James McNaughton Paper Group Ltd v Hicks Anderson & Company
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE NEILL,LORD JUSTICE NOURSE,LORD JUSTICE BALCOMBE |
| Judgment Date | 31 July 1990 |
| Judgment citation (vLex) | [1990] EWCA Civ J0731-15 |
| Docket Number | 90/0765 |
| Court | Court of Appeal (Civil Division) |
| Date | 31 July 1990 |
[1990] EWCA Civ J0731-15
Lord Justice Neill
Lord Justice Nourse
Lord Justice Balcombe
90/0765
IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
(HIS HONOUR JUDGE LIPFRIEND, sitting as
as additional Judge of the High Court)
Royal Courts of Justice.
MR. Q.J. IWI (instructed by Messrs. Hewitt Woollacott & Chown) appeared on behalf of the (Plaintiffs) Respondents.
MR. NICHOLAS PADFIELD Q.C. and MISS MONIQUE ALLAN (instructed by Messrs. Herbert Smith) appeared on behalf of the (Defendants) Appellants.
This is an appeal by Hicks Anderson & Co., a firm of chartered accountants (whom I shall call "HA"), from the order dated 2nd December 1988 of His Honour Judge Lipfriend sitting as an additional judge of the High Court whereby it was ordered that HA should pay to James McNaughton Paper Group Ltd. (whom I shall call "McNaughton") the sum of £75,000 by way of damages for negligence.
McNaughton is the parent company of a group of companies engaged in the supply of paper for the printing trade. The chairman of the group was Mr. James McNaughton. He died in November 1987.
McNaughton alleged that they had suffered loss and damage when they took over a group of companies known as the MK Paper Group of which the parent company was MK Paper Group Holdings Ltd. I shall call this group "MK". They further alleged that they had been materially influenced in reaching their decision to take over MK by
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(a) a set of accounts which had been prepared by HA relating to MK and subsidiary companies in the group for the year ended 30th June 1982;
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(b) an answer given by Mr. Pritchard on behalf of HA at a meeting on 7th September 1982 which was also attended by Mr. McNaughton and by Mr. Barry Topsom, the chairman of MK.
The central issue raised on this appeal is whether HA owed any duty of care to McNaughton either in respect of the preparation of the set of accounts or in respect of the answer given by Mr. Pritchard.
I must start by stating the relevant facts.
In about 1977 Mr. McNaughton became interested in the possibility of a takeover of MK. At that time, however, nothing came of the idea, although there was some discussion about the matter between Mr. McNaughton and Mr. Topsom. MK were in the same line of business as McNaughton, though the group was smaller and was mainly concerned with roll paper. The two shareholders in MK were Mr. Topsom and his wife. The two groups had some common customers and were to some extent competitors.
In about 1982 Mr. Topsom became concerned about the prospects for MK and about his own long-term future because at that time MK were not prospering. He therefore raised with Mr. McNaughton the possibility of a takeover by McNaughton.
On 3rd June 1982 a preliminary meeting took place between Mr. Topsom and Mr. McNaughton and some of his co-directors at the McNaughton office in Camberwell.
On 29th June 1982 Mr. Topsom and Mr. McNaughton met again at the Inn on the Park Hotel in London to discuss details of the proposed takeover. Following this meeting Mr. McNaughton sent to Mr. Topsom a letter dated 6th July, though the letter was not actually sent until 9th July. In this letter Mr. McNaughton wrote:
"I think it was useful our meeting last Tuesday in order to quietly discuss our future plans.
Should we both decide to move on to a next meeting I would suggest the following points which would of course become an agenda.
1) JMPG purchase the shares of MK
a) 75% on 1st September 1982
b) 25% on 30th September 1985.
2) That the basis valuation be as follows for all of the shares:
a) Balance Sheet value of shares as at 30th June 1982 as certificated by your auditors and examined by my auditors (this being the total of subscribed funds and retained reserves) adjusted by
b) the actual gross margins on sales for the two months to 31st August 1982 less the agreed budgeted costs for that period.
3) Item 1(b) would be adjusted should any of the debtors as of 31st August 1982 not be fully paid. This would be in direct proportion to the amount of the shortfall in debtors.
4) The Company would continue to trade as MK although it might in the near future trade as McNaughton MK if this was considered to be beneficial.
…
I look forward to hearing your comments."
