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Carry on Carillion: Carillion PLC (In Liquidation v KPMG (2020) EWHC 1416 (Comm)

22 September 2020
This significant judgment in relation to pre-action disclosure is of interest not just to those engaged in claims against auditors, but also more widely, because the topic does not often attract the attention of the Commercial and higher courts, as the judgment acknowledges.

Background

The potential claim is enormous. Employing 43,000 staff globally, in January 2018, Carillion was a huge company collapse under the weight of a reported £1.5 trillion debt, including its pension liability.  Its collapse was foreshadowed by three profit warnings in 2017 in five months whilst it wrote down more than £1bn from the value of contracts.

Almost immediately, questions were asked about how such a black hole in Carillion's accounts went apparently undetected by auditors KPMG. Parliamentary Select Committees raised criticisms concerning KPMG's failure to challenge assumptions made in the Group's financial statements relating to (i) construction contract revenue and (ii) goodwill from historic acquisitions. Promptly, the liquidator indicated his intention to pursue KPMG for losses arising from the collapse.

In broad terms, the liquidator's pre-action disclosure application was for KPMG's audit working papers.

Applicable Law

Pre-action disclosure can a useful tool in the armoury of a claimant often, but not exclusively, in professional negligence claims. In some circumstances, knowledge of whether or not there is a valid, meritorious claim is only available to the proposed defendant. To prevent the obvious injustice of a claimant having to commit itself to court proceedings in order to discover if there is a valid claim, CPR31.16(3) permits the court to exercise its discretion in ordering disclosure before court proceedings are commenced in the following circumstances:

  • the applicant and the respondent must both be likely to be parties to any subsequent proceedings. (But it is not necessary to show that such proceedings are likely: Black v Sumitomo Corp [2002] 1 WLR 1562); and
  • the documents sought must fall within the scope of the respondent's standard disclosure obligations in the anticipated proceedings; and
  • pre-action disclosure must be desirable to (i) dispose fairly of the anticipated proceedings, (ii) assist the dispute to be resolved without proceedings, or (iii) save costs.

Decision

Although Jacobs J accepted (with some hesitation, in the case of the final factor) that the court had power to order that KPMG's audit working papers be disclosed, he declined to exercise discretion on the following grounds:

  1. It was not established that the disclosure was necessary for the claimant to plead its initial claim. "Carillion sought a level of assurance and certainty which is inappropriate..." It already had an expert with a prima facie view of negligence, and its counsel accepted that the claim "would not go away" if the application were dismissed. In Assetco plc v Grant Thornton UK LLP [2013] EWHC 1215 (also an audit negligence case), a significant reason for Blair J. declining to make such an order was that: "The applicants already have their own documents in relation to the audits.
  2. The number of documents were estimated at 8,500 in number, with some documents running to many pages. The immense size of the exercise militated against the court making the order. The nature of the case meant that such disclosure would not conclude matters, with the potential for further applications and, if proceedings were commenced, amended pleadings altering the procedural landscape. Jacobs J wanted to look at the "big picture" (per Rix LJ in Black)
  3. No breach of the Pre-Action Protocol for Professional Negligence was found by KPMG, although the judge accepted that such applications for pre-action disclosure might be made before or after a Protocol Letter of Claim. In Black, Rix LJ considered this to be relevant to discretion. In contrast, the claimant liquidator came under some criticism for serving what the judge termed a partial or provisional Letter of claim, reserving the right to amend or add alternative allegations. 

Comment

Perhaps the greatest problem for the claimant was that its pre-action correspondence did not sit easily with the purpose of CPR31.16, namely that the documents were needed to establish whether it had a clear cut claim or not. No doubt anxious to show that its claim was not speculative, it had made some quite precise allegations with detailed supporting evidence. The Letter of Claim was not indicative of an uninformed claim, running to 38 pages. 

Although not expressed precisely in this way, the judge was obviously concerned that the application was to bolster a claim that was already well formed, rather than to see whether a claim was feasible or not. Plainly the scale of the exercise, and the possibility of future undesirable applications with the potential for an endless phony war of applications without formal proceedings, weighed heavily.

Most defendants will not be defending cases of this size, but this is a useful authority with which to defend requests for pre-action disclosure and hopefully extinguish some claims at an early stage. Conversely, claimants will be disappointed with this decision. From the point of auditor claims, many will ask what discretion will be exercised for if not working papers, which are normally at the heart of the case on breach of duty. Others will look to distinguish this case and that is not difficult: it is important to bear in mind that in more usual cases, the size of the pre-action disclosure exercise will not be as oppressive depriving the respondent of a strong argument. This case may have been decided the other way if the company had been a small one and the audit working papers not significant in number.

Author: Steven O'Sullivan.

Further Reading