Seven partners of a leading auditing firm were ordered to shoulder part of the damages suffered by a supplier of poultry products that continued to do business with Price Club, when the company’s certified accounts gave no clue to the financial troubles ahead.
This was the outcome of a lengthy judgment delivered by the Court of Appeal, following appeals filed by both Valle Del Miele, the local supplier, and Raphael Aloisio, Malcolm Booker, Steve Cachia, Edward Camilleri, Andrew Manduca, Paul Mercieca and Stephen Paris, personally and in their capacity as partners at Deloitte and Touche, auditing and accountancy firm.
Back in 2013, the First Hall, Civil Court, had concluded that the auditors had acted negligently when carrying out work for Price Club Operators Ltd, the supermarket chain that went bankrupt in 2001.
A year before the company stopped paying its creditors, the company accounts and auditors’ report published in September 2000, had painted an “optimistic view of an enterprise having a large business activity”.
That report had not hinted at any “possible serious financial problems” looming ahead, serving as a reference point for Valle Del Miele to extend its credit to Price Club, with its standing debt of Lm78,293 (€182,373.63) almost doubling to €350,019.24 by March 2001.
A financial advisor of the poultry supplier later explained how Valle Del Miele had sought to exploit the surge in demand it had experienced at the time of the mad cow disease outbreak, when producers of other meat products experienced a drop in sales.
Moreover, the poultry supplier believed that by continuing to do business with Price Club it would stand a better chance of recovering the money owed, rather than if it were to cut off business relations abruptly, possibly making the situation worse.
While declaring that the auditors had acted negligently, the first court had concluded that they were not to be held responsible in damages incurred by Valle Del Miele, which should have engaged its own experts to examine Price Club’s situation, without relying on the supermarket chain’s own audited report.
The Court of Appeal confirmed the auditors’ negligence but went a step further, stating that upon the evidence put forward, there had clearly been a causal link between the shortcomings of the auditors and the losses suffered by the creditor.
While discarding the presence of any fraudulent intent on their part, the Court, presided over by Mr Justices Giannino Caruana Demajo, Joseph R. Micallef and Anthony Ellul, observed that the auditors had exercised insufficient care and had failed to read the signs which, “given their resources and vast experience, they could have”.
In 2009, 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.
“The Court does not believe that the respondents, who run a well-known and reputed firm, would ever tarnish their good reputation through complicity in such wrongdoing,” the appeal judgment read.
Striking down the auditors’ argument, based on English common law and jurisprudence, that auditors were only responsible towards third parties in certain very restricted cases, the Court said that this case was to be decided in line with Maltese law on civil liability and the principle of good faith.
The Court observed that the Maltese Companies Act binds auditors to hand over their report not only to shareholders, debentures and those attending the company’s general meeting, but were also to deposit the audited accounts with the Registrar of Companies.
Thus, the respondents knew that their report was to be accessible to the public, including Valle Del Miele, which was owed “a significant sum” by Price Club.
It was to be expected that Valle Del Miele would show “a special and specific interest, beyond a general public interest, in that auditors’ report,” when considering whether to continue business with its debtor.
The Court also observed that publication of the accounts was not intended as a “mere formality,” at law, but was meant to safeguard third party interests who could defrauded, “as evidently happened in this case”.
Moreover, it was useless to argue that accounts were drawn up by the company directors, given that auditors ultimately shouldered the responsibility of verifying those accounts before certifying them as “correct” and thus reliable, the Court went on.
Although, as happened in this case, a creditor is bound to seek personal advice, that advice would likely rest upon the published audited accounts of his debtor, based upon the premise that the conclusions were “objectively true”.
Indeed, any creditor had little else to go by, unlike the auditors who had full access to the company books, the Court observed.
The supermarket company had insufficient capital from the start, structured in such manner as to shift the risk of losses onto its creditors rather than its investors, the Court said.
Without discarding the possibility that the auditors could have been deceived by Price Club’s directors, the Court concluded that the auditors were ultimately to bear one-fourth of the damages suffered by Valle Del Miele through their negligence.
That sum was to be calculated on the difference between the credit before deciding to continue business and the final amount owed when Price Club stopped payments.
That difference worked out to €167,646, which meant that the auditors were to fork out €41,911 in damages.
Lawyers Shazoo Ghaznavi, Robert Galea and Mario Calleja assisted Valle Del Miele.