See you in court

Two recent court battles between auditors and liquidators have highlighted
the tensions that can exist between professionals.

In one case, the judge ruled that Begbies Traynor, joint liquidators of The
Accident Group, could have ‘almost unfettered’ access to documents and emails
relating to work done for the troubled claims company by its former auditors,
KPMG.

But in another case, BDO Stoy Hayward was allowed to withhold documents
produced while acting as auditor to a company that went into liquidation seven
years before. Liquidator Elliot Harry Green lost his appeal against a ruling,
refusing him an order for certain documents to be handed over, essentially
because he failed to show a reasonable requirement for the information.

Liquidators’ powers stem from the Insolvency Act 1986. Under s235, auditors
are under a duty to co-operate in giving the appointed insolvency practitioner
such information as he may ‘reasonably require’ to fulfil his duties. If
auditors don’t co-operate, under s236 the practitioner has the power to go to
court to try and force them to provide the information.

The Begbies Traynor win looks dramatic, although previous cases had
established that the courts would generally accede to liquidators’ requests for
a wide range of documents. John Davies, ACCA’s head of business law, doesn’t
expect auditors routinely to have to hand over everything they have relating to
a client. ‘If parliament and the courts intended for the accountants or auditors
to disclose everything, there would not have been this test of reasonableness,’
he says.

The BDO decision was more surprising. ‘This is one of the few reported cases
where the accountants were successful in resisting an order,’ says Adam Culy,
solicitor with Reynolds Porter Chamberlain who handled the defence.

‘The case re-emphasises that the burden is on the liquidator to show that the
request is reasonably made. In other words, the liquidator must convince the
court that the disclosure is relevant to a matter he is investigating before the
court can exercise its discretion in favour of disclosure.’

As Jeremy Willmont, an insolvency partner with Moore Stephens, explains, IPs
should only ask for information that they cannot find themselves, perhaps
because the company’s records are incomplete. ‘There is anecdotal evidence that
some liquidators engage in rather more threatening correspondence as a matter of
course with auditors to see what they can flush out,’ he says. ‘But the powers
are not a substitute for liquidators’ proper investigation and review of the
accounting records in the first place.’

The problem is that auditors’ deep pockets make them potential targets for
liability claims. ‘There are quite a few people out there on a fishing
expedition,’ Willmont says. ‘They want all the papers to see if they can bring
an action against the auditors. The courts should quite rightly give some
protection to auditors. The people who are on fishing expeditions don’t do any
good for the rest of the professionals who are trying to do a proper job.’

‘These tussles go on because the stakes are high and it’s a rough, tough
game,’ comments PricewaterhouseCoopers partner Peter Wyman. ‘The liquidators are
under pressure from creditors and shareholders to have done everything they can
to get as much money back as they can.’ Liability reform might help matters,
adds Wyman, because auditors won’t run the risk of being sued for ‘daft
amounts’.

Nick Hood, senior London partner at Begbies Traynor, has some sympathy for
auditors. ‘It tends to be the high-profile insolvencies that go to court, where
auditors are understandably concerned that they are being viewed as the people
with the deep pockets,’ he says. ‘When we ask the auditors for information, they
should be notifying their professional indemnity insurers straightaway. The
insurers’ lawyers’ instinct is always to say “no”.’

Hood stresses that the onus is on the IP to make a reasonable request.

‘If the practitioner says to the auditor, “The following issues have come to
my attention and I am wondering what information you may have to help me,” that
should be productive,’ he says. ‘If the message the auditors received is, “I am
coming on a fishing trip,” they are much less likely to be comfortable.

‘The onus is on the practitioner to be as specific as he can about what he is
looking for and how he may use the information. You cannot give a blanket
undertaking that having the information will never lead to any action against
the auditors; that’s in breach of the practitioner’s duty to ferret out sources
of money for the creditors. Insolvency practitioners can’t do cosy deals with
firms of accountants, but it is incumbent on the auditors not to be precious
about their papers.’

Hood notes that insolvency practitioners have a duty to look at what advisers
were saying and doing around the time when a client was potentially becoming
insolvent.

‘Auditors will say they are only the watchdog and not a bloodhound,’ he says.
‘With this sort of stand off, the insolvency practitioner becomes potentially
the watchdog over the watchdogs and, when appropriate, he has to become a
bloodhound.’

IPs will therefore continue trying to sniff out information they consider
helpful to themselves in serving the creditors of insolvency companies.
Inevitably, auditors will at times seek to resist.