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There is often a close and long-standing relationship between the individuals involved in small or medium sized enterprises (SMEs) and their professional advisors, which can cause complications when things go wrong.
The recent High Court decision of Carmela De Sena & Anor v Joseph Notaro & Ors, handed down on 1 May 2020 after a three week trial in November 2019, explores this scenario.
Sabato Notaro settled in Somerset in the 1950s, establishing a business that grew over many years into a family enterprise holding many property assets and undertaking construction and development works of various sorts. Following his death, the businesses were continued and developed by various of his children including his eldest child, Carmela De Sena (the First Claimant), and his eldest son, Joseph Notaro (the First Defendant) - both shareholders in the holding company S Notaro Holdings Ltd (SNHL) and the latter being the managing director.
The businesses had used the services of the same accountant, Bishop Fleming (the accountants) (Third Defendant) and solicitor, Davies and Partners Solicitors (the solicitors) (Fourth Defendant) for many years. Amongst other things, rumbling tensions between the First Claimant and First Defendant led to a demerger of the business. The First Claimant negotiated a split of all assets and passed c.£5.5m of property assets and cash to the Second Claimant, Meltor Developments Ltd (a company established as part of the demerger). The accountants had a long history of dealing with the group of companies held by SNHL (and often their point of contact was the First Claimant). The same was true of the solicitors. Both professional firms acted for SNHL in relation to the demerger in 2011. The First Defendant (together with two other siblings) retained the remainder of SNHL’s assets in S Notaro Group Limited (the Second Defendant).
Nearly six years after completion of the demerger, the claimants issued a claim alleging undue influence and breaches of fiduciary duties against the First Defendant and the two professional firms. They also claimed the First Defendant had been unjustly enriched at their expense. The First Claimant asserted that the assets and cash received did not fairly reflect her shareholding and the true value of her shareholding equated to between c. £7.2m and £9.9m. Despite nearly 10 years having passed by the time the matter came to trial, the claimants sought rescission of the demerger transaction and/or equitable compensation for their losses.
Decision
HHJ Paul Matthews dismissed all the claimants’ allegations against the defendants (namely undue influence, breach of fiduciary duty and negligence as against the accountants and solicitors only).
In considering the allegations against the accountants and solicitors, the nature of a fiduciary obligation was carefully set out by the court, building upon and explaining the approach identified in earlier decisions. The court held that a fiduciary relationship does not arise where one party claims to have relied on another after having misplaced trust in that party. Neither does it automatically arise where a professional advisor is acting for a party.
Although the First Claimant dealt with and had a professional relationship with both the accountants and solicitors through her capacity as company secretary and principal administrator of the family company, the court concluded that there was no fiduciary duty owed to her, as a shareholder, in the demerger. For those purposes, her interests were intrinsically opposed to that of the company/the other shareholders. The court determined that it ought to have been clear to the First Claimant that the professionals were acting for SNHL and were not advising her personally. It also found that the accountants had advised her to obtain independent professional advice.
The First Claimant also asserted that the accountants owed her a duty of care because of the closeness of the historic relationship. She further asserted that the accountants had undervalued her share in the company and favoured SNHL and the First Defendant in their dealings in the demerger.
HHJ Matthews stated “It seems to me that the appropriate approach for me to take in considering whether in the present case there was a duty of care owed to the first claimant is to consider all three of the tests referred to by Lord Bingham ... and see whether they lead in the same direction.”
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The three tests set out by Lord Bingham in Customs & Excise Commissioner v Barclays Bank plc [2007] are:
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HHJ Matthews concluded that there was no assumption of a duty on the part of the accountants (or the solicitors) and that, even if there had been, he would have determined that there was no breach.
HHJ Matthews determined that the accountants reasonably believed the First Claimant was agreeing to the transaction and did not appear to be at a disadvantage or otherwise vulnerable. Further, he decided that the claimants’ approach in calculating loss was wholly wrong. The claimants had asserted that the entitlement of the First Defendant was equal to the monetary value of the shares in the original company; whereas, the entitlement of a shareholder, in fact, is only to a share in the profits or a distribution of surplus assets following a liquidation. A departing shareholder in a private company is only entitled to a value based upon commercial negotiation.
In the present case, it was relevant that in the context of a family company there was only likely to be a very limited pool of potential buyers.
Comment
When considering the duties owed by a professional to a claimant, it is easy to be lulled into thinking that a court will always favour the ‘lay person’. It is easy to assume that a court would criticise a professional for not disabusing a lay person who (wrongly) holds the notion that the professional is offering some advice to them and doing so in no uncertain terms.
This recent decision of HHJ Paul Matthews provides some comfort to professionals and their insurers that the court will not be swayed by a claimant’s belief - however strongly held - that a professional advisor owes duties to a claimant if the facts do not support that and if the application of the appropriate tests lead to a different conclusion.
Kennedys acted for the successful Third Defendant firm of accountants and instructed Clare Dixon and Hannah Daly of 4 New Square.
Read others items in Professions and Financial Lines Brief - May 2020
Insurance and reinsurance
United Kingdom