s breach of duty, then the expense of reasonable mitigation is claimable too. On the other hand if loss was, or would have been, avoided by reasonable mitigation, then that loss may not be claimed. 15.15 After the claimant has proved a loss which on its face resulted from the defendant’s breach of duty, then it is for the defendant to allege and prove that the claimant failed to take reasonable steps to mitigate its loss. ‘The test of what is “reasonable” in this context is not simply one of general rationality but is governed by legal rules’.1 1 Per Leggatt J in Thai Airways v KI Holdings [2015] EWHC 1250 (Comm) at [34].

15.16 A key aspect is that in general the courts are reluctant to scrutinise too closely a claimant’s conduct in the period after the commission of the breach of contract or tort: ‘I confess I am not disposed to regard with much sympathy the criticism which Messrs Waterlow have directed at the Bank’s action. Where the sufferer from a breach of contract finds himself in consequence of that breach placed in a position of embarrassment the measures which he may be driven to adopt in order to extricate himself ought not to be weighed in nice scales at the instance of the party whose breach of contract has occasioned the difficulty. It is often easy after an emergency has passed to criticize the steps which have been taken to meet it, but such criticism does not come well from those who have themselves created the emergency. The law is satisfied if the party placed in a difficult situation by reason of the breach of a duty owed to him has acted reasonably in the adoption of remedial measures, and he will not be held disentitled to recover the cost of such measures

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15.17 Counterclaims and mitigation of loss merely because the party in breach can suggest that other measures less burdensome to him might have been taken.’1 1 Banco de Portugal v Waterlow [1932] AC 452 at 506 per Lord Macmillan, and see the subsequent authorities summarised by Leggatt J in Thai Airways v KI Holdings [2015] EWHC 1250 (Comm) at [38].

15.17 The application of this principle will be a fact-sensitive matter in every case. The precise steps which it could be said that a claimant should reasonably have taken to avoid or reduce its loss will vary according to the context. 15.18 However, a particular issue which seems to have arisen on numerous occasions in the context of claims against professionals is whether the duty to mitigate requires a claimant to issue proceedings against a third party. The first case in this line of authority is Pilkington v Wood1 where the defendant solicitors in a negligence action argued that the claimant should have mitigated its loss flowing from a defect in title which the solicitors had not adverted to by suing the vendor of the property under an implied covenant of title. Harman J rejected that contention, holding that the commencement of litigation against the vendor would not have been a reasonable course for the claimant to have taken. 1 [1953] 1 Ch 770.

15.19 Pilkington was applied in the Australian case of Segenhoe Ltd v Akins.1 In that case the company’s financial statements had overstated its retained profits and the company had relied upon the report of its auditors in declaring a dividend in favour of the shareholders. Because the profits were overstated, the dividend was paid partly out of capital and was therefore unlawful. When the company later sued its auditors for negligence, the auditors contended (amongst other things) that the company had failed to mitigate its loss by failing to bring a claim against the shareholders to recover the dividend. That argument was rejected by the Supreme Court of New South Wales, which held that the company had not acted unreasonably: the standard of reasonableness was not high in view of the fact that the auditors had been negligent and the duty to mitigate did not require the company to have brought litigation against the shareholders in circumstances where the shareholders were numerous and scattered, the various amounts involved were relatively small, and it would have been uncertain whether a claim against the shareholders would in fact have succeeded. 1 [1999] ACSR 691.

15.20 The same principle was applied by the New Zealand Court of Appeal in Allison v KPMG,1 a case where auditors were liable to a purchaser of shares in the audited company and argued unsuccessfully that the claimant was unreasonable in settling their claims against the purchaser under warranties in

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Mitigation of loss 15.24 the share purchase agreement instead of pursuing them to judgment or suing them again for further losses which came to light after the settlement. 1 [2000] 1 NZLR 560 at [108].

15.21 By contrast, Pilkington v Wood has been distinguished by the English Court of Appeal in two solicitors’ negligence claims. 15.22 In Western Trust & Savings Ltd v Travers & Co Ltd1 the defendants had provided the claimant lender with a report on title in reliance upon which the claimant had made a mortgage advance. The report had been negligently prepared and the claimant alleged that as a result the security was worthless. However, the claim failed because the Court of Appeal held that the claimant had failed to mitigate its loss by taking steps to enforce its security, which it could reasonably have done by commencing proceedings against the borrower and reclaiming possession of the property in question. 1 [1997] PNLR 295.

15.23 A similar conclusion was reached in Walker v Geo H Medlicott & Son1 where the claimant was a beneficiary under a will who alleged that the defendant solicitors had negligently failed to carry out the testatrix’s instructions. On the facts the Court of Appeal held that the solicitors had not been negligent but in obiter dicta it went on to say that that claim would in any event have failed because the claimant had failed to mitigate his loss by first issuing proceedings for rectification of the will. 1 [1999] 1 WLR 727.

15.24 It is important to distinguish mitigation, which relates only to actions taken by the claimant deliberately in the wake of the losses caused by the defendant’s breach of duty, from other conduct or events which reduce the claimant’s loss or confer a benefit. Thus, in Barings, subsequent profitable unauthorised trading was not mitigation of loss.1 1 Barings v Coopers & Lybrand [2003] EWCH 1319 (Ch), [2003] PNLR 34 at [886].

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Chapter 16

Statutory relief

INTRODUCTION 16.01 Pursuant to s 1157 of the Companies Act 2006,1 the court has the power to relieve an officer of a company or a person employed by a company as an auditor (whether or not an officer) from liability – either in whole or in part – in respect of negligence, default, breach of duty, or breach of trust. The full text of s 1157 is as follows: ‘(1) If in proceedings for negligence, default, breach of duty or breach of trust against– (a) an officer of a company, or (b) a person employed by a company as auditor (whether he is or is not an officer of the company), it appears to the court hearing the case that the officer or person is or may be liable but that he acted honestly and reasonably, and that having regard to all the circumstances of the case (including those connected with his appointment) he ought fairly to be excused, the court may relieve him, either wholly or in part, from his liability on such terms as it thinks fit. (2)

If any such officer or person has reason to apprehend that a claim will or might be made against him in respect of negligence, default, breach of duty or breach of trust– (a) he may apply to the court for relief, and (b) the court has the same power to relieve him as it would have had if it had been a court before which proceedings against him for negligence, default, breach of duty or breach of trust had been brought.

(3)

Where a case to which subsection (1) applies is being tried by a judge with a jury, the judge, after hearing the evidence, may, if he is satisfied that the defendant (in Scotland, the defender) ought in pursuance of that subsection to be relieved either in whole or in part from the liability sought to be enforced against him, withdraw the case from the jury and forthwith direct 378

Scope of section 1157 16.04 judgment to be entered for the defendant (in Scotland, grant decree of absolvitor) on such terms as to costs (in Scotland, expenses) or otherwise as the judge may think proper.’ 1 Formerly, s 727 of the Companies Act 1985 and, before that, s 448 of the Companies Act 1948. Close equivalents may be found in s 1318 of the Corporations Law (Australia), s 468 of the Companies Act 1955 (New Zealand), s 391 of the Companies Act (Cap 50) (Singapore) and s 358 of the Companies Ordinance (Cap 32) (Hong Kong).

16.02 There is a plethora of cases in which the courts have considered attempts by directors to claim relief under s 1157 and its predecessors. In contrast, there are only a handful of decided cases in which the courts have had to consider the circumstances in which an auditor may seek relief from liability. 16.03 Before turning to the substance of s 1157, three preliminary points may be noted about the provision from a procedural perspective. The first is that the burden undoubtedly lies upon the officer or auditor to prove that he is entitled to relief under s 1157. The second is that, save in exceptional cases, the court will not grant relief under s 1157 without a full trial: it has been held that it ‘must be highly improbable’ that an officer (or auditor) could establish at an interim stage that he had acted honestly and reasonably in all the circumstances.1 The third point is that it has been held that it is not necessary for a party to plead reliance upon s 1157 and the defence can be raised for the first time at trial, although it has also been said that this rule ‘may be ripe for reappraisal’.2 1 Equitable Life Assurance Society v Bowley [2003] EWHC 2263 (Comm) at [45(iii)] per Langley J. 2 Phillips v McGregor-Paterson [2010] 1 BCLC 72 at [36], citing two pre-CPR authorities: Singlehurst v Tapscott Steamship Co Ltd [1899] WN 133 (CA) and Re Kirbys Coaches Ltd [1991] BCLC 414. These were all misfeasance summonses and it may be said that a different approach would apply in an ordinary civil claim under the Civil Procedure Rules (CPR). We would respectfully agree in any event that the supposed rule is ‘ripe for reappraisal’: this is a good case for the application of the principle that the CPR is a new procedural code to be interpreted without undue deference to old case law.

SCOPE OF SECTION 1157 16.04 As is clear from the wording of s 1157, a claim to relief from liability may only be made by officers and auditors: the provision is not therefore available in every case in which an accountant is sued. The scope of the provision is less clear in other respects, however. Thus, for example, a number of cases have considered whether it is only available in cases where the claimant is the company, or whether an officer or auditor may also make an application for relief in response to a claim by a third party. It is now well settled that the former interpretation of the provision is the correct one.1 What remains

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16.05 Statutory relief unclear is whether s 1157 only applies to companies incorporated in England and Wales. It appears that this question has never arisen for consideration by the English courts. This issue did arise, however, in the Hong Kong case of Grand Field Group Holdings v Chu King Fai2 where Yan SC DHCJ held that the equivalent to s 1157 in the Hong Kong Companies Ordinance did not apply to a non-Hong Kong company. Given that s 2(1) of the Companies Act 2006 defines ‘a company’ as being one that is formed and registered under the 2006 Act (or one which was in existence at the time that the 2006 Act came into force) it is submitted that an English court would likely reach the same conclusion as in Grand Field, albeit that there appears to be no logical reason why the scope of s 1157 should not extend to foreign companies.3 1 Commissioners of Customs and Excise v Hedon Alpha Ltd [1981] QB 818 and more recently First Independent Factors and Finance Ltd v Mountford [2008] 2 BCLC 297 at [31]–[33] per Lewison J. 2 [2014] HKCU 1470 at [169]–[173]. 3 There may be cases where a court in jurisdiction A considers the audit of a company registered in jurisdiction B. In such cases, any claim against auditors may be governed by the law of B. If so, then statutory relief under the law of B should be available in the courts of A (as happened in Barings v Coopers & Lybrand, see at para 16.08, below). If the claim is governed by the law of A or some other law, then it seems that relief is not available unless perhaps an application for relief could be made in the courts of B. That would be difficult in that it is hard to see how the courts in B could adjudicate upon statutory relief without hearing the main trial; on the other hand, the alternative is for the right for such relief to be considered to be lost altogether.

PRINCIPLES GOVERNING THE GRANT OF RELIEF 16.05 The leading English case on s 1157 is the decision of Hoffmann J in Re D’Jan of London Ltd.1 That case concerned a fire insurance policy which the insurers were able to repudiate because Mr D’Jan, the director and controlling shareholder of the insured company, had signed a proposal form containing an incorrect statement. The company’s insurance broker had filled in the form in draft, writing ‘No’ as the answer to a question asking whether Mr D’Jan had ever been a director of a company which went into liquidation. That was not correct, but Mr D’Jan did not notice the error and simply signed the proposal form. There was a serious fire at the company’s premises and the insurers were able to repudiate liability because of Mr D’Jan’s incorrect answer. Hoffmann J held that Mr D’Jan had been negligent, but nevertheless relieved him of part, but not the whole, of what would otherwise have been his liability to the company. In what has become a much cited dictum Hoffmann J stated that:2 ‘It may seem odd that a person found to have been guilty of negligence, which involves failing to take reasonable care, can ever satisfy a court that he acted reasonably. Nevertheless, the section clearly contemplates that he may do so and it follows that conduct

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Principles governing the grant of relief 16.08 may be reasonable for the purposes of s 727 despite amounting to lack of reasonable care at common law.’ 1 [1993] BCC 646. 2 At 649A.

16.06 The fact that an officer or auditor is entitled to relief under s 1157 even though he has acted negligently is significant.1 It means that the critical question in every case is whether the negligent officer or auditor can prove that he acted honestly and reasonably in all the circumstances. 1 This represents an important point of distinction between section 1157 and the protection which exists for trustees under s 61 of the Trustee Act 1925: see Santander UK v RA Legal Solicitors [2014] PNLR 20 at [31]–[32] per Briggs LJ.

16.07 In the context of applications under s 1157 (and its predecessors) by company directors, the courts have made clear that the issue of honesty is to be tested subjectively and the issue of reasonableness is to be tested objectively.1 It has also been held, perhaps unsurprisingly, that even if a director acted honestly and reasonably, he would be most unlikely to be granted relief from liability if he obtained a material personal benefit as a result of the relevant breach of duty.2 1 Re MDA Investment Management Ltd [2004] EWHC 42 (Ch) at [16]–[17] per Park J. 2 Re In a Flap Envelope Co Ltd [2003] BCC 487 at [64].

16.08 Turning to the application of s 1157 to auditors, the leading case in England is the decision of Evans-Lombe J in Barings Plc v Coopers & Lybrand.1 The background to that case is well known and has already been explained.2 Although on the facts the provision under which Deloitte & Touche applied for relief from liability was s 391(1) of the Singapore Companies Act, it was common ground between the parties that its effect could be assumed to be identical to s 727 of the Companies Act 1985. After referring to the decision of Hoffmann J in Re D’Jan of London, to Australian authority and to what he called the ‘obvious paradox’ that a negligent auditor may be excused on the grounds that he acted honestly and reasonably, Evans-Lombe J held as follows:3 ‘I conclude from the above authorities that section 727 is available to me if D&T acted honestly and reasonably. They may have acted reasonably for the purposes of the section even though I have found them to have acted negligently, if they acted in good faith and their negligence was technical or minor in character, and not “pervasive and compelling”. Nor am I limited to consideration of the nature of D&T’s fault, but may take into account wider considerations, such as in D’Jan the economic reality that the defendant and his wife owned

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16.09 Statutory relief the entire company. Similar considerations weighed with the court in Re Duomatic [1969] 2 Ch 365. If these threshold tests are met, I have a wide discretion as to whether D&T ought fairly to be excused. In exercising that discretion, I am required to look at all the circumstances. However I clearly should not apply the section so as to negate the basic principles of liability in this sort of case. Having found that D&T were negligent, I should not use the section to relieve them from liability merely because the negligence was not particularly gross (to use Hoffmann LJ’s term). Likewise fault by BFS, and the comparison between its fault and D&T’s, is taken account of adequately in admitting a defence of contributory negligence. Something more is required to justify relief.’ 1 [2003] EWHC 1319 (Ch). On this issue, see [1125]–[1148]. 2 See para 6.41, above. 3 At [1133–[1134].

16.09 In the result, Evans-Lombe J held that the threshold condition for the application of s 727 was satisfied. There was no suggestion that Deloitte & Touche had acted anything other than honestly and Evans-Lombe J was also satisfied that they had acted reasonably, referring to the facts that: (a) their audits had been conducted ‘with great thoroughness, for very low fees’; and (b) the negligence found was ‘limited in extent and technical in nature and certainly was not “pervasive and compelling”’. So far as the exercise of discretion was concerned, Evans-Lombe J was persuaded that Deloitte & Touche were entitled to partial relief from liability in light of the fact that other companies within the Barings group had made profits out of Mr Leeson’s unauthorised trading; in particular, he held that because he had concluded earlier in his judgment that Deloitte & Touche were not entitled to credit for the profits, ‘it would be quite unfair’ to make them liable for the losses. 16.10 More recently, two attempts by auditors to seek statutory relief under s 727 and s 1157 have failed. In Manchester Building Society v Grant Thornton1 Grant Thornton argued that, notwithstanding it had (admittedly) acted negligently, it had acted reasonably. In particular, it argued that its negligence was of a technical character since the case turned on the rules relating to hedge accounting which were newly introduced and of a technical nature. Teare J rejected this characterisation of Grant Thornton’s negligence and held that, even though it was common ground that Grant Thornton had acted honestly and in good faith, he could not find that it had acted reasonably 382

Principles governing the grant of relief 16.12 because the negligence was not minor in character. Nor did Teare J consider that the mere fact that he had found contributory negligence on the part of the claimant meant that Grant Thornton had acted reasonably, albeit that he held that this was a relevant factor.2 In Assetco v Grant Thornton3 Bryan J gave Grant Thornton’s application for statutory relief short shrift, holding that even though Grant Thornton had acted honestly nevertheless:4 ‘GT’s conduct was not reasonable and it did not act reasonably in all the circumstances, for the purpose of section 1157. Its negligence was most certainly not minor or technical, and not only was it pervasive and compelling it was, as I have found, of the most serious nature … The breaches consisted of a catalogue of failures over two audit years that were of the utmost gravity and that went to the very heart of an auditor’s duties and the ‘very thing’ GT admits it was responsible for but failed to do. This was negligent conduct of the highest order (short of recklessness) which also amounted to a breach of professional standards …’ 1 [2018] PNLR 27 at [257]–[267]. The case was appealed to the Court of Appeal, and a further appeal is pending before the Supreme Court, but not in relation to this issue. 2 See also JSI Shipping v Tefoongwonglcloong [2007] 4 SLR 460 at [159]–[181]. 3 [2019] EWHC 150 (Comm) at [1262]–[1272]. The case was appealed to the Court of Appeal, but not in relation to this issue. 4 At [1268].

16.11 The earlier Australian decision of Pacific Acceptance Corp Ltd v Forsyth1 is noteworthy for the conclusion by Moffitt J that when considering whether the auditor has acted reasonably, the court may have regard to his conduct after the breach of duty, including his conduct of the litigation. According to Moffitt J, it would be surprising if an auditor could be entitled to relief from the court in circumstances where, ‘having found he had made some mistake which was in breach of his duty, [he] could not confess it at the first available opportunity’.2 Moffitt J also relied on the way that the defendants conducted the litigation including contesting every point. It remains to be seen whether an English court would follow this: whilst there may be nothing objectionable in principle with taking into account conduct subsequent to the breach of duty, it seems harsh to deny an auditor the opportunity to seek relief because of the fact that he has chosen to contest liability or the manner in which he did so. 1 (1970) 92 NSW (WN) 29. 2 At p 119D–F.

16.12 Another feature of Pacific Acceptance was the reluctance of Moffitt J to relieve the auditor from liability on the basis that the directors and management of the company were also at fault:1

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16.12 Statutory relief ‘To excuse an auditor because the directors or management were also at fault, and in particular to excuse him when he failed to perform his duty with independence and to check on management and the board, would be to apply s 365 [of the Australian Companies Act] to negate a fundamental reason for the appointment of the auditor. If there is a complaint that other officers of the company also failed in their duty and contributed thereby to the loss, then the proper course is to take such action, if any, as in the circumstances is open to the auditor, for contribution from the officers at fault so that the company’s loss can be shared between those proved at fault after precise allegations and proper investigation, rather than being cut down or excused to the detriment of the company because others as well as the auditor were at fault.’ This view has not been followed, either in Australia or elsewhere in the Commonwealth. In AWA Ltd v Daniels2 the New South Wales Court of Appeal approved the approach of the first instance judge, who had held that if he was wrong in the conclusion that he had expressed as to the availability to Deloitte Haskins & Sells of a defence of contributory negligence, the same facts would have entitled them to invoke s 1318 of the Corporations Law (the equivalent of s 1157). In JSI Shipping (S) Pte Ltd v Teofoongwonglcloong (a firm)3 the Singapore Court of Appeal also held that the equivalent provision in the Singapore Companies Act could be used to permit apportionment of loss in a similar way to the operation of contributory negligence. The point remains open in English law. 1 At p 125. 2 [1955]–[1995] PNLR 727 at 819. 3 [2007] 4 SLR 460 at [159]–[181].

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Part 5

Issues arising in litigation concerning accountants

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Chapter 17

Disclosure

INTRODUCTION 17.01 Disclosure is the process by which parties to proceedings exchange copies of documents for use in the action. In certain circumstances it is also possible for a party to obtain disclosure before proceedings have been commenced and from non-parties. The rules on disclosure are contained in Part 31 of the Civil Procedure Rules (CPR) and in addition to the notes in the White Book there are numerous specialist works on the subject to which reference may be made.1 In this chapter, we briefly explain the rules and practice governing pre-action disclosure, standard disclosure, non-party disclosure, and specific disclosure applications, highlighting the particular issues that have arisen in the case law in relation to accountants. 1 See, for example, Charles Hollander QC, Documentary Evidence 13th Edn (Sweet & Maxwell, 2018) and Paul Matthews and Hodge Malek Disclosure 5th Edn, (Sweet & Maxwell, 2016).

17.02 On 1 January 2019, a pilot scheme (the Pilot) for disclosure in the Business and Property Courts came into effect for two years: see CPR Practice Direction 51U. Certain provisions of CPR Part 31 have been included within Section II of Practice Direction 51U,1 but otherwise CPR Part 31 (and Practice Directions 31A and 31B) do not apply to proceedings falling within the Pilot. At the time of writing, it is unclear whether and to what extent the Pilot will be permanently incorporated into the CPR at the end of the two-year period. Accordingly, we do not address the Pilot in detail in this chapter. In brief summary, the Pilot provides for ‘Initial Disclosure’, namely the disclosure of key documents2 by the parties at the same time as serving statements of case, and ‘Extended Disclosure’ (either in addition to, or as an alternative to Initial Disclosure) by reference to a ‘List of Issues for Disclosure’ and a ‘Disclosure Review Document’, and involving the use of one of five so-called ‘Disclosure Models’. The five Models were explained by the Chancellor in McParland & Partners Limited v Whitehead as follows:3 ‘Model A confines disclosure to known adverse documents. Model B limits disclosure and expressly explains that it applies “where and to the extent that they have not already done so by way of Initial Disclosure, and without limit as to quantity”. The limitation is to 387

17.02 Disclosure “(a) the key documents on which [the parties] have relied (expressly or otherwise) in support of the claims or defences advanced in their statement(s) of case; and (b) the key documents that are necessary to enable the other parties to understand the claim or defence they have to meet; and in addition to disclose known adverse documents in accordance with their (continuing) duty under paragraph 3.1(2)”. No new search is required under Model B. Model C is “[r]equest-led search-based disclosure” “of particular documents or narrow classes of documents relating to a particular Issue for Disclosure, by reference to requests set out in or to be set out in Section 1B of the Disclosure Review Document [DRD] or otherwise defined by the court”. Model D is “[n]arrow search-based disclosure, with or without Narrative Documents”, which are defined by paragraph 1.11 of Appendix 1 as documents which are “relevant only to the background or context of material facts or events, and not directly to the Issues for Disclosure”, but “for the avoidance of doubt an adverse document … is not to be treated as a Narrative Document”. Model D requires disclosure of “documents which are likely to support or adversely affect its claim or defence or that of another party in relation to one or more of the Issues for Disclosure”, and “[e]ach party is required to undertake a reasonable and proportionate search in relation to the Issues for Disclosure for which Model D disclosure has been ordered”. The order for Model D disclosure “should specify whether a party giving Model D disclosure is to search for and disclose Narrative Documents”. Finally, Model E is “[w]ide search-based disclosure” or what is more commonly known as “train of inquiry” disclosure. It is stated to be exceptional and is not relevant to this case. Where an order for Model B, C, D or E Extended Disclosure is made on one or more Issues for Disclosure, any adverse documents to be disclosed in compliance with the duty under paragraph 3.1(2) above and not already disclosed must be disclosed at the time ordered for that Extended Disclosure.’ 1 The provisions of CPR Part 31 which appear in Section II of PD 51U include CPR 31.16, 31.17, and 31.22 which are considered below at paras 17.12–17.25, 17.51–17.53 and 17.35 respectively. 2 Key documents include both those documents on which a party has relied (expressly or otherwise) in support of the claims or defences advanced in its statement of case (including the documents referred to in that statement of case) and also those documents that are necessary to enable the other parties to understand the claim or defence they have to meet: para 5.1 of CPR PD 51U. 3 [2020] EWHC 298 (Ch) at [10]–[13].

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Pre-action disclosure 17.05

PRE-ACTION DISCLOSURE 17.03 It can often be useful and sometimes even necessary for a potential claimant to obtain documents from another party before deciding whether to bring a claim against it. In the case of a potential claim by a client against an accountant, there are four principal routes by which the client may be able to obtain documents before commencing proceedings.

Rights in contract and equity 17.04 First, the client may have a contractual right to require the production of documents under the terms of its retainer with the accountant. Even if the retainer is silent on this, the potential claimant will have a right in equity to recover documents produced by the accountant on its behalf. This is because under the general law of agency any documents created by the accountant on behalf of the client during the course of the retainer will be the property of the client.1 The client’s equitable right to require production of documents belonging to it is, however, subject to the accountant’s right to exercise a lien over the documents in respect of any unpaid fees.2 The lien is not enforceable by an accountant over a company’s accounting records,3 nor against an insolvency officer holder.4 1 See Gomba Holdings UK Ltd v Minories Finance Ltd [1988] 1 WLR 1231 at 1233 per Fox LJ. 2 Although there had been a plethora of cases concerning the right of solicitors, bankers, factors, stockbrokers and insurance brokers to exercise a lien, it was not until Woodworth v Conroy [1976] QB 884 that the equivalent right of accountants was established. See Lawton LJ at pp 889–890: ‘I would adjudge that accountants in the course of doing their ordinary professional work of producing and auditing accounts, advising on financial problems, and carrying on negotiations with the Inland Revenue in relation to both taxation and rating have at least a particular lien over any books of account, files and papers which their clients delivered to them and also over any documents which have come into their possession in the course of acting as their clients’ agents in the course of their ordinary professional work. Accountants may enjoy a wider lien than this; but I find it unnecessary for the purposes of this appeal to say more than I have.’ 3 DTC v Gary Sargeant & Co [1996] 1 WLR 797. 4 Insolvency Act 1986, s 246.

17.05 In any event, the client will not be entitled to require production of the accountant’s own working papers. In this context ‘working papers’ include correspondence to and from the client, attendance notes of discussions with the client, and drafts of letters. The leading case on this remains Chantrey Martin v Martin,1 where the Court of Appeal held that various categories of documents (namely audit working papers, first draft accounts, notes and calculations relating to the accounts made by the accountants, and draft tax computations) that had been brought into existence by a firm of chartered accountants in the preparation of an audit were the property of that firm. 1 [1953] 2 QB 286. See also Gomba Holdings (cited above) and also Casson Beckman & Partners v Papi [1991] BCLC 299.

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17.06 Disclosure

Professional Negligence Pre-Action Protocol 17.06 The second route by which a client that is contemplating bringing a claim against an accountant may obtain pre-action disclosure is through the Professional Negligence Pre-Action Protocol. 17.07 The Protocol requires a claimant to notify the professional as soon as it decides that there is a reasonable chance that it will bring a claim and to write a detailed Letter of Claim to the professional as soon as it decides that there are grounds for a claim.1 The stated aim of the Protocol is ‘to establish a framework in which there is an early exchange of information so that the claim can be fully investigated and, if possible, resolved without the need for the litigation’, including by ensuring that the parties are on an equal footing.2 Consistent with this objective, the Protocol requires the parties promptly to supply ‘whatever relevant information or documentation is reasonably requested’ and the professional to provide copies of documents upon which it relies in its Letter of Response.3 There may be costs consequences if the professional does not provide such disclosure.4 1 Paragraphs B1.1 and B2.1. 2 Paragraph A2. 3 Paragraphs B4.3 and B5.2(f). 4 Paragraph 4.6 of CPR PD Pre-action Conduct.

17.08 Guidance note C5.1 of the Protocol clarifies that para B4.3 is intended to encourage early exchange of relevant information but it should not be used as a ‘“fishing expedition” by either party and no party is obliged thereunder to ‘disclose any document which a Court could not order them to disclose in the pre-action period’. The status and effect of these paragraphs has been the subject of several judicial comments. 17.09 Perhaps the fundamental point of relevance to claims against accountants is one made by HHJ Behrens QC in Marshall v Allotts:1 ‘In some forms of litigation it may be right that early disclosure is exceptional. It is however clear that that is not the position in professional negligence actions. As the Guidance Note [C5] makes clear, early exchange of relevant information is encouraged.’ 1 [2005] PNLR 11 at [49].

17.10 Conversely, in a case where the applicant for pre-action disclosure under CPR 31.16 had not followed the protocol process against the accountant it wished to sue to the stage where disclosure would normally have been given, Blair J said: ‘Here it seems to me that the pre-action protocol is particularly relevant. Mr Chivers points out that there is no requirement in the rule

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Pre-action disclosure 17.13 that it be followed. That is correct, but it is mentioned as a factor in Rix LJ’s judgment in Sumitomo, and the protocol represents the route that parties should usually take when faced with a dispute of this kind.’1 1 Assetco v Grant Thornton [2013] EWHC 1215 (Comm) at [32].

17.11 On the other hand, if the documents requested are outside the permissible scope of pre-action disclosure, then the protocol does not create a free-standing right to additional disclosure. Although the relevant protocol in that case was worded differently, the following dictum of Underhill LJ in Smith v Secretary of State for Climate Change applies equally here: ‘Protocols do not have the status of rules and there is no obligation as such to comply with them; nor are they drafted with the precision of the rules themselves. If, applying CPR r 31.16 according to its terms, the court were to conclude that an applicant was not entitled to pre-action disclosure, it is inconceivable that the [defendant] would at some subsequent stage be held to have failed to comply with the protocol, still less subjected to any sanction, by withholding the documents in question pre-action simply because they would have been disclosable if proceedings were commenced and thus on a literal reading fell within the terms of paragraph 7.3 [of the protocol in question].’1 1 Smith v Secretary of State for Climate Change [2014] 1 WLR 2283 at [35].

CPR 31.16 17.12 The third method by which a potential claimant can obtain pre-action disclosure is by making an application to court under CPR 31.16. Pursuant to CPR 31.16(3), the court may make an order for pre-action disclosure only where the following conditions are satisfied: ‘(a) the respondent is likely to be a party to subsequent proceedings; (b) the applicant is also likely to be a party to those proceedings; (c) if proceedings had started, the respondent’s duty by way of standard disclosure, set out in CPR 31.6, would extend to the documents or classes of documents which the applicant seeks disclosure; and (d)

disclosure before proceedings have started is desirable in order to: (i)

dispose fairly of the anticipated proceedings;

(ii) assist the dispute to be resolved without proceedings; or (iii) save costs.’ 17.13 CPR 31.16(3) therefore falls into two parts: first, the jurisdictional requirements set out in CPR 31.16(3)(a) to (d) must be satisfied, and then the 391

17.14 Disclosure court will go on to consider whether, in the exercise of discretion, it should make an order for pre-action disclosure. 17.14 CPR 31.16(3) has been considered judicially on numerous occasions. In relation to CPR 31.16(3)(a) and (b) it was held in the leading case of Black v Sumitomo1 that ‘likely to be a party’ means ‘may well’ be a party as opposed to ‘more likely than not’. Further, the Court of Appeal’s judgment in Black v Sumitomo had been interpreted by some as meaning that it is necessary for the applicant to satisfy the court that it has an arguable claim on the merits, but in Smith v Secretary of State for Energy and Climate Change2 the Court of Appeal held that in fact there is no jurisdictional merits threshold implicit in CPR 31.16(3)(a) to (c).3 There is no doubt that the term ‘proceedings’ in CPR 31.16(3)(a) and (b) means proceedings in the High Court and not in arbitration.4 1 [2002] 1 WLR 1562. 2 [2014] 1 WLR 2283. 3 Prior to Smith v Secretary of State for Energy and Climate Change, there had been a debate in a number of first instance authorities, stemming from the Court of Appeal’s decision in Rose v Lynx Express Ltd [2004] 1 BCLC 455, as to the correct height of the merits threshold, specifically whether the applicant had to show merely an arguable case or that it had a reasonable prospect of success. In Kneale v Barclays Bank Plc [2010] EWHC 1900 (Comm) Flaux J held that the Court of Appeal in Black v Sumitomo had implicitly taken the former view, but in Smith v Secretary of State for Energy and Climate Change the Court of Appeal held that Flaux J had been wrong to interpret Black v Sumitomo as having imposed any merits threshold at all. However, similar issues – especially whether the applicant had suffered a compensatable injury – would be relevant to the exercise of discretion. 4 EDO Corporation v Ultra Electronics Ltd [2009] 2 Lloyd’s Rep 349 and Travelers Insurance Co Ltd v Countrywide Surveyors Ltd [2011] 1 All ER (Comm) 631.

17.15 So far as CPR 31.16(3)(c) is concerned, it has been held that the applicant must show that it is more probable than not that the documents sought are within the scope of the standard disclosure which the respondent would have to provide if proceedings were to be commenced; and where a class of documents is sought, the applicant must show that the whole class would fall within the scope of standard disclosure.1 Applications for pre-action disclosure should not be used for fishing purposes to assist in the formulation of a speculative claim, though this does not exclude their use in a properly focused way where the claimant is not yet certain whether to bring a claim at all.2 1 Hutchison 3G UK Ltd v O2 (UK) Ltd [2008] EWHC 55 (Comm). See also Hays Specialist Recruitment (Holdings) v Specialist Recruitment [2008] IRLR 904. 2 See Dunning v United Liverpool Hospitals Board of Governors [1973] 1 WLR 586 at 593 per James LJ; Kuah Kok Kim v Ernst & Young [1996] 3 SLR(R) 485; and BSW Ltd v Balltec Ltd [2007] FSR 1 at [81] per Patten J.

17.16 The requirement in CPR 31.16(3)(d) is usually easy to satisfy, and has been described as being a low threshold,1 since pre-action disclosure will often facilitate the fair disposal of the proceedings or settlement or save costs. 392

Pre-action disclosure 17.18 But as Rix LJ made clear in Black v Sumitomo, this is only the first of a two-stage process. The second stage is for the court to consider whether to order pre-action disclosure in the exercise of its general discretion. At this stage, each case will turn upon its own facts. However, Rix LJ identified a number of ‘important considerations’ as follows:2 ‘the nature of the injury or loss complained of; the clarity and identification of the issues raised by the complaint; the nature of the documents requested; the relevance of any protocol or pre-action inquiries; and the opportunity which the complainant has to make his case without pre-action disclosure.’ 1 Mitsui & Co Ltd v Nexen Petroleum UK Ltd [2005] EWHC 625 (Ch) at [27] per Lightman J. 2 Black v Sumitomo (cited above) at [88].

17.17 In most litigation, orders for pre-action disclosure are not commonly made. There must be something about the case which is outside the ‘usual run’.1 A useful rule of thumb is to consider whether, in the absence of pre-action disclosure, the claimant has enough material to decide whether to commence proceedings and to plead its case: if it does, then even if it cannot plead its case perfectly, it is likely that the court will exercise its discretion against him.2 In any event, even where an applicant successfully obtains an order for pre-action disclosure it will usually be required to pay the costs of the respondent.3 1 A phrase first used by Tomlinson J in Trouw UK Ltd v Mitsui & Co (UK) [2006] EWHC 863 (Comm) at [43] but adopted in subsequent authorities. 2 First Gulf Bank v Wachovia Bank National Association [2005] EWHC 2827 (Comm) per Christopher Clarke J at [24]. 3 Ibid.

