Accountants Owed No Duty to Creditors After Corporate Collapse

October 24, 2012

Accountants Owed No Duty to Creditors After Corporate Collapse

An accountancy firm, one of whose corporate clients was dissolved last year, did not owe a duty of care to an indirect investor who was left nursing losses of more than $52 million, the High Court has ruled.

The investing company had advanced substantial sums to a third party, who in turn made those funds available to the corporate client of the firm, which was engaged in trading in the ‘grey market’ in mobile telephones.

The two loans advanced were for $28 million and £5 million respectively and the interest rate applied to them was 22 per cent, to reflect the high risk associated with the venture. The client was compulsorily wound up in 2009 and dissolved in 2011, after HM Revenue and Customs refused a number of VAT repayment claims. There was no distribution to creditors.

The investor argued that the accountancy firm owed a duty of care to it as an indirect investor in the failed venture. It claimed that the firm knew that it had been engaged by the client due to its expertise in dealing with VAT repayment claims and that potential investors in the client would be likely to rely upon and take comfort from the accountancy firm’s involvement.

Deputy High Court Judge Stephen Males QC accepted that there might be cases in which it would be fair, just and reasonable to impose a duty of care on a professional firm which was aware that its advice was being passed on by its client to a third party who could reasonably be expected to rely upon it. However, the judge said that to hold in this case that there had been a voluntary assumption of responsibility to the investor by the accountancy firm would ‘fly in the face of the reasonable expectations of businessmen’.

Even on the assumption that the claimant was able to show sufficient ‘proximity’ between itself and the accountancy firm, and that the losses it sustained were reasonably foreseeable, the judge held that it would not be fair, just and reasonable to impose a duty of care upon the firm.

The judge also ruled that the claim was statute barred because the alleged cause of action arose more than six years before the date on which the claim form was issued.

Even if the investing company had had a good claim (and in the absence of clearly defined obligations such claims are difficult to prove), the failure to bring proceedings within the required time period after the loss was recognised was fatal.