1. Please treat all transactions and clients' names as confidential Accountants' and Auditors' Liability Seminar with Simon Salzedo QC and Tony Singla of Brick Court Chambers Thursday, 7 April 2016

2. CAPARO & STONE & ROLLS SIMON SALZEDO Q.C. Brick Court Chambers 7 April 2016

3. Caparo v Dickman  [1990] 2 AC 605  Caparo’s 2 claims  Any potential corporate bidder  Shareholder qua potential buyer of more shares  Any potential bidder claim rejected as part of the retreat from Anns v Merton

4. Caparo – First instance  Argument for claimant:  Statutory requirement for report to shareholders – proximity, akin to contract  Eminently foreseeable that shareholders would consider buying or selling shares on basis of report  Sir Neil Lawson [1988] 4 BCC 144  Contract was with company  Statute imposed no liability  Shareholders as a body could sack auditor  No duty of care to shareholders at all

5. Caparo – Court of Appeal  [1989] QB 653 (6 days)  Bingham LJ  Statutory scheme to ensure shareholders have independent information about the company and their investment  Investment in shares is economically important  Duty owed  Taylor LJ  Duty owed  O’Connor LJ  Duty only owed to shareholders as a body and any loss recoverable by company

6. Caparo – House of Lords  [1990] 2 AC 605 (6 days) (53 cases)  Lord Bridge, Lord Oliver, Lord Jauncey (Lord Roskill, Lord Ackner)  Relevant duty NOT owed

7. Caparo: House of Lords (2)  Threefold test  Foreseeability  Proximity  Fair just & reasonable  Shareholders qua general meeting entitled to a remedy against auditors, but that claim brought by company. (Reflective loss).

8. Caparo: House of Lords (3)  “It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.”  Scope of duty – see later SAAMCO.

9. Caparo – Wrap Up  Truly seminal  Could have gone either way  Common ground that auditor’s primary duty is owed to company  Additional duty to shareholders owed only to the body – irrelevant for practical purposes

10. Stone & Rolls v Moore Stephens - facts  One man company  Used to defraud banks  Bank sued company and won  Company, now insolvent, sued auditors for failing to detect fraud  Moore Stephens applied to strike out on ground of ex turpi causa non oritur actio

11. Stone & Rolls – House of Lords  [2009] 1 AC 1391  3 days, 128 cases  Lord Mance bemoans points not fully argued.

12. Stone & Rolls – majority decision  3 different sets of reasoning.  Basis of the claim was the company’s own fraud, so the claim is barred by ex turpi causa.  Lord Phillips: auditors owe no duty for benefit of creditors.  Lord Walker, Lord Brown: Stojevic could not recover, nor could his company.

13. Stone & Rolls – misunderstanding of Caparo  The majority all expressed the view that the auditors duty was not owed for the benefit of creditors and attributed that to Caparo.  That is completely wrong. Caparo was not concerned with who benefits from the auditor’s duty to the company.  See Salzedo in Butterworths Journal of International Banking and Financial Law Oct 2015.

14. Bilta v Nazir (No 2) [2016] AC 1  Guilty directors/shareholders took Stone & Rolls to logical conclusion - argued the liquidator’s claim must fail.  Nothing to do with auditors  2 days (70 cases)  Result was no surprise – defendants lost unanimously at all levels.

15. Bilta on Stone & Rolls  Stone & Rolls confined to a decision on its own facts.  Lord Mance says it may one day fall for reconsideration (#50).  How does that work?  Clear that an ex turpi strike out would fail if there are any innocent shareholders.  Not clear what should happen at trial.  Not clear whether claim on same facts could/should be struck out.

16. Personal view  Lord Mance was right about the issue in Stone v Rolls.  Clearly no reliance by the company, so no claim on ordinary Galoo / Berg principles (see Tony’s talk).  Question is whether insolvency (and SAS 110/ISA 240) means auditor’s duty extends to losses felt without such reliance.  Majority do not address that issue.

17. SCOPE OF DUTY AND THE RECOVERABILITY OF TRADING LOSSES TONY SINGLA Brick Court Chambers 7 April 2016

18. The scope of duty principle  One of four restrictions on the recoverability of damages against negligent professionals  Logically arises for consideration before causation and remoteness  Caparo Industries plc v Dickman [1990] 2 AC 605 per Lord Bridge at page 627D: ‘It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless.’

