Barings Plc v Coopers & Lybrand & Ors

Factual and Procedural Background

The Plaintiff was the English holding company of a group based in London that did not trade on its own account. An indirect subsidiary of the Plaintiff, Company A (formerly known as another entity), was incorporated in the Cayman Islands but operated from London, conducting securities and futures trading both on agency and proprietary bases. The Plaintiff and Company A initiated proceedings in England against a firm of chartered accountants, Company B, and several partners associated with firms in Singapore, who were named as the second to fifth defendants. The Plaintiff sought leave to serve the fourth and fifth defendants out of jurisdiction on grounds that they were necessary parties and the claim was founded on tortious negligence with damage sustained within the jurisdiction. The High Court judge dismissed the fourth and fifth defendants' application to set aside this leave, prompting the defendants to appeal with leave.

The underlying collapse of the group on 26th February 1995 was attributed to unauthorised and loss-making trading by an individual who managed one of the subsidiaries incorporated in Singapore and trading on the Singapore International Monetary Exchange. This individual concealed losses through a falsely designated account and manipulated funding requests and margin calls, leading to significant financial losses and insolvency of the group. The Plaintiff alleges that the auditors failed to detect or report these irregularities during audits, which inaccurately showed profitability and solvency.

The claim against the Singapore accounting firm arises from their duties as reporting accountants for consolidated group accounts and a particular transaction falsely reported as a receivable. The Plaintiff asserts the auditors owed a duty of care to it, distinct from any duty owed to the subsidiaries, and that the auditors' negligence contributed to the financial losses experienced.

Legal Issues Presented

1. Whether the Singapore accounting firm owed a duty of care directly to the Plaintiff, the holding company, in respect of the consolidated group accounts and related audit work.
2. Whether the Plaintiff has a good arguable case against the Singapore accounting firm to justify service of proceedings out of the jurisdiction.
3. Whether the appropriate forum for trial of the action is England or Singapore.
4. Whether a holding company can claim damages for loss in value of its subsidiaries resulting from auditors' negligence, distinct from any claim the subsidiaries themselves may have.

Arguments of the Parties

Defendant's Arguments

• The Singapore accounting firm owed no relevant duty of care to the Plaintiff, as their duty was owed to the subsidiary companies whose accounts they audited.
• Any loss claimed by the Plaintiff, as a holding company and effectively a shareholder, is derivative and cannot be recovered independently; only the subsidiaries suffering damage can claim.
• The information supplied by the Singapore auditors was solely for the purpose of enabling the Plaintiff's directors to prepare consolidated accounts, and this does not establish a duty of care to the Plaintiff itself.
• The Plaintiff did not allege any direct expenditure or loss of its own funds caused by the auditors' negligence.
• Relied on precedent establishing that shareholders cannot claim for diminution in share value caused by damage to the company, and that the company alone has a cause of action for negligent audits.

Plaintiff's Arguments

• The Singapore accounting firm assumed a direct duty of care to the Plaintiff in relation to the preparation and audit of consolidated group accounts.
• The Plaintiff can claim for loss in value of its subsidiaries caused by breach of duty owed to it, distinct from any claim by the subsidiaries themselves.
• There is a dispute as to whether the Singapore accounting firm owed a duty to the subsidiary which conducted the trading, as the audit report was signed to the Plaintiff but not to the subsidiary.
• Relied on precedent supporting recovery of damages for loss of profits or diminution in value of subsidiaries where the holding company has a direct right of action.
• The auditors knew their reports were required for the Plaintiff to comply with its statutory obligations, and the scope of their duty included ensuring the accounts gave a true and fair view.
• Failure to detect fraud and material misstatements during the audit supports the claim that the auditors breached their duty of care to the Plaintiff.

Table of Precedents Cited

Court's Reasoning and Analysis

The court examined whether the Singapore accounting firm owed a duty of care directly to the Plaintiff, distinct from any duty owed to the subsidiaries. It considered the nature of the relationship, the purpose of the audit work, and the instructions given, which required the auditors to report significant matters to the Plaintiff's auditors in England to enable preparation of consolidated group accounts compliant with statutory requirements.

The court acknowledged established principles that generally a company alone has a cause of action for negligent audits and shareholders cannot claim for diminution in share value. However, it found that the Plaintiff, as the holding company, had pleaded specific facts showing a direct relationship and an independent duty of care owed by the Singapore auditors to it, arising from the circumstances in which audit work and information were supplied for consolidated accounts.

The court noted that the auditors knew their reports were to be used for statutory consolidated accounts and could not have intended their duty to be limited merely to submitting subsidiary accounts without ensuring a true and fair view. The failure to detect the fraud and misstatements raised a serious issue to be tried.

The court also addressed the risk of multiple claims and double recovery, concluding that such risks could be managed within the same action. It rejected the argument that the Plaintiff had no good cause of action or that England was not the appropriate forum, especially given the stay of proceedings in Singapore.

Accordingly, the court found the Plaintiff had established a good arguable case and that service out of jurisdiction was proper. The appeal was dismissed without resolving factual or legal conclusions, which were reserved for trial.

Holding and Implications

DISMISSED

The court dismissed the appeal against the order allowing the Plaintiff to serve the Singapore accounting firm out of jurisdiction and to proceed with the claim in England. The decision affirms that the Plaintiff has a serious issue to be tried regarding the auditors’ duty of care owed directly to it in respect of consolidated group accounts. The ruling permits the continuation of the claim in England but does not establish any new legal principles beyond confirming the appropriateness of the procedural order. The implications are limited to the parties, allowing the Plaintiff to pursue its claim against the auditors in the English courts.