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England and Wales High Court (Chancery Division) Decisions
You are here: BAILII >> Databases >> England and Wales High Court (Chancery Division) Decisions >> Jarvis Plc & Ors v. Price Waterhouse Coopers [2000] EWHC Ch 78 (13th July, 2000)
URL: http://www.bailii.org/ew/cases/EWHC/Ch/2000/78.html
Cite as: [2000] EWHC Ch 78
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Jarvis Plc & Ors v. Price Waterhouse Coopers [2000] EWHC Ch 78 (13th July, 2000)
|
IN THE HIGH COURT OF JUSTICE |
No 1808/00 Royal Courts
of Justice 13th July 2000
|
IN THE MATTER OF JARVIS PLC AND OTHERS
AND IN THE MATTER OF THE COMPANIES ACT 1985
B e f o r e
MR JUSTICE LIGHTMAN
BETWEEN:
JARVIS PLC &
ORS
Claimants
and
PRICEWATERHOUSECOOPERS
(a firm)
Defendant
Mr George Bompas QC & Mr Paul Greenwood (Instructed by Messrs Eversheds, Senator House, 85 Queen Victoria Street, London EC4V 4JL) appeared on behalf of the Claimants.
Mr David Richards QC & Mr Philip Gillyon (Instructed by Messrs Herbert Smith, Exchange House, Primrose Street, London EC2A 2HS) appeared on behalf of the Defendant.
JUDGMENT
Approved by the Court
Hearing: 4th July
2000
Judgment: 13th July 2000
This is the official judgment of the Court and I direct that no further note or transcript be made
INTRODUCTION1. This is an application which raises questions in relation to Section 394 ("Section 394") of the Companies Act 1985 ("the Act"). Section 394 is designed to provide important safeguards directly for the persons entitled under Section 238 of the Act to be sent copies of the company's accounts, that is to say the shareholders and holders of debentures ("the persons interested") and indirectly for creditors and the investing public. It does not appear to have been the subject of consideration in reported authorities.
2. Section 394(1) imposes on an auditor of a company who ceases for any reason to hold office a duty to deposit at the company's registered office a statement of any circumstances connected with his ceasing to hold office which he considers should be brought to the attention of the persons interested or, if he considers that there are no such circumstances, a statement that there are none. Section 394(2) requires that in case of resignation the statement shall be deposited along with the notice of resignation. Section 394(3) provides that, if the statement is of circumstances which the auditor considers should be brought to the attention of the persons interested, the company shall within 14 days of the deposit of the statement either send a copy to the persons interested or apply to the court. Section 394(5) requires the auditor, unless he receives notice of such an application to the court by the end of 21 days from the date of the deposit, within a further 7 days to send a copy of the statement to the Registrar of Companies. Section 394(6) and (7), which are the critical provisions for the purposes of this application, read as follows:
"(6) If the court is satisfied that the auditor is using the statement to secure needless publicity for defamatory matter-
(a) it shall direct that copies of the statement need not be sent out, and
(b) it may further order the company's costs on the application to be paid in whole or in part by the auditor, notwithstanding that he is not a party to the application;
and the company shall within 14 days of the court's decision send to the persons [interested] a statement setting out the effect of the order.
(7) If the court is not so satisfied, the company shall within 14 days of the court's decision-
(a) send copies of the statement to the persons [interested], and
(b) notify the auditor of the court's decision;
and the auditor shall within seven days of receiving such notice send a copy of the statement to the registrar."
3. In this case PricewaterhouseCoopers ("PwC") resigned as auditors of Jarvis Plc and its subsidiaries ("Jarvis") and deposited a statement under Section 394 of the circumstances connected with their ceasing to hold office which they considered should be brought to the attention of the persons interested ("the Statement"). In fact the Statement formed part of the resignation letter. Jarvis thereafter applied to the court under Section 394(3), but some three months later served notice of discontinuance discontinuing the proceedings. The two issues raised are: (1) what is necessary to constitute a decision of the court for the purposes of Section 394(7); and (2) what order should be made as to the costs of the proceedings and in particular whether Jarvis should be ordered to pay the costs of PwC on an indemnity basis.