19. SAAMCO  [1997] AC 191  Should the negligent valuers be held liable:  only for the loss represented by the extent of their negligent over-valuation?  or should they also be liable for the additional losses incurred by the lenders as a result of the market crash?  Seminal judgment of Lord Hoffmann

20. SAAMCO continued  At page 213: ‘ Normally the law limits liability to those consequences which are attributable to that which made the act wrongful. In the case of liability in negligence for providing inaccurate information, this would mean liability for the consequences of the information being inaccurate.’  The example of the mountaineer’s knee  Important distinction between (1) a duty to provide information and (2) a duty to advise on what course of action to take

21. Information v advice cases  Aneco Reinsurance Underwriting Ltd v Johnson & Higgins Ltd [2001] UKHL 51 per Lord Steyn at [41]-[42]: ‘... the inescapable conclusion on the facts that the brokers assumed a duty to advise Aneco as to what course to take.’  Haugesund Kommune v Wikborg Rein & Co [2011] EWCA Civ 33 per Rix LJ at [76]: ‘Wikborg Rein had no general responsibility to advise Depfa on whether to proceed with the transactions or not... It was giving a specific piece of legal advice.’

22. Scope of duty in audit cases  Berg Sons & Co Ltd v Adams [1992] BCC 661 per Hobhouse J at page 677D- F: ‘... the purpose of the statutory audit is to provide a mechanism to enable those having a proprietary interest in the company or being concerned with its management or control to have access to accurate financial information about the company. Provided that those persons have that information, the statutory purpose is exhausted. What those persons do with the information is a matter for them and falls outside the scope of the statutory purpose.’

23. Scope of duty in audit cases continued  BCCI v Price Waterhouse [1999] BCC 351. Laddie J at [65]-[66] – not arguable that legitimate but loss-making activities within scope of duty.  Barings Plc v Coopers & Lybrand [2003] EWHC 1319 (Ch). Evans-Lombe J at [806]-[825] – losses caused by trading with ‘Dollar Funding’ within scope of duty.  Equitable Life v Ernst & Young [2004] PNLR 269. Brooke LJ at [129] – arguable that lost sale within scope of duty.

24. Trading losses  Galoo Ltd v Bright Graeme Murray [1994] 1 WLR 1360  A case about legal causation or scope of duty?  Glidewell LJ at page 1375A: ‘The breach of duty by the defendants gave the opportunity to Galoo and Gamine to incur and to continue to incur trading losses; it did not cause those trading losses, in the sense in which the word “cause” is used in law.’

25. Trading losses continued  Galoo distinguished in Sasea v KPMG [2000] BCC 989 at 995: ‘... a distinction may be made between the present case and Galoo. We are concerned with losses brought about by fraud or irregularities the risk of which KPMG ought to have apprehended and reported.. There does not seem to us to be any fair distinction to be drawn between the four transactions as pleaded. Each in its own way was fraudulent or irregular. Each in its own way was the kind of transaction against the risk of which KPMG had a duty to warn.’

26. Trading losses continued  Galoo has repeatedly been distinguished  Temseel Holdings Limited v Beaumonts Chartered Accountants [2003] PNLR 27. Tomlinson J at [52]: ‘It seems to me that the complaint which is made in the present case, whether or not it is well founded, is of a different nature. The complaint made by the company is not simply that it was allowed to continue trading, but rather that in reliance upon the figures which had been supplied to it and represented to be correct it continued to trade in a particular manner.’

27. Trading losses continued  Galoo has also been distinguished in other jurisdictions:  Sew Hoy and Sons Ltd v Coopers and Lybrand [1996] 1 NZLR 392  OPI Pacific Finance v Sherwin Chan & Walshe [2014] NZHC 449  Heather Capital v KPMG, Isle of Man High Court, 17 November 2015

28. Conclusions on Galoo  Galoo does not establish that an auditor can never be held liable for trading losses.  On its facts, Galoo was similar to Berg Sons v Adams. In neither case was an independent organ of the company misled by the negligent auditor reports. So no chain of legal causation could be proved / pleaded.  Ultimately whether the losses claimed in any given case were caused by the auditor’s breach of duty is a question of fact to be determined at trial.