Date: Mon, 19 Nov 2007 12:16

From: Donald Macdonald

Subject: Alice in Wonderland (or how to extract millions from auditors)

While it is a rather different issue from the points raised in Stone & Rolls (that being argued on whether the company was liable in fraud), see in Scotland the case of Royal Bank of Scotland v Bannerman Johnstone Maclay, (2005) CSIH 39, (2005) 1 Session Cases 437. The bank had bought shares in reliance on the accounts. The Inner House of the Court of Session upheld the Outer House view that there was a potential claim under Caparo if the auditors knew that the bank would rely; it was not necessary to show that they intended that the bank should so rely. There was no disclaimer of liability for the accounts, and the court took this to be a relevant factor. (This was a preliminary decision on the law and the case was remitted for further consideration whether the alleged facts were proved.)

Ross Macdonald

>>> Andrew Tettenborn 19/11/2007 10:55 >>>

If you're scammed by a company, obviously you can sue the company. But can you also sue its auditors for negligently failing to take steps to stop their client scamming you? At first sight, obviously not: that's just the sort of third-party claim that Caparo v Dickman [1990] 2 AC 605 is meant to strangle at birth.

Except that ... er... it seems you now can. In Stone & Rolls Ltd v Moore Stephens [2007] EWHC Comm 1826 SR scammed its bank out of a cool $170 million in a slick letter of credit fraud. The bank got judgment against it, but of course found no assets. Nothing daunted, the bank then bankrolled SR's liquidator to sue SR's auditors for damages (i.e. SR's liability to the bank of $170 million), which it could then pass on to the bank.

Langley J held it could do so, despite (a) the blatant avoidance of the duty of care argument in Caparo, and (b) the peculiarity of a corporate criminal effectively saying, in the best traditions of the hopeless underclass, "you negligently failed to stop me being wicked."

Does anyone share my initial view that all this is straight out of Alice in Wonderland, and (for want of a better word) plain screwy?

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