Judgment

[Please note that this case has not been edited in accordance with the current Singapore Law Reports house style.]                                                                                                                                                            

Lai Kew Chai J:

1           In this action the plaintiffs, who are bankers and merchant bankers, claimed damages for negligence against the defendants, a firm of accountants, who were alleged to have negligently prepared and audited the accounts of Pan-Electric Industries Ltd (‘Pan-EL’) and the consolidated accounts of the Pan-El group of companies for the year ended 1983. This was in essence a claim to recover economic losses suffered by the plaintiffs in respect of loans which they had extended having relied on what they asserted were the negligent mis-statements made by the defendants, as auditors, when they after the audit negligently mis-represented in their auditors’ report dated 9 April 1984 that the accounts represented a ‘true and fair’ view of the financial position or state of affairs of Pan-El, the borrower company, and of the group, when in truth and in fact they were not.

2           In the light of the ratio of the House of Lords in Caparo Industries plc v Dickman & Ors and particularly the ruling of Millet J in Al Saudi Banque & Ors v Clerk Pixley (a Firm), and distinguishing Morgan Crucible Co plc v Hill Samuel Bank & Ors, the defendants not unexpectedly applied for an order that the plaintiffs’ statement of claim be struck out under O 18 r 19(1) of the Rules of Supreme Court on the principal ground that it disclosed no reasonable cause of action. 

3           As I was persuaded that no direct and close relationship or proximity in the Caparo sense existed between the plaintiffs and the defendants, I was of the view that the plaintiffs’ claims as pleaded were bound to fail. Caparo, which approved Al Saudi Banque, ruled that for a claim for purely economic loss suffered by reason of a negligent mis-statement there must be a sufficient ‘relationship of proximity’ and it must be just and reasonable to impose liability on the potential defendant. I was persuaded by counsel for the defendants that the averments in the statement of claim would establish that it was foreseeable, indeed even highly foreseeable, that the plaintiffs who were in the thick and fury of being engaged in the corporate finance of the Pan-El group would rely on the statements of the defendants as auditors and would suffer loss if the auditors’ statements were wrong. But I was equally convinced that such foreseeability by itself was not enough if Caparo and Al Saudi Banque were to be followed and if the frontiers of this sub-category of the tort  of negligent mis-statement were not to be unjustifiably extended.

4           In this case, the parties were not in any relevant contractual relationship; there was neither privity between them nor any consideration proceeding from the plaintiffs to the defendants. Nor were they in a relationship analogous to privity or to there being consideration moving from the plaintiffs to the defendants. Therefore the defendants did not owe the plaintiffs any contractual duty or any analogous duty in tort in relation to the audit. The plaintiffs also did not allege any intentional deceit practised on them by the defendants. The plaintiffs based their cause of action on the duty of care equivalent to that which arose in Hedley Byrne & Co Ltd v Heller & Partners Ltd. Reading Hedley Byrne, and the powerful dissenting views of Denning MR in Candler v Crane Christmas & Co Ltd, and in view of Caparo and Al Saudi Banque, I was not persuaded that the plaintiffs’ case, as pleaded, could arguably come within this limited category of auditors’ negligent mis-statement as a cause of action. I accepted the submission that the purpose of the auditors’ report in this case was in compliance with their statutory duties under the Companies Act and that this critical factor was the main reason why in Caparo1 it was held that there was no proximity such as would give rise to a duty of care. I accordingly struck out the plaintiffs’ statement of claim.

5           Counsel for the plaintiffs almost immediately applied for leave to amend the plaintiffs’ statement of claim. After considering the matter, I took the view that the amendments sought did not arguably demonstrate that there could be the relationship of proximity and that therefore a duty of care was owed by the defendants to the plaintiffs. Since the amendments for which leave to amend was sought did not, in my view, take the matter any further, I refused leave to amend in the exercise of my discretion. The reasons for this decision will be further elaborated.

6           For the purposes of the application before me, it was assumed, as was and is the practice in such interlocutory applications, that the averments in the statement of claim were true although there had been no proof of the same in a trial. Indeed, and in fairness to the defendants, it has to be stated quite categorically that the defendants strenuously disputed any allegation of negligence on their part.

