Date: Mon, 19 Nov 2007 12:30

From: Robert Stevens

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

The rules for the attribution of wrongdoing of the agent of a company to the company itself do not change according to either the solvency position of a company, or whether it has subsequently gone into an insolvency proceeding. If they did, companies in insolvent liquidation could deny liability for wrongs committed by the company during solvency on the basis that that was done on behalf of the shareholders. Economically the owners of the company are now the creditors, but this does not change the rules of attribution.

In this case, the fact that the individual who was the (primary) wrongdoer was also the main shareholder was not relevant to whether his wrongdoing was attributed to the company. His wrongdoing would have been attributed to SR even if he had no shares at all.

What does change upon a company becoming balance sheet insolvent is the nature of the duties directors owe to the company. The 'true' owners of the company are no longer the shareholders as they will receive nothing if the company goes into winding up. Whose interests the company represents changes, and so the nature of the duty owed by the directors changes. (This point doesn't seem to me to be accurately reflected in the Companies Act 2006 section 170 and following, but as those provisions are not supposed to change anything perhaps it doesn't matter.)

The latter point doesn't seem to me to influence the former. So far as outsiders are concerned, the claimant is the company, this has committed the wrong and this does not alter according to its balance sheet position or whether it goes into insolvency.

Langley J seems to accept that the wrongdoing is attributed to SR, and does not base his judgment upon the company now being in liquidation.

As to the Caparo point, if the target company had suffered a loss as a result of the negligent auditors report prepared for it, prima facie it would have had a perfectly good claim to recover this loss based upon breach of contract. That any recoveries would accrue to the shareholder investors who would not have any free standing claim in their own right would not be an illegitimate circumvention of Caparo. We cannot conclude from the fact that a third party to a right (the investors) cannot claim for loss suffered as a result of its violation, that the rightholder (the company) cannot sue for the loss it suffers because of the rights violation, even if the benefit of recoveries flows to the third party. If I am negligently injured and cannot work, allowing me to claim for my loss does not illegitimately circumvent the rule that my children have no claim in their own right for the loss they suffer as a result of my injuries.

RS

On Nov 19 2007, Charles Mitchell wrote:

Does it not often happen that liquidators sue people who have participated in company wrongdoing, as where corporate assets are misdirected to third parties with the whole-hearted consent of the naughty shareholders, but to the dismay of the creditors? It seems to me that what we mean by 'the company' changes once the insolvency regime kicks in, and that the court might rightly feel reluctant to deny claims by 'the company really meaning the creditors' on the ground that 'the company really meaning the shareholders' has done something bad. I agree with what Andrew says about the decision subverting Caparo, though.

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