BAILII [Home] [Databases] [World Law] [Multidatabase Search] [Help] [Feedback]

England and Wales High Court (Chancery Division) Decisions


You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Barings Plc and Anor v. Coopers & Lybrand and Ors [2001] EWHC Ch 461 (23rd November, 2001)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2001/461.html
Cite as: [2001] EWHC Ch 461

[New search] [Context] [View without highlighting] [Printable RTF version] [Help]


Barings Plc and Anor v. Coopers & Lybrand and Ors [2001] EWHC Ch 461 (23rd November, 2001)

Case No: CH 1996 B No. 477 &

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

CH 1998 B No. 5286
Royal Courts of Justice
Strand, London, WC2A 2LL
23rd November 2001

B e f o r e :

THE HONOURABLE Mr. JUSTICE EVANS - LOMBE
____________________

BARINGS Plc (in liquidation) and anr
Claimants
- and -

COOPERS & LYBRAND (a firm) and ors
Defendants


BARINGS FUTURES (SINGAPORE) PTE LTD (in liquidation)
Claimants
-and-

MATTAR and 36 ors
Defendants
____________________

Charles Aldous QC/Rhodri Davies QC/ (instructed by Slaughter & May for Plc)
Michael Brindle QC/Craig Orr (instructed by Ashurst Morris Crisp for BFS)
Jonathan Gaisman QC/Christopher Butcher QC/
David Bailey/ James Brocklebank (instructed by Clifford Chance for D&T)

____________________
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.

HTML VERSION OF APPROVED JUDGMENT

____________________

Crown Copyright ©

    Mr. Justice Evans-Lombe :

    JUDGMENT

    INTRODUCTION

  1. This is an application made by Deloitte & Touche (Singapore) (“D&T”) to strike out the claims brought against them by Barings Plc (“Plc”) and Bishopscourt (BS) Ltd (formerly Barings Securities Ltd) (“BSL”). It is made pursuant to RSC O.18 r.19 and the inherent jurisdiction of the court, as a result of an order for directions I made on 26th July 1999, which provided, inter alia, that the CPR were to apply to the combined action save as regards pleadings and discovery, which were to be governed by the Rules of the Supreme Court.

  2. I must first set out the factual background although, given the number of times this ground has been traversed in other judgments, I shall try to do so reasonably briefly.

  3. FACTUAL BACKGROUND

  4. Plc was the holding company of the Barings group. It was based in London and did not trade on its own account. BSL was an indirect subsidiary of Plc. It conducted securities and futures trading, both on behalf of clients and (from 1993 onwards through a subsidiary, Baring Securities London Ltd (“BSLL”)) on its own account.

  5. Barings Futures Singapore Pte Limited (“BFS”) was an indirect subsidiary of BSL, and so of Plc. It was incorporated in Singapore to trade on the Singapore International Monetary Exchange (“SIMEX”).

  6. D&T were the auditors of BFS in 1992 and 1993. In 1994, they were replaced by Coopers and Lybrand Singapore (“C&LS”). The other auditors involved in the action are Coopers and Lybrand in London (“C&LL”), who were the auditors of Plc, BSL and the Barings group in all three years.

  7. The Barings group collapsed on 27th February 1995. Plc and BSL are now in insolvent liquidation. The immediate cause of the collapse was unauthorised and loss-making trading by Nicholas Leeson, who was the general manager of BFS from 1992 until he disappeared shortly before 27th February 1995.

  8. BFS undertook futures and options trading on SIMEX on behalf of BSL, BSLL, Barings Securities Japan (“BSJ”) and one external client, Banque Nationale de Paris. BFS was initially limited to executing trades on SIMEX only on the instructions of its clients. But from 1993 Leeson was permitted to carry out arbitrage trading at his own discretion, exploiting price differences that arose between matching contracts traded on SIMEX and the Japanese exchanges. He was given no authority to hold open overnight positions: all positions on one exchange were understood by Plc and BSL management to be matched by equal and opposite positions on the other exchange.

  9. To maintain a contract on SIMEX, a broker such as BFS is required to deposit margin with the exchange. Limiting myself to futures trades for the time being, when first buying or selling the contract the broker is required to deposit with SIMEX initial margin as collateral. This may be deposited in cash or by instruments such as Treasury bonds. If the value of the contract moves against the broker, it is required to deposit variation margin, so that the contract is “marked-to-market” on a daily basis. Finally, in unusual circumstances such as extreme market volatility, SIMEX may require a broker to deposit additional margin.

  10. Margin to be deposited with SIMEX is calculated daily and has to be deposited with SIMEX by the start of the next trading day.

  11. Under SIMEX rules a broker conducting agency trading for clients (which did not include other Barings companies, but did include those companies’ clients) is usually required to obtain from its client at least as much margin as the broker is required to deposit with the exchange. Furthermore, a broker is required to obtain margin from clients on a gross basis. Therefore a broker will always hold more margin from its clients than it has to deposit with the exchange in relation to their trades.

  12. BFS’ day-to-day trading and accounting records were maintained on a computer system known as CONTAC. At the end of each trading day information as to trades conducted and margin requirements was transmitted by electronic feed direct to BSL’s computer system, known as First Futures. BSL reconciled the information to its own information as to client orders. It was then able to update its clients’ positions, request any margin required from its clients, and transfer margin if required from the Barings Securities Group Treasury to BFS in time for the next trading day. BSLL, when it began handling proprietary trading in 1993, also used the First Futures system.

  13. A similar, though less automated, process applied to BSJ.

  14. In brief, Leeson’s fraud consisted in the following. Soon after BFS began trading in June 1992, Leeson opened an account, 88888, in the CONTAC system. It was described in both systems as an error account. Leeson used the account (i) to book speculative trades, without it being apparent that they were unmatched, (ii) to adjust the prices of legitimate trades, conducted on behalf of BFS’ clients, so as to make those trades appear more profitable than they in fact were, at the cost of the 88888 account, (iii) to hide unprofitable trades by transferring them into the 88888 account, and (iv), increasingly, to book the sale of options which Leeson wrote to raise money to finance his losses.

  15. Using his knowledge of the BSL back office, Leeson persuaded the provider of the CONTAC system to omit information as to the 88888 account from the trade feed to BSL. It was included in the margin feed but, because BSL’s First Futures system did not have an account under that number, the system ignored the information as to the 88888 account. Information as to the 88888 account of course remained in the CONTAC system, but BFS’ monthly management accounts were prepared from a different, SUN, system and Leeson caused the 88888 trades to be omitted when trading results were transferred each month from CONTAC to SUN.

  16. The losses on the 88888 account were £3.1 million in September 1992, at the time of the first audit of BFS by D&T. They fell to £2.1 million by December 1992. By December 1993, at the time of the second audit (BSL and BFS having changed their year-end to December in the meantime), the losses were £24.4 million; and by December 1994, £215.5 million. By the time of the collapse in February 1995, the losses were £848.5 million.

  17. During 1992 and 1993, Leeson seems to have financed his losses on the 88888 account using the excess margins which, as described above, BFS called from its clients, and the premiums from the sale of options. However, beginning on 12 January 1994, Leeson began to request from BSL additional funding, in US dollars (“the Dollar Funding”). This was on top of the conventional funding in yen which BFS received through the operation of the margining mechanism I have described above. Leeson made these requests by e-mail, addressed to individuals in the BSL settlements department, and they arranged for the monies requested to be transferred to BFS’ account with Citibank in Singapore.

  18. Leeson seems to have explained the need for the Dollar Funding by referring to factors such as additional margin calls by SIMEX and the difficulty of obtaining in time yen from BSJ for margins on its trading. However it is admitted by Plc and BSL in their pleading, which I quote below, that no proper investigation into the validity or accuracy of the funding requests was carried out. Furthermore for the first ten months BSL advanced the Dollar Funding without BFS providing any breakdown between the amounts required for client and house business. When in November 1994 BFS was required to provide such a breakdown, it usually split the amount requested 50:50 between the two, which could not have been the case. None of the Dollar Funding was reconciled by BSL to its own clients, so no attempt was made to recover it from clients. Instead, the amounts were simply recorded in BSL’s and BSLL’s books in two accounts, the BSINGCOLL and BSSHSECOLL accounts. In the solo consolidated balance sheet, which combined the financial positions of Baring Brothers & Co. and BSL, the imbalance between the amounts advanced to BFS and the amounts recovered from clients was shown as “client loans”, known within BSL as the “top-up” balance. This top-up balance existed before 12 January 1994, apparently because of timing differences, but increased from £21.7 million on 31st December 1993 to £306.3 million at 24th February 1995.

  19. THE PROCEDURAL BACKGROUND

  20. There are two actions, which are being heard together. In the first, Plc and BSL sue D&T and the two Coopers firms. D&T have joined BFS and BSJ as third parties. In the second, BFS sue D&T and C&LS only. D&T have joined Plc, BSL and BSJ as third parties.

  21. In both actions, the claimants have alleged that the two Singapore firms of auditors conducted their audits negligently, with the result that Leeson’s activities were not detected and stopped. In addition, Plc and BSL allege that C&LL were negligent in their conduct of the audits of Plc and BSL and their supervision of the Singapore audits.

  22. The trial of the combined action began on 2nd October 2001. During its second week, it was announced that the claimants in both actions had signed definitive and binding agreements with the Coopers firms, which would, when effective, settle the claims against those firms. The agreements are subject to approval by creditors and the Companies Court. I understand that the Companies Court will consider whether to give such approval on 11th and 12th December 2001.

  23. I have not been shown the terms of the settlement. However, by a letter dated 9th October 2001 from BFS’ solicitors, Ashurst Morris Crisp, to those of D&T, Clifford Chance, BFS, Plc and BSL have proposed that, if the settlement is implemented, BFS will continue with its action against D&T, save that it will not claim against D&T in respect of any loss incurred after 31st December 1994. Plc and BSL have limited their claim against D&T similarly, and propose that their claim should be stayed. The stay should be lifted only if BFS are held at trial unable to recover from D&T on a ground which does not prevent Plc and BSL recovering. The example given is the issue as to the representation letter which I have ordered to be tried as a preliminary issue and which I describe below. Otherwise subject to any necessary involvement as a result of being part 20 defendants they will take no part in the trial and will be bound by any findings of fact and law.

  24. I have indicated that I am not at present minded to agree to the proposed stay. If the settlement goes ahead, subject to the result of this application, Plc and BSL will have to decide whether to pursue their claims against D&T or discontinue them.

  25. D&T’s response to the settlement involving the other parties has been threefold. Firstly, they indicated their intention of bringing third party claims for contribution against C&LL and C&LS, so as to bring them back into the main trial. Secondly, they applied to me to order the trial of a preliminary issue in the BFS action. If found in their favour, that issue would defeat BFS’ claim against them. I describe it in the next paragraph. Thirdly, they have made the present application in the Plc/BSL action to strike out Plc’s and BSL’s claims against them.

  26. On 23rd October 2001 I ordered the trial of a preliminary issue in the BFS action. That preliminary issue is currently expected to be heard on 14th January 2002, before the resumption of the reconfigured trial of the main action against D&T. The issue is whether D&T have a complete defence based on circuity of action and/or set-off and/or estoppel, such as to bar BFS’ claim. D&T argue that this defence arises as a result of two representation letters, written to them by Mr Jones, a director of BFS, in advance of the completion of the 1992 and 1993 audits respectively, which D&T allege to have been recklessly fraudulent.

  27. Plc’s AND BSL’S CLAIMS

  28. After that description of the background to the present application, I shall set out the claims which are brought by Plc and BSL, and the objections taken to them by D&T.

  29. D&T were appointed in 1992 as auditors to BFS, and therefore are sued by BFS in contract and tort. Plc’s and BSL’s claims against D&T are in tort only. They argue that D&T owed a duty of care to them arising out of the acceptance of group audit instructions to audit BFS’ consolidation schedules, to report to the group auditors on those schedules and to give an audit report on those schedules to the directors of the parent company. For the purposes of this application, D&T accept the existence of a duty of care, although there has been vigorous debate before me as to its scope.

  30. It is important to note that the claimants allege that D&T owed BSL a duty of care in relation to the September 1992 audit only, and owed Plc a duty of care in relation to the 1993 audit. This is because the BFS accounts were consolidated into the BSL group accounts in 1992, but (as part of the consolidation of BSL into Plc) into the Plc group accounts in 1993. Thus D&T’s audit report on the consolidation schedules for BFS was addressed in 1992 to the directors of BSL, and in 1993 to the directors of Plc.