7           The plaintiffs are well-known bankers in Singapore and had been bankers of Pan-El since 1965. Mr Northrop was at all material times the Area Credit Controller of the first plaintiffs. Indeed, the first plaintiffs were one of the major bankers of Pan-El which, unfortunately for many in Singapore, went into provisional liquidation on 6 February 1986 and liquidation on 9 October 1986. Both plaintiffs also participated in a syndicated loan of S$40m and US$15m. The loan was granted to Pan-El on or about 16 May 1984 pursuant to a loan agreement dated 9 May 1984. However, negotiations for the syndicated loan had started in Jan 1984, well before the issue of the auditors’ report dated 6 April 1984.

8           Pan-El, a public company, was quoted on the Stock Exchange of Singapore and the Kuala Lumpur Stock Exchange until November 1983 when a receiver and manager was appointed for Pan-El. Up to the receivership, one of the directors of Pan-El was one Peter Tham Wing Fai who became a director of Pan-El from May 1982. The other director who featured in this case is one Tan Kok Liang. Pan-El’s accounts and the consolidated accounts of the Pan-El group were at all material times audited by the defendants. Pan-El had a number of subsidiaries.

9           It is significant to note that the accounts of some of the subsidiaries were audited by other firms of accountants, although the defendants were responsible as auditors for the consolidated accounts of the entire group. It is only necessary to mention the relevant subsidiaries, of which the first sub-group comprised of Anrite Aviation Co Pte Ltd (‘Anrite’), Vanguard Realty & Development Pte Ltd (‘Vanguard’) and Holland Park Development Pte Ltd (‘Holland Park’); all these three companies were audited by another firm of accountants, Messrs Ernst & Whinney. The second sub-group is Orange Grove Property Pte Ltd (‘Orange Grove’) which was audited by Messrs Tan Teo & Co, another firm of accountants. The third sub-group is Orchard Hotel (Singapore) Pte Ltd (‘Orchard Hotel’) which was audited by KPMG Peat Marwick, yet another firm of accountants.

10          It has to be noted that Peter Tham was also a director and majority shareholder in Associated Asian Securities Pte Ltd (‘AAS’) which, at all material times, carried on business as stockbrokers on the Stock Exchange of Singapore. AAS were audited by Tan Teo & Co. Peter Tham’s dual and dominant roles in the Pan- El group and in AAS, it was suggested, provided him with the opportunity to get his hands at the funds and manipulate the accounts of the Pan-El group.

11         The defendants, a firm of accountants, were auditors of Pan-El and some of the subsidiaries. The defendants had audited the accounts of Pan-El and the consolidated accounts of the Pan-El group for 1983. However, they were not auditors of Vanguard, Holland Park, Anrite, AAS, Orange Grove or of Metal Agencies (Malaya) Pte Ltd (‘Metal’), a 100% subsidiary of Pan-El. Nor were they auditors of Contango Pte Ltd, a 100% subsidiary of Growth Industries Holdings Ltd (‘GIH’), a major shareholder in Pan-El. Having different auditors of sub-groups of companies within a parent public company again set the stage, it would appear, for the inherent weaknesses to be exploited.

12         The defendants’ audit of Pan-El began in February 1984. They issued the auditors’ report dated 6 April 1984 in which they stated their opinion. The opinion has to be stated in full because these were the very representations complained of by the plaintiffs as negligent mis-statements and which were allegedly relied upon by the plaintiffs. The opinion stated that:

(a)   the 1983 accounts were properly drawn up in accordance with the provisions of the Companies Act and gave a true and fair view of the state of affairs of Pan-El as at 31 December 1983 and of the profit for the year ended 31 December 1983 and of the other matters required by s 169 of the Companies Act to be dealt with in the accounts;

(b)   the 1983 consolidated accounts subject to any adjustment which may become necessary on the finalization of certain salvage awards referred to in the notes thereto, gave a true and fair view of the state of affairs of the Pan-El group as at 31 December 1983 and of the results of the group and the source and application of the funds for the year ended 31 December 1983 and of the other matters required by s 169 of the Companies Act to be dealt with in the accounts.

