“As pleaded in the previous sections D1 and D8, by way of summary and without prejudice to the detailed contentions above and below, had GT properly performed its obligations it would have been apparent to it in both FY09 and FY10 that AssetCo plc was cash negative; that a significant impairment of assets was necessary; that there were no net assets and the business was sustaining losses; that AssetCo plc was in breach of its banking covenants and could not continue as a going concern; that the Executive Directors had a vested interest in AssetCo plc’s continued existence and share price; that the Executive Directors’ emoluments were not satisfactorily declared; that there had been dishonest fabrication by management of an increase in the [unitary payments] to support an unsustainable accounting treatment; and that management had misused restricted cash, had overfunded assets, and had inflated the cash position by adopting inappropriate and unsustainable accounting treatments.”
“During the course of the Audits, GT were provided with fabricated or false evidence by AssetCo plc’s management. This included evidence purporting to show an increase in the unitary payment (“UP”) due under the LFEPA contract in 2009 and 2010 and which was relied upon to justify a change in accounting treatment in FY09 as regards accounting for certain capital expenditure connected with the LFEPA contract which was henceforth treated as if it were the sale of a finance lease. It is common ground that there was in fact no increase in UP and that the statements to the contrary were false and fraudulent.”
“Third, legal causation: GT submits that even if it could in principle be liable to AssetCo in some amount, none of the heads of damage claimed by AssetCo was in the event legally caused by GT. It alleges that those alleged losses result only from the continuation of the existence of the company – and as such they are losses which, GT submits, do not fall within the scope of the auditor’s duty to protect against – or because (so it alleges) there was some intervening act which broke the chain of causation.”
“919. It is helpful to start by identifying precisely where the disagreement lies. I have set out GT’s broad position above. GT submits that the principle is, ultimately, one of reliance: if the company has relied on the auditor’s approval of some particular matter in order to continue trading in a particular fashion, then it may be said that the losses were caused by the breach. But where it is the mere existence of the company, which – in combination with the business operated by the company – has caused the company loss, there has been no relevant reliance. 920. That is largely agreed by AssetCo, subject to a question about the precise meaning and role of “reliance”, which I will address separately below to the extent that it is relevant (which ultimately it is not, in my view, in relation to the primary debate about scope of duty). AssetCo accepts that it cannot recover losses that were suffered simply because the company remained in existence and carried on trading, but avers that it can recover losses suffered by AssetCo continuing to trade in a particular fashion in reliance on the audit. The dispute is centred, in particular, on how narrowly or broadly the concept of “a particular manner/fashion” should be defined. 921. AssetCo says that its losses resulted from its business being run in a fundamentally dishonest way, and that, since GT should have detected that AssetCo was being run in that way, AssetCo’s losses were of a type that GT was under a duty to prevent, and indeed were suffered by its trading in a particular (i.e. fraudulent) manner as a result of GT’s negligence. GT’s case is that that is too vague, and that the “particular manner” in which AssetCo conducted its business must be more narrowly defined such that AssetCo can say that each head of loss was caused by a particular fraud which GT was required to, and negligently failed to, identify.”
“961. In the present case GT’s negligence deprived the decision-makers within AssetCo of the opportunity to “exercise their powers in general meeting to call the directors to book” for the dishonest way in which the business was being run, to “influence future policy and management” in that regard “and to ensure that errors in management” – i.e., that dishonesty – “were corrected”
“On the contrary, I consider it entirely appropriate that GT assumed a responsibility to protect AssetCo against losses suffered as a result of fraudulent trading conducted by the AssetCo management in circumstances where it is agreed that GT should have detected that the business was being conducted fraudulently, and in circumstances where such fraudulent trading would not have continued had GT complied with its auditing duties.”
“The trading losses fell within the scope of GT’s duty on the basis that they were sustained through AssetCo’s (continued) trading in a fundamentally dishonest manner, in reliance on the negligent audit, in circumstances where if GT had acted in accordance with its duties it would have uncovered most if not all of the instances of Mr Shannon’s and Mr Flynn’s dishonesty, and AssetCo would (as I have found on the Counterfactuals) have acted largely as it did in 2011 (avoiding such trading losses). In such circumstances I am satisfied, and find, that GT’s breaches were the legal, as well as the factual, cause of the trading losses, and there can be no suggestion of any novus actus interveniens in relation to this head of loss.”
