Amathus Drinks Plc v Eagk LLP
| Jurisdiction | England & Wales |
| Judge | Master Brightwell |
| Judgment Date | 22 September 2023 |
| Neutral Citation | [2023] EWHC 2312 (Ch) |
| Year | 2023 |
| Court | Chancery Division |
| Docket Number | Case No: BL-2021-001184 |
[2023] EWHC 2312 (Ch)
Master Brightwell
Case No: BL-2021-001184
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Royal Courts of Justice, Rolls Building
Fetter Lane, London, EC4A 1NL
Samir Amin (instructed by Else Solicitors LLP) for the Claimants
James Sharpe (instructed by RPC LLP) for the Eleventh and Twelfth Defendants
Hearing date: 7 August 2023
Approved Judgment
This judgment will be handed down remotely by circulation to the parties' representatives by email and release to The National Archives. The date and time for hand-down is deemed to be 10:00am on Friday 22 September 2023
This application concerns the sustainability of a claim in professional negligence against an auditor by the buyers and thus members of a company, in circumstances where the audit was to the knowledge of the auditor relied on by the buyers for the determination of the purchase price and where the auditor previously acted for the buyers when they were in the process of acquiring the company.
On 28 August 2015, the first and second claimants (“the buyers”) entered into a share and purchase agreement (“SPA”) for the acquisition of the entire share capital of the third claimant company. It is common ground that, before completion of the SPA, the first and second claimants retained the eleventh defendant to conduct due diligence in relation to the sale. The eleventh defendant (“EAGK”) is a firm of accountants, and the twelfth defendant is a member of the firm who had direct dealings with the first and second claimants.
The claim was initially brought also against ten former shareholders and directors of the company. Because of matters dealt with at an earlier hearing and not relevant to this judgment, the claim now proceeds only against the eleventh and twelfth defendants. I will accordingly refer to the eleventh and twelfth defendants in this judgment collectively as “the defendants”.
The defendants apply to strike out the claim against them, alternatively for summary judgment.
At the first hearing of the application on 11 May 2023, and for reasons given on that occasion, I came to the view that the facts and matters relied on by the claimants in support of their claim that the defendants had assumed responsibility to the buyers were not adequately particularised and I directed the claimants to file and serve amended particulars of claim. They have done so, and the defendants have filed and served an amended defence.
The amended particulars of claim allege at paragraph 6 that the price to be paid for the shares in the company was £1,700,454 plus a 20% uplift, to be subject to adjustment if the Completion Net Assets (as defined) were less than that sum, as derived from the Completion Accounts, to be ascertained in accordance with clause 6 of and schedule 9 to the SPA. Those Completion Accounts were to comprise a profit and loss account from 31 March 2014 to completion, and a balance sheet as at the date of completion.
The Completion Accounts were prepared by EAGK, who also produced statutory accounts for the company. There is a dispute between the parties, to which I will return, as to whether EAGK was retained by the company and/or by the buyers for this purpose. In any event, EAGK issued a Completion Certificate for the purposes of the SPA on 22 September 2016. The claimants plead, and the defendants neither admit nor deny, that ‘on 3 October 2016, the Buyers' solicitor wrote to the Sellers' solicitor to confirm that, the Buyers already having paid the Sellers £1,437,954, the Buyers were due a refund of £142,199, so as to make the total amount paid £1,0769,796 plus 20 per cent (£1,297,755). Such a refund was subsequently made by the Sellers.’
The claimants allege that it was later discovered that a fraud had been committed on the company in the period before the SPA was entered into, in that:
i) Assets in the accounts had been double counted;
ii) Cash receipts had been inflated and the difference between sums received and sums posted was shown in a payment contra account as a debt owed to the company by a customer when no such debt was owed; and
iii) False invoices were created and added to the sales ledger and cash receipts were then credited against the false invoices.
The effect of this alleged fraud is said (amended particulars of claim, paragraph 22(a)) to be that it ‘resulted in the apparent net balance sheet of the Third Claimant being inflated, as at 28 July 2015, by between approximately £290,000 and £400,000…. This would have resulted in the Buyers paying the Sellers between approximately £348,000 and £480,000 more than they should have done under the SPA.’
