Background
AssetCo Plc was the holding company for a group supplying fire and rescue support services. In 2009 and 2010 the company's senior management behaved in a fundamentally dishonest manner, including misstating reported profits, misappropriating monies and concluding fraudulent related party transactions. As part of this, money was also dissipated in breach of a preference share agreement with a group of investors (NAV). Grant Thornton failed to detect these and other matters. It subsequently came to light that AssetCo was only sustainable on the basis of the directors' dishonest representations. NAV intervened in the business in 2011, a new executive chairman was appointed and insolvency was avoided by agreeing to a scheme of arrangement with the company's creditors.
In 2017, the Financial Reporting Council investigated the audit work of Grant Thornton, which led to a fine of £3.5 million, and a retired partner of the firm being struck off for three years and ordered to pay £200,000 personally.
Whilst Grant Thornton admitted negligence in their audits in 2009 and 2010, failing to detect the fundamentally dishonest way in which the company was being managed, the parties disagreed as to causation and loss. Grant Thornton argued that as a result of their negligence AssetCo managed to survive financially and therefore denied that their beaches caused any loss. However, AssetCo issued proceedings on the basis that the negligence of Grant Thornton resulted in a delay is taking action against their dishonest employees, causing recoverable loss.
'Counterfactuals' were prepared as to what would have happened had Grant Thornton acted competently in either 2009 or 2010 (in particular what action NAV would have taken), and AssetCo sought approximately £30million in damages.
Judgment
The Commercial Court was required to address a number of legal issues. In determining whether loss was established on counterfactuals, the Court held that a competent auditor would have discovered a number of flaws within AssetCo during 2009 and 2010, including the dishonesty of their senior employees. Had Grant Thornton identified these problems, NAV would have been aware of them much sooner than they in fact were and would have taken various actions, including shutting down unnecessary expenditure, supporting the scheme of arrangement (which did in fact occur), and performing a large contract.
On the point of legal causation, it was held that the trading losses of AssetCo were within the auditor's duty as they had been sustained through the dishonest trading of the company and in reliance on the negligent audit. The auditor's breaches were the legal cause of various losses, including trading losses and a related party payment, but not the payment of dividends (which was caused by the directors intervening act of unreasonable decisions to declare dividends).
Grant Thornton argued (similarly to Coopers & Lybrand in the Barings litigation) that they had a claim against AssetCo for deceit, for falsely representing to Grant Thornton that all audit information had been made available to them during the audits. The Court rejected this defence, finding that such dishonesty was the very thing that as auditor Grant Thornton had been engaged to detect.
The Court refused to excuse Grant Thornton from liability under s.1157 of the Companies Act 2006 (which can provide relief to auditors and others if they acted honestly and reasonably) as they had not acted reasonably.
AssetCo Plc were awarded damages in excess of £20 million. This award is likely to increase following a hearing to determine the exact quantum of liability including liability for interest and costs.
Grant Thornton have indicated that they will seek permission to appeal this decision.
Comment
This decision can be viewed as providing clarity as to how the Court will determine the scope of an auditor's duty, the approach to be taken where causation is in dispute, and the damages that result.
It is interesting how the Court assessed the various 'counterfactuals' that would have arisen but for the auditor's negligence, and the damages that flowed from those. It is worth noting that the Court refused relief to Grant Thornton under the Companies Act due to how they had approached the audits.
It is also interesting how the Court dealt with AssetCo's own conduct by its directors to reduce the damages awarded. This reinforces the importance of contributory negligence defences for auditors and other professionals.
Finally, this case reinforces the interplay between civil claims and professional disciplinary sanctions for the same acts or omissions by a professional. Grant Thornton faced both in parallel, and in this instance the civil damages were higher than the professional fine (albeit there would as a matter of public policy be no insurance for the latter). It will be interesting to see how this plays out on any future appeal.
Contact
For more information, please conract Danielle Greenley, Trainee Solicitor, or Jonathan Hyde, Director.