  31. There are three categories of claim brought by Plc and BSL and which D&T seek to have struck out:

  32. i) BSL claims, consequent upon the 1992 audit, the sums which it advanced to BFS by way of the Dollar Funding. I have described this funding in the factual background above. The sums advanced are put at £321 million (US$507 million), plus £76 million (US$120 million) advanced by BSLL, which BSL claims as assignee of BSLL’s rights of action. D&T argue that this claim fails, both because this is loss which would be made good if BFS were to recover it (the Johnson v Gore Wood ground) and because, on the pleadings, the claim fails the purpose or transaction test which I shall describe in due course.

    ii) Plc and BSL both claim (consequent in Plc’s case upon the 1993 audit and in BSL’s case upon the 1992 audit) the value of their respective groups, which became insolvent as a result of Leeson’s fraud. Quantum is to be decided at a later trial but BSL’s claim is in the region of £400 million and Plc’s is in the region of £1,000 million. Both claims will lapse if the settlement with the Coopers firms becomes operative; as I have explained above, under the reconfigured trial the claimants will not make any claim in relation to losses incurred after 31st December 1994. By their present application, D&T argue that, on the pleading, the loss of value claims fail the purpose or transaction test.

    iii) Plc claims (consequent upon the 1993 audit) in relation to bonuses which it paid out in 1994, the calculation of which relied on the apparent 1993 profits shown in the 1993 accounts audited by D&T. The profits were overstated in that they failed to take account of Leeson’s losses on the 88888 account. This claim is for £12.2 million. D&T apply to strike it out both on the facts (relying on the inherent jurisdiction of the court and adducing some limited, uncontroverted evidence) and on the Johnson v Gore Wood ground.

    THE PLEADINGS

  33. Insofar as relevant to this application, the claimants’ Re-amended Statement of Claim (“the Statement of Claim”) is pleaded as follows (references are to paragraph numbers, and I have substituted the abbreviations I have used above where necessary). I shall set out separately the paragraphs dealing with, firstly, duty, loss and reliance, secondly, the Dollar Funding and, thirdly, the claim for overpayment of bonuses:

  34. DUTY, LOSS and RELIANCE

    59 and 61: D&T accepted responsibility and undertook duties in tort (and addressed their report on the consolidation schedules) to BSL in 1992 and to Plc in 1993.

    318: “C&LL, D&T and C&LS carried out the audits identified above and made their audit reports and their reports on internal controls for the purposes of:

    (1) providing assurance to the Plaintiffs that the accounts audited showed a true and fair view;

    (2) providing an assurance to the Plaintiffs that the accounts audited were not materially misstated due to material fraud or irregularities or significant and continuing weaknesses in internal control;

    (3) complying with the statutory and regulatory requirements pleaded at paragraphs 43 to 49 above…”

    319: “C&LL, D&T and C&LS carried out the following audits for the purposes of Barings plc and addressed reports on them to Barings plc (or to its directors or members):

    …(2) D&T’s audit of BFS for the period ended 31st December 1993;…”

    320: “Each of C&LL, C&LS and D&T knew, or ought to have known, that Plc would rely, for the purposes pleaded at paragraph 318 above and for the purpose of determining the amounts of dividends and bonuses, upon their respective audits as identified in paragraph 319 above and upon the audit reports and reports on internal controls made by them in relation to those audits, and Plc did so rely.”

    321: “C&LL and D&T carried out the following audits for the purposes of BSL and addressed reports on them to BSL (or to its directors or members):

    …(2) D&T’s audit of BFS for the year ended 30th September 1992;…”

    322: “Each of C&LL and D&T knew, or ought to have known, that BSL would rely, in the manner pleaded at paragraph 320 above, upon their respective audits as identified in paragraph 321 above and upon the audit reports and reports on internal controls made by them in relation to those audits, and BSL did so rely.”

  35. I interject here that, in relation to paragraphs 320 and 322, D&T asked Plc and BSL to provide further and better particulars of the matters relied upon in support of the alleged knowledge on the part of D&T. In relation to the bonuses claim (set out at paragraph 335 of the Statement of Claim, quoted below), the claimants specified a document on D&T’s audit file “which evidences D&T’s understanding that bonuses were declared by the holding company”. But in relation to the other claims the claimants did not point to any such specific document evidencing knowledge. They referred instead to matters which evidenced D&T’s knowledge that BFS was a subsidiary of BSL and that their report would be used in the group audit, in particular the terms of the audit instructions and the fact that the audit report was to be addressed to the directors of the parent company.

  36. 323: “As a result of Leeson’s continued unauthorised and loss-making trading on account 88888 the Barings Group (including each of BFS, BSL, BSLL and Barings plc) became insolvent and collapsed on 26th February 1995.”

    324 – 330: the claimants plead that all the auditors were in breach of duty in failing to detect Leeson’s unauthorised trading and to report the weaknesses in internal controls; had they reported either, the trading would have been discovered and brought to an end.

    331: “Plc complains of…

    (2) D&T’s breaches of their tortious duties in respect of their audit of BFS for the periods ended 31 December 1993 …

    (4) C&LS’ breaches of their tortious duties in respect of their audit of BFS for the period ended 31 December 1994;”

    and C&LL’s breaches of their contractual and tortious duties for 1992 - 1994.

    332: “By reason of the matters complained of, Plc has suffered loss and damage. The insolvency and collapse of the Barings Group has deprived Plc of the whole value of the group…”

    333: “BSL complains of:

    (1) D&T’s breaches of their tortious duties in respect of their audit of BFS for the year ended 30th September 1992”

    and C&LL’s breaches of their contractual and tortious duties for all years.

    334: “By reason of the matters complained of, BSL has suffered loss and damage. BSL has lost the sums advanced by it to BFS, amounting to at least £321m (US$507m) by 26th February 1995, and the entire value of its subsidiaries.... Further, BSL, as assignee of BSLL, claims in respect of the sums advanced by BSLL to BFS, amounting to at least £76m (US$120m).”

    THE DOLLAR FUNDING

    173: “From early 1994, Leeson began to send daily margin calls to BSL in London by electronic mail. These margin calls (“additional margin calls”) were in addition to the margin requirements transmitted electronically to BSL by means of the funding spreadsheets. The amounts remitted by BSL in response to these calls were used by Leeson to fund losses incurred and margin required for account 88888.”

    174: Leeson explained the additional margin calls as being required by advance margin calls by SIMEX, time differences, and delays in obtaining funding from BSJ.

    175: “Initially the additional margin calls gave no information as to the particular accounts for which the margin was required. From about October 1994, the additional margin calls were allocated between house and client business without details of particular accounts.”

    176: Barings Treasury arranged for the calls to be paid.

    177: “From 5th January 1994, the settlements staff manually entered the amounts so demanded into an account established for the purpose within the First Futures system, known as “BSINGCOLL”. In June 1994, a further account, “BSSHSECOLL” was established within First Futures. From a date thereafter the supposed house portion of additional margin calls was entered in BSSHSECOLL and the supposed client portion in BSINGCOLL.”

    178: “The settlements staff would subsequently reconcile the balances on BSINGCOLL and BSSHSECOLL as recorded in First Futures to the balances on the corresponding accounts in the London Gross report sent from BFS. …The settlements staff carried out no further reconciliation or analysis of the balances on BSINGCOLL and BSSHSECOLL. They were unable to do so since they had no details of any accounts to be charged with the payments recorded in BSINGCOLL and BSSHSECOLL.”…

    180: “The solo consolidated balance sheet of BSL included matching lines K2 “Loan Contra” and P4 “Client loans”. The balances on these lines reflected unallocated payments made by BSL and BSLL to BFS in response to the additional margin calls. The balances on these lines were £100m at 30 September 1994 and £120m at 30th December 1994.”

    181: BSL and BSLL did not carry out a reconciliation between the positions recorded in their books as held with BFS and the positions recorded by SIMEX or by BFS.

    334: the claim for loss and damage is quoted above.

    BONUSES

    335: “Further, in reliance upon the audits and reports of C&LL in respect of the accounts of the Barings Group, BSL and Plc and the audit and report of D&T in respect of BFS’ accounts for the periods ended 31st December 1993, the Plaintiffs decided to declare and to pay dividends to their shareholders and profit related bonuses to their management and employees and to the management and employees of their groups. If C&LL and D&T had carried out their duties as pleaded above, smaller sums would have been paid by way of dividends and bonuses. The Plaintiffs claim as damages the difference between the amounts paid as dividends and bonuses and the sums which would have been paid if C&LL and D&T had not been negligent. The Plaintiffs will quantify their claims in respect of overpaid dividends and bonuses in a schedule to be served separately.”

  37. The Claimants did not serve a reply in the action brought by them. However in the action brought by BFS, D&T, as I have explained, brought third party proceedings against Plc and BSL. D&T alleged against Plc and BSL the management failings which D&T had already alleged in their defence in the Plc action. In this application, D&T relied upon the admissions which Plc and BSL made in their defence to the third party proceedings. Insofar as they are relevant to the claim for the Dollar Funding by BSL, the third party defence admits the following (where appropriate I have quoted below the sections of the D&T defence in the Plc action which are admitted):

  38. 47(A): “very considerable funds were provided to BFS by BSL, BSLL and BSJ without any adequate monitoring or control.”

    47(C3): “from January 1994 Leeson requested additional margin in US dollars. US$ additional margins could not be reconciled against trade data and the explanations provided by Leeson for why such additional margins were required were false.”

    47(D): “the US$ funding requests made by BFS of BSL until a date in 1994 had no breakdown between the amount required for proprietary and client business. Hawes [the Group Treasurer] appreciated that this was unsatisfactory and, during his visit to Singapore in October 1994, requested a split between house and client business together with a breakdown of the actual monies being called and how they were being applied. From a date in 1994 the funding requests usually split the amount requested (itself usually a round sum) 50/50 between the request for client accounts and that for house positions. This was unlikely to be correct for any day, and it was beyond all possibility that it was true for most days. Moreover the broker reconciliations of the US$ collateral accounts revealed no trades but only a cash balance. Notwithstanding these facts, no proper investigation into the accuracy or validity of Leeson’s funding requests was carried out and funding continued to be provided. Hawes attributed the equal amounts called from customer and house accounts to poor book-keeping and sloppy treasury management in BFS.”

    47(E): the Dollar Funding “was not reconciled to individual client balances and the margin paid to BFS was not recovered from clients. There was accordingly a difference (the “top-up”) between the amount advanced to BFS and the amount collected from clients. This amount increased as follows:

    Date 31.12.93 31.3.94 31.6.94 30.9.94 31.12.94 30.1.95 24.2.95
    £ (000s) 21,718 74,765 120,294 143,593 120,040 150,355 306,309”

    47(F): “in 1993, the Baring Group’s Solo Consolidated Working Group discovered that the funds remitted by BSL to other Barings Group entities (including BFS) did not reconcile with the funds that BSL collected from its clients...The Working Group commissioned a study … to investigate this difference. Their explanation was that the balance arose from timing differences because BSL had placed money with brokers before it was received from clients.”

    47(G): “the credit implications of the top-up ought to have been brought to the attention of the Credit Committee and they were not.”

    47(H): “although the top-up was separately shown in a solo balance sheet detailing individual entity balance sheets for BSL, BSGT (Barings Securities Group Treasury) and BSLL, no investigation was made as to who were the clients who were supposedly debtors in these amounts. Equally the top-up was included within the caption “advances” in the weekly solo consolidation balance sheet… and in the monthly management accounts. These were available to the Credit Committee which failed to use this information” (though it is denied that they saw the solo consolidation balance sheet) “to identify significant items for review and failed to explore the existence or reasons for the top-up.”

    47(I): “Barings management did not adequately question why BSL should be lending very substantial sums to its clients to trade on SIMEX and did not enquire who those clients were, what their credit worthiness was or what amount was owed by each. Had these enquiries been made, it would have been apparent that these sums did not represent amounts due from clients at all, but amounts advanced to BFS for which there was no legitimate explanation.”

    47(J): “very large sums were advanced to BFS by BSL, BSLL and BSJ. Barings management did not put an effective limit on the funds made available to finance Leeson’s trading activities and did not adequately query or verify why such funding was needed even though BFS’ trading on behalf of its clients was regarded as being profitable.” Leeson “explained that the funding requests were attributable to a number of factors including: advance margin calls; drawing on formal credit facilities; timing considerations; and the effect of mutual offset business. …Hawes made enquiries of Bowser and Granger, through the internal audit and directly of Leeson as to why funding was required. This was also one of the aims of the Singapore project.”

    THE APPLICATION TO STRIKE OUT

  39. The grounds advanced by D&T in support of their application to strike out may be summarised in this way:

  40. i) The claim set out in paragraph 29(i) above fails on the pleading because it is being made by the indirect parent company of BFS in whom the claim properly resides under the rule which emerges from the decision of the Court of Appeal in Prudential Assurance v Newman [1982] Ch 204 as recently explained and applied in the decision of the House of Lords in Johnson v Gore Wood [2001] 2 WLR 72.

    ii) The claims summarised at paragraph 29(i) and 29(ii) above fail on the pleadings because the statement of claim does not contain a necessary allegation to make good the claim in negligence namely, that it does not contain the necessary allegation that the loss suffered by the Claimant was caused by their entering into a transaction or transactions of which D&T were aware at the time of which and for the purpose of which, inter alia, D&T gave its services (“the Purpose Test”).

    iii) The claim summarised at paragraph 29(iii) above fails under the Johnson v Gore Wood rule, alternatively, under the general jurisdiction of the court because it can be shown by reference to uncontroverted documentary evidence that the cost of the provision of the bonuses was not met by Plc.