13         The auditors’ report was made under the then s 174 of the Companies Act which provided for the powers and duties of auditors as to reports on accounts. Under the then s 174(6) of the Companies Act it was provided that the auditors’ report shall be attached or endorsed on the accounts or consolidated accounts and shall, if any member so required, be read before the company in general meeting and shall be open to inspection by any member at any reasonable time. This was done. As required under the Companies Act, the defendants’ auditors’ report was addressed to the members of Pan-El and nobody else. In the proceedings before me, it was not suggested that the report was sent by the defendants to anyone else.

14          I would now elaborate on the plaintiffs’ complaints against the defendants as to the latter’s audit of the accounts for the year ended 1983. Anrite had entered into ‘forward contracts’ with AAS for the sale and purchase of shares which were not genuine transactions in the sense that AAS received moneys from Anrite in respect of the purported purchases thereof but no shares were in fact transferred thereunder nor were any of the relevant scrips handed over to Anrite. As at year ended 1983 AAS owed Anrite S$47,197,805 and would have held scrips for Anrite to the value of S$13,888,881. These were not true and genuine transactions but were contrived to disguise the transfer of funds from Pan-El to AAS. The allegation was that Peter Tham was at the bottom of it. Just after the year end, Anrite banked cheques drawn by AAS totalling S$44,077,733 but at about the same time Anrite paid a similar sum to other companies within the Pan-El group. As part of the fraud, companies within the Pan-El group (which in all cases except one were not the companies which had received payments from Anrite) made payments to AAS and these payments totalled S$40,928,000. For the fraudulent scheme to have worked, Anrite’s accounts (before auditing) were prepared by officers of the company on the basis that the company had both received the AAS payment and the company had itself made payments to other companies within the Pan-El group before the end of the year. On the other hand, so far as the accounts of the companies which had made payments to AAS were concerned, those accounts showed that the payments were only made after the year end.

15         What did the defendants discover and what steps did they take after that? During the audit, the defendants discovered, firstly, that the balance shown in Pan-El’s cash book as at 31 December 1983 exceeded the balance on its bank account(s) by S$25,896,345.85, including cheques payable to Pan-El from Anrite and other subsidiaries and banked only after 31 December 1983. Secondly, the defendants discovered that the payments by Anrite to Pan-El had been banked after 31 December 1983 and had followed the payments of such sums totalling S$44,077,733 by AAS to Anrite. Thirdly, they also noted the fact that the said sum of S$44,077,733 had also been banked after 31 December 1983 and, in fact, between 4 and 6 January 1984. Lastly, the defendants’s audit revealed that the said sum of S$40,928,000 had been paid by the members of the Pan-El group to AAS between 4 and 6 January 1984.

16          The plaintiffs asserted that after making the discoveries the defendants made inquiries with Tan Kok Liang. Tan Kok Liang told the defendants that the ‘late banking’ of the cheques from AAS was due to the year-end holidays and oversight. It was further alleged that Tan Kok Liang had told the defendants that the sum of S$44,077,733 was reflected in the draft accounts under ‘cash in hand’ instead of under ‘debtors’ because he did not want to show the said sum as a debt for three reasons, namely, (1) the inclusion of such a large debt would upset Pan-El’s (meaning thereby Pan-El group’s) bankers; (2) such a large debt would breach the loan ratios which the Pan-El group had agreed with their bankers to maintain; and (3) the sum of S$44,077,733 cheque had been given (though not encashed) before the year end. The plaintiffs also asserted that Tan Kok Liang had told the defendants that the sum of S$44,077,733 paid by AAS to Anrite was immediately re-invested in the purchase and forward sales of shares through AAS. These responses which were allegedly made by Tan Kok Liang were apparently the answers the defendants were believed to have obtained in the course of their audit enquiries. By the last two ‘particulars of duty’ the plaintiffs alleged that the defendants as experienced accountants and auditors knew that bankers including the plaintiffs would inevitably demand and rely on audited accounts of their borrowers and that by March/April 1984 it was well known in Singapore banking and accounting circles that the plaintiffs and other bankers were contemplating making a substantial syndicated loan to the Pan-El group.