FACTS
4. From the date of its appointment as auditors in 1996, PwC have had differences with Jarvis as to how Jarvis's income should be recognised in its accounts. Jarvis adopted an aggressive approach to the recognition of the income and profits on long term contracts. A volume of material issues arose on the Jarvis audit which required PwC to devote substantial additional time not anticipated when the estimate of the audit fee was agreed. The differences became acute in relation to the year to 31st March 1999, in particular in relation to the Rail Division and the Construction Division. As one example, in relation to the Rail Division Jarvis wished to include 2 claims totalling £15.2 million which PwC could not satisfy themselves were sufficiently certain of recovery to be recorded as income without actual payment or acknowledgement by Railtrack that the sum was due. Ultimately, when PwC threatened to qualify their audit report unless Jarvis excluded £12 million, Jarvis reluctantly agreed to exclude this sum. PwC were plainly correct in the line they took for, when Jarvis finally settled accounts with Railtrack, Jarvis had to write off this £12 million and a further £6.8 beside.
5. The additional work required of PwC led them to claim a fee of £1,147,000 as their 1999 audit charge, which was some £449,000 above the estimated fee of £698,000. Jarvis was unwilling to pay the sum claimed and after lengthy negotiations a compromise figure was agreed. Further disputes arose as to the fee to be paid for the pending 2000 audit. PwC took the view that the fee which Jarvis was willing to pay for the 2000 audit was inadequate to enable PwC to carry out the full audit required. Accordingly on the 3rd March 2000 PwC wrote a letter to Jarvis which both gave notice of resignation as auditors of Jarvis and included the Statement. The letter read as follows:
"In accordance with Section 392 of the Companies Act 1985, we give notice that we are resigning as auditors of Jarvis plc, registered number 022238084 ('the Company'), with effect from the date of this letter.
In accordance with Section 394 of the Companies Act 1985, we set out below the circumstances connected with our resignation that we consider should be brought to the notice of the shareholders or creditors of the company.
Our experience of auditing the Company's annual accounts and reviewing its interim results in recent years has demonstrated that an unusually high level of audit work is necessary before it is possible for us to express an opinion on those accounts. This is because, in the past, we have had no alternative but to extend substantially the scope of our audit work to determine whether or not the subjective approach necessarily taken by management in relation to the recognition and recoverability of revenue and profit on certain long term contracts incorporated the degree of prudence required by Statement of Standard Accounting Practice No9 or whether adjustments were necessary.
In investigating issues of the type described in the preceding paragraph in 1999, we undertook extensive work that resulted in material adjustments being made in the course of finalising the audited accounts. In doing so, we incurred costs that were significantly in excess of the original fee estimates. We have been unable to obtain management's agreement to reimburse us satisfactorily for this work.
We believe that in relation to the audit of the accounts for the year ending 31 March 2000, we will encounter similar circumstances to those that we experienced in the course of the 1999 audit and our fee proposal for the 2000 audit reflected that belief. Management has indicated to us that our fee proposal is unacceptable. With the benefit of the knowledge we have of the nature of the company's business, we regard the effect of management's position as a limitation on the necessary scope of our audit.
In these circumstances, we have resigned as auditors to the Company and all its subsidiaries."
Jarvis requested PwC to amend the fourth paragraph of this letter and a replacement letter was served on the 13th March 2000, in which the fourth paragraph (in place of what appeared as the fourth paragraph of the original letter) read as follows:
"Despite extending significantly the scope of our audit work as described above, we were unable to satisfy ourselves as to the recoverability of revenue and profits recognised in the draft 1999 accounts in relation to certain major contracts. Management sought to resolve this issue by accelerating negotiations with their client but without success and material adjustments had to be made to the accounts. In completing our work, we incurred costs that were significantly in excess of the original fee estimates. We have been unable to obtain management's agreement to reimburse us satisfactorily for this work."