The claimants allege that EAGK had both a contractual and a common law duty to exercise reasonable skill and care in preparing the statutory accounts and the Completion Certificate, including a duty to undertake a reasonable and proper investigation of the company's accounts, books and stock sheets and to draw to the attention of the buyers any material irregularities which it discovered. They allege, in summary, that the defendants acted without reasonable skill and care in failing to detect the fraud alleged to have been committed on the company, causing loss to the buyers, who were then unable to take the steps they would have taken had they been aware of the apparent fraud much sooner.
The claim in contract
The claimants plead that the buyers retained EAGK to produce statutory accounts, and that a formal engagement letter was entered into between the buyers and EAGK on 7 September 2015. The defendants not only deny that contention, but contend that there is no real prospect of such claim succeeding at trial and that summary judgment should be granted in their favour. The following matters are relevant to this question.
A schedule of engagement has been put in evidence and is headed “Bablake Wines Ltd”. The first section heading reads, ‘Your responsibilities as directors’, above which is reference to an audit being carried out for the purposes of the Companies Act 2006. Paragraph 2.2 states as follows:
‘Our report will be made solely to the company's members, as a body, in accordance with Chapter 3 of Part 16 of CA 2006. Our audit work will be undertaken so that we might state to the company's members those matters we are required to state to them in an auditor's report and for no other purpose. To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company and the company's members as a body, for our audit work, for the audit report or for the opinions we form.’
No copy of the separate letter of engagement attaching the schedule has been put in evidence by either side. The schedule indicates that it is to be read together with the Engagement Letter and EAGK's Terms and Conditions of Business (the latter of which included, at paragraph 4.1, a separate obligation of a contracting party not to provide EAGK's work to third parties without consent). Whilst not stated in evidence, both counsel indicated that their respective clients had not been able to locate a copy of the letter.
The schedule of engagement itself post-dates the entry into the SPA. Schedule 3, Part 3 to the SPA had required the sellers to cause a completion board meeting to take place at which there would be, ‘approval of the appointment of EAGK…as the auditors of the Company…with effect from the end of the relevant board meeting’.
When the audited accounts, having been prepared, were sent out by Mr Christofi to Mr Georgiou on 26 April 2016 with an audit report, they were addressed to ‘The Directors, Bablake Wines Ltd’, together with a statement that, ‘this report has been prepared for the sole use of Bablake Wines Limited. It must not be disclosed to third parties, quoted or referred to, without our prior written consent. No responsibility is assumed by us to any other person.’ The report itself contained a further disclaimer in terms almost identical to paragraph 2.2 of the letter of engagement (set out above).
The court may grant summary judgment on a claim or an issue in favour of the defendants if it considers that the claimants have no real prospect of succeeding on the claim or issue, and there is no other compelling reason why the claim or issue should be disposed of at a trial: CPR r 24.2. The test to be applied was set out by Lewison J (as he then was) in his frequently cited decision in Easyair Ltd v Opal Telecom Ltd [2009] EWHC 339 (Ch) at [15]. For present purposes, the key points are that the claimants' case on the claim or on the issue must be realistic and not fanciful, meaning that it must carry some degree of conviction and be more than merely arguable. The court must not conduct a mini-trial, but must take account of the evidence that can reasonably be expected to be available at trial.
Addressing myself at this point solely to the claim in contract, accordingly, I ask whether there is a realistic as opposed to a fanciful prospect of the claimants succeeding at trial in showing that EAGK entered into a retainer in September 2015 with the buyers. I accept, as Mr Amin submits, that the written agreement falls to be construed as against the background matrix of fact. It is clear from the amended particulars of claim that the claimants rely on the written contract made on or around 7 September 2015 and not on any collateral or other contract. Mr Amin suggests that the contract may have been made by EAGK with both the company and with the buyers.
For the following reasons, however, I do not consider that there is any realistic prospect of the claimants showing...
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