    THE PURPOSE TEST

  41. I will deal with D&T’s second ground first.

  42. As I understand it D&T’s submission defines the Purpose Test in the following way: where a claimant claims damages in tort flowing from a negligent mis-statement he must plead and prove not only that the loss for which compensation is claimed was caused by the defendant’s breach of duty to the claimant, and was foreseeable, but also that the claim arises from a transaction or class of transactions, that was within the contemplation of the defendant at the time he undertook the relevant duty and for the purpose of which transaction, inter alia, he provided his services, and that the claimant relied on those services for the purpose of that transaction.

  43. Thus in the case of a claim in tort against an auditor the claimant must plead and prove, in addition to a relationship between the auditor and the claimant capable of giving rise to a duty of care, and that the loss flowing from the auditor’s breach of that duty was caused by the auditor’s negligent report, and was foreseeable, that, at the time he undertook those services, the auditor had in contemplation that they would be relied on by the claimant for the purpose of a particular transaction or class of transaction that was likely to result and that the claimant, in fact, relied on the auditor’s report when embarking on such transaction which resulted in the loss for which compensation is claimed.

  44. In Candler v Crane Christmas & Co [1951] 2 KB 164 the Court of Appeal was considering a case where the plaintiff, an investor, was considering the possibility of investing £2,000 in a company but, before doing so, wished to see that company’s accounts. The managing director of the company instructed the company’s accountants to speed up the preparation of the accounts so that they could be shown to the plaintiff. They were shown to him and he discussed them with the accountants and he invested £2,000. Some months later he invested a further £200 in the company. In his dissenting judgment Lord Justice Denning said this at page 182 of the report:-

  45. “Thirdly, to what transaction does the duty of care extend? It extends, I think, only to those transactions for which the accountants knew their accounts were to be required. For instance in the present case it extends to the original investment of £2,000 which the plaintiff made in reliance on the accounts, because the accountants knew that the accounts were required for his guidance in making that investment; but it does not extend to the subsequent £200 which he made after he had been two months with the company. This distinction, that the duty only extends to the very transaction in mind at the time, is implicit in the decided cases… It will be noticed that I have confined the duty to cases where the accountant prepares his accounts and makes his report for the guidance of the very person in the very transaction in question. That is sufficient for the decision of this case. I can well understand that it will be going too far to make an accountant liable for any person in the land who chooses to rely on the accounts for matters of business, for that would expose him to a “liability in an indeterminate amount for an indeterminate time to an indeterminate class”: see Ultramares Corporation v Touche, per Cardozo CJ… My conclusion is that a duty to use care in statement is recognised by English law, and that its recognition does not create any dangerous precedent when it is remembered that it is limited in respect of the persons by whom and to whom it is owed and the transactions to which it applies.”

  46. Lord Justice Denning’s judgment in the Candler case was approved by Lord Bridge in the decision of the House of Lords in Caparo Plc v Dickman [1992] AC 605 at page 623 as a “masterly analysis” requiring “little, if any, amplification or modification in the light of later authority”. At page 624 of the report of his speech in the Caparo case Lord Bridge also approved a passage from the judgment of Richmond P in the New Zealand High Court in the case of Scott Group Ltd v McFarlane [1978] 1 NZLR 553 at page 566 where he says:-

  47. “I do not think that such a relationship [resulting in a duty of care] should be found to exist unless, at least, the maker of the statement was, or ought to have been, aware that his advice or information would in fact be made available to and be relied on by a particular person or class of persons for the purposes of a particular transaction or type of transaction. I would especially emphasise that to my mind it does not seem reasonable to attribute an assumption of responsibility unless the maker of the statement ought in all the circumstances, both in preparing himself for what he says and in saying it, to have directed his mind, and to have been able to direct his mind, to some particular and specific purpose for which he was aware that his advice or information would be relied on. In many situations that purpose will be obvious. But the annual accounts of a company can be relied on in all sorts of ways and for many purposes”

  48. In his speech in the Caparo case at page 620 Lord Bridge, having reviewed a number of earlier authorities, summarised their effect in this way:

  49. “The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. … I should expect to find that the “limit or control mechanism…. imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence” rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the "proximity" between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual or as a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (e.g. in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter on that transaction or upon a transaction of that kind”.

  50. Lord Bridge’s conclusion at the end of his speech at page 627 was:

  51. “It is never sufficient to ask simply whether A owes B a duty of care. It is always necessary to determine the scope of the duty by reference to the kind of damage from which A must take care to save B harmless. “The question is always whether the defendant was under a duty to avoid or prevent that damage, but the actual nature of the damage suffered is relevant to the existence and extent of any duty to avoid or prevent it:” see Sutherland Shire Council v Heyman 60 ALR 1,48, per Brennan J. Assuming for the purpose of the argument that the relationship between the auditor of a company and individual shareholders is of sufficient proximity to give rise to a duty of care, I do not understand how the scope of that duty can possibly extend beyond the protection of any individual shareholder from losses in the value of the shares which he holds. As a purchaser of additional shares in reliance on the auditor’s report, he stands in no different position from any other investing member of the public to whom the auditor owes no duty.”

  52. In his speech in the Caparo case Lord Oliver says this at page 638 of the report:

  53. “What can be deduced from the Hedley Byrne case, therefore, is that the necessary relationship between the maker of a statement or giver of advice (“the adviser”) and the recipient who acts in reliance upon it ("the advisee”) may typically be held to exist where (1) the advice is required for a purpose, whether particularly specified or generally described, which is made known, either actually or inferentially, to the adviser at the time when the advice is given; (2) the adviser knows, either actually or inferentially, that his advice will be communicated to the advisee, either specifically or as a member of an ascertainable class, in order that it should be used by the advisee for that purpose; (3) it is known either actually or inferentially, that the advice so communicated is likely to be acted upon by the advisee for that purpose without independent inquiry, and (4) it is so acted upon by the advisee to his detriment.”

  54. In his speech in the Caparo case Lord Jauncey says this at page 661 of the report:

  55. “Possibility of reliance on a statement for an unspecified purpose will not impose a duty of care on the maker to the addressee. More is required. In Smith v Eric S Bush [1990] 1 AC 831 it was probable, if not highly probable, that the potential purchaser would rely on the valuer’s report. This probable reliance was an essential ingredient in establishing proximity. Had it merely been a possibility that the purchaser would rely on the report I very much doubt whether this House would have decided that the valuer owed a duty of care to the purchaser. Furthermore reliance, even if probable, thereby establishing proximity, does not establish a duty of care of unlimited scope. Regard must be had to the transaction or transactions for the purpose of which the statement was made. It is loss arising from such transaction or transactions rather than “any loss” to which the duty of care extends.”

  56. In the BBL case [1997] AC 191 the House of Lords was considering a claim based on the negligence of a valuer. At page 211 of the report Lord Hoffmann is reported as saying:

  57. “A duty of care such as the valuer owes does not however exist in the abstract. A plaintiff who sues for breach of the duty imposed by the law (whether in contract or tort or under statute) must do more than prove that the defendant has failed to comply. He must show that a duty was owed to him and that it was a duty in respect of the kind of loss which he has suffered. Both of these requirements are illustrated by Caparo…. The auditor’s failure to use reasonable care in auditing the company’s statutory accounts was a breach of their duty of care. But they were not liable to an outside take-over bidder because the duty was not owed to him. Nor were they liable to shareholders who had bought more shares in reliance on the accounts because, although they were owed a duty of care, it was in their capacity as members of the company and not in the capacity (which they shared with everyone else) of potential buyers of its shares. Accordingly, the duty which they were owed was not in respect of loss which they might suffer by buying its shares… In the present case there is no dispute that the duty was owed to the lenders. The real question in this case is the kind of loss in respect of which the duty was owed.”

  58. Again in his speech in Nykredit Plc v Edward Erdman Group Limited [1997] 1 WLR 1627 Lord Hoffmann was dealing with the case of an allegedly negligent valuer. He said this at page 1638 of the report:

  59. “It is important to emphasise that this is a consequence of the limited way in which the House defined the valuer’s duty of care and has nothing to do with questions of causation or any limit or “cap” imposed upon damages which would otherwise be recoverable. It was accepted that the whole loss suffered by reason of the fall in the property market was, as a matter of causation, directly attributable to the lender having entered into the transaction and that, but for the negligent valuation, he would not have done so. It was not suggested that the possibility of a fall in the market was unforeseeable or that there was any other factor which negatived the causal connection between lending and losing the money. There was, for example, no evidence that if the lender had not made the advance in question he would have lost his money in some other way. Nor, if one started from the proposition that the valuer was responsible for the consequences of the loan being made, could there be any logical basis for limiting the recoverable damages to the amount of the overvaluation. The essence of the decision was that this is not where one starts and that the valuer is responsible only for the consequences of the lender having too little security.”

  60. Finally in Reeman v Department of Transport [1997] 2 Lloyd's Law Reports 648 the Court of Appeal was considering the case of an allegedly negligent survey of a fishing boat by a surveyor employed by the Department of Transport for the purposes of a certificate of seaworthiness to be given by the Department.

  61. In his judgment at page 685 Lord Bingham says this:

  62. “The cases show that before a plaintiff can recover compensation for financial loss caused by negligent misstatement his claim must meet a number of conditions. Among these are three particularly relevant here. The statement (whether in the form of advice, an expression of opinion, a certificate or a factual statement) must be plaintiff - specific: that is, it must be given to the actual plaintiff or to a member of a group, identifiable at the time the statement is made, to which the actual plaintiff belongs. Secondly, the statement must be purpose- specific: the statement was must be made for the very purpose for which the actual plaintiff has used it. Thirdly, and perhaps overlapping with the second condition, the statement must be transaction - specific: the statement must be made with reference to the very transaction into which the plaintiff has entered in reliance on it”

  63. The above quoted extracts from the cases, are in my judgment, ample authority for the propositions of law of D&T which I have sought to summarise. To perfect his cause of action for negligent misstatement a claimant must establish that the defendant had in contemplation the transaction by which the claimant suffered loss in order for the defendant to have assumed a duty to exercise due care and skill to protect the claimant from the loss resulting from it. To have in contemplation may mean either to be directly informed that the claimant either would or was likely to embark on the transaction in reliance on his advice or other statement or that, from the surrounding circumstances of the case, it can be inferred that he knew of the transaction and the reliance. As Lord Oliver said in Caparo at page 638 “it is clear that “knowledge” on the part of the [defendant auditors] embraced not only actual knowledge but such knowledge as would be attributed to a reasonable person placed as the [defendants] were placed.”

  64. In both cases it is, in my judgment, clear that the claimant must plead the circumstances on the basis of which he alleges that the defendant knew of the intended transaction of the claimant and his reliance on the defendant for the purpose of it. The Caparo case was decided on a preliminary issue on the basis of facts alleged in the statement of claim. In the result the House of Lords restored the order of the Judge who held that the claim against the auditors failed because the pleaded facts did not disclose an actionable duty owed by the auditors to a purchaser of shares in the company being audited, albeit an existing shareholder of that company.

  65. In Galoo Limited v Bright Graham Murray [1994] 1 WLR 1360 the Court of Appeal were considering a case, part of which involved a claim by one of the plaintiffs against auditors for losses resulting, firstly, from a purchase of shares pursuant to a contract under which the purchase price was to be calculated by reference to accounts to be prepared by the defendant auditors, secondly, from loans subsequently made by that claimant to the company and, thirdly, from losses sustained as a result of a subsequent purchase of further shares. The court dismissed the appeal against the Judge’s order striking out part of the claimant’s claims. In doing so the court concluded that the claim in respect of the first category of losses sustained was sufficiently pleaded, in that the statement of claim pleaded circumstances from which a court might conclude that the defendant auditors, in giving their opinion at the time of the original transaction, had in contemplation that the claimants were relying upon them to produce a competent audit for the purpose of calculating the price payable for the original purchase of shares. By contrast, no facts were pleaded which might have sustained the conclusion that the auditors, in preparing subsequent accounts, had in contemplation that the claimants would make advances to the company in reliance on their audited accounts or would purchase further shares in the same reliance.

  66. In his judgment at page 1382 of the report Lord Justice Glidewell says this:

  67. “The distinction between the set of facts which it was held in Morgan Crucible v Hill Samuel... would suffice to establish a duty of care owed by auditors from those facts which it was held in the Caparo Industries case... would not have this effect is inevitably a fine one. In my judgment that distinction may be expressed as follows. Mere foreseeability that a potential bidder may rely on the audited accounts does not impose on the auditor a duty of care to the bidder, but if the auditor is expressly made aware that a particular identified bidder will rely on the audited accounts or other statements approved by the auditor, and intends that the bidder should so rely, the auditor will be under a duty of care to the bidder for the breach of which he may be liable.”