17.18 There are several reported cases concerning pre-action disclosure applications made against accountants. One of the first decisions under CPR 31.16 was Bermuda International Securities Ltd v KPMG1 where the Court of Appeal made an order for disclosure in order to assist the applicant’s intended claim against KPMG for negligent performance of its duties as the applicant’s auditor and tax agent. On the facts of the case, the court was satisfied that pre-action disclosure would save costs and either facilitate a settlement or alternatively assist the applicant to plead its claim. It was also the case that the documents in question had already been reviewed by KPMG and therefore it was no burden for KPMG to hand them over. However, the Court of Appeal stated that it was unwilling, at such an early stage in the life of the new rule under CPR 31.16, to lay down any general principles as to how the discretion should be exercised in future cases. As explained above, such principles were subsequently established by the Court of Appeal in Black v Sumitomo. 1 [2001] Lloyd’s Rep PN 392.

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17.19 Disclosure 17.19 Orders for pre-action disclosure were also made against accountants in Jay v Wilder Coe,1 Moresfield Limited v Banners (a firm)2 and Marshall v Allotts.3 In the first case, the applicants were former partners in a firm of solicitors who intended to sue their accountants in negligence in respect of a shortfall in the firm’s accounts. The solicitors sought pre-action disclosure of the accountants’ ‘files, working papers, and any other documents produced’ in relation to the preparation of two sets of accounts. Tugendhat J said that he could not rule out that the intended claim was ‘speculative and may be a fishing expedition’4 but he was nonetheless persuaded to exercise his discretion in favour of the applicants because he considered that they needed the disclosure which they were seeking in order to investigate the misfortune which they had suffered and the cause thereof. The Moresfield case concerned a professional negligence action brought against a firm of solicitors who had advised in relation to a share and purchase transaction. The solicitors were contemplating commencing third-party proceedings against KPMG, which had audited the claimant, and therefore they brought an application for pre-action disclosure against KPMG.5 Applying the principles established in Black v Sumitomo, Lawrence Collins J acceded to the application, holding that the pre-action disclosure sought was plainly relevant, was not voluminous, and would allow the solicitors to assess whether KPMG had been negligent and therefore whether it would be worthwhile for the solicitors to commence their intended third-party proceedings. Marshall v Allotts was a case of allegedly negligent share valuation in which the accountants were held to have been in breach of the pre-action protocol and pre-action disclosure was ordered. 1 [2003] EWHC 1786 (QB). 2 [2003] EHWC 1602 (Ch). 3 [2005] PNLR 11. 4 At [19]. It is clear from [95] of Rix LJ’s judgment in Black v Sumitomo that he did not regard the fact that a claim might be speculative as being necessarily fatal to an order for pre-action disclosure. 5 Since KPMG had not yet been jointed to the proceedings, the application for disclosure was brought under CPR 31.17 (which governs non-party disclosure) in the alternative.

17.20 By contrast, in Medisys Plc v Arthur Andersen (a firm),1 an application for pre-action disclosure was dismissed. The applicant intended to bring a claim in negligence against Arthur Andersen arising out of a report that it had produced in connection with a company which the applicant had acquired. The court held that the conditions in CPR 31.16(3)(a) and (b) were not satisfied because it was not apparent that there was a real issue between the parties; in particular, the nature of the intended claim which the applicant had advanced in pre-action correspondence had changed on several occasions and the applicant had not prepared a draft pleading in support of its application. 1 [2002] PNLR 22.

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Pre-action disclosure 17.23 17.21 Pre-action disclosure against accountants who had acted as administrators was refused in Maltby v Spratt,1 where the documents sought (certain valuations) were unlikely to be necessary to formulating the proposed claims or helpful in resolving them without litigation and where there was a suspicion that the real motivation for the application was that the documents might be of use to the applicants in other litigation.2 1 [2012] EWHC 4 (Ch). 2 See, for example, at [59].

17.22 An application for pre-action disclosure was also dismissed in AssetCo Plc v Grant Thornton UK LLP.1 The applicant was contemplating a professional negligence claim against its former auditors, Grant Thornton. Although Grant Thornton had been notified of the potential claim in accordance with the Professional Negligence Pre-action Protocol, at the time that the application for pre-action disclosure was made, no Letter of Claim had been sent and no draft Particulars of Claim had been prepared. In those circumstances, Blair J held that it was not ‘desirable’ within the meaning of CPR 31.16(3)(d) for pre-action disclosure to be ordered. The application as formulated was also held to be disproportionate in that it went beyond seeking copies of the electronic working papers which Grant Thornton had produced in connection with the relevant audits. 1 [2013] EWHC 1215 (Comm).

17.23 The latest example of a pre-action disclosure application being dismissed is Carillion Plc (in liquidation) v KPMG LLP.1 KPMG were the auditors of the Carillion Group prior to its collapse. The liquidators made an application under CPR 31.16 on the basis that they intended to bring a negligence action against KPMG, but KPMG had refused to provide disclosure of any of its working papers voluntarily in the course of pre-action correspondence. Jacobs J was satisfied that the documents sought would be disclosable by KPMG once proceedings had been commenced and that the other jurisdictional requirements set out in CPR 31.16(3)(a) to (d) were satisfied,2 but as a matter of discretion he dismissed the application for six reasons.3 First, the liquidators were already able to plead a negligence case against KPMG without disclosure as was clear from their very detailed pre-action correspondence. Second, whilst pre-action disclosure might have enabled the liquidators’ expert to reach a more informed view as to KPMG’s negligence, this was not a good justification; otherwise, pre-action disclosure would be ordered in every professional negligence case whereas the authorities show that it is not the norm. Third, the exercise which KPMG would have had to carry out if pre-action disclosure were ordered was substantial and burdensome: this was not a case where a small collection of key documents was being sought. Fourth, it was likely that the liquidators’ case against KPMG would develop and expand in due course, and it was undesirable that there should be a series of further disclosure applications. Fifth, the liquidators’ argument that KPMG had breached the letter or the spirit of 395

17.24 Disclosure the Pre-Action Protocol – which Jacobs J considered to be the only substantial argument as to why the case was exceptional – was rejected on the facts. Finally, Jacobs held that ‘standing back from the detail’ and considering how matters should proceed ‘as a matter of sensible case management’, he did not consider that the overriding objective or the efficient case management of the litigation would be furthered by acceding to the application. 1 [2020] EWHC 1416 (Comm). 2 At [69]–[85]. 3 At [86]–[109].

17.24 As is clear from the above, it is extremely rare for pre-action disclosure applications against allegedly negligent accountants to succeed. In broad summary, the key lessons from these cases for standard accountants’ negligence claims are these: (i)

Where a proposed claimant has a sufficiently clearly formulated potential claim against an accountant for professional negligence, the parties will be expected to comply with the pre-action protocol, including its provisions for early disclosure of the accountant’s papers.

(ii) Where the proposed claimant does not properly pursue the protocol, including clarifying the nature of his claim, the court is unlikely to permit the process to be circumvented by an application under CPR 31.16. (iii) On the other hand, where the proposed defendant accountant does not provide disclosure under the protocol, with which the proposed claimant has complied, then an application under CPR 31.16 is likely to succeed unless there are special factors which justify the accountant’s position.

Insolvency Act 1986, s 236 17.25 The fourth principal method for obtaining pre-action disclosure from accountants is available only to companies acting by an insolvency office holder. Insolvency Act 1986, s 236 permits such an office holder to apply to the court for the production of documents by any officer of the company or any person suspected of having in his possession any property of the company or any person who is capable of giving information concerning the affairs of the company. For this purpose, a statutory auditor is an officer of the company,1 although he may also fall within the other categories of permitted respondent. 1 See above at para 4.14.

17.26 The leading case on the exercise of this power is the decision of the House of Lords in Re British & Commonwealth Holdings.1 British & Commonwealth was the holding company in a group which had become insolvent after purchasing Atlantic Computers and discovering it to have 396

Pre-action disclosure 17.28 had a substantial deficiency in net assets. The administrators of the British & Commonwealth group applied for an order that the auditors of Atlantic Computers disclose all of their papers relating to the audit of Atlantic Computers. The House of Lords upheld the order and rejected earlier authority that had suggested that the purpose of s 236 was limited to reconstituting the state of the company’s knowledge. Lord Slynn stated:2 ‘At the same time it is plain that this is an extraordinary power and that the discretion must be exercised after a careful balancing of the factors involved – on the one hand the reasonable requirements of the administrator to carry out his task, on the other the need to avoid making an order which is wholly unreasonable, unnecessary or “oppressive” to the person concerned. … The protection for the person called upon to produce documents lies, thus, not in a limitation by category of documents (“reconstituting the company’s state of knowledge”) but in the fact that the applicant must satisfy the court that, after balancing all the relevant factors, there is a proper case for such an order to be made. The proper case is one where the administrator reasonably requires to see the documents to carry out his functions and the production does not impose an unnecessary and unreasonable burden on the person required to produce them in the light of the administrator’s requirements.’ 1 [1993] AC 426. 2 At 439D–H.

17.27 Where the insolvency office holder is considering proceedings against an auditor, it will usually not be difficult to establish a ‘reasonable requirement’ to see the auditor’s documents and that will normally outweigh the prejudice to the auditor of having to disclose their files in advance.1 The power is wider than the power under CPR 31.16 and does not need to be focused on any particular proceedings.2 However, the power is an extraordinary one and it is for the office holder to show a reasonable requirement, not merely a general desire to see the documents.3 1 As in Sasea v KPMG [1998] BCC 216 especially at 224F–H. 2 Re Corporate Jet Realisations [2015] 2 BCLC 15 at [53]. 3 Unusually, a liquidator failed to show such a requirement, after a long delay before seeking documents, in Re XL Communications Group Plc [2005] EWHC 2413 (Ch).

17.28 Subject to express provisions permitting the court to assist a foreign insolvency office holder, these powers under English insolvency legislation are not available in support of an insolvency in another jurisdiction.1 1 Singularis v PricewaterhouseCoopers [2015] 2 WLR 971, a decision of the Privy Council on appeal from the courts of Bermuda considering provisions which were indistinguishable from s 236. However, for a discussion including the provisions of English law which may be relevant to foreign insolvencies, see at [39]–[50].

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17.29 Disclosure

STANDARD DISCLOSURE The CPR regime 17.29 Before the entry into force of the Pilot, in substantial professional negligence claims, it was not unusual for standard disclosure to take place. Standard disclosure is a broad form of disclosure, and much broader than for example request-led disclosure. Pursuant to CPR 31.6, standard disclosure requires each party to disclose the following categories of documents:1 (i)

the documents on which he relies; and

(ii) the documents which: (a)

adversely affect his own case;

(b) adversely affect another party’s case; or (c)

support another party’s case; and

(iii) the documents which he is required to disclose by a relevant practice direction. 1 ‘Documents’ are defined in CPR 31.4.

17.30 Prior to the entry into force of the CPR, the disclosure obligation was broader. In particular, the pre-CPR test as established by the Court of Appeal in Compagnie Financière et Commerciale du Pacifique v Peruvian Guano1 required each party to disclose documents which may lead to a train of enquiry enabling a party to advance its own case or damage that of its opponent. But it is clear that ‘train of enquiry’ documents do not fall within CPR 31.6. It is also clear that, although documents falling within the categories referred to in CPR 31.6 are often referred to as being ‘relevant’, relevance is not in fact the test.2 In any given case, the documents which fall within CPR 31.6 will depend upon the pleaded issues. 1 (1882) 11 QBD 55 at 63 per Brett LJ. 2 Shah v HSBC Private Bank (UK) Ltd [2011] EWCA Civ 1154 per Lewison LJ at [25]: ‘It is notable that the word “relevant” does not appear in the rule. Moreover the obligation to make standard disclosure is confined “only” to the listed categories of document. While it may be convenient to use “relevant” as a shorthand for documents that must be disclosed, in cases of dispute it is important to stick with the carefully chosen wording of the rule. Thus in my judgment the first of the questions ventilated before the judge was not quite the right question.’

17.31 The disclosure obligation in CPR 31.6 only extends to documents which are or have been in a party’s control. ‘Control’ is defined in CPR 31.8(2) as including physical possession, the right to possession, or a right to inspect or take copies of a document. However, this definition is not exhaustive. Thus, for example, where certain documents are within the physical possession of a third party the court will consider whether as a matter of fact, given the true 398

Standard disclosure 17.33 nature of the relationship between the disclosing party and the third party, they are within the control of the disclosing party for the purposes of CPR 31.8.1 1 North Shore Ventures Ltd v Anstead Holdings Inc [2012] EWCA Civ 11. See also the well-known earlier case of Lonrho Ltd v Shell Petroleum Co Ltd [1980] 1 WLR 627.

17.32 Pursuant to CPR 31.7, the duty on the disclosing party is to make a ‘reasonable search’ for documents falling within CPR 31.6 that are within its control. This is intended to ensure that the exercise does not become disproportionate. Factors relevant in deciding the reasonableness of a search are stated in CPR 31.7(2) to include: ●●

the number of documents involved;

●●

the nature and complexity of the proceedings;

●●

the ease and expense of retrieval of any particular document; and

●●

the significance of any document which is likely to be located during the search.1

The reasonableness of the search in any given case will depend on the extent to which a disclosing party holds electronic documents. Guidance on the disclosure of electronic documents is contained in CPR PD 31B. 1 See also para 2 of CPR PD 31A.

17.33 The procedure for standard disclosure is that documents which are or have been within the control of the disclosing party are to be listed in a standard form disclosure statement.1 Amongst other things, insofar as any categories or classes of documents have not been searched for on grounds of reasonableness, this must be explained in the statement.2 Any party to whom documents have been disclosed has a right to inspect them except if the documents are no longer within the control of the disclosing party or if the disclosing party has a right to withhold inspection (eg on grounds of privilege or public interest immunity) or if inspection would be disproportionate.3 If a party wishes to inspect documents disclosed to it, it must provide notice in writing to the disclosing party.4 1 CPR 31.10. See also para 4 of CPR PD 31A. The rule is that the disclosure statement must be signed personally by the litigant: see HRH Prince Abdulaziz Bin Mishal Bin Abdulaziz Saud v Apex Global Management Ltd [2014] 1 WLR 4495 where the Supreme Court rejected an argument that a member of the Saudi Arabian Royal Family should be exempt from the rule. A false disclosure statement may be a contempt of court: CPR 31.23. 2 CPR 31.7(3). 3 CPR 31.3(1)(a) to (c). Pursuant to CPR 31.3(1)(d), a further exception to the right to inspect is where CPR 78.26 (concerning evidence in mediated cross-border disputes) applies. CPR 31.19(3) provides that a person who wishes to claim that he has a right or duty to withhold inspection of a document must state in writing (a) that he has such a right or duty, and (b) the grounds upon which he claims that right or duty. 4 CPR 31.15(a).

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17.34 Disclosure 17.34 In view of the considerable costs burden which standard disclosure can impose upon parties,1 CPR 31.5 was amended with effect from 1 April 2013 so as to incorporate a new set of rules for all cases (excluding personal injury cases) allocated to the multi-track. Under the new system, which applies unless the court orders otherwise, in advance of the first case management conference the parties are required to prepare disclosure reports (together with electronic documents questionnaires where required by CPR PD 31B) describing: ●●

what documents exist which are or may be relevant to the issues in the case;

●●

where and with whom those documents are located;

●●

how any electronic documents are stored; and

●●

how much it will cost to carry out the standard disclosure exercise.2

The parties then must discuss and seek to agree proposals in relation to disclosure so that at the first case management conference the court may make appropriate orders in relation to disclosure, which may be an order that the parties should simply provide standard disclosure in accordance with CPR 31.6 or may be a more limited form of order, for example: (i)

an order that each party should disclose the documents upon which it relies and should at the same time request any specific disclosure which it requires from the other party; or

(ii) an order that the parties should provide disclosure on an issue-by-issue basis.3 These changes were not considered to be sufficient to deal with concerns about the excessive costs and scale of disclosure. Accordingly, in May 2016 the Chancellor established a Disclosure Working Group to identify the problems and propose a practical solution for cases in the Business and Property Courts. The Working Group concluded that standard disclosure often leads to wasted time and cost and the production of irrelevant documents, and that whilst standard disclosure may remain appropriate (and even desirable) in factually complex cases, many cases may be determined more fairly and efficiently on the basis of more focused and limited disclosure. A sub-committee of the Working Group therefore drafted Practice Direction 51U and the template ‘Disclosure Review Document’ (which is to be used in place of the Electronic Disclosure Questionnaire) and in July 2018 the Civil Procedure Rule Committee approved the launch of the Pilot for a two-year period commencing on 1 January 2019. We have briefly summarised the Pilot in para 17.02, above. 1 An issue identified by Jackson LJ in his Review of Civil Litigation Costs: Final Report (December 2009), at paras 2.1 to 2.8 and 3.1 to 3.20. 2 CPR 31.5(3). 3 CPR 31.5(7).

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Standard disclosure 17.36 17.35 Three final points fall to be made about the disclosure process. First, the duty to disclose is a continuing duty, so that if a document within CPR 31.6 comes to a party’s notice at any time during the proceedings (even after the trial has commenced) it must immediately notify every other party.1 Second, it is well established that confidentiality is not a bar to disclosure. However, steps can be taken to preserve the confidential nature of the documents in question. For example, the court can order that confidentiality rings should be established, thus meaning that the confidential documents may be reviewed only by certain named individuals,2 and the court can direct that hearings may take place in private.3 Third, pursuant to CPR 31.22, documents disclosed are subject to what is known as the ‘collateral undertaking’, ie the rule that a party to whom documents have been disclosed may not use those documents for any purpose other than the proceedings except where the document has been referred to by the court at a public hearing or the court gives permission or the disclosing party provides its consent.4 In Killick v PricewaterhouseCoopers (No 2)5 an application for permission to use documents disclosed for a collateral purpose was made pursuant to CPR 31.22(1)(b) and permission was granted. The claimants had brought a claim alleging that PricewaterhouseCoopers (PwC) had negligently valued the shares of a company for them. The claimants had received disclosure from PwC in that action and they applied for permission to use those documents in a related action which they had commenced against third parties, specifically an unfair prejudice petition concerning the company which had been valued by PwC. The respondents to the unfair prejudice petition had applied to strike out the petition and it was argued successfully by the claimants that they should be released from the collateral undertaking because if they were permitted to deploy some of the disclosure which they had received from PwC then that would materially improve their prospects in resisting the strike out. Ferris J was influenced by the fact that PwC would not be prejudiced by the claimants’ collateral use of its disclosure.6 1 CPR 31.11. The continuing nature of the duty is reflected in para 3 of the Pilot. 2 Confidentiality rings are commonplace in competition and intellectual property claims. 3 Pursuant to CPR 39.2(c). 4 The rule stems from Riddick v Thames Board Mills Ltd [1977] QB 881. CPR 31.22 is a provision which has been included within Section II of the Pilot. 5 Unreported, Ferris J, 11 October 2000. For the general principles on the exercise of this discretion, see Tchenguiz v SFO [2014] EWCA Civ 1409. 6 For discussion of the role that prejudice to the original disclosing party plays in the exercise of the discretion, see also Tchenguiz v SFO [2015] EWHC 266 (Comm) at [19] and [59].

Privilege 17.36 As explained above, one of the principal grounds upon which a party can withhold inspection of documents which it has listed on its disclosure

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17.37 Disclosure statement is that the documents in question are privileged. There are a number of types of privilege: (i)

litigation privilege (which covers documents of any nature provided that they were created at a time when litigation was in reasonable prospect1 and for the dominant purpose of that litigation2);

(ii) legal advice privilege (which has traditionally been regarded as being limited to communications between a lawyer and client);3 (iii) without prejudice privilege (which covers communications made for the purpose of a genuine attempt to compromise a dispute); and (iv) the privilege against self-incrimination (which has existed for decades at common law4 but is now the subject of various statutory limitations). 1 Re Highgrade Traders Ltd [1984] BCLC 151 at 172 per Oliver LJ. 2 Waugh v British Railways Board [1980] AC 521. 3 The leading authorities on legal advice privilege remain the decision of the Court of Appeal in Three Rivers DC v Bank of England (No 5) [2002] EWHC 2730 (Comm) and the decision of the House of Lords in a distinct disclosure application in Three Rivers DC v Bank of England (No 6) [2005] 1 AC 610. The former decision was considered by the Court of Appeal in Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd [2019] 1 WLR 791. Noting that this was strictly a matter for the Supreme Court and did not arise on the facts, the Court of Appeal said at [123] that their view was that Three Rivers (No 5) decided that communications between an employee of a company and the company’s lawyers could not attract legal advice privilege unless that employee was tasked with seeking and receiving such advice on behalf of the client. 4 See Blunt v Park Lane Hotel Ltd [1942] 2 KB 253 at 257 per Goddard LJ.

17.37 The doctrine of privilege is complex and gives rise to many difficult issues, including in relation to waiver. However, claims involving accountants rarely give rise to privilege issues (in contrast to professional negligence claims against solicitors for example) and a detailed discussion of privilege lies beyond the scope of this work. Reference should be made to the specialist works on the subject.1 So far as accountants are concerned, it is sufficient to focus on legal advice privilege and litigation privilege. 1 See, for example, Bankim Thanki QC, The Law of Privilege 3rd Edn, (Oxford University Press, 2018), Colin Passmore, Privilege 4th Edn (Sweet & Maxwell, 2019), Charles Hollander QC, Documentary Evidence 13th Edn (Sweet & Maxwell, 2018), and Paul Matthews and Hodge Malek, Disclosure 5th Edn (Sweet & Maxwell, 2016). Indeed, for limited purposes, the privilege has been extended to accountants: Proceeds of Crime Act 2002, s 330(6), (10) and (14).

Legal advice privilege 17.38 Traditionally at common law legal advice privilege has been understood as applying only to communications between a client and his lawyer.1 However, in R (Prudential plc) v Special Commissioner of Income Tax,2 the Supreme Court considered the question of whether legal advice privilege in fact extends, 402

Standard disclosure 17.41 or should be extended, to legal advice provided by accountants, for example in relation to tax law. 1 There are some statutory instances of legal advice privilege having been extended to nonlawyers, eg to licensed conveyancers, patent attorneys, and trade mark attorneys. 2 [2013] 2 AC 185.

17.39 The facts of Prudential were as follows. PwC had developed and marketed a tax avoidance scheme to its client Prudential. Her Majesty’s Revenue and Customs (HMRC) later issued notices to Prudential under s 20 of the Taxes Management Act 1970 for the delivery up of documents containing information about certain transactions which Prudential had entered into in pursuance of the scheme. The material sought included communications passing between Prudential and PwC during the giving of the advice. Prudential brought judicial review proceedings challenging the validity of the notices on the ground that the material sought was covered by legal advice privilege. The judge dismissed the claim on the basis that legal advice privilege applied only to advice given by members of the legal profession. The Court of Appeal dismissed Prudential’s appeal. The matter then went before a seven-member panel at the Supreme Court. By a 5:2 majority the Supreme Court dismissed Prudential’s appeal.1 1 Lords Neuberger, Hope, Walker, Mance and Reed in the majority; Lords Sumption and Clarke in the minority.

17.40 In a nutshell, Prudential’s argument before the Supreme Court was that clients seek and obtain legal advice on tax law from accountants as much as, if not more than, from lawyers, and the policy reasons for maintaining legal advice privilege apply just as much when an accountant provides advice on tax law as they do when such advice is provided by a member of the legal profession. Prudential contended that whether particular legal advice is protected by privilege ought not to depend on whether the adviser is a lawyer or an accountant. 17.41 The judgments of the Supreme Court Justices make for interesting reading. What is particularly striking is that amongst those in the majority Lords Neuberger and Walker and (albeit to a lesser extent) Lord Hope accepted that Prudential’s argument was correct as a matter of logic and principle. Thus, for example, Lord Neuberger, who gave the main judgment for the majority and with whom Lord Walker agreed, stated that it was ‘hard to see why, as a matter of pure logic’ legal advice privilege should be restricted to communications with legal advisers ‘who happen to be qualified lawyers, as opposed to communications with other professional people with a qualification or experience which enables them to give expert legal advice in a particular field’.1 He said that the arguments for restricting legal advice privilege to communications with professional lawyers were ‘weak, but not wholly devoid

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17.42 Disclosure of force’2; that it would ‘accord with underlying logic’ to extend legal advice privilege in the manner contended for by Prudential;3 that it could fairly be said to be ‘illogical in the modern world’ to restrict legal advice privilege to members of the legal profession;4 that such a restriction was ‘outmoded’;5 and that Prudential’s arguments were ‘powerful’.6 1 At [39]. 2 At [42]. 3 At [47]. 4 At [48]. 5 At [49]. 6 At [51].

17.42 To similar effect, Lord Hope stated that: ‘a search for a principled answer might well lead one to the conclusion that there was no good reason at all for holding that the tax advice of chartered accountants should be treated differently from similar advice given by a barrister or a solicitor’.1 1 At [78].

17.43 Ultimately, however, Lords Neuberger and Hope (and the others in the majority) were persuaded that if legal advice privilege were to be extended beyond members of the legal profession, this was a matter which should be left to Parliament. Lord Neuberger gave three reasons for reaching this conclusion. First, he considered that the consequences of allowing Prudential’s appeal were ‘hard to assess and would be likely to lead to what is currently a clear and well understood principle becoming an unclear principle, involving uncertainty’; secondly, he held that the question of whether legal advice privilege should be extended raises questions of policy; and thirdly, he regarded the fact that Parliament had already enacted certain legislation extending legal advice privilege to certain non-lawyers as meaning that it was inappropriate for this area of the common law to be extended judicially.1 For their part, Lords Hope and Mance were also concerned about the uncertainty that would be created if legal advice privilege were to be extended beyond members of the legal profession.2 1 At [52] per Lord Neuberger. See also Lord Hope at [80]–[81], Lord Mance at [92], Lord Reed at [101]. 2 At [80]–[81] (Lord Hope) and [100] (Lord Mance).

17.44 Lords Sumption and Clarke dissented. They were both of the view that, as a matter of principle, legal advice privilege ought to extend to advice given by accountants on a professional basis, and that the Supreme Court should itself declare this instead of leaving the matter to Parliament. The judgment of Lord Sumption is especially forceful. Having explained the development and rationale of legal advice privilege at common law over the last 250 years he noted that, in the early cases, lawyers had been identified in 404

Standard disclosure 17.45 contradistinction not to other professionals providing legal advice but rather to other professionals ‘whose advice was not legal at all, such as priests or doctors’.1 Consequently, Lord Sumption held that legal advice privilege is not dependent on the status of the adviser and it would be ‘not only irrational, but inconsistent with the legal basis of the privilege’ to distinguish between some types of professional advisers and others.2 Such a distinction would exist for ‘no principled reason’ and would be ‘arbitrary’.3 Instead, Lord Sumption held that the test is functional and that the privilege applies to ‘the taking of legal advice in the course of a professional relationship with a person whose profession ordinarily includes the giving of legal advice’.4 As to whether the matter should be left to Parliament, Lord Sumption held that he did not agree with the argument that, by allowing Prudential’s appeal, the Supreme Court would be extending the scope of legal advice privilege at common law; on the contrary, he considered that the Supreme Court would simply be applying existing principles and recognising that as a matter of fact legal advice is now provided not only by barristers and solicitors but also by accountants. There was no need, therefore, to leave the matter to Parliament because: ‘It is the function of the courts, and in particular of this court, to ensure that changes in legal, commercial or social practice are properly reflected in the way that the law is applied’.5 Moreover: ‘we are not here concerned with social or economic issues or other issues of macro-economic policy which are classically the domain of Parliament. Nor are we concerned with legal principles derived from statute. Legal professional privilege is a creation of the common law, whose ordinary incidents are wholly defined by the common law. In principle, therefore, it is for the courts of common law to define the extent of the privilege. The characterisation of privilege as a fundamental human right at common law makes it particularly important that the courts should be able to perform this function. Fundamental rights should not be left to depend on capricious distinctions unrelated to the legal policy which makes them fundamental.’6 1 At [121]. 2 At [122]. 3 At [122], [128], and [136]. 4 At [137]. 5 At [128]. 6 At [131].

17.45 The analysis of Lord Sumption was very powerful, but following the majority decision in Prudential it now seems clear that legal advice privilege will not be accorded to advice given by accountants (and others) in English law unless the matter is considered by Parliament. We do not agree with those who say that tax planning advice, by its very nature, should not attract legal advice privilege:1 whilst tax avoidance schemes may have received adverse publicity 405

17.46 Disclosure in recent times, the law on legal advice privilege should not discriminate based on the subject-matter of the advice being sought (unless the communications are in furtherance of a fraud or a crime, in which case the iniquity exception to privilege will apply in any event). But there are undoubtedly options for a middle-ground: for example, in New Zealand the statutory privilege which exists for tax documents does not apply to ‘tax contextual information’ (ie the privilege only covers the actual advice given and does not cover everything else on the accountant’s file)2 and in England the Law Reform Committee has previously recommended that legal advice privilege should apply to communications with tax advisers but could be overridden if it unreasonably impedes the State’s ability to ascertain facts necessary to determine a taxpayer’s tax liabilities and there is no other way of ascertaining those facts.3 1 See, for example, Andrew Higgins and Adrian Zuckerman, ‘Re Prudential plc [2013] UKSC 1: The Supreme Court leaves to Parliament the issue of privilege for tax advice by accountants, what Parliament should do is restrict privilege for tax advice given by lawyers’, (2013) 32 CJQ 313 and Professor Joan Loughrey, ‘An unsatisfactory stalemate, R (on the application of Prudential Plc) v Special Commissioner of Income Tax’, (2014) 18 International Journal of Evidence & Proof 65. 2 See ss 20B to 20G of the New Zealand Tax Administration Act 1994, inserted by the Taxation (Base Maintenance and Miscellaneous) Act 2005. 3 Report of the Law Reform Committee, ‘The Enforcement Powers of the Revenue Departments’ (1983).

17.46 On any view, it is submitted that – contrary to the view expressed by Lord Hope in Prudential1 – there is a pressing need for this area of the law to be reviewed by Parliament. The status quo means that members of the legal profession stand at a considerable competitive advantage relative to members of the accountancy profession in the market for the provision of tax advice.2 It is regrettable that the UK government announced immediately after the Supreme Court handed down its judgment in Prudential that it would not review the position. 1 At [80]. 2 This was recognised by the Office of Fair Trading in its report entitled ‘Competition in the Professions’ (March 2001) at p 11.

17.47 A further noteworthy decision in relation to legal advice privilege as it affects accountants is the Court of Appeal decision in Sports Direct v FRC.1 The FRC was carrying out an investigation into the conduct of Sports Direct’s former auditors, Grant Thornton. Pursuant to its statutory powers,2 the FRC issued notices to Sports Direct requesting it to provide certain categories of documents. Sports Direct withheld a number of documents on the grounds that they were covered by legal advice privilege. The FRC challenged the claim to privilege, contending that the case fell within a narrow exception in the case law which meant that there would be no infringement of Sports Direct’s privilege if the documents were provided or alternatively that any breach of privilege was only technical and was impliedly overridden by the relevant 406

Standard disclosure 17.48 statutory regime. Although the FRC succeeded at first instance, the Court of Appeal allowed Sports Direct’s appeal. It is submitted that the conclusion reached by the Court of Appeal was plainly correct. The FRC’s statutory power to request documents is subject to an express exception for privilege and there is no good reason why it should be read as being subject to any implied qualifications. Although the FRC argued that Sports Direct’s refusal to provide the documents would have a disruptive effect on the FRC’s investigation, that was dismissed by the Court of Appeal as an irrelevant consideration on the basis that Parliament had already chosen3 how to strike ‘the balance between the imperatives of the FRC’s regulation of auditors and the fundamental rights of those auditors and their clients to protect their privileged material’.4 1 [2020] EWCA Civ 177. 2 Statutory Auditors and Third Country Auditors Regulations 2016 (‘SATCAR’). The FRC issued notices to Sports Direct under para 1 of Sch 2 to SATCAR and also rule 10(b) of the FRC’s Audit Enforcement Procedure. 3 SATCAR, Sch 2, para 1(8). 4 At [49] per Rose LJ.

Litigation privilege 17.48 The relevance of litigation privilege to accountants is that very often documents and reports, including drafts, produced by accountants (either in their capacity as expert witnesses formally instructed under CPR Pt 351 or in some other capacity) may be created for the dominant purpose of litigation. The principles governing litigation privilege were considered by the Court of Appeal in Director of the Serious Fraud Office v Eurasian Natural Resources Corp Ltd2 and may be summarised as follows. First, the burden of proof is on the party claiming litigation privilege to establish it.3 Secondly, the party claiming privilege must establish that litigation was reasonably in prospect, ie reasonably contemplated or anticipated at the time that the relevant documents were produced. It is not sufficient to show that there was a mere possibility of litigation, or that there was a distinct possibility that someone might at some stage bring proceedings, or a general apprehension of future litigation.4 Thirdly, the party claiming privilege must show that the relevant communications were for the dominant purpose of either enabling legal advice to be sought or given or seeking or obtaining evidence or information to be used in or in connection with such anticipated or contemplated proceedings. Where communications have taken place for a number of purposes, it is incumbent on the party claiming privilege to establish that the dominant purpose was litigation.5 1 See Chapter 21. 2 [2019] 1 WLR 791. 3 West London Pipeline and Storage v Total UK [2008] 2 CLC 258 at [50]. 4 United States of America v Philip Morris Inc [2004] EWCA Civ 330 at [68] and Westminster International v Dornoch Ltd [2009] EWCA Civ 1323 at [19]–[20]. 5 Price Waterhouse (a firm) v BCCI Holdings (Luxembourg) SA [1992] BCLC 583 at 589–590 and West London Pipeline (cited above) at [52].

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17.49 Disclosure 17.49 There are several reported cases in which unsuccessful claims to litigation privilege have been made in respect of documents produced by accountants. 17.50 In Price Waterhouse v BCCI Holdings (Luxembourg) SA,1 the Serious Fraud Office and the Bank of England had served various notices on Price Waterhouse requiring the production of documents in connection with the various functions which Price Waterhouse had performed for BCCI prior to its collapse. The Bank of England and the Treasury had also set up a nonstatutory inquiry to inquire into the supervision of BCCI under the Banking Acts. Price Waterhouse wished to cooperate with the inquiry but considered that it could not do so because information and documents in its possession relating to BCCI were confidential and/or subject to legal professional privilege. It therefore applied for declaratory relief to the effect that it was not precluded from providing documents to the inquiry by any claims to privilege by BCCI. Amongst other things, Millett J held that BCCI could not claim litigation privilege in respect of documents prepared by or produced to Price Waterhouse in the course of the investigation into BCCI’s problem loans: although one of the purposes of the investigation was for BCCI to obtain legal advice in connection with possible litigation for the recovery of the problem loans that was not the dominant purpose and the documents were therefore not privileged. At [54] of his judgment, Millett J held as follows: ‘The board of BCCI, the auditors, and the regulatory authorities all needed to know what was the true financial position of BCCI, and this required an investigation in order to establish the facts. If BCCI itself or its controlling shareholders did not set an investigation in motion, it was feared that the regulatory authorities would. BCCI’s financial position depended, in part at least, on the recoverability of the problem loans and that might require legal advice as to the prospects of success if resort had to be made to legal proceedings. But just as in Waugh v British Railways Board the board needed to establish the facts whether or not litigation ensued, so the board of BCCI, the auditors and the controlling shareholders needed to establish BCCI’s financial position whether or not recovery proceedings were necessary. Given that the dominant purpose of the investigation was to establish the facts necessary to enable BCCI’s financial position to be determined, documents brought into existence in the course of the investigation did not in my judgment attract legal professional privilege merely because legal advice might be necessary in order fully to evaluate the financial implications of the facts. The obtaining of legal advice is not an end in itself. To attract privilege it must be for the purpose of actual or contemplated proceedings.’ 1 [1992] BCLC 583.

