Assetco Plc v Grant Thornton UK LLP

The Court of Appeal dismissed the defendant auditor's appeal save that it excluded one discrete head of loss (the Jaras payment) from the damages and allowed a credit for the proceeds of AssetCo's July 2009 share issue. The court upheld Bryan J's primary findings that Grant Thornton (GT) had been negligent in its 2009 audit, that GT should have uncovered management dishonesty and materially misstated accounting, and that those audit failures fell within the scope of GT's duty to the company.

Key legal principles applied were the Caparo purpose-based approach to an auditor's duty, the SAAMCO distinction between information and advice applied as a tool (not an absolute bar) for defining the scope of recoverable losses, and established loss-of-chance principles for counterfactual third-party actions. The court held that where an audit negligently failed to disclose the dishonesty that made continued trading "ostensibly sustainable", losses flowing from continued trading were within the auditor's duty and legally caused by the breach. The court also applied recent Supreme Court authorities (notably The New Flamenco and Tiuta) in holding that a claimant must show a sufficiently close causal link before crediting a defendant for collateral benefits; on that basis it awarded credit for the July 2009 equity proceeds but not for the March 2011 fundraising or other items.

Background and factual matrix. AssetCo was the AIM-listed holding company of a group providing fire and rescue services, whose 2009 audited accounts presented a profitable and solvent group. In truth the group was insolvent and performance was heavily loss-making, in particular the London and Lincoln contract sub‑groups. The chief executive and finance director engaged in dishonest misrepresentations to the auditor, including forged documents and false cashflow and contract invoices, which enabled unjustified accounting treatments (including finance lease treatment and failure to impair goodwill).

Procedural posture and relief sought. Bryan J in the Commercial Court ([2019] EWHC 150 (Comm)) awarded AssetCo about £22.36m for losses said to have been caused by the negligent 2009 and 2010 audits. GT admitted breaches but disputed scope of duty/legal causation, quantification by loss‑of‑chance, and entitlement to credit for benefits. GT appealed to the Court of Appeal ([2020] EWCA Civ 1151).

Issues for the Court of Appeal.

• Whether AssetCo's losses fell within the scope of GT's duty and were legally caused by GT's admitted audit breaches.
• Whether the judge erred in applying loss‑of‑chance principles (treating various third‑party contingencies as effectively certain and failing to discount the award).
• Whether GT was entitled to credit for benefits received by AssetCo (notably proceeds of two share issues, PSA monies and overdraft funds).

Court's reasoning and conclusions.

• Scope of duty/legal causation: The court accepted Bryan J's analysis that the purpose of an auditor's duty (Caparo) includes protecting the company from consequences of undetected management dishonesty and that the SAAMCO distinction is a tool to identify what losses flow from negligent information as against the decision to continue a transaction or course of conduct. Applying the common ground that GT would, if competent, have uncovered most instances of management deceit, the court held GT's negligence was a substantial cause of the trading losses that flowed from the business continuing to trade in a manner sustainable only by dishonest representations.
• Loss of a chance: The court upheld the trial judge's methodology and evaluations. The judge had carefully analysed each third‑party step needed for the counterfactual rescue in 2009, examined oral and documentary evidence and, where appropriate, treated some contingencies as so close to certainty that no discount was appropriate. The Court of Appeal applied the usual appellate standard to evaluative findings and declined to substitute its own assessments.
• Credit for benefits: Applying the Supreme Court's recent statements, the court held that a defendant is entitled to credit for a benefit only where the benefit is both factually and legally caused by the defendant's breach. The court concluded that the July 2009 share issue proceeds were legally caused and so creditable, but the March 2011 share issue, PSA monies and overdraft did not have a sufficient legal causal link and were not credited. The Jaras payment (£1.5m) was excluded from recoverable loss because there was no effective causal link to the 2009 audit failings.

Result. The appeal was dismissed in substance, but the Court of Appeal excluded the Jaras payment from recoverable loss and allowed a credit of £7,506,000 for the proceeds of the July 2009 share issue, thereby varying the quantum awarded by Bryan J.

Appeal allowed in part. The Court of Appeal dismissed the appellant's primary challenge to Bryan J’s findings that GT’s negligent 2009 audit breaches were within the scope of its duty and legally caused the trading losses; it upheld the trial judge’s loss‑of‑chance analysis. However, the court reduced the recoverable losses by excluding the Jaras payment (no sufficient causal link to the 2009 audit) and by allowing credit for the July 2009 equity proceeds, as those proceeds were legally caused by GT’s negligence.

Appeal from the Commercial Court (Bryan J) ([2019] EWHC 150 (Comm), [2019] Bus LR 2291) to the Court of Appeal ([2020] EWCA Civ 1151). The trial judgment of Bryan J awarded damages to AssetCo for negligent audits; GT appealed on scope of duty/legal causation, loss of chance quantification and entitlement to credit for benefits. The Court of Appeal largely upheld Bryan J but varied the quantum as noted above.