Assetco Plc v Grant Thornton UK LLP

The SAAMCO principle generally applies to negligent statutory audits. It is a tool for identifying whether claimed loss falls within the purpose and scope of the auditor’s duty, although it may be unsuitable for some classes of loss.

An auditor may be liable for continued trading losses where a negligent audit conceals insolvency and management dishonesty, thereby depriving the company of the opportunity to stop loss-making activities. Mere factual causation does not extend liability to a later fraud of a different kind.

A benefit reduces damages only if the breach legally, as well as factually, caused it. In evaluating a lost chance, independent contingencies are generally considered cumulatively, but a chance assessed as virtually certain may be treated as certain without spurious numerical precision.

Grant Thornton UK LLP admitted serious negligence in its audits of AssetCo plc’s accounts for the years ended March 2009 and March 2010. The accounts presented an insolvent and heavily loss-making group as profitable and solvent. The auditor failed to detect dishonest representations and fabricated evidence supplied by senior management.

Bryan J awarded AssetCo damages of just over £22.36 million following a 25% deduction for contributory fault: [2019] EWHC 150 (Comm), [2019] Bus LR 2291. He found that a competent audit would have led in 2009 to management change, financial support, a scheme of arrangement and restructuring similar to those achieved in 2011.

The appeal concerned the scope of the auditor’s duty and legal causation, the valuation of hypothetical third-party conduct under loss-of-a-chance principles, and whether AssetCo must give credit for funds received after the negligent audit.

1. The appeal was allowed in part. The auditor was not liable for a £1.5 million fraudulent related-party payment to Jaras. It was, however, entitled to credit for £7.506 million received through a July 2009 share issue. The remaining challenges failed.

2. The SAAMCO principle generally applies to claims arising from an unqualified statutory audit. It distinguishes a negligent audit which merely provides the occasion for loss from one which legally causes the loss. It remains a tool rather than a rigid rule and may be unsuitable for particular classes of case, potentially including dividends which could not lawfully have been paid under competently audited accounts: Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 and Hughes-Holland v BPE Solicitors [2017] UKSC 21 applied.

3. The continued trading losses fell within the auditor’s duty and were legally caused by its breaches. The auditor failed to detect management’s dishonest concealment of the group’s insolvency and substantial losses. This deprived the company of information which would have enabled its shareholders or non-executive directors to call management to account, stop the loss-making activities and restore solvency. That was a principal purpose of an audit identified in Caparo Industries plc v Dickman [1990] 2 AC 605.

4. The Jaras loss was different. It arose from a later personal misappropriation, whereas no similar transaction existed in the 2009 audit period and no relevant audit negligence concerned that type of transaction. The negligent audit was only a factual cause and supplied no effective causal link.

5. Where a counterfactual depends on the claimant’s conduct, the claimant must prove what it would have done on the balance of probabilities. A necessary third party’s conduct is evaluated as a real and substantial chance and reflected in damages. Independent contingencies are generally multiplied, while overlapping contingencies require a broader assessment. The judge was entitled to treat the relevant chances as certainties because they were assessed as virtually certain, not because 90% was automatically rounded to 100%.

6. A benefit is brought into account only where the breach legally and factually caused it. Borrowed money and restricted funds carrying an equal repayment or restoration obligation were not benefits. The July 2009 share issue formed part of the continued ostensibly sustainable business and was legally caused by the negligent audit. The March 2011 issue was instead a response to the disclosed financial crisis and lacked the necessary causal nexus.

1. Court of Appeal (Civil Division): The appeal was allowed in part. Liability for the £1.5 million Jaras payment was removed and credit of £7.506 million was allowed for the July 2009 share issue. The other grounds were dismissed: [2020] EWCA Civ 1151.
2. Commercial Court: Bryan J awarded damages of just over £22.36 million after reducing losses by 25% for contributory fault: [2019] EWHC 150 (Comm), [2019] Bus LR 2291.