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Standard disclosure 17.52 17.51 In Starbev GP Ltd v Interbrew Central European Holding BV,1 a claim was brought concerning the proper interpretation of an agreement under which the defendant was entitled to deferred consideration. The defendant had retained KPMG to conduct an ‘audit’ of various notices which the claimant had served on the defendant purportedly in accordance with the terms of the agreement. In the proceedings the defendant withheld inspection of the documents produced by KPMG on the grounds of litigation privilege. However, Hamblen J rejected the claim for litigation privilege on the basis that, even if litigation had been reasonably anticipated shortly after KPMG had been instructed, the dominant purpose for which the defendant had instructed KPMG was not the litigation but rather the contractual audit. 1 [2013] EWHC 4038 (Comm).

17.52 In Rawlinson and Hunter Trustees SA v Akers1 Mr Robert Tchenguiz, his brother Mr Vincent Tchenguiz, and various companies and trusts associated with them claimed damages from the Director of the Serious Fraud Office (SFO) in connection with their arrests, and the execution of search warrants at their homes and offices, in March 2011. The search warrants had been granted by a judge sitting in the Central Criminal Court and the claimants contended that five reports prepared by Grant Thornton had played a key role in the preparation of, and informed the content of, the material that had been placed before the judge in support of the application for the search warrants.2 Those reports had been shown to the SFO by Grant Thornton, but the SFO had not been permitted to make copies, and therefore the claimants made an application for non-party disclosure under CPR 31.17 against a partner in Grant Thornton UK LLP and a director of Grant Thornton (BVI) Limited. It was common ground that those two individuals had commissioned the five reports and were therefore in a position to disclose them, but they resisted disclosure on grounds of litigation privilege. At first instance Eder J rejected the claim to privilege and an appeal against his judgment was dismissed by the Court of Appeal. In reaching its conclusion, the Court of Appeal held that the dominant purpose test was not satisfied because the first duty of the liquidators had been to obtain information simply to establish what, if any, assets or liabilities existed and what, if any, steps were open to the liquidators to collect in the assets or to reduce or discharge the liabilities. It was not sufficient that some of the reports had been commissioned so as to enable the liquidators to seek advice in relation to potential litigation strategy and it could not be assumed that everything done by the liquidators had been in contemplation of litigation. 1 [2014] EWCA Civ 136. 2 The five reports are described by the Court of Appeal at [11] of its judgment.

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17.53 Disclosure

NON-PARTY DISCLOSURE 17.53 Pursuant to CPR 31.17(3), the court may make a disclosure order against a non-party only where the following conditions are satisfied: (a) the documents of which disclosure is sought are likely to support the case of the applicant or adversely affect the case of one of the other parties to the proceedings; and (b) disclosure is necessary in order to dispose fairly of the claim or to save costs. 17.54 The non-party disclosure regime therefore falls into two parts: first, the jurisdictional requirements in CPR 31.17(3) must be satisfied and then the court will go on to consider whether, in the exercise of its discretion, it should make an order for non-party disclosure. 17.55 For present purposes, it is sufficient to make five points about applications for non-party disclosure. First, the word ‘likely’ in CPR 31.17(3)(a) has been interpreted generously so that it is sufficient if the documents sought ‘may well’ support the case of the applicant or adversely affect the case of another party; it is not necessary for the applicant to show that this is ‘more probable than not’ but there does have to be something more than a mere possibility.1 Second, the court will order a non-party to disclose a class of documents only if it is satisfied that all the documents in the class meet the condition in CPR 31.17(3)(a).2 Third, if the first requirement is satisfied then it must also be shown that disclosure of the documents by the non-party is ‘necessary’;3 because of this requirement in CPR 31.17(3)(b) applications are unlikely to succeed if other methods of obtaining the documents are available to the applicant; in practice, this means that orders for non-party disclosure are exceptional. Fourth, when considering whether to exercise its discretion in favour of ordering a non-party to provide disclosure, the court will have regard to a range of factors including whether the categories of documents sought are too broad4 and whether the documents sought are confidential; confidentiality will be an important factor but ultimately will not preclude disclosure being ordered against the non-party if the documents sought are necessary for the fair disposal of the case.5 Finally, as with applications for pre-action disclosure, the usual rule is that, even where an application for non-party disclosure is successful, the applicant will be ordered to pay the respondent’s costs.6 1 Three Rivers DC v Bank of England (No 4) [2003] 1 WLR 210 per Chadwick LJ at [31]–[33]. See also Destiny Investments (1993) Ltd v TH Holdings Ltd [2016] EWHC 507 (Ch) at 15, a case involving an application for non-party disclosure against KPMG. In Slater & Gordon (UK) 1 Limited v Watchstone Group plc (unreported, 12 July 2019) Jacobs J acceded to an application for non-party disclosure against Ernst & Young made by the defendant to a substantial fraud claim. Ernst & Young had carried out financial due diligence on behalf of the claimant in respect of the transaction which was the subject of the fraud claim, and Jacobs J was satisfied that it was likely to have documents supporting the defendant’s case or adversely affecting the claimant’s case.

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Specific disclosure 17.57 2 Three Rivers (No 4) per Chadwick LJ at [36]–[38]. 3 The meaning of ‘necessary’ has been considered in a number of authorities which were helpfully summarised in Sarayiah v Royal & Sun Alliance Plc [2018] EWHC 3437 (Ch) per Barling J at [32]–[36]. 4 See Flood v Times Newspapers [2009] EWHC 411 (QB) and Henry v News Group Newspapers [2011] EWHC 1364 (QB). 5 See, for example, Wallace Smith Trust v Deloitte Haskins Sells [1997] 1 WLR 257. 6 CPR 46.1(2).

SPECIFIC DISCLOSURE 17.56 Pursuant to CPR 31.12, an application may be made for specific disclosure of certain documents or classes of documents. Such an application may be made for example where the applicant considers that the opposing party has given inadequate disclosure (ie has failed properly to search for all documents falling within a standard disclosure order) or where the applicant wishes to go beyond standard disclosure and seek ‘train of inquiry’ documents.1 CPR 31.12 does not appear in Section II of CPR PD 51U and therefore does not apply to cases falling within the scope of the Pilot; in such cases, applications for specific disclosure must be brought under para 18 of CPR PD 51U. Similar principles will apply to such applications as to those under CPR 31.12. 1 See para 5 of CPR PD 31A.

17.57 In every case, the court will have to decide as a matter of discretion whether to accede to an application for specific disclosure. In considering how to exercise its discretion, the court will take account of the fact that the overriding objective requires a party to disclose documents which will assist its opponent’s case.1 The court will always want to be satisfied as to the relevance of the documents sought before making an order under CPR 31.12. Thus, for example, in Chantrey Vellacott v Convergence Group plc,2 Rimer J acceded to a specific disclosure application made in the context of a negligence claim (brought by way of counterclaim) against a firm of accountants because he took the view that the outcome of the trial was likely to turn upon the documents sought by the applicant. 1 Commissioners of Inland Revenue v Exeter City AFC Ltd [2004] BCC 519. 2 [2006] EWHC 490 (Ch).

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Chapter 18

Expert evidence

INTRODUCTION 18.01 Expert evidence is evidence of opinion rather than evidence of fact. As explained further below, in most claims against accountants it will be necessary for the parties to adduce expert evidence, specifically to explain what a reasonably competent accountant in the position of the defendant would have done and whether the defendant acted in accordance with the relevant professional standards. Indeed, in most claims it will be necessary for a claimant to seek the assistance of an expert before pleading its case. Hence in Pantelli Associates Limited v Corporate City Developments Number Two Limited1 Coulson J stated that, save in exceptional cases:2 ‘it is standard practice that, where an allegation of professional negligence is to be pleaded, that allegation must be supported (in writing) by a relevant professional with the necessary expertise. That is a matter of common sense: how can it be asserted that act x was something that an ordinary professional would and should not have done, if no professional in the same field had expressed such a view? CPR Part 35 would be unworkable if an allegation of professional negligence did not have, at its root, a statement of expert opinion to that effect.’ 1 [2010] EWHC 3189 (TCC) at [17]. Cf the decisions of Akenhead J in ACD (Landscape Architects) Ltd v Overall [2012] PNLR 19 and Whessoe Oil & Gas Ltd v Dale [2012] PNLR 33. 2 Most notably, negligence claims against solicitors.

18.02 The rules governing the use of expert evidence in High Court litigation are contained in CPR Pt 35.1 CPR Pt 35 was amended with effect from 1 April 2013 following the recommendations made by Jackson LJ in his ‘Review of Civil Litigation Costs: Final Report’ (December 2009).2 The amendments were intended to allow courts to control more effectively the use of expert evidence and the associated costs. 1 The statutory basis for the admission of expert evidence in civil proceedings is s 3(1) of the Civil Evidence Act 1972. CPR Pt 35 is supplemented by CPR PD 35, which annexes ‘Guidance for the Instruction of Experts in Civil Claims 2014’ (the ‘Guidance’). The Guidance was published

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Admissibility of expert evidence 18.05 in 2014 by the Civil Justice Council and replaced the ‘Protocol for the instruction of experts to give evidence in civil claims’. 2 In relation to expert evidence, see Chapter 13 of the Final Report.

18.03 In this chapter we do not provide a comprehensive explanation of all aspects of expert evidence;1 instead, we focus on the main principles and issues which arise in practice. At the outset, it should be noted that an ‘expert’ is defined in CPR 35.2(1) as ‘a person who has been instructed to give or prepare expert evidence for the purpose of proceedings’. Accordingly, CPR Pt 35 and the rules therein do not apply to an expert who assists a party to prepare its case but does not provide a written report to the court.2 1 Reference should be made to, eg Chapter 33 of H Malek (Ed), Phipson on Evidence 19th Edn (Sweet & Maxwell, 2017) and specialist works on the subject such as T Hodgkinson and M James, Expert Evidence: Law and Practice 4th Edn (Sweet & Maxwell, 2014). 2 See paras 6–7 of the Guidance.

ADMISSIBILITY OF EXPERT EVIDENCE 18.04 CPR 35.1 provides that ‘expert evidence should be restricted to that which is reasonably required to resolve the proceedings’ and CPR 35.4(1) provides that no party may rely upon expert evidence without first having received the court’s permission to do so. The public policy objective underlying these rules is to ensure that parties are not able to adduce unnecessary and inappropriate expert evidence in support of their cases. Permission is normally sought by the parties at the first case management conference in the proceedings. Since 1 April 2013 parties applying for permission to adduce expert evidence have been obliged to identify the field in which expert evidence is required and the issues which the expert evidence will address, and also, where practicable, to identify the proposed expert.1 If permission is granted by the court, such permission will relate only to the expert named or the field identified and the order granting permission may specify the particular issues which the expert evidence should address.2 In certain cases, even where permission for expert evidence has been granted, the trial judge may later disallow it if he considers it to be irrelevant or excessive or disproportionate.3 1 CPR 35.4(2). The costs of experts are also to be included in the costs budgets that now need to be prepared under the costs management rules in CPR 3.12–3.18. 2 CPR 35.4(3). 3 See, for example, para 17.58 of the Chancery Guide (2020).

18.05 The burden of persuading the court that expert evidence will assist it to resolve the matters which are in issue lies upon the party applying for permission.1 However, save in claims against solicitors, where the court itself has the relevant expertise, the court will generally grant permission to adduce

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18.06 Expert evidence expert evidence in professional negligence cases. As Butler-Sloss LJ stated in Sansom v Metcalfe Hambleton & Co:2 ‘a court should be slow to find a professionally qualified man guilty of a breach of his duty of skill and care towards a client (or third party) without evidence from those within the same profession as to the standard expected on the facts of the case and the failure of the professionally qualified man to measure up to that standard.’ 1 Clarke v Marlborough Fine Art (London) Ltd [2002] EWHC 11. 2 [1998] PNLR 542 at 549. See also Worboys v Acme Developments (1969) 4 BLR 133 and Caribbean Steel Co v Price Waterhouse [2013] UKPC 18, [2013] PNLR 27.

18.06 The principles governing the admissibility of expert evidence were considered by Evans-Lombe J in Barings Plc v Coopers & Lybrand (No 2).1 In that case Coopers & Lybrand contended that Barings ought to have been aware of the speculative trading which had been carried out by Mr Leeson on the derivatives market in Singapore. This was relevant to their defences of causation and contributory negligence, and also a counterclaim in deceit, which they had brought against Barings. Coopers & Lybrand adduced expert evidence as to banking management and Barings applied to strike out the relevant parts of the experts’ reports on the basis that such evidence was inadmissible. After carrying out a detailed review of the authorities, Evans-Lombe J held that expert evidence is admissible wherever the court is satisfied that: (i)

there is a recognised expertise governed by recognised standards and rules of conduct capable of influencing the court’s decision on any issue which it has to decide; and

(ii) the relevant expert witness demonstrates sufficient knowledge and experience to render his evidence potentially of value. However, he noted that even evidence satisfying these criteria could still be excluded if the court took the view that admitting such evidence would not help the court to resolve justly any issue in the case, for example where the issue is one of law or whether the court is able to reach a fully informed decision without hearing any expert evidence. On the facts, Evans-Lombe J was satisfied that there did exist a body of recognised expertise in respect of the management of investment banks engaging in derivatives trading and, since there was no challenge to the expertise of the proposed expert witnesses, he dismissed Barings’ strike out application. The principles expounded by Evans-Lombe J in relation to the admissibility of expert evidence have been frequently endorsed.2 1 [2001] PNLR 22. 2 See for example RBS Rights Issue Litigation [2015] EWHC 3433 (Ch) at [13]–[15].

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Admissibility of expert evidence 18.08 18.07 It is not the role of an expert witness to comment on what the defendant ought to have done as a matter of law: the decision whether there has or has not been negligence is one for the court.1 Nor is it relevant for an expert to find facts or state what he would have done if hypothetically he had been in the position of the defendant.2 Instead, in order to be admissible expert evidence should address, on the basis of assumed facts, whether the actions of the defendant fell below the standard of a reasonably competent practitioner operating in the relevant field.3 By way of example, in an auditor’s negligence case, it would be legitimate for an expert witness to opine on what course an auditor in the position of the defendant might reasonably have adopted in practice and to explain the theories and principles which underlie the practices and procedures of the profession. 1 United Bank of Kuwait v Prudential Property Services Ltd [1995] EGCS 190. 2 RBS Rights Issue Litigation [2015] EWHC 3433 (Ch) at [15]. 3 Re Barings Plc (No 6) [1999] 1 BCLC 433 at 493 per Jonathan Parker J and JP Morgan Chase Bank v Springwell [2006] EWHC 2755 (Comm) at [22] per Aikens J.

18.08 Moffitt J usefully discussed the approach to expert evidence in the specific context of auditing in a passage in Pacific Acceptance v Forsyth.1 Since the report of that case is long and not readily available, we reproduce the entire passage here: ‘I turn to the question of the approach to the expert evidence. It is relevant to know if others at the relevant period adopted or did not adopt particular procedures in like circumstances. It is relevant to consider what course an experienced auditor might reasonably adopt in practice to deal with a particular aspect of an audit or as to the reasons of an expert for the framing of a procedure in some particular way or omitting some step as serving no reasonable audit purpose. There is some difficulty, however, in applying evidence directed to these matters, because, in the end, the propriety of taking or not taking a particular audit step depends on the circumstances met in the particular audit. To some degree audit situations do fall into patterns permitting some uniformity of programmes and procedures. However, in the end the court must make its own decision on the particular circumstances of the case, using the procedures adopted by others as but a general guide as to how others attack a particular but somewhat similar problem. Much so-called expert evidence given in the case and not subject to objection was not proper to be relied upon, but came before the court because of the virtual impossibility of hearing the acceptable expert evidence without receiving the other intermingled material. For example, some of the evidence had comprised within it the witnesses’ view of the legal duty in particular circumstances. It went in because it could not be separated but, anyhow, it was material to the extent that 415

18.08 Expert evidence the expert opinion on material matters could be seen to be soundly or unsoundly based on the view of the law expressed. When the conduct of an auditor is in question in legal proceedings it is not the province of the auditing profession itself to determine what is the legal duty of auditors or to determine what reasonable skill and care requires to be done in a particular case, although what others do or what is usually done is relevant to the question of whether there had been a breach of duty. It follows, if the auditing profession or most of them fail to adopt some step which despite their practice was reasonably required of them, such failure does not cease to be a breach of duty because all or most of them did the same. Thus, if it be true, as was said in this case in relation to whether an auditor’s report was or was not qualified, that ten years ago as against now auditors only rarely qualified their reports and if this means, as it seems to mean, that auditors, although not satisfied without qualification concerning the accounts, failed to say so, then the fact that reports were rarely qualified would not excuse an auditor who failed to perform his duty by qualifying his report when in fact he was not satisfied. This would be so whether this occurred ten years ago or today. It was suggested that on the question of qualification of his report the situation of the auditor was a delicate one in which the auditor should talk the matter over with management and avoid qualification if he could. If this means, as I fear it really means in some cases, that despite his duty to the shareholders an auditor who is not satisfied in fact should strenuously avoid expressing his true opinion and be prepared to join in a compromise in which he expressed less than a true opinion, then he would fail to do his duty whether this occurred ten years ago or today. I trust my preceding remark does not fail to appreciate that in many cases opinions may and at times generally are altered by the auditor in fact being persuaded by management to a genuinely different view. That others have adopted a procedure which the defendants have not may be consistent with the defendants’ due performance of their duty, because audits may differ or the procedure adopted may have been one of several acceptable procedures. That others have adopted the procedure used by the defendants or omitted by the defendants may or may not prevent a finding of negligence against the defendants, for the audits may have differed or both may have been negligent. Much evidence, a lot not subject to objection, crept into the case under the guise of expert evidence, sometimes in the framework of questions directed to proper professional practices, but in fact being no more than the witness giving his interpretation of a document or stating what he thinks he would do in identical circumstances or 416

Duties of experts 18.09 stating the inference he would draw from the supposed facts. In any event, often the answer was unsatisfactory because it was based on incomplete assumptions or a version of the facts not established. In some cases it appeared later that the witness knew other facts than those put to him and had drawn on those as well. These criticisms are particularly directed to those of the defendants and their staff who, as well as being involved in the audit, gave expert evidence as well. However, much of the evidence did give an indication of how auditors or the witness approach particular problems. In the end, of course, all these questions are for the court, with or without the aid of admissible expert evidence. In this case there has been useful evidence as to accepted audit techniques and procedures, and the opinion evidence has indicated how the auditing profession in the course of a practical operation would approach various questions and situations. In the end I think that what is reasonable can be determined as a practical logical question once the facts are known and the practices and procedures of auditors and the theories or principles which underlie them and the objects of them are understood. The field is that of checking and investigating and forming opinions or judgments. Accordingly it is not a field remote from the court’s experience. In this case the acceptable expert evidence has rather merely served to confirm conclusions which common sense in any event indicated.’ 1 (1970) 92 WN (NSW) 29 at 74–76.

DUTIES OF EXPERTS 18.09 CPR 35.3 provides that it is the duty of experts to help the court on matters within their expertise and that this duty overrides any obligation to the person from whom the experts have received instructions or by whom they are paid.1 The existence of this duty is reinforced by the requirement that experts must state in their report that they have complied with it.2 Moreover, para 2 of CPR PD 35 provides as follows: ‘2.1 Expert evidence should be the independent product of the expert uninfluenced by the pressures of litigation. 2.2

Experts should assist the court by providing objective, unbiased opinions on matters within their expertise, and should not assume the role of an advocate.’

1 See also para 9 of the Guidance. 2 CPR 35.10(2).

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18.10 Expert evidence 18.10 The duties owed by experts were considered by Cresswell J in National Justice Compania Naviera SA v Prudential Assurance Co Ltd (The ‘Ikarian Reefer’).1 In what has become a classic statement of the relevant principles, Creswell J held as follows: ‘(1) Expert evidence presented to the Court should be, and should be seen to be, the independent product of the expert uninfluenced as to the form or content by the exigencies of litigation (Whitehouse v Jordan, per Lord Wilberforce). (2) An expert witness should provide independent assistance to the court by way of objective unbiased opinion in relation to matters within his expertise (see Polivitte Ltd v Commercial Union Assurance Co Plc, per Garland J and Re J, per Cazalet J). An expert witness in the High Court should never assume the role of an advocate. (3)

An expert witness should state the facts or assumption upon which his opinion is based. He should not omit to consider material facts which could detract from his concluded opinion (Re J above).

(4) An expert witness should make it clear when a particular question or issue falls outside his expertise. (5)

If an expert’s opinion is not properly researched because he considered that insufficient data is available, then this must be stated with an indication that the opinion is no more than a provisional one (Re J above). In cases where an expert witness who has prepared a report could not assert that the report contained the truth, the whole truth and nothing but the truth without some qualification, that qualification should be stated in the report (Derby & Co Ltd v Weldon, per Staughton LJ).

(6) If, after exchange of reports, an expert witness changes his view on a material matter having read the other side’s expert’s report or for any other reason, such change of view should be communicated (through legal representatives) to the other side without delay and when appropriate to the court. (7) Where expert evidence refers to photographs, plans, calculations, analyses, measurements, survey reports or other similar documents, these must be provided to the opposite party at the same time as the exchange of reports’. 1 [1993] 2 Lloyd’s Rep 68 at [81].

18.11 The requirement of independence is particularly important and has been considered in a number of cases.1 In Whitehouse v Jordan2 Lord Wilberforce stated that: ‘Expert evidence presented to the Court should be, 418

Duties of experts 18.13 and should be seen to be, the independent product of the expert, uninfluenced as to form or content by the exigencies of litigation.’ In R (Factortame Ltd) v Transport Secretary (No 8),3 the Court of Appeal held that it would only be in a very rare case indeed that the court would be prepared to consent to an expert being instructed under a contingency fee agreement. The Court of Appeal held that if an expert held a significant financial interest in the outcome of the case, by, for example, giving evidence on a contingency basis, such an interest was ‘highly undesirable’.4 The main issue in Factortame was whether an agreement between the claimants and Grant Thornton, that Grant Thornton would be paid eight per cent of the sum recovered as damages, was champertous. In fact, Grant Thornton had not themselves acted as expert witnesses in the proceedings but had provided support and engaged certain independent experts. The Court of Appeal dismissed the champerty argument, holding that eight per cent was not extravagant and that no reasonable onlooker would seriously have suspected that Grant Thornton would be tempted by their financial interest in the outcome of the proceedings to deviate from performing their duties in an honest manner. 1 See also para 11 of the Guidance: ‘Experts must provide opinions that are independent, regardless of the pressures of litigation. A useful test of “independence” is that the expert would express the same opinion if given the same instructions by another party. Experts should not take it upon themselves to promote the point of view of the party instructing them or engage in the role of advocates or mediators.’ 2 [1981] 1 WLR 246 at 256. 3 [2003] QB 381. Factortame (No 8) is expressly referred to at para 85 of the Guidance. 4 At [73] per Lord Phillips.

18.12 But the existence of a potential conflict of interest does not necessarily disqualify an expert from giving evidence. Rather, as the Court of Appeal held in Toth v Jarman,1 the key issue is whether the expert is able to give independent evidence. In light of this, the Court of Appeal held that it is important that a potential conflict of interest should be disclosed as soon as possible in the proceedings: either in the expert’s report or, if the conflict arises later, as soon as practicable thereafter. 1 [2006] EWCA Civ 1028, [2004] 4 All ER 1276 (Note).

18.13 In Armchair Passenger Transport Ltd v Helical Bar Plc,1 Nelson J reviewed the authorities concerning potential conflicts of interest and stated that the following principles emerged: ‘(i)

It is always desirable that an expert should have no actual or apparent interest in the outcome of the proceedings.

(ii)

The existence of such an interest, whether as an employee of one of the parties or otherwise, does not automatically render the evidence of the proposed expert inadmissible. It is the nature and extent of the interest or connection which matters, not the mere fact of the interest or connection. 419

18.14 Expert evidence (iii) Where the expert has an interest of one kind or another in the outcome of the case, the question of whether he should be permitted to give evidence should be determined as soon as possible in the course of case management. (iv) The decision as to whether an expert should be permitted to give evidence in such circumstances is a matter of fact and degree. The test of apparent bias is not relevant to the question of whether or not an expert witness should be permitted to give evidence. (v) The questions which have to be determined are whether (i) the person has relevant expertise and (ii) he or she is aware of their primary duty to the Court if they give expert evidence, and willing and able, despite the interest or connection with the litigation or a party thereto, to carry out that duty. (vi)

The Judge will have to weigh the alternative choices open if the expert’s evidence is excluded, having regard to the overriding objective of the CPR.

(vii) If the expert has an interest which is not sufficient to preclude him from giving evidence the interest may nevertheless affect the weight of his evidence.’ 1 [2003] EWHC 367 (QB at [29]. Nelson J’s summary was adopted by Aikens J in Gallaher International Limited v Tlais Enterprises Limited [2007] EWHC 464 (Comm).

SINGLE JOINT EXPERTS 18.14 Pursuant to CPR 35.7, the court may direct that any expert evidence should be provided by a single expert appointed jointly by all parties. Single joint experts are usually appropriate in cases where the expert opinion is not controversial.1 They are unlikely to feature in claims against accountants where liability often turns upon the expert evidence and the expert issues are often complicated. Hence the Chancery Guide (2020) provides as follows:2 ‘The factors which the court will take into account in deciding whether there should be a single expert include those listed in PD35 paragraph 7. Single experts are, for example, often appropriate to deal with questions of quantum in cases where the primary issues are as to liability. Likewise, where expert evidence is required in order to acquaint the court with matters of expert fact, as opposed to opinion, a single expert will usually be appropriate. There remains, however, a substantial body of cases where liability will turn upon expert opinion evidence or where quantum is a primary issue and where it will be 420

Expert reports 18.17 appropriate for the parties to instruct their own experts. For example, in cases where the issue for determination is whether a party acted in accordance with proper professional standards, it will often be of value to the court to hear the opinions of more than one expert as to the proper standard in order that the court becomes acquainted with the range of views existing upon the question and in order that the evidence can be tested in cross-examination.’ 1 A non-exhaustive list of the factors which the court will take into account when deciding whether expert evidence should be provided by a single joint expert is set out at para 7 of CPR PD 35. 2 Para 17.49.

18.15 Paragraph H2.6 of the Admiralty and Commercial Courts Guide (2017) also recognises that in many cases the use of single joint expert is not appropriate and as such it states that each party will generally be given permission to call one expert in each field requiring expert evidence.

EXPERT REPORTS 18.16 Expert evidence is to be given in the form of a written report unless the court directs otherwise.1 The contents of the report must comply with para 3 of CPR PD 35 and the requirements of CPR 35.10. 1 CPR 35.5(1).

18.17 Paragraph 3 of CPR PD 35 provides that an expert’s report must be addressed to the court and must be verified by a statement of truth. In addition, an expert report must: ‘(1) give details of the expert’s qualifications; (2)

give details of any literature or other material which has been relied on in making the report;

(3)

contain a statement setting out the substance of all facts and instructions which are material to the opinions expressed in the report or upon which those opinions are based;

(4)

make clear which of the facts stated in the report are within the expert’s own knowledge;

(5)

say who carried out any examination, measurement, test or experiment which the expert has used for the report, give the qualifications of that person, and say whether or not the test or experiment has been carried out under the expert’s supervision;

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18.18 Expert evidence (6)

where there is a range of opinion on the matters dealt with in the report – (a) summarise the range of opinions; and (b) give reasons for the expert’s own opinion;

(7)

contain a summary of the conclusions reached;

(8)

if the expert is not able to give an opinion without qualification, state the qualification; and

(9)

contain a statement that the expert – (a) understands their duty to the court, and has complied with that duty; and (b) is aware of the requirements of Part 35, this practice direction and the Guidance for the Instruction of Experts in Civil Claims 2014.’1

1 See in particular paras 47–60 of the Guidance.

18.18 As regards CPR 35.10, this requires that at the end of an expert report there must be a statement that the expert understands and has complied with his duty to the court.1 Further, CPR 35.10(3) requires that an expert report must state ‘the substance of all material instructions, whether written or oral, on the basis of which the report was written’. This ensures transparency but it means that a party must take care before supplying its expert with materials such as draft statements from witnesses of fact that it might decide ultimately not to call. The word ‘material’ means that it is not necessary for an expert to refer in its report to all of the instructions which it has received.2 1 CPR 35.10(2). 2 Lucas v Barking Havering and Redbridge Hospitals NHS Trust [2004] 1 WLR 220.

18.19 CPR 35.10(4) provides that an expert’s instructions will not be privileged against disclosure1 but the court will not, in relation to those instructions, order disclosure of any specific document or permit any questioning in court, other than by the party who instructed the expert in question, unless it is satisfied that there are reasonable grounds to consider the statement of instructions set out in the report to be inaccurate or incomplete. To similar effect, para 5 of CPR PD 35 provides that cross-examination of experts on the contents of their instructions will not be allowed, unless the court gives permission (or the party who instructed the expert consents) and that, before deciding to grant permission, the court must be satisfied that there are reasonable grounds to consider that the statement in the report of the substance of the instructions is inaccurate or incomplete.

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Expert reports 18.22 1 Prior to service of the expert report, the instructions and earlier reports or drafts will be privileged: Jackson v Marley Davenport [2004] 1 WLR 2926. As regards the content of instructions to experts, see paras 20–26 of the Guidance.

18.20 Expert reports can either be served simultaneously or sequentially. This is a matter which will be considered by the court at the same time as it grants permission to adduce expert evidence (generally at the first case management conference in the proceedings). Sequential service will be appropriate ‘if service of the first expert’s report would help to define and limit the issues’1 and: ‘may in many cases save time and costs by helping to focus the contents of responsive reports upon true rather than assumed issues of expert evidence and by avoiding repetition of detailed factual material as to which there is no real issue.’2 1 Para 17.52 of the Chancery Guide (2020). 2 Para H2.17 of the Admiralty and Commercial Courts Guide (2017). The issue of sequential service of expert reports is considered at para 61 of the Guidance.

18.21 Failure to serve an expert report in accordance with the rules of CPR Part 35 or any directions made by the court can have serious consequences.1 In extreme cases, a party who serves its expert evidence late could be debarred from relying upon that evidence at trial.2 1 CPR 35.13. 2 See, for example, Baron v Lovell [2000] PIQR 20, Boyle v The Commissioner of Police of the Metropolis [2013] EWCA Civ 1477 and Clarke v Barclays Bank Plc [2014] EWHC 505 (Ch). An application for relief from sanctions would probably have to be made under CPR 3.9. The relevant principles were considered by the Court of Appeal in Mitchell v News Group Newspapers Ltd [2014] 1 WLR 795 and Denton v TH White Ltd [2014] 1 WLR 3926.

18.22 Finally, what if a party obtains a report from one expert but then before serving it decides to instruct a different expert instead? Such a situation arose in Beck v Ministry of Defence1 and the Court of Appeal allowed the defendant to instruct a second expert but only on the condition that the first expert’s report was disclosed to the claimant. Similarly, in Edwards-Tubb v JD Wetherspoon2 the claimant in a personal injury case had obtained a medical report from one doctor in the pre-action phase and had then annexed to the Particulars of Claim a report from a different doctor; the Court of Appeal ordered the defendant to disclose the first doctor’s report as a condition on the claimant’s ability to rely upon the expert evidence of the second doctor at trial. This is a decision with important practical consequences: parties must proceed with caution if they decide to instruct an expert in the pre-action phase because any reports produced could be disclosable irrespective of whether that expert will be called to give evidence at trial. However, where the court simply gives permission for a party to call an unnamed expert, then permission may not be required

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18.23 Expert evidence for a change in expert, so there may be no basis for disclosure to be required: Vasiliou v Hajigeorgiou.3 1 [2003] EWCA Civ 1043, [2005] 1 WLR 2206 (Note). 2 [2011] 1 WLR 1373. 3 [2005] 1 WLR 2195.

WRITTEN QUESTIONS TO EXPERTS 18.23 CPR 35.6 permits a party to put written questions about an expert’s report to an expert instructed by another party.1 CPR 35.6(1) and (2) provide that, unless the court gives permission or the parties agree, such questions: ●●

must be proportionate;

●●

may be put once only;

●●

must be put within 28 days of service of the relevant expert report; and

●●

must be for the purpose only of clarification of the report, unless the court gives permission or the other party agrees.2

1 See also paras 65–67 of the Guidance. 2 An example of a case where the court gave permission for questions to be put to an expert, notwithstanding that they went beyond seeking clarification of his report, is Mutch v Allen [2001] CP Rep 77.

18.24 Whether it is appropriate for a party to put written questions to another party’s expert will depend upon the circumstances of every case. It is clear, however, that any questions which are put may be closely scrutinised by the court. Hence para 17.56 of the Chancery Guide (2020) states as follows: ‘It is emphasised that this procedure is only for the purpose (generally) of seeking clarification of an expert’s report where the other party is unable to understand it. Written questions going beyond this can only be put with the agreement of the parties or with the permission of the court. The procedure of putting written questions to experts is not intended to interfere with the procedure for an exchange of professional opinion in discussions between experts or to inhibit that exchange of professional opinion. If questions that are oppressive in number or content are put or questions are put without permission for any purpose other than clarification of an expert’s report, the court will not hesitate to disallow the questions and to make an appropriate order for costs against the party putting them.’ 18.25 Paragraph H2.28(b) of the Admiralty and Commercial Courts Guide (2017) is to similar effect:

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Discussions between experts 18.29 ‘The court will pay close attention to the use of this procedure (especially where separate experts are instructed) to ensure that it remains an instrument for the helpful exchange of information. The court will not allow it to interfere with the procedure for an exchange of professional opinion at a meeting of experts, or to inhibit that exchange of professional opinion. In cases where (for example) questions that are oppressive in number or content are put, or questions are put for any purpose other than clarification of the report, the court will not hesitate to disallow the questions and to make an appropriate order for costs against the party putting them.’ 18.26 An expert’s answers to such questions will be treated as part of that expert’s report.1 Where an expert does not answer a question put to him, the court may order that that expert’s evidence may not be relied upon at trial by the party instructing him or that the party instructing him may not recover his fees and expenses from any other party.2 1 CPR 35.6(3). 2 CPR 35.6(4).

DISCUSSIONS BETWEEN EXPERTS 18.27 Discussions between experts are governed by CPR 35.12 and para 9 of CPR PD 35.1 It is usual for the court to direct under CPR 35.12(1) that a discussion should take place between the parties’ experts following service of their reports for the purpose of identifying and discussing the expert issues in the proceedings and, where possible, reaching agreed opinion on those issues.2 Indeed, in Hubbard v Lambeth and Southwark and Lewisham Health Authority3 the Court of Appeal indicated that experience demonstrated that a discussion between experts was worthwhile in almost every case. Unless the parties and the experts agree, or the court so orders, neither the parties nor their legal representatives may attend the experts’ discussion.4 1 See also paras 68–80 of the Guidance. 2 The contents of the discussion shall be protected by without prejudice privilege unless the parties agree otherwise: CPR 35.12(4). 3 The Times, 8 October 2001. 4 Para 9.4 of CPR PD 35.