17         In particular, para 39(i) of the statement of claim asserted ‘that in or about early April 1984, Tan Kok Liang informed Mr Tan of Coopers that the audited accounts (meaning thereby the 1983 accounts, 1983 consolidated accounts and the auditor’s report) were required by SCB in respect of loans made to the Pan- El group as a whole and that the said audited accounts would also be required by SCB and SCMBA as the lead bankers for the syndicated loan.’ I interpose this summary of the averments with a view which I wish to make on this assertion of the plaintiffs, which allegedly provided the linkage between the plaintiffs and the defendants. The averment about what Tan Kok Liang had told Mr Tan of the defendants was nothing more than a reiteration to the defendants what was plainly foreseeable to the defendants. In the prevailing commercial context and in the light of their experience as accountants, the defendants must have known that the audited accounts of Pan-El and its group were required by existing and potential lenders of Pan-El and its group.

18         On those premises the plaintiffs averred that the defendants were ‘sufficiently proximate to (the plaintiffs) to owe them a duty of care in respect of the statements and/or representations’ which were contained in their auditors’ certificate.

19          In an area of the law such as negligence where liability for pure economic loss was sought to be imposed on a party which was not under any contractual duty and where the question was whether the relationship was akin to a contractual duty, perhaps it is unavoidably necessary to hark back and listen to the lessons and guideposts thrown up by the historical developments in the law of negligence. The tort of negligence, like other traditional types of torts such as deceit, nuisance or conversion, has its own elements which have to exist before there can be a cause of action. In Donoghue v Stevenson, at p 579 Lord Atkin said: ‘In order to support an action for damages for negligence the complainant has to show that he has been injured by the breach of duty owed to him in the circumstances by the defendant to take reasonable care to avoid such injury’. It was, and meant to be, a general proposition inasmuch as it was impossible, and unwise, to distil and expound a proposition with greater particularity. The common law genius was left to extend the proposition to a new category of negligence if and only if the case so warranted as a matter of principle: see Hedley Byrne where the essence of liability was that where the plaintiffs and the defendants were dealing with each other directly, albeit in a non-contractual context since there was no consideration or fee paid to the defendants, the defendants had voluntarily assumed responsibility to the plaintiffs to ensure that the advice or information given was not made carelessly.

20       Negligence as a cause of action, in sharp contrasts with other types of torts, features most prominently in litigation today. This has been so for sometime. Most of the claims for damages for negligence which courts deal with nowadays are brought by plaintiffs who had suffered personal injury or property damage. This development is, in my view, singularly remarkable if one recalls the fact of legal history that negligence had originally developed out of the action of trespass on the case and, what is more remarkable, negligence was not recognized by common law as an independent tortious liability until the 19th century. In other words, negligence as a tort has been developed pragmatically and incrementally. It follows, with greater force, that any category of the tort of negligence should only be extended pragmatically and incrementally.

21       To found negligence, common law required that firstly the defendant should have been under a duty of care owed to the plaintiff. Secondly, the defendant had breached that duty of care. Thirdly, to warrant an order that the defendant compensate the plaintiff for any damage or injury such damage or injury must be shown to be a reasonably relevant consequence of the defendant’s careless behaviour. Until the decision in Donoghue v Stevenson common law found it difficult to make a manufacturer of a defective product liable to a consumer because there was no privity of contract and there was not the relationship between the two parties as to give rise to a duty of care.

22       When will a duty of care arise? Lord Atkin at p 580 in Donoghue v Stevenson described in general terms the kind of relationship which would give rise to a duty of care and stated:

The liability for negligence, whether you style it such or treat it as in other systems as a specie of ‘culpa’, is no doubt based upon a general public sentiment of moral wrongdoing for which the offender must pay. But acts or omissions which any moral code would censure cannot in a practical world be treated as to give a right to every person injured by them to demand relief. In this way rules of law arise which limit the range of complainants and the extent of their remedy. The rule that you are to love your neighbour becomes in law, you must not injure your neighbour; and the lawyer’s question, Who is my neighbour? receives a restricted reply. You must take reasonable care to avoid acts or omissions which you can reasonably foresee would be likely to injure your neighbour. Who, then, in law is my neighbour? The answer seems to be — persons who are so closely and directly affected by my act that I ought reasonably to have them in contemplation as being so affected when I am directing my mind to the acts or omissions which are called in question.

