DMC/PI/04/01
Hands v. Coopers & Lybrand
English High Court: Sachs J: Unreported: April 2001
PROFESSIONAL NEGLIGENCE: DUTY OF COMPANY’S AUDITORS TO A CREDITOR OF THE COMPANY: DUTY OF DISCLOSURE: FLOATATION OF SHARES: GOING CONCERN: DUTY TO ADVISE: LIQUIDATION OF COMPANY: NO LIABILITY TO CREDITOR
The auditors of a company, who were also advising the company on a floatation, did not owe a lender to the company a duty of care to advise him about the making or continuation of the loan, even where, in the context of the floatation, they obtained from the lender a letter postponing repayment of the loan.
DMC Category Rating: Confirmed
Facts
In 1993, the Claimant, Mr.Dennis Hands, lent money to a company, Swithland
Group PLC. The defendant acccountants were the auditors of the company. They
also co-ordinated a proposed floatation of the shares of the company in October
1993. The report they prepared for the floatation was based on their audits. On
29 October of that year, they confirmed that the company was a going concern. In
the event, the floatation failed and the company subsequently went into
liquidation. The reason for the failure of the company was the dishonesty and
fraud of the three men who controlled it. They were all prosecuted and sent to
prison. Mr.Hands did not recover his money.
Mr. Hands’ first loan to the company, in the amount of £180,000, was made in January 1993. In preparation for the floatation, it was thought advisable for the amounts due to creditors to be postponed, in order to reduce the amount of the company’s debts repayable within a year to be shown in the prospectus. At the request of the Managing Director of the company, Mr. Hands signed a letter drafted by Coopers and dated 24 October, in which repayment of this loan was postponed until the end of January 1995. The second loan, in the amount of £90,000 was made on October 13, 1993.
Mr. Hands claimed that in extending the time for repayment of the first loan and in making the second loan, he had relied on ‘the professionalism and efficiency of Coopers in its then recent auditing work for the Swithland accounts and in its work….. as reporting accountants and advisers in connection with the prospectus [for the floatation].’ Mr. Hands alleged that Coopers were aware that he ‘was placing confidence in and relying upon [Coopers’] work and advice.’
Mr. Hands maintained that in these circumstances Coopers owed him a duty of care to advise him that, if the floatation failed, the company would not be a going concern, particularly at the time when they were ‘advising him’ to sign the letter of postponement. He also maintained that they had a duty to advise him ‘as if their work as auditors and reporting accountants had been and was being carried out efficiently’. On that basis, Coopers should have advised him not to extend the time of repayment of the first loan and not to make the second loan. Mr. Hands claimed that Coopers had, by their silence, breached both duties.
Judgment
Sachs J upheld the decision of the District Judge, who had struck out the
particulars of the claim on the grounds that they disclosed no reasonable
grounds of bringing the claim and alternatively ordered that summary judgment be
given against Mr. Hands on the grounds that the claim had no real prospect of
succeeding. Sachs J referred to the House of Lords case of Caparo Industries v.
Dickman, [1990] 2 AC 605, the leading authority in the field of auditors’
liability. That case, which concerned whether an auditor of a public company had
a duty of care to shareholders or potential investors to carry out the audit
with reasonable care and skill, laid down three criteria for the imposition of a
duty of care, namely, forseeability of damage, proximity of relationship and the
reasonableness or otherwise of imposing a duty. In Caparo, the House of Lords
held that ‘auditors of a public company’s accounts owe no duty of care to
members of the public at large who rely on the accounts in deciding to buy
shares in the company’.
The judge went on to distinguish the cases of The Law Society v. KPMG Peat Marwick [2001] WLR 192 and of ADT v. BDO Binder Hamlyn [1996] BCC 808 and concluded that ‘it is not the law of England and Wales that somebody in the claimant’s unfortunate position has any remedy under that law against the auditor in those circumstances’.
The judge did not accept a further argument advanced on behalf of Mr.Hands and based on the case of Electra v. KPMG Peat Marwick [1999] Lloyd’s PN 670, that as the law relating to auditors’ duties was still ‘in a state of transition’ and was highly fact-sensitive, it was inappropriate to use the court’s powers to strike out a claim, since that precluded the facts from ever being fully established.
The decision of the District Judge in favour of Coopers was therefore upheld.