Vincent Billings 8 Apr 2019 12:20pm

Will Patisserie Valerie’s battle against KPMG set a trend?

It has been recently reported that Patisserie Valerie (PV) shareholders are considering legal action against administrators KPMG in order to gain access to forensic accounting reports that found PV’s net assets had been overstated by at least £94m

Caption: Auditors have higher liabilities as can be responsible to the company, shareholders and others

The issue here is that the PV shareholders are looking at the liability of the accountants, auditors and now the administrators in relation to such a huge accounting error. This is not a new issue, as often parties who have suffered a loss will examine the work of professional advisers to see whether they have conducted themselves in an appropriate manner when supplying services.

All companies are obliged to keep financial records that give a true and fair view of its financial affairs. If a company fails to keep the correct type of accounting records, every officer (director and company secretary) is in default and liable to a fine and/or imprisonment unless they can show they acted honestly and that in the circumstances the default was excusable. Therefore, in the first instance it is the company’s responsibility to ensure their accounting records show a true and fair view.

The next link in the chain is the preparation of the accounts by the company’s accountants and where required an audit by an independent auditor. Both the preparation of the accounts and the audit are subject to legislation and accounting standards. Where a company requires an audit, the auditor must prepare an auditor’s report that sits alongside the accounts and gives the auditor’s opinion on the company’s financial records. Auditors have particularly higher liabilities as they can be responsible to the company, its shareholders and others who have a stake in the company.

In some circumstances auditor’s reports can be qualified by (for example) stating that there has been a lack of information. However, the accountants or auditors are relying on the directors and management of the company to provide the financial information in order to prepare the accounts. If the company has been acting in a way to cover their tracks, it may not be easy to identify that untoward financial activity has taken place or the directors answers to questions may seem plausible. If the accountant and auditor have acted in accordance with their legal and accounting obligations then they will, generally, not be held liable.

As in PV’s case, the auditors are being investigated in relation to their role in PV’s audits going back to 2015.

Where the company enters an insolvency procedure such as administration, the administrators then take on certain duties. These duties are much more limited than the accountants or auditors as it is known at this stage that the company is insolvent, and the role of administrators is clearly defined. As such, legal action against administrators of a company is generally difficult as claims are limited to (i) unfair harm or inefficient conduct and (ii) misfeasance.

During an administration, a creditor or member of the company can challenge the administrator by applying to court on one or both of the following grounds:

That the administrator is acting, has acted or is proposing to act in a way that unfairly harms the interests of the applicant, or that the administrator is not acting as quickly or as efficiently as is reasonably practicable in his conduct of the administration.

If the court finds in favour of the applicant, it may make an order including one or more of the following provisions:

A requirement that the administrator carry out a specific act or not carry out a specific act; or
A requirement that the administrator seek a decision of the creditors; or
The termination of the administrator's appointment.

Misfeasance in this context means:

The misapplication or retention of money or other property belonging to the company; or
Breaching a fiduciary or other duty owed to the company; or
Otherwise being misfeasant in relation to the company.

Issues like these only arise where there has been loss by a party and therefore it is reasonable to look at whether the professionals have conducted themselves in a reasonable manner considering all the concerns. There are built-in safeguards for the professionals where the services are delivered correctly and appropriately.

Vincent Billings is a partner in the corporate team at SA Law