SAAMCo in the spotlight

AssetCo Plc v Grant Thornton UK LLP [28.08.20]

Date published

30/09/2020

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This article was co-authored by Daniel Kellard, Trainee Solicitor, London office. 

On 28 August 2020, the Court of Appeal handed down judgment in an appeal concerning the assessment of quantum in professional negligence claims against auditors. 

At first instance, Bryan J awarded damages of c£22.36m. Whilst Grant Thornton persuaded the Court of Appeal to reduce the damages awarded, the appeal was substantially dismissed on two other grounds. The Court of Appeal rejected Grant Thornton’s arguments concerning (1) the judge’s approach to application of the SAAMCo cap and (2) the assessment of damages on a “loss of chance” basis.

The judgment highlighted that the principles established in the landmark professional negligence case of South Australia Asset Management Corporation v York Montague Ltd [1997] (SAAMCo) should be applied when considering which losses fall inside the scope of duty owed by an auditor undertaking a statutory audit.

Background

AssetCo Plc instructed Grant Thornton to audit its financial statements for the financial years ending 2009 and 2010. The senior managers of AssetCo Plc acted fraudulently during that period when presenting the business as solvent. As a result, the assets of AssetCo Plc were overstated by £120 million. Grant Thornton admitted substantial breaches of duty in relation to its failure to uncover the fraud. 

AssetCo Plc claimed that, ‘but for’ the negligence of Grant Thornton, the insolvent state of the company would have been discovered at the time of the audits, and various actions could have been taken to avoid and reduce the losses suffered as a result of the fraudulent activities of the senior management of AssetCo Plc.

First instance decision

In the High Court, the judge held that AssetCo Plc successfully established that ‘but for’ the clean bill of health given by Grant Thornton, it could have avoided wasted expenditure (mainly consisting of funding provided to its subsidiaries) and agreed more amenable credit terms with creditors.

The lower Court agreed with AssetCo’s pleaded counterfactuals (i.e. that AssetCo would have taken the same steps it took to save the business earlier, if Grant Thornton had identified that AssetCo was unsustainable in either 2009 or 2010), subject to a 25% reduction in damages for contributory negligence. Grant Thornton had to pay damages of £22.36 million (reduced from £29.8 million).

The appeal

The appeal by Grant Thornton had three elements: application of SAAMCo, damages for loss of chance, and credit for benefits received by AssetCo Plc.

The application of SAAMCo

Grant Thornton argued that the judge at first instance made an error when considering whether trading losses fell within the scope of duty owed by Grant Thornton.

The decision at appeal outlined the difference between a professional adviser giving advice or merely providing information, and the associated implications of that for the accountability of the adviser. Namely, that in advice cases, a wider duty is owed by the adviser to protect against the consequences of his advice being wrong. In information cases however, the judgment in SAAMCo limits the adviser’s liability to losses arising from the “wrongness” of the information. AssetCo argued that SAAMCo should not be applied, because that decision related to a specific transaction, whilst the issues at hand concerned all matters on which the directors were required to report in two accounting years. The Court of Appeal rejected AssetCo’s argument.

The Court of Appeal’s judgment considered the basic SAAMCo distinction between advice and information in the context of a statutory audit. The Court of Appeal found that a statutory audit goes beyond the provision of advice or information for an isolated transaction. The statutory audit instead is a means of signalling to shareholders the truth and fairness of the financial statements. The Court of Appeal held that Grant Thornton had prevented AssetCo from holding its senior management to account by failing to uncover their dishonest misrepresentations. It further found that it was this breach of duty which permitted AssetCo to continue trading and ploughing funds into subsidiaries. Hence, the Court of Appeal held that Grant Thornton was liable for the trading losses sustained by AssetCo Plc.

Loss of a chance

The Court of Appeal refused to interfere with Bryan J’s findings in relation to loss of a chance. It did not consider his reasoning to be flawed, based on the evidence.

Credit for the benefits of continuing to trade

The Court of Appeal accepted that credit should be given by AssetCo for a share issue of approximately £7.5 million. Accordingly, damages payable by Grant Thornton were reduced by around £6.75 million, as the share issue was not strictly linked to Grant Thornton’s failure to recognise the fraudulent activity by senior management.

Comment

The crucial takeaway is that the SAAMCo principle does not only apply where professional information or advice is provided in the context of a specific transaction, but under certain circumstances can also apply in the context of an audit report to a company and its shareholders; even though the purpose of an audit is not to inform a decision regarding a particular transaction.

We understand that Grant Thornton intends to appeal the Court of Appeal’s decision to the Supreme Court. Whether Grant Thornton decides to appeal or not, it will be important to monitor the upcoming judgment of Manchester Building Society v Grant Thornton UK LLP [2019] the appeal hearing of which will be heard in the Supreme Court next month. This may further develop the SAAMCo principle which is at the heart of so many professional indemnity cases. We wait with baited breath to see if the Supreme Court takes the opportunity to further clarify this difficult area of law.

Related item: SAAMCO principles applied to accountants’ negligence claim

Read other items in Professions and Financial Lines Brief - October 2020