6. Jarvis thereupon appointed Ernst & Young to act as its auditors and to carry out an audit, which it completed in June 2000, and commenced these proceedings. On the 4th July 2000, the day after the discontinuance of these proceedings, Jarvis sent a circular to shareholders referring to the audit by Ernst & Young and giving an account of the dispute with PwC and the discontinuance together with the Statement.
COURSE OF PROCEEDINGS
7. Jarvis commenced these proceedings under Section 394(3) on the 20th March 2000 in which it maintained (in the language of that subsection) that PwC were "using the Statement to secure needless publicity for defamatory matter". The combined effect of the commencement of the proceedings and Section 394(3) and (5) was to suspend the obligation of Jarvis to send the Statement to the persons interested and the obligation of PwC to send a copy to the Registrar of Companies until after the conclusion of the proceedings.
8. Both parties filed substantial evidence. Jarvis filed 4 witness statements on the 20th March 2000; PwC filed 5 witness statements in answer on the 28th April 2000; and Jarvis filed 8 witness statements in reply on the 2nd June 2000. In support of this allegation that PwC made the Statement to secure needless publicity for defamatory matter, three directors of Jarvis, namely Mr Sutton, Mr Kendall and Mr Lafferty made witness statements to the effect that the Statement suggested that there was an unsatisfactory state of affairs in the way that Jarvis accounted for long term contracts, that the suggestion was completely unjustified, that the reason for the Statement was that PwC was bitter at having to compromise the figure it claimed for its fees and at losing a client to Jarvis's new auditor, and that PwC was using the statement to paint the circumstances of their resignation in a more favourable light to themselves. (These highly damaging allegations were groundless and false and were unequivocally withdrawn by Jarvis in response to an invitation from me in the course of the hearing before me).
9. In view of the public interest that the shareholders and debenture holders in Jarvis and the investing public should be made aware of the Statement as soon as possible if an order was not finally made under Section 394(6), PwC asked Jarvis to apply for an expedited hearing or for support on such an application. Significantly Jarvis replied that it would oppose an expedited hearing. PwC applied on the 18th May 2000 for an order for expedition and at the last moment (facing the inevitable) Jarvis had then to support the application. The order was duly made. The hearing was fixed to begin on Monday the 3rd July, 2000. Jarvis gave an estimate of 10 days for the hearing on the basis that Jarvis wished to have an extensive cross-examination of the PwC witnesses. On the afternoon of Friday the 30th June 2000, the parties were informed that no judge was available for Monday the 3rd July but that it was anticipated that a judge would be available on Tuesday the 4th July. At 8.44 a.m. on Monday the 3rd July, Jarvis sent to PwC a brief letter enclosing a notice of discontinuance. No explanation for this late and sudden decision to discontinue was given. Questions were ventilated between the parties' solicitors the same day whether a decision of the court was required and as to what was the proper order for costs. PwC maintained that a hearing was required so that the decision referred to and required by Section 394(7) could be obtained and so that the court should decide whether Jarvis should pay their costs on an indemnity basis. Jarvis maintained that no such hearing was necessary and that there should be no order as to costs. These two issues came before me on the 4th July 2000.
