Mutual Reinsurance Company Ltd v Peat Marwick Mitchell & Company and Another
| Jurisdiction | England & Wales |
| Judge | LORD JUSTICE HOBHOUSE,LORD JUSTICE THORPE,LORD JUSTICE LEGGATT |
| Judgment Date | 11 October 1996 |
| Judgment citation (vLex) | [1996] EWCA Civ J1011-13 |
| Court | Court of Appeal (Civil Division) |
| Date | 11 October 1996 |
| Docket Number | QBCMF 96/0863/B |
[1996] EWCA Civ J1011-13
IN THE SUPREME COURT OF JUDICATURE
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
(MR JUSTICE TUCKEY)
Royal Courts of Justice
Strand
London WC2
Lord Justice Leggatt
Lord Justice Hobhouse
Lord Justice Thorpe
QBCMF 96/0863/B
MR P SCOTT QC with MR R HACKER (Instructed by Messrs Stephenson Harwood, London EC4M 8SH) appeared on behalf of the Appellant
MR R ADKINS QC with MR L TAMLYN (Instructed by Messrs Freshfields, London EC4Y 1HS) appeared on behalf of the Respondent
Friday, 11 October 1996
In this action the Plaintiff, a reinsurance company incorporated in Bermuda under the Bermudan Companies Act 1981, sues the firms which were its auditors for the company's accounting years 1986–1989 inclusive. The Plaintiff alleges that the Defendants were negligent in failing to detect that monies which it is alleged should have been received by the Plaintiff were, as a result of a fraud, retained by certain Liechtenstein and German companies. The Defendants deny that they were negligent. But a preliminary question has arisen in the action whether the terms of the Plaintiff's Byelaws (the Bermudan equivalent of the company's articles) in any event preclude the Plaintiff from making this claim against the Defendants. The short question of construction that arises is whether the word "officers" as used in Byelaw 123 includes the company's auditors appointed under Byelaw 118. Although the questions in the action fall to be decided by Bermudan law, the parties agreed to submit their dispute to the Commercial Court in London. The Commercial Judge ordered the trial of a preliminary issue to determine the question of construction. On the trial of the preliminary issue in June of this year Tuckey J ruled in favour of the Plaintiff and held that for the purposes of Byelaw 123 the Defendants were not officers of the company. The Defendants have appealed to this Court.
The question is a question of the construction of a provision in a commercial document—the Byelaws of the company. Any commercial document has to be construed having regard to the surrounding circumstances and the legal and factual context. In the present case the relevant context is the law of Bermuda which in many respects follows the law of England. The Bermudan Companies Act is largely derived from the corresponding UK legislation and the evidence is that any decision of a Bermudan Court would be inclined to follow and apply the established English law. It is therefore convenient to start with a brief consideration of the position of auditors as officers of a company under English law.
The definition of "officers" in section 744 of the Companies Act 1985 is an inclusive one: it "includes a director, manager or secretary". Prior to 1948 there was no statutory definition of "officer". Over the years the courts have held that the expression can include, depending on the circumstances, an auditor, a solicitor, an investment manager and a liquidator. As regards auditors, there is a line of authority from 1895 that they can be officers of a company and will be if they have been appointed as such. In in re London & General Bank [1895] 2 Ch 166 the Court of Appeal held that the Bank's auditors were officers of the company. Lindley LJ said at p.170:
"It seems to me impossible to deny that for some purposes and to some extent an auditor is an officer of the company."
The Court of Appeal rejected the argument that an officer must be a person who is concerned with the management of the company or has at least some measure of control over the assets of the company. This decision was followed in in re Kingston Cotton Mill Co [1896] 1 Ch 6. The Court of Appeal held that the London & General Bank decision was of general application. The distinction drawn by Kay LJ in the earlier case between auditors appointed by the company to report upon the balance sheet and accounts presented to them by the officers of the company and persons asked, ad hoc, to carry out a particular audit exercise, was referred to. This distinction was specifically picked up in in re Weston Counties Steam Bakeries & Milling Co [1897] 1 Ch 616. The earlier cases were distinguished. At p.627 Lindley LJ said:
"An auditor may or may not be an officer of a company. So may anybody else—e.g. a banker or solicitor. Prima facie such persons are not officers. See as to bankers ( in re Imperial Land Co of Marseilles LR 10 Eq 298): as to solicitors Carter's Case ( 31 Ch D 496). But if appointed to an office under the company, and if they act in that office as officers of the company, they will be officers within section 10. That was decided in the case of ( in re Liberator Permanent Benefit Building Society 71 LT (ns) 406) and no irregularity in their appointment, would, I conceive, avail them. But to be an officer there must be an office, and an office imports a recognised position with rights and duties annexed to it, and it would be an abuse of words to call a person an officer who fills no such position either de jure or de facto, but who happens to do some of the work which he would have to do if he were an officer in the proper sense of the word."
Accordingly in that case, because the relevant persons had never been appointed as auditors of the company, they were held not to be officers of the company. Finally, in R v Shacter [1960] 2 QB 252, a criminal case, the Court of Appeal again followed the earlier cases. The relevant offences were statutory offences which could only be committed by an officer of a company. The Court of Appeal considered that the question was answered by ascertaining in what capacity the person had been appointed. If the person had been appointed to hold "the office of auditor", "it can well be asked what office an auditor is being appointed to unless it is an office in the company and what officer he becomes unless it be an officer of the company". (Per Lord Parker LCJ at p.256.)
The English legislation reflects the same approach. The Companies Acts provide for the appointment of auditors, normally by the company in general meeting and refer to such an auditor as holding "office". The implication is that auditors are appointed and are, whilst they hold office, officers of the company. (See generally Part XI Chapter V of the Companies Act 1985.) Sections 310 and 727 of the Act also recognise the distinction made in the Western Counties case. A person carrying out an auditing function may or may not be an officer of the company. These provisions do not draw a contrast between officers on the one hand and auditors on the other but recognise that persons other than officers may be employed to carry out an audit.
One of the arguments considered in the London & General Bank case was whether the commonly found provision disqualifying an officer of the company from being appointed auditor meant that an auditor should not be treated as an officer of the company. (See now s.389 of the 1985 Act and Part II of the 1989 Act.) In London & General Bank, Kay LJ...
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