The Gazette 1989

GAZETTE

DECEMBER 1989

task was to vet the accounts and provide the shareholders with inde- pendent and reliable information on the company's financial standing. The facts of the case were that fraudulent misrepresentations made by the Chairman and Chief Execu- tive of the company (F. pic.) had " been included in the audited accounts. The accounts had been certified by the auditor who had failed to detect the falsity of the representations. The plaintiffs, being the holders of 100,000 shares, purchased further shares following the publication of the audited accounts. They gave evidence that they had relied on the accuracy of the accounts when purchasing the additional shares and that the audited accounts had also been instrumental in the plaintiffs' decision to take over the company six months later. The potential liability of the auditors in the circumstances was examined by Lawson J. by way of preliminary issue. The plaintiffs were suing both in their capacities as individual shareholders and as potential investors holding no shares. Lawson J. held at first instance that the auditor did not owe them a duty of care in either capacity, when carrying out his statutory function. The Court of Appeal, however, (O'Connor L. J. dissenting in part) held that the auditor owed a duty of care not only to the general body of shareholders, with whom he had a relationship close to contract, but also to the individual shareholder. The relationship between the statutory adutior and the individual shareholder was su f f i c i en t ly proximate to ground a duty of care in carrying out his statutory duties. It was just and equitble to recognise the existence of that duty of care. The relationship between the auditors and the individual potential investors was, their Lordships held, less proximate. The auditor was not engaged to report to them but to the shareholders, the relationship between them was not contractual and the nexus or link between them was tenuous. It would neither be just nor equitable to find a duty of care existed between the auditors and the individual potential investor. Lord Justice Bingham laid down three clear tests to be satisfied before a duty of care could be found to exist between the plaintiffs and the auditors -

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(1) Foreseeability: was it foresee- able that the individual share- holders and investors would rely on the accuracy of the audited accounts and the audit report? ( 2 ) Proximity: was the relation- ship between the auditor and the shareholders and potential investors sufficiently close to establish a duty of care? ( 3 ) Fairness: was it just and reasonable that the Court should impose a duty of care on the auditor in the circumstances? His Lordship held the plaintiffs had satisfied the three tests as individual shareholders and Lord Justice Taylor agreed that such a liability had been established. O'Connor L. J., dissenting in part, held that in the circumstances of the case before him he could see no reason for imposing upon the statu- tory auditor any duty to share- holders at Common Law in addition to the duties he owed to them under Statute. Those duties, he said, were owed to them as a body and not as individuals. This would, of course, mean that the plaintiffs would not be entitled to sue in their individual capacity for a breach of duty or statutory duty. The Court was unanimous, however, in holding that the auditors did not owe the plain- tiffs any duty of care in their capacity as potential investors holding no shares. The importance of the case rests in the Court of Appeal's acceptance that a com- pany auditor can owe a duty of care in the exercise of his statutory function, not only to the company, his employer, but also to individual shareholders, who would then be entitled to sue him in that capacity

for economic loss they have suffer- ed as a result of his negligence. Avoiding Liability In the absence of a contractual relationship with parties other than the company (e.g. an agreement to conduct a private audit) an ex- clusion clause published with the audited accounts and purporting to except the auditor from liability would be ineffective against such parties due to lack of privity. The auditor's contractual relationship is with the company itself and he cannot exclude his liability to the company by means of an exclusion clause or disclaimer by virtue of Section 200 of the Companies Act 1963. That section prohibits any provision "either in the company Articles or any contract with the company or otherwise" which pur- ports to exempt a company auditor from any liability "wh i ch by virtue of any rule of law would otherwise attach to him in respect of any negligence, default, breach of duty or breach of trust of which he may be guilty in relation to the company". An auditor may enjoy a limited indemnity from the company in respect of his costs in successfully defending himself against civil or criminal proceedings, where the company Articles or his contract provide for such an indemnity. As with other agents, however, the auditor is not entitled to reimburse- ment or an indemnity from the company for loss occasioned to another if it is due to his own negligence. Where proceedings contemplated by Section 200 (above) are taken against or apprehended by a bona fide auditor he may apply to the High Court

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