18.28 It is also usual for the court to direct under CPR 35.12(3) that, once such a discussion has taken place, the experts should prepare a statement for the court setting out those issues on which they agree and those on which they disagree, with a summary of their reasons for disagreeing. 18.29 Where the experts reach agreement on an issue during their discussions, any such agreement will not bind the parties unless the parties expressly agree 425

18.30 Expert evidence to be bound by the agreement.1 In practice, however, it will be very difficult for a party to persuade the Court to disregard an agreement reached between the experts. 1 CPR 35.12(5).

18.30 Both the Chancery Guide (2020)1 and the Admiralty and Commercial Courts Guide (2017)2 provide that it may be useful in some cases for further discussions between the experts to take place during the trial itself. 1 Para 17.53. 2 Para H2.21.

EXPERTS’ REQUESTS FOR DIRECTIONS 18.31 Pursuant to CPR 35.14, experts may file with the court written requests for directions to assist them in carrying out their functions.1 Unless the court orders otherwise, an expert who proposes to request directions from the court must provide a copy of the proposed request to the party instructing him at least seven days before filing it and to all other parties at least four days before filing it.2 When giving directions to an expert the court may also direct that a copy of the directions should be served on some or all of the parties.3 1 As regards the form of such requests, see para 29 of the Guidance. 2 CPR 35.14(2). 3 CPR 35.14(3).

EXPERT EVIDENCE AT TRIAL 18.32 At trial the evidence of expert witnesses is usually taken as a block, after the witnesses of fact have given their evidence. Usually, each expert witness will be called to give evidence (and asked to verify the contents of his report) by counsel acting for the party instructing him and then cross-examined by counsel acting for the other parties. Since 1 April 2013, however, the court has had the power to direct expert witnesses to give their evidence concurrently. This practice, referred to colloquially as ‘hot-tubbing’, is regularly adopted in arbitral proceedings and in other common law jurisdictions, most notably Australia. The advantage of hot-tubbing is that it enables the experts to comment directly on each other’s evidence and it also allows the tribunal to test their evidence proactively by asking questions of both experts rather than relying upon Counsel’s sequential cross-examinations. 18.33 Guidance in relation to the hot-tubbing procedure is contained in para 11 of CPR PD 35, which provides that the court may direct that the parties 426

No immunity from suit 18.35 agree an agenda for the taking of concurrent evidence, based upon the areas of disagreement identified in the experts’ joint statement, and that in relation to each issue on the agenda the default procedure should be as follows: the court may initiate the discussion by asking the experts, in turn, for their views and then asking questions itself and inviting the experts to comment on each other’s evidence; the parties’ representatives may then ask questions of their experts in order to test the correctness of, or to clarify, their views, and finally, the court may summarise the experts’ different positions and ask them to confirm or correct that summary.1 1 See also para 81 of the Guidance.

NO IMMUNITY FROM SUIT 18.34 Prior to the Supreme Court’s decision in Jones v Kaney,1 experts had enjoyed immunity from suit, ie they could not be sued by their clients for breach of contract or negligence in respect of the evidence which they gave in court or the work which they carried out in preparation for giving evidence.2 The rationale for this lay in the public policy concern that if experts were not immune from suit this would have a ‘chilling effect’ and would make them reluctant to give evidence freely and frankly.3 A further justification was so as to protect experts from vexatious claims and to avoid a multiplicity of actions in which the value or truth of evidence given by an expert witness would be retried in the context of a negligence action against that expert.4 1 [2011] 2 AC 398. 2 The immunity of expert witnesses was propounded by the Court of Appeal in Stanton v Callaghan [2000] QB 75. 3 Jones v Kaney at [15] per Lord Phillips. See also Stanton v Callaghan (cited above) at pp 101–102 per Chadwick LJ: ‘In my view, the public interest in facilitating full and frank discussion between experts before trial does require that each should be free to make proper concessions without fear that any departure from advice previously given to the party who has retained him will be seen as evidence of negligence. That, as it seems to me, is an area in which public policy justifies immunity. The immunity is needed in order to avoid the tension between a desire to assist the court and fear of the consequences of a departure from previous advice.’ 4 Jones v Kaney at [17] per Lord Phillips.

18.35 In two respects, the immunity enjoyed by experts had been eroded even before Jones v Kaney. First, it was held in Phillips v Symes (No 2)1 that non-party costs orders could be obtained against expert witnesses under s 51 of the Senior Courts Act 1981 where their evidence causes significant expense to be unnecessarily incurred. Second, in Meadow v General Medical Council,2 it

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18.36 Expert evidence was held that an expert witness could be the subject of professional disciplinary proceedings in respect of evidence given in court. 1 [2005] 1 WLR 2043. 2 [2007] QB 462.

18.36 In Jones v Kaney a majority of the Supreme Court1 abolished the immunity for experts. In essence they held that any exception to the general rule that every wrong should have a remedy (ie a client’s prima facie right to sue a negligent expert) had to be justified as being necessary in the public interest. Referring to the earlier decision of Arthur JS Hall & Co v Simons,2 in which the House of Lords had abolished the equivalent immunity for barristers, the majority in Jones v Kaney held that there was no justification for continuing to hold expert witnesses immune from suit for breaches of duty committed by them in relation to the evidence which they gave in court or for the views which they expressed in anticipation of court proceedings. In particular, the majority rejected the argument that experts would be prevented from fulfilling their duties to the court by their fear of being sued by their clients; they also held that experience after Hall v Simons had shown that the removal of immunity would not in practice lead to a rise of vexatious claims and a multiplicity of proceedings. It remains to be seen how claims against experts will develop post-Jones v Kaney – for example whether experts’ liability will arise principally out of written reports or oral evidence given in court – but it is submitted that there is no doubt that the abolition of the immunity will have a significant impact in practice and that claims against experts will be brought. By way of example, in Ridgeland Properties Ltd v Bristol CC3 an expert had failed to adduce certain relevant valuation evidence in proceedings before the Upper Tribunal and the Court of Appeal refused to reopen those proceedings to admit that evidence on the basis that, in so far as the applicant had suffered prejudice, it had a right of redress directly against the expert (and the solicitor). 1 Lords Phillips, Brown, Kerr, Collins, and Dyson. Lord Hope and Baroness Hale dissented. 2 [2002] 1 AC 615. 3 [2011] EWCA Civ 649.

18.37 It should be noted that nothing in Jones v Kaney alters the rule that experts, like lay witnesses, benefit from absolute privilege in respect of claims in defamation.1 1 Jones v Kaney at [62] per Lord Phillips: ‘It follows that I consider that the immunity from suit for breach of duty that expert witnesses have enjoyed in relation to their participation in legal proceedings should be abolished. I emphasise that this conclusion does not extend to the absolute privilege that they enjoy in respect of claims in defamation.’

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Part 6

Disciplinary regimes and money laundering

Chapter 19

Disciplinary regimes

INTRODUCTION 19.01 The activities of accountants, like other professionals such as lawyers and medical practitioners, are subject to regulation. In this chapter we provide an overview of the various accountancy disciplinary regimes which exist. 19.02 In summary, there are two levels at which accountants are regulated and may be disciplined in the UK. First, the principal professional bodies for accountants such as the Institute of Chartered Accountants in England and Wales (ICAEW) have contractual jurisdiction to discipline their members for a variety of disciplinary breaches. These professional bodies are often referred as to ‘recognised supervisory bodies’ (RSBs) under Companies Act 2006, Sch 10. Second, there is the Financial Reporting Council (FRC) which acts as the independent disciplinary body for accountants and accountancy firms (and also actuaries) in the UK. The FRC, through a dedicated team, carries out what is known as Audit Quality Review, which is essentially work undertaken to monitor and improve the quality of audit work in the UK in respect of public interest and large AIM-listed entities. But in addition, through its Conduct Committee the FRC has jurisdiction under the Accountancy Scheme to discipline accountants and accountancy firms in respect of acts or omissions which constitute ‘Misconduct’ and where the matters raise ‘important issues affecting the public interest in the United Kingdom’. As we explain below, precisely what acts or omissions constitute ‘Misconduct’ within the meaning of the Scheme is a controversial issue. In any event, the scope of the Accountancy Scheme is now limited following the entry into force of the Audit Enforcement Procedure on 17 June 2016 pursuant to the EU Audit Regulation (EU) 537/2014 and EU Audit Directive 2014/56/EU. 19.03 After considering the operation of the Scheme, we turn to address the new Audit Enforcement Procedure. It still remains to be seen how the Audit Enforcement Procedure will operate in practice, and in particular how it will interact with other regulatory work carried out both by the RSBs and by the FRC itself under the Accountancy Scheme. At the end of this chapter, we explain that the FRC is due to be replaced by a new regulator called the Audit, Governance and Reporting Authority.

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19.04 Disciplinary regimes

RECOGNISED SUPERVISORY BODIES (RSBs) 19.04 There are six main accountancy professional bodies in the UK: the ICAEW, the Chartered Institute of Public Finance and Accountancy (CIPFA), the Institute of Chartered Accountants in Ireland (ICAI), the Association of Chartered Certified Accountants (ACCA), the Institute of Chartered Accountants of Scotland (ICAS) and the Chartered Institute of Management Accountants (CIMA).1 With the exception of CIMA,2 these bodies are all members of the Consultative Committee of Accountancy Bodies (CCAB) whose stated ‘mission’ is to be ‘the collective voice of the UK profession’ and whose ‘strategic goal’ is to provide ‘a forum whereby its member bodies can meet and act collectively on behalf of the accountancy profession in the UK to promote the public interest on matters within the sphere of the profession and its members’. 1 Within the UK it is not obligatory for an accountant to be a member of a professional body, but in practice most employers require a professional qualification from one of them. 2 CIMA withdrew from the CCAB in 2011.

19.05 The five members of the CCAB are recognised by the FRC as RSBs and each operates its own disciplinary scheme subject to monitoring by the FRC’s Conduct Committee. Thus if an accountant or an accountancy firm is alleged to have breached the rules and regulations of the RSB of which they are a member then the RSB can launch an investigation into the member’s conduct and the investigation may result in disciplinary proceedings against the member. If the charges are established, there are a number of sanctions that the RSB can impose. 19.06 Traditionally the RSBs have played a significant role in the regulation of audit work in particular: indeed under s 1212 of the Companies Act 2006, an accountancy firm can only accept a statutory audit appointment if it is registered with and subject to supervision by an RSB. 19.07 Each of the RSBs has its own particular rules and regulations and each follows its own investigation and disciplinary process. To take the ICAEW as an example, the ICAEW has a Code of Ethics1 which establishes certain ‘fundamental principles’ with which its members must comply at all times in carrying out their professional activities and under bye-law 4.1 of the ICAEW’s disciplinary bye-laws2 members will face disciplinary action in the following circumstances: ‘a.

if they have committed misconduct; by committing any act or default, whether in the course of carrying out professional work or otherwise, likely to bring discredit on themselves, ICAEW or the profession of accountancy, or so as to fall significantly short of the standards reasonably expected of a member …;

b.

if they have demonstrated professional incompetence; by performing professional work, whether as a principal, director,

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Recognised supervisory bodies (RSBs) 19.08 employee or as an individual, incompetently, to such an extent, or on such a number of occasions, as to fall significantly short of the standards reasonably expected of a member …; c.

if they have committed a breach of the bye-laws or of any regulations or have failed to comply with any order, direction or requirement made, given or imposed under them;

d.

if they have failed to comply with any order of the Investigation Committee, Disciplinary Committee or Appeal Committee, or of any tribunal or panel, otherwise than by failing to pay any fine or costs;

e.

if they have, in a court of competent jurisdiction, been convicted of an indictable offence (or have, before such a court outside England and Wales, been convicted of an offence corresponding to one which is indictable in England and Wales);

f.

if they have had a disqualification order made against them or have given a disqualification undertaking which has been accepted by the Secretary of State under the Company Directors Disqualification Act 1986 (or if they have had orders made against them or have given undertakings under legislation of equivalent effect in jurisdictions outside England and Wales where the courts are of competent jurisdiction);

g.

if, at any time, they have carried on any regulated activities when not duly authorised;

h.

if any of the circumstances set out in paragraph 2 exist with respect to them.’

1 The current version of the ICAEW’s Code of Ethics came into force on 1 January 2020. It is based on the 2018 Handbook of the International Code of Ethics for Professional Accountants (IESBA). 2 The current version of the ICAEW’s disciplinary bye-laws came into force on 14 October 2019.

19.08 The ICAEW’s disciplinary bye-laws also prescribe matters such as: ●●

how disciplinary investigations are commenced;

●●

the scope of the powers to investigate that are conferred upon the Investigation Committee;

●●

the potential outcomes at the Investigation Committee stage;

●●

the process before the Disciplinary Committee in the event that Formal Complaints are referred to it by the Investigation Committee;

●●

the conduct of hearings before the Disciplinary Committee; and

●●

the range of sanctions that are available to it.

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19.09 Disciplinary regimes In practice, the most common form of sanction that is imposed by the ICAEW Disciplinary Committee is a fine. 19.09 As a final point, it should be noted that the ICAEW is amenable to judicial review. Hence in R v Institute of Chartered Accountants in England and Wales, ex parte Brindle,1 Price Waterhouse successfully challenged a decision of the ICAEW to proceed with (and not adjourn) disciplinary proceedings against the firm in relation to the firm’s conduct as auditors of the BCCI group whilst various pieces of litigation were pending. Given the similarity of the functions that they exercise, it must follow from this decision that the other RSBs are also amenable to judicial review in so far as they carry out investigatory and disciplinary functions.2 1 [1994] BCC 297. 2 In accordance with the decision of the Court of Appeal in R v Panel On Take-Overs & Mergers, ex p Datafin plc [1987] QB 815.

AUDIT QUALITY REVIEW 19.10 The Audit Quality Review (AQR) team within the FRC is responsible for monitoring and promoting improvements in the quality of audit work that is carried out within the UK. In principle, all public interest entities and large AIM-listed companies are subject to AQR inspections although in practice the FRC selects which entities to inspect depending on various factors such as the particular industry sectors on which it wishes to focus. Five points can be made about the nature of AQR inspections based on what the FRC itself says about the process on its website. First, the FRC places particular emphasis on ‘the appropriateness of key audit judgments made in reaching the audit opinion and the sufficiency and appropriateness of the audit evidence obtained’. Second, the inspections ‘monitor compliance with ‘Relevant Requirements’ as defined in the 2016 Regulations. Relevant Requirements include, for example, the Auditing Standards, Ethical Standards and Quality Control Standards for auditors issued by the FRC and the Audit Regulations issued by the relevant professional bodies’. Third, the FRC identifies areas ‘where improvements are required to safeguard or enhance audit quality and/or comply with regulatory requirements’ and it seeks ‘to agree an action plan with each firm inspected to achieve the improvements needed’. Fourth, the reports which the FRC issues on individual audits reviewed are scored according to four audit categories: ●●

Good;

●●

Limited improvements required;

●●

Improvements required; and

●●

Significant improvements required. 434

The Accountancy Scheme 19.15 Finally, in certain cases the FRC may decide, in the light of matters uncovered during AQR inspections, to impose sanctions. To this end, in April 2016 the FRC published ‘Auditor Regulatory Sanctions Procedure’ and in June 2016 the FRC published ‘Auditor Regulatory Sanctions Guidance’. In practice, cases in which AQR inspections have led to sanctions being imposed are relatively rare.

THE ACCOUNTANCY SCHEME 19.11 As already noted, the FRC though its Conduct Committee acts as the independent disciplinary body for accountants and accountancy firms. The basis on which the FRC has jurisdiction is contractual: the accountancy professional bodies are all ‘participants’ in the Accountancy Scheme.1 1 CIMA is a ‘participant’ in the Accountancy Scheme even though it is not (and has not been since 2011) a member of the CCAB.

19.12 By way of background, the Accountancy Scheme was originally adopted by the former Accountancy Investigation and Discipline Board (AIDB) on 13 May 2004. The AIDB became the Accountancy and Actuarial Discipline Board (AADB) in 2007 and the Accountancy Scheme was amended by the AIDB on various occasions between September 2007 and 18 October 2012. Both the AIDB and AADB were independent ‘operating bodies’ of the FRC until 2012, when responsibility passed to the FRC. The Accountancy Scheme was subsequently amended on 1 July 2013. Also in July 2013 and in connection with the Scheme the FRC published ‘Guidance on the delivery of Formal Complaints’. The most recent version of the Accountancy Scheme came into effect on 8 December 2014. The Accountancy Scheme needs to be read together with the Accountancy Regulations. 19.13 It is under the Accountancy Scheme that the FRC (and before it the AIDB and AADB) has investigated the work carried out by auditors in relation to some very well-known companies which have collapsed in the UK such as Cattles, Equitable Life, Mayflower, MG Rover, Autonomy, and Carillion.

The structure of the Accountancy Scheme 19.14 The basic structure of the Accountancy Scheme is as follows. 19.15 Paragraph 5 provides when an accountant or accountancy firm is liable to investigation and disciplinary proceedings.

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19.16 Disciplinary regimes 19.16 Paragraph 5(1) provides: ‘A Member or Member Firm shall be liable to investigation under this Scheme only where, in the opinion of the Conduct Committee: (i) (a) the matter raises or appears to raise important issues affecting the public interest in the United Kingdom (‘the first criterion’); and

(b) there are reasonable grounds to suspect that there may have been Misconduct (‘the second criterion’); or

(ii) it appears that the Member or Member Firm has failed to comply with any of his or its obligations under paragraphs 14(1) or 14(2) below.’ 19.17 Paragraph 5(2) provides: ‘In deciding whether a matter satisfies the first criterion, the Conduct Committee shall, amongst other things, consider whether it appears to give rise to serious public concern or to damage public confidence in the accountancy profession in the United Kingdom. The Conduct Committee shall also be entitled to consider all the circumstances of the matter including, but not limited to, its nature, extent, scale and gravity.’ 19.18 Paragraph 5(3) provides: ‘In considering whether there are reasonable grounds to suspect that there may have been Misconduct by a Member or Member Firm, regard shall be had in particular to any law, whether statutory or otherwise, or regulation of any sort, and to any charter, bye-law, rule, regulation or guidance.’ 19.19 Paragraph 5(4) provides: ‘A Member or Member Firm shall be liable to disciplinary proceedings under this Scheme if, following an investigation, the Executive Counsel considers: (i)

that there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm; and

(ii) that a hearing is desirable in the public interest.’ 19.20 ‘Misconduct’ is defined as follows: ‘An act or omission or series of acts or omissions, by a Member or Member Firm in the course of his or its professional activities (including as a partner, member, director, consultant, agent, or 436

The Accountancy Scheme 19.25 employee in or of any organisation or as an individual) or otherwise, which falls significantly short of the standards reasonably to be expected of a Member or Member Firm or has brought, or is likely to bring, discredit to the Member or the Member Firm or to the accountancy profession.’ 19.21 ‘Adverse Finding’ is defined as meaning ‘a finding by a Disciplinary Tribunal that a Member or Member Firm has committed Misconduct, or has failed to comply with any of his or its obligations under paragraphs 14(1) or 14(2)’. 19.22 Paragraph 6 stipulates the circumstances when an investigation under the Accountancy Scheme may be instituted. Those circumstances are in summary either, under para 6(2), where a ‘participant’ (ie one of the professional accountancy bodies) refers a matter to the FRC and requests the Conduct Committee to institute an investigation or, under para 6(8): ‘Where a Participant is conducting an investigation into the conduct of a Member of Member Firm of which the Conduct Committee is aware, or the Conduct Committee otherwise becomes aware of matters relating to the conduct of a Member or Member Firm, and in either case the Conduct Committee is of the opinion that the criteria at paragraph 5(1), taking account of the considerations in paragraph 5(2), have been met, the Conduct Committee may decide that the matter shall be dealt with by the FRC in accordance with this Scheme.’ 19.23 Under para 7(10), if the Executive Counsel1 considers that (a) ‘there is a realistic prospect that a Disciplinary Tribunal will make an Adverse Finding against a Member or Member Firm’ and (b) ‘a hearing is desirable in the public interest’ then he must notify the Member or Member Firm accordingly and invite the Member or Member Firm to make written representations on a draft of the intended Formal Complaint. Under para 7(11), if, having reviewed any such representations, the Executive Counsel still considers that there is a realistic prospect of an Adverse Finding and a hearing is in the public interest then he shall deliver a Formal Complaint to the Conduct Committee. 1 The Executive Counsel is a legally qualified officer of the FRC (and the term is defined in the Accountancy Scheme).

19.24 Paragraph 8 deals with settlement. It is open to the Member or Member Firm to enter into what is known as a Carecraft1 agreement with the FRC based on an agreed statement of facts. 1 Following the procedure that originated in directors’ disqualification proceedings: see Re Carecraft Construction Co Ltd [1994] 1 WLR 172.

19.25 Paragraph 9 deals with disciplinary proceedings. Paragraph 9(1) requires that, where the Executive Counsel delivers a Formal Complaint, the 437

19.26 Disciplinary regimes Conduct Committee shall serve that complaint on the Member or Member Firm concerned. Paragraph 9(2) then requires that a Disciplinary Tribunal shall be appointed to hear the Formal Complaint. Under para 9(7) the Disciplinary Tribunal shall, after hearing the Formal Complaint, either make an Adverse Finding or dismiss it. Under para 9(8) the Disciplinary Tribunal may impose sanctions if it makes an Adverse Finding. 19.26 Paragraph 10 provides for appeals against the decision of the Disciplinary Tribunal. 19.27 Paragraph 12 makes clear that the standard of proof to be applied by the Disciplinary Tribunal is the ordinary civil standard of proof. 19.28 Paragraphs 14(1) and (2) impose a duty on members and member firms to co-operate fully with the Executive Counsel and with the Disciplinary Tribunal.

What constitutes ‘Misconduct’? 19.29 It can be seen from the above summary of the structure of the Accountancy Scheme that, at least until the development of the new Audit Enforcement Procedure (see paras 19.43–19.50, below), what used to distinguish between disciplinary matters within the jurisdiction of the RSBs on the one hand and that of the FRC on the other were the requirements in the Accountancy Scheme that: (a)

the conduct must fall within the definition of ‘Misconduct’; and

(b)

a hearing in the public interest must be considered to be desirable (first by Conduct Committee at the investigation stage and then by the Executive Counsel at the disciplinary stage).

If these requirements were not met, then the relevant case would not be pursued by the FRC. 19.30 But as noted at the start of this chapter, the question of what conduct constitutes ‘Misconduct’ within the meaning of the definition in the Accountancy Scheme is a controversial one. This is in contrast to other professional disciplinary contexts in which there is a well-established definition. 19.31 In the medical context, for example, the definition of ‘misconduct’ has been considered in, amongst other cases, two decisions of the Privy Council. For example, in Roylance v General Medical Council Lord Clyde said as follows:1 ‘The expression “serious professional misconduct” is not defined in the legislation and it is inappropriate to attempt any exhaustive 438

The Accountancy Scheme 19.33 definition … However the essential elements of the concept can be identified. … Analysis of what is essentially a single concept requires to be undertaken with caution, but it may be useful at least to recognise the elements which the respective words contribute to it. Misconduct is a word of general effect, involving some act or omission which falls short of what would be proper in the circumstances. The standard of propriety may often be found by reference to the rules and standards ordinarily required to be followed by a medical practitioner in the particular circumstances. The misconduct is qualified in two respects. First, it is qualified by the word ‘professional’ which links the misconduct to the profession of medicine. Secondly, the misconduct is qualified by the word “serious”. It is not any professional misconduct which will qualify. The professional misconduct must be serious … In the present case the critical issue is whether, if there was misconduct, the misconduct was “professional misconduct”. As counsel for the General Medical Council pointed out it is not simply clinical misconduct which is in issue. Professional misconduct extends further than that. So it is not simply misconduct in the carrying out of medical work which may qualify as professional misconduct. But there must be a link with the profession of medicine. Precisely what that link may be and how it may occur is a matter of circumstances. The closest link is where the practitioner is actually engaged on his practice with a patient. Cases here may occur of a serious failure to meet the necessary standards of practice, such as gross neglect of patients or culpable carelessness in their treatment, or the taking advantage of a professional relationship for personal gratification.’ 1 [2000] 1 AC 311 at 330–331.

19.32 In Preiss v General Dental Council Lord Cooke said:1 ‘It is settled that serious professional misconduct does not require moral turpitude. Gross professional negligence can fall within it. Something more is required than a degree of negligence enough to give rise to civil liability but not calling for the opprobrium that inevitably attaches to the disciplinary offence’. 1 [2001] 1 WLR 1926 at [28].

19.33 In the context of solicitors, Lord Denning once said that ‘negligence in a solicitor may amount to a professional misconduct if it is inexcusable and

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19.34 Disciplinary regimes is such as to be regarded as deplorable by his fellows in the profession’.1 And more recently in Connolly v Law Society Stanley Burnton J stated as follows:2 ‘I accept that generally the honest and genuine decision of a solicitor on a question of professional judgment does not give rise to a disciplinary offence. But that does not mean that for a solicitor to act where there is a significant risk of a conflict of interest cannot be a disciplinary offence. If a solicitor does not honestly and genuinely address the issue, he may be guilty of an offence. And if his decision is one that no reasonably competent solicitor could have made, it may be inferred that he did not (or could not) properly address the issue. That inference may well be appropriate where, as in the present case, the reason given for the solicitor’s professional decision is manifestly unsustainable.’ 1 In Re a Solicitor [1972] 1 WLR 869 at 873. 2 [2007] EWHC 1175 (Admin) at [62].

19.34 Returning to the Accountancy Scheme, the issue which is controversial is the extent to which acts or omissions which constitute mere negligence should fall within the definition of ‘Misconduct’. The overall effect of the authorities cited may be summarised as follows: (a)

‘Misconduct’ does not require a finding of moral turpitude or bad faith;

(b) negligence in the sense of any breach of the common law duty to exercise reasonable care and skill does not, without more, constitute ‘Misconduct’; (c)

there must instead be negligence of a high degree or gross negligence;

(d) individual mistakes and errors of judgment do not normally constitute negligence of a high degree or gross negligence; and (e) action taken in good faith and for legitimate reasons will not normally constitute ‘Misconduct’. 19.35 There are two further points which we consider to be relevant to the interpretation of the term ‘Misconduct’ in the Accountancy Scheme. First, when the Accountancy Scheme was revised on 1 July 2013 the definition of ‘Misconduct’ was amended so as to make it a requirement that the relevant conduct must fall ‘significantly’ short of the standards reasonably to be expected of a member or member firm. This is an indication that the draughtsman intended the threshold to be higher than bare negligence. Second, para 2(1) of the Accountancy Scheme provides that its purpose is ‘[T]o protect the public, maintain public confidence in the accountancy profession and uphold proper standards of conduct’. This stated purpose of the Accountancy Scheme is consistent with the authorities as summarised above.

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The Accountancy Scheme 19.37 19.36 Our views are consistent with the approach that was adopted by the Disciplinary Tribunal in the MG Rover case where the Tribunal stated as follows:1 ‘Before we can make a finding that the Respondents or either of them are guilty of misconduct and make a finding adverse to them we have to be satisfied not only that there has been a departure from the conduct reasonably expected of a Member or a Member Firm but that that departure has been significant. Whether that departure is significant is a matter for our judgement. A trivial departure will not suffice. We have to be satisfied before we reach a conclusion that there has been such a departure, that the Executive Counsel has proved that no reasonable accountant would have acted in the way that the Respondents have acted … We accept the Respondents’ contention that for the Respondents to be guilty of misconduct and to have acted in a way that no reasonable professional would have acted the conduct would have to amount to more than mere carelessness or negligence and has to cross the threshold of real seriousness. It is not sufficient for the Executive Counsel to prove that the Respondents failed to act in accordance with good or best practice or that most or many members of the profession would have acted differently. The conduct has to be more serious than that.’ 1 FRC v Deloitte & Touche and Maghsoud Einollahi (MG Rover), 2 September 2013 at [18]–[19]. The decision of the Tribunal was subsequently appealed, but the legal test was common ground before the Appeal Tribunal. This guidance has been applied by a number of Tribunals in subsequent cases including FRC v Mr Paul Newsham (Worthington Nicholls), 5 September 2014 at [14]–[17], FRC v Deloitte and John Clennett (Aero), 10 November 2016 at [21] and [24], FRC v Mr Stephen Harrison and PwC (Connaught), 12 April 2017 at [29], FRC v John Shannon, Raymond Flynn and Matthew Boyle (AssetCo), 24 July 2018 at [28].

19.37 However, in R (Baker Tilly UK Audit LLP) v Financial Reporting Council1 Singh J preferred a broader interpretation of ‘Misconduct’. In that case Baker Tilly and two of its partners have been alleged by the FRC to have committed ‘Misconduct’ in various respects which they argued before Singh J amounted to ‘simple negligence’ and therefore fell outside the definition of ‘Misconduct’. The key submission that was made on their behalf was recorded by Singh J at [115]–[116]: ‘On behalf of the Claimants Mr Drabble QC submits that the definition of “misconduct” is one which is now well defined in the case law which has been cited earlier and that the Defendants proceeded on a misdirection as to its meaning in the present case. He submits that it requires an “ingredient X”: that ingredient lies on a spectrum between simple negligence and a lack of integrity. Although he accepts that

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19.38 Disciplinary regimes it does not always require moral culpability, he submits that it does require a high degree of negligence: simple negligence will not suffice. First Mr Drabble complains that both the Executive Counsel and Mr Leech simply equated the concept of “standards reasonably to be expected” within the definition of “misconduct” in the Accountancy Scheme with breach of standards to be found in the ISAs.’ 1 [2015] EWHC 1398 (Admin).

19.38 This argument was rejected by Singh J. He held that the question of whether particular acts or omissions constitute ‘Misconduct’ is a fact-sensitive one and will need to be considered on the facts of every case. At [118] he said as follows: ‘Depending on the individual facts, sometimes the breach of an ISA may amount to a failure to comply with the standards reasonably to be expected; in other cases it may not. It all depends on the facts of the individual case and calls for the judgment of the person applying the test of “misconduct.”’ 19.39 It is submitted that this reasoning does not take account of the fact that the definition of ‘Misconduct’ requires the relevant acts or omissions to fall significantly short of the standards reasonably to be expected. If the word ‘significantly’ in the definition is to have any meaning, then something more than a mere breach of the ISAs is surely required. (This is not to say necessarily that the outcome of the Baker Tilly judicial review should have been different since the argument which Baker Tilly and its partners were advancing could have been pursued before the Disciplinary Tribunal in any event and, in light of that alternative remedy, there was no case for a quashing order.) An appeal against Singh J’s judgment was dismissed by the Court of Appeal, but the focus of the appeal was a different issue.1 1 [2017] EWCA Civ 406. Singh J had rejected a further argument made by the claimants, to the effect that the FRC’s Guidance on the delivery of Formal Complaints is unlawful because it contains an erroneous approach to ‘Misconduct’ and/or contains a misdirection as to what it capable of constituting ‘Misconduct’. That was the argument which was the focus of the appeal. However, the part of the Guidance which was under attack relates solely to the ‘public interest’ criterion and is not concerned with the ‘Misconduct’ issue.

Public interest 19.40 As explained above, whether a hearing is considered to be desirable in the public interest is an important pre-condition to the Conduct Committee launching an investigation and subsequently the Executive Counsel initiating

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The Accountancy Scheme 19.42 disciplinary proceedings. There is no definition of ‘public interest’ in the Accountancy Scheme itself. However, this is addressed at paras 11–13 of the Guidance on the delivery of Formal Complaints. There it is said that the Executive Counsel in applying the public interest should be ‘especially mindful’ of four points: (i)

all cases falling within the scope of the Guidance necessarily raise or appear to raise important issues affecting the public interest (because otherwise the Conduct Committee will not have commenced the investigation in the first place) and therefore the key question for the Executive Counsel is whether a hearing would be desirable in the public interest;

(ii) a Formal Complaint which satisfies the evidential test (ie as to whether an Adverse Finding of Misconduct is likely) should usually be delivered to the Conduct Committee ‘unless contrary public interest factors clearly outweigh those favouring delivery’; (iii) as an alternative to a hearing, the Executive Counsel can seek to dispose of cases by way of settlement; and (iv) ‘the application of the public interest is not simply a matter of comparing the number of factors on each side. The Executive Counsel must carefully and fairly weigh each factor, and then make an overall assessment. No single factor or combination of factors is necessarily determinative’. 19.41 Paragraphs 12 and 13 of the Guidance then go on to set out examples of public interest factors which, respectively, favour and point against the delivery of a Formal Complaint to the Conduct Committee for a hearing. 19.42 In Baker Tilly one of the arguments made on behalf of the judicial review claimants was that the Executive Counsel’s decision to deliver the Formal Complaint to the Conduct Committee was based on an unlawful application of the public interest criterion, specifically because of the amount of delay between the claimants first being informed that they were being investigated (in September 2009) and the FRC’s service of the Formal Complaint (in June 2014). This argument was rejected by Singh J who held that if the claimants wished to argue that the proceedings were an abuse of process then this was a matter which they could pursue before the Disciplinary Tribunal. The contrary argument is that under the Accountancy Scheme, once a Formal Complaint has been delivered by the Executive Counsel to the Conduct Committee then it must convene a Disciplinary Tribunal and that Tribunal must hear the case. There is no express provision within the Accountancy Scheme which allows the Tribunal to consider whether the Executive Counsel was correct to deliver the Formal Complaint: accordingly, contrary to the reasoning of Singh J, it could be said that any argument about whether the ‘public interest’ criterion has been satisfied can only be taken by way of a judicial review challenge. 443

19.43 Disciplinary regimes

THE NEW AUDIT ENFORCEMENT PROCEDURE 19.43 On 17 June 2016, the EU Audit Regulation (EU) 537/2014 (the ‘Audit Regulation’) and EU Audit Directive 2014/56/EU (the ‘Directive’) came into force.1 The Audit Regulation has direct effect in the UK but the Directive required transposition and it has been implemented in the UK through the Statutory Auditors and Third Country Auditors Regulations 2016 (SATCAR). Together, the Audit Regulation and the Directive establish a new regime for the regulation of statutory audits of public interest entities (PIEs). PIEs are defined in reg 2 of SATCAR as issuers admitted to trading on a regulated market, credit institutions, and insurance undertakings. 1 The Regulation will remain applicable in the UK as ‘retained EU law’ under the European Union (Withdrawal) Act 2018, s 3.

19.44 The objective of the Audit Regulation is usefully summarised in the Recitals: ‘1. Statutory auditors and audit firms are entrusted by law to conduct statutory audits of public-interest entities with a view to enhancing the degree of confidence of the public in the annual and consolidated financial statements of such entities. The public-interest function of statutory audit means that a broad community of people and institutions rely on the quality of a statutory auditor’s or an audit firm’s work. Good audit quality contributes to the orderly functioning of markets by enhancing the integrity and efficiency of financial statements. Thus, statutory auditors fulfil a particularly important societal role. … 5. It is important to lay down detailed rules with a view to ensuring that the statutory audits of public-interest entities are of adequate quality and are carried out by statutory auditors and audit firms subject to stringent requirements. A common regulatory approach should enhance the integrity, independence, objectivity, responsibility, transparency and reliability of statutory auditors and audit firms carrying out statutory audits of public-interest entities, contributing to the quality of statutory audits in the Union, thus to the smooth functioning of the internal market, while achieving a high level of consumer and investor protection. The development of a separate act for public-interest entities should also ensure consistent harmonisation and uniform application of the rules and thus contribute to a more effective functioning of the internal market. These strict requirements should be applicable to statutory auditors and audit firms only insofar as they carry out statutory audits of public-interest entities.’

