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A warning to carefully consider strike out and/or summary judgment applications in auditor's negligence claims - BTI 2014 LLC v (1) PwC (2) Windward Prospects Ltd (2019)

22 September 2020
The Defendant firm of auditors failed in an application to strike out a professional negligence claim or, alternatively, for summary judgment of the claim. The auditors were ordered to pay the costs of the application, even though they might well succeed at trial.   


The claim, brought by BTI against PwC, related to PwC's audits of the 2007 and 2008 annual accounts of Windward Prospects Ltd (previously known as AWA), which was also the nominal second Defendant. 

The claim had been stayed for several years pending the outcome of related proceedings. The related proceedings were BTI's claim against AWA's former parent company, claiming large dividends paid by AWA to its parent company. The dividends were paid against the background of PwC's audit of AWA. That claim failed. As a result, BTI's claim against PwC (for all of the dividends paid) was revived.

PwC applied to strike out the claim against them or alternatively for summary judgment. For the purposes of this article, we will purely focus on causation, scope of duty and loss. 


PwC argued AWA's directors did not rely on its audit reports and there was no arguable case that any further information or advice would have made a difference to what the directors did. It further argued that before the audits, the directors had formed the intention of declaring substantial dividends in favour of the parent company. It argued nothing that PwC could tell the directors would have made any difference to what they knew or would have done. If the directors already knew the full picture and were determined to proceed, it could not be said they relied on any misstatement by PwC.

Scope of duty 

PwC argued loss suffered by AWA by the payment of dividends to its parent company was not loss that PwC owed AWA a duty of care to prevent. PwC submitted that the first question was whether it was retained to provide ”information” or ”advice”, on the basis of which AWA would decide whether to declare dividends (an “information case”) or whether it was retained to advise AWA’s directors on what decision they should take (an “advice case”). PwC argued that if it was an "information" case, it was not responsible for the consequences of the dividends being paid, but only the foreseeable consequences of its audit opinion or advice being wrong. It further argued that the accounts had shown a true and fair view, the dividend would have been declared in any event, and accordingly any loss resulting from the payment of the dividend is outside the scope of its duty of care. 


Sums of money equal to the dividends were not paid out by AWA but were set off against the receivable in AWA's accounts and the debt in its parent company's accounts. PwC argued that the value of the debt fell to be assessed at the date of trial. At that date, the parent company was insolvent, with no prospect of any payment to unsecured creditors, therefore PwC argued AWA had lost nothing. 


On the issue of causation the Mr Justice Fancourt found there was clearly an arguable case that the terms of the PwC audit report had been relied on. It was not possible to conclude, without hearing evidence at trial, that nothing the directors learnt could have made a difference to the outcome. 

Furthermore, Mr Justice Fancourt held that PwC had misapplied the test provided by SAAMCO and that their scope of duty arguments were novel and contrary to previous High Court decisions, such as Assetco PLC v Grant Thornton [2019], in which dividends paid as a result of negligent audit reports were held to be recoverable in full. He held that the general understanding of the law is that a company can 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. Determining whether a company could reclaim dividends from a negligent auditor was a notoriously difficult area of law and not something to be decided as a general proposition on a summary basis and needed to be carefully examined in this case in light of the true facts.  

In dismissing PwC's application to strike out the claim entirely the Judge stated that it could not be said that AWA had suffered no loss. The debt had to be valued at the date of the breach, not the trial date. It was held that it was not possible to say on a strike-out application that the assessment would produce a nil sum.  


The decision illustrates the significant difficulties defendants can face in attempting to bring a strike-out and/or summary judgment application, particularly where there are novel arguments on scope of duty. 

A successful application for strike out and/or summary judgment can mean a quick and relatively cost effective decision for a defendant. An unsuccessful application, however, can lead to an adverse costs order and present the claimant with a tactical advantage. A defendant must therefore be confident that it can fulfil the relatively strict criteria under CPR 3.4 and CPR 24.2.

In relation to scope of duty, in this judgment it was not determined whether it was "information" case or an "advice" case. However it highlighted the importance of establishing whether a case was an "information" or "advice", as established in the case of SAAMCO
As usual, every case must be carefully approached on the basis of its own facts. However in a standard audit negligence case the enquiry of what losses fall within the scope of the auditor's duty will be to assess acts and omissions of an auditor in the context of the performance of the audit as a whole. In cases where the focus is on a particular discrete transaction or investment, the SAAMCO principle is likely to apply and the information or advice distinction will assume importance. 

In the BTI case, we will have to wait for trial judgment before getting further clarity on the issues raised, particularly the arguments on scope of duty.  

Author: Simon Bosworth.

Further Reading