Auditor’s disclaimer may not have prevented liability to buyer

05 October 2023

The court leaves the door open for the buyers of shares to claim against the target company’s auditor for negligence.

The buyers alleged that the auditor had failed to spot a fraud when preparing the target company’s accounts, which were used as the basis for settling the final purchase price.

What happened?

Amathus Drinks plc and others v EAGK LLP and another [2023] EWHC 2312 (Ch) concerned the acquisition of shares in a UK company.

The buyers and the sellers entered into a share purchase agreement (SPA). As is fairly common on a trade acquisition such as this one, the SPA set out a provisional purchase price and required the parties to agree the final purchase price after completion using a “completion accounts” mechanism. For more information on completion accounts, see the box “What are completion accounts?” below.

What are completion accounts?

Completion accounts are a pricing mechanism used when acquiring a business (whether by buying the shares in the operating company or buying the assets that make up the business).

Under a completion accounts mechanism, the parties agree a provisional purchase price in the share purchase agreement (SPA). That provisional purchase price will be derived, wholly or in part, from an estimated value of specified assets or revenue streams used to value the business.

The parties sometimes appoint a person with financial expertise – normally an accountant or auditor – to conduct a valuation after the sale completes. That person, or the parties themselves, will then draw up completion accounts, or a completion statement, showing the true value of the assets or revenue stream in question as at the completion date (based on agreed accounting metrics).

In the most basic completion accounts structure, if the true value is more than the parties’ estimated value, the buyer will pay the excess to the seller(s). Conversely, if the true value is less than the estimated value, the seller(s) will refund the difference to the buyer.

Normally, the buyer will prepare the completion accounts (as, following completion, the buyer will own and control the target company) and send them to the seller(s) for approval. The SPA will normally contain a specific procedure for resolving any disputes if the parties cannot agree on the final completion accounts. This typically involves appointing an independent accountant or auditor to give a binding view on the correct calculation of the “true” value.

Completion accounts are more common on “trade acquisitions” – namely where the buyer is acquiring the target business not for investment purposes but rather to integrate into its own business. However, they are by no means used exclusively on trade acquisitions.

To implement a completion accounts mechanism effectively, the parties need to identify some set of assets or revenue to be valued as part of the exercise. This is known as the “basis” of the completion accounts.

Common bases for completion accounts include a company’s net assets, which will include all (or substantially all) of the company’s asset base, or the company’s net debt and/or working capital. However, completion accounts can be based on any metric that can be sensibly measured. Other bases might include saleable stock, work in progress, regulatory capital or subscriber numbers.

Before agreeing the acquisition, the buyers had engaged a firm of accountants to conduct financial due diligence on the target company.

The same firm of accountants was subsequently engaged to prepare statutory accounts for the target company after completion of the acquisition (although, as discussed below, the question of whether the appointment was actually made by the buyers or by the target company was relevant). Those statutory accounts would, in turn, form the basis for the completion accounts, which would also be prepared by the same firm of accountants.

The accountants prepared the completion accounts, and the buyers and sellers approved them. The completion accounts showed a modest refund by the sellers to the buyers, which the sellers paid.

Subsequently, the buyers alleged that they had discovered several frauds committed by the target company. These included double-counting assets in the accounts, inflating cash receipts and logging false invoices. The upshot, the buyers argued, was that they had overpaid for the business.

The buyers brought a claim against the accountants, arguing that (among other things) they had been negligent by failing to identify the fraud when preparing the target company’s statutory accounts. The buyers claimed that the accountants had owed the buyers a duty of care, because they had been aware that the statutory accounts would feed into the completion accounts and that the buyers would be relying on them.

How did the accountants respond?

The accountants denied liability. They said they had been engaged by the target company and not by the buyers. As a result, the only person to whom they owed any duty of care was the target company.

They also noted that they had, in various places, expressly disclaimed any liability to anyone other than the target company and its “members as a body” – a so-called “Bannerman clause”.

In particular, a “schedule of engagement” attached to the accountants’ engagement letter stated:

“Our report will be made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of CA 2006. . . . To the fullest extent permitted by law, we will not accept or assume responsibility to anyone other than the company and the company’s members as a body, for our audit work, for the audit report or for the opinions we form.”

The accountants’ report itself contained the same language, and the covering letter under which that report was sent stated:

“[T]his report has been prepared for the sole use of [the company]. It must not be disclosed to third parties, quoted or referred to, without our prior written consent. No responsibility is assumed by us to any other person.”

The courts have previously held that a Bannerman clause will effectively prevent a person other than the company itself from claiming against the company’s auditors in negligence. For more information, see the box “What is a Bannerman clause?” below.

What is a Bannerman clause?

A Bannerman clause is a form of exclusion of liability typically asserted by a professional adviser.

The clause normally states that the adviser is working solely for their client and not for any other person, and that the adviser will not assume any responsibility for that work to anyone other than their client.

A Bannerman clause is often accompanied by restrictions preventing the client from providing a copy of the professional adviser’s work to anyone else without the adviser’s consent.

Finally, if the professional adviser is delivering a report as part of their instruction, it is common for the report to contain similar Bannerman wording.

The purpose of a Bannerman clause is to prevent a professional adviser from being liable to third parties who may use and rely on the adviser’s work.