  68. Applying that distinction to the facts before the court Lord Justice Glidewell continued at page 1385:-

  69. “It will be seen that the statement of claim does not plead that BGM knew that Hillsdown would rely on the audited accounts for the purpose of making further loans, nor that BGM intended that Hillsdown should so rely.

    The deputy judge said that in his view the situation pleaded was indistinguishable from that contemplated in Caparo… and which was before Millett J in Al Saudi Bank... He set out the argument advanced to him by Mr Bennett, for the plaintiffs, that BGM knew that the purpose of the acquisition by Hillsdown of the first tranche of shares was the advancement of the business of Galoo and Gamine, that loans and advances were likely to be made, and that as auditors they would know in any particular year that loans had been made in the preceding years. He therefore argued that one of the purposes of auditing the accounts was the vouching of the fact that the companies were solvent.

    The deputy judge said of that argument:

    “Those matters as it seems to me, go to foreseeability and only foreseeability and they do not establish the degree of proximity that is, on the authorities, required. At the end of the day it seems to me that it is not shown to be pleaded that any particular loan was made in reliance upon a particular set of accounts or that the defendants promulgated any set of accounts for the purpose of any specific loan or indeed for the purpose of loans at all, and the mere fact of the knowledge that loans would or might be made is not sufficient to create that degree of proximity. Accordingly, the cause of action in respect of the loans is in my judgment obviously unsustainable”

    On this issue also I agree with the deputy judge. As I have said, the statement of claim does not plead the facts which in Morgan Crucible… were held to be those necessary in order to establish a duty of care, namely that the auditor knew that the intending lender would rely on the accounts approved by the auditors for the purpose of deciding whether to make the loans or increase loans already made and intended that the intending lender should so rely. In other words I agree with the deputy judge that the statement of claim does not set out facts which establish a duty of care in this respect on the principles derived from Caparo…”

  70. In relation to the purchase of the second tranche of shares, Lord Justice Glidewell also agreed with the Judge’s conclusion that, since it was common ground that that purchase of shares took place independently of the original purchase agreement, in which the price was fixed without reference to any formulae based on any set of accounts, the pleading did not disclose an actionable duty to claim losses resulting from that further purchase of shares.

  71. BSL’s CLAIM (including as assignee of BSLL’s claim) for loss of the amounts advanced by BSL and BSLL pursuant to the Dollar Funding and for the value of the BSL Group, consequent on D&T’s 1992 audit.

  72. BSL’s claim is pleaded as the loss of the amounts advanced by it and BSLL, pursuant to the Dollar Funding loans, to BFS which, as a result of BFS’ insolvency, have become irrecoverable: see the Statement of Claim paragraphs 173 to 178, 182 and 334. It seems to me that BSL can only put their claim in this way, that is, that, had D&T conducted a competent audit which would have revealed the Leeson frauds for the year to September 1992, BSL and BSLL would not have started to make, or continued making, the Dollar Funding loans. It is not open to BSL to claim, in the alternative, in respect of the losses resulting from the unauthorised and fraudulent trading activity of Leeson, financed by the Dollar Funding loans. Such a claim can only be pursued by BFS see Prudential Assurance v Newman 1982 CH 204.

  73. The relevant pleading in the Statement of Claim, so far as it concerns D&T, reads as follows: -

  74. “318…. D&T carried out the audits identified above and made their audit reports and their reports on internal controls for the purposes of:

    (1) Providing assurances to the Plaintiffs that the accounts audited showed a true and fair view;

    (2) Providing an assurance to the Plaintiffs that the accounts audited were not materially misstated due to material fraud or irregularities or significant and continuing weaknesses in internal control;

    (3) Complying with the statutory and regulatory requirements pleaded at paragraphs 43-49 above;

    320... D&T knew, or ought to have known, that Barings Plc would rely, for the purposes pleaded at paragraph 318 above and for the purpose of determining the amounts of dividends and bonuses, upon their respective audits as identified in paragraph 319 above and upon the audit reports and reports on internal controls made by them in relation to those audits, and Barings Plc did so rely.

    322… D&T knew, or ought to have known, that BSL would rely, in the manner pleaded in paragraph 320 above, upon their respective audits as identified in paragraph 321 above and upon the audit reports and reports on internal controls made by them in relation to those audits, and BSL did so rely.”

  75. D&T sought particulars of the allegation in paragraph 322 that D&T knew, or ought to have known, that BSL would rely on their audits. The lengthy answers given do not, in my view, advance the point under examination and I will not therefore set them out here.

  76. It is apparent, therefore, that no attempt has been made to plead in the statement of claim that D&T, at the time that they received group audit instructions or undertook the audit work consequent on those instructions, had in contemplation that the product of that work would be used by BSL or BSLL, or would be likely to be so used, in deciding whether to make the Dollar Funding loans to BFS at the request of Leeson or, having started to do so, to continue making them. This is to be contrasted with the way in which the statement of claim pleads Plc’s claim for overpaid bonuses (no particularised claim for overpaid dividends is actually made). The relevant pleading is at paragraphs 318 and 320 of the statement of claim, which I have already set out, supplemented by paragraph 335 as follows: -

  77. “335 Further, in reliance upon the audits and reports of C&L in respect of the Barings Group, BSL and Barings Plc and the audit and reports of D&T in respect of BFS’s accounts for the periods ended 31st December 1993, the plaintiffs decided to declare and to pay dividends to their shareholders and profit-related bonuses to their management and employees and to the management and employees of their groups. If C&L and D&T had carried out their duties as pleaded above, smaller sums would have been paid by way of dividends and bonuses. The plaintiffs claim as damages the difference between the amounts paid as dividends and bonuses and the sums which would have been paid if C&L and D&T had not been negligent…”

  78. It is conceded that this pleading, so far as the claim for overpaid bonuses is concerned, meets the Purpose Test. In particular it meets the test of Lord Oliver in the passages from his speech in the Caparo case cited above, in that it is possible to infer from the facts pleaded that D&T, when they received the group audit instructions, would have realised that Plc would use their consolidation schedules, when consolidated into the accounts of the Plc group, to calculate bonuses payable to the staff of the group companies.

  79. In his judgment in the Galoo case Glidewell LJ at page 1383 of the report affirmed the decision of the Judge that paragraph 13 of the statement of claim in that case passed the Purpose Test in that it pleaded that “the 1986 audited accounts were to be prepared not only for the purposes of the audit but also for the purpose of fixing the purchase consideration under” the initial share sale agreement. No attempt has been made to amend the statement of claim in this case as was made in the Galoo case in accordance with the proposed paragraph 9A as set out in page 1375 of the report. For the sake of brevity I will not set out here the words of that proposed amendment save to highlight that at paragraph (4) it would have pleaded that the relevant plaintiffs, Hillsdown, “were year by year to the knowledge of the defendants advancing substantial sums to the second plaintiffs and supporting that company in reliance on the defendants’ work…” The proposed new paragraph was not sufficient to save the claim in respect of the purchaser’s loans made subsequent to the initial share purchase agreement from being struck out.

  80. As I have said no attempt has been made to further amend the statement of claim to meet the Purpose Test. As at present advised it does not seem to me to be possible now to put forward an amendment which BSL would have a realistic chance of making good at the trial, given the following facts which are admitted by BSL on the pleadings or as to which there is no issue. The group audit instructions for the year to 30th September 1992 were sent by C&LL to D&T on 21st July 1992. On 17th August Mr Mah of D&T sent a letter to C&LL saying that D&T’s audit of BFS had revealed “no significant accounting/audit issues”. On 2nd October 1992 D&T commenced their fieldwork for the 1992 audit. On 16th October 1992 D&T sent the completed consolidation schedules for BFS to C&LL, subject to the ultimate certification of the local accounts of BFS in the process of preparation by D&T. D&T’s final and unqualified accounts of BFS for the year to September 1992 were sent to C&LL on 31st December. It was not until 12th January 1994 that the first of the Dollar Funding loans was made by BSL to BFS pursuant to requests made by Leeson. The Barings Group collapsed when administrators were appointed by the court on the 26th February 1995. It is not in issue that the overwhelming majority of the indebtedness incurred by the Plc group companies as a result of Leeson’s activities, including the BSL sub-group, was incurred between the beginning of December 1994 and the collapse on 26th February 1995.

  81. Thus the Dollar Funding loans started some 15 months after D&T’s consolidation schedules were sent to C&LL, and the transactions which brought down the Barings Group occurred approximately two years later. In these circumstances it is hard to see how BSL could allege the necessary reliance on D&T’s 1992 audit to comply with the Purpose Test in respect of the Dollar Funding loans.

  82. In Esanda Finance Corporation Ltd v Peat Marwick Hungerfords (1997) 71 ALJR. 448 the High Court of Australia was dealing with an auditors negligence case and affirmed the decision of the full court of the Supreme Court of South Australia to strike out parts of the statement of claim as failing to comply with the Purpose Test, citing the Caparo case. The following passage appears in the judgment of McHugh J at page 473 of the report:-

  83. “Where the plaintiff requires an audit to be carried out so that credit can be extended or an investment made, a court will probably have little difficulty in finding that the plaintiff relied on the audit. But that is the type of case where a duty of care will probably arise under the principles laid down in San Sebastian. Where the plaintiff has made no such demand or request but merely relies on the audit, as the plaintiff in this case did, determining the issue of reliance is likely to be very difficult. An annual audit report is out of date, so far as the business of the client is concerned, when it is published. The report gives merely a picture of the business on a particular date, which may be from 6 to 10 weeks or more before the audit is published. By publication date, the details of the business will have changed even if the fundamentals of the business have not. The gap between financial reality and the financial position represented by the audit increases as each week goes by.”

  84. In Berg Sons & Co Ltd v Adams [1992] BCC 661 Hobhouse J was dealing with another auditors’ negligence case. At page 669 of the report the following passage appears in his judgment: -

  85. “Furthermore, there would only be a limited period of time within which it would be reasonably foreseeable that a bank or discount house would rely upon a given set of audited accounts. By the time of the completion of the audit, over six months had already elapsed since the end of the year covered by these accounts. It would not be reasonably foreseen that these accounts would still be relied upon by any banker acting in the ordinary course of business as a basis for assessing the then creditworthiness of Berg after the passage of more than 15 months from the end of the period covered by the accounts. By that time the information contained in the audited accounts would be so out of date that it would not reasonably be foreseen as the basis for a business judgment concerning the extension of credit to Berg or the discounting of bills.”

  86. Paragraph 178 of the Statement of Claim together with the pleading set out at paragraph 31 of this judgment contain admissions by the claimants of the improvident nature of the Dollar Funding loans, in particular, that they were made without any real attempt to reconcile the amounts ostensibly sought by Leeson to make margin payments in respect of alleged agency transactions to specific customer accounts. I accept D&T’s submission that it is hard to see how BSL could plead that D&T knew that its audit would be used for such an improvident purpose.

  87. It was submitted on behalf of BSL that BSL’s claim to recover the amounts of the Dollar Funding loans was sufficiently pleaded and ought not to be struck out. The duty assumed to BSL by D&T included a duty to protect BSL from the consequences of fraud in the conduct of the business of BFS which ought, reasonably, to have been discovered by D&T in the course of their 1992 audit. It was submitted that the loss of the Dollar Funding loans was a result of a continuation of the fraudulent activities of Leeson which resulted from the failure, in the course of the 1992 audit, to detect that fraud. That Leeson would continue his fraudulent activities resulting in further losses to BSL was foreseeable. The fact that those losses were ultimately so substantial as to cause the loss of the entire BSL Group of companies was nothing to the point.

  88. In support of this submission the case of Sasea Finance v KPMG [2000] 1 AER 676 was cited. In this case the Court of Appeal were considering a claim by a client company against its auditors in negligence and breach of contract based on the allegation that, in breach of duty, the auditors failed to uncover the frauds of a senior employee which led to massive losses. The claim concerned the losses suffered as a result of four transactions which took place at the time of or after the relevant audit was complete. Two of the transactions amounted to thefts of the company’s property, the other two to the diversion from the company of the proceeds of sale of shares held by the company, to other group companies. The auditors applied to strike out the claim for damage arising from all four transactions. At first instance the Judge declined to strike out the claim in respect of two of the transactions which amounted to theft. He struck out the claims as to the remaining two transactions on the ground that they were examples of the sort of transaction which it was in the company’s business to transact. On appeal, the Court of Appeal allowed the company’s appeal. Materially to the issues in this case, they found that the two share sale transactions could not be distinguished in their nature from the transactions treated as thefts. At page 682 of the report Lord Justice Kennedy says this: -

  89. “It is accepted for present purposes that it was KPMG’s duty to warn either the directors or some relevant third party of any fraud or irregularity likely to result in material loss to the company with a reasonable degree of promptitude. Why should that be? The obvious and common-sense answer it is that by so doing the company may be spared such losses.”

