The Supreme Court has unanimously allowed accountant Lowick Rose LLP’s appeal against earlier decisions that it was liable to pay £15 million of damages arising from its negligent advice. The decision emphasises the importance of the form, as well as the substance, of a transaction. It confirms that the distinction between a company and its owner – even in the case of a "one-man business" – is critical.
This case will be of interest both to businesses (who should be reminded of the importance of distinguishing between a company and its owners/directors), and to lenders (who are often faced with issues relating to preservation of losses arising from negligence claims against advisors, while seeking to restructure or sell distressed debt).
Swynson Ltd v Lowick Rose LLP: the facts
Mr Hunt was the owner of Swynson Ltd. On the basis of negligent advice from Lowick Rose LLP, Swynson Ltd lent money to EMSL to fund its purchase of Evo. On Evo getting into financial difficulty, Mr Hunt lent money to EMSL – in his own name – to pay off Swynson Ltd. The practical effect was that Mr Hunt was substituted for Swynson Ltd as the party to whom EMSL was indebted.
Lowick Rose LLP argued that:
- notwithstanding its negligent advice, Swynson Ltd had been fully repaid and suffered no loss
- Mr Hunt had no claim of his own against Lowick Rose LLP.
Generally loss that has been avoided (e.g. a repaid loan) is not recoverable. An exception is made for collateral payments arising independently of the circumstances giving rise to the loss, such as insurance payments.
At first instance and at the Court of Appeal, the loan by Mr Hunt to EMSL was considered to arise from collateral events, not in the ordinary course of business, and so Mr Hunt's losses were recoverable from Lowick Rose LLP. This decision focused on the substance of the transaction rather than its technical form.
The Supreme Court disagreed. It held, unanimously, that repayment of part of the loan should be taken into account when calculating the damages payable as a result of Lowick Rose LLP's negligence. Mr Hunt's loan to EMSL was not an act of Swynson Ltd and was not attributable to Lowick Rose LLP's negligence. It discharged the liability which represented Swynson Ltd's loss. It was not "collateral".
Who is affected?
For some businesses (especially small, family-owned or one-man businesses), the lines between the corporate entity and its individual directors/shareholders can be blurred. Decisions can then be made (as here) on the basis that a company and its owner are "one" when legally they are not. This can have, as for Mr Hunt, devastating consequences – damages of £15 million being entirely extinguished. Without proper advice, pragmatic decisions such as Mr Hunt's loan to EMSL can have unforeseen outcomes, particularly in difficult areas like tax and restructuring.
Lenders are frequently faced with issues relating to preserving losses arising from negligence claims against advisors while at the same time seeking to re-structure or sell distressed debt. When in this situation, lenders must ensure that proper advice is taken to ensure that the transaction is structured appropriately to protect any claims in negligence or breach of contract.
Relevant to this decision is the case of Tiuta International Ltd v De Villiers Surveyors Ltd, which has been granted permission to appeal to the Supreme Court. A negligent valuer was held liable for all losses suffered by a lender as a result of its overvaluation of property. The loan in question was a "top up" of earlier lending but was structured as a refinancing. This refinancing meant that, in the Court of Appeal, the lender could recover all its losses, and not just the "top-up" loan.
The timings and structure of the transactions in Swynson Ltd and Tiuta International Ltd are different. It will therefore be interesting to see how the Supreme Court deals with those differences when it considers the question of loss in the context of the valuers' appeal of the Tiuta decision. We will be monitoring those proceedings closely.