DAC Beachcroft Accountancy Alert: Shelter behind the corporate veil in Swynson Ltd and Hunt v Lodwick Rose (HMT) - July 2014
Published 21 July 2014
Mr Hunt the Second Claimant is/was an investor in small businesses, particularly those who are looking for cash injection because traditional sources of finance are not available to them. For this he charges high interest, expects early repayment, and often a stake in the business. Sometimes he invests directly, sometimes through companies set up for the purpose. On this occasion he invested through the First Claimant, Swynson Ltd. The target company in question was a US business, Evo, specialising in medical supplies to old peoples' homes looking for a co-investor to fund a management buyout. Mr Hunt, through Swynson Ltd, and based on a due diligence report produced by the defendant firm of accountants Hurst Morrison Thompson ("HMT"), invested circa £15 million in October 2006 and problems emerged very quickly afterwards.
For example, it emerged that there was a $3-4m working capital "hole" which was not spotted by HMT and revenues did not match forecasts, in the first month, or unfortunately, at any time thereafter. Over the next few years Mr Hunt ploughed in further money and, as part of the restructuring of the business in December 2008, he personally took over the investment from Swynson Ltd. The business was eventually wound up in December 2012.
There was no engagement letter between the defendant and Mr Hunt, and the letter which was signed was addressed to Swynson Ltd and post-dated the due diligence report and subsequent investment.
Mr Hunt alleged he relied upon various positive representations by Mr Morrison of the defendant firm about Evo as a business proposition, made prior to the due diligence report.
There were a number of issues at trial. The one we focus on below was whether the defendant owed a duty of care to Mr Hunt personally. This issue became central to the claim because since Mr Hunt had effectively paid off Swynson Ltd in taking over the investment in 2008, the "loss" was suffered not by Swynson Ltd but by Mr Hunt.
The judge having reviewed the normal and well known authorities on duties of care, reached the decision that no duty care was owed to Mr Hunt because the only person whom HMT assumed responsibility to for the accuracy of its advice was the person who entered into the transaction and made the loan. That person was Swynson, not Mr Hunt. Any reliance placed by Mr Hunt on HMT's work was in his capacity as a shareholder or agent/officer of Swynson Ltd and to "look through" Swynson to find a duty of care was owed to Mr Hunt would require the corporate veil to be lifted, and there was no reason applying relevant case law to do so. She concluded "I do not see that Mr Hunt placed any reliance on the advice which is separate from the reliance of Swynson... since a company can only act through human agents...that conduct is not generally treated in law as something they do personally in parallel with or in addition to the action of the company." Further, the only person to whom Mr Morrison assumed a duty of care was "To whomever ends up loaning EMSL the money...the accuracy of the advice only matters to the person who relies on it and that is the person who enters into the transaction [Swynson Ltd]".
Because of their comparative rarity and also their significance to future claims against accountants, any accountants case which involves consideration of the scope of duty of care is of potential interest.
The decision is not wholly without its controversial aspects and we await to see whether there is an appeal. The facts suggest that Mr Morrison knew it was to be Mr Hunt's own money that was likely to be at risk at the time that he started to provide his advice regarding the financial health of Evo, the views he expressed were to Mr Hunt personally, and he did not have the benefit of an engagement letter in place with Swynson Ltd at the time he gave that advice. On these facts, the judge's conclusion, or least the way she expresses it, when she concludes the only person to whom HMT could have assumed a duty of care was "To whomever ends up loaning EMSL the money", was no doubt hotly contested. On the face of it, it is arguable that if advice was being given at a time when Mr Hunt had not decided the identity of the vehicle through which the investment was made and HMT knew that Mr Hunt was personally funding the investment, there could be duties assumed towards Mr Hunt. Whether it could also be said that, having decided that the investment was to be made by a corporate vehicle, he could claim that he had suffered the loss as the funder of that vehicle, is arguably separate to the question of to whom a duty of care was owed, although the question of whether his, rather than the company's, losses could be said to have been caused by the original advice would involve difficult causation issues.
This case does emphasise, yet again, the paramount importance of the engagement letter in English law. The defendants' letter was addressed to Swynson Ltd and not Mr Hunt. Without such a letter the defence to Mr Hunt's claim would have been far less likely to have succeeded. For Mr Hunt, having made the initial investment through Swynson Ltd and arranged for Swynson Ltd to contract with the defendant, he faced the risk of a decision such as this, with the courts respecting the corporate veil.
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Richard Highley, Partner
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