The English Courts have witnessed an upward trajectory in litigation involving auditors over recent years. Against this backdrop, Ickenham Travel Group v Tiffin Green [2024] EWHC 27 (Comm) is a significant case. We discuss the judgment and its implications for auditors and their insurers.
Background
The claimant, Ickenham Travel Group ("ITG"), is a luxury travel agency. Until July 2019, it operated two divisions: a business travel division ("BTD") and a consumer travel agency ("LG2").
In 2019, serious irregularities in ITG's accounting systems and records were identified. As a consequence, the trade creditors of the LG2 division were overstated, leaving a 'hole' in ITG's accounts. The understatement, which totalled approximately £4.5 million when it was discovered in 2019, was believed to have built up over a large number of years.
ITG issued a claim against its former auditors, Tiffin Green, who had audited ITG's accounts for the financial years ended 30 September 2014 to 30 September 2017. ITG alleged that Tiffin Green should have identified the irregularities and understatement in each of the years which it audited ITG.
ITG alleged that Tiffin Green's failure to identify the issues had the following consequences:
- In July 2019, ITG was forced to sell BTD to Reed & Mackay in a 'fire sale' at a price £6 million below its true value. ITG sought to evidence BTD's true value by reference to an earlier offer from a private equity firm, Endless.
- ITG incurred professional fees of c. £300,000 in dealing with the irregularities that it would not otherwise have incurred.
Judgment
Simon Tinkler, sitting as a Deputy High Court Judge, agreed with Tiffin Green's arguments in respect of factual causation and loss:
- Factual Causation: ITG accepted at trial that the understatement was at least £2.5 million in 2014, i.e. the first year of Tiffin Green's audit. ITG had failed to show that it had any options for internal or external funding to fill the hole in 2014 that were not available in 2019, or that the consequences would otherwise have been different had the irregularities and understatement been discovered in 2014. Consequently, the Court found that ITG was "always going to be in the situation in which it found itself" and Tiffin Green had not caused it any loss.
- Loss of Value: there was, in any event, no loss of value on the sale of BTD. The evidence in fact demonstrated that the possibility of a transaction with Endless had "disappeared over the horizon" long before the understatement was identified. There was no evidence that, had it had more time, ITG would have been able to sell BTD for a higher price than that paid by Reed & Mackay. There was no evidence of other potential buyers. ITG had not proven that the terms of the sale to Reed & Mackay in 2019 were anything other than the fair market value.
The Court therefore rejected ITG's claim and gave judgment for Tiffin Green.
Implications
The rising trajectory in claims against auditors over recent years has been fuelled by a number of factors, including high profile corporate collapses, increasing regulatory scrutiny, and a string of rulings which have expanded auditors' scope of duty.
Against this legal landscape, Ickenham Travel Group v Tiffin Green is a significant case for auditors and their professional indemnity insurers, particularly as breach was not in dispute by the time of the trial and the claim was defended on causation and loss grounds. The ruling is a timely reminder that auditors should not be perceived as 'easy targets'; a claimant must be able to evidence the constituent elements of its claim if it is to succeed.
Tom Mungovan and Emma Smith acted for the successful defendant in this matter, with Clare Dixon KC and William Harman of 4 New Square. The full judgment can be accessed here.
