A leading firm of certified public auditors and accountants has been found negligent in the work it carried out for Price Club Operators Ltd, the supermarket chain that went bust in 2001.

The court judgment on Deloitte & Touche follows action filed that year by one of Price Club’s suppliers, Valle Del Miele Ltd, which claimed the auditing firm’s report did not reflect the chain’s precarious financial position at the time.

As a result, Valle Del Miele, a chicken processing company, had taken the decision to continue supplying Price Club and was owed more than €350,000.

However, the court also ruled that the accounting firm was not responsible for damages incurred by Valle Del Miele, which should have engaged its own experts to examine Price Club’s situation and not rely on the supermarket chain’s own auditors.

The judgment was given by Mr Justice Joseph Azzopardi in the First Hall of the Civil Court regarding Deloitte & Touche and its partners Raphael Aloisio, Malcolm Booker, Steve Cachia, Edward Camilleri, Andrew Manduca, Paul Mercieca and Stephen Paris. The partners were sued in their personal capacity.

Four years ago, Price Club’s directors were found guilty of wrongful trading when they continued to do business in full knowledge that Price Club was going under.

They were held personally liable for the €20 million in debts racked up by the company.

It should have been obvious to them that Price Club was in trouble

Deloitte & Touche had been engaged to carry out a report for Price Club on the basis of audited accounts, which were finalised on June 30, 2000.

Valle Del Miele said Price Club had substantially increased its orders from it so it decided to examine the accounts, published on September 13, 2000, to see what Price Club’s financial status was.

The accounts and the auditors’ report portrayed an “optimistic picture” of Price Club’s business and in no manner did it indicate financial difficulties.

As a result, Valle Del Miele decided to continue to supply the supermarket chain.

Price Club stopped payments to its creditors in April 2001.

The various creditors engaged their own consultants to examine the company’s finances and it resulted that by the end of 2000 Price Club had owed its creditors millions of Maltese liri, Valle Del Miele held.

It claimed this showed the accounting firm had acted in a negligent or fraudulent manner when it prepared Price Club’s accounts because these did not reflect the company’s actual financial position.

Valle Del Miele also held the firm and its partners were liable in damages because its decision to continue supplying Price Club had been taken on the basis of these accounts.

The accounting firm and partners argued that Valle Del Miele’s claims were unfounded because they had never had a legal relationship with this company. They also categorically denied the allegations of negligence and fraud.

In yesterday’s judgment Mr Justice Azzopardi said this was an unusual case and because of the new subject matter, the court would examine the findings of the English courts in similar cases.

The duty owed by accountants who had to examine accounts and make reports on which other people, other than their clients, relied in the ordinary course of business, was not merely a duty to use care in their reports.

They also had a duty to any third party to whom they showed the accounts or to whom they knew their employer was going to show the accounts.

John Zarb, a witness in the case, told the court that in his opinion the manner in which Price Club was structured placed this company in a financially precarious position.

The company had debts of some €6 million to its creditors.

This exceeded the stocks purchased by Price Club from its suppliers by €2.7 million. According to Mr Zarb, the sum of €2.7 million was intended to finance the company’s takeover in such a manner that Price Club’s shareholders would not have to provide any initial capital.

As a result, Mr Zarb concluded that the financial consequences of the company’s bankruptcy were planned to be borne by its creditors.

Mr Justice Azzopardi found that Deloitte & Touche and its partners had shown an element of negligence in their work.

The defendants were experts in their field and it should have been obvious to them that Price Club was in financial trouble.

However, Valle Del Miele itself had not taken necessary precautions before deciding to extend credit to Price Club, and it had therefore brought its losses upon itself.

It had been aware Price Club had financial problems but relied on its published accounts, which did not absolutely reflect the reality of the situation.

It ought to have engaged its own accounting experts to examine the situation. Deloitte & Touche had therefore not caused Val Del Miele to suffer damages.