  90. Then continuing at page 683 of the report under the heading “Causation or the opportunity to suffer loss”, he says:

  91. “…a distinction may be made between the present case and the Galoo case. We are concerned with losses brought about by fraud or irregularities the risk of which KPMG ought to have apprehended and reported. Albeit in the Galoo case the auditors had failed to detect a fraudulent overstatement of assets going back several years and by continuing to trade the companies were acting fraudulently in that they were insolvent, the auditors were not under a duty to warn against the possibility of losses of the type incurred. However the judge distinguished the Rivaud and Renta transactions on the basis that they were the sort of transactions which were normal for SFL and so the losses arose in the normal course of business, which the judge seemed to be suggesting, implicitly at least, was outside the scope of KPMG’s duty.

    We do not agree. There does not seem to us to be a fair distinction to be drawn between the four transactions as pleaded. Each in its own way was fraudulent or irregular. Each in its own way was the kind of transaction against the risk of which KPMG had a duty to warn. The fact that similar irregularities had occurred in the past can hardly be used to narrow the scope of KPMG’s duty towards its client.”

  92. I accept D&T’s submission that the Sasea case is no support for BSL’s contention. The Sasea case was a claim in contract as well as tort by a client company against its auditor and did not involve a claim by a third party for damages resulting from reliance upon the audit. For this purpose a third party means a party making a claim who is not in direct contractual relationship with the auditor: see per Lord Bridge in the Caparo case at page 619. Although passages from the speeches of Lord Bridge and Lord Oliver in Caparo, and from the speech of Lord Hoffmann in the Nykredit case are cited in Lord Justice Kennedy’s judgment, it has yet to be made clear in authority that concepts such as the Purpose Test are applicable where the relevant relationship is contractual or are applicable in the same way that they apply where the relationship is tortious only. The actual decision in the Sasea case turned on a point of causation, as is made clear from the second passage in the judgment of Lord Justice Kennedy which I have cited above and from the heading of the part of the judgment in which it appears. Kennedy LJ was distinguishing between losses of the kind which the audit client was unable to recover in Galoo (because the auditors’ breach did not cause the trading losses, but merely gave the companies the opportunity to incur them) and the losses in Sasea, which were brought about by the fraud which KPMG had failed to detect and therefore were caused by the breach. As is also seen in the BCCI case referred to below, lack of causation is often used as an explanation as to why the scope of duty is limited, while the converse is not true: proof that the breach did cause the loss in question does not establish that the scope of duty extends to that loss.

  93. Accordingly it does not appear to me that the decision in the Sasea case helps at all on the issue whether the pleadings in the present case should be struck out, subject to the next submission of BSL with which I will now deal.

  94. As I understand that submission, it is that the relationship between BFS and its auditor D&T, and BSL and its group auditor C&LL, was such that D&T is to be treated as if it had a contractual relationship with BSL at the material time of the audit. This arises, it is said, from the fact that BFS was the “in-house” broker in Singapore of the BSL Group of Companies. Its business was to execute trades on the Simex market in respect of group companies’ Agency and House business. As a result large amounts of money, the property of those group companies passed through its hands. The group was managed on the “Matrix” system. This meant that managers of particular aspects of the group’s business could be the employees of one of the group companies while the actual business to be managed was being conducted by another group company. Thus Leeson’s trading activities were notionally controlled by managers outside BFS. If this is correct, the submission goes, the result should be the same as in the Sasea case, namely, that D&T should be liable for all the consequences of failing to discover the frauds of Leeson in the course of the 1992 audit without any limitation such as might arise as a result of the application of the Purpose Test.

  95. In support of this proposition the decision of the Court of Appeal in Bank of Credit & Commerce International (Overseas) Ltd (in liquidation) v Price Waterhouse (No 2) [1998] PNLR 564 was cited. That case concerned three companies in the BCCI group which were in liquidation known as “Holdings”, “SA” and “Overseas”. Messrs Price Waterhouse (“PW”) were the auditors of Overseas. Messrs Ernst and Whinney (“EW”) were the auditors of Holdings and SA. It appeared that those three companies each had a board consisting of the same six individuals and had been run as one enterprise conducting a banking business. It was alleged that both firms of accountants had been negligent in carrying out their audits of the companies so that their true financial position was not revealed until a substantial period had gone by, during which a number of transactions, including improvident loans, had been entered into whereby the company sustained losses. The claims were framed in contract and in tort.

  96. In the course of the proceedings EW applied to strike out the action of Overseas against them on the basis that they disclosed no cause of action. They argued that in the circumstances they owed no duty of care to Overseas with whom they had no contractual relationship. It is apparent from the quotations from the judge’s judgment (Laddie J), contained in the leading judgment in the Court of Appeal of Sir Brian Neill, that the judge had struck out the claims by applying the Purpose Test in respect of which he found that the necessary pleading had not been made. The Court of Appeal allowed an appeal. It is apparent from the judgment of Sir Brian Neill that a matter which weighed particularly heavily with him was the way in which the group had been run in the past, with the result that there had to be extremely close co-operation between the two auditors in the exchange of information relevant to their audits. Application had been made to the judge to amend the statement of claim which was renewed before the Court of Appeal. It is difficult to tell from the report exactly what this amendment concerned or what its terms were. At page 588 of the report the following passage appears in the judgment of Sir Brian Neill: -

  97. “It will be remembered that counsel for EW submitted that it was necessary for Overseas to plead and prove that EW knew and intended that Overseas would rely on its work and on statements made by it... It seems that at one point at least in his judgment the judge accepted this submission… In support of this submission counsel referred to some passages in the authorities including the following sentence in Lord Oliver’s speech in Caparo where he said at page 654 D:

    “To widen the scope of the duty to include loss caused to an individual by reliance upon the accounts for a purpose for which they were not supplied and were not intended would be to extend it beyond the limits which are so far deducible from the decisions of this House.”

    But I am quite satisfied that the general trend of the authorities makes it clear that liability will depend not on intention but on the actual or presumed knowledge of the adviser and on the circumstances of the particular case. Indeed elsewhere in his judgment in Caparo, Lord Oliver, having referred to Smith v Bush made it clear that an expressed intention that advice shall not be acted upon by anyone other than the immediate recipient “cannot prevail against actual or presumed knowledge that it is in fact likely to be relied upon in a particular transaction without independent verification”.

  98. The matter returned to Laddie J when a further application was made to him to strike out various parts of the statement of claim. Laddie J’s judgment is reported at [1999] BCC 351.

  99. At paragraph 64 of his judgment he says this: -

  100. “I have read the February 1998 judgment again since the end of submissions made on behalf of the parties. It seems to me that it only expressly deals with the issue of whether, as between Overseas and the EW defendants, a duty of care exists at all. It concentrates on whether an auditor can owe a duty of care to a company to which it had not been appointed auditor. It held, in the special circumstances of this case, that it can. However I can find nothing in the February 1998 judgment which throws light on the issues of the scope of the duty (i.e. the Caparo question), causation or remoteness.”

  101. With respect, I cannot accept that such was the case. It seems clear from the passage from the judgment of Sir Brian Neill which I have cited and from other passages in that judgment that there was a difference between the judge and Sir Brian as to whether it was a necessary part of the Purpose Test that the claimant must plead and prove that the auditor, in undertaking his auditing services, intended that the product would be used for the purpose of the particular transaction being undertaken by the Claimant as a result of which he suffered loss. Sir Brian Neill’s judgment concluded that this was not necessary and it was sufficient that the claimant established that the defendant auditors had in contemplation the probability that the claimant would embark on such a transaction in reliance on their audit.

  102. Be all this as it may it is apparent that the Court of Appeal were not deciding that it was not necessary for a claimant to plead facts which met the Purpose Test, albeit in a somewhat different form from that which the judge thought necessary. Rather, the focus of EW’s case, and therefore Sir Brian Neill’s judgment, was much more on whether the scope of EW’s duty extended to that claimant, rather than to particular transactions entered into by that claimant: to use Lord Bingham’s terminology in Reeman, whether the audit report was plaintiff-specific, rather than whether it was purpose- or transaction-specific.

  103. In particular this case is no authority for the proposition that a subsidiary auditor is to be treated as subject to the same duties to a parent company as those to which the group auditor would be subject as a result of his contractual relationship with that parent. In the present case no attempt is made to plead reliance by BSL on D&T’s 1992 audit in deciding to make the Dollar Funding loans, or that D&T were aware that BSL was likely so to rely, at the time they accepted their group audit instructions and undertook their audit work. In my view the submissions for which the BCCI case is cited as authority, and which I have summarised above, cannot be accepted.

  104. Before leaving that case it is perhaps notable that Sir Brian Neill concluded his judgment with a sentence pointing out that the facts of that case were most unusual and that he did not wish “the conclusion which I have reached on the pleadings to be used in support of an argument in some other case that the court should be more ready than in the past to impose liability whenever a close relationship between adviser and advisee was established.” See page 591 of the report.

  105. It is then submitted by the claimants that it is not open to me to strike out BSL’s or Plc’s claim, on the ground of no sufficient pleading for the establishment of a duty of care, because I am bound by the decision of the Court of Appeal in the Barings case itself see: Barings Plc (in administration) and anr v Coopers & Lybrand (a firm) [1997] 1 BCLC 427. In this case the Court of Appeal were dealing with an appeal from a decision of Chadwick J giving Plc leave to serve the proceedings on C&LS, outside the jurisdiction, under Order 11 rule1 (1)(c) and (f). So far as material that rule provides:

  106. “1(1)... service out of the jurisdiction is permissible with the leave of the Court if in the action begun by writ…

    (c) the claim is brought against a person duly served within or out of the jurisdiction and the person out of the jurisdiction is a necessary and proper party thereto...

    (f) the claim is founded on a tort and the damage is sustained, or resulted from an act committed, within the jurisdiction…”

  107. Chadwick J gave leave under both sub rules. However it is only the ruling under sub rule (f) which is material to this judgment. Under that sub-rule he concluded that the proper test was whether there existed, on the pleadings, a serious question of law to be tried as to the existence of the tort alleged and that this required “an examination of the relationship between Barings Plc and C&LS with reference to the work on which C&LS was engaged and the information which C&LS supplied”. Having examined certain documentary evidence, in particular the group audit instructions and C&LS’ audit report to the directors of Plc for the year to December 1994, the judge concluded that the test was met. The Court of Appeal dismissed C&LS’s appeal.

  108. Before the Court of Appeal the matter was argued under two main heads, first, that Plc had not sufficiently established the existence of a duty of care owed by C&LS to Plc and, second, that the claim was barred by the rule in Prudential v Newman with which I will later deal. That part of the judgment of the Court of Appeal which dealt with the issue under the Prudential v Newman rule was subsequently disapproved by the House of Lords in the Johnson v Gore Wood case, to which again I will later turn.

  109. Lord Justice Leggatt who delivered the lead judgment deals with the issue of the existence of a duty of care between page 435 (f) and the conclusion of his judgment on page 436. Although it is plain from the skeleton arguments put before the Court of Appeal, which I was shown, that the argument based on the Purpose Test was before the court, it is not identifiably dealt with in the judgment of Lord Justice Leggatt although he would have had to have disposed of it to arrive at the conclusion that he did. However the concluding sentence of his judgment reads: -

  110. “In appraising the evidence for this appeal it is no part of our task to reach any final conclusions of fact or law and I have not done so. It suffices to say that there is in my judgment a serious issue to be tried between the parties, and I would dismiss the appeal.”

  111. This concluding passage highlights the reason why, in my judgment, this decision of the Court of Appeal is not binding so as to preclude my striking out BSL’s and Plc’s claims on the ground of failure to plead sufficiently that D&T owed BSL and Plc a duty of care. There is no issue estoppel. D&T were not a party to the application. In fact I am informed that they were against it. The decision is not binding on the facts since the pleaded factual background of D&T is substantially different from that of C&LS. D&T were the auditors of BFS for 1992 and 1993. C&LS were the auditors for 1994. There was not the same time gap between the commencement of the Dollar Funding loans or the build up of indebtedness in the final months and the commencement of the audit work by C&LS as there was between those events and D&T’s audit work. But, most conclusively, the Court of Appeal was considering an application under Order 11 for service outside the jurisdiction. Had the appeal succeeded it would have stopped the proceedings against C&LS in limine. Conclusions of law arrived at in such applications cannot preclude the court of trial from re-examining those conclusions in the course of the trial. The trial of this case has started, although it stands adjourned while it is reconfigured consequent on the settlement of the claims against the Coopers defendants which requires the sanction of the court to become finally binding. This application is one which would have had to have been dealt with at the trial in any event and it has been convenient to deal with it during this period of adjournment. I have had the benefit of detailed legal argument extending over a number of days.