23       The case before me concerned pure economic loss arising out of an auditors’ negligent mis-statement, which is a category or a sub-category of the tort of negligence: see Hedley Byrne. The plaintiffs as bankers sought damages for their bad loans extended to borrowers which became insolvent and defaulted on the basis that they had relied on, as the defendants well knew, the careless representations of the defendants in the auditors’ certificate. Cases such as Caparo and Al Saudi Banque have brought into sharp focus the limits of duty of care with which we are concerned so that liability for economic loss caused by negligent mis-statements does not result in a flood of claims for indeterminate sums by an indeterminate class of claimants over an uncertain period.

24       Whether the defendants in these proceedings on the case as pleaded against them owed the plaintiffs a duty of care raised issues which were almost authoritatively considered in Caparo. Caparo Industries plc, who were shareholders of a company, launched a takeover of the company relying on the audited accounts which certified that the company had earned a profit when in fact it had suffered a loss. Caparo Industries plc alleged that the auditors owed them a duty of care as existing shareholders and as potential investors who might buy more shares in reliance on the audited accounts. At first instance and on a preliminary issue, the learned judge ruled that no duty of care was owed to existing shareholders or potential shareholders. The Court of Appeal decided that a duty was owed to existing but not potential shareholders. Both parties appealed against that part of the decision unfavourable to them respectively. The House of Lords held that in the absence of exceptional circumstances auditors owe no duty of care to third parties who rely on the audited accounts. Doctrinally consistent with the incremental approach as was seen in the historical evolution of the tort of negligence, the House of Lords was most reluctant to go beyond Hedley Byrne unless there were exceptional circumstances. The Law Lords made it very clear that foreseeability or high foreseeability that a person or a group of persons may rely on the statements of an auditor was by itself not sufficient. On behalf of Caparo Industries plc it was submitted that there was a widespread duty of care owed by the auditors when they performed their statutory duty to certify company accounts and that the duty of care extended to anyone who might rely on the accounts to invest in or lend the company money. Lord Roskill (at p 582) said:

No doubt it can be said to be foreseeable that those accounts may find their way into the hands of persons who may use them for such purposes or, indeed, other purposes and lose their money as a result. But to impose liability in these circumstances is to hold, contrary to all recent authorities, that foreseeability alone is sufficient … .

25       Lord Bridge (at p 576) set out the underlying principle:

… the ‘limit or control mechanism … imposed upon the liability of a wrongdoer towards those who have suffered economic damage in consequence of his negligence’ rested in the necessity to prove, in this category of the tort of negligence, as an essential ingredient of the ‘proximity’ between the plaintiff and the defendant, that the defendant knew that his statement would be communicated to the plaintiff, either as an individual, or a member of an identifiable class, specifically in connection with a particular transaction or transactions of a particular kind (eg in a prospectus inviting investment) and that the plaintiff would be very likely to rely on it for the purpose of deciding whether or not to enter upon that transaction or upon a transaction of that kind.

26       In Al Saudi Banque the plaintiff banks had advanced money to the company whose accounts were alleged to have been carelessly audited by the defendants. The company was compulsorily wound up and was badly insolvent. Seven of the banks were existing lenders on the date of the auditors’ reports and three were not. They sued the defendants and alleged

(1)    that the defendants ought reasonably to have foreseen that the plaintiff banks would rely on the contents and 
        accuracy of the defendants’ reports;

(2)    that the plaintiffs had relied on the defendants’ reports in deciding whether to continue, renew or increase the 
        existing credit facilities, or to grant new facilities to the company; and

(3)    that the reports did not reflect a true and fair view of the company’s affairs as at the date of the balance sheet.

27       Millett J in answering the preliminary issue held (1) that the three banks, like that of a potential investor in the company, did not have the proximity necessary to found a duty of care even though it was foreseeable that they might well ask the company for copies of the audited accounts; and, according to the headnote:

(2) That, although the remaining seven plaintiffs were a limited class and their identities and the amounts of their exposure were known to the defendants at the dates when they signed their reports, their position was not comparable with that of shareholders of the company, to whom a statutory duty to report was owed; and that, since the defendants had neither supplied the plaintiffs with copies directly, nor sent copies to the company with the intention or in the knowledge that the company would supply them to the plaintiffs, no duty of care was owed to them.

