Independents Advantage Insurance Company v Personal Representatives of Cook (Deceased)
| Jurisdiction | England & Wales |
| Judge | Lord Justice Chadwick,Lord Justice Potter |
| Judgment Date | 24 July 2003 |
| Neutral Citation | [2003] EWCA Civ 1103 |
| Docket Number | Case No: A3/2002/2463 |
| Court | Court of Appeal (Civil Division) |
| Date | 24 July 2003 |
[2003] EWCA Civ 1103
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
(MR JUSTICE LLOYD)
Royal Courts of Justice
Strand,
London, WC2A 2LL
Lord Justice Potter
Lord Justice Chadwick and
Mr Justice Cresswell
Case No: A3/2002/2463
Miss Leona Powell (instructed by CMS Cameron McKenna of Merchants House North, Wapping Road, Bristol BS1 4RW) for the Appellants
Mr Graeme McPherson (instructed by Fladgate Fielder of 25 North Row, London W1K 6DJ) for the Respondent
This is an appeal from an order made on 11 November 2002 by Mr Justice Lloyd on an application to strike out and for summary judgment made by the appellants in proceedings brought against them by Independents' Advantage Insurance Company Limited ("IAIC"). The question raised by the appeal is whether the judge was right to take the view that the proceedings should be allowed to go to trial.
The underlying facts
The appellants accept that, for the purposes of the application before Mr Justice Lloyd and on this appeal, it must be assumed that, at a trial, the claimant would establish the facts alleged in the particulars of claim. On that basis, the underlying facts may be summarised as follows:
(1) The appellants are Mr Colin White-Adams and the personal representatives of the late Mr Michael Cook. At all material times Mr Cook and Mr White-Adams carried on business together as chartered accountants under the firm name "Michael Cook & Co". The firm held itself out as having experience in the provision of audit and accountancy services to travel agents..
(2) Until January 2000 Mr Paul Emery and his wife, Mrs Elaine Emery, carried on business together as travel agents and tour operators under the name "Swift Travel". Swift Travel was a member of the Association of British Travel Agents ("ABTA") and the International Air Transport Association ("IATA").
(3) Both ABTA and IATA required their members to submit annually audited financial statements and reports. They also required their members to satisfy them that they had in place acceptable security sufficient to cover the obligations which each association undertook towards those who travel under arrangements made through or provided by members of that association.
(4) It was common practice within the travel industry for the security required by ABTA and IATA to be provided by a third party in consideration of a premium paid by the travel agent or tour operator. The business of IAIC included the provision of ABTA and IATA bonds in respect of independent travel agents. In particular, it provided bonds in respect of Swift Travel to IATA in March 1996 and February 1997 and to ABTA in January and July 1999. Further, between August and November 1999, IAIC made loans to Swift Travel (amounting in aggregate to £144,254) in order to enable it to meet working capital requirements imposed by ABTA (and so to continue to trade) and in the hope of avoiding a call under the bonds.
(5) From 1995 until the end of 1998 Michael Cook & Co ("the firm") had been retained by Swift Travel to provide audit and accountancy services. In the course of that retainer the firm prepared financial statements for each of the years to 31 May 1995, 1996, 1997 and 1998, audited those financial statements, prepared and signed auditors' reports and submitted those financial statements and reports to Swift Travel, to ABTA and (save in respect of the year to 31 May 1998) to IATA.
(6) Swift Travel submitted the financial statements and reports to IAIC in support of its application for the provision of the bonds required by ABTA and IATA, and for financial assistance to meet the working capital requirements imposed by ABTA. In deciding whether to provide the bonds —and whether to make loans to Swift Travel between August and November 1999 – each association relied on the financial statements and reports which had been submitted to it.
(7) In January 1998 IAIC paid £40,000 to IATA under the February 1997 bond. Between April and August 1998 IAIC recovered £8,332 from Swift Travel in reimbursement of that payment. The balance has not been recovered. In January 2000 Swift Travel ceased to trade – following termination of its ABTA membership – and, shortly thereafter, Mr and Mrs Emery were declared bankrupt. IAIC has recovered no part of the loans made to Swift Travel in 1999. It may be that IAIC has been required to pay ABTA under the bonds executed in January and July 1999; but that is not alleged in the particulars of claim. What is said is that "The Claimant has incurred professional fees in investigating and attempting to limit its liability under the terms of the IATA and ABTA bonds and under the terms of the loans. Those fees presently total £15,876.63".