DISTURBING FACTS
10. Before I turn to the issues, I should refer to a number of disturbing features of this case which raised questions at the hearing before me whether Jarvis was maintaining these proceedings in good faith or to achieve a collateral advantage:
(1) it was at all time obvious to all concerned that the trial of this action required expedition for the reasons which PwC gave to Jarvis, but Jarvis maintained opposition to expedition until the last minute when, if it was to maintain its opposition, it would have had to explain to the court why it opposed. Counsel for Jarvis before me could do no more than describe the attitude it had taken as "a mistake";
(2) Jarvis continued the proceedings until (for all practical purposes) they reached the doors of the court and then gave no explanation for the decision to discontinue. Counsel for Jarvis sought in his speech to give evidence as to existence of the good reasons for doing so. One reason suggested was the publicity relating to the resignation of PwC and speculation relating to the Statement generated by an article in Contract Journal dated the 28th April 2000, some two months prior to the discontinuance. Counsel cannot give evidence in this way and in any event the reasons proffered lacked any substance;
(3) Jarvis had plainly had it in mind, if it had not already made up its mind, to discontinue this action well before the 3rd July. This is plain from the drafts of the circular to shareholders which it was having printed before the 3rd July and which included explanations for this decision;
(4) the commencement of these proceedings secured for Jarvis (as its Counsel conceded before me) the advantage of a three month delay in dissemination of the Statement, a period used to enable its new auditors to prepare accounts and Jarvis to prepare a circular to shareholders concerning the resignation of PwC which might counter the perceived adverse impact of the Statement;
(5) on Monday the 3rd July 2000 the Financial Times published an article by its reporter Mr Charles Batchelor entitled "Jarvis moves to clarify dispute with former auditors". This article sets out a one-sided (favourable to Jarvis) and inaccurate account of the facts. The article was perfectly timed to coincide with the discontinuance. The contents suggested that the source of the information to the newspaper was someone from Jarvis's camp, indeed a (perhaps inadequately instructed) public relations consultant. All I could extract from Counsel at the hearing was that it was "an agent of Jarvis acting without authority". Efforts by Counsel to obtain clarification the night before, prior to and at the hearing elicited nothing further. At the close of the hearing, I invited Jarvis to investigate further and let me know the result of this investigation before I gave judgment.
11. In response to this invitation Jarvis submitted to me three affidavits sworn by Mr Mackey, Mr Sutton and Mr Mason. A glance at these affidavits revealed that they went far beyond the single topic on which I invited further evidence. Without further reading, I communicated to Counsel that I was minded to disregard the contents of the affidavits so far as they strayed beyond the boundaries of this topic, but I offered to see Counsel in my room if they wished to make representations that I should do otherwise. Counsel for Jarvis wished to make such representations, and I saw both Counsel. Counsel for Jarvis stated that his clients wished to adduce evidence on the issue of good faith, though no such intimation had been given at the hearing, and that for this reason the evidence dealt with this issue. I expressed concern that the invitation to serve evidence on one issue should not be abused by serving at the same time evidence on another issue. Counsel for PwC had not yet seen the evidence served, but on the basis that it was only directed to the issues of the article and the good faith of Jarvis, he did not object to my reading it so long as he had the opportunity to serve evidence in answer. I accordingly agreed to allow the evidence of Jarvis to stand on these two issues and PwC to serve evidence in answer. This was duly served on the 10th July, and consisted of witness statements of Mr Bunn and Mr Pope. I also received skeleton arguments from both sides.
12. Mr Mackey, managing director of GCI Financial Group Limited ("GCI") who were the financial public relations advisers to Jarvis, was clearly the "agent" of Jarvis referred to by Counsel for Jarvis who spoke to Mr Batchelor. In his affidavit Mr Mackey said that he had spoken to Mr Batchelor on the telephone on the 30th June; that he told Mr Batchelor that Jarvis was not prepared to go on record concerning any aspect of the dispute; that he did not inform Mr Batchelor that Jarvis would discontinue the proceedings; that he had responded factually to such of Mr Batchelor's queries as were in the public domain; that he had only spoken hypothetically and generally in respect of the dispute; and that he was not responsible for the inaccuracies in the article. A somewhat different picture was drawn by Mr Bunn, Head of Media Relations for the United Kingdom of PwC. He exhibited a contemporaneous note of a telephone conversation which he had with Mr Batchelor on the 30th June. This read as follows:
"Charles Batchelor - 7873 4135 30 June pm
Jarvis - termination of audit
Jarvis telling CB possibility that they will publish letter to shareholders from chairman and 394 notices
If they win their case & say they can't be published.
Propose drop legal action but bring it out in open."