This letter was sent under cover of a letter dated 9th July which was in the following terms:
"I do apologise for not having sent the enclosed letter on the Monday as promised but I did want Edward, John, Alan and Peter to see it before I sent it off, which they have now done. The main comment from Edward is that he would like to sit down with you on your own and go through your customer accounts from the point of view of credit taken etc., in order that he can feel happier in his own mind concerning this aspect of business. I feel sure that you would not object to this."
The four persons named in the letter of 9th July were directors of McNaughton at that time. "Edward" was Mr. Edward Fenaroli.
There was then a delay of several weeks which was due, in part at least, to the fact that Mr. Stephen Ince, the managing director of MK, was away on holiday. On 5th August (it seems) Mr. Topsom replied:
"With Steve now back from his holiday, I have had a chance to discuss with him points raised in your letters of 6th and 9th July and our reply is as follows:—
In broad terms the package is acceptable but I think it would be wise to clarify what you have in mind regarding the Midlands operation.
…
Our end of year Accounts are being produced now and I will be able to let you have a draft by the end of next week, in the meantime perhaps we could meet to discuss the points in my letter and draw out an outline plan for the joint venture."
The reference to "the Midlands operation" in the letter of 5th August was a reference to a proposal in paragraph 5 of Mr. McNaughton's letter dated 6th July about establishing a small satellite warehouse in the Midlands. It is not necessary, however, to refer in further detail to this matter or to the other arrangements which were proposed in the letters passing between the parties.
It seems probable that by 5th August 1982 Mr. Topsom had spoken to Mr. Pritchard of HA to ask him to prepare the accounts for the year as quickly as possible. He had been having discussions with HA during the previous six months.
In the next few days Mr. Topsom met Mr. Edward Fenaroli, the vice-chairman of McNaughton, to discuss MK's aged debt list. On 18th August Mr. Topsom wrote to Mr. McNaughton again:
"As you know I have discussed with Edward our aged debt list and have visited your warehouse in Bristol and both Stephen and I feel that we are in a position to have a meaningful discussion regarding the possible take-over by you of the Company.
I will have the audited Balance Sheet available by the end of the week and have also prepared budget figures for the company remaining in its present form and what I think would be the likely cost of a warehouse operation. Perhaps we could meet next week with an agenda as per your letter of 6th July but incorporating the points in my letter to you of 5th August. I look forward to hearing from you."
The draft consolidated balance sheet of MK and draft balance sheets of the three subsidiaries—MK Papers Ltd., MK Papers (Leicester) Ltd. and MK (Leeds) Ltd., became available at about the end of August 1982. These documents ( CB2: 22–40) were sent by Mr. Pritchard to, Mr. Topsom under cover of a letter dated 27th August 1982 which was in these terms ( CB1: 22):
"I enclose final drafts of the balance sheets of MK Papers Group Holdings Limited, and its various subsidaries for your approval.
The various expenses, balances and write offs of these subsidiaries have been transferred to and charged against MK Papers Group Holdings Limited.
On my return from holiday on 6th September, perhaps we can meet and finalise the accounts.
In the meantime I am taking this opportunity of enclosing a note of my firm's fees on account of the audit of group.
Good luck for Tuesday."
At a meeting at McNaughton's offices in Camberwell on 31st August 1982 Mr. McNaughton was handed copies of these draft balance sheets together with copies of the balance sheets for the previous years. This meeting was also attended by Mr. Topsom and Mr. Stephen Ince. It was arranged that a further meeting should take place on Friday, 3rd September, after Mr. McNaughton had had an opportunity to consider the figures.
It is to be noted
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(a) that the second draft of the group balance sheet as at 30th June 1982 showed net current assets of £11, 124 (CB2: 24),
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(b) that the draft trading and profit and loss account for the year ended 30th June 1982 showed a net loss for the year of £48, 094 (CB2: 30).
On 3rd September 1982 the meeting took place as arranged between Mr. McNaughton and Mr. Topsom at the Inn on the Park. Mr. McNaughton then told Mr. Topsom that he thought it would be helpful if he could discuss MK's position with their accountant. Mr. Topsom wrote the name of Mr. Pritchard and his firm on Mr. McNaughton's copy of the draft group balance sheet. Mr. McNaughton added the address and the telephone number which were given to him by Mr. Topsom.
In the course of the next day or so Mr. McNaughton made an appointment by telephone to meet Mr. Pritchard. On 7th September he went to Mr. Pritchard's office at Newport Pagnall.
By the time of the trial Mr. McNaughton had died. The judge had before him, however, Civil Evidence Act statements in the form of an...
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