BTI 2014 LLC v Pricewaterhousecoopers LLP
| Jurisdiction | England & Wales |
| Judge | Mr Justice Fancourt |
| Judgment Date | 15 November 2019 |
| Neutral Citation | [2019] EWHC 3034 (Ch) |
| Court | Chancery Division |
| Docket Number | Case No: HC-2014-000954 |
| Date | 15 November 2019 |
[2019] EWHC 3034 (Ch)
IN THE HIGH COURT OF JUSTICE
BUSINESS AND PROPERTY COURTS OF ENGLAND AND WALES
BUSINESS LIST (ChD)
Rolls Building
7 Rolls Buildings
Fetter Lane, London
EC4A 1NL
Mr Justice Fancourt
Case No: HC-2014-000954
Anneliese Day QC, Andrew Thompson QC and Ciaran Keller (instructed by Debevoise & Plimpton LLP) for the Claimant
Simon Salzedo QC, Tony Singla and Zahra Al-Rikabi (instructed by Reed Smith LLP) for the First Defendant
Hearing dates: 7, 8, 9 October 2019
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
Introduction
This claim for damages for professional negligence was issued by the claimant (“BTI”) on 28 October 2014. The second defendant is only a nominal defendant. The claim against the first defendant (“PwC”) is concerned with its audit of the 2007 and 2008 annual accounts of the second defendant (then known as Arjo Wiggins Appleton Ltd, or “AWA”) in October 2008 and May 2009 respectively.
In circumstances that I will explain, the claim was stayed for several years pending the outcome of related proceedings by BTI against AWA's former parent company, Sequana S.A. (“Sequana”) and the directors of AWA (“the Directors”). This claim was revived following the decision of the Court of Appeal in those proceedings, by which time BTI had served Amended Particulars of Claim. On 26 March 2019, PwC applied to strike out the claim and alternatively for summary judgment to be entered in its favour. I heard argument on that application over three days from Mr Salzedo QC on behalf of PwC and Ms Day QC and Mr Thomson QC on behalf of BTI.
BTI, which is a wholly-owned subsidiary of BAT Industries plc (“BAT”), sued Sequana and the Directors as assignee of AWA, claiming recovery of very large dividends paid by AWA to Sequana in December 2008 (€443 million, “the December dividend”) and May 2009 (about €135 million, “the May dividend”). The dividends were paid against the background of PwC's audit of AWA's annual accounts in October 2008 and May 2009. That claim failed. Rose J held that the accounts relied on by the Directors for payment of the dividends were proper accounts for the purposes of Part 23 of the Companies Act 2006 (“the 2006 Act”) and that accordingly the dividends could not be recovered from the defendants. BTI did not appeal that decision.
BTI now alleges that PwC negligently audited AWA's 2007 and 2008 annual accounts thereby causing AWA loss, in that the Directors would not have resolved to pay the very large dividends had PwC acted non-negligently. They would not have done so, BTI alleges, because the accounts of AWA would then have shown that it had considerably greater liabilities and fewer distributable reserves. BTI claims against PwC loss in the full amount of the December and May dividends paid to Sequana.
The grounds on which PwC applies to strike out the claim, alternatively for summary judgment, are the following:
i) the claim is an abuse of process because it is or involves a collateral attack on the findings of Rose J and as such brings the administration of justice into disrepute;
ii) if not an abuse of process for that reason, nevertheless there is no real prospect of any different evidence from that heard by Rose J leading to a different conclusion on the appropriateness of the accounts, and so the claim is either an abuse of process for that reason or is bound to fail;
iii) the damages claimed are for losses that, if incurred, fall outside the scope of PwC's duty to AWA; and
iv) no loss has in fact been suffered by AWA because of the later insolvency of Sequana.
The relevant facts giving rise to the claims against Sequana and PwC can be summarised briefly as follows.
The factual background
Another wholly-owned subsidiary of BAT, Appleton Papers Inc (“API”), purchased two paper coating businesses from National Cash Register Company (“NCR”) in 1978. API operated in the Lower Fox River area of Wisconsin. Under the terms of the sale and purchase agreement, API took over NCR's liabilities, including any environmental liabilities, and BAT agreed to indemnify NCR against API's failure to discharge those liabilities. At a later time, API's immediate parent company was separated from the BAT group and changed its name to AWA, but API's and BAT's liabilities remained. The paper businesses purchased by API had previously been responsible for polluting the Lower Fox River. In the 1990s, environmental liability claims were notified against NCR and API in this regard, comprising clean-up costs (“remediation liability”) and natural resources damages (“NRDs”) resulting from the pollution.
