Terms of Engagement Determine Liability for Advice, Rules Court

When a firm of accountants approached a client regarding investing in a management buyout (MBO) that needed finance, the end result was that the client lent the company set up to invest in the MBO company £15 million.

Such loans are not advanced lightly and the lender had relied on due diligence reports about the MBO company's performance and prospects.

The deal was structured so that the loans were made to the second company and that company made the loan to the MBO team. The accountants' engagement letters were with the second company, not the man who had lent his money to it.

The failure of the MBO company to live up to expectations led to further loans being advanced in an effort to keep it afloat, but it eventually foundered.

The lender then sued the accountancy firm (a limited liability partnership) alleging that it had given him negligent advice on which he had relied and claiming damages for his loss.

The accountants rejected his claim, arguing that their advice was given to the company which had made the loans to the failed MBO company.

The investor argued that the accountants owed him a duty of care because they were aware that he was risking his assets and also had advised him personally before the intermediate company was set up to complete the deal.

For such claims to succeed, there are a number of facts that have to be established:

  • Firstly, the person suffering the loss has to have acted on advice given and thereby suffered a loss. This had clearly taken place; and
  • Secondly, the adviser has to owe a duty of care to the person who suffered the loss – to have assumed responsibility for the advice given to them. This is an objective, not a subjective, test. The mere ability to foresee that the third party will rely on its advice and thereby might make a loss is not sufficient to infer that the adviser has assumed responsibility.

Since the entity that entered into the transactions and thereby suffered a loss was the intermediate company, the High Court concluded that the accountants did not owe a duty of care to the man. The judge ruled that a duty of care owed to a company by its advisers could not be construed as being a duty of care to the 'human agents' of the company.

Although this judgment may seem harsh, a finding that the advisers were liable to the investor could have opened up a can of worms, resulting in cases being brought by a variety of people connected with failed companies and investments.

The contents of this article are intended for general information purposes only and shall not be deemed to be, or constitute legal advice. We cannot accept responsibility for any loss as a result of acts or omissions taken in respect of this article.