SAAMCO principles remain a complex area of law – how does it apply to a claim based on alleged audit negligence?

Published 30 March 2020

BTI 2014 LLC v PWC [2019] EWHC 3034 (Ch)

An audit report certifies that the financial statements prepared by the board of directors is free of material misstatement. It is generally accepted that, applying SAAMCO principles, the auditor is giving “information” and not “advice” to the company and its members. Identifying what losses flow from the incorrectness of this “information”, and the scope of the auditors’ duty were the issues facing the judge in BTI. This is the first case where a court has been asked to apply SAAMCO to alleged audit negligence in a claim contending there were unlawful dividend payments.

The Facts

BTI’s professional negligence claim against PwC had been stayed for several years pending the outcome of related proceedings. The claim underpinning the related proceedings - assigned to BTI by Arjo Wiggins Appleton Ltd (“AWA”) as part of a funding arrangement – was against Sequana S.A (AWA’s parent company) and the directors of AWA. BTI claimed recovery of two large dividends paid by AWA to Sequana in December 2008 (EUR 443 million) and May 2009 (EUR 135 million). The claim in the related proceedings failed and this led to a revival of BTI’s claim against PWC.

The dividends were paid against the background of PwC’s audit of AWA’s 2007 and 2008 annual accounts. The accounts included a provision for environmental liabilities. This provision reflected an agreement that AWA would indemnify its former subsidiary API for certain environmental liabilities. BTI alleged that PwC negligently audited AWA’s 2007 and 2008 annual accounts causing AWA loss. It argued that if PwC had not acted negligently, the accounts would have shown that AWA had considerably greater liabilities and fewer distributable reserves, and so the directors would not have paid the very large dividends. BTI claimed the full amount of the December 2008 and May 2009 dividends from PwC.

In response, PwC applied to strike out the claim, or alternatively, for summary judgment. It made the application on four grounds. For the purposes of this article, we focus on PWC’s scope of duty argument, i.e. that the damages claimed by BTI are losses that, if incurred, would fall outside of the scope of PwC’s duty to AWA.

Scope of Duty analysis

The parties could not agree what losses (if any) were attributable to the audit opinion containing incorrect “information”.

PwC argued that earlier cases, which have held that unlawfully paid dividends were recoverable from a negligent auditor, predate SAAMCO and that a different approach now applied. It contended that no losses flowed as a consequence of its audit opinion being wrong; the directors had full knowledge of the exposure and risks, and they had an improper plan to put assets beyond the reach of creditors, so nothing said or done by PwC would have made any difference. The losses fell outside its scope of duty because, even if the audit report had correctly shown a true and fair view the dividends would have been paid in any event.

The judge concluded it would be wrong to decide the issue in a summary judgment application, without the benefit of detailed factual findings. He observed that PwC’s approach was contrary to previous court decisions (i.e. the pre-SAAMCO cases) which have held that unlawful dividends paid as a result of negligent audit reports are recoverable as damages. He noted that on the pleaded case, had the audit report been non-negligent, the financial statements would have provided for higher liabilities and there would have been lower distributable reserves, and it followed that only lower dividends would have been paid. The judge considered that in principle, the difference between a higher and lower dividend ought to be recoverable as loss resulting from a negligent audit, and it seemed “intuitively wrong” to say there was no loss attributable to PwC.

Comment

Determining what losses are attributable to information being wrong (i.e. the application of the SAAMCO cap) requires the consideration of hypothetical questions concerning what would have happened if the auditor had given correct information (i.e. the audit report was not negligently signed off). Such issues are likely to require a full consideration of the facts, meaning cases suitable for a strike out application based upon arguments applying the SAAMCO cap will be rare.                                                                                        

However, SAAMCO remains a limiting influence on damages claimable as a result of audit negligence. If BTI proceeds to a full trial, the court will apply SAAMCO and the more recent cases of the Supreme Court in BPE v Hughes-Holland [2017] and the Court of Appeal in Manchester Building Society v Grant Thornton [2019]. Applying the judge’s reasoning, if negligence is proven, the court will proceed on the basis of the counter factual and will make an assessment based on the dividends which the court considers the directors would most likely have declared had the audit not been negligent. Damages in theory may range anywhere from nil to a sum equivalent to the dividends paid, or figure in between. While this may not be a mathematically precise tool, as Lord Sumption acknowledged in BPE, it is a justifiable method for limiting recovery and “mathematical precision is not always attainable in the law of damages”.