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The new audit enforcement procedure 19.46 19.45 In order to reflect the entry into force of the Audit Regulation and the Directive, the FRC – which is the UK designated ‘Competent Authority’ within the meaning of the Audit Regulation and is defined as such in SATCAR – has developed what it refers to as a new Audit Enforcement Procedure. 19.46 Between March and May 2016, the FRC consulted on the (then proposed) new Audit Enforcement Procedure.1 When it did so, the FRC noted that it was already operating two procedures in relation to audit enforcement, namely the AQR (and the possibility of sanctions following AQR inspections) and also the Accountancy Scheme in respect of matters constituting ‘Misconduct’ and raising issues of public interest. However, the FRC said that it nonetheless considered it appropriate to establish and operate a procedure specifically tailored to the European legislation for a number of reasons. These included the facts that: (i)

the existing procedures were created under voluntary arrangements;

(ii) the Audit Regulation and the Directive contained various requirements which if breached the FRC was under a duty to investigate and sanction; and (iii) the traditional disciplinary tribunal-based scheme was not an appropriate mechanism of dealing with the potential range of new cases that might arise under the new legislation. The FRC further explained in its consultation document that three principles underlie the new audit enforcement procedure: (i)

the need to comply with the European Convention on Human Rights and to ensure fairness to statutory auditors, whilst at the same time protecting the public.

(ii) the need for a single, streamlined procedure to deal with the full range of audit enforcement, ranging from the regulation of simple ‘misdemeanour’ breaches to more serious ones which would have previously fallen within the definition of ‘Misconduct’ in the Accountancy Scheme; and (iii) the desire to establish an administrative procedure which would facilitate the early resolution of certain cases by way of settlement. In its Feedback Statement on the responses to its consultation document the FRC further sought to explain its decision to design a new procedure, stating that it ‘took a policy decision to develop and consult on a single, streamlined procedure bespoke to the incoming legislation, rather than attempting to shoehorn legacy procedures into a new legislative and regulatory environment’.2 1 The FRC’s consultation document was entitled ‘Enhancing Confidence in Audit: The Financial Reporting Council’s Audit Enforcement Procedure’ (March 2016).

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19.47 Disciplinary regimes 2 ‘Feedback Statement: Enhancing Confidence in Audit: The Financial Reporting Council’s Enforcement Procedure’ (June 2016), para 15.2.

19.47 In summary, the new Audit Enforcement Procedure consists of a fourstage process. At the outset the FRC’s Conduct Committee will decide whether an investigation should be commenced and whether the investigation should be carried out by the Executive Counsel or delegated to the relevant RSB; if it decides that there is a ‘good reason’ to investigate and refers the matter to the Executive Counsel then the Executive Counsel will carry out the investigation following which it will decide whether to issue a Decision Notice; at the next stage (which is a new stage that does not exist in the Accountancy Scheme procedure), if that Decision Notice is accepted by the respondent then an early settlement will be concluded and a percentage reduction in the fine will be granted, but if the Decision Notice is not accepted then the Enforcement Committee will consider the allegations and if appropriate issue a Decision Notice and impose a sanction (again, assuming that no settlement is possible); and finally, the matter will go before a Disciplinary Tribunal in a stage of the process which is almost identical to the Accountancy Scheme regime. So far as sanctions are concerned, there are numerous specified sanctions which might be imposed as a minimum, including a notice to cease and abstain from any repetition of the breach to a financial penalty, and certain other sanctions which might be imposed in addition such as an order that the respondent repay client fees or be excluded as a member of one or more RSBs. 19.48 Arguably the most significant change that has been brought about by the new Audit Enforcement Procedure is that, whereas under the Accountancy Scheme the FRC needs to consider that there is a realistic prospect of a finding of ‘Misconduct’, under the new regime an ‘adverse finding’ is a finding that the respondent in question has ‘breached a relevant requirement’ where ‘relevant requirement’ is defined as a ‘requirement under the 2016 Regulations or the Audit Regulations or Pt 16 or Pt 42 of the Companies Act 2006 (as amended)’. Whatever might be the correct interpretation of ‘Misconduct’, on any view it is plain that the threshold in the new Audit Enforcement Procedure is a much lower one and therefore the FRC now has jurisdiction to pursue cases which would previously have fallen outside the scope of the Accountancy Scheme, for example because they involved a minor or technical breach of an auditing standard. In its Feedback Statement the FRC sought to justify the lower standard by stating (at para 15.2) that ‘the breach of a relevant requirement’ accords with the Audit Regulation. It is notable, however, that the FRC had previously stated that it did not consider that the development of the new Audit Enforcement procedure would lead to an overall increase in the amount of regulation.1 1 See the Preliminary Impact Assessment which the FRC published as part of its March 2014 consultation document.

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The Audit, Reporting and Governance Authority 19.51 19.49 What all of this will mean in practice remains to be seen. As part of its consultation process, the FRC stated that it ‘intends to delegate the majority of non-PIE Audit Regulation tasks’ to the RSBs pursuant to Delegation Agreements between the FRC and each of the RSBs. Not only are the precise boundary lines unclear but also on the face of it this would appear to mean that the Accountancy Scheme (and the controversy about the definition of ‘Misconduct’ referred to above) will cease to be of any relevance to the regulation of audit work since all audit work will be regulated wither by the FRC pursuant to the new Audit Enforcement Procedure or by the RSBs applying their own procedures.1 But if the FRC does intend to continue applying the Accountancy Scheme in respect of accountants carrying out non-audit work, then a concern arises in that there would potentially be inequality of treatment in so far as auditors of PIEs could be disciplined by the FRC for breach of a ‘relevant requirement’ whereas accountants could only be disciplined if their conduct was sufficiently serious to constitute ‘Misconduct’. 1 The FRC has made clear that where an complaint or referral in respect of audit work was made prior to 17 June 2016, then it will consider the matter under the Accountancy Scheme: see the FRCs Feedback Statement, para 15.8.

19.50 There are also other uncertainties surrounding the new Audit Enforcement Procedure. For example, it is unclear how the Conduct Committee will reach decisions as to whether there is a ‘good reason’ to investigate and how differently in practice this will operate relative to the ‘public interest’ criterion in the Accountancy Scheme. It is also unclear whether any sanctions that might be imposed following AQR inspections will now be imposed through the new Audit Enforcement Procedure. At least for the time being there are plenty of questions, but few answers. It is early days yet for the new regime: at the time of writing, only four Decision Notices have been issued under the new Audit Enforcement Procedure and it is difficult therefore to express any definitive views. However, the signs so far suggest that the FRC’s stance is hardening: action is being taken under the Audit Enforcement Procedure in respect of audit failings which would not have been so significant as to constitute ‘Misconduct’ under the Accountancy Scheme and harsher sanctions (including substantial fines and eg requirements on audit partners to undertake remedial training) are being imposed than under the old regime.1 1 A summary of recent enforcement sanctions imposed against audit firms and audit partners is available on the FRC’s website at https://www.frc.org.uk/auditors/enforcement-division/ enforcement-outcomes.

THE AUDIT, REPORTING AND GOVERNANCE AUTHORITY 19.51 At the time of writing, the FRC is in the course of being transitioned into a new regulator, to be known as the Audit, Reporting, and Governance (ARGA). 447

19.51 Disciplinary regimes The creation of the ARGA as a new regulator, with broader statutory powers and the ability to impose greater sanctions than the FRC, was recommended by the Kingman Review. The Kingman Review was an independent review of the FRC in 2018, led by Sir John Kingman, which was commissioned following growing criticism of the FRC in the aftermath of a number of high-profile corporate failures including that of Carillion plc. In addition to regulating the accountancy profession, the ARGA will (amongst other things) have an extended remit covering corporate reporting and it will take responsibility for the UK Corporate Governance Code and UK Stewardship Code. On 11 March 2019, the Government confirmed that the ARGA will be established in place of the FRC and on the same date it announced a consultation process; however, the enacting legislation has yet to be published.

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Chapter 20

Money laundering

INTRODUCTION 20.01 This chapter considers money laundering law and practice in the UK and its application to the accountancy sector. 20.02 Accountants, in common with certain other professionals, are regarded as gatekeepers whose services can facilitate others to launder money. For this reason, accountancy firms are not only subject to the general law prohibitions on money laundering contained in the Proceeds of Crime Act 2002 (POCA) but also fall within the regulated sector under the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017).1 Accountants must therefore have compliant anti-money laundering procedures in place to mitigate the risk that they will be used to facilitate money laundering. 1 SI 2017/692.

20.03 Recent events such as the Panama Papers have highlighted the role that professional services firms, including accountants, can play in facilitating wrong-doing and, in particular, the criminal evasion of taxes. The Panama Papers involved the leak of some 11.5 million documents from Panamanian law firm (and corporate services provider), Mossack Fonseca, in April 2016. These documents provided client information on around 214,000 offshore entities, some of which are alleged to have been used for the purposes of facilitating unlawful tax evasion and other criminality. The Panama Papers leak is one of a number of scandals that have shone a light on the inner workings of some parts of the professional services industry. The issues that have come to light have influenced government policy and legislation. The result of this has been increased scrutiny of the accountancy profession and new laws and regulations that impact on and create obligations for the sector. 20.04 New requirements include important developments such as the Criminal Finances Act 2017 (CFA 2017), which introduced a number of measures targeting money laundering, corruption and terrorist financing. These include the corporate offence of failing to prevent the facilitation of tax evasion, which requires firms to implement reasonable prevention procedures to mitigate the risk of facilitating tax evasion. 449

20.05 Money laundering 20.05 The use of the professional services sector to facilitate money laundering has also attracted attention at the European Union level. It prompted the European Parliament to carry out an inquiry into money laundering, tax avoidance and tax evasion in the course of 2017. The European Parliament’s Report on its inquiry raised concerns that accountancy firms had played a role in recent tax scandals. The Report further concluded that in the context of anti-money laundering compliance, auditors and tax advisors remained insufficiently defined and regulated under the laws of the European Union and in the laws of Member States. 20.06 The accountancy sector is accordingly under increased focus for anti-money laundering compliance issues. Under reg 8 of the MLR 2017: ‘auditors, external accountants and tax advisors and any other person that undertakes to provide, directly or by means of other persons to which that person is related, material aid, assistance or advice on tax matters as principal business or professional activity’ are subject to specific requirements to have in place policies, controls and procedures to combat the risk that they will be used to facilitate money laundering. 20.07 In developing anti-money laundering compliance procedures, it is important for the sector to understand its susceptibility to money laundering and, accordingly, the reasons why the profession has been brought within the regulated sector. The accounting sector is extremely diverse, more so than many other professions. Risks posed to firms will therefore differ considerably across the sector. The UK is an attractive destination for money launderers, notwithstanding its long-established anti-money laundering legal and supervisory framework. The UK Government’s National Risk Assessment on Money Laundering and Terrorist Financing of October 2017 (Risk Assessment) found that the size and complexity of the UK’s financial sector mean that it is more exposed to criminality than financial sectors in other jurisdictions, including abuse enabled by professionals in the legal and accounting sectors. The Risk Assessment found that accountancy services remain attractive to criminals due to the ability to use them to gain legitimacy, create corporate structures or transfer value. The Risk Assessment found there to be a high risk of money laundering for accountancy services. On the other hand, the risk of terrorist financing was assessed as being low. Criticisms have been made of the UK’s supervisory structure, with Transparency International advocating in its ‘Don’t Look, Won’t Find’ Report that there should be a ‘radical overhaul’ of the UK’s anti-money laundering system. The accountancy profession in the UK is, in particular, subject to supervision by a patchwork of different supervisory bodies.

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Introduction 20.11 20.08 The Financial Action Task Force (FATF),1 in its Guidance to Accountants on the ‘risk based approach’ to money laundering, identified the following services provided by accountants as most useful to potential money launderers and therefore presenting the greatest vulnerabilities: (i)

financial and tax advice – criminals with a large amount of money to invest may pose as individuals hoping to minimise their tax liabilities or to place assets out of reach in order to avoid future liabilities;

(ii) the creation of corporate vehicles or other complex legal arrangements (trusts, for example) – such structures may serve to confuse or disguise the links between the proceeds of crime and the perpetrator; (iii) buying or selling of property – property transfers can serve as either the cover for transfers of criminal property or may represent the final investment of these proceeds after their having passed through the laundering process; (iv) performing financial transactions – accountants may be involved in effecting financial transactions for clients (for example, involving the purchase and sale of securities which involve criminal proceeds); and (v) providing introductions to financial institutions – accountants may lend credibility to clients by introducing them to financial institutions. 1 The FATF is an inter-governmental body which sets standards for anti-money laundering and terrorist financing laws internationally. National anti-money laundering legislation is influenced by FATF’s Recommendations on Combatting Money Laundering and the Finance of Terrorism and Proliferation. Recommendation 12 of the ‘old’ Recommendations (now Recommendation 22) required that designated non-financial businesses and professionals (including accountants) be subject to additional anti-money laundering requirements.

20.09 It is in relation to these areas, therefore, that accountancy firms should focus their policies and procedures to mitigate the risk of facilitating money laundering and ensuring that they comply with their obligations under the MLR 2017. 20.10 The current UK anti-money laundering (AML) and counter-terrorism financing (CTF) framework has been shaped to a large extent by the five European Money Laundering Directives,1 which have sought to implement the recommendations made by the Financial Action Task Force (FATF). 1 Directives 91/308/EEC, 2001/97/EC, 2005/60/EC, Directive 2015/849/EU and Directive (EU) 2018/843.

20.11 The law in the UK is based on the EU’s Fourth Money Laundering Directive1 (4MLD) as amended by the Fifth Money Laundering Directive (5MLD).2 The 4MLD was transposed in the UK through the MLR 2017, which came into force on 26 June 2017. These Regulations built on the framework established by the earlier Money Laundering Regulations 2007 451

20.11A Money laundering which they replaced. They have in particular focused more on a risk-based approach whilst preserving the architecture of the 2007 Regulations. 1 Directive (EU) 2015/849 of the European Parliament and of the Council of 20 May 2015 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, amending Regulation (EU) No 648/2012 of the European Parliament and of the Council, and repealing Directive 2005/60/EC of the European Parliament and of the Council and Commission Directive 2006/70/EC. 2 Directive (EU) 2018/843 of the European Parliament and of the Council of 30 May 2018 amending Directive (EU) 2015/849 on the prevention of the use of the financial system for the purposes of money laundering or terrorist financing, and amending Directives 2009/138/EC and 2013/36/EU (Text with EEA relevance).

20.11A The UK has, of course, now left the EU and will no longer be legally bound by EU Directives or other EU legislation. Anti-Money Laundering and Counter Terrorist Financing measures were addressed in the Trade and Co-operation Agreement entered into between the UK and the European Union. The provisions in the Agreement principally cover the commitments by both parties to ensure transparency of beneficial ownership of corporate bodies and other legal entities and for the parties’ respective authorities to co-operate in investigations and proceedings relating to the freezing and confiscation of property in criminal matters. In the run up to the UK formally leaving the European Union and the end of the Transition Period, the UK Government embarked on a process of onshoring EU legislation and ensuring that appropriate amendments were made to EU derived legislation to ensure that it could function in the post-Brexit era. In the case of the EU Money Laundering Directives and the MLR 2017, the Money Laundering and Terrorist Financing (Amendment) (EU Exit) Regulations 2020, SI 2020/991 updated the existing Money Laundering Regulations 2017. The principal amendments introduced by the provisions relate to trusts, in particular requiring additional trusts to be included on the trust register and extending the duty to report discrepancies in beneficial ownership to trusts (see regs 5 and 7). 20.11B The EU is in the process of rapid consolidation of anti-money laundering supervision and laws. The EU’s Sixth Money Laundering Directive (Directive 2018/1673 on combating money laundering by criminal law) (6MLD) will harmonise criminal law offences and sanctions across the EU. It will not, however, be implemented in the UK. The UK Government expressed the view that the UK was largely compliant with the provisions of the 6MLD, which as a criminal law provision would not have applied in the UK prior to Brexit in any event, unless the UK had expressly opted in to it. Interestingly, Article 7 of 6MLD contains a novel provision for the ‘Liability of Legal Persons’ which imposes corporate criminal liability where a company has failed to properly supervise or control senior staff who have committed a money laundering offence. Since this applies to all business sectors and not just the regulated sector, it is likely to go beyond existing UK criminal law. The UK is, however, investigating a new corporate criminal liability offence of failure to prevent economic crime. 452

Risk assessment 20.16 20.11C Although the UK has left the EU, the background to the development of the EU Directives remains an important consideration in understanding the development of the UK’s regulations. 20.12 The terrorist attacks in Europe at the end of 2015 and the Panama Papers revelations in early 2016 prompted the EU to amend the 4MLD to address specific concerns arising from these events. The 5MLD set out amendments to the 4MLD and was transposed in the UK through the Money Laundering and Terrorist Financing (Amendment) Regulations 2019,1 which came into force on 10 January 2020, shortly before the UK left the EU. 1 SI 2019/1511.

20.13 This chapter provides an overview of the obligations that apply to accountants under the UK’s AML framework. It also provides an overview of requirements related to terrorist financing contained in the Terrorism Act 2000, which mirror the requirements of POCA in many respects. 20.14 A key part of the AML framework is the supervisory structure created by the MLR 2017 whereby firms which fall within the scope of the regulations must be supervised for compliance by HMRC, the Financial Conduct Authority (FCA) or a professional body such as the Institute for Chartered Accountants for England and Wales (ICAEW). This chapter also considers the supervisory structure and guidance that has been issued for the sector as to how it should go about complying with its legal and regulatory obligations.

RISK ASSESSMENT 20.15 As already noted, a key aspect of AML compliance is the ‘risk-based approach’ which requires that compliance procedures are calibrated according to the risks presented by particular clients, projects, transactions and products. The 4MLD has resulted in increased focus on firms implementing a risk-based approach. In order to assist firms in doing this, national governments have been required to publish risk assessments of money laundering and terrorist financing risks so that firms can combine this macro-level assessment of risk with their own micro-level assessment. 20.16 The UK’s Home Office published the latest UK National Risk Assessment of Money Laundering and Terrorist Financing Risks in December 2020. Chapter 6 of the Risk Assessment covers accountancy service providers. The Risk Assessment categorises this sector as having a ‘high’ overall risk. Although the sector overall is rated ‘high’ risk, the risks posed to firms should also be considered on an individual basis.

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20.17 Money laundering 20.17 The key threats and vulnerabilities that the Risk Assessment identified for accountants are as follows: (i)

Company formation and termination – the Risk Assessment identifies company formation and termination as the accountancy sector’s highest risk. The Home Office states in the Risk Assessment that company formation continues to be exploited by criminals to mask the ownership of assets or the transfer of assets between persons. These services are assessed to be higher risk where they are offered by accountants as opposed to specialist company formation agents. This is because criminals may also access and exploit an accountant’s wider services. The Risk Assessment also identifies the provision of company liquidation and associated services as an area of risk.

(ii) False accounting – the Risk Assessment notes that accountancy services have also been exploited to provide a veneer of legitimacy to falsified accounts or other documents used to conceal the source of funds. In some cases this has been facilitated intentionally by accounting professionals, whereas in other cases it has been inadvertent. The Risk Assessment states that the risk of false accounting can arise in relation to both high-end and cash-based money laundering, with accountants involved in the account preparation or review processes for both small and large businesses. (iii) Payroll services – the Risk Assessment states that payroll services can provide criminals with a legitimate looking record of money movement. The risk of payroll services being used to launder funds is considered to be high. (iv) Misuse of client accounts – the Risk Assessment identifies that there is a risk posed by accountants performing high value financial transactions for clients with no clear business rationale involved, allowing criminals to transfer funds through bank accounts with little scrutiny as a means to complicate the audit trail. (v) Tax services – as already noted, there is an increased focus on the provision of tax-related services. The Risk Assessment states that while tax services are unlikely to be used to launder the proceeds of other crimes, they are used to facilitate tax evasion and VAT fraud, the proceeds of which constitute criminal property under POCA. (vi) Supervision, compliance and law enforcement response – the Risk Assessment notes that the risk of inconsistent supervision of accountancy firms remains, albeit that the Government has taken action to promote more effective supervision through the introduction of the Office for Professional Body Anti-Money Laundering Supervision, an office within the Financial Conduct Authority (see para 20.121, below).

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Proceeds of Crime Act 2002 20.21 20.18 The areas of risk identified by the Home Office in the UK’s Risk Assessment are similar in scope to the areas identified by the FATF in its Guidance to Accountants which is referred to at para 20.08, above. Under reg 18 of the MLR 2017, accountancy firms must take appropriate steps to identify and assess the risks of money laundering and terrorist financing to which their business is subject. They must also prepare a written risk assessment taking account of risk factors relating to their customers, the countries or geographic areas in which they operate, their products or services, their transactions and delivery channels.

PROCEEDS OF CRIME ACT 2002 20.19 The principal UK criminal offences of money laundering are contained in the Proceeds of Crime Act 2002 (POCA). This is a lengthy Act and the money laundering offences are to be found in Pt 7 (POCA, ss 327–340). The intention of POCA was to consolidate the fragmented legislative structure that previously existed and to reform the offences relating to money laundering on a UK-wide basis. POCA sets out the legal definition of the term ‘money laundering’ and sets out the specific money laundering offences. In summary, POCA establishes that a person will commit a money laundering offence if he deals in any of the ways specified in ss 327–329 (see below) with property that he knows or suspects is the product of criminal conduct as committed either in the UK or elsewhere. A person also commits an offence if he attempts, conspires or incites a person to commit one of the offences or aids, abets, counsels or procures the commission of any of them. 20.20 The offences under POCA, ss 327–329 have been described as ‘parasitic’ offences. This is because they are predicated on the commission of another offence which has yielded proceeds, which then become the subject of a money laundering offence. The offences under POCA, ss 327–329 apply generally to all individuals and entities. POCA also contains specific offences which apply only to businesses in the ‘regulated sector’. The ‘regulated sector’ is a subset of businesses (corresponding to the business sectors subject to the MLR 2017) that have specific AML responsibilities. Offences that apply in particular to the ‘regulated sector’ are the offences of ‘Failure to disclose: regulated sector’ (s 330), ‘Failure to disclose: nominated officers in the regulated sector’ (s 331) and ‘Tipping off: regulated sector’ (s 333A).

The POCA regulated sector 20.21 The definition of ‘business in the regulated sector’ is set out in Sch 9 to POCA. Businesses which fall within this definition include: (i)

the carrying on of statutory audit work by a statutory auditor under Companies Act 2006, Pt 42; 455

20.22 Money laundering (ii) the activities of a person appointed to act as an insolvency practitioner under Insolvency Act 1986, s 388; (iii) the provision of accountancy services by way of business; (iv) the provision of advice on or assistance with tax affairs, whether provided directly or through a third party; (v) the creation, operation or management of trusts, companies or other similar structures; (vi) the carrying on of local audit work within the meaning of Sch 5 to the Local Audit and Accountability Act 2014 by any firm or individual who is a local auditor within the meaning of that Act; and (vii) acting or arranging for another person to act as a director or secretary of a company, as a partner of a partnership or in a similar position in relation to other legal persons, providing a registered office, business address, correspondence or administrative address or other related services for a company, partnership or other legal person or arrangement and acting or arranging for another person to act as a trustee of an express trust or similar legal arrangement or nominee shareholder for a person other than a company whose securities are listed on a regulated market. In this chapter, reference to accountants can be taken to read accountants and auditors working in the regulated sector.

Principal money laundering offences 20.22 POCA sets out three principal money laundering offences, which are: (i) concealing, disguising, converting, transferring or removing from the jurisdiction property which is, or represents, criminal property (POCA, s 327); (ii) entering into, or becoming concerned in, arrangements that a person knows or suspects will facilitate another person’s acquisition, retention, use or control of criminal property (POCA, s 328); and (iii) acquiring, possessing or using criminal property (POCA, s 329). 20.23 A key ingredient of the above offences is that the conduct in question must be carried out in connection with ‘criminal property’. The term ‘criminal property’ is defined in s 340 of POCA and, broadly, covers property that constitutes a person’s benefit from ‘criminal conduct’. The concepts of ‘criminal property’ and ‘criminal conduct’ are addressed further in paras 20.33–20.38, below. 20.24 The offences under ss 327–329 can only be committed where a person knows or suspects that the property involved is criminal property or in the case 456

Proceeds of Crime Act 2002 20.30 of the offence under s 328 of POCA, that the person knows or suspects that the arrangements concerned facilitate the acquisition, retention, use or control of criminal property. Knowledge or suspicion for these purposes is ‘subjective’ so that a person must actually know or suspect the relevant matters in order to commit an offence. 20.25 The UK operates a consent regime whereby a person can avoid the commission of one of the principal money laundering offences by making an authorised disclosure under POCA, s 338 and obtaining an appropriate consent to proceed. This applies in the case of each of the offences under ss 327–329 of POCA. The consent regime is covered in paras 20.58–20.63, below.

Section 327: concealing, disguising or converting 20.26 Under s 327(1) of POCA a person commits an offence if he conceals, disguises, converts, transfers or removes criminal property from the jurisdiction.1 Concealing or disguising criminal property includes concealing or disguising its nature, source, location, deposition, movement or ownership or any rights with respect to it.2 1 The jurisdictions being respectively England and Wales, Scotland and Northern Ireland. 2 POCA, s 327(3).

20.27 Prosecutions brought under s 327 of POCA cover a wide variety of factual circumstances. These range from cases involving employees of an investment management firm who set up bogus accounts into which they received proceeds from the redemption of customers’ investments1 to cases involving the conversion of cash from the sale of drugs.2 1 R v Price [2008] EWCA Crim 590. 2 R v Rourke [2008] EWCA Crim 233.

20.28 Section 327 of POCA has also been used to prosecute cases involving the proceeds of tax evasion, theft, bribery and fraud.

Section 328: concerned in arrangements 20.29 This section makes it an offence for a person to enter into or become concerned in an arrangement that he knows or suspects facilitates the acquisition, retention, use or control of criminal property by or on behalf of another person. 20.30 This offence may typically be committed by a third party which becomes involved in another person’s wrongdoing.1 For professionals such as accountants, the offence under POCA, s 328 is one which is most likely 457

20.31 Money laundering to be relevant to their activities as it criminalises the provision of services to clients where the services being provided facilitate the client’s or another party’s acquisition, retention, use or control of criminal property. 1 For example K Ltd v National Westminster Bank [2007] 1 WLR 311.

20.31 In order for an offence to be committed under POCA, s 328, a person must enter into or be concerned in an arrangement that in fact facilitates the acquisition, retention, use or control of criminal property (it is not sufficient that the offender merely suspects that it does). In R v GH,1 the Supreme Court found that it does not matter whether criminal property exists when the relevant arrangement is entered into. What matters is that the property should be criminal property when the arrangement operates on it. Accordingly, an accountant’s involvement in arrangements which are subsequently used to launder money will result in the commission of an offence at the time when the criminal property is used in the arrangements. 1 [2015] 1 WLR 2126.

Section 329: acquisition, use and possession 20.32 Under POCA, s 329 it is an offence to acquire, use or have possession of criminal property. An offence can be committed by a person where he acquires, uses or has possession of the proceeds of his own criminal conduct. A defence is provided in s 329(2)(c) so that an offence is not committed where a person acquires, uses or has possession of property for adequate consideration. This defence is necessary in order to protect third parties who receive payment from funds that constitute criminal property. As indicated, the defence is only available where a person gives ‘adequate consideration’. This is an important limitation. Consideration will not be regarded as ‘adequate’ where the value of the consideration is significantly less than the value of the property. Moreover, the defence is not available where a person provides goods or services which he knows or suspects may help another to carry out criminal conduct.

Criminal conduct and criminal property 20.33 The legal understanding of the term ‘money laundering’ revolves around the central concept of ‘criminal property’. In order for one of the principal money laundering offences to be committed, some act must be carried out in relation to ‘criminal property’. Under POCA, s 340(3), there are two main elements to criminal property: ●●

the property1 must constitute a person’s benefit from criminal conduct or it must represent such a benefit in whole or in part, directly or indirectly; and 458

Proceeds of Crime Act 2002 20.37 ●●

the alleged offender must know or suspect that the property constitutes criminal property. For these purposes, knowledge is actual knowledge and a person will be regarded as having a suspicion where it is more than merely fanciful that the relevant facts exist.2 In both cases, the test is a subjective one (ie whether the person in fact knows or suspects) and not an objective test.

1 Property is defined in POCA, s 340(9) as all property wherever situated, including cash, things in action and other intangible or incorporeal property. 2 See the case of Da Silva [1996] EWCA Crim 1654, where the court said that: ‘It seems to us that the essential element in the word “suspect” and its affiliates, in this context, is that the defendant must think that there is a possibility, which is more than fanciful, that the relevant facts exist. A vague feeling of unease would not suffice.’

20.34 Property that is alleged to be criminal property must have that quality at the time of the commission of the money laundering offence. It must therefore be obtained as a result of or in connection with criminal conduct that is separate from the conduct alleged to constitute the money laundering offence. In other words, there must be some separate underlying criminal conduct that produces criminal property, before a money laundering offence can be committed. 20.35 Under s 340(4) it is immaterial who carried out the conduct, who benefited from it and when the conduct was engaged in. Property must be criminal property at the time of commission of the principal money laundering offence. 20.36 Criminal conduct is defined under POCA, s 340(2) as conduct that constitutes an offence in any part of the UK or conduct which would constitute an offence in any part of the UK if it occurred there. The definition of criminal conduct therefore includes conduct committed abroad, provided that this would have resulted in the commission of an offence if carried on in the UK and includes every crime on the statute book regardless of the seriousness of the crime. As a result, accountants in the UK have to be alert to a wide range of potential criminal activity. Some limits are imposed on the jurisdictional scope of the offences under POCA, ss 327–329. For minor offences (ie those punishable with a term of imprisonment of 12 months or less) POCA effectively requires dual criminality (ie that the underlying criminal conduct that gives rise to the criminal property being laundered must be illegal both in the UK and the country in which the conduct occurred). Accordingly, with some exceptions, for such minor offences no offence is committed where the alleged offender knew or believed that the underlying conduct that occurred outside the UK was not unlawful under the criminal law of the country in which the conduct occurred. 20.37 The jurisdictional scope of the principal money laundering offences under POCA has been the subject of some debate. Broadly, criminal law has been applied on a territorial basis meaning that some element of the offence 459

20.38 Money laundering must occur in the UK for the conduct to be susceptible to prosecution in the UK. With money laundering offences, this has meant that while the underlying conduct giving rise to criminal proceeds may occur outside the UK, some element of the money laundering offence (eg arrangements relating to the laundering of the criminal funds or the transfer of those funds) must take place in the UK for the commission of an offence in the UK. The courts have, however, started to adopt a more flexible approach. In the case of R v Rogers,1 the Court of Appeal found that Parliament had intended POCA to have extraterritorial effect and that a person who permitted use of his bank account in Spain for the receipt and withdrawal of criminally derived monies could be guilty of an offence under POCA, s 327 of converting criminal property, even though the conduct in question had taken place outside the UK. 1 [2014] EWCA Crim 1680.

20.38 Some uncertainty formerly existed as to whether tax evasion constitutes a predicate offence for money laundering purposes. This is on the basis that the funds in question are derived from a legitimate source and do not have a criminal origin. However, the case law in the UK has made clear that where a person engages in tax evasion, the tax not paid will constitute the proceeds of crime. This is on the basis that the person would have made a false declaration to HMRC and/or otherwise committed the offence of cheating the Revenue. Where a person cheats the Revenue by not paying tax on undeclared takings and obtains a pecuniary advantage as a result of criminal conduct this can amount to ‘criminal property’ within the meaning of POCA.1 In particular, POCA, s 340(6) provides that if a person obtains a pecuniary advantage as a result of or in connection with conduct, he is taken to obtain as a result of or in connection with the conduct of a sum of money equal to the value of the pecuniary advantage. A person who unlawfully cheats the Revenue therefore obtains a benefit within POCA, s 340(3). 1 R v IK [2007] EWCA Crim 491.

Disclosure and the consent regime 20.39 Where a person considers that he has committed a breach of any of the principal money laundering offences, or may get into a situation where a breach could occur, a reporting obligation is likely to arise. 20.40 Under POCA, s 330, for a business in the regulated sector, an offence is committed unless suspicions of money laundering (knowledge, suspicion or reasonable grounds to suspect that another person is engaged in money laundering) are disclosed to the National Crime Agency (NCA) or to a Nominated Officer (being a person nominated internally to receive reports of such knowledge or suspicion) with a view to the Nominated Officer assessing whether to onward report to the NCA. 460

Proceeds of Crime Act 2002 20.47 20.41 A disclosure might also be made as an ‘authorised disclosure’ under POCA, s 338. A disclosure is an authorised disclosure if it is a disclosure to a constable (including NCA), a customs officer or a Nominated Officer that property is criminal property. An authorised disclosure is made where a reporter is seeking an appropriate consent to proceed with an act that would otherwise constitute a money laundering offence under POCA, ss 327–329 (a prohibited act). 20.42 An authorised disclosure may be made while doing the prohibited act provided that the person concerned had started to do the act at a time when he did not know or suspect that the act was prohibited. In such circumstances the disclosure must be made on the person’s own initiative as soon as practicable after knowing or suspecting that property constitutes or represents a person’s benefit from criminal conduct: POCA, s 338(2A). 20.43 The disclosure may also be made after the person carries out the prohibited act. In order for this to apply the person concerned must have a reasonable excuse for failing to make the disclosure before doing the act and the disclosure must be made as soon as practicable. Where for example a person does not realise when he starts to conduct a transaction that criminal property was involved the onus is on the person concerned to make an authorised disclosure as soon as possible when he does suspect. 20.44 According to the Suspicious Activity Reports (SARs) Annual Report for 2019, in the period April 2018 to March 2019 a total of 478,437 suspicious activity reports were made and an appropriate consent was sought in 34,543 cases.

Reporting suspicions – the regulated sector and POCA, s 330 20.45 For accountants in the regulated sector, the key requirement in POCA, s 330 is that a report must be made as soon as possible if: ●●

you know or suspect or have reasonable grounds for knowing or suspecting that someone is engaged in money laundering; and

●●

the information on which you base your knowledge or suspicion has come to you in the course of your business in the regulated sector (ie in the course of providing accountancy services).

20.46 The offence under POCA, s 330 can be committed both where a person has actual knowledge or suspicion and where a person has reasonable grounds to suspect money laundering. 20.47 The standard of ‘reasonable grounds’ is an objective standard. Liability can arise under s 330 even where an accountant does not in fact know or 461

20.48 Money laundering suspect the relevant matters. It is sufficient for the prosecution to show that the accountant should have known or suspected. 20.48 The UK government1 justified this standard of liability on the basis that persons who are employed in the regulated sector, should be expected to exercise a higher level of diligence in handling transactions than those employed in other businesses. The introduction of such a wide failure to disclose offence was resisted by several accountancy industry bodies. 1 Proceeds of Crime Consultation on Draft Legislation (Home Office, 2001).

