Assetco Plc v Grant Thornton UK LLP

Key legal principles and outcome: The High Court held that Grant Thornton (GT) was negligent in the conduct of the 2009 and 2010 audits of AssetCo and that those breaches caused recoverable loss to AssetCo. The court applied the established rules on auditors' duties (including the role of professional scepticism and the auditor’s responsibilities under relevant auditing standards), the principles on causation and loss of a chance (Allied Maples and subsequent authority), the Companies Act framework (including the court’s discretion under s.1157 CA 2006), and the doctrines of mitigation, contributory fault and novus actus interveniens.

Main reasons: Bryan J found that GT’s admitted failures would, on a proper audit, have revealed management deceit and triggered events that AssetCo proved, on the balance of probabilities, would have led to an earlier restructuring and scheme of arrangement. The judge rejected GT’s six principal defences (factual causation, mitigation, scope of duty/legal causation, credit for benefits, contributory fault and circuity) except that dividend claims failed by reason of an intervening act of the board. The claim for wasted expenditure and other heads (subject to apportionment for contributory fault on particular items) succeeds.

Background and parties: AssetCo plc (claimant) is an AIM-listed holding company which operated PFI/PPP support services (notably under a London 20-year contract) and later pursued business in Abu Dhabi through a subsidiary structure. Grant Thornton UK LLP (defendant) audited AssetCo’s consolidated accounts for the years ended 31 March 2009 and 31 March 2010. AssetCo alleged that GT was negligent in those audits and that GT’s failures caused AssetCo to continue trading in a dishonest, unsustainable way and to incur wasted expenditure and related losses.

Nature of the claim and relief sought: AssetCo sued for damages in contract and tort (negligent audit) for losses arising from the 2009 and 2010 audits. The principal heads were (i) wasted payments to subsidiaries and related parties, (ii) a fraudulent Jaras payment, (iii) unlawful dividends, (iv) sums spent at plc level, and (v) profits of profitable subsidiaries misapplied within the group. AssetCo’s alternative case pleaded loss of a chance to restructure earlier.

Issues framed by the court:

• whether GT breached its audit duties (admitted in large part by GT);
• whether on the counterfactual a competent auditor would have discovered the misstatements and fraud sooner and, if so, what would have followed (the counterfactual chronology);
• factual and legal causation (including scope of duty and whether losses were the kind GT had to guard against);
• mitigation and whether AssetCo’s 2011 scheme avoided recoverable loss;
• whether AssetCo must give credit for benefits received; (vi) contributory fault; (vii) whether GT was entitled to relief under s.1157 Companies Act 2006; and (viii) interest and quantum.

Court’s reasoning (concise): The judge found GT in serious breach of audit standards (failure to obtain sufficient appropriate evidence, lack of professional scepticism, and specific admitted audit errors). He accepted AssetCo’s account of what a competent auditor would have discovered by late May 2009 (and by early June 2010) and accepted the evidence (notably of Mr Davies and Mr Mills) that, on the counterfactual, NAV would have intervened, Mr Davies would have been appointed and the banks would have agreed short-term standstills; a restructuring and scheme of arrangement would then have followed and AssetCo would have avoided the bulk of the wasted expenditure. The court applied Allied Maples on loss of a chance where third-party acts were required, but found on the facts that NAV’s intervention and the subsequent events were sufficiently likely (in many respects effectively certain) on the counterfactual so that AssetCo had established causation. The court rejected GT’s mitigation and “benefits” defences (the 2011 scheme did not negate AssetCo’s prior waste), dismissed GT’s circuity/deceit counterclaim (Barings/Singularis principle), disallowed GT’s s.1157 defence, and found that contributory fault required reductions in respect of particular items (differing rates applied to PSA dissipation and other heads); dividend claims failed because the board’s decision to pay was a novus actus interveniens. The judge gave detailed findings on chronology, audit timing and quantum issues and invited the parties to agree consequential figures.

Wider observations: The judgment explores difficult issues about auditors’ scope of duty, the application of loss-of-chance principles when third-party acts are needed for the counterfactual, and the interplay of mitigation, contributory fault and the rare s.1157 defence. The decision emphasises the centrality of professional scepticism in an audit and illustrates the courts’ pragmatic approach to complex factual counterfactuals.

Claim succeeded. The court held that Grant Thornton breached its audit duties in 2009 and 2010 by failing to obtain sufficient appropriate audit evidence and to apply professional scepticism; a competent auditor would have uncovered the management deceit by late May 2009/early June 2010 and that, on the counterfactual, NAV would have intervened, Mr Davies would have been appointed and a scheme and refinancing achieved, thereby avoiding the bulk of the expenditure now claimed. Grant Thornton’s defences on factual causation, mitigation, scope of duty/legal causation, credit for benefits, circuity and s.1157 failed; dividend claims failed by reason of novus actus; contributory fault required reductions on specified heads. The claim therefore succeeds subject to apportionment and quantification adjustments set out in the judgment.