An agreement was made between BAT, NCR and API in 1998 to share out these environmental liabilities. BAT and API agreed to assume liability for 55% up to a total of $75 million. It was later determined that liability in excess of that amount would be allocated as to 60% to BAT and API. There was also agreement in relation to possible liability for further identified decontamination sites (“Future Sites”) where NCR or API might have “arranger” liability (that is to say, liability for facilitating or contributing indirectly to contamination). One such site was the Kalamazoo River in Michigan, in relation to which the first intimation of liability was issued in 1998 and a request for information from the Environmental Protection Agency was received by NCR and API in 2003.
By 2000, it was clear that API would have a substantial liability in relation to the Lower Fox River, though its amount was uncertain, and there was a risk of a future claim in relation to the Kalamazoo River and other Future Sites.
In that same year, AWA was acquired by Sequana. It sold off API in 2001 on terms that AWA would indemnify API against certain environmental liabilities. In that way, both BAT and AWA had contingent liabilities in respect of API's direct and indirect liability for remediation costs and NRDs. AWA purchased an insurance policy (“the Maris policy”) to pay for these future liabilities. By November 2008 the policy was worth about $250 million.
After the sale of API, AWA ceased to trade. The proceeds of sale of AWA's businesses were lent to Sequana, with the result that, in time, the only assets of AWA were the inter-company receivable from Sequana, the Maris policy and certain other historic insurance policies. By the end of 2006, the Sequana receivable was valued at £464.6 million in AWA's accounts, which showed a fully paid-up share capital of in excess of £200 million. The 2006 accounts included a provision of £50.8 million in excess of the value of the Maris policy for Lower Fox River liability.
In 2008, the Directors decided to explore ways of releasing to Sequana tied up capital in AWA. To achieve this, they proposed to reduce the share capital of AWA from €318.6 million to €1 million and then pay one or more large dividends to Sequana, which could be set off against the inter-company receivable. Before these steps were taken, PwC audited the 2007 accounts. This work was completed on 28 October 2008 (“the 2007 accounts”). The 2007 accounts included a provision of €59.3 million (in excess of the value of the Maris policy) for the Fox River liability and valued the receivable at €569.7 million.
On 15 December 2008, the Directors each signed a solvency statement and Sequana, as sole shareholder, passed a special resolution to reduce the share capital. On the following day, AWA prepared a new set of interim accounts that reflected the reduced share capital (“the December interim accounts”). This time, the Lower Fox River provision was €58.4 million, which derived from new estimates of the aggregate remediation liability provided to AWA in November 2008. On 17 December 2008, the board of AWA approved the December interim accounts and resolved to pay the December dividend by way of set-off against the receivable. This left an outstanding balance of the Sequana debt of €142.5 million.
In the first part of 2009, the Directors undertook work on the necessary Lower Fox River provision for the 2008 annual accounts (to 31 December 2018). The conclusion was eventually reached that the Maris policy was sufficient to cover the best estimate of liability and that no further provision was therefore needed. On 18 May 2009, PwC gave an unqualified certificate that the accounts gave a true and fair view of the state of AWA's affairs. These accounts (“the 2008 accounts”) showed distributable reserves of €137 million. The Directors approved them. On the same day, the board of AWA resolved to pay the May dividend by way of set-off against the Sequana debt.
Still on the same day, Sequana sold AWA to its former general counsel, Mr Gower, then acting as a consultant to AWA, and another connected person who had advised AWA in relation to the liability issues. From that time, Sequana was no longer exposed to any risk that its debt to AWA would have to be used to fund AWA's environmental indemnity liabilities, and AWA was left with assets of only about €3 million in excess of the Maris policy to meet any such liabilities.
In none of AWA's relevant accounts was provision or disclosure made in relation to potential liability at the Kalamazoo River or other Future Sites.
When, within less than a year after these events, it became clear that NCR and API's liability and therefore AWA's and BAT's exposure was significantly greater than the value of the Maris policy, and claims were notified in respect of the Kalamazoo River, the question of the lawfulness of the December and May dividends was considered. AWA in due course...
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