20.49 Where a firm carries on activities, some of which are in the regulated sector and some of which are not, only the employees carrying on the regulated sector activities are intended to be caught by the failure to disclose offence. The knowledge or suspicion may relate to a client, counterparty or any other person provided that the information or other matter giving rise to the knowledge or suspicion comes to a person in the course of the firm’s regulated sector business. 20.50 In order to avoid the commission of an offence the accountant must make the required disclosure1 to a Nominated Officer (an internal disclosure) or the NCA as soon as is practicable. A Nominated Officer is a person nominated internally to receive disclosures under POCA, s 330(9) (see para 20.57, below). 1 Defined in s 330(5) of POCA.

20.51 From the perspective of the accountant, the act of disclosure to the Nominated Officer will be sufficient to discharge the accountant’s employee duties under POCA, s 330. Once a disclosure has been made, the Nominated Officer must consider whether it is necessary to make an onward disclosure to the NCA. Section 331 of POCA sets out a specific offence for Nominated Officers who will themselves be guilty of an offence if after having received notification pursuant to s 330, they fail to make a suspicious activity report to the NCA. 20.52 Section 330 contains certain exceptions to liability for the failure to disclose offence. Under s 330(7A) of POCA, the offence of failure to disclose is not committed where a person in the regulated sector believes on reasonable grounds that the money laundering of which he has knowledge or suspicion is occurring outside the UK and is not unlawful under the criminal law in the jurisdiction in which it is taking place. This exception is subject to the condition that the conduct in question must not be of a description prescribed in an order made by the Secretary of State. 20.53 Under POCA, s 330(6)(a), an offence is also not committed where a person has a reasonable excuse for not making the required disclosure. There is considerable uncertainty as to what would constitute a reasonable excuse. 462

Proceeds of Crime Act 2002 20.57 It has been suggested that a defence might be successful where the accountant has been subjected to threats and there would be violent consequences if he did report, but it should be said that care would need to be exercised before relying on this provision. 20.54 Where an accountant in the regulated sector has not received training on identifying suspicious transactions, this may found the basis of a defence for that employee. Under POCA, s 330(7), where the person concerned has not been provided with suitable training by his employer and did not have actual knowledge or suspicion of money laundering, no offence will be committed. However, a failure by an accounting firm in the regulated sector to provide training to employees may mean that the firm is in breach of its obligations under the MLR 2017. 20.55 Finally, legal advisers or a ‘relevant professional adviser’ are exempt from reporting if the information on which they would otherwise base their knowledge or suspicion came their way in privileged circumstances. A ‘relevant professional adviser’ includes an accountant, auditor or tax adviser who is a member of a relevant professional body. The scope of the exemption for information communicated in privileged circumstances was expanded to cover such relevant professional advisers following requests from the accountancy profession. 20.56 Care should be taken to establish whether privilege has attached as it only applies where information is communicated in connection with the giving by the adviser of legal advice to the client or by a person seeking legal advice or by a person in connection with legal proceedings or contemplated proceedings. Examples of situations could be advising directors on legal duties and liabilities, for example, wrongful trading under the Insolvency Act or perhaps giving advice to a client on employment law. An accountant might meet the litigation advice condition if he represents a client at a tax tribunal.

Nominated Officers 20.57 A SAR may be made externally to the NCA or internally to the accountancy firm’s Nominated Officer. A Nominated Officer is the individual who has been nominated to receive reports of money laundering suspicions by his firm. In most cases disclosures will in the first instance be made internally to the Nominated Officer and in most cases from the perspective of the employee that will be sufficient to discharge the employees duties under POCA, s 330. The role of the Nominated Officer in this connection is governed under POCA, s 331, which sets out a specific offence for Nominated Officers who will themselves be guilty of an offence if after having received a SAR they fail to make a report to the NCA where the SAR gives rise to reasonable grounds for knowing or suspecting money laundering. 463

20.58 Money laundering

Consent 20.58 Upon the making of a disclosure to the NCA, the NCA has an initial notice period of seven working days, starting with the first working day after the disclosure is made, in which to consider the request for consent. Consent must either be given or refused within this seven-day notice period. If consent is not refused within this period, there will be a deemed consent to the carrying out of the prohibited act. If consent is refused, a further 31-day moratorium period will apply. Unless consent is refused again within this period, there will be a deemed consent to the carrying out of the act. As explained further below, where consent has been refused, NCA must keep its decision under review during the moratorium period and must give a consent where there is no longer any good reason for withholding it. This period of time may be extended on application to the court under POCA 2002, s 336A. 20.59 Where a disclosure is made to the Nominated Officer, the Nominated Officer may grant consent to doing the prohibited act where the Nominated Officer has made a disclosure to the NCA and consent has been provided or the notice period or moratorium period referred to above has expired. The Nominated Officer will commit an offence if he provides consent without having obtained the consent from the NCA.

Effect of consent 20.60 A consent to perform a prohibited act will only protect the person who has obtained the consent from otherwise committing a principal money laundering offence. A consent does not protect against the commission of some other criminal offence. 20.61 It will also not provide protection from civil claims against a firm that transfers property that is suspected to be criminal property (for example, because it suspects the property to be the proceeds of a fraud or other misappropriation of assets) by the owner of the assets. 20.62 Accordingly, the consent from the NCA will not necessarily protect an accountant or an accountancy firm from the risk of constructive trust liability. In such situations it would be prudent to approach the court for directions and/or a declaration from the court under CPR 40.20 (of the Court’s Civil Procedure Rules). Directions and/or a declaration may be sought in order to avoid constructive trust liability under the civil law. Moreover, the fact that the firm has made a SAR and received a consent to act may in itself be sufficient to rebut an assertion that it had somehow acted dishonestly in transferring assets or funds. 20.63 The operation of the consent regime has given rise to considerable practical problems, particularly for banks, although also relevant to accounting firms. 464

Proceeds of Crime Act 2002 20.66 Once a SAR is made the requirement not to continue involvement in a particular matter until consent for that involvement is forthcoming can present a significant challenge. For example the firm is unable to operate the client’s account as this could constitute a principal money laundering offence and potentially expose the firm to civil liability as a constructive trustee. On the other hand a failure to implement a client’s instructions could constitute a breach of the client’s mandate and result in legal action against the firm for an injunction requiring the firm to comply with the mandate or for damages. From the perspective of an accountancy firm, the continued provision of services could result in the firm committing an offence under POCA, s 328 of being concerned in arrangements. 20.64 The issues were more acute prior to the introduction of the notice and moratorium periods contained in POCA. The leading case on issues pre POCA is the Bank of Scotland v A Ltd.1 In this case the Bank suspected that an account in the name of A Ltd was being used to launder criminal property. The Bank was concerned that paying funds in accordance with A Ltd’s instructions could result in a money laundering offence and possible constructive trust liability but refusing to pay could result in a tipping off offence as well as a civil claim against it for breach of mandate. The Court of Appeal held that the appropriate course for the bank was to seek directions from the court with the Serious Fraud Office, rather than the customer, as respondent. The court could then use its powers to grant interim declarations in proceedings setting out the extent of the information which could be revealed to the customer. 1 [2001] 1 WLR 751.

20.65 Post POCA there have been several breach of contract claims brought by customers who have suffered an alleged loss as a result of a bank restricting access to their funds due to a suspicion of money laundering. The courts have given a degree of protection by establishing that the ‘relevant suspicion’ need not be based on reasonable grounds but is a subjective suspicion.1 Further, in Iraj Parvizi v Barclays Bank plc,2 Master Bragge confirmed that suspicion need not be reasoned or thought out provided it was ‘a clear belief’ held by the disclosing person. 1 Shah v HSBC Private Bank (UK) Ltd [2012] EWHC 1283. 2 [2014] EWHC B2 (QB).

20.66 However, the Serious Crime Act 2015 should render the debate about proof of suspicion obsolete by s 37, which came into force on 1 June 2015. There is now a statutory exclusion of civil liability for an authorised disclosure of suspicions of money laundering. This is achieved through amending s 338 of POCA to include the following additional words: ‘where an authorised disclosure is made in good faith, no civil liability arises in respect of the disclosure on the part of the person by or on whose behalf it is made.’ 465

20.67 Money laundering This should remove the emphasis of any prospective claim away from proof of suspicion; instead the question becomes, was the disclosure made in good faith?

FAILURE TO PREVENT THE FACILITATION OF TAX EVASION UNDER THE CRIMINAL FINANCES ACT 2017 20.67 The CFA 2017 was introduced as part of the Government’s reform of the UK’s anti-money laundering framework. It made a number of amendments to Part 5 of POCA. In addition to this, Part 3 of the CFA 2017 established two new corporate criminal offences of failing to prevent facilitation of UK and foreign tax evasion.1 Whilst the first offence applies to all businesses, wherever located, in respect of the facilitation of UK tax evasion, the second offence applies to businesses with a UK connection in respect of the facilitation of non-UK tax evasion. The offences are strict liability and require the existence of three elements, as described in more detail below. There is a statutory defence where at the time of the offence the relevant body had reasonable prevention procedures in place to prevent tax evasion facilitation offences or where it is unreasonable to expect such procedures. 1 CFA 2017, Pt 3 (ss 44–52).

20.68 The UK Government’s Second National Risk Assessment of Money Laundering and Terrorist Financing Risks identifies tax services as one of the main areas of risk for the accounting profession. The Government, in particular, refers to the risk that accountants can be utilised to facilitate tax evasion and VAT fraud. Part 3 of the CFA 2017 is aimed at ensuring that firms have reasonable preventative measures in place to mitigate this risk. The requirements of Part 3 of the CFA 2017 overlap with anti-money laundering requirements given that the procedures of tax evasion constitute criminal property under POCA. 20.69 Under the CFA 2017, a body corporate or partnership will be guilty of an offence if: ●●

a tax evasion offence is committed by a taxpayer (the tax evader);

●●

the offence is criminally facilitated by a third party (the facilitator) who is associated with the body corporate or partnership; and

●●

the body corporate or partnership has failed to prevent that facilitation.

20.70 ‘Associated persons’ for these purposes are employees, agents and other persons who perform services for or on behalf of the business, such as contractors, suppliers, agents and intermediaries. The associated person must have criminally facilitated the tax evasion, in its capacity as an associated

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Failure to prevent the facilitation of tax evasion under CFA 2017 20.75 person, providing services to the business. Effectively, bodies corporate or partnerships will be vicariously liable for the criminal acts of their employees and others who act for or represent them. 20.71 However, to be guilty of the corporate offence, the last limb requires that the corporation has failed to prevent the facilitation. This means that if a corporation had put in place reasonable measures to prevent the facilitation, or where it is unreasonable to expect such procedures, it can escape liability. 20.72 HMRC has published guidance on the types of processes and procedures that a business can put in place to limit the risk of its ‘associated persons’ criminally facilitating tax evasion.1 Under this guidance, HMRC explains that there are six guiding principles when establishing reasonable measures to prevent the facilitation of tax evasion. These are: ●●

risk assessment;

●●

proportionality of risk-based prevention procedures;

●●

top level commitment;

●●

due diligence;

●●

communication, including training; and

●●

monitoring and review.

As noted above, undertaking a thorough risk assessment is key to AML policies. Businesses are required to undertake a rigorous risk assessment to identify the risks of facilitation of tax evasion within the organisation and the potential gaps in the existing control environment and policies. Robust measures and procedures should be based on this risk assessment. In addition, support from the organisation’s board and training its staff appropriately will be essential. 1 HMRC Guidance, ‘Failing to prevent criminal facilitation of tax evasion – government guidance on the criminal offences’, 16 September 2017, last updated 18 May 2018.

20.73 In addition to the three stages above, the foreign offence will be made out if there is a UK nexus and dual criminality. 20.74 A UK nexus will be established if the relevant body is (i) incorporated in the UK, (ii) carries on business in the UK, or (iii) where any of the conduct constituting the facilitation of the foreign tax evasion takes place in the UK. 20.75 Dual criminality means that there is an equivalent offence to the tax evasion and facilitation in the local law, so that the conduct is illegal under both local law and UK law. 467

20.76 Money laundering

TERRORISM 20.76 Relevant anti-terrorism legislation broadly falls into two categories: legislation which provides for the imposition of penalties on those engaged in terrorist financing and legislation which aims to combat terrorism by freezing terrorist assets. One key difference between terrorist financing and money laundering is that money laundering relates to the proceeds of crime, whereas a terrorist money laundering offence may be committed in relation to the funds that have a legitimate source. 20.77 The Terrorism Act 2000 (TACT) includes a number of provisions relating to money laundering and, in particular, makes it an offence to enter into or become concerned in an arrangement which facilitates the retention or control of terrorist property by concealment, removal from the jurisdiction, transfer to nominees or in any other way. 20.78 In the same way as accountants and others within the ‘regulated sector’ are obliged to report knowledge and suspicions of money laundering under POCA there are corresponding requirements imposed on those persons to report information about offences committed under TACT. 20.79 TACT makes it an offence to provide or receive, or invite another person to provide, money or other property, intending or having reasonable cause to suspect that it may be used for the purposes of terrorism.1 Other offences created by TACT relate to the use and possession of terrorist property2 or the entering into of arrangements as a result of which money or other property is made available to another person for the purposes of terrorism.3 These three offences include a mental element in contrast to the strict liability money laundering offence created by TACT, s 18 entering into an arrangement which facilitates the retention or control of terrorist property. 1 TACT, s 15. 2 TACT, s 16. 3 TACT, s 17.

20.80 For the purposes of these provisions ‘property’ is defined on the same wide basis as it is in POCA. ‘Terrorist property’ is defined to mean: ●●

money or other property which is likely to be used for the purposes of terrorism (including any resources of a proscribed organisation);

●●

proceeds of the commission of acts of terrorism; and

●●

proceeds of acts carried out for the purpose of terrorism.

It includes property which is wholly or partly directly or indirectly terrorist property.

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Tipping off, prejudicing an investigation and super-SARs 20.84 20.81 The circumstances in which accountants will be required to report information about offences committed under TACT are set out in s 21A as follows: ●●

when they know or suspect or have reasonable grounds for knowing or suspecting, that one of a number of specified offences have been committed (or have been attempted to be committed) by another person; and

●●

the information on which the knowledge or suspicion is based comes to them in the course of ‘a business in the regulated sector’.

20.82 The reporting obligation operates in the same way as that under POCA, meaning that for an employee of a regulated firm the obligation to report a suspicion is discharged by informing the firms’ Money Laundering Reporting Officer (MLRO) by means of the firms’ internal reporting procedures. If the MLRO believes that the internal report contains grounds for suspicion the MLRO has an obligation to report to the NCA. The offence of failing to disclose by a person in the regulated sector is punishable by a fine, or imprisonment of up to five years. 20.83 TACT is broadly similar to POCA in applying a single criminality test for its offences, that is, that an offence will be committed if a person has reasonable grounds to suspect that another person has engaged in money laundering or terrorist financing conduct either in the UK or overseas. Equivalent defences to those under POCA exist, including the privilege exceptions for professional advisers.

TIPPING OFF, PREJUDICING AN INVESTIGATION AND SUPER-SARs 20.84 Both POCA and TACT contain strict rules regarding the disclosure of information to third parties once a suspicion of money laundering is held. This is to ensure those suspected of involvement in such activity are not given opportunity to escape or to destroy evidence before an investigation is conducted. Section 333A of POCA (and an equivalent offence relating to terrorist financing contained in TACT, s 21D) sets out an offence of tipping off once a SAR has been made. An accountant, or any other person in the regulated sector, must not: ●●

disclose that a disclosure has been made of information obtained in the course of the practice either to a constable, the NCA, an officer of HMRC or a Nominated Officer where the disclosure is likely to prejudice any investigation which might be conducted following the initial disclosure; or

●●

disclose that an investigation into allegations that a money laundering offence (which came to light in the course of the accountancy practice) has been committed, is being contemplated or is being carried out and the disclosure is likely to prejudice that investigation. 469

20.85 Money laundering 20.85 The risk of committing a tipping off offence has created a practical impediment to financial institutions sharing information in order to resolve concerns around transactions or clients. This position has been addressed through the introduction of so called ‘super-SARs’, which provide a framework within which institutions can exchange information in circumstances that might otherwise result in a disclosure that could amount to a tipping off offence. 20.86 Sections 333B–333D of POCA (and equivalent ss 21E–21G of TACT) contain exemptions that permit disclosures to be made in certain circumstances – for example, between employees, officers and partners of the same undertaking, between credit institutions, between financial institutions and between professional legal advisers. 20.87 There are separate offences under POCA, s 342 and TACT, s 39, which relate to prejudicing an investigation and which apply to the non-regulated sector. An offence is committed if a person knows that an investigation is being conducted and makes a disclosure which is likely to prejudice that investigation. The investigation may be for the purposes of confiscation, civil recovery or money laundering. In addition, under s 342 of POCA it is an offence where a person falsifies, conceals, destroys or otherwise disposes of documents relevant to an investigation knowing or suspecting that an investigation is being or is about to be conducted. 20.88 As pointed out at para 20.85, above, a recent innovation has been the super-SAR. This was introduced by the CFA 2017 which inserted new ss 339ZB–339ZG into POCA 2002, and new ss 21CA–21CF into TACT. The purpose of such super-SARs is to allow businesses in the regulated sector to share information with each other on a voluntary basis in relation to (i) a suspicion that a person is engaged in money laundering, (ii) a suspicion that a person is involved in the commission of a terrorist financing offence, or (iii) in relation to the identification of terrorist property or its movement or use. The accountancy profession cannot currently make a super-SAR as the new provisions are limited to regulated firms that provide investment services and banks. The new provisions in POCA 2002 and TACT allow information sharing to be instigated either by a regulated sector entity or the NCA. This can be done where the disclosure of the information will or may assist in determining any matter in connection with a suspicion that a person is engaged in money laundering. 20.89 In practical terms, where a regulated sector firm suspects money laundering, the super-SAR process allows it to send a request for disclosure to another regulated sector firm. The firm seeking disclosure will also need to notify the NCA of the intention to share information and indicate which regulated sector entities will be involved in the information sharing process. Once there is agreement between the parties to share information, information is disclosed to the party making the request. The party making the disclosure 470

The Money Laundering Regulations 20.93 must be satisfied that the requested information will assist in determining any matter relating to a suspicion that a person is engaged in money laundering.

CLIENT CONFIDENTIALITY 20.90 Provisions in both POCA and TACT override the fundamental professional principle that accountants owe a duty of confidentiality to their clients. Sections 337(1) and 338(4) of POCA make it clear that any disclosure made by a person in the regulated sector which satisfies the three reporting conditions discussed at para 20.xx, above, will not breach any restriction on the disclosure of information and will be a ‘protected disclosure’. Where a person makes a report where any one of the conditions are not met, for example, an accountant makes a report on the basis of information that has not come his way during the course of his business, the accountant could leave himself open to an action by the client. An equivalent protection is provided by s 21B of TACT: provided the information on which the reporter’s knowledge or suspicion is based was obtained in the course of a business in the regulated sector the report will be a ‘protected disclosure’.

THE MONEY LAUNDERING REGULATIONS Introduction to the Money Laundering Regulations 20.91 The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 (MLR 2017), which came into force on 26 June 2017, give effect in the UK to the EU’s Fourth Money Laundering Directive. 20.92 The MLR 2017 impose five main duties or obligations on firms and importantly legally enshrine the concept of a ‘risk-based approach’. Regulation 18 requires firms subject to the MLR 2017 to prepare a written risk assessment which identifies and assesses the risk of money laundering and terrorist financing to which the firm is subject. In carrying out this assessment, firms must have regard to risk factors relating to their customers, the countries and geographical areas in which they operate, their products and services, and their transactions and delivery channels. They also need to have regard to information issued by supervisory activities and must take the EU and UK risk assessments into consideration. 20.93 The other main requirements under the MLR 2017 are: ●●

Customer due diligence measures – firms are required to carry out customer due diligence measures on a risk-sensitive basis. These measures

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20.94 Money laundering must involve the identification and verification of customers and beneficial owners. Firms must also obtain information regarding the purpose and intended nature of the business relationship with the customer; ●●

Internal polices, controls and procedures – firms must develop and maintain adequate and appropriate policies, controls and procedures to mitigate money laundering risks. These should cover risk management practices, internal controls and monitoring;

●●

Record keeping – firms must make and retain records of their customer due diligence measures and transactions carried out by the firm, as evidence that they have complied with their legal and regulatory obligations;

●●

Suspicious transactions and reporting procedures – firms must ensure that suspicious transactions are identified and reported to the firm’s Money Laundering Reporting Officer, who may report the incident to the National Crime Agency, which performs the role of the UK’s financial intelligence unit; and

●●

Education and training to employees – firms must ensure that employees are adequately trained to identify suspicious transactions and are aware of the firm’s money laundering risks.

20.94 The MLR 2017 require that the approval of senior management be obtained for the adoption of policies, controls and procedures. The role of senior management is therefore important both formally under the MLR 2017 and in setting the ‘tone from the top’. Each of these duties is considered further below.

Scope of the Regulations 20.95 The offences under POCA apply to all persons. The MLR 2017, on the other hand, are limited in scope, applying to persons engaged in certain types of activities. The rationale for this is that the specified sectors carry a greater risk of facilitating money laundering. The MLR 2017 apply to ‘relevant persons’ acting in the course of business carried on by them in the UK. The full list of ‘relevant persons’ is set out below. Only certain of these activities will be relevant for the accountancy profession as is explained below: (a)

credit institutions (as defined in reg 10(1));

(b)

financial institutions, which includes money service businesses (as defined in reg 10(2));

472

The Money Laundering Regulations 20.95 (c)

auditors, insolvency practitioners, external accountants and tax advisers;

(d) independent legal professionals, when participating in financial or real property transactions concerning: (i)

the buying and selling of real property or business entities;

(ii) the managing of client money, securities or other assets; (iii) the opening or management of bank, savings or securities accounts; (iv) the organisation of contributions necessary for the creation, operation or management of companies; or (v) the creation, operation or management of trusts, companies and similar structures; (e) trust or company service providers, being persons who provide the following services to others: (i)

forming companies or other legal persons;

(ii) acting or arranging for another person to act as a director/secretary of a company, a partner of a partnership, or a similar position for other legal persons; (iii) providing a registered office, business address, correspondence or administrative address or other related services for a company, partnership or any other legal person or arrangement; or (iv) acting, or arranging for another person to act, as: (A) a trustee of an express trust or similar legal arrangement; or (B) a nominee shareholder for a person other than a company whose securities are admitted to trading on a regulated market. (f)

estate agents and letting agents (as defined in reg 13);

(g) high value dealers being a firm or sole trader who by way of business trades in goods (including auctioneers), who accept cash payments, in respect of any transaction, of €10,000 or more (whether the transaction is executed in a single operation or in a series of operations that appear to be linked); (h) casinos, being the holder of a casino operating licence; (i)

art market participants;

(j)

cryptoasset exchange providers; and

(k) custodian wallet providers.

473

20.96 Money laundering 20.96 Firms in the accountancy sector are most likely to fall within the definition of a ‘relevant person’ and therefore become subject to the requirements of the MLR 2017 listed at para 20.95(c) or (e), above. In relation to (c), that is ‘auditors, insolvency practitioners, external accountants and tax advisers’, reg 11 of the MLR 2017 provides as follows: ‘(a) “auditor” means any firm or individual who is— (i)

a statutory auditor within the meaning of Part 42 of the Companies Act 2006 (statutory auditors), when carrying out statutory audit work within the meaning of section 1210 of that Act (meaning of statutory auditor), or

(ii) a local auditor within the meaning of section 4(1) of the Local Audit and Accountability Act 2014 (general requirements for audit), when carrying out an audit required by that Act. (b) “insolvency practitioner” means any firm or individual who acts as an insolvency practitioner within the meaning of section 388 of the Insolvency Act 1986 or article 3 of the Insolvency (Northern Ireland) Order 1989 (meaning of “act as insolvency practitioner”). (c) “external accountant” means a firm or sole practitioner who by way of business provides accountancy services to other persons, when providing such services. (d) “tax adviser” means a firm or sole practitioner who by way of business provides material aid, or assistance or advice, in connection with the tax affairs of other persons, whether provided directly or through a third party, when providing such services.’ The definition of “tax adviser” has been expanded by the changes introduced pursuant to the Fifth Money Laundering Directive. The provision of material aid or assistance in connection with another person’s tax affairs is now within scope. The definition has also been expanded to cover the provision of services directly or through a third party to address the concern that advisors were not applying anti-money laundering checks where customers were introduced by another firm and not directly. 20.97 Regulation 11(c) of the 2017 Regulations defines an external accountant as someone who provides accountancy services to other persons by way of business. As the CCAB Guidance (discussed in more detail at para 20.115 ff, below) points out, there is no definition given for the term accountancy services. For the purposes of the CCAB Guidance, it includes any service which involves the recording, review, analysis, calculation or reporting of financial information, and which is provided under arrangements other than a contract of employment.

474

The Money Laundering Regulations 20.100

Customer due diligence 20.98 The MLR 2017 require firms to carry out customer due diligence (CDD) measures when they: ●●

establish a business relationship;

●●

carry out an occasional transaction that amounts to the transfer of funds within the meaning of art 3.9 of the Funds Transfer Regulation1 exceeding €1,000 or more or (other than for high value dealers and casinos) for occasional transactions that amount to €15,000 or more where they appear to be linked;

●●

suspect money laundering or terrorist financing; or

●●

doubt the veracity or adequacy of documents, data or information previously obtained for the purposes of identification or verification.2

Additionally, firms must apply CDD measures on a risk-sensitive basis at ‘other appropriate times’.3 1 Regulation 2015/847/EU of the European Parliament and of the Council of 20th May 2015 on information accompanying transfers of funds. 2 MLR 2017, reg 27. 3 MLR 2017, reg 27(8).

20.99 Broadly, a firm must: ●●

identify the customer and verify the customer’s identity on the basis of documents, data or information obtained from a reliable and independent source;

●●

identify, where there is a beneficial owner who is not the customer, the beneficial owner and take reasonable measures to verify the identity of the beneficial owner so that the firm is satisfied that it knows who the beneficial owner is, including, in the case of a legal person, trust or similar legal arrangement, taking measures to understand the ownership and control structure of the person, trust or arrangement; and

●●

obtain information on the purpose and intended nature of the business relationship.1

1 MLR 2017, reg 28.

Beneficial owner 20.100 Broadly, a ‘beneficial owner’ is a person that has a 25% or higher interest in the customer, or any other person on whose behalf a transaction or activity is

475

20.101 Money laundering carried out. Regulations 5 and 6 set out the definition of a ‘beneficial owner’. The definition appears capable of capturing significant clients of customers as well as owners or controllers of customers. However, as set out above, it is not necessarily clear whether indirect clients should properly be treated as customers or as beneficial owners by a firm. In any event, it is submitted that due diligence measures should be carried out on direct customers of the firm, the owners or controllers of the firm and known indirect customers of the firm.

Customer 20.101 Whilst the MLR 2017 provide a list of circumstances in which CDD must be carried out, the absence of certain definitions can cause potential problems. For instance, the term ‘customer’ is not defined in the MLR 2017. Guidance issued by the Consultative Committee of Accountancy Bodies on Compliance with the MLR 2017 states that CDD should normally be carried out before entering into a business relationship or undertaking an occasional transaction. A business relationship is defined by the MLR 2017 as a business, commercial or professional relationship between a firm and a customer, which arises out of the firm’s business and is expected by the firm when contact is established to have an element of duration.1 An ‘occasional transaction’ is defined as any transaction that is not carried out as part of a business relationship.2 1 MLR 2017, reg 4. 2 MLR 2017, reg 3(1).

20.102 However, these definitions, whilst helpful, do not appear to answer all the possible questions as to who a firm must classify as its ‘customers’. For instance, it is not explicitly clear (although, following a cautious approach, arguably it should be assumed) that the client of a customer should also be treated by a firm as its customer, and due diligence measures applied, or whether such a person would more accurately be characterised as a ‘beneficial owner’. 20.103 As well as the requirement that CDD measures be carried out at the outset of a business relationship or prior to carrying out an occasional transaction, the MLR 2017 also require measures to be applied when there is doubt as to previous information supplied, or where there is reason to suspect money laundering or terrorist financing. Additionally, measures are to be applied on a ‘risk-based basis’ at ‘other appropriate times’.1 The MLR 2017 also require a firm to keep the information it holds on customers up to date. It is clear, therefore, that the obligation on firms to ensure that they know who their clients are is an ongoing one. The frequency of applying due diligence measures over the course of the relationship can be determined in line with the firm’s risk-based approach, the concept of which is a central approach taken under the MLR 2017 and the Fourth Money Laundering Directive. 1 MLR 2017, reg 27(8).

476

The Money Laundering Regulations 20.106

Simplified due diligence 20.104 Regulation 37 of the MLR 2017 provides that a simplified due diligence (SDD) procedure may be carried out in relation to a particular business relationship or transaction if the firm determines that the business relationship or transaction presents a low degree of risk of money laundering and terrorist financing. 20.105 SDD is not a derogation from the need to perform CDD measures. The MLR 2017 are clear that when applying SDD firms must continue to comply with CDD requirements under reg 28 but that firms can adjust the extent, timing or type of measures that the firm undertakes. Firms applying SDD are also required to carry out sufficient monitoring of any business relationship or transactions which are subject to those measures, to enable firms to detect unusual or suspicious transactions. 20.106 The criteria to which firms must have regard in determining whether to apply SDD are: (i)

the firm’s risk assessment carried out under reg 18(1);

(ii) relevant information made available to the firm by regulators or other bodies under regs 17(9) and/or 47; and (iii) the following risk factors: ●● customer risk factors including whether the customer: ——

is a public administration, or a publicly owned enterprise;

——

is an individual resident in a geographical area of lower risk;

——

is a credit institution or a financial institution which is: (A) subject to the requirements in national legislation implementing the Fourth AML Directive as an obliged entity (within the meaning of that directive), and (B) supervised for compliance with those requirements in accordance with section 2 of Chapter VI of the Fourth AML Directive;

——

is a company whose securities are listed on a regulated market, and the location of the regulated market;

●● product, service, transaction or delivery channel risk factors including whether the product or service is: ——

a life insurance policy for which the premium is low;

——

an insurance policy for a pension scheme which does not provide for an early surrender option, and cannot be used as collateral; 477

20.106 Money laundering ——

a pension, superannuation or similar scheme which satisfies the following conditions: (A) the scheme provides retirement benefits to employees; (B) contributions to the scheme are made by way of deductions from wages; and (C) the scheme rules do not permit the assignment of a member’s interest under the scheme;

——

a financial product or service that provides appropriately defined and limited services to certain types of customers to increase access for financial inclusion purposes in an EEA state;

——

a product where the risks of money laundering and terrorist financing are managed by other factors such as purse limits or transparency of ownership;

——

a child trust fund within the meaning given by the Child Trust Funds Act 2004, s 1(2);

——

a junior ISA within the meaning given by the Individual Savings Account Regulations 1998,1 reg 2B;

●● geographical risk factors including where the customer is resident, established or registered or in which it operates is: ——

an EEA state;

——

a third country which has effective systems to counter money laundering and terrorist financing;

——

a third country identified by credible sources as having a low level of corruption or other criminal activity, such as terrorism (within the meaning of s 1 of TACT), money laundering, and the production and supply of illicit drugs;

——

a third country which, on the basis of credible sources, such as evaluations, detailed assessment reports or published follow-up reports published by the FATF, the IMF, the World Bank, the OECD or other international bodies or nongovernmental organisations: (A) has requirements to counter money laundering and terrorist financing that are consistent with the revised Recommendations published by the FATF in February 2012 and updated in October 2016; and (B) effectively implements those Recommendations.

1 SI 1998/1870.

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The Money Laundering Regulations 20.108

Enhanced due diligence 20.107 In addition to carrying out CDD measures, the MLR 2017 also require firms to apply enhanced due diligence measures (EDD) to a number of situations: ●●

where there is a high risk of money laundering or terrorist financing;

●●

in any business relationship or transaction with a person established in a high-risk country;

●●

in relation to correspondent relationships with credit institutions or financial institutions;

●●

where it is determined that a customer is a politically exposed person (PEP), or a family member or known close associate of a PEP;

●●

in any case where a customer provides false or stolen identification documents or information, and the relevant person proposes to continue to deal with that customer;

●●

where a transaction is complex and unusually large or there is an unusual pattern of transactions, and the transaction or transactions have no apparent economic or legal purpose; or

●●

in any other case which by its nature can present a higher risk of money laundering or terrorist financing.

Where EDD is to be applied, the firm must perform the following additional measures: (i)

examine the background and purpose of the transaction,

(ii) increase the degree and nature of monitoring of the business relationship in which the transaction is made; (iii) seek additional independent, reliable sources to verify information provided or made available; (iv) take additional measures to understand better the background, ownership and financial situation of the customer, and other parties to the transaction; (v)

take further steps to be satisfied that the transaction is consistent with the purpose and intended nature of the business relationship; and

(vi) increase the monitoring of the business relationship, including greater scrutiny of transactions.

Policies, controls and procedures 20.108 Under reg 19 of the MLR 2017, firms must establish and maintain policies, controls and procedures to mitigate and effectively manage the risks 479

20.109 Money laundering of money laundering and terrorist financing identified in the risk assessment. The policies, controls and procedure must specifically include: ●●

risk management practices;

●●

internal controls;

●●

customer due diligence;

●●

reliance and record keeping; and

●●

monitoring and management of compliance.

20.109 The policies, controls and procedures adopted by a firm must be regularly reviewed and be proportionate to the size and risk of the firm. They should also provide for specific scrutiny where a transaction is complex or unusually large, or there is an unusual pattern of transactions and no apparent economic or legal purpose. 20.110 In addition, senior management must approve them and one person of senior management should be appointed as the officer responsible for compliance with the MLR 2017. The relevant supervisory authority needs to be informed of the appointment within 14 days. 20.111 Firms must also establish an independent audit function which is to examine and evaluate the adequacy and effectiveness of policies, controls and procedures, make appropriate recommendations and monitor compliance with those recommendations and carry out screenings of relevant employees, testing their integrity, skills and knowledge.

Record keeping 20.112 The MLR 2017 require firms to make and keep records relating to their CDD measures, that is, customer identification and verification procedures, and transactions carried out by the firm, as evidence that they have complied with their legal and regulatory obligations. Such evidence may also be used in any investigations conducted by the law enforcement bodies. The general rule is that all records must be retained for the ‘prescribed period’ of five years from the date the file is closed.

Internal reporting procedures 20.113 The MLR 2017 require firms to ensure that any suspicious transactions identified are reported internally by staff to the firm’s MLRO who must then determine whether it gives rise to knowledge or suspicion of money laundering or reasonable grounds for such knowledge or suspicion. 480

The Money Laundering Regulations 20.116 Where such knowledge or grounds of suspicion are considered to exist, the MLRO must report such suspicious activity to the NCA.

Training 20.114 The MLR 2017 require firms to take appropriate measures to ensure that: ●●

all employees are aware of the risks of money laundering and terrorist financing, the relevant legislation, and their obligations under that legislation;

●●

all employees are given regular training in how to recognise and deal with suspicious transactions, and other activities or situations, that may be related to money laundering or terrorist financing; and

●●

the firm maintains written records of the measures taken under the two points above.

