The High Court has ruled that the buyers of shares in a company had a realistic prospect of successfully showing at trial that the defendant auditors owed them a common law duty to exercise reasonable skill and care in preparing the target company's completion accounts for the transaction, despite the auditors' terms of engagement including a Bannerman disclaimer disclaiming the assumption of responsibility to anyone other than the company and its members as a body

Amathus Drinks Plc and others v EAGK LLP and another [2023] All ER (D) 16 (Oct).

Background

The first and second claimants (the "Claimants") agreed to acquire the entire share capital of the third claimant company (the "Company") on terms that the purchase price would be adjusted by reference to completion accounts.

Before completion of the SPA, the Claimants retained the defendant accountants, EAGK LLP, to conduct due diligence in relation to the purchase. Following completion, EAGK also prepared the completion accounts and issued a completion certificate addressed to the Claimants and the sellers that would determine the price adjustment under the SPA. EAGK also prepared the Company's statutory accounts.

Subsequently, the Claimants alleged that they discovered an accounting fraud that had been perpetrated on the Company before the SPA was entered into, involving double counting of assets, inflation of cash receipts and false invoices, the result of which was inflation of the Company's net balance sheet at completion, causing the Claimants to overpay for its shares by between £348,000 and £480,000.

Claim

The Claimants brought a claim against EAGK and a member of EAGK (the "Defendants") alleging that the Defendants had a duty in both contract and tort to exercise reasonable skill and care in preparing the statutory accounts and the completion certificate, including a duty to undertake a reasonable and proper investigation of the Company's accounts, books and stock sheets and to draw to the Claimants' attention any material irregularities which they discovered. In summary, they alleged that the Defendants acted without reasonable skill and care in failing to detect the alleged fraud, causing loss to the Claimants, who were then unable to take the remedial steps they would have taken had they been aware of the apparent fraud much sooner.

The Defendants applied for summary judgment, or alternatively strike out, of the claim.

Judgment – contract claim

The Claimants contended that they had entered into an engagement letter with EAGK to produce statutory accounts, but the Defendants denied that. Neither party was able to put a copy of EAGK's engagement letter before the court, although they did put in evidence a schedule to the engagement letter which the court found was not at all consistent with the contract having been entered into with the Claimants. Instead, the schedule referred exclusively to matters concerning the Company and not with the requirements of the SPA in relation to post-completion matters, nor to the rights of the Claimants in that regard. Accordingly, the Court granted summary judgment to the Defendants on the contract claim as it did not consider that there was a realistic possibility of further material being available to the trial judge which might point towards the contract having been made between EAGK and the Claimants.

Judgment – tort claim

The Claimants pleaded separately that the Defendants owed them a common law duty of care in preparing the Company's accounts and completion certificate. They claimed that this duty arose because of an assumption of responsibility by the Defendants, or because it was fair, just and reasonable in the circumstances to impose such a duty. In particular, the Claimants relied upon the following facts:

  • There was an existing relationship between the Claimants and the Defendants because the Defendants had been involved in the process of negotiating the SPA.
  • The SPA required the Claimants to procure completion accounts as soon as practicable after completion.
  • The accounts were prepared in accordance with the SPA, covering the period immediately prior to the acquisition and not for the Company's usual accounting period.
  • It was both known and intended by the Defendants that the Claimants would use the net asset figure in the accounts and the completion certificate to calculate the final price to be paid under the SPA.
  • The Defendants were in possession of the documents provided by the sellers for the purposes of ascertaining the net asset value of the Company i.e. in accordance with the SPA.
  • The Defendants provided the completion certificate to the Claimants separately from the accounts. The certificate was addressed to the sellers and the Claimants, and not to the Company.

However, the Defendants contended that the following disclaimer contained in the schedule to EAGK's engagement letter referred to above was an insuperable barrier to the tort claim:

"Our report will be made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of CA 2006. Our audit work will be undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for the audit report or for the opinions we form."

In doing so, the Defendants relied upon the summary judgment decision in Barclays Bank plc v Grant Thornton UK LLP [2015] 1 CLC 180, in which a disclaimer in substantially, although not precisely, the same form as this one (also known as a "Bannerman disclaimer") was held to preclude a claim. However, the Court distinguished the current claims from Barclays on grounds including:

  • Barclays was a sophisticated commercial party operating in the world of finance. The presence of disclaimers in auditors' statutory reports was well known and Barclays was well aware of them.
  • There was no direct communication between the parties in Barclays and thus nothing beyond the known purpose for which the reports were required which could give rise to an assumption of responsibility. Therefore, there were no other potential facts which Barclays could pray in aid in support of its claim. All the facts on which it could rely were assumed in its favour.
  • By contrast, in the present case, the allegation of breach of duty related both to the accounts and to the later completion certificate, the latter being based on the former, so events up to the date of the completion certificate were relevant to an assessment of whether there was an assumption of responsibility by EAGK. The fact that there were continuing communications between the parties after the date of the audit engagement was a relevant factor. The Court noted that it had to look at the facts right up to the date of actual reliance (and thus not merely to whether there was objectively an assumption of responsibility as at the date of the contract with the Company).
  • In particular, it was "potentially very relevant" that there were, after the engagement letter was entered into, emails between the Defendants and the Claimants, whilst the auditing process was underway, to which the sellers were not party. These could be said to convey the sense that the Defendants saw themselves as part of or as a support to the Claimants' professional team, and that there was a "continuing and direct commercial relationship" of a type that did not exist in Barclays.

In light of these and other factors, the Court found that the Claimants had an "entirely reasonable" prospect of showing that there was an assumption of responsibility by the Defendants to the Claimants in relation to the completion certificate, and therefore rejected the Defendants' summary judgment application on the tort claim.

Commentary

It is important to bear in mind that this was a decision on a summary judgment application, and that the Court therefore did not rule substantively on the question of liability having considered all of the facts and evidence that would be available at trial. The Court noted expressly that, if, when this case proceeded to trial, there would need to be an enquiry into what was said orally and in writing over a period of many months.

However, it is nevertheless clear from this judgment that a Bannerman disclaimer in an auditor's engagement letter will not automatically operate to preclude a claim by an individual shareholder (e.g. as investor or potential investor) as opposed to shareholders as a body, or another third party, in all circumstances. Instead, the court will look at all of the facts in order to decide whether there has been an assumption of responsibility that overrides a disclaimer in that particular case.

This case also provides a reminder for auditors on the importance of ensuring that they have robust and well documented contractual arrangements in place on all mandates and are able to evidence them.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.