The Gazette 1989

GAZETTE

DECEMBER 1989

tions additional to his statutory duties they do not attract liability under Statute. Should the company go into liquidation, Section 298 provides that a creditor, the liquidator or a member may apply to the court to have the conduct of any "officer", including the auditor, examined. If the court finds that the officer has ". . . misapplied or retained or become liable or accountable for any money or property of the company, or been guilty of any misfeasance or breach of trust . . . " it may compel the officer concerned to repay or restore the company property in whole or in part, with interest. Section 198 of the new Bill states that there is an onus on every company to keep proper books of account and that the directors must take ail reasonable steps to ensure the company meets the Section's requirements. Section 194 obliges the company auditor to inform the company and the Registrar if he forms the opinion that the company is in contravention of Section 198 by "failing to cause to be kept proper books of account". Failure to keep proper books of account may in a subsequent liquidation lead to the personal liability of any one of the officers for the debts of the company where it is proved to the Court's satisfaction that the officer was in default (Section 200). It could be argued that the auditor who has served a notice under Section 194 has ex- hausted his obligations in ensuring that proper books of account are kept and that he cannot be subse- quently held liable under Section 200 if the company failed to keep proper books of account. Contractual Liability An auditor may be liable to the com- pany in damages if he fails to fulfil his contractual obligations. This is true, not only of substantive breaches, but also of the failure to reach professional standards in carrying out his contractual obliga- tions. The terms of his contract are normally contained in an express service agreement with the com- pany with further terms possibly laid out in the company Articles and other contract documents. The auditor has no contractual relation- ship with the members of the com- pany and so will not incur any

contractual liability to them for breach of contract, although he may incur concurrent liability on agency or negligence principles ( Caparo Industries -v- Dickman, post). Where a company sues its own auditor for breach of contract, it must prove a consequential loss and damages will be compensatory. Damages will usually be minimal in such cases as it is difficult for the company to prove that it suffered losses that it would not otherwise have suffered, as a result of its reliance on inaccurate figures which the auditor certified as being correct in his audit of the accounts. Tortious Liability If an auditor knowingly gives false information to any party about the company's financial standing he will be liable in damages for fraud at Common Law. If he has acted in a negligent rather than a fraudulent manner, his liability will be the same as any professional who knows, or ought to know that his skill and judgment are being relied upon. If he fails to exercise reasonable care he may be liable in damages not only to the company, but to shareholders and third parties (in- cluding investors) who, he foresaw, or should have foreseen, would rely on the accuracy of the certified accounts and opinions expressed by him in his capacity as auditor. He may be liable under the ordinary principles of negligence and/or the principles governing negligent mis- statement. In a case of Anns -v- Merton London Borough Council [1978] A.C. 728, Lord Wilberforce said at p. 751: "Through a trilogy of cases in this House, Donoghue -v- Stevenson, Hedtey Byrne & Company Limited -v- Heller and Home Office -v- Dorset Yacht Company Limited., the position has been reached that in order to establish that a duty of care arises in a particular situation it is not necessary to bring the facts of that situation within those previous situ- ations in which a duty of care has been held to exist, rather, the question has to be approached in two stages. First, one has to ask whether, as between the alleged wrongdoer and the person who has suffered the damage there is sufficient relationship of proximity or neighbourhood, such that in the reasonable contemplation of the former, carelessness on his part

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may be likely to cause damage to the latter in which case a prima facie duty of care arises. Secondly, if the first question is answered affirmatively, it is necessary to consider whether there are any considerations which ought to negative or reduce or limit the scope of the duty or the class of persons to whom it is owed or the damage to which a breach of it may give rise (see the Dorset Yacht case per Lord Reid). In an unreported decision deliver- ed on the 25/11/'80 (McSweeney tV - Bourke) Ms. Justice Carroll expressed her reluctance to extend financial advisers' liability for negli- gent mis-statement beyond those to whom the statement was actually made, saying at p. 17: "Irrespective of contract, the adviser has a primary duty of care to the client and there may or may not be a duty to third parties. If the advice given is not given negligently vis-a-vis the client in the first in- stance but is given with all due care, there is no breach of duty to the client. If an adviser is not negligent vis-a-vis the client and does not purport to advise any person other than the client, I do not see how a third party who knows of the advice given to the client and carries out steps outlined in that advice (ultim- atley to his own detriment) can claim that the advice was negligent in relation to him". In later cases the High Court has, however, accepted that an auditor's liability to third parties hinges on foreseeability, namely "was it fore- seeable that reliance would be placed on the auditor's advice or opinion by the third party?" In Kelly

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