“The Jaras transaction was part of the management’s dishonest trading, and fell within the scope of GT’s duty on the basis that it occurred through AssetCo’s (continued) trading in a fundamentally dishonest manner, in reliance on the negligent audit, in circumstances where if GT had acted in accordance with its duties it would have uncovered most if not all of the (prior) instances of Mr Shannon’s and Mr Flynn’s dishonesty, and AssetCo would have put a stop to such fraudulent activities, and would have acted as it did in 2011, with the result that the Jaras payment would never have been made and the Jaras loss never suffered. In such circumstances the legal cause of the Jaras loss was GT’s breach of duty in failing to identify the fraudulent matters that it admits it should have identified when it gave its opinion on the financial statements for 2009 in June 2009.”
“AssetCo’s case is that the business of AssetCo was being run in a thoroughly dishonest manner, and that it continued to carry on business in a way that was only sustainable on the basis of dishonest representations made by management which GT should have identified, and that it continued to trade in a particular manner in reliance upon GT’s negligently audited accounts, and that absent GT’s negligence it would have entered into a Scheme of Arrangement with all the identified steps leading up to that. AssetCo has succeeded in such case. It has also succeeded in establishing legal causation, that trading losses are recoverable as they were incurred as a result of the company continuing to trade in a particular manner in reliance upon the negligent audit.”
“As for the SAAMCO “cap” or restriction, which excludes loss that would still have been suffered even if the erroneous information had been true, that is simply a tool for giving effect to the distinction between (i) loss flowing from the fact that as a result of the defendant’s negligence the information was wrong and (ii) loss flowing from the decision to enter into the transaction at all.”
“816. By contrast with the present case, the cases being examined by the House of Lords in the [SAAMCO] decision were “one transaction cases” that is, cases where the claimant, in reliance on negligent advice, had elected to enter into a loan transaction. In the present case the negligent certification of BFS’s 1992 and 1993 financial statements was one of the causes which allowed Leeson to continue his unauthorised trading until a few days before the bank collapsed. Had the financial statements truly reflected the results of Leeson’s trading, they would have shown BFS to have been loss-making in both years and, by December 1993, substantially insolvent…. 818. Lord Hoffmann’s test, to enquire whether the losses funded by the Dollar Funding “would have occurred even if the information which [D&T] gave had been correct” does not assist. If the 1993 audit certificate had been correct, it would mean that there had been no unauthorised trading up to31 December 1993 . In those circumstances it must be most unlikely that Leeson would have started unauthorised trading in 1994. It would be unwarranted speculation to assume that Leeson would have done so. 819. Nonetheless a reasonable “common sense” case can be made for saying that D&T should not be liable for loss occurring after the commencement of the improvident Dollar Funding, of which D&T could have known nothing and from which they could be under no duty to protect BFS.”
“The shareholders have a collective interest in the company’s proper management and in so far as a negligent failure of the auditor to report accurately on the state of the company’s finances deprives the shareholders of the opportunity to exercise in general meeting to call the directors to book and to ensure that errors in management are corrected, the shareholders ought to be entitled to a remedy. But in practice no problem arises in this regard since the interest of the shareholders in the proper management of the company’s affairs is indistinguishable from the interest of the company itself and any loss suffered by the shareholders, e.g. by the negligent failure of the auditor to discover and expose a misappropriation of funds by a director of the company, will be recouped by a claim against the auditors in the name of the company, not by individual shareholders.”
“It is the auditors’ function to ensure, so far as possible, that the financial information as to the company’s affairs prepared by the directors accurately reflects the company’s position in order, first, to protect the company itself from the consequences of undetected errors or, possibly, wrongdoing (by, for instance, declaring dividends out of capital) and, secondly, to provide shareholders with reliable information for the purpose of enabling them to scrutinise the conduct of the company’s affairs and to exercise their collective powers to reward or control or remove those to whom that conduct has been confided.”
“(1) Notification by the Competent Auditor of the Audit Committee of major audit concerns, leading to discovery by NAV of major problems within AssetCo by30 April 2009 ; (2) The availability of Mr Davies to be appointed by NAV to carry out further investigations, and then as executive chairman of AssetCo; (3) An agreement between NAV and the Board of AssetCo, pursuant to which NAV pledges support for AssetCo and Mr Davies is appointed as executive chairman by8 June 2009 ; (4) The resolution of Shannon’s and Flynn’s roles after Mr Davies’ appointment; (5) Mr Davies’ other actions once appointed as executive chairman of AssetCo; (6) The reaching of standstill agreements with the London and Lincoln banks; (7) Staving off insolvency in the period leading up to the proposed scheme; (8) Support of AssetCo’s shareholders for the proposed scheme and placing; (9) Support of AssetCo’s creditors for the proposed scheme; (10) Conclusion of the SOC Contract after the scheme.”
