The Wine Enterprise Investment Scheme Limited (In Liquidation) v Crowe UK LLP

An auditor’s statutory and common-law obligations do not generally require direct reporting to individual shareholders, even where the directors are suspected of fraud. The Companies Act 2006 provides the relevant resignation and notification mechanisms. A claimant alleging professional negligence must prove the counterfactual chain of causation, including what relevant persons would have learned and done, and the effectiveness of those steps. Benefits caused by the breach, including later investment funds, may reduce recoverable loss. Directors’ dishonesty may constitute contributory fault attributable to the company. In this case the claim succeeded only to a limited extent, with damages reduced for sale costs, payments received and contributory fault.

The claimant company, acting through its creditors’ voluntary liquidators, sued its former auditor for negligent audits of its accounts for the years ending 2012 to 2018. The company alleged that the auditor should have detected fabricated deposits said to be held with Lilliput Holdings Limited, identified fraud, declined to issue unqualified audit reports or resigned, and thereby enabled shareholders to preserve or recover assets.

The company sought to introduce late claims that the auditor owed a duty to report directly to shareholders and that shareholders would promptly obtain protective relief. The court considered the amendment application, the auditor’s liability, causation, loss, credits, contributory fault and interest.

1. Late amendments. The proposed amendments were required because they introduced new essential factual elements, including direct reporting to members, resignation statements, statutory reporting routes, urgent legal advice and specific protective proceedings. They were not based on the same or substantially the same facts for the purposes of Limitation Act 1980 s 35 and CPR r 17.4. They were also unclear, unsupported by the evidence, very late and prejudicial. Permission was refused.
2. Direct reporting. The statutory scheme in Companies Act 2006 ss 518–522 requires an auditor’s resignation statement to be sent to the company, with prescribed onward routes. It does not require direct reporting to individual members. ISA 240 and ISA 260, particularly explanatory material concerning the possibility of reporting to shareholders, did not create such a legal duty. Sasea Finance Ltd v KPMG was an interlocutory decision proceeding on an agreed assumption and was not authority for a direct reporting duty.
3. Liability. The auditor failed to obtain sufficient appropriate evidence concerning the existence, recoverability and classification of the alleged deposits, failed adequately to investigate co-mingling and related-party risks, and failed to exercise appropriate professional scepticism. Proper enquiries would probably have exposed the Lilliput fiction and the directors’ dishonesty. The auditor should have considered disclaiming its opinion or resigning.
4. Causation. The pleaded case was confined principally to the consequences of the auditor failing to provide proper audit reports. The court was not satisfied that shareholders would have acted quickly or effectively enough to preserve cash. It assessed the possibility that they would have taken protective action and the likely delay before protection became effective. The directors could have continued selling wine during that period.
5. Loss and credits. The company’s claim for liquidation and legal costs failed. Interest was awarded at 3% above Bank of England base rate from 1 December 2019. Credit was given for £73,944 received during the members’ voluntary liquidation, and for 2.5% sale costs.
6. Contributory fault. The directors’ pervasive dishonesty was attributable to the company for contributory-fault purposes. The company’s damages were reduced by 50%. The bookkeeper’s conduct did not justify a further reduction.
7. Disposition. Damages were assessed at £101,965.95 before any further agreed adjustments, with interest at 3% above Bank of England base rate from 1 December 2019. Counsel were directed to agree the order, with costs and permission to appeal reserved.