Isle of Man High Court dismisses strike out application in c£100 million auditor’s negligence claim

23/11/15

The High Court of the Isle of Man has handed down judgment in Heather Capital Limited (in liquidation) v KPMG, an auditor’s negligence claim in which the Liquidator of Heather is claiming damages in the sum of approximately £100 million against KPMG.

The background to the case is that Heather used to operate as an investment scheme which lent money in the property market. The scheme was suspended in January 2009 and Heather was subsequently wound up. KPMG acted as Heather’s auditors from August 2007 onwards. The Liquidator’s case is that in the course of their audit work KPMG negligently failed to detect and report frauds and imprudent lending by Heather’s executive management and as a result thereof Heather and its shareholders suffered substantial losses after August 2007.

KPMG sought to strike out the claim primarily on the basis that the losses allegedly suffered by Heather fall outside the scope of the duties which KPMG owed as auditors. In particular, in reliance upon the well-known decision of the Court of Appeal in Galoo v Bright Graeme Murray [1994] 1 WLR 1360, KPMG argued that the losses claimed by the Liquidator constituted trading losses for which, even assuming that they did act negligently (which they deny), they are not legally liable.

His Honour Deemster Corlett dismissed the strike out application.  Having reviewed a number of the leading English and Commonwealth authorities on the scope of duty principle in the context of auditor’s negligence claims, the Judge concluded that the claim pleaded by the Liquidator is sufficient to bring the losses claimed, at least arguably, within the scope of the duties which KPMG owed as Heather’s auditors. The Judge concluded that Galoo was distinguishable from the present case because the central complaint made by the Liquidator is not that KPMG’s alleged negligence merely created the opportunity for Heather to continue to incur trading losses, but rather that the alleged negligence caused Heather to continue trading in a particular manner (ie by advancing further irrecoverable loans to certain borrowers).

The judgment is here.