Electra Private Equity Partners (A Ltd Partnership) and Others (Plaintiffs/Appellants) v Kpmg Peat Marwick (A Firm) and Others
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE AULD,LORD JUSTICE CHADWICK,LORD JUSTICE CLARKE |
| Judgment Date | 23 April 1999 |
| Judgment citation (vLex) | [1999] EWCA Civ J0423-16 |
| Court | Court of Appeal (Civil Division) |
| Date | 23 April 1999 |
| Docket Number | CHANI 98/0115/1100/3 |
[1999] EWCA Civ J0423-16
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE CHANCERY DIVISION
(CARNWATH J and HIS HONOUR JUDGE HEGARTY QC sitting as a High Court Judge)
Royal Courts of Justice
Strand
London WC2
Lord Justice Auld
Lord Justice Chadwick
Lord Justice Clarke
CHANI 98/0115/1100/3
MR CHARLES ALDOUS QC and MR JOHN NICHOLLS (Instructed by Messrs Herbert Smith, London, EC2A 2HS) appeared on behalf of the Appellants
MR PETER GROSS QC and MR ADRIAN BELTRAMI (Instructed by Messrs Lovell White Durrant, London, EC1A 2DY) appeared on behalf of the Respondent
Friday 23 April 1999
The plaintiffs, Electra Private Equity Partners ("Electra"), are venture capital fund managers. On 14th May 1992 Electra invested IR£10 million in the unquoted convertible loan stock, and thereby acquired effective control, of an Irish leasing company, known as the Cambridge Group PLC ("Cambridge"). Electra lost all of that investment 18 months later when Cambridge went into receivership. Electra seeks to recover its loss by suing in negligence the defendants, two firms of accountants. The first is KPMG, whom Electra instructed to investigate and report to it on the suitability of the investment, and who did so. The second is KPMG Stokes Kennedy Crowley ("SKC"), an Irish partnership and part of the KPMG International Group, who, as auditors to Cambridge, produced or concurred in Cambridge producing to Electra before the investment its audited accounts and their unqualified report on them for the year ended 29th February 1992.
There are two appeals of Electra before the Court. The first is from an order of Carnwath J on 6th November 1997, striking out Electra's claim against SKC, under RSC Order 18, Rule 19 or in the court's inherent jurisdiction, on the ground that it was bound to fail. It raises the issue whether, on Electra's pleaded case and evidence it was plain that it could not establish that SKC owed it a duty of care in respect of the 1992 audited accounts. The second is from an order of His Hon. Judge Hegarty, QC, of 18th May 1998, refusing Electra leave to amend the writ and to re-amend its statement of claim, alleging an assumption by SKC of a duty of care to Electra arising out of its provision to KPMG of audit information, so as to bring SKC back into the action. It raises the issues whether such claim is barred by reason of cause of action or issue estoppel or as an abuse of process, or because it would, in any event, be bound to fail in law. Neither order nor appeal concerns the action against KPMG, which proceeds.
Electra's complaints against SKC, taking the two claims together, are, in outline, as follows. It engaged KPMG, as part of its due diligence before making the investment, to investigate and report on Cambridge. With the knowledge and approval of Electra, KPMG sought and obtained from its associated firm, SKC, audit information upon which it relied in its investigation and report to Electra. SKC gave assurances to Electra as to what the audited accounts would show and knew that Electra required them before making, and would rely on them in deciding whether to make, the investment. SKC also knew or should have known that KPMG would rely on, its, SKC's, provision of information to KPMG for the purpose of its investigation and report to Electra on the suitability of Cambridge as an investment, and that Electra would rely on that report.
On 13th May 1992 SKC, or Cambridge with their knowledge and concurrence, provided Electra with draft audited accounts for the year ended 29th February 1992. The draft accounts showed a profit before tax of IR£5.017 million and net assets of IR£13.391 million and were accompanied by an unqualified draft audit report. Pursuant to a "placing agreement" between Electra and Cambridge on that day, which, to SKC's knowledge, was held in escrow overnight pending receipt by Electra of signed final accounts in accordance with the draft, it was agreed that Electra would purchase the stock on the following day. Late on 13th May Cambridge's directors and SKC respectively signed the accounts and the audit report in the same terms as the drafts, and on 14th May SKC, or Cambridge with SKC's knowledge and concurrence, provided them to Electra. In reliance on those signed accounts and report, Electra purchased the stock on that day.