  112. It follows that I cannot accept the submissions by BSL in opposition to the application. In my judgment the statement of claim does not sufficiently plead the claim based on an allegation of negligence against BSL to recover from D&T damages for the loss of the amount of the Dollar Funding loans or the value of the BSL group arising from D&T’s 1992 audit of BFS.

  113. Plc’s claim for the value of the Plc Group consequent on D&T’s 1993 audit.

  114. The relevant pleading in the statement of claim consists of paragraphs 318 and 320, the relevant parts of which I have already set out, and paragraphs 323 and 332 which materially provide as follows: -

  115. “323. As a result of Leeson’s continuing unauthorised and loss-making trading on account 88888 the Barings Group… became insolvent and collapsed on 26th February 1995.

    332... The insolvency and collapse of the Barings Group has deprived Barings Plc of the whole value of the group…”

  116. In my judgment this claim must also be struck out on the same principles, upon which I have based my conclusion that the BSL claim should be struck out. No attempt is made in the pleading of the Statement of Claim to define any transaction or transactions of Plc which resulted in Plc losing the value of its entire group, which were embarked upon by Plc in reliance on D&T’s 1993 audit and which D&T had in contemplation when they undertook that audit.

  117. The following matters are not in issue between the parties. As I have already pointed out, the substantial part of the indebtedness of the Barings Group was incurred in the last three months before February 26th 1995 and it was the loss of the money lent by group companies to finance this indebtedness, incurred in those months, which sealed the group’s fate. It is the claimant’s case, that had Leeson’s fraud been detected as late as the end of January 1995, the group could still have been saved. The collapse of the Barings Group was caused by the irrecoverable Dollar Funding loans and other advances by BSL, BSLL and BSJ, the liability of BFS for undiscovered option transactions to which Leeson committed group companies and the liability for open positions on futures markets as a result of unauthorised house trading by Leeson. The Barings Group collapsed because this indebtedness absorbed the whole of Barings’ capital base. A larger bank with a larger capital base would have survived.

  118. I have already struck out the claims in respect of the Dollar Funding loans. No separate claim is made for loss arising from the loans to BFS by BSJ, the undiscovered options or the unauthorised dealings on the futures market, but these must also have contributed to the collapse.

  119. It is circumstances like these which illustrate the necessity for a “control mechanism” highlighted in many of the judgments dealing with this area of the law. To the outsider it would seem far-fetched that the negligence of a subsidiary auditor of one of the minor subsidiary companies of a complex and substantial banking group should expose that auditor to liability for massive damages flowing from the collapse of the entire group, notwithstanding that it can be said that but for his negligence that collapse would not have taken place.

  120. THE JOHNSON v GORE WOOD DEFENCE.

  121. My conclusion on the Purpose Test point is enough to dispose of BSL’s claim for loss of the Dollar Funding and of Plc’s and BSL’s claim for the loss of the value of their respective groups, but, in case this matter goes further, I shall give my view also on the alternative ground upon which D&T apply to strike out that claim. This requires me to explain the background to D&T’s cross-claim which is the subject of the preliminary issue which is to be heard in January.

  122. D&T’s claim arising out of the representation letters

  123. When conducting their audit for the period ending 30th September 1992, D&T sent to C&LL their audit report on the BFS consolidation schedules on 16th October 1992. The report was expressed to be subject to, inter alia, the local statutory accounts. On 20th November 1992, D&T sent the draft statutory accounts for the various Barings companies in Singapore to Simon Jones, the Finance Director of BFS and the Chief Operating Officer of Barings’ South Asia operations. D&T asked him to sign or have signed the draft accounts and a number of other documents, including a directors’ representation letter in respect of, inter alia, BFS. They sent him a further draft of the representation letter on 10th December 1992. Jones seems to have returned the representation letter signed a few days later. On 31st December 1992, D&T signed off the statutory accounts.

  124. For the period ending 31st December 1993, Jones signed a representation letter in respect of BFS on 27th January 1994, before D&T either sent the opinion on the consolidation schedule to London on 28th January 1994 or signed the statutory accounts on 28th February 1994.

  125. The directors’ representation letter was a letter signed by Jones as a director of BFS. In 1992, he addressed it to D&T “in connection with your audit of the financial statements of [BFS] (“company”) as of [30th September 1992] and for the period then ended for the purpose of expressing an opinion as to whether the financial statements give a true and fair view of the financial position…”. Jones on behalf of BFS confirmed “to the best of our knowledge and belief” a number of representations. These included that “There have been no irregularities involving management or employees who have a significant role in the system of internal control or that could have a material effect on the financial statements”, that “The financial statements are free of material errors and omissions. There are no material transactions or related assets or liabilities that have not been properly recorded in the financial and accounting records” and that “We have recorded or disclosed all liabilities, both actual and contingent”.

  126. The 1993 letter, written on 27th January 1994, included identical wording to that quoted above.

  127. The evidence of Mr Mah of D&T is that, if D&T had not received a satisfactory representation letter from BFS, D&T would not have provided (or, in 1992, would have withdrawn) their opinion on the consolidation pack.

  128. D&T argue that Jones signed both representation letters reckless of their truth or falsity. They argue that each letter contained an implied representation that Jones had reasonable grounds for making the express representations. D&T say that the evidence shows that Jones knew that he had no such reasonable grounds for making these representations, in that he knew that he neither had personal knowledge of the facts stated nor had made sufficient enquiry of those who had such knowledge. Therefore Jones made the implied representation fraudulently.

  129. D&T argue that they were deceived by Jones into signing the audit opinions when otherwise they would not have done so. Therefore BFS is liable to D&T for all the loss flowing from that deceit, and BFS’ action against D&T for audit negligence fails for circuity, because D&T can set off its claim for deceit against BFS’ claim, alternatively BFS is estopped from claiming damages from D&T. D&T’s defence and counterclaim are pleaded at paragraphs 56, 149 and 157 of their Re-amended Defence and Counterclaim in the BFS action. They claim that BFS is “liable for deceit and/or is in breach of contract and/or duty towards D&T”; that D&T are entitled to claim from BFS any sum for which they would otherwise be liable to BFS; and that, if D&T are liable for any sums to BFS, BFS “are liable to them in the same amount, and that [BFS’] claim fails for circuity of action”.

  130. The Issue

  131. It is against this background that D&T apply to strike out BSL’s claim for the Dollar Funding loans. D&T argue that BSL’s claim is a claim by the (indirect) parent company of BFS which is reflective of BFS’ claim, and therefore BSL’s claim is excluded by the rule in Johnson v Gore Wood [2001] 2 WLR 72.

  132. BSL conceded in argument that its claim for the amount of the Dollar Funding loans was reflective of BFS’s claim against D&T arising from their failure to detect Leeson’s fraud and thus prevent the losses from his fraudulent continuation of the transactions which the Dollar Funding loans financed. But BSL argued that Johnson v Gore Wood does not operate to exclude a shareholder’s claim in circumstances where the defendant has, and always has had, a complete defence to the company’s claim, such as D&T allege in this case.

  133. The Authorities

  134. I start with the judgment of the House of Lords in Johnson v Gore Wood itself. Mr Johnson conducted his affairs through a number of companies, one of which was WWH, in which he held all but two of the shares. WWH brought a claim against Gore Wood, a firm of solicitors, for negligence in serving an option notice. After WWH’s claim had been settled, Mr Johnson brought his own, personal claim against Gore Wood. Gore Wood applied to strike out his claim. One of the issues for decision was whether the heads of damage pleaded by Mr Johnson were irrecoverable, as being reflective of damage which had been suffered by WWH. The House of Lords held that Mr Johnson was unable to recover in relation to (i) the diminution in value of his majority shareholding in WWH and (ii) payments which the company would have made into a pension fund for Mr Johnson. Both were reflective loss. He could recover heads of damage such as sums which, acting on Gore Wood's advice, he invested in other companies and lost, and interest on sums which he was obliged to borrow because of his lack of funds, caused by Gore Wood's breach of duty.

  135. Lord Bingham explained the principles applicable, which he derived from a number of authorities including Prudential Assurance Co. Ltd. v. Newman Industries Ltd. (No. 2) [1982] Ch. 204:

  136. “1) Where a company suffers loss caused by a breach of duty owed to it, only the company may sue in respect of that loss. No action lies at the suit of a shareholder suing in that capacity and no other to make good a diminution in the value of the shareholder's shareholding where that merely reflects the loss suffered by the company. A claim will not lie by a shareholder to make good a loss which would be made good if the company's assets were replenished through action against the party responsible for the loss, even if the company, acting through its constitutional organs, has declined or failed to make good that loss…

    2) Where a company suffers loss but has no cause of action to sue to recover that loss, the shareholder in the company may sue in respect of it (if the shareholder has a cause of action to do so), even though the loss is a diminution in the value of the shareholding...

    3) Where a company suffers loss caused by a breach of duty to it, and a shareholder suffers a loss separate and distinct from that suffered by the company caused by breach of a duty independently owed to the shareholder, each may sue to recover the loss caused to it by breach of the duty owed to it but neither may recover loss caused to the other by breach of the duty owed to that other…

    These principles do not resolve the crucial decision which a court must make on a strike-out application, whether on the facts pleaded a shareholder's claim is sustainable in principle, nor the decision which the trial court must make, whether on the facts proved the shareholder's claim should be upheld. On the one hand the court must respect the principle of company autonomy, ensure that the company's creditors are not prejudiced by the action of individual shareholders and ensure that a party does not recover compensation for a loss which another party has suffered. On the other, the court must be astute to ensure that the party who has in fact suffered loss is not arbitrarily denied fair compensation. The problem can be resolved only by close scrutiny of the pleadings at the strike-out stage and all the proven facts at the trial stage: the object is to ascertain whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible, and whether (to use the language of Prudential at page 223) the loss claimed is “merely a reflection of the loss suffered by the company.” In some cases the answer will be clear, as where the shareholder claims the loss of dividend or a diminution in the value of a shareholding attributable solely to depletion of the company's assets, or a loss unrelated to the business of the company. In other cases, inevitably, a finer judgment will be called for. At the strike-out stage any reasonable doubt must be resolved in favour of the claimant.”

  137. Lord Millett delivered the other main judgment in the course of which he said:-

  138. “… where the company suffers loss caused by the breach of a duty owed both to the company and to the shareholder … the shareholder's loss, insofar as this is measured by the diminution in value of his shareholding or the loss of dividends, merely reflects the loss suffered by the company in respect of which the company has its own cause of action. If the shareholder is allowed to recover in respect of such loss, then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. This is a matter of principle; there is no discretion involved. Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder. These principles have been established in a number of cases, though they have not always been faithfully observed.

  139. Lord Millett then quoted the well known example of the theft of the cash box given in Prudential v Newman at p. 222, continued:

  140. “It has sometimes been suggested … that Prudential v Newman is authority only for the proposition that a shareholder cannot recover for the company's loss, and is confined to the case where the defendant is not in breach of any duty owed to the shareholder personally. That is not correct. The example of the safe-deposit box makes this clear. It is the whole point of the somewhat strained business of the key. The only reason for this is to demonstrate that the principle applies even where the loss is caused by a wrong actionable at the suit of the shareholder personally.”

  141. At page 124, Lord Millett considered the decision of the New Zealand Court of Appeal in Christensen v. Scott [1996] 1 N.Z.L.R. 273 and decided that it did not represent the law of England:

  142. “The test is not whether the company could have made a claim in respect of the loss in question; the question is whether, treating the company and the shareholder as one for this purpose, the shareholder's loss is franked by that of the company. If so, such reflected loss is recoverable by the company and not by the shareholders.

    Thomas J. [in Christensen v. Scott] acknowledged that double recovery could not be permitted, but thought that the problem did not arise where the company had settled its claim. He considered that it would be sufficient to make an allowance for the amount paid to the liquidator. With respect, I cannot accept this either. As Hobhouse L.J. observed in Gerber (at p. 471), if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. By parity of reasoning, the same applies if the company settles for less than it might have done. Shareholders (and creditors) who are aggrieved by the liquidator’s proposals are not without a remedy; they can have recourse to the Companies Court, or sue the liquidator for negligence.

    But there is more to it than causation. The disallowance of the shareholder's claim in respect of reflective loss is driven by policy considerations. In my opinion, these preclude the shareholder from going behind the settlement of the company's claim. If he were allowed to do so then, if the company's action were brought by its directors, they would be placed in a position where their interest conflicted with their duty; while if it were brought by the liquidator, it would make it difficult for him to settle the action and would effectively take the conduct of the litigation out of his hands. The present case is a fortiori; Mr. Johnson cannot be permitted to challenge in one capacity the adequacy of the terms he agreed in another.

    Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends (specifically mentioned in Prudential) and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds. …

    The same applies to other payments which the company would have made if it had had the necessary funds even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.”