28       Millet J at p 337 A/B quoted O’Connor LJ who, in the course of his minority judgment in Caparo in the Court of Appeal, said:

In my judgment there has to be something linking the auditor to the person relying upon his certificate other than knowledge that some person, or persons may rely on the certificate.

29       He prophetically pointed out that the stringent requirements of proximity would ‘limit the duty of care in respect not only of the persons to whom it is owed, but also of the transactions in which it applies.’ The learned judge expressed the views that the Court of Appeal’s decision in Caparo marked ‘the furthest limit to which the duty of care for negligent mis-statement (had) so far been taken in England’ and that ‘its reasoning (did) not encourage any further advance.’ The House of Lords cut back the extension by the Court of Appeal and approved the reasoning of O’Connor LJ.

30       Counsel for the defendants submitted that the critical feature underlying proximity was to identify the purpose for which the auditors’ statements were made. It was stressed that there would be no liability unless it was made for the purpose for which the plaintiffs relied upon it. When I considered the matter, this submission influenced me most. In my judgment, what ruled out the arguable existence of a relationship of proximity so as to give rise to a duty of care was that, on the plaintiffs’ case as pleaded, the alleged negligent mis-statement by the defendants had not been given to the plaintiffs for the purpose of continuing their existing credit facilities or in connection with their participation in the syndicated loan. Lord Bridge of Harwich stated in Caparo (at p 576):

The salient feature of all these cases is that the defendant giving advice or information was fully aware of the nature of the transaction which the plaintiff had in contemplation, knew that the advice or information would be communicated to him directly or indirectly and knew that it was very likely that the plaintiff would rely on that advice or information in deciding whether or not to engage in the transaction in contemplation. In these circumstances the defendant could clearly be expected, subject always to the effect of any disclaimer of responsibility, specifically to anticipate that the plaintiff would rely on the advice or information given by the defendant for the very purpose for which he did in the event rely on it. So also the plaintiff, subject again to the effect of any disclaimer, would in that situation reasonably suppose that he was entitled to rely on the advice or information communicated to him for the very purpose for which he required it. The situation is entirely different where a statement is put into more or less general circulation and may foreseeably be relied on by strangers to the maker of the statement for any one of a variety of different purposes which the maker of the statement has no specific reason to anticipate. To hold the maker of the statement to be under a duty of care in respect of the accuracy of the statement to all and sundry for any purpose for which they may choose to rely on it is not only to subject him, in the classic words of Cardozo CJ, ‘to liability in an indeterminate amount for an indeterminate time to an indeterminate class’(see Ultramares Corp v Touche (1931) 255 NY 170 at 179), it is also to confer on the world at large a quite unwarranted entitlement to appropriate for their own purposes the benefit of the expert knowledge or professional expertise attributed to the maker of the statement. Lord Roskill said (at p 582): I think that before the existence and scope of any liability can be determined, it is necessary first to determine for what purposes and in what circumstances the information in question is to be given.

31       Lord Oliver said (at p 592):

My Lords, no decision of this House had gone further than Smith v Eric S Bush, but your Lordships are asked by the respondents to widen the area of responsibility even beyond the limits to which it was extended by the Court of Appeal in this case and to find a relationship of proximity between the adviser and third parties to whose attention the advice may come in circumstances in which the reliance said to have given rise to the loss is strictly unrelated either to the intended recipient or to the purpose for which the advice was required. My Lords, I discern no pressing reason of policy which would require such an extension and there seems to me to be powerful reasons against it.

32       Lord Jauncey of Tullichettle said (at p 605a/b):

The crucial issue is the purpose for which the report was made. To quote the words of Denning LJ in the Candler case [1951] 2 KB 164, 183, what was the ‘very transaction’ for which it was provided?

33       As was fully explained in Caparo, and as laid down by s 207(1) of the Companies Act in Singapore, an auditor has to report to the members on the accounts required to be laid before the company in general meeting and on the company’s accounting and other records relating thereto. That statutory duty is owed to the shareholders as a body and not to individual shareholders, and certainly not to existing and potential lenders.

