AssetCo Plc provided frontline firefighting services in the middle East. Its 2009 and 2010 accounts presented a picture of health: profits were up and the balance sheet was healthy. All was well for AssetCo and its group of companies. Except… this picture was entirely false. This formed the backdrop for the Court of Appeal's decision in AssetCo Plc v Grant Thornton UK LLP.
In truth, AssetCo was insolvent. The group's assets were overstated in the accounts by some £120m as a result of "dishonest statements" and evidence "fabricated" by its former chief executive and chief financial officers.
The true state of affairs was discovered in 2011 when AssetCo appointed new management, which took steps to secure the survival of the business. They then sued the company's auditors, Grant Thornton, for professional negligence, arguing that they had failed to apply appropriate professional scepticism before issuing unqualified audit certificates for the 2009 and 2010 accounts. The Auditors admitted certain failures, leaving the court to determine the level of damages to be paid to AssetCo.
In January 2019, Bryan J, sitting in the High Court, delivered a chunky 493 page judgment awarding AssetCo damages of £22.36m, as compensation for the losses incurred by the business between 2009 and 2011. The Auditors appealed, arguing, amongst other things, that the Judge had not correctly applied the SAAMCo Principle.
The SAAMCo Principle: Information vs Advice
This principle takes its name from the 1996 House of Lords case of South Australia Asset Management Corp (SAAMCo) v York Montague Ltd. Put simply, it provides that a professional can only be liable for losses which fall within the scope of their duty of care.
This is not always a simple concept to apply however and several high profile cases have grappled with it in recent years. Notably, in BPE v Hughes Holland the Supreme Court applied the principle to solicitors' negligence claims and, in doing so, highlighted the SAAMCo distinction between 'information' and 'advice' cases when determining what falls within the scope of a professional's duty of care:
- Where a professional provides a client with information which influences a client's decision to enter into a particular transaction, the professional will only be liable for the consequences of the information itself being wrong. Wider losses may not be recoverable, even if the client can show that it would not have entered into the transaction if the professional had provided the correct information (the so-called 'no-transaction case').
- By contrast, where a professional advises a client on whether or not to enter into the transaction itself, they may take on a much wider potential liability for the entire consequences of that decision.
Did SAAMCo apply?
The Auditors argued that the consequences of AssetCo continuing to trade and incur losses for two years went beyond the scope of their duty of care when auditing the accounts. Accordingly, the SAAMCo Principle prevented these losses from being recovered.
AssetCo argued that the SAAMCo Principle should not apply to this claim at all because they were not dealing with the consequences of a particular transaction.
The Court of Appeal noted that the SAAMCo Principle is not a rigid rule of law: it is a tool which the court can use to determine the loss flowing from negligently wrong information. There may be cases where it is inappropriate to use this tool, but there was no reason in general why the SAAMCo Principle should not be applied to negligent audits.
The Court of Appeal therefore found that the SAAMCo Principle applied and they had to rule on what losses the Auditors had a duty to prevent, i.e. what losses were within the scope of its duty of care.
The Scope of an Auditor's Duty of Care
It was accepted that, but for the Auditor's failure to expose the deceit, AssetCo would not have continued doing business in the manner it did. However, the Auditor argued that this was an 'information case' and the losses incurred by AssetCo continuing to trade did not arise as a consequence of the information being wrong.
The Court assessed the scope of duty on the basis that is was an 'information case' but held that the purpose of an audit is to provide the information required to enable a company to protect itself from undetected errors or wrongdoing and hold its directors to account. The bulk of the claimed losses arose out of AssetCo continuing to trade in an unsustainable manner, which was exactly what the audit was designed to prevent. Those losses accordingly fell within the scope of the Auditor's duty of care and could be recovered.
Silver linings for the Auditor
Whilst the Auditor's appeal failed on the key question of whether the trading losses were recoverable under the SAAMCo Principle, one loss of £1.5m was not recoverable. That had been caused by one of AssetCo's former directors misappropriating funds.
As a matter of fact, this loss may well have been avoided if the audit had exposed the dishonest conduct of the directors, but it was deemed insufficiently linked to the continuation of the loss-making business to fall within the scope of the Auditor's duty of care. It was not something which the Auditor was under a duty to prevent.
The Auditor also persuaded the Court of Appeal to reduce the damages by a further £7.5m in recognition of a benefit received by AssetCo as a result of its continuing to operate an unsustainable business.
Lessons learned
It is well-established that a breach of duty is not enough to win damages. In addition to overcoming the causation hurdle, a SAAMCo assessment is also required to determine whether the losses fall within the scope of the professional's duties:
- Did the professional provide information or advice?
- If it is an 'information case', what specific losses would have been avoided if the information provided had been correct?
- If it is an 'advice case', what are the foreseeable consequences of the course of action undertaken as a result of that advice?
NOTE: Specialist legal advice should always be sought on the specific circumstances of a claim and whilst this article is representative of the law as at November 2020, it does not constitute such advice.
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