  143. I was next referred to Day v Cook [2001] Ll. Rep. P.N. 551. Here Mr Day was the principal shareholder in TL. He had been persuaded by his solicitor, Mr Cook, to invest through TL in a number of joint ventures. This advice was negligent and in breach of fiduciary duty. All the ventures failed and Mr Day sued for the loss in value of his shareholding. TL and its related companies were not parties to the litigation. By the time of the decision, they had all been dissolved and any claims they might have had against Mr Cook would have been time-barred.

  144. The Court of Appeal held that all Mr Day’s principal claims failed because they were reflective loss (though one minor claim relating to a loan of £40,000 was remitted to the trial judge for further decision). Arden LJ cited at length the speeches in Johnson v Gore Wood and concluded:

  145. “38. It will thus be seen from the speeches in Johnson v Gore Wood that, where there is a breach of duty to both the shareholder and the company and the loss which the shareholder suffers is merely a reflection of the company's loss, there is now a clear rule that the shareholder cannot recover. That follows from the graphic example of the shareholder who is led to part with the key to the company's money box and the theft of the company's money from that box. It is not simply the case that double recovery will not be allowed, so that, for instance if the company's claim is not pursued or there is some defence to the company's claim, the shareholder can pursue his claim. The company's claim, if it exists, will always trump that of the shareholder.

    39. Accordingly the court has no discretion. The claim cannot be entertained….

    41. However, it is apparent that there are limits to the application of the no reflective loss principle. The principal limit is that the no reflective loss principle does not apply where the company has no claim and hence the only duty is the duty owed to the shareholder (Lord Bingham's proposition (2)). Likewise it does not apply where the loss which the shareholder suffers is additional to and different from that which the company suffers and a duty is also owed to the shareholder: see Lord Bingham's proposition (3)…There may well be other limits.

    42. Accordingly the Court must consider carefully such issues as whether the defendant owed a duty to the company as well as the shareholder, and whether, if both the company and the shareholder have a cause of action, the loss which they can claim is the same. In some cases these issues may not be difficult to determine, but it is difficult here because the companies are not parties to these proceedings and because Mr Day was closely identified with the companies. Mr Hughes accepted that the onus of proof was on the defendant in this respect. In these circumstances the Court must, as Lord Bingham indicated, scrutinise the facts with care and consider whether the loss would have been made good if TL (or any other company in the TL group) had enforced any action which it may have had against Mr Cook.”

  146. Ward LJ, with whom Tuckey LJ agreed, concurred with Arden LJ in respect of the claims for loss of value of shareholding, stating that the “losses fall squarely and unarguably within the first rule established by Lord Bingham of Cornhill in Johnson v Gore Wood & Co.”. He remitted the issue as to the £40,000 to the trial judge, noting that, among the questions with which the trial judge would have to deal were:

  147. “(5) Was a duty owed to TL from the inception of this arrangement and if so how did it arise?

    (6) If no duty was originally owed, did a separate duty arise from the giving of the cross guarantee in December? How did that duty arise?

    (7) How does Johnson v Gore Wood apply in those circumstances and can Mr Day assert pursuant to Lord Bingham's third proposition that he has suffered a loss "separate and distinct from that suffered by the company".”

  148. I was referred to two recent cases at first instance in which the principle has been applied. In John v Price Waterhouse (11th April 2001, unreported), Sir Elton John was not a shareholder of the corporate vehicle concerned, but was an employee entitled to a salary equal to 99% of its net income. The company was alleged to have suffered loss as a result of the defendant’s negligence. Its claim was time-barred. Sir Elton sued for the loss he suffered through the reduction in the company’s income. Ferris J held that Johnson v Gore Wood applied to bar his claim. The time bar did “not produce a situation in which “the company … has no cause of action.” … [It] had a cause of action and strictly it still has it, although it is subject to a procedural bar which prevents it maintaining an action upon it. Moreover the shareholder’s (or in this case the employee’s) loss is attributable not to the action of the assumed wrongdoer but to the fact that the company has allowed its claim to become statute-barred.”

  149. Finally Giles v Rhind (24th July 2001, unreported) was, as Mr Gaisman described it, undoubtedly a hard case. Mr Rhind, a 50% shareholder in a company, SHF, acted in breach of a contractual duty of confidence owed to SHF and to the other shareholder, Mr Giles. SHF sued, but discontinued after it was unable to raise security for Mr Rhind’s costs. By then in administrative receivership, it agreed not to bring any further proceedings. Mr Giles then sued and succeeded at the trial on liability. At the assessment of damages, the Johnson v Gore Wood point was taken against him, by which time the company’s claim was time-barred as well as barred by the settlement agreement.

  150. Applying the principles which he drew from Johnson v Gore Wood, Blackburne J held that Mr Giles’ claim was clearly reflective and was barred by the rule, despite the company being unable to claim and therefore the outcome leaving “a wrong without a remedy”. Having quoted Lord Millett’s explanation, quoted above, why a shareholder should not be able to go behind a settlement of the company’s claim, he noted at paragraph 31:

  151. “It is difficult to see why, in a case such as this, those considerations should apply. For good reason or ill, SHF (by then in administrative receivership) chose to discontinue its claims against Mr Rhind and the other defendants and undertook not to raise them again. Even if he could, SHF’s liquidator has not sought to question that decision. To allow Mr Giles to claim for the losses which he says he has suffered involves no double recovery, for there has been no recovery thus far and, given SHF’s undertaking not thereafter to pursue its claims, there can be no double recovery in the future. In any event, any new claim by the company would be barred by limitation as it is well over six years since the events giving rise to any claim. By parity of reasoning there can be no question of any recovery by Mr Giles operating to the prejudice of SHF’s creditors.”

  152. Nevertheless Blackburne J held that he was bound by Johnson v Gore Wood and that there was “no basis for distinguishing the heads of loss which [Mr Giles] claims against Mr Rhind from the plaintiff’s claim to loss of dividend and diminution in share value which the House of Lords held to be irrecoverable in Johnson v Gore Wood.”

  153. Is BSL’s Claim for The Dollar Funding Reflective Loss?

  154. As I have stated, Mr Aldous for BSL conceded that, if there were no defence to a claim by BFS, BSL’s funding claim would be reflective of BFS’ claim. This is clearly correct. BFS is claiming from D&T the losses it incurred on SIMEX, which it argues would have been avoided if D&T had performed their audits competently. Part of the losses claimed by BFS were funded by loans from BSL which BFS remains liable to repay. If BFS’ claim were to succeed, it would be obliged to repay BSL’s funding and BSL’s loss would be made good. BSL’s claim is therefore within Lord Millett’s observations in Johnson v Gore Wood:

  155. “Reflective loss extends beyond the diminution of the value of the shares; it extends to the loss of dividends … and all other payments which the shareholder might have obtained from the company if it had not been deprived of its funds…

    The same applies to other payments which the company would have made if it had had the necessary funds, even if the plaintiff would have received them qua employee and not qua shareholder and even if he would have had a legal claim to be paid. His loss is still an indirect and reflective loss which is included in the company's claim. The plaintiff's primary claim lies against the company, and the existence of the liability does not increase the total recoverable by the company, for this already includes the amount necessary to enable the company to meet it.”

  156. BSL’s Dollar Funding is in the same category as the pension contributions which Mr Johnson would have received from the company in that case if it had not been for the defendant’s breach, and which the House of Lords held to be irrecoverable.

  157. Does a defence to the company’s claim oust the rule?

  158. That being so, the argument before me came down to quite a narrow point. BSL argued that, although Johnson v Gore Wood would apply to its claim if BFS had an enforceable claim against D&T, it does not operate to exclude a shareholder’s claim in circumstances where the defendant has, and always has had, a complete defence to the company’s claim. BSL said that that is the position here. It referred to three defences:

  159. i) D&T deny that they were negligent.

    ii) In their defence and counterclaim, D&T argue that BFS must give credit for the sums advanced by other group companies, which would extinguish BFS’ claim, and

    iii) If D&T are correct, Jones’ representation letters give D&T a complete defence to BFS’ claim for negligence.

  160. I can deal with the first two points reasonably briefly. The first, in particular, has no substance. In almost all strike out applications and preliminary issues the defendant will deny liability but the application will proceed on the assumption that the case pleaded by the claimant is made out. If the defendant successfully defends the claim on the merits, the Johnson v Gore Wood point becomes unnecessary of decision along with most other issues. The whole point of this application is to decide whether, if D&T are proved to have been negligent, Plc and BSL can claim.

  161. The second point arises out of D&T’s defence in the BFS action:

  162. At paragraph 82AA, D&T contend that the correct measure of BFS’ loss is not, as BFS claim, the amount of the losses it incurred on SIMEX. Rather, it is BFS’ liability to the other companies in the Barings group who provided the monies used to fund the losses. D&T say that BFS has declined to plead its claim on that basis and as a result its claim fails. Alternatively, if BFS does advance an alternative case on the basis of liability to other companies, BFS must give credit for profits and interest received by those companies, and other factors.

  163. At paragraph 82AB, D&T argue that, if (contrary to the above) BFS’ current basis of claim is correct, BFS must give credit for the funding from other group companies, commission and interest income of BFS, and profits and interest accruing to the other companies.

  164. BSL argue that, if D&T’s point at paragraph 82AB is correct, it would eliminate BFS’ loss without affecting BSL’s claim. Therefore BSL’s claim is to recover a loss separate and distinct from that suffered by the company, within Lord Bingham’s formulation.

  165. I think this argument goes too far. D&T’s point is that BFS have pleaded on the wrong basis. They emphasise that by saying that, if BFS’ basis of claim were correct, BFS would have to give credit for other companies’ funding to it. It has not been argued before me which is the correct basis of claim, and I do not decide the issue. But clearly it does not prevent Johnson v Gore Wood applying that the company’s claim might fail because it has been wrongly pleaded. That is on all fours with all the cases I have cited above, in each of which the company allowed its claim to be barred, by limitation and/or by settlement, and yet the rule applied. As Lord Millett observed in one of the passages from that case which I have quoted above:

  166. “if the company chooses not to exercise its remedy, the loss to the shareholder is caused by the company's decision not to pursue its remedy and not by the defendant's wrongdoing. By parity of reasoning, the same applies if the company settles for less than it might have done.”

  167. The third argument put by BSL – that based on the representation letter argument – has more substance. D&T argue that Jones’ representation letters give them a complete defence to BFS’ claim for negligence. Furthermore BSL point out that D&T acquired their cause of action when they received the letters, whereas BFS only acquired its cause of action when the statutory accounts were signed, which in each year is a later date. Therefore BFS never had an enforceable claim against D&T.

  168. Mr Aldous based his argument on Lord Bingham’s statement in Johnson v Gore Wood that the issue on a strike-out is “whether the loss claimed appears to be or is one which would be made good if the company had enforced its full rights against the party responsible”. Arden LJ used a similar formulation in Day v Cook: the court must “consider whether the loss would have been made good if TL … had enforced any action which it may have had against Mr Cook.” Mr Aldous pointed out that plainly a loss cannot be made good by the company enforcing its full rights if the company’s claim is subject to a complete defence.

  169. Mr Aldous supported this argument by looking at the rationale for the Johnson v Gore Wood rule, and Lord Millett’s explanation that:

  170. “If the shareholder is allowed to recover… then either there will be double recovery at the expense of the defendant or the shareholder will recover at the expense of the company and its creditors and other shareholders. Neither course can be permitted. … Justice to the defendant requires the exclusion of one claim or the other; protection of the interests of the company's creditors requires that it is the company which is allowed to recover to the exclusion of the shareholder.”

  171. So Mr Aldous argued that the principle is aimed at protecting companies, for the benefit of their creditors and members, and defendants from paying out twice. It is not intended to protect defendants from having to pay at all.

  172. This argument raises the issue of what Lord Bingham and Arden LJ meant by “if the company had enforced its full rights”. Clearly it does not require that the company was in fact able to enforce its rights, since in all the four cases I have cited above the company was not in a position to enforce its rights yet the rule applied. Equally the principle is not limited to protecting companies, for the benefit of their creditors and members, and defendants from paying out twice: again, in each of those four cases the company recovered nothing and the rule relieved the defendant of most or all of its liability.

  173. Mr Aldous’ answer was that those cases have involved only two types of defence – limitation and settlement. Both, he argued, are defences which arise subsequent to the accrual of the company’s cause of action, as a result of the company’s own act or default. He conceded that the same would apply where the company was estopped by its subsequent conduct from bringing a claim. As Lord Millett observed, in such cases the shareholder’s claim is barred as a matter of causation. But Mr Aldous argued that the same does not apply where the defence is available from the start. The test, he said, is to look at the situation at the date when the company’s cause of action arose. If at that date the company had an enforceable cause of action, the shareholder cannot claim, irrespective of whether the company does in fact recover in full. If at that date the company did not have an enforceable cause of action, the shareholder can claim.