Contrary to SKC's unqualified report, there were substantial deficiencies in Cambridge's accounting systems and controls. SKC's unaudited accounts for the 15 months' period ending just over 3 months later on 31st May 1992 were to show a loss of IR£35.4 million, mainly due to bad debts in respect of unsupervised loans made by Cambridge's "Confirming Division" without board approval during the year ended 29th February 1992. Cambridge went into receivership in September 1993 and, as I have said, Electra lost the whole of its investment.
SKC's case in outline is that Electra's claim was bound to fail and that the facts alleged by Electra, even if true, did not give rise to any duty of care. It acted throughout solely as auditor to Cambridge and that in such contact as it had with Electra or KPMG it did not assume a responsibility to Electra for the accuracy of its auditing or reporting on Cambridge's accounts. It did not know that Electra was relying on the accuracy of the accounts for the purpose of deciding whether to make the investment; it gave no assurances to Electra during the course of the audit as to what the accounts would show or that Electra could rely on them when making that decision; and in giving such unaudited information as it did to KPMG it did not assume any responsibility to it or to Electra for its accuracy, in particular, it did not know what use KPMG would make of it or even that KPMG or Electra would rely on it.
The matter first came before Master Moncaster in June 1997 when he dismissed SKC's application to strike out Electra's amended statement of claim against it and gave Electra leave to re-amend its statement of claim, which it did in September 1997. SKC's appeal against that order was heard by Carnwath J on 3rd and 4th November 1997. By then the parties had exchanged pleadings, but there had been no discovery between Electra and SKC, and KPMG were in default of an unless order for the service of lists. KPMG did not serve its list until 7th November 1997, the last day permitted by the order and the day after Carnwath J gave judgment allowing SKC's appeal and striking out Electra's claim. During inspection of KPMG's documents, which required a further order, Electra discovered documents relating to specific information given by SKC to KPMG before the investment about which, if it had known at the time, if would have put before Carnwath J in support of its case that SKC owed it a duty of care. Electra has sought, and the Court has given it, leave to adduce those documents in evidence in support of its appeal from Carnwath J's order, maintaining that they reinforce its case before him that SKC owed it a duty of care.
It was in reliance on the same documents that Electra unsuccessfully sought leave before Judge Hegarty to bring SKC back into the action by re-amending its statement of claim to allege negligent misstatement by SKC to Electra through the medium of KPMG.
The First Appeal
The parties do not agree about the issues before Carnwath J and what he decided. Electra maintains that the only issue before him, and the one he decided, was whether, under RSC Order 18, Rule 19, or in the inherent jurisdiction of the court, its claim should be struck out because it had no reasonable prospect of success, not whether, under RSC Order 18, Rule 19(1)(a), its pleaded claim disclosed a reasonable cause of action. SKC's stance is that both issues were before the Judge, that he rightly decided the former against Electra and that, if he did not also decide the latter against it, he should have done so.
In my view, it is plain from the parties' conduct of their respective cases on the application and Carnwath J's judgment that he decided the matter only on the basis that on the evidence before him the claim was bound to fail.
I should now set out Electra's pleaded case and relate it to its affidavit evidence in support of it at that time. Paragraph 16 of the Re-Amended Statement of Claim alleged a proximity of relationship between Electra and SKC giving rise to a duty of skill and care by SKC to Electra "to be expected of a reasonably competent accountant in auditing and reporting on Cambridge['s] accounts". SKC's pleaded defence was that its sole function was the fulfilment of its statutory duties as auditor to Cambridge. It denied any duty of care to Electra.
Electra particularised the proximity on which it relied in two main ways: first, as pleaded in paragraphs 16.3–6, in Electra seeking assurance direct from SKC and in SKC assuring Electra direct that it could rely on the audited accounts in deciding whether to invest in Cambridge; and second, in paragraph 16.2, in SKC supplying audit information to KPMG when it knew or ought to have known that KPMG would rely upon it in reporting to Electra on the suitability of Cambridge as an investment.
As to the provision of information to KPMG, paragraph 16.2 read:
"16.2SKC carried out their audit at substantially the same time as KPMG were carrying out their investigation. SKC supplied information to KPMG and had discussions with them during the course of KPMG's investigation during March and April 1992. SKC...
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