The pleaded allegations
The claimant company's case is that, by reason of the breach of duty of the firm, it has suffered loss. The duty upon which IAIC relies is a duty to exercise the care and skill of competent accountants and auditors. That duty is said to have arisen at common law in relation to the preparation of financial statements for Swift Travel in respect of each of the four years to 31 May 1998; in relation to the auditing of those financial statements; and in relation to "preparing and providing auditors' reports" in respect of those statements – see paragraph 41 of the particulars of claim. The matters which are said to have given rise to that duty are (at least primarily) those set out under paragraphs 37 to 40 of the particulars of claim under the heading "The relationship between the Claimant and the Defendant". Those matters include the following:
"37. The Defendant knew or ought to have known
a. Of Swift's membership of ABTA and IATA, and
b. That Swift's audited financial statements and the auditors' reports relating to those financial statements
i. Would be provided to (and were provided to) ABTA and/or IATA for the purpose of enabling Swift to secure and renew its membership of those trade associations, and
ii. Would be relied upon by ABTA and/or IATA for the purposes of determining whether or not to offer or continue to offer membership of the relevant association to Swift and if so, on what terms.
…
39 The Defendant also knew or ought to have known
a. That Swift obtained bond facilities and finance from institutions such as the Claimant in order to satisfy the requirements of ABTA and/or IATA, and
b. That Swift's audited financial statements and the auditors' reports relating to those financial statements
i. Would be provided (and were provided) by Swift to institutions such as the Claimant to support applications for the provision of bond facilities and/or other financial support, and
ii. Would be relied upon by institutions such as the Claimant for the purposes of determining whether to provide bond facilities and/or other financial support to Swift and if so, on what terms."
There were set out at paragraph 38 of the particulars of claim the matters relied upon in support of the allegation of knowledge pleaded in paragraph 37. Paragraph 40 contained particulars of the matters relied upon in support of the allegation in paragraph 39:
"40 …
a. The Defendant knew that Swift was a member of ABTA and/or IATA and so had to meet the funding requirements of those associations …
b. Between 1995 and 1999 Paul Emery of Swift orally advised Joy Boswell of Michael Cook on numerous occasions that Swift:
i. Intended to satisfy (and were satisfying) the funding and financial requirements imposed on it by ABTA and IATA by obtaining bond facilities and raising funds from institutions such as the Claimant;
ii Would be providing the audited financial statements and auditors' reports prepared by the Defendant to institutions such as the Claimant for the purpose of persuading institutions such as the Claimant to provide bond facilities and/or finance to Swift so as to enable Swift to meet the funding and financial requirements imposed on it by ABTA and IATA;
c. The Defendant included within the Schedule of Overheads in Swift's financial statements for each of the years 31 st May 1995, 31 1st May 1996, 31 st May 1997 and 31 st May 1998 an expense labelled 'Travel Bond' representing the cost to Swift of obtaining a bond facility and/or finance from institutions such as the Claimant;
d. It was common practice within the travel industry:
i. For travel agents applying to institutions such as the Claimant for the bond facilities and/or funds necessary to satisfy the requirements of ABTA and/or IATA to submit audited accounts and auditors' reports [ii.] to third parties such as the Claimant to support such applications, and
iii. For institutions such as the Claimant to rely upon such audited accounts and auditors' reports when determining whether to grant such bond facilities and/or other funding and if so, on what terms.
The Defendant was aware or ought to have been aware of such matters from its own experience of providing accountancy and audit services to travel agents."
It was alleged – at paragraph 42 of the particulars of claim – that, in preparing and purporting to audit Swift Travel's financial statements for the years to 31 May 1995, 1996, 1997 and 1998 and in providing auditors' reports in respect of those financial statements, the firm acted in breach of the duty of care which it owed to the claimant, IAIC. Particulars of the breach of duty included (i) understatement of Swift Travel's liability in respect of value added tax in the period May...
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