Resourcing and the MLRO 20.115 The appropriate staffing and resourcing of a money laundering function is an important part of a firm’s policies, controls and procedures. All firms are required to appoint a Money Laundering Reporting Officer (MLRO). As the CCAB Anti-Money Laundering Guidance for the Accountancy Sector (CCAB Guidance) states, the role of the MLRO is not defined in legislation but has traditionally included responsibility for internal controls and risk management. The CCAB Guidance further states that the MLRO should have the seniority, authority, governance responsibility, time, capacity and resources to fulfil the MLRO’s brief. 20.116 The CCAB Guidance goes on to state that MLRO should: ●●

have oversight of, and be involved in AML and CTF risk assessments;

●●

take reasonable steps to access any relevant information about the business;

●●

obtain and use national and international findings to inform their performance of their role;

●●

create and maintain the business’s risk-based approach to preventing money laundering and terrorist financing;

●●

support and coordinate management’s focus on money laundering and terrorist financing risks in each individual business area. This involves developing and implementing systems, controls, policies and procedures that are appropriate to each business area; 481

20.117 Money laundering ●●

take reasonable steps to ensure the creation and maintenance of AML and CTF documentation;

●●

develop CDD policies and procedures;

●●

ensure the creation of the systems and controls needed to enable staff to make internal SARs in compliance with POCA;

●●

receive internal SARs and make external SARs to the NCA;

●●

take remedial action where controls are ineffective;

●●

draw attention to the areas in which systems and controls are effective and where improvements could be made;

●●

take reasonable steps to establish and maintain adequate arrangements for awareness and training;

●●

receive the findings of relevant audits and compliance reviews (both internal and external) and communicate these to the board (or equivalent managing body); and

●●

report to the board (or equivalent managing body) at least annually, providing an assessment of the operations and effectiveness of the business’s AML systems and controls. This should take the form of a written report. These written reports should be supplemented with regular ad hoc meetings or comprehensive management information to keep senior management engaged with AML compliance and up to date with relevant national and international developments in AML, including new areas of risk and regulatory practice. The board (or equivalent managing body) should be able to demonstrate that it has given proper consideration to the reports and ad hoc briefings provided by the MLRO and then take appropriate action to remedy any AML deficiencies highlighted.

The role of the MLRO and the MLRO’s interaction with senior management within an organisation’s governance structure are important features of an AML compliance framework.

Failure to comply with the MLR 2017 20.117 Failure to comply with the requirements of the MLR 2017 is a criminal offence which is punishable with up to two years’ imprisonment, a fine or both. This offence is committed irrespective of whether any money laundering has taken place. It is also important to understand that in practice, where an offence is committed by a body corporate or partnership, for example, an offence may also have been committed by a director of the company or partner of the partnership. This will be the case where an offence is committed

482

The Money Laundering Regulations 20.121 by a body corporate with the consent or connivance of an officer of the body corporate or can be attributed to neglect on the part of the director. 20.118 Failure to comply with the requirements of the MLR 2017 may also give rise to civil penalties imposed by the relevant supervisory authorities. We discuss the supervisory authorities further at para 20.120, below. 20.119 The MLR 2017 provide that, in determining whether a person has complied with its requirements, the court may take account of any relevant supervisory or regulatory guidance. For the accountancy sector the Guidance issued by the CCAB has been approved by HM Treasury for the purposes of the MLR 2017.

Supervisory authorities 20.120 Supervision and monitoring of compliance with MLR 2017 is undertaken by a number of bodies. In particular, the MLR 2017 designate certain bodies, such as the FCA, HMRC and certain professional bodies as ‘supervisory authorities’ and impose requirements on these bodies to monitor the firms they supervise and, where necessary, to adopt measures to ensure compliance by those firms with the requirements of the MLR 2017. 20.121 For accountants, bookkeepers, tax advisers and other financial advisers, the main supervisory bodies are: ●●

Association of Accounting Technicians;

●●

Association of Chartered Certified Accountants;

●●

Association of International Accountants;

●●

Association of Taxation Technicians;

●●

Chartered Institute of Management Accountants;

●●

Chartered Institute of Taxation;

●●

HMRC;

●●

Insolvency Practitioners Association;

●●

Institute of Certified Bookkeepers;

●●

Institute of Chartered Accountants in Ireland;

●●

Institute of Chartered Accountants in Scotland;

●●

Institute of Chartered Accountants of England and Wales;

●●

Institute of Financial Accountants; and

●●

International Association of Bookkeepers. 483

20.122 Money laundering These supervisory bodies are in turn supervised by the Office for Professional Body Anti-Money laundering Supervision (OPBAS), a regulator set up in 2018 pursuant to the Oversight of Professional Body Anti-Money Laundering and Counter Terrorist Financing Supervision Regulations 2017.1 OPBAS is intended to strengthen the UK’s AML supervisory regime and to ensure that professional body supervisors provide consistently high standards of AML supervision. The OPBAS sits within the FCA and oversees the above-listed bodies which are listed in Sch 1 to the MLR 2017. If a professional body wishes to become an AML supervisor, it needs to apply to OPBAS which will consider whether it meets the standards set out in the MLR 2017. If it does, OPBAS will make a recommendation to HMRC to amend Sch 1 to the MLR 2017 to give the body the formal role. OPBAS does not supervise members of professional bodies such as individual firms. 1 SI 2017/1301.

GUIDANCE ISSUED BY SUPERVISORY BODIES 20.122 In addition to the legislative provisions set out above, POCA1 and the MLR 2017 enable HM Treasury to approve guidance issued by supervisory or other relevant bodies in relation to compliance with AML and CTF legal requirements. Under s 330(8) of POCA, in determining whether an offence of failure to disclose suspicions of money laundering has been committed, the court must have regard to guidance issued by a supervisory or other relevant body that has been approved by HM Treasury. Under regs 76(6) and 86(2) of the MLR 2017, a court will have regard to guidance approved by HM Treasury in determining whether to impose a civil or criminal penalty for breaches of the MLR 2017. 1 POCA, ss 330–331.

20.123 This section considers below, in particular, the guidance issued by the CCAB1 and the Financial Reporting Council (FRC).2 Guidance issued by both the CCAB and FRC has been approved by HM Treasury for these purposes which means that UK courts must take account of its contents when deciding whether a business has committed an offence under MLR 2017 or under POCA ss 330–331. 1 The CCAB is made up of the ICAEW, ACCA, CIPFA, ICAS, Chartered Accountants Ireland and The Chartered Institute of Public Finance and Accountancy. Its guidance, Anti-Money Laundering Guidance for the Accountancy Sector, was published in March 2018 (the CCAB Guidance). 2 International Standard on Auditing (UK) 250 (Revised November 2019), Appendix: Money Laundering, Terrorist Financing and Proceeds of Crime Legislation in the United Kingdom.

484

Guidance issued by supervisory bodies 20.126

Anti-money laundering guidance for the accountancy sector 20.124 The CCAB Guidance provides that businesses (principally, auditors, insolvency practitioners, external accountants and tax advisers) need to establish systems that create an internal environment or culture where employees are aware of their responsibilities under the UK AML regime and where they understand that they are expected to fulfil those responsibilities with appropriate diligence. It is important that businesses have controls in place before establishing a client relationship or accepting an engagement. In deciding what systems to install, a business will need to consider a range of factors, including but not limited to: ●●

the type, scale and complexity of its operations;

●●

the geographical spread of client operations (including local AML regimes);

●●

the extent to which operations are linked to other organisations;

●●

the number of different business types it is involved in;

●●

the types of services it offers;

●●

its client profiles;

●●

the manner in which it sells its services;

●●

the types of business transactions it becomes involved in or advises on; and

●●

the risks associated with each area of its business in terms of the risks of the business or its services being used for money laundering or terrorist operations, or the risks of its clients and their counterparties being involved in such operations.1

1 CCAB Guidance, section 4.5.

20.125 The CCAB Guidance notes that businesses should consider the nature of their practice when deciding how to carry out their risk assessment in line with the MLR and whether it should be simple or sophisticated. Where the practice is simple and the firm has few service lines and most clients fall into similar categories, a simple approach may be most appropriate for most clients, with the focus being on those clients that are atypical.1 1 CCAB Guidance, section 4.5.

20.126 Under normal circumstances, if a prospective or existing client refuses to provide CDD information, the work must not proceed and any existing relationship with the client must be terminated. The CCAB Guidance

485

20.127 Money laundering notes that verification procedures may be completed during the establishment of a business relationship if it is necessary not to interrupt the normal course of business and that in some circumstances it may be necessary to carry out CDD while commencing work because the situation is so urgent. Such exceptional circumstances include: ●● some insolvency appointments; ●● appointments that involve ascertaining the client’s legal position or defending them in legal proceedings; ●● ●●

response to an urgent cyber incident; or when it is critically important to preserve or extract data or other assets without delay.

The CCAB Guidance also recommends that the above categories (and any others which may be appropriate depending on the business) must be carefully considered by the MLRO to ensure that the reasons for any extension are appropriate. 20.127 When deciding who is an appropriate person to be appointed to the role of MLRO within an accountancy firm, the CCAB Guidance suggests that an appropriately experienced individual might include an accounting firm principal (or similar in other businesses) or another senior and skilled person with sufficient authority to enable decisions to be taken independently.1 1 CCAB Guidance, section 7.1.

20.128 The CCAB Guidance also provides a list of some of the more common instances where a firm acting in the accountancy industry may itself require a consent: ●● acting as an insolvency office holder where there is knowledge or suspicion either that the assets may in whole or in part represent criminal property, or where the insolvent entity may enter into or become concerned in an arrangement under s 328 of POCA; ●● designing and implementing trust and company structures for clients, including acting as trustees or company officers, where there is knowledge or suspicion that these structures are being, or may be about to be, used to launder money; ●● acting on behalf of the client in the negotiation and implementation of transactions where these involve an element of criminal property being either bought or sold by a client, for example, corporate acquisitions; ●● handling money in client accounts which is suspected to be of criminal origin; and ●● providing outsourced business processing for clients where money is suspected to be of criminal origin.1 1 CCAB Guidance, section 8.5.

486

Guidance issued by supervisory bodies 20.133

Anti-money laundering guidance for the tax practitioner 20.129 The CCAB Guidance includes a Tax Appendix which contains supplementary guidance and should be consulted by tax practitioners as it offers an indication of the money laundering risk areas that a tax practitioner may encounter in practice. 20.130 The Tax Appendix states that tax compliance services (that is assisting in the completion and submission of tax returns) should not be treated as being covered by the MLR 2017 together with their tax advisory services. The Tax Appendix provides that tax practitioners need to be alert to the risk of assisting or facilitating the laundering of proceeds of crime whether through the evasion of taxes or otherwise. 20.131 A client’s actions in respect of his tax affairs will create the proceeds of crime where he refuses to correct errors for the past or on an ongoing basis or where he deliberately makes an under declaration in respect of profits, income or gain, or makes a deliberate overstatement in respect of expenses or loses. Similarly a money laundering risk emerges where, during the course of dealing with a client’s tax affairs, a tax practitioner realises that the client is holding the proceeds of crime.1 1 Supplementary Anti-Money Laundering Guidance for Tax Practitioners (July 2019), section 4.1.

20.132 A tax practitioner should be alert to the risk of assisting or facilitating the laundering of proceeds of crime whether through the evasion of taxes or otherwise. This risk should be appreciated particularly where a client puts significant importance on maintaining the anonymity of beneficiaries or owners or in keeping confidential the structure of a complex plan, ostensibly intended to minimise legally a tax liability, as there is the possibility that the funds involved are derived from the proceeds of crime.1 1 Supplementary Anti-Money Laundering Guidance for Tax Practitioners (July 2019), section 4.2.

20.133 A tax practitioner is not expected to be an expert in criminal law but there is an expectation that he will appreciate the boundary between deliberate understatement or other tax evasion and cases of error or differences in the interpretation of tax law. There will be no question of criminality where the client has adopted in good faith, honestly and without misstatement a technical position with which HMRC disagrees. The Tax Appendix states that the main areas where offences might arise are: ●●

tax evasion, including making false returns (involving supporting documents), accounts or financial statements or deliberate failure to submit returns; and

●●

deliberate refusal to correct known errors. 487

20.134 Money laundering

Anti-money laundering guidance for auditors 20.134 The Appendix to the International Standard on Auditing (UK) 250 summarises the requirements for auditors under the UK’s anti-money laundering (AML) regime and contains guidance on an auditor’s responsibilities in respect of AML and terrorist financing. This guidance was previously contained in a stand-alone document issued by the Auditing Practices Board but was added as an appendix to the FRC’s International Standard on Auditing (UK) 250 (ISA (UK) 250) following the MLR 2017. An auditor will be considered to be within the regulated sector when conducting the audit of UK private or public companies, building societies, friendly societies, Lloyd’s syndicate aggregate accounts, insurance undertakings, limited liability partnerships, qualifying partnerships1 and any other such bodies prescribed by Order of the Secretary of State.2 1 These are defined in the Partnerships (Accounts) Regulations 2008, SI 2008/569. 2 The definition of carrying out audit work in the regulated sector is provided in s 1210 of the Companies Act 2006.

20.135 Examples of situations that may give rise to money laundering offences which auditors may encounter during the course of an audit include: ●●

offences that indicate dishonest behaviour, such as overpayments not returned;

●●

Companies Act offences that are criminal offences, such as illegal dividend payments;

●●

offences that involve saved costs, such as environmental offences; and

●●

offences where the client is the victim, such as where the client has been the victim of shoplifting.

20.136 Where an audit client has obtained legal advice indicating that certain actions or circumstances do not give rise to criminal conduct and as such cannot give rise to criminal property, an auditor may rely on this advice provided that it has been obtained from a suitably qualified and independent lawyer who was made aware of all material circumstances known to the auditor and the auditor followed industry standards on evidence and using an expert.1 1 Appendix to ISA (UK) 250, section 33.

20.137 Due to the nature of an auditor’s role, where a report has been made to the audit firm’s MLRO and they have initiated further review, the auditor will need to be made aware of the results of any enquiries as these may have an impact on the audit report or the auditor’s decision to accept reappointment as an auditor.1 1 Appendix to ISA (UK) 250, section 35.

488

Guidance issued by supervisory bodies 20.141 20.138 An auditor may sometimes be required to make an application to obtain consent to perform an act which could otherwise constitute a principal money laundering offence. This would be required, for instance, where an auditor suspects that an audit report is necessary to allow financial statements to be issued in connection with a transaction involving the proceeds of crime, or if the auditor was to sign off on an auditor’s report on financial statements for a company that was a front for illegal activity. In such circumstances the auditor might be involved in an arrangement which facilitated the acquisition, retention, use or control of criminal property under POCA, s 328. In these circumstances the auditor would generally also need to obtain appropriate consent from the NCA via its MLRO, as soon as is practicable.1 Reporting to the NCA does not relieve the auditor from other statutory duties to report.2 1 Appendix to ISA (UK) 250, section 45. 2 Ibid, section 48.

20.139 Where an auditor suspects that money laundering has occurred they will need to apply the concept of materiality when considering whether any report they have provided on the financial statements of a company needs to be qualified or modified. In doing this they should consider whether the crime itself has a material effect on the financial statements, whether the consequences of the crime have a material effect on the financial statements or whether the outcome of any subsequent investigation by the police or other investigatory body may have a material effect on the financial statements.1 In deciding which action to take where the auditor believes money laundering has had a material impact, the auditor should be cautious of how and when any qualifications or modifications are introduced so as not to alert the money launderer and risk tipping off.2 1 Appendix to ISA (UK) 250, section 50. 2 Ibid, section 52.

20.140 An auditor may wish to resign where they believe money laundering or indeed any illegality has taken place, particularly where they believe that a normal relationship of trust cannot be maintained. In such circumstances they should be conscious of conflicts between the requirement under s 519 of the Companies Act for the auditor to deposit a statement at a company’s registered office of any circumstances which they believe need to be brought to the attention of members or creditors and tipping off.1 1 Appendix to ISA (UK) 250, section 53.

20.141 In respect of other businesses that are regulated under the AML regime (eg credit institutions and estate agents), auditors should, when auditing their financial statements, review the steps and processes taken by the entity to comply with the MLR, assess their effectiveness and obtain management representations concerning compliance. 489

20.142 Money laundering 20.142 If an auditor considers that a regulated client’s systems may be ineffective they should consider whether there is a responsibility to report a ‘matter of material significance’ to the regulator in compliance with ISA (UK) 250, Section B ‘The Auditor’s Right and Duty to Report to Regulators in the Financial Sector’. They should also consider the possible impact of fines if non-compliance is proven.1 1 Appendix to ISA (UK) 250, section 29.

20.143 In contrast, where an entity’s business lies outside the scope of the regulated sector, its management is not required to implement the MLR 2017. The auditor is unlikely to consider anti-money laundering laws to have a material effect on the financial statement of the entity for the purposes of ISA (UK) 250, Section A.

APPLICATION OF PRIVILEGE TO THE ACCOUNTANCY PROFESSION 20.144 In the UK, different levels of privilege apply to communications involving professional legal advisers and relevant professional advisers such as accountants, auditors and tax advisers, who are members of a relevant professional body. Where privilege applies, a professional body will not be obliged to disclose information which they would otherwise be obliged to report under POCA, the MLR 2017 or other AML or CTF legislation, unless this information has been communicated or given with a view to furthering a criminal purpose. 20.145 Communications between a lawyer, a client and either of them and a third party, such as an accountant, auditor or tax adviser, are covered by litigation privilege, so long as the communications are for the dominant purpose of litigation which is existing or reasonably in prospect. 20.146 Legal advice given by professionally qualified lawyers, which is not related to any ongoing or foreseeable litigation, is covered by legal advice privilege. There was for some time a degree of uncertainty as to whether this privilege applied to other professional advisers who provide advice, particularly legal advice. This point was tested in the Supreme Court in R (on the application of Prudential plc) v Special Commissioner of Income Tax.1 Prudential argued that it was not required to disclose documents to HMRC, which included tax advice from its accountants in relation to a tax avoidance scheme, as legal advice privilege attached to that advice. The Supreme Court rejected this argument and ruled that legal advice privilege should only apply in connection with advice provided by professional legal advisers, on the grounds that a change to the rules would make uncertain a principle that is clearly 490

Application of privilege to the accountancy profession 20.148 understood from previous authorities and it was for Parliament to legislate to alter the status quo. 1 [2013] UKSC 1. The High Court and Court of Appeal both rejected Prudential’s argument and the Supreme Court rejected Prudential’s appeal. See also the discussion of this case at paras 17.36–17.44, above.

20.147 Some solace was provided for the accountancy profession in the form of two dissenting judgments, which emphasised that privilege should be connected with a client’s right to consult a professional legal adviser rather than members of a professional body. The dissenting judges also noted that accountants offering tax advice execute essentially the same function as tax lawyers. 20.148 Professional bodies, most notably the ICAEW responded negatively to the decision and committed to lobbying parliament for a change that would level the playing field for the accountancy profession. The ICAEW has confirmed this as a priority in view of the Legal Services Act 2007. This Act provides for the creation of multi-disciplinary practices, the existence of which may serve to exacerbate the imbalance in privilege.

491

492

Index

A Accountancy Scheme disciplinary powers 19.02, 19.07, 19.29–19.39 generally 19.11–19.13 public interest 19.40–19.42 structure 19.14–19.28 Accountant See also Auditor activities, generally 1.03–1.09 anti-money laundering guidance for 20.124–20.128 confidentiality See Confidentiality/ confidential information conflict of interest See Conflict of interest contractual liability 1.10–1.12 corporate finance advisory work 10.40–10.41 counterclaims 15.01–15.12 criminal liability 1.24 defences See Defences disciplinary regimes See Disciplinary regimes disclaimers 13.01–13.15 double employment rule 10.09 employment status 1.27–1.29 equitable liability 1.20–1.23 fiduciary liability 1.20–1.21, 9.46–9.47, 10.02–10.06 insolvency advice or practice conflicts of interest 10.45–10.65 liability for 9.117–9.127 investment advice conflicts of interest 10.08 liability for 9.114–9.116 self-dealing 10.08 key threats and vulnerabilities of sector 20.17–20.18 non-audit liability accounts 9.10–9.20 contractual audits 9.27 due diligence 9.21 expert witness advice 9.113

Accountant – contd non-audit liability – contd finance raising 9.22–9.26 forensic accountancy 9.113 general principles 9.01–9.09 insolvency advice 9.117–9.127 investment advice 9.114–9.116 listing particulars 9.49–9.53 other reports required by legislation 9.43–9.48 prospectuses 9.49–9.69 public sector audits 9.28–9.29 reporting to regulators 9.30–9.39 takeover accounts 9.10–9.20 taxation advice and agency 9.90–9.112 valuations 9.70–9.89 ‘whitewash’ reports 9.40–9.42 non-audit liability See Non-audit liability privilege 1.30, 17.36 status 4.08–4.46 tax compliance work 9.90 tortious liability 1.13–1.19 Accounting Standards Brexit 3.03 generally 3.02–3.03 preparation of accounts 2.04 UK-adopted International Accounting Standards 2.04, 3.03 Accounts EU legislation 2.21–2.25 liability for non-audit work 9.10–9.20 standards 3.02–3.06 statutory requirement 2.03–2.06 Acquisitions range of activities 1.07 Agent liability for non-audit work 9.90–9.112 range of activities 1.05 status of auditors 4.21–4.26 Analytical review generally 3.21

493

Index Apportionment contribution 14.49–14.53 contributory negligence 14.25–14.36 Audit Enforcement Procedure generally 19.02, 19.43–19.50 Audit Quality Review disciplinary liability 19.10 Financial Reporting Council 19.02 Audit Reporting and Governance Authority (ARGA) establishment 19.03, 19.51 generally 2.17 Auditing See also Auditor accounts, preparation Companies Act requirement 2.03–2.06 EU legislation 2.21–2.25 standards 3.02–3.06 analytical review 3.21 audit testing 3.21 Brexit and 2.01–2.02, 2.08 Companies Act 2006 requirements 2.02–2.20 company and auditor relationship contract, under 4.01–4.02 duty of care 4.03–4.05 duty of confidentiality 2.27, 4.06–4.07, 10.01–10.64 tort, in 4.03–4.05 Competition and Markets Authority Order 2.52–2.53 confidential information 2.27, 4.06–4.07 contractual relationship 4.01–4.02 documenting auditor’s work 3.13 EU legislation generally 2.26–2.39 preparation of accounts 2.21–2.25 public interest entities 2.40–2.51 evidence See also Expert evidence audit 3.20, 3.22 Financial Services and Markets Act 2000 2.54–2.55 going concern, assumption of 3.22 management’s written representations 3.22 non-statutory 9.10 planning an audit 3.19, 7.57–7.59

Auditing – contd post-balance sheet events 3.22 professional judgment of auditor 3.02, 3.09, 3.11, 8.58 purpose 8.55–8.58 regulatory framework Accounting Standards 3.02–3.06 Auditing Standards 3.07–3.26 Brexit and 2.01–2.02, 2.08 Companies Act 2006 2.03–2.20 Competition and Markets Authority Order 2.52–2.53 EU legislation 2.21–2.51 FSMA 2000 2.54–2.55 generally 2.01–2.02, 3.01 related party disclosures 3.22 standard of care, and 7.07–7.16, 7.40–7.45 advice as to likely outcome, auditor’s duty to give 7.06 statutory requirement 2.07–2.20 stock-take/physical inventory 3.20 Auditor See also Auditing access to books 2.15 activities, generally 1.03–1.09 agent of company, as 4.21–4.26 anti-money laundering guidance for 20.134–20.143 appointment cessation 2.17 competitive tendering process 2.53 FTSE 350 companies 2.53 generally 2.20 public interest entities 2.50 audit opinion, expressing 3.02 authorisation 3.04–3.06 communication with those charged with governance 3.15–3.18 company general meetings and resolutions 2.16 confidentiality 2.27, 4.06–4.07 conflicts of interest 2.35–2.38, 10.01–10.64 contractual liability 1.10–1.12 corporate governance, and 2.13 corporate group, in 6.39–6.54 criminal liability 1.24 damages recoverable against 8.55

494

Index Auditor – contd defences See Defences directorship in audited entity 2.38 disciplinary regimes See Disciplinary regimes disclaimers and exemptions 4.49, 6.21, 13.01–13.12 employment status 1.27–1.29 equitable liability 1.20–1.23 fees auditor independence and 2.38–2.39 recoverable losses 8.100 fiduciary liability 1.20–1.21, 4.27–4.46, 9.08 ‘good repute’ 2.27 independence generally 2.38–2.39 public interest entities 2.40–2.45, 2.47 information, duty to provide fraud, suspected 8.54–8.58, 8.60–8.61, 11.18 materially misstated financial statements 8.54–8.55 purpose of audit 8.55–8.58 true and fair view 8.08, 8.11, 8.58, 8.155 liability exclusion 13.49–13.52 generally 8.01, 8.54–8.77 limitation 2.19, 13.49–13.52 negligent misstatements 8.16, 8.54–8.55 management position in audited entity 2.38 negligence claims See also Negligence claim Caparo principle 5.01–5.82, 6.01–6.106, 8.39, 8.58, 13.04 counterclaims 4.49, 15.01–15.12 duty of care 5.01–5.82, 8.54–8.77, 13.04 elements 4.48 generally 4.47–4.49, 8.01–8.05 mitigation of loss 15.13–15.24 negligent misstatements 8.16, 8.54–8.55 recoverable losses 8.83–8.165

Auditor – contd negligence claims – contd remoteness See Remoteness scope of duty See Duty of care standard of care 7.01–7.70 negligent misstatements 8.16, 8.54–8.55 non-audit liability See Non-audit liability officer of the company, as 4.08–4.19 privilege 1.30, 17.36 professional judgment, exercise of 3.02, 3.09, 3.11, 8.58 regulation 3.04–3.06 relationship with company contract, under 4.01–4.02 duty of care 4.03–4.05 duty of confidentiality 2.27, 4.06–4.07 tort, in 4.03–4.05 reliance on another auditor 3.23 removal 2.18 reports 2.12 s 1157 CA 2006 relief generally 4.49, 16.01–16.03 principles governing grant 16.05–16.12 scope 16.04 scope of duty principle 8.54–8.77 servant of the company, as 4.20 status agent, as 4.21–4.26 fiduciary, as 4.27–4.46, 9.08 officer, as 4.08–4.19 servant, as 4.20 tortious liability 1.13–1.19 transparency report 2.42 true and fair view, duty to give 8.08, 8.11, 8.58, 8.155 Avoided loss and benefits recoverable losses 8.160–8.165 B Bonus overpayment recoverable losses 8.94–8.95 Breach of contract contributory negligence 14.05–14.07 liability of auditor 8.01

495

Index Breach of duty See also Breach of fiduciary duty; Duty of care advice as to likely outcome, auditor’s duty to give 7.06 auditing 7.07–7.16, 7.40–7.45 damage caused 8.39 experience 7.46 fraud 7.60–7.66 generally 1.26, 4.48, 7.01–7.06 historical development 7.17–7.38 independence 7.49–7.56 negligent misstatements 8.16, 8.54–8.55 planning the audit 7.57–7.59 pressure of time 7.47 professional responsibility 7.46–7.48 professional scepticism 2.33–2.34, 7.49–7.56 remuneration 7.48 reporting to shareholders 7.67–7.71 standard of care 7.01–7.71 Breach of fiduciary duty conflicts of interest 9.46–9.47, 10.02–10.06 contributory negligence 14.09 liability for non-audit work 9.46–9.47, 9.70, 9.89 Brexit Accounting Standards 3.03 legal framework and 2.01–2.02, 2.08 C Caparo Industries v Dickman application of principle 6.01–6.106, 8.39, 8.58 assumption of responsibility 6.13–6.38 auditor in corporate group 6.39–6.54 corporate transactions 6.13–6.38 duty not owed 6.01–6.12 failed applications to strike out 6.55–6.106 assumption of responsibility 6.13–6.38 auditor in corporate group 6.39–6.54 Commonwealth court decisions 5.55–5.60 corporate transactions 6.13–6.38

Caparo Industries v Dickman – contd Court of Appeal, in 5.08–5.13 duty not owed 6.01–6.12 facts 5.03–5.06 failed applications to strike out cases 6.59–6.100 conclusions 6.101–6.106 generally 6.55–6.58 first instance, at 5.07 generally 5.01–5.02, 13.04 House of Lords, in 5.14–5.43 Lord Bridge speech 5.17–5.28 Lord Jauncey speech 5.40–5.43 Lord Oliver speech 5.29–5.39 summary 5.44–5.47 Causation causa causans 8.03 effective cause 8.03 factual generally 8.02, 8.06–8.13 relationship with other principles 8.78–8.82 generally 1.26, 4.48 legal generally 8.03, 8.14–8.26 relationship with other principles 8.78–8.82 proximate cause 8.03 relationship with other principles 8.78–8.82 substantial cause 8.03 Client account misuse 20.17 Collateral undertaking disclosure rules 17.35 Confidentiality/confidential information audit information generally 2.27, 4.06–4.07 tax authority information request 4.07 compensation for breach 10.01 damages recoverable for breach 10.01 disclosure rules 17.35 fiduciaries, and 10.02–10.06, 10.25–10.39 former clients 10.16 merger cases 10.22–10.24 Prince Jefri Bolkiah v KPMG 10.16–10.21

496

Index Confidentiality/confidential information – contd generally 2.27, 4.06–4.07, 10.01–10.11 misuse of confidential information 10.04 money laundering and client confidentiality 20.90 professional standards 10.12–10.15 terrorism and client confidentiality 20.90 threat of breach 10.01 Conflict of interest accountants and 10.01–10.64 corporate finance advisory work 10.10, 10.40–10.41 double employment rule 10.09 fiduciaries, and 9.46–9.47, 10.02–10.06, 10.14, 10.25–10.39 former client conflicts merger cases 10.22–10.24 Prince Jefri Bolkiah v KPMG 10.16–10.21, 10.22 generally 2.35–2.38, 10.01–10.11 ICAEW Code of Ethics 10.14 IESBA Code of Ethics 10.13–10.15 insolvency practice appointment as receiver by creditor 10.65 appointments to entities with conflicting interests 10.45–10.49 generally 10.42–10.44 sequential appointments 10.50–10.55 significant relationship with connected person 10.56–10.64 significant relationship with entity 10.56–10.64 investment advice 10.08, 10.25–10.34 liability 1.22 merger cases 10.22–10.24 mergers between accountants 10.22–10.24 professional standards 10.12–10.15 quia timet injunctions 10.01 Revised Ethical Standard 10.12 self-dealing 10.08 valuations 10.35–10.39

Continuing defalcations recoverable losses 8.98 Contractual audit liability for non-audit work 9.27 Contractual liability generally 1.10–1.12 relationship between auditor and company 4.01–4.02 Contribution apportionment 14.49–14.53 contributory negligence compared 14.37 generally 14.35–14.39 net contribution clauses 13.18–13.20 overlap with contributory negligence 14.42 ‘same damage’ 14.43–14.48 Contributory negligence apportionment 14.25–14.36 breach of contract claims 8.01, 14.05–14.07 breach of fiduciary duty claims 14.09 claimant’s failure to notice defendant’s negligence 14.12–14.16 contribution compared 14.37 deceit claims 14.08 defendant’s duty of care 14.17–14.24 generally 4.49, 14.01–14.04 identifying fault by claimant claimant’s failure to notice defendant’s negligence 14.12–14.16 generally 14.10–14.11 ‘very thing’ issue 14.17–14.24 overlap with contribution 14.42 scope breach of contract 8.01, 14.05–14.07 breach of fiduciary duty 14.09 deceit 14.08 ‘very thing’ issue 14.17–14.24 Corporate finance advisory work conflicts of interest 10.10, 10.40–10.41 Corporate transaction assumption of responsibility 6.13–6.38 Counterclaim Barings decisions 15.03–15.10 conclusion 15.11–15.12 generally 4.49, 15.01–15.02 set-off 4.49 Criminal liability generally 1.24

497

Index D Deceit contributory negligence 14.08 Defences avoided loss and benefits 4.49, 8.160–8.165 claimant’s failure to mitigate 4.49 contribution apportionment 14.49–14.53 generally 4.47, 14.37–14.41 limitation period 12.34 overlap with contributory negligence 14.42 ‘same damage’ 14.43–14.48 contributory negligence 4.49, 14.01–14.04 apportionment 14.25–14.36 breach of contract claims 14.05–14.07 breach of fiduciary duty claims 14.09 claimant’s failure to notice defendant’s negligence 14.12–14.16 deceit claims 14.08 defendant’s duty of care 14.17–14.24 identifying fault by claimant 14.10–14.24 overlap with contribution 14.42 scope 14.05–14.09 ‘very thing’ issue 14.17–14.24 counterclaims, set off 4.49 disclaimers audit reports 4.49, 13.04–13.12 generally 6.21, 13.01–13.03 ICAEW guidance 13.01, 13.09, 13.12, 13.14 non-audit reports 13.13–13.15 ex dolo malo non oritur actio 11.01 ex turpi causa conclusion 11.58 current approach 11.33–11.57 generally 11.01–11.06 illegality, generally 11.04–11.32 exclusion of liability clauses generally 13.01–13.02, 13.21–13.30 reasonableness requirement 13.31–13.32, 13.41–13.48

Defences – contd exclusion of liability clauses – contd restriction by UCTA 1977 13.31–13.48 statutory audits 13.49–13.52 exemptions 4.49 generally 4.49, 11.01–11.03 ‘hold harmless’ letters generally 13.01, 13.02, 13.16–13.17 ICAEW guidance 13.17 illegality Bilta v Nazir 11.20, 11.22–11.30 ex dolo malo non oritur actio 11.01 ex turpi causa 11.01–11.58 generally 11.04–11.32 Singularis Holdings Ltd v Daiwa 11.31–11.32 Stone & Rolls v Moore Stephens 11.07–11.57 insolvency of audited company 11.02, 11.59–11.73 limitation addition or substitution of parties 12.30 burden of proof 12.19 contribution claims 12.34 expiry, pleading amended after 12.29–12.33 extended limit under section 32 12.24–12.28 facts relevant to cause not known at date of accrual 12.17–12.23 fraud, concealment or mistake 12.24–12.28 generally 4.49, 12.01–12.04 purpose of limitation period 12.02 special limit under section 14A 12.16–12.23 when time ceases to run 12.16 when time starts to run 12.05–12.15 limitation of liability clauses 13.01–13.02, 13.21–13.30 ‘no duty for benefit of creditors’ 11.02, 11.59–11.73 proportionate (net) liability 13.02, 13.18–13.20

498

Index Defences – contd public policy 4.49, 11.01–11.58 s 1157 CA 2006 relief acting honestly and reasonably 4.49 generally 4.49, 16.01–16.03 principles governing grant 16.05–16.12 scope 16.04 Director communication with those charged with governance 3.15–3.18 Directorship auditor accepting, within audited entity 2.38 Disciplinary regimes Accountancy Scheme 19.02, 19.07, 19.29–19.39 generally 19.11–19.13 public interest 19.40–19.42 structure 19.14–19.28 Audit Enforcement Procedure 19.02, 19.43–19.50 Audit Quality Review 19.10 FRC 19.02 generally 1.25, 19.01–19.03 hearings 19.08 ICAEW 19.02, 19.04, 19.07–19.09 investigations 19.08 liability of accountants, generally 1.25, 19.01–19.03 money laundering, supervisory authorities 20.14, 20.120–20.123 recognised supervisory bodies 19.02, 19.04–19.09 registration with 19.06 sanctions 19.08 Disclaimer audit reports 4.49, 6.21, 13.04–13.12 generally 13.01–13.03 ICAEW guidance 13.01, 13.09, 13.12, 13.14 non-audit reports 13.13–13.15 Disclosure after trial has commenced 17.35 auditor’s statutory requirements 4.07 collateral undertaking 17.35 confidential documents 17.35 continuing nature of duty 17.35 generally 17.01

