Barings plc v Coopers & Lybrand & Ors

The shareholder reflective-loss principle does not bar a holding company from suing an auditor where the auditor assumed a separate duty directly to the holding company in connection with group accounts. Potential overlap with loss recoverable by a subsidiary does not defeat the claim; the risk of double recovery can be managed by joining the claims in one action. Auditors who know that their work will enable parent directors to prepare true and fair consolidated accounts may owe a direct duty extending beyond the subsidiary’s statutory audit. At the service-out stage, the court considers whether there is a good arguable case and a serious issue to be tried, rather than determining the final merits.

Barings and Bishopscourt sued Coopers & Lybrand Singapore and its partners in connection with the collapse of the Barings group following unauthorised trading by an employee of a subsidiary. Barings obtained leave to serve the fourth and fifth defendants outside the jurisdiction. Chadwick J dismissed their application to set aside that leave.

On appeal, the defendants argued that any audit duty was owed to the subsidiary, that Barings’ alleged loss was merely reflective of the subsidiary’s loss, and that there was no good cause of action. The forum objection was no longer pursued after related Singapore proceedings were stayed. The central issues were whether the pleaded facts disclosed an independent duty owed to Barings and whether the claim was a proper case for service out.

Lord Justice Leggatt delivered the leading judgment. Lord Justices Swinton Thomas and Mummery agreed. The appeal concerned an interlocutory order and did not require final findings of fact, duty, causation or damages.

1. The principle in Prudential Assurance Co. Ltd v Newman Industries Ltd ([1982] Ch. 204) prevents a shareholder from recovering loss which merely reflects damage suffered by the company. It did not, however, bar Barings’ claim because Barings pleaded an independent cause of action arising from a direct relationship with the auditors. That remained so even if the damages might overlap with loss recoverable by a subsidiary.
2. Any risk of double jeopardy or double recovery could be managed by bringing the related claims in the same action. Christensen v Scott ([1996] 1 N.Z.L.R. 273) illustrated the concern, but did not prevent the claim.
3. George Fischer (Great Britain) Ltd v Multi Construction Ltd ([1995] 1 B.C.L.C. 260) showed that there was no general principle preventing a holding company recovering loss in the value of subsidiaries caused directly by breach of a duty owed to the holding company. The fact that BFS itself also had a possible cause of action did not defeat Barings’ separate claim.
4. The pleaded facts gave rise to a good arguable case that C&LS owed Barings a direct duty. C&LS knew that its audit and reports on the consolidation schedules were required to enable Barings’ directors to prepare accounts showing a true and fair view of the group’s financial affairs. The scope of that duty, and the issues of breach, causation, foreseeability and recoverable loss, were matters for evidence and argument at trial.
5. The court did not finally determine fact or law. Barings had established a good arguable case on the grounds relied on for service out, and the claim was a proper one for service outside the jurisdiction. The appeal was dismissed with the costs of both respondents. Leave to appeal to the House of Lords was refused, and the time for acknowledging service was extended as ordered.

1. Court of Appeal (Civil Division): Appeal dismissed; the court held that Barings had a good arguable case and that the claim was a proper case for service out ([1996] EWCA Civ 1025).
2. High Court of Justice: Chadwick J dismissed the fourth and fifth defendants’ application to set aside leave to serve them outside the jurisdiction. The appeal was brought against the order made on 2 August 1996.