“Two further questions were debated before me in relation to the application of loss of chance principles. The first was how the court deals with multiple contingencies for example where the claimant’s loss depends on the hypothetical action of a number of third parties. The second (that I raised with the parties) is whether the position is different, in relation to the application of loss of chance principles if the court hears from the witness or witnesses concerned from a third party – is the chance still to be evaluated [at] a percentage ascribed to that chance, or in such a scenario can the matter be decided on balance of probabilities.”
“Where there are a number of independent steps which would have needed to be taken by specific third parties before the claimant could have obtained a benefit, the probability of each step must be multiplied together”
“…in the absence of some other identifiable error, such as (without attempting an exhaustive account) a material error of law, or the making of a critical finding of fact which has no basis in the evidence, or a demonstrable misunderstanding of relevant evidence, or a demonstrable failure to consider relevant evidence, an appellate court will interfere with the findings of fact made by a trial judge only if it is satisfied that his decision cannot be reasonably be explained or justified.”
“Some conclusions of fact are, however, not conclusions of primary fact of the kind to which I have just referred. They involve an assessment of a number of different factors which have to be weighed against each other. This is sometimes called an evaluation of the facts and is often a matter of degree upon which different judges can legitimately differ. Such cases may be closely analogous to the exercise of a discretion and, in my opinion, appellate courts should approach them in a similar way.”
“The decision may be wrong, not because of some specific error of principle in that narrow sense, but because of an identifiable flaw in the judge’s reasoning, such as a gap in logic, a lack of consistency, or a failure to take account of some material factor, which undermines the cogency of the conclusion. However, it is equally clear that, for the decision to be “wrong” underCPR 52.11 (3), it is not enough that the appellate court might have arrived at a different evaluation.”
“…whilst it is not possible to be sure as to the precise capacity in which Mr Flynn and Mr Shannon would remain as employees, I am satisfied and find, based on the evidence of Messrs Davies and Mills, that they would have remained employees for as long as AssetCo considered that to be necessary – firstly so as to obtain as much information as possible but secondly to keep them ‘on-side’.”
“In any event, GT’s suggestion that if AssetCo did not win business in the Middle East AssetCo would have gone into insolvent liquidation sometime after the Scheme of Arrangement does not bear examination, and I reject it as without merit, and for the reasons that AssetCo identified in closing. As a result of the Scheme of Arrangement and refinancing, AssetCo would have been a clean company with no actual or contingent liabilities, a profitable or potentially profitable business, and adequate working capital. I do not consider that there is any evidential basis for supposing that AssetCo plc would have incurred liabilities that it could not meet, or that there would be any unpaid creditors which would seek [to] try to wind up the company after it emerged from the scheme process. In addition, on the 2009 Counterfactual AssetCo would have the London business, the Lincoln business, the (profitable) AS Fire & Todd subsidiaries; and around£9m or£10m of working capital.”
“You can prove that a past event happened, but you cannot prove that a future event will happen and I do not think the law is so foolish as to suppose that you can. All that you can do is to evaluate the chance. Sometimes it is virtually 100 per cent certain: sometimes virtually nil. But often it is somewhere in between.”
“If, in consequence of the injuries sustained, the plaintiff has enjoyed receipts to which he would not otherwise have been entitled, prima facie, those receipts are to be set against the aggregate of the plaintiff’s losses and expenses in arriving at the measure of his damages”
“The essential question is whether there is a sufficiently close link between the two and not whether they are similar in nature. The relevant link is causation. The benefit to be brought into account must have been caused either by the breach of the charterparty or by a successful act of mitigation.”
“At the most, that means that the premature termination is the occasion for selling the vessel. It is not the legal cause of it.”
“In my opinion the result of the facts as I have set them out is perfectly straightforward and turns on ordinary principles of the law of damages. The basic measure of damages is that which is required to restore the claimant as nearly as possible to the position that he would have been in if he had not sustained the wrong. This principle is qualified by a number of others which serve to limit the recoverable losses to those which bear a sufficiently close relationship to the wrong, could not have been avoided by reasonable steps in mitigation, were reasonably foreseeable by the wrongdoer and are within the scope of the latter’s duty. In the present case, we are concerned only with the basic measure.”
“The general rule is that where the claimant has received some benefit attributable to the events which caused his loss, it must be taken into account, unless it is collateral. In [Swynson], it was held that as a general rule “collateral benefits are those whose receipt arose independently of the circumstances giving rise to the loss”
“requires one to look at the whole of the transaction which was caused by the negligent valuation. In this case, that means one must have regard to the fact that the refinancing element of the second facility both (i) increased the lender’s exposure and ultimate loss under the second facility by£2,560,268.45 , and (ii) reduced its loss under the first facility by the same amount. Its net effect on the lender’s exposure and ultimate loss was therefore neutral. Only the new money advanced under the second facility made a difference.”