Commercial Court rejects pre-action disclosure application against allegedly negligent KPMG auditors

The Commercial Court rejected Carillion (in liquidation)’s application against KPMG for pre-action disclosure, which application racked up half a million pounds of costs for both parties, on the basis that the application on the facts was not appropriate and the liquidators had adequately pleaded its case without disclosure of all of the relevant material which would be later disclosed in the course of litigation.

Officially “the largest ever trading liquidation in the UK” , Carillion plc was a British multinational construction and facilities management services company headquartered which went into liquidation in January 2018.

The liquidators, in contemplation of a negligence claim, issued an application in the Commercial Court for pre-action disclosure from the company’s former auditors KPMG LLP and KPMG Audit Plc (together “KPMG”), pursuant to CPR 31.16. KPMG is currently under investigation by the FRC for its audit of Carillion’s statements for the financial years 2014 to 2017.

The liquidators considered that the auditors should have detected that the financial statements of the Carillion Group were unreliable and did not reflect the true position of the company. The liquidators for Carillion argued that receipt of the disclosure would allow them to prepare their pleaded case. It came as a surprise to the liquidators that their application was rejected and the Court held that the application on the facts was not appropriate.

Why did the pre-action disclosure application fail?

Judge Jacobs commented that he was not referred to any examples of successful applications for pre-action disclosure in the Commercial Court.

Applications for pre-action disclosure in the Commercial Court are relatively rare, and the authorities to which I was referred contain no recent examples of successful applications.

Pre-action disclosure of audit working papers is not viewed as the norm for audit negligence in the Commercial Court

Carillion had not sent a formal Letter Before Claim, in non compliance with the Pre-Action Protocol and the Judge stated that the obligation under the Pre-Action Protocol for Professional Negligence to exchange the primary relevant documents was not engaged. Furthermore, the Judge held that the requests for disclosure were too broad. Carillion was invited to send a further, compliant Letter of Claim setting out the scope of the intended allegations and they could make a request for documents pursuant to the provisions of the Protocol.

The Judge commented that Carillion’s liquidators had access to the company’s records and had been able to adequately plead a detailed case in negligence which rendered pre-action disclosure redundant and the process would likely be repeated at the disclosure stage of the litigation. This would increase costs and resources of both parties. It perhaps did not impress the Judge that the parties’ costs incurred following the substantive hearing of the application amounted to over £500,000 each.

Advice on for pre-action disclosure applications

This case is helpful for Defendants defending a pre-action disclosure application and arguments can be put forward as to pushing provision of the documents to the later stage of disclosure and saving costs of the parties.

The Claimant however in these cases will need to balance pleading a detailed case (and complying with Pre-Action Protocols) from the outset against showing a need for the disclosure. If pre-action disclosure is reasonably required then any requests or application should be narrowed down as much as possible or otherwise the Court may view such applications as “fishing expeditions”.

Read the full judgment for Carillion v KPMG [2020] EWHC 1416.

Compliance with Pre-action disclosure under the Pre-Action Protocol for Professional Negligence

Parties are encouraged to cooperate openly in the early exchange of relevant information so that issues in dispute can be clarified, narrowed down or resolved. The Claimant should clearly set out documents reasonably requested which are relevant to the issues in dispute.

Paragraph 10 of the Pre-Action Protocol for Professional Negligence states:

10.1 This protocol is intended to encourage the early exchange of relevant information, so that issues in dispute can be clarified or resolved. The claimant should provide key documents with the Letter of Claim and (at any time) any other documents reasonably requested by the professional which are relevant to the issues in dispute. The professional should provide key documents with the Letter of Response, to the extent not provided by the claimant, and (at any time) any other documents reasonably requested by the claimant which are relevant to the issues in dispute.

10.2  Parties are encouraged to cooperate openly in the exchange of relevant information and documentation. However, the protocol should not be used to justify a ‘fishing expedition’ by either party. No party is obliged under the protocol to disclose any document which a court could not order them to disclose in the pre-action period under CPR 31.16.

10.3 This protocol does not alter the parties’ duties to disclose documents under any professional regulation or under general law.

It is important to comply with Pre-Action Protocols to enable parties to settle issues between themselves avoiding resources of the Court. Instances of non-compliance may be fatal to a litigation case and may result in costs sanctions.

Obtaining solicitors’ advice on disclosure

We are experienced, specialist litigation lawyers and can advise you on applications for disclosure.

Solicitors are under a duty to investigate the position carefully and to ensure so far as is possible that full and proper disclosure of all relevant documents is made. Specialist litigation solicitors must carefully consider what might be the most appropriate approach to disclosure in your case including any applications to be made including pre-action disclosure and non party disclosure.

Advice on claims against negligent auditors

Auditors have a duty to look into the substantial accuracy of any given account, to ensure they correctly represent the state of the company’s affairs. This duty only requires the auditor to have been reasonably careful in their role.

In the instance where a claim of fraud is established in a company, the auditor will not automatically be held to have been negligent in failing to detect the fraud. Therefore, to establish whether an auditor has been negligent, it is necessary to prove that a reasonably competent auditor exercising normal skill and care would have identified the fraud.

In recent years it has become apparent that some of the more successful cases against negligent auditors have been where there has been a misunderstanding as to the degree of responsibility which the auditor was to assume in giving advice. Therefore, it is essential that you distinguish your claim between:

a) negligence which has been carried out contrary to agreed terms; or

b) a dispute that has arisen due to a misunderstanding regarding assumed duties of the auditor.

Instruct Specialist Professional Negligence Solicitors

We are a specialist City of London law firm made up of Solicitors & Barristers operating from the only law firm based in the Middle Temple Inn of Court adjacent to the Royal Courts of Justice. Our team have expertise in advising on claims for compensation against professionals that have fallen below the standard expected, which causes clients financial or personal loss. We are experienced in bringing successful claims against negligent solicitors, barristers, financial advisers, insurance brokers, surveyors, valuers, architects, tax advisers and IFAs.

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