Under the law of negligence, a person can incur liability to someone if they assume a duty of care to that person and they breach that duty. In the context of professional advice, this is normally because the work has not been carried without with sufficient care, skill or diligence.

Establishing a duty of care can be a complex task, and the courts use a number of different tests to decide whether a duty has arisen. A key element is that there normally needs to be some kind of special proximity between the two persons, or some kind of assumption of responsibility, for a duty to exist. A duty of care can arise even if the persons have not entered into a contract. Indeed, as we note below, the buyers and the accountants had not entered into a contract in this case.

A Bannerman clause tries to avoid liability for negligence by denying that a duty of care has arisen in the first place. If no duty has arisen, there can be no breach of duty and, without a breach of duty, there can be no negligence.

The courts have previously upheld Bannerman clauses. For example, in Barclays Bank plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm), a Bannerman clause prevented a company’s auditor from incurring liability towards one of the company’s lenders in relation to its audit work.

A Bannerman clause is a type of exclusion clause. As such, it is subject to section 2 of the Unfair Contract Terms Act 1977, which states that a clause that attempts to exclude liability for negligence is valid only if it is reasonable. However, where parties are commercially sophisticated and have taken legal advice, the courts will normally respect a sensibly drafted exclusion clause.


Indeed, in a similar case – Barclays Bank plc v Grant Thornton UK LLP [2015] EWHC 320 (Comm) – the High Court specifically held that a Bannerman clause in a company auditor’s engagement prevented the auditor from incurring any liability to a third party lender to the company for failing to identify alleged fraud by two employees.

However, in that case, although the auditor and the lender were in communication in the early stages of the transaction, by the time the auditor had been appointed, communication had ceased.

What did the court say?

This was an application for summary judgment. The question for the court, therefore, was not whether the accountants were in fact liable to the buyers, but whether the buyers had a realistic prospect of showing, at full trial, that the accountants were liable.

The court found that there was a realistic prospect of the buyers succeeding in their claim.

The judge acknowledged the similarity between this case and the Barclays case, particularly the fact that both cases dealt with possible liability of an auditor to a third party not identifying historic fraud.

However, he also felt there were differences between the two cases. In the Barclays case, although the auditor and lender had been communicating before the auditor had been instructed, those communications had finished by the time the auditor assumed their engagement. This suggested that the auditor had not intended to continue to owe the lender any duty of care.

In this case, however, the accountants had continued to communicate with the buyers after the acquisition completed. Indeed, the accountants had specifically agreed to carry out the completion accounts valuation.

In the judge’s view, this suggested a “continuing and direct commercial relationship” of a kind that was not present in the Barclays case. Indeed, he went further and suggested that the accountants might well not only have known that the buyers were relying on them to ascertain the correct figure for the completion accounts, but even have intended for the buyers to rely on them.

The court also appears to have been persuaded by the fact that the original engagement letter between the company and the accounting firm could not be found, removing a key piece of evidence.

As a result, the court allowed the buyers to proceed with their claim to full trial.

The buyers also claimed that the accountants were in breach of contract. The judge dismissed this argument on the grounds that there was in fact no contract between the buyers and the accountants on which to base such a claim. As a result, he allowed only the buyers’ claim in negligence to proceed.

What does this mean for me?

This was merely a decision on an application for summary judgment, so it does not create any new law.

However, the decision is worth noting because it suggests that, in certain circumstances, an assumed duty of care might be able to override an express disclaimer of liability.

In other words, if an adviser engaged by a company expressly disclaims any responsibility or duty of care towards a third party, but clearly acts – both before and after their engagement – to the contrary, the courts may well find that a duty of care exists notwithstanding the disclaimer.

We must wait to see whether the claim proceeds to full trial to know whether the court is prepared to disregard the accountant’s disclaimer in these circumstances.

The judge felt that the buyers had a “realistic” prospect of success, but a “realistic” prospect is not necessarily a “good” prospect. There is no doubt that the buyers have a task on their hands persuading the court to ignore clear and unequivocal wording in the accountant’s engagement.

Indeed, the amount of the alleged loss in this case may well mean that the claim ultimately settles out of court.

However, the case does show the need to ensure that any arrangement with a professional adviser is fully and properly documented, including retaining copies of key engagement documentation.

A professional adviser should ensure that documentation for all engagements states clearly who the adviser is assuming responsibility towards.

Whilst audited financial statements should be free from material misstatement, the risk of fraud and error are specifically considered by international auditing standards (IAS). These require auditors to remain vigilant and seek appropriate corroborative evidence in support of their audit opinion, and ultimately to design procedures and evidence-gathering in a way that could help them to detect fraud.

Auditors are then required to explain how the audit was considered capable of detecting irregularities, including fraud. An auditor following the guidance may still miss fraud that occurs in a business, but may not be liable if they have appropriately designed and executed their procedures.

In this case (putting to one side the missing engagement letter), the accountants had clearly stated the limits of their responsibility for work carried out under their statutory accounts engagement.

It is interesting to consider whether the position might have been different had the accountants explicitly excluded liability to the buyers in connection with preparing the completion accounts. Unfortunately, we may never know the answer to that question.

Read the judgment in Amathus Drinks plc v EAGK LLP [2023] EWHC 2312 (Ch)