34       Counsel for the plaintiffs relied on Morgan Crucible. It was a company takeover case. The directors of a target company in resisting a bid stated in their letters to shareholders that they forecast a 38% rise in the profits of the target company. The accountants, the second defendants in that case, confirmed that the statement was made in accordance with the target’s accounting policies. In compliance with the requirements of the City Code on Takeovers and Mergers, the forecast was sent to the plaintiffs, Morgan Crucible Co plc. Relying on the forecast the plaintiffs in that case increased their offer. They succeeded in the take-over bid but, after the take-over, they found that the target company was in such an unfavourable financial position that the forecast amounted to a negligent misstatement by the accountants. They issued a writ and the statement of claim, which was filed before the decision in Caparo, averred that there was liability based on the alleged foreseeability of the economic loss which the plaintiffs suffered. After the decision in Caparo, the plaintiffs in that case applied for leave to amend their statement of claim. I should mention that the amendments included an assertion that ‘a particular purpose of the representations was to persuade them to offer the best terms which the directors could expect to recommend shareholders to accept’. The judge refused the plaintiffs’ application. The Court of Appeal allowed the appeal. They came to the view that each of the defendants intended when making the forecast that the plaintiffs in that case would rely on it in deciding whether or not to make an increased bid and that accordingly it was at least arguable that a duty of care arose. The Court of Appeal at pp 319–320 held that on the assumed facts the defendants were aware that:

Morgan Crucible would rely on them (ie the representations) for the purpose of deciding whether or not to make an increased bid, and intended that they should; this was one of the purposes of the defence documents and the representations contained therein.

35       I was informed that Morgan Crucible was settled and there was no trial. It therefore only decided that on the assumed facts it was ‘plainly arguable’ that there was such proximity between the parties as could give rise to a duty of care. As pointed out by counsel for the defendants in the instant case, the crux of Morgan Crucible was the view of the Court of Appeal that the defendants in the defence documents intended that Morgan Crucible should rely on the forecast. That feature set it apart from Caparo. Contrary to the submissions of counsel for the plaintiffs in this case, I accepted the defendants’ submission that this feature distinguished Morgan Crucible from the present case.

36       This analysis of Morgan Crucible conveniently leads to the amendments for which the plaintiffs sought leave. Counsel for the plaintiffs indicated that the amendments were inspired by Morgan Crucible; he also said that he was not asserting any new primary facts except that there was no disclaimer on the part of the defendants when issuing the auditors’ report. The plaintiffs claimed that they were making explicit what was implicit in the averments. Four new sub-paragraphs were added after sub-para 39(i) of the statement of claim and an omnibus assertion to the effect that one of the purposes of the defendants’ report as auditors ‘was to enable the Pan-El group to place the same before the plaintiffs in order to persuade them to grant the said syndicated loan and to continue and/or grant further overdrafts and loan facilities to Pan-El and the Pan-El group.’

37       Counsel for the defendants in opposing the application to amend made a number of points. First, it was too late. Although it was late, as it was made after I had ruled on the matter and had certified that no further arguments would be required, I decided not to disallow the application on that ground in view of the serious consequences of my decision. Secondly, counsel for the defendants turned to the substance and merits of the application. It was stressed that the factual foundation in the averments remained wholly intact, to which no allegation of any new fact, except the fact that there was no disclaimer, was added. The defendants were discharging their duties as auditors under the Companies Act and they had that pre-existing duty before they were told what was set out set out in sub-paras 39(h) and (i); that is, what Tan Kok Liang told one Mr Tan of the defendants. There was no allegation of any direct contact and no other factual basis to found the assertion that there was a second purpose, as alleged in the amendments, in the defendants’ issue of the audited accounts and their certificate. I accepted these objections. On the question of disclaimer, I agreed that it did not arise and that, in any event, no such disclaimer was possible in view of s 140 of the Companies Act. In the result, there was no factual substratum to bring the plaintiffs’ case within the decision in Morgan Crucible. The claim as amended did not overcome the hurdles which the plaintiffs faced as a result of the decisions in Caparo and Al Saudi Banque. I was satisfied that for reasons of adhering to strict doctrine as enunciated in Caparo1 the sub-category of tortious liability for economic loss arising out of an auditor’s mis-statement should not be extended to lenders, existing or potential, where in truth and in substance the auditors are performing the statutory duty of rendering an auditors’ report for the protection of shareholders and no more.

Defendants’ application allowed.

Reported by Tan Chuan Thye