Disclosure – contd money laundering disclosure regime authorised disclosures 20.25, 20.41–20.42 generally 20.39–20.44 reporting suspicions 20.45–20.56 non-party disclosure 17.01, 17.53–17.55 Pilot scheme for Business and Property Courts 17.02, 17.29, 17.34 pre-action disclosure contractual rights 17.04–17.05 CPR 31.16 applications 17.12–17.24 equitable rights 17.04–17.05 generally 17.01, 17.03 Insolvency Act 1986, s 236 applications 17.25–17.28 Professional Negligence Pre-Action Protocol 17.06–17.11 prejudicing an investigation 20.84–20.88 privilege generally 17.36–17.37 legal advice 17.36, 17.38–17.47 litigation 17.36, 17.48–17.52 self-incrimination, against 17.36 types 17.36 without prejudice 17.36 related-party disclosure 3.22 specific disclosure 17.56–17.57 standard disclosure costs burden 17.34 CPR regime 17.29–17.35 privilege 17.36–17.49 tax avoidance 9.91–9.92 whistle-blowing 2.49, 2.55 Dividend overpayment recoverable losses 8.83–8.93 Dormant company audit requirement 2.09 Double employment rule conflicts of interest 10.09 valuer, accountant acting as 10.09 Due diligence liability for non-audit work 9.21 range of activities 1.07

499

Index Duty of care assumption of responsibility, corporate transactions 6.13–6.38 auditor’s advice as to likely outcome 7.06 auditor in corporate group 6.39–6.54 auditor’s relationship with company 4.03–4.05 generally 13.04 information, duty to provide 8.55–8.56 materially misstated financial statements 8.54 negligent misstatements 8.16, 8.54–8.55 professional judgment, exercise of 8.58 recoverable damages 8.55 suspected fraud 8.54–8.58, 8.60–8.61, 11.18 true and fair view, duty to give 8.08, 8.11, 8.58, 8.155 BCCI v Price Waterhouse 5.71, 5.77–5.80, 8.57–8.60 breach See Breach of duty ‘but for’ test 8.02 Caparo Industries v Dickman Commonwealth court decisions 5.55–5.60 Court of Appeal, in 5.08–5.13 facts 5.03–5.06 first instance, at 5.07 generally 5.01–5.02, 13.04 House of Lords, in 5.14–5.43 Lord Bridge speech 5.17–5.28 Lord Jauncey speech 5.40–5.43 Lord Oliver speech 5.29–5.39 summary 5.44–5.47 Caparo principle, application assumption of responsibility 6.13–6.38 auditor 6.39–6.54, 8.58, 13.4 corporate transactions 6.13–6.38 duty not owed 6.01–6.12 failed applications to strike out 6.55–6.106 generally 6.01–6.106, 8.39, 8.58

Duty of care – contd causation generally 8.02, 8.06–8.26 relationship with other principles 8.78–8.82 contributory negligence defence and 14.17–14.24 corporate transactions 6.13–6.38 Customs & Excise Commissioners v Barclays Bank plc 5.64–5.70 duty not owed 6.01–6.12 factual causation generally 8.02, 8.06–8.13 relationship with other principles 8.78–8.82 failed applications to strike out cases 6.59–6.100 conclusions 6.101–6.106 generally 6.55–6.58 generally 1.26, 4.48, 8.01–8.05 legal causation generally 8.03, 8.14–8.26 relationship with other principles 8.78–8.82 liability See also Liability disclaimers 4.49, 6.21, 13.01–13.15 generally 8.39 McNaughton v Hicks Anderson 5.76 negligent misstatement 8.16 post-Caparo approach 5.61–5.82 purpose of audit 8.55–8.58 reasonableness requirement 5.82 recoverable losses audit fees 8.100 avoided loss and benefits 4.49, 8.160–8.165 continuing defalcations 8.98 investigation costs 8.99 liability of auditor, generally 8.01 loans 8.146–8.147 loss of chance 8.148–8.149 overpaid bonuses 8.94–8.95 overpaid dividends 8.83–8.93 overpaid tax 8.96–8.97 reflective loss 8.157–8.159 share issues 8.146–8.147 special duty of care established, where 8.150–8.156 trading losses 8.101–8.145

500

Index Duty of care – contd remoteness generally 1.26, 4.48, 8.04, 8.27–8.37, 8.38 relationship with other principles 8.78–8.82 scope advice, duty to provide 8.45–8.51 audit cases 8.54–8.77 ‘but for’ test 8.02 Caparo principle 8.39 causation 1.26, 8.06–8.26, 8.38, 8.79 context of claim 8.39 damage caused 8.39 framework 8.01–8.05 generally 1.26, 4.48, 8.01, 8.05, 8.38 information, duty to provide 8.45–8.51 key authorities on 8.39–8.51 recoverable losses 8.83–8.165 relationship with other principles 8.78–8.82 remoteness 1.26, 8.04, 8.27–8.37, 8.38 SAAMCO principle 8.38, 8.40–8.42, 8.44, 8.50–8.53, 8.63, 8.66 summary of principle 8.52–8.53 Seddon v DVLA 5.75 standard of care, and audit task 7.40–7.45 auditing, in 7.07–7.16 experience 7.46 fraud 7.60–7.66 generally 7.01–7.06 historical development 7.17–7.38 independence 7.49–7.56 planning the audit 7.57–7.59 pressure of time 7.47 professional responsibility 7.46–7.48 professional scepticism 2.33–2.34, 7.49–7.56 remuneration 7.48 reporting to shareholders 7.67–7.71 specific issues 7.39–7.71 time 7.47

E Equitable liability generally 1.20–1.23 EU legislation Accounting Directive 2013/34 2.21–2.25 Eighth Company Law Directive 2006/43 2.26–2.39 generally 2.26–2.39 preparation of accounts 2.21–2.25 public interest entities 2.40–2.51 Regulation 537/2014 2.08, 2.40–2.51 retained 2.40–2.51 Ex dolo malo non oritur actio generally 11.01 Ex turpi causa conclusion 11.58 current approach 11.33–11.57 generally 11.01–11.06 Exclusion of liability clauses contra proferentem rule 13.24 duty-defining clauses and 13.34–13.40 generally 13.01–13.02, 13.21–13.30 legislative regime 13.30–13.48 reasonableness requirement 13.31–13.32, 13.41–13.48 scope 13.24–13.25 statutory audits 13.49–13.52 third parties 13.26–13.29 Experience standard of care, and 7.46 Expert evidence admissibility 18.04–18.08 discussions between experts 18.27–18.30 duties of experts 18.09–18.13 generally 3.24, 18.01–18.03 no immunity from suit 18.34–18.37 range of activities 1.09 report by expert 18.16–18.22 requests for directions 18.31 single joint experts 18.14–18.15 trial, at 18.32–18.33 written questions to experts 18.23–18.26 Expert witness advice liability 9.113

501

Index F Factual causation generally 8.02, 8.06–8.13 relationship with other principles 8.78–8.82 Failed applications to strike out cases 6.59–6.100 conclusions 6.101–6.106 generally 6.55–6.58 False accounting risk assessment 20.17 Fiduciary breach of fiduciary duty 9.46–9.47, 9.70, 9.89, 10.02–10.06, 14.09 conflicts of interest 9.46–9.47, 10.05–10.06, 10.14, 10.25–10.39 former client conflicts 10.16–10.24 generally 1.20–1.21 investment advice, giving 10.25–10.34 status of auditors 4.27–4.46, 9.08 valuations, fiduciary duty 10.35–10.39 Finance raising liability for non-audit work 9.22–9.26 Financial Action Task Force (FATF) Guidance to Accountants 20.08, 20.18 Financial Conduct Authority (FCA) anti-money laundering framework and 20.14 generally 2.54 Financial Reporting Council (FRC) Accounting Standards 3.01 Audit Quality Review 19.1, 19.02, 19.46, 19.50 Auditing Standards 3.07 disciplinary regime 19.02 replacement 19.03, 19.51 Revised Ethical Standard 3.06 Financial statement Accounting Standards 3.02 annual, publication 2.25 approval 3.02 duty of auditor 8.54–8.58 materially misstated 8.54–8.55 Forensic accountancy liability 9.113

Fraud auditor’s duty to report 8.54–8.58, 8.60–8.61, 11.18 ex dolo malo non oritur actio 11.01 fraudulent misstatements 3.14 limitation periods 12.24–12.28 standard of care 7.60–7.66 suspected, auditor’s duty to report 8.54–8.58 Value Added Tax 20.17, 20.68 G Galoo v Bright Grahame Murray recoverable losses 8.03, 8.20–8.22, 8.86, 8.111–8.145, 11.64–11.65, 11.73 Generally Accepted Accounting Principles (GAAP) Accounting Standards 3.02 Group company preparation of accounts 2.04 H ‘Hold harmless’ letter generally 13.01, 13.02, 13.16–13.17 ICAEW guidance 13.17 I ICAEW anti-money laundering framework and 20.14, 20.148 authorisation of auditors 3.05 Code of Ethics 10.14, 19.07 disciplinary regime 19.02, 19.07–19.09 recognised supervisory body, as 19.04, 19.07 IESBA Code of Ethics conflicts of interest 10.13–10.15 Illegality, defence of Bilta v Nazir 11.20, 11.22–11.30 ex dolo malo non oritur actio 11.01 ex turpi causa 11.01–11.58 generally 4.49, 11.04–11.32 Singularis Holdings Ltd v Daiwa 11.31–11.32 Stone & Rolls v Moore Stephens Court of Appeal, in 11.11 facts and issues 11.07–11.09, 11.19–11.30

502

Index Illegality, defence of – contd Stone & Rolls v Moore Stephens – contd first instance, at 11.10 House of Lords, in 11.13–11.18 reconsideration in principle 11.33–11.57 Independence standard of care, and 7.49–7.56 Insolvency adviser or office holder conflicts of interest appointment as receiver by creditor 10.65 appointments to entities with conflicting interests 10.45–10.49 generally 10.42–10.44 sequential appointments 10.50–10.55 significant relationship with connected person 10.56–10.64 significant relationship with entity 10.56–10.64 succession of appointments 10.49–10.54 liability 9.117–9.127 range of activities 1.06 Insolvency of audited company as defence 11.02, 11.59–11.73 International Accounting Standards (IAS) UK-adopted 3.03 Investment advice conflict of interest 10.08 conflicts of interest 10.08, 10.25–10.34 fiduciary duty 10.25–10.34 liability for 9.114–9.116 range of activities 1.04 recoverable losses 8.99 self-dealing 10.08 K Kingman Review recommendations 19.51 L Legal advice privilege generally 1.30, 17.36, 17.38–17.47

Legal causation generally 8.03, 8.14–8.26 relationship with other principles 8.78–8.82 Legal and regulatory framework Accounting Standards 3.02–3.03 Auditing Standards 3.07–3.26 authorisation of auditors 3.04–3.06 Brexit and 2.01–2.02, 2.08 Companies Act 2006 acting honestly and reasonably 4.49 generally 2.02, 2.07–2.20 preparation of accounts 2.03–2.06 s 1157 relief 4.49, 16.01–16.012 Competition and Markets Authority Order 2.52–2.53 Criminal Finances Act 2017 20.04, 20.67–20.75 EU legislation generally 2.26–2.39 preparation of accounts 2.21–2.25 public interest entities 2.40–2.51 Financial Services and Markets Act 2000 2.54–2.55 generally 2.01–2.02, 3.01 Generally Accepted Accounting Principles (GAAP) 3.02 ICAEW Members’ Handbook 3.05 International Standards on Auditing (ISAs) 3.07–3.26 Money laundering Regulations 2017 See Money laundering Proceeds of Crime Act 2002 See Money laundering Reduced Disclosure Framework 3.03 regulation of auditors 3.04–3.06 Revised Ethical Standard 3.06 Statement of Recommended Practice (SORP) 3.03 Terrorism Act 2000 20.13, 20.77–20.83, 20.84–20.88, 20.106 UK GAAP 3.03 Liability contractual 1.10–1.12 criminal 1.24 damage caused 8.39 disciplinary 1.25, 19.01–19.03

503

Index Liability – contd disclaimers audit reports 4.49, 6.21, 13.04–13.12 generally 13.01–13.03 ICAEW guidance 13.01, 13.09, 13.12, 13.14 non-audit reports 13.13–13.15 duty of care See Duty of care equitable 1.20–1.23 factual causation 8.03–8.13 fiduciary 1.20–1.21, 9.46–9.47 generally 8.01, 8.39 legal causation 8.03, 8.14–8.26 non-audit See Non-audit liability tortious 1.13–1.19 Limitation defence addition or substitution of parties 12.30 burden of proof 12.19 concealment 12.24–12.28 contribution claims 12.34 date actionable damage sustained 12.05–12.15 extended limit under section 32 12.24–12.28 facts relevant to cause not known at date of accrual 12.17–12.23 fraud, concealment or mistake 12.24–12.28 generally 4.49, 12.01–12.04 limitation period expiry, pleading amended after 12.29–12.33 mistake 12.24–12.28 pleading 12.03 primary limitation period 12.04 purpose of limitation period 12.02 special limit under section 14A 12.17–12.23 when time ceases to run 12.16 when time starts to run 12.05–12.15 Limitation of liability clause contra proferentem rule 13.24 duty-defining clauses and 13.34–13.40 generally 13.01–13.02, 13.21–13.30 legislative regime 13.30–13.48 monetary limits 13.23 proportionate (net) liability clauses 13.02, 13.18–13.20

Limitation of liability clause – contd reasonableness requirement 13.31–13.32, 13.41–13.48 restriction by UCTA 1977 13.31–13.48 scope 13.24–13.25 statutory audits 13.49–13.52 third parties 13.26–13.29 time period for claims, limiting 13.23 type of loss, limiting 13.23 Listing particulars liability for non-audit work 9.49–9.53 Litigation issues See also Negligence claims disclosure after trial has commenced 17.35 collateral undertaking 17.35 confidential documents 17.35 continuing nature of duty 17.35 generally 17.01 non-party disclosure 17.01, 17.53–17.55 pre-action disclosure 17.03–17.28 privilege 17.36–17.52 specific disclosure 17.56–17.57 standard disclosure 17.29–17.52 expert evidence admissibility 18.04–18.08 discussions between experts 18.27–18.30 duties of experts 18.09–18.13 generally 18.01–18.03 no immunity from suit 18.34–18.37 report by expert 18.16–18.22 requests for directions 18.31 single joint experts 18.14–18.15 trial, at 18.32–18.33 written questions to experts 18.23–18.26 range of activities 1.09 Litigation privilege burden of proof 17.48 generally 17.36, 17.48–17.52 Loss of chance recoverable losses 8.148–8.149

504

Index Loss claimed See also Recoverable loss audit fees 8.100 auditor’s duty of care 8.38–8.77 avoided loss and benefits 4.49, 8.160–8.165 continuing defalcations 8.98 Galoo v Bright Grahame Murray 8.03, 8.20–8.22, 8.86, 8.111–8.145, 11.64–11.65, 11.73 investigation costs 8.99 loans 8.146–8.147 loss of chance 8.148–8.149 overpaid bonuses 8.94–8.95 overpaid dividends 8.83–8.93 overpaid tax 8.96–8.97 reflective loss 8.157–8.159 share issues 8.146–8.147 special duty of care established, where 8.150–8.156 trading losses case law before Galoo 8.101–8.110 Galoo v Bright Grahame Murray 8.111–8.145, 11.64–11.65, 11.73 M Merger between accountants, conflicts of interest 10.22–10.24 merger cases, conflicts of interest 10.22–10.24 Micro-entity preparation of accounts 2.04, 2.21, 2.22 Misstatement auditor’s duty to report 8.54–8.56 fraudulent 3.14 limitation defence 12.24–12.28 material 3.09, 3.14, 3.19 negligent 8.16, 8.54–8.55 risk of, assessment 3.19 Mitigation of loss generally 4.49, 15.13–15.24 Money laundering accountancy sector guidance for 20.124–20.128 key threats and vulnerabilities 20.17

Money laundering – contd acquisition, use and possession of criminal property 20.22, 20.32 auditors, guidance for 20.134–20.143 authorised disclosures 20.25, 20.41–20.42 client confidentiality 20.90 compliance procedures, development 20.07 concealing, disguising or converting criminal property 20.22, 20.26–20.28 concerned in arrangements 20.22, 20.29–20.31 consent regime 20.25, 20.39–20.44, 20.58–20.66 criminal conduct 20.23, 20.34–20.38 Criminal Finances Act 2017 20.04, 20.67–20.75 criminal property 20.17, 20.22–20.24, 20.33–20.38 customer due diligence measures 20.98–20.99, 20.93 definition 20.19 disclosure regime generally 20.39–20.44 reporting suspicions 20.45–20.56, 20.93 dual criminality 20.73–20.75 employee training 20.54, 20.72, 20.93, 20.114, 20.116 EU policy 20.05, 20.11–20.12 facilitation 20.02–20.03, 20.06, 20.09, 20.130–20.131 failure to comply 20.117–20.119 FATF Guidance 20.08 generally 20.01–20.14 internal controls, policies and procedures 20.93, 20.108–20.111 knowledge or suspicion 20.19, 20.24 legal framework 20.07–20.14 Money Laundering Reporting Officer 20.82, 20.113, 20.115–20.116, 20.127, 20.137 monitoring compliance 20.108, 20.120–20.121 Nominated Officers 20.40, 20.50–20.51, 20.57, 20.59, 20.138

505

Index Money laundering – contd offences acquisition, use and possession of criminal property 20.22, 20.32 concealing, disguising or converting criminal property 20.22, 20.26–20.28 concerned in arrangements 20.22, 20.29–20.31 generally 20.22–20.25 knowledge or suspicion 20.19, 20.24 ‘parasitic’ offences 20.20 prejudicing an investigation 20.84–20.88 privilege 20.144–20.148 Proceeds of Crime Act 2002 acquisition, use and possession of criminal property 20.22, 20.32 authorised disclosures 20.25, 20.41–20.42 concealing, disguising or converting criminal property 20.22, 20.26–20.28 concerned in arrangements 20.22, 20.29–20.31 consent regime 20.25, 20.39–20.44, 20.58–20.66 criminal conduct 20.23, 20.34–20.38 criminal property 20.17, 20.22–20.24, 20.33–20.38, 20.68 disclosure regime 20.20, 20.25, 20.39–20.44 generally 20.02, 20.13, 20.19–20.20 knowledge or suspicion 20.19, 20.24 Nominated Officers 20.40, 20.50–20.51, 20.57, 20.59, 20.138 offences 20.20–20.25 prejudicing an investigation 20.84–20.88 regulated sector 20.20–20.21 reporting suspicions 20.45–20.56 tax evasion 20.17, 20.68 tipping off 20.84–20.88 VAT fraud 20.17

Money laundering – contd record keeping 20.93, 20.108, 20.112 regulated sector 20.20–20.21 Regulations 2007, replacement 20.11 Regulations 2017 beneficial owner 20.100, 20.102 customer 20.101–20.103 customer due diligence 20.93, 20.98–20.99, 20.108 employee training 20.114 enhanced due diligence measures 20.107 failure to comply 20.117–20.119 generally 20.02, 20.06, 20.91–20.94 internal controls, policies and procedures 20.93, 20.108–20.111 monitoring compliance 20.108, 20.120–20.121 record keeping 20.93, 20.108, 20.112 reporting procedures 20.113 resourcing and staffing 20.115–20.116 risk management 20.108 scope 20.95–20.97 simplified due diligence measures 20.104–20.106 supervisory authorities 20.14, 20.120–20.123 suspicious transactions 20.19, 20.113 reporting procedures 20.113 risk assessment 20.08, 20.11, 20.15–20.18, 20.72, 20.92, 20.103, 20.106–20.107, 20.125 Risk Assessment on Money Laundering and Terrorist Financing 20.07, 20.15–20.18, 20.68 risk management 20.108, 20.115 supervisory authorities 20.14, 20.120–20.123 guidance issued by 20.122–20.143 Suspicious Activity Reports (SARs) 20.44, 20.84–20.85, 20.88–20.89, 20.116 suspicious transactions 20.19, 20.24, 20.93, 20.113 reporting 20.45–20.56, 20.93, 20.113

506

Index Money laundering – contd tax evasion 20.17, 20.67–20.75 tax practitioners, guidance for 20.129–20.133 terrorism, and client confidentiality 20.90 counter-terrorism financing framework 20.10, 20.76–20.83 generally 20.07 Money Laundering Regulations 2017 20.02, 20.07, 20.89 Proceeds of Crime Act 2002 20.13 Risk Assessment on Money Laundering and Terrorist Financing 20.07, 20.15–20.18, 20.68, 20.116 Terrorism Act 2000 20.13, 20.77–20.83, 20.84–20.88, 20.106 terrorist property, definition 20.80 test of criminality 20.83 tipping off 20.84–20.86 UK nexus 20.73–20.75 VAT fraud 20.17, 20.68 N National Crime Agency (NCA) money laundering disclosure to 20.41, 20.50–20.51, 20.57–20.59, 20.82, 20.113, 20.138 Suspicious Activity Reports (SARs) 20.88–20.89, 20.116 Negligence claim breach of duty See Breach of duty contribution apportionment 14.49–14.53 generally 4.47, 14.37–14.41 overlap with contributory negligence 14.42 ‘same damage’ 14.43–14.48 contributory negligence apportionment 14.25–14.36 breach of contract claims 8.01, 14.05–14.07 breach of fiduciary duty claims 14.09 claimant’s failure to notice defendant’s negligence 14.12–14.16

Negligence claim – contd contributory negligence – contd deceit claims 14.08 defendant’s duty of care 14.17–14.24 generally 4.49, 14.01–14.04 identifying fault by claimant 14.10–14.24 limitation of contribution claims 12.34 overlap with contribution 14.42 scope 14.05–14.09 ‘very thing’ issue 14.17–14.24 counterclaims Barings decisions 15.03–15.10 conclusion 15.11–15.12 generally 4.49, 15.01–15.02 date actionable damage sustained 12.05–12.15 defences contribution 4.47, 14.37–14.53 contributory negligence 4.49, 14.01–14.34 disclaimers 13.03–13.15 ex dolo malo non oritur actio 11.01 ex turpi causa 11.01–11.58 exclusion of liability clauses 13.21–13.52 generally 4.49, 11.01–11.03 ‘hold harmless’ letters 13.01, 13.02, 13.16–13.17 illegality 11.01–11.58 limitation 12.01–12.34 ‘no duty for benefit of creditors’ 11.02, 11.59–11.73 proportionate (net) liability 13.02, 13.18–13.20 public policy 11.01–11.58 disclaimers audit reports 4.49, 6.21, 13.04–13.12 generally 13.01–13.03 ICAEW guidance 13.01, 13.09, 13.12, 13.14 non-audit reports 13.13–13.15 disclosure generally 17.01 non-party disclosure 17.01, 17.53–17.55

507

Index Negligence claim – contd disclosure – contd pre-action disclosure 17.03–17.28 privilege 17.36–17.52 specific disclosure 17.56–17.57 standard disclosure 17.29–17.52 duty of care audit cases 8.54–8.77 Caparo principle 5.01–5.60, 6.01–6.106, 8.39, 13.04 causation 8.06–8.26 context of claim 8.39 damage caused 8.39 disclaimers 6.21, 13.01–13.12 generally 1.26, 4.48, 8.01–8.05 post-Caparo requirements 5.61–5.82 recoverable losses 8.83–8.165 relationship with other principles 8.78–8.82 remoteness See Remoteness scope of duty See Duty of care elements 4.48 ex dolo malo non oritur actio 11.01 ex turpi causa conclusion 11.58 current approach 11.33–11.57 generally 11.01–11.06 exclusion of liability clauses generally 13.01–13.02, 13.21–13.30 reasonableness requirement 13.31–13.32, 13.41–13.48 restriction by UCTA 1977 13.31–13.48 statutory audits 13.49–13.52 expert evidence admissibility 18.04–18.08 discussions between experts 18.27–18.30 duties of experts 18.09–18.13 generally 18.01–18.03 no immunity from suit 18.34–18.37 report by expert 18.16–18.22 requests for directions 18.31 single joint experts 18.14–18.15 trial, at 18.32–18.33 written questions to experts 18.23–18.26

Negligence claim – contd factual causation 8.06–8.13 generally 4.47 ‘hold harmless’ letters 13.01, 13.02, 13.16–13.17 illegality as defence Bilta v Nazir 11.20, 11.22–11.30 ex dolo malo non oritur actio 11.01 ex turpi causa 11.01–11.58 Stone & Rolls v Moore Stephens 11.07–11.57 legal causation 8.14–8.26 liability of auditor, generally 8.01 limitation of liability clauses generally 13.01–13.02, 13.21–13.30 reasonableness requirement 13.31–13.32, 13.41–13.48 restriction by UCTA 1977 13.31–13.48 statutory audits 13.49–13.52 limitation periods contribution claims 12.34 expiry, pleading amended after 12.29–12.33 extended limit under section 32 12.24–12.28 facts relevant to cause not known at date of accrual 12.17–12.23 fraud, concealment or mistake 12.24–12.28 generally 12.01–12.04 special limit under section 14A 12.17–12.23 when time ceases to run 12.16 when time starts to run 12.05–12.15 litigation issues disclosure 17.01–17.57 expert evidence 18.01–18.37 mitigation of loss 15.13–15.24 negligent misstatements 8.16, 8.54–8.55 ‘no duty for benefit of creditors’ 11.02, 11.59–11.73 non-audit work accounts 9.10–9.20 contractual audits 9.27

508

Index Negligence claim – contd non-audit work – contd due diligence 9.21 expert witness advice 9.113 finance raising 9.22–9.26 forensic accountancy 9.113 general principles 9.01–9.09 insolvency advice 9.117–9.127 investment advice 9.114–9.116 listing particulars 9.49–9.53 other reports required by legislation 9.43–9.48 prospectuses 9.49–9.69 public sector audits 9.28–9.29 reporting to regulators 9.30–9.39 takeover accounts 9.10–9.20 taxation advice and agency 9.90–9.112 valuations 9.70–9.89 ‘whitewash’ reports 9.40–9.42 proportionate (net) liability 13.02, 13.18–13.20 public policy 11.01–11.58 standard of care 7.01–7.71 Net contribution clause generally 13.18–13.20 Net liability clause generally 13.18–13.20 ‘No duty for benefit of creditors’ generally 11.02, 11.59–11.73 Non-audit liability accounts 9.10–9.20 agency 9.90–9.112 breach of fiduciary duty 9.46–9.47, 9.70, 9.89 contractual audits 9.27 due diligence 9.21 expert witness advice 9.113 finance raising 9.22–9.26 forensic accountancy 9.113 general principles 9.01–9.09 insolvency adviser or office holder 9.117–9.127 investment advice 9.114–9.116 listing particulars 9.49–9.53 other reports required by legislation 9.43–9.48 preparation of accounts 9.10–9.20 prospectuses 9.49–9.69 public sector audits 9.28–9.29

Non-audit liability – contd raising finance 9.22–9.26 reporting to regulators 9.30–9.39 takeover accounts 9.10–9.20 tax advice and agency 9.90–9.112 valuations ‘bracket approach’ 9.72–9.88 breach of fiduciary duty 9.70, 9.89 double employment rule, breach 10.09 generally 9.70–9.71 ‘whitewash’ reports 9.40–9.42 Non-party disclosure generally 17.01, 17.53–17.55 O Officer of the company status of auditors 4.08–4.19 Omission material 3.09 P Planning the audit auditing standards 3.19 standard of care, and 7.57–7.59 Pre-action disclosure contractual rights 17.04–17.05 CPR 31.16 applications 17.12–17.24 equitable rights 17.04–17.05 generally 17.01, 17.03 Insolvency Act 1986, s 236 applications 17.25–17.28 Professional Negligence Pre-Action Protocol 17.06–17.11 Pressure of time standard of care, and 7.47 Private company audit requirement 2.10 preparation of accounts 2.04 Privilege accountancy profession 20.144–20.148 generally 1.30, 17.36–17.37 legal advice 1.30, 17.36, 17.38–17.47 litigation 17.36, 17.48–17.52 self-incrimination, against 17.36 types 17.36 without prejudice 17.36

509

Index Professional responsibility standard of care, and 7.46–7.48 Professional scepticism auditing standards 3.10–3.11 generally 2.33–2.34, 7.49–7.56 standard of care, and 2.33–2.34, 7.49–7.56 tax avoidance and 9.94 Professional standards conflicts of interest 10.12–10.15 Proportionate liability generally 13.02, 13.18–13.20 Prospectus liability for non-audit work 9.49–9.69 Prudential Regulation Authority (PRA) generally 2.54 Public company preparation of accounts 2.04 Public interest entity auditing 2.11, 3.25 auditor independence 2.40–2.45, 2.47 auditor’s whistle-blowing duties 2.49 engagement quality control review 2.46 preparation of accounts 2.04 reappointment of auditor, maximum term 2.50 retained EU legislation 2.40–2.51 Public policy defences ex dolo malo non oritur actio 11.01 ex turpi causa conclusion 11.58 current approach 11.33–11.57 generally 11.01–11.32 generally 4.49, 11.01–11.03 illegality Bilta v Nazir 11.20, 11.22–11.30 generally 11.01–11.32 Stone & Rolls v Moore Stephens 11.07–11.57 Public sector audit liability 9.28–9.29 Q Quia timet injunction conflicts of interest 10.01 Quoted company preparation of accounts 2.04

R Raising finance liability for non-audit work 9.22–9.26 Recoverable loss assessment 1.26 audit fees 8.100 avoided loss and benefits 4.49, 8.160–8.165 causation See Causation continuing defalcations 8.98 investigation costs 8.99 loans 8.146–8.147 loss of chance 8.148–8.149 overpaid bonuses 8.94–8.95 overpaid dividends 8.83–8.93 overpaid tax 8.96–8.97 reflective loss 8.157–8.159 remoteness See Remoteness share issues 8.146–8.147 special duty of care established, where 8.150–8.156 trading losses 8.101–8.145 Reduced Disclosure Framework Accounting Standards 3.03 Reflective loss recoverable losses 8.157–8.159 Reliance generally 1.26 Remoteness generally 1.26, 4.48, 8.04, 8.27–8.37, 8.38 relationship with other principles 8.78–8.82 test for 8.28–8.30 unrecoverable losses 8.04, 8.31–8.37 Remuneration standard of care and 7.48 Reporting to regulators liability for non-audit work 9.30–9.39 Reporting to shareholders standard of care 7.67–7.71 Revised Ethical Standard conflicts of interest 10.12 generally 3.06 S Scepticism See Professional scepticism Secret profits fiduciary liability 1.21, 9.46–9.47

510

Index Self-dealing conflict of interest 10.08 Self-incrimination privilege 17.36 Servant of the company status of auditors 4.20 Set off counterclaims 4.49 Share issue recoverable losses 8.146–8.147 Small company preparation of accounts 2.04 requirement for audit 2.09 Specific disclosure generally 17.56–17.57 Standard of care advice as to likely outcome, auditor’s duty to give 7.06 audit task 7.07–7.16, 7.40–7.45 experience 7.46 factual causation 8.06–8.13 fraud 7.60–7.66 generally 7.01–7.06 historical development 7.17–7.38 independence 7.49–7.56 planning the audit 3.19, 7.57–7.59 pressure of time 7.47 professional responsibility 7.46–7.48 professional scepticism 2.33–2.34, 7.49–7.56 remuneration 7.48 reporting to shareholders 7.67–7.71 specific issues 7.39–7.71 time 7.47 Standard disclosure CPR regime 17.29–17.35 privilege 17.36–17.52 Standards Accounting 3.02–3.03 Auditing 3.07–3.26 Statement of Recommended Practice (SORP) Accounting Standards 3.03 Statutory (s 1157 CA 2006) relief acting honestly and reasonably 4.49 generally 4.49, 16.01–16.03 principles governing grant 16.05–16.12 scope 16.04

Stock-take/physical inventory auditor taking 3.20 Subsidiary Reduced Disclosure Framework 3.03 requirement for audit 2.09 T Takeover accounts liability for non-audit work 9.10–9.20 Tax advice liability for non-audit work 9.90–9.112 status of auditors 4.21–4.26 tax planning and tax avoidance 9.91 Tax agent liability for non-audit work 9.90–9.112 range of activities 1.05 status of auditors 4.21–4.26 Tax authority information notice from 4.07 Tax avoidance DOTAS guidance 9.91, 9.92 General Anti-Abuse Rule 9.91 Tax compliance inaccuracy in tax returns, duty to warn company of 9.97, 11.43 professional scepticism, exercise of 9.94 role of accountants 9.90 tax compliance retainers 9.92 Tax evasion Criminal Finances Act 2017 20.04, 20.67–20.75 dual criminality 20.73–20.75 facilitation 20.03, 20.04, 20.17, 20.67–20.75 Proceeds of Crime Act 2002 20.17, 20.68 UK nexus 20.73–20.75 Tax overpayment recoverable losses 8.96–8.97 Tax practitioner anti-money laundering guidance for 20.129–20.133 Tax underpayment liability of accountant 9.96

511

Index Terrorist financing client confidentiality 20.90 counter-terrorism financing framework 20.10, 20.76–20.83 Money Laundering Regulations 2017 beneficial owner 20.100, 20.102 customer 20.101–20.103 customer due diligence 20.93, 20.98–20.99, 20.108 employee training 20.114 enhanced due diligence measures 20.107 failure to comply 20.117–20.119 generally 20.02, 20.06, 20.07, 20.91–20.94 internal controls, policies and procedures 20.93, 20.108–20.111 monitoring compliance 20.108, 20.120–20.121 record keeping 20.93, 20.108, 20.112 reporting procedures 20.113 resourcing and staffing 20.115–20.116 risk management 20.108 scope 20.95–20.97 simplified due diligence measures 20.104–20.106 supervisory authorities 20.14, 20.120–20.123 suspicious transactions 20.19, 20.113 Risk Assessment on Money Laundering and 20.07, 20.15–20.18, 20.68 Terrorism Act 2000 20.13, 20.77–20.83, 20.84–20.88, 20.106 terrorist property, definition 20.80 test of criminality 20.83

Time See also Limitation defence standard of care, and 7.47 Tortious liability generally 1.13–1.19 relationship between auditor and company 4.03–4.05 Trading loss case law before Galoo 8.101–8.110 Galoo v Bright Grahame Murray 8.111–8.145, 11.64–11.65, 11.73 Transparency report audit of public-interest entities 2.42 True and fair view duty of auditor 8.08, 8.11, 8.58, 8.155 preparation of accounts 2.05, 2.23 U UK GAAP Accounting Standards 3.03 Unquoted company preparation of accounts 2.04 V Valuation conflicts of interest 10.35–10.39 fiduciary duty 10.35–10.39 liability for non-audit work 9.69–9.88 W Whistle-blowing auditor, by 2.49, 2.55 ‘Whitewash’ report liability for non-audit work 9.40–9.42 Without prejudice privilege generally 17.36

512