Helen Dale & Ors v BDO LLP

Sections 235 and 236 of the Insolvency Act 1986 confer a wide discretion to obtain information and documents needed by an insolvency office-holder. The court must assess whether the office-holder reasonably requires the material, while considering the burden and any oppression caused to the respondent. Those considerations form one discretionary balancing exercise, rather than rigid sequential stages. The power may be used to investigate potential claims, including claims against the person required to provide the material. An application is not defeated because litigation may follow, because the material is inconvenient to produce, or because a pre-action protocol exists. Where audit files are self-contained records of the auditor’s procedures, evidence, professional scepticism and dealings with management, they may reasonably be required to investigate potential claims, even if the request covers the audits generally rather than only the contracts in which errors were later identified.

The joint liquidators of two companies in liquidation applied under sections 235 and 236 of the Insolvency Act 1986 for their former auditor to deliver its 2018 and 2019 audit files. The companies’ accounts had reported substantial profits and equity, but later reviews identified significant contract-related misstatements and losses. The liquidators wished to investigate possible claims against the auditor and former management. The auditor had already disclosed documents shared with the companies and opposed production of its working papers, arguing that the request was insufficiently specific, unnecessary, oppressive and inconsistent with the Professional Negligence Pre-Action Protocol. The central issues were whether the audit files were reasonably required and how the court’s discretion should be exercised.

1. Application granted. BDO was ordered to deliver up the 2018 and 2019 Audit Files.
2. Sections 235 and 236 of the Insolvency Act 1986 enable an office-holder to discover the true facts concerning an insolvent estate quickly, effectively and economically. The power is not confined to reconstructing the company’s existing knowledge and may assist in deciding whether to bring proceedings.
3. The court’s discretion is at large. In deciding whether information is reasonably required, the court may consider the burden and potential oppression to the respondent. The analysis is a single balancing exercise, not a rigid two-stage test. Potential inconvenience, cost, vulnerability to future claims and the fact that the respondent is not an officer, employee or contractor are relevant, but none is automatically decisive. The introduction of the Professional Negligence Pre-Action Protocol did not restrict that statutory discretion.
4. The Audit Files were likely to contain a unique, consolidated record of the audit procedures, evidence obtained, professional judgments, professional scepticism, discussions with management and information provided orally or electronically. That material could enable a reasonably informed preliminary assessment of whether the auditor had complied with its duties and whether claims against the auditor or management had merit.
5. The request was sufficiently targeted. The later discovery of errors in water contracts did not justify limiting disclosure to those contracts, since errors in one part of an audit might be replicated elsewhere. The potential oppression to BDO, including a privilege review and the possibility of subsequent litigation, did not outweigh the liquidators’ reasonable requirement.