AssetCo awarded damages in excess of £20m in negligence case against Grant Thornton
Judgment was handed down today by Mr Justice Bryan in the long running case of AssetCo plc v Grant Thornton UK LLP. AssetCo is an AIM listed provider of fire and rescue services. It sought damages of approximately £30 million plus interest and costs against accounting firm Grant Thornton for the negligent conduct of AssetCo's audits in 2009 and 2010. This is the latest in a series of well-publicised high-value actions against firms of auditors, at a time when the audit industry is facing widespread scrutiny from a variety of sources.
In 2017 Grant Thornton submitted to a fine of £3.5 million (before settlement discount) by the Financial Reporting Council in respect of the conduct of the audits. Mr Robert Napper, Grant Thornton's audit partner, was struck off from the Institute of Chartered Accountants of England and Wales for three years with no automatic right of reinstatement and submitted to a fine of £200,000 (before settlement discount).
Not surprisingly, therefore, in the civil suit brought by AssetCo, Grant Thornton admitted breach of duty. However, it denied that its breaches caused AssetCo any loss. Grant Thornton argued instead that had it not been negligent and the true position of AssetCo's finances had been revealed at the time of the relevant audits, AssetCo would have become insolvent. Grant Thornton alleged, therefore, that in fact AssetCo was better off as a result of Grant Thornton's negligence since AssetCo in fact managed to survive, despite the fact that between 2009 and 2011 it raised and expended over £20 million in reliance upon Grant Thornton's negligently audited accounts, before its true financial position was revealed and it entered into a Scheme of Arrangement pursuant to which liabilities of over £120 million were settled for £5 million, and the balance written off.
The case went to a six week trial in June/July of 2018. In the judgment handed down today, AssetCo was awarded damages in excess of £20 million. A further hearing is due to take place shortly to determine the precise quantum of Grant Thornton's liability, together with liability for interest and costs. The sum of damages awarded is largely comprised of the sums AssetCo wasted in pursuit of its flawed business model under the stewardship of its previous fraudulent management between 2009 and 2011, which the Court has held would not have been wasted had Grant Thornton not been negligent.
The learned judge stated as follows:
"I have set out at length GT’s duties and the extensive (admitted) breaches by GT of its duties. As the breaches of duty were admitted it is easy to lose sight of just how serious those breaches of duty were. They consisted of a catalogue of failures over two audit years that were of the utmost gravity and that went to the very heart of an auditor’s duties and the ‘very thing’ GT admits it was responsible for but failed to do. In this regard GT accepts that it failed to obtain sufficient appropriate audit evidence in respect of every material audit issue raised in these proceedings, it failed to apply appropriate professional scepticism (GT admitting that had it done so this would have led to the dishonesty being discovered), and it failed to ensure that the accounts gave a true and fair view of AssetCo’s financial position (whereas, if it had acted as a Competent Auditor would have done, a Competent Auditor would have reported as I have found, and events would have turned out on the Counterfactual as occurred in 2011 but without the very substantial wasted expenditure that was incurred)."
This case also raised important questions of law, as to the scope of auditors' duty, legal causation and the correct approach to the quantification of damages when a claimant's recovery depends upon the actions of an independent third party. As such, it has potentially serious ramifications for the audit profession generally. Grant Thornton has indicated that it will seek permission to appeal.
AssetCo was advised by Mark Davis, Eleanor Dixie and their team at Mishcon de Reya, who instructed Mark Templeman QC of Essex Court Chambers, and Richard Blakeley and Tom Pascoe of Brick Court Chambers. Grant Thornton was represented by James Roberts and his team at Clyde & Co, who instructed One Essex Court members David Wolfson QC, Simon Colton QC and Stephanie Wood.
Commenting on the case, Mark Davis, partner at Mishcon de Reya, said: "The claimants are pleased to have recovered substantial damages for the very serious losses caused by GT's negligence. It remains to be seen what impact this claim may have upon the conduct of auditors' negligence claims in the future, but it could be significant".
The judgment comes just one day after the Court of Appeal held in a separate case brought against Grant Thornton by Manchester Building Society, in which Grant Thornton also admitted that its advice and audits were negligent, that the losses in that case were not recoverable.