  174. Insofar as Arden LJ in Day v Cook seemed to extend the rule further, suggesting that the shareholder could not sue for reflective loss no matter what the nature of the defence to the company’s claim:

  175. “It is not simply the case that double recovery will not be allowed, so that, for instance if the company's claim is not pursued or there is some defence to the company's claim, the shareholder can pursue his claim. The company's claim, if it exists, will always trump that of the shareholder”,

    Mr Aldous submitted that she was clearly intending to summarise the speeches in Johnson v Gore Wood and did not intend to extend the rule. In any event she was in the minority in the Court of Appeal and her comment was obiter.

  176. I agree with Mr Aldous that neither Johnson v Gore Wood nor the cases since (save perhaps for Arden LJ’s dictum) give a clear answer to the question raised by this application. The two reasons underlying the rule put forward by Lord Millett, of protecting the defendant from double recovery, and the shareholders and creditors from one shareholder scooping the pool, do not require Plc’s and BSL’s claims to be barred. Mr Gaisman for D&T relied also on Lord Millett’s discussion of causation and what Mr Gaisman termed Lord Millett’s circumvention argument. But the former amounts to saying that, if the shareholder cannot sue, his loss is caused by the company, not the defendant, rather than explaining why the shareholder cannot sue; and the latter is stated by Lord Millett as applying to a settlement of the company’s claim, rather than as a principle of general application.

  177. It is clear from the cases that, as Arden LJ stated in Day v Cook, the rule is not rooted in avoiding double recovery and does apply where the defences of limitation and estoppel, at least, are available to the defendant. Beyond that, any general principle involves unsatisfactory distinctions between defences. Mr Gaisman contended, I think correctly, that the correct distinction is between cases where there was no claim at all and those where the claim existed but was subject to a defence. I can see that that might itself lead to some fairly narrow distinctions, but Mr Aldous was unable to come up with a more satisfactory rule.

  178. As I have indicated above, Mr Aldous initially proposed that the dividing line was between defences that were available when the cause of action accrued and those that were not. So he conceded that, where the defendant has a defence to the company’s claim, of limitation, estoppel by convention, or estoppel by conduct, the shareholder cannot sue. But he argued that defences that arise prior to or at the same time as the cause of action do not bar the shareholder’s claim.

  179. I am not sure that this distinction fits in with either BFS’ or Plc/BSL’s pleadings. Both contain significant allegations of negligence by D&T prior to their receipt of the representation letters and plead that, if it had not been for that negligence, Leeson’s fraud would have been discovered and/or prevented; and BFS argue that auditors have a duty to warn before conclusion of the audit, in line with Sasea v KPMG [2000] 1 All ER 676. In any event, if the rationale for the rule in Johnson v Gore Wood is avoiding double-recovery and protecting the company, it is difficult to see why the time when the defence arose should be critical.

  180. Furthermore, in argument I suggested a situation where an auditor, who is being sued for negligence in his audit, is owed fees for prior audits which exceed the amount of the negligence claim. Surely the auditor’s right to set off the claim for fees would bar the shareholder as well as the company, even though the fees claim arose before the company’s cause of action? Mr Aldous conceded that it would.

  181. Accordingly there cannot be a distinction based only on timing. Mr Aldous found himself trying to argue that defences of limitation, estoppel by convention, estoppel by conduct and set-off, pre-existing or subsequent, all barred the shareholder suing; but D&T’s claim for deceit, giving rise to estoppel or set-off or a defence of circuity, does not. It is no criticism of him to say that he found it difficult, and he did not satisfactorily reformulate his contention as to what the distinction should be. That suggests that the correct distinction is that between claims that exist and those that do not and therefore, effectively, that Arden LJ in Day v Cook at para 38 meant what she said.

  182. However it is not necessary for the purpose of deciding this application to decide whether that is right. I have said that Mr Aldous conceded that the fees set-off mentioned in argument would bar the shareholder’s claim. That must be correct: the company in that example has received value for its negligence claim, in that it has used it to reduce the auditor’s claim for fees. To allow the shareholder to bring a claim for negligence would indeed be to allow double recovery against the auditor.

  183. Mr Gaisman contended that the present case is on all fours with the example of set-off of fees. Mr Aldous tried to distinguish that example from D&T’s counterclaim for deceit by arguing that, in the fees example, the fees claim is a free-standing claim. There are two independent, valid claims, each of which is enforceable and could be enforced were it not for the other. He contrasts that with D&T’s claim, which exists only as a defence to BFS’ claim against D&T, and would have no substance were it not for that claim.

  184. I do not see any valid distinction between the two situations. On their case, D&T had a cause of action in contract against BFS when the representation letters were written, and in tort once they suffered damage. It is true that the damage suffered is their exposure to a potential liability to BFS and that their loss is to be quantified by reference to the amount of that liability. That makes it more difficult to talk of the company having received full value for its claim, given that on the facts the claim against which it is set off has no value other than to negate the company’s claim. But that does not justify treating the set-off of D&T’s claim for deceit differently from the set-off of the auditor’s fees in my example: both are separate claims arising out of facts related to those giving rise to the principal claim and which can be pleaded as a defence to that claim. In my view both prevent the shareholder suing for reflective loss.

  185. For completeness, before I conclude this section I should deal with two further points argued by Mr Aldous:

  186. i) D&T’s function was to report to BSL on accounts put forward by local management, including Jones. Mr Aldous argued that it would be a negation of that function if they could rely on Jones’ reckless neglect of his duties to defeat the claims, not only of BFS, but also of BSL.

    This is an unfairness argument of the type which Blackburne J so regretfully rejected in Giles v Rhind and it does not affect the application of the Johnson v Gore Wood rule. In any event, this is a case where ex hypothesi Jones has defrauded D&T. It does not seem to me a criticism of the application of the rule that the company which put Jones in his position should bear the consequences of his fraud, rather than that the auditors whom he defrauded should do so. As Mr Gaisman pointed out, and Mr Aldous conceded, Plc and BSL do not allege that D&T were at fault in not detecting Jones’ fraud. The decisions I have quoted contain much harder cases than this one.

    ii) BSL acquired a cause of action on day 1, when D&T reported on the consolidation schedules. D&T acquired its cause of action against BFS on day 2, when the representation letter was signed. BFS did not acquire its cause of action until day 3, when D&T signed the statutory accounts. Mr Aldous argued that it would be extraordinary if on day 3 Johnson v Gore Wood operated to cause BSL to lose its existing cause of action. Indeed just this issue, of how the rule operates where a company acquired a cause of action after the shareholder acquired his, was left undecided by the Court of Appeal in Day v Cook and sent back to the trial judge. Mr Aldous did not shrink from saying that, where the shareholder acquired his cause of action first, that should prevent the application of the rule and any danger of double-recovery should be met by the shareholder giving credit for the company’s recovery.

    Mr Aldous conceded in argument that, if there were no defence to BFS’ claim, BSL would be unable to sue. Since, on Mr Aldous’ argument, BSL acquired its claim before BFS did, he concedes that the rule would have just the effect which he describes as extraordinary. In any event, I agree with Mr Gaisman’s submission that, if different labels for causes of action do not affect the application of the rule, nor should the date of accrual of the cause of action, which certainly does not affect the policy underlying the rule. Mr Aldous’ solution of the shareholder giving credit for the company’s recovery is just the principle in Christensen v. Scott which the House of Lords rejected in Johnson v Gore Wood. Finally, I think Mr Aldous mis-characterises the position. BSL would not lose its cause of action, but would be unable to recover this head of loss. The rule would not prevent it enforcing its cause of action to recover other, non-reflective losses.

  187. Accordingly in my judgment D&T’s entitlement to set off its claim for deceit against BFS’ claim against them for negligence is not a circumstance which permits BSL, as a shareholder of BFS, to sue for reflective loss. BSL’s claim for its dollar funding is reflective. Therefore I conclude that for this reason also the Dollar Funding claim, pleaded at paragraph 334 of BSL’s statement of claim, discloses no reasonable cause of action and should be struck out pursuant to RSC O.18 r.19 (1)(a).

  188. BONUSES

  189. The third category of claim summarised at paragraph 29(iii) above which is the subject of this application is Plc’s claim for overpayment of bonuses. D&T applied to strike it out both on Johnson v Gore Wood grounds and on the facts as being an abuse of process. I shall deal with the two points in that order, but must first describe the claim as pleaded.

  190. I have quoted in the Pleadings section at paragraph 29 of this judgment paragraph 335 of the Statement of Claim. The schedule referred to in that paragraph was never served. Instead the claimants served Amended Further and Better Particulars in February 2001, which pleaded as follows:

  191. The Plaintiffs’ claim under paragraph 335 of the Re-amended Statement of Claim is for overpaid bonuses in 1993 only. The claim is calculated as follows:

    (i) The Plaintiffs allocated half of their pre-bonus profits to a bonus pool for distribution by way of bonuses.

    (ii) By 31st December 1993 the cumulative losses on account 88888 stood at £24.4m.

    (iii) Had D&T and C&L performed a competent audit in 1993…, the Plaintiffs’ pre-bonus profits would have been reduced by £24.4m.

    (iv) In consequence, the amount paid out by the Plaintiffs by way of bonuses would have been reduced by £12.2m.”

    Johnson v Gore Wood

  192. It is agreed between the parties that I cannot at this stage give a final decision on this ground. This is because the decision will depend upon the findings in the trial. The loss which is at the centre of the claim is the loss to BFS of £24.4m incurred by Leeson’s unauthorised trading during 1993. In the BFS action, BFS has claimed that from D&T on the basis that D&T were negligent in the 1992 audit: if D&T had performed that competently, Leeson’s fraud would have been stopped then and he would not have incurred the £24.4m of losses during 1993. On the other hand, Plc claim in relation to the 1993 audit that, if D&T had performed that audit competently, Plc would have known that the profits for 1993 were overstated and would not have made the £12.2m of excess bonus payments.

  193. Plc concede that, if BFS succeed in proving negligence in relation to the 1992 audit, Plc’s claim for overpayment of bonuses in relation to the 1993 audit will be reflective loss and Plc will be unable to claim under this head. If BFS do not succeed in relation to the 1992 audit, it will (subject to D&T’s other ground of challenge, considered below) be open to Plc to seek to recover under this head in relation to 1993.

  194. Inherent Jurisdiction

  195. D&T submitted that a small number of documents which they tabled showed that, for the accounting year 1993, there were separate bonus pools for the BSL Group (which included BFS) on the one hand and the rest of the Barings Group on the other. 50% of BSL Group profits were paid out as bonuses to directors and staff of the BSL Group. Therefore the overpayment of bonuses was borne by BSL, not Plc. Plc did not seek to contest this.

  196. D&T are not alleged to have owed a duty to BSL in relation to the 1993 audit. The claimants allege only a duty of care owed to Plc. Therefore, on the face of it, the only party which suffered loss was owed no duty of care and the only party which was owed a duty of care suffered no loss.

  197. The claimants made no response to this argument, other than to state in their skeleton that:

  198. “Plc was the holding company of the group. A mistaken payment out of £12m inevitably damaged Plc”

    and to table an amendment to the Amended Further and Better Particulars I have set out above. This amendment accepted that BSL allocated half its profits to the bonus pool, pleaded that, had D&T performed a competent audit, “the pre-bonus profits of BSL and the Barings Group as a whole would have been reduced by £24.4m”, and added to its previous paragraph (iv) that:

    “If and insofar as the bonus payments were borne by BSL rather than by Barings plc, it will be said by Barings plc that such overpayments out by BSL reduced the value of the Barings Group and caused equivalent loss, not exceeding £12.2m, to Barings plc as the parent company of the group.”

  199. I must decide this application on the basis of the current pleadings. No application has been made for leave to amend paragraph 335 or the Amended Further and Better Particulars, which plead a claim for overpayment, not a claim for loss suffered by the parent company as a result of an overpayment by its subsidiary. If such an application were made in the form of the current draft I would reject it as embarrassing to D&T. Plc must decide whether it accepts that the bonus payments in question were born by BSL and plead accordingly. I would also reject it on the ground that it is too late. The new case presented of loss of value to Plc’s group will require significant further factual and expert valuation evidence to support it which D&T should not now be required to meet. The claim is also now probably statute-barred.

  200. The current pleading is a claim for the difference between the amounts paid as bonuses and the sums which would have been paid if D&T had not been negligent. The claimants do not dispute that the bonuses were overpaid by BSL, nor that D&T did not owe a duty of care to BSL in relation to the relevant year. Therefore as pleaded, in the light of the undisputed facts, the claim has no prospect of success and I shall strike out the current pleading under my inherent jurisdiction.

  201. In the result I will accede to the application of D&T and grant the relief sought.


© 2001 Crown Copyright


BAILII:
Copyright Policy | Disclaimers | Privacy Policy | Feedback | Donate to BAILII
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2001/461.html