Mr Bunn went on to say that he told Mr Batchelor (totally properly) that PwC could not make any comment on the whole matter, a position which Mr Mackey could and should also have taken.
13. Mr Mason, Jarvis's company secretary, in his affidavit stated on the basis of inquiries he had made, that to the best of his knowledge no-one involved in drafting the circular had spoken to the press. Mr Sutton swore an affidavit maintaining that Jarvis had acted in good faith throughout the proceedings. The main thrust of his explanation why Jarvis proceeded with the action until the 3rd July was that Jarvis understood the Statement to imply that Jarvis was deliberately seeking to limit the scope of the audit, and that Jarvis was only reassured that PwC did not intend this (and accordingly discontinued the proceedings) when this was made plain in PwC's skeleton argument shortly before trial. This explanation (presaged by Counsel at the hearing) is scarcely credible. The critical question was at all times what the Statement said, not what PwC had in mind; the Statement clearly made no such implication; it was never any part of PwC's case that any such implication was intended or to be justified; and Jarvis never took the obvious step if this was a real concern to them of seeking reassurance in this regard from PwC, which would have been forthcoming immediately.
SECTION 394
14. Section 394 imposes upon auditors an important duty in the public interest and in the interest of the persons interested and indirectly of creditors and the investing public: to make a statement indeed it is a duty of such importance that a failure to comply constitutes a criminal offence. The auditor is the judge of whether there are relevant circumstances: he must exercise his judgment and, uninfluenced by any collateral considerations, make up his own mind and state whether he considers that there are circumstances which ought to be brought to the attention of the persons interested to whom for this purpose he must owe a duty of care. He is uniquely placed to judge. The requirement is not designed to protect the auditors or give the auditors an opportunity to say something which protects their goodwill or reputation when they cease to be the auditors, and the court will presume that the auditors who make a statement under Section 394(1) are acting in faithful discharge of their duty and not in pursuit of any private or collateral interest, unless the contrary is shown.
15. I turn first to the question what constitutes a decision for the purposes of Section 394(7). Section 394 anticipates that, whatever the outcome of proceedings under Section 394(3), there will be a decision of the court. Section 394(6) provides that, if the court decides that the auditors are using the statement to secure needless publicity for defamatory matter, the company shall send within 14 days of the court's decision to the persons interested a statement setting out the effect of the order. For this purpose there must plainly be a positive decision of the court upholding the charge of impropriety against the auditor and a court order in the terms set out in Section 394(6)(a). The question arises whether any positive decision of the court that it "is not satisfied" is required under Section 394(7). In my view it is not. Section 394(7) (unlike Section 394(6)), does not require that the court give any directions: such directions are unnecessary, for the section itself spells out what shall happen next. All that Section 394(7) contemplates is that the proceedings are brought to an end without the court being "so satisfied". It is sufficient that the proceedings are brought to an end, and it does not matter whether they are brought to an end by a final judgment, an order striking out the proceedings or a discontinuance. Accordingly in this case, as provided in CPR Part 38.5, on service of the notice of discontinuance on the 3rd July 2000 the proceedings were brought an end, and for the purpose of Section 394(7) the relevant decision of the court was made on that date. No further decision is called for.
16. I turn now to the question of the order for costs. As I have said, the position taken by Jarvis on the 3rd July was that there should be no order as to costs. This position was swiftly and wisely abandoned at an early stage at the hearing. CPR Part 38.6(1) provides that, unless the court otherwise orders, a claimant who discontinues is liable to pay the other side's costs, which again (in the absence of a special order) will be assessed on the standard basis. The only issue can be whether the costs of PwC should be assessed on a standard or an indemnity basis. This issue turns on whether there are established such exceptional circumstances as justify an order on the indemnity basis. There are three special considerations which apply to proceedings under Section 394(3):
(1) the auditor (unless in the proceedings the court holds otherwise) is acting solely for the benefit of the persons interested. His role is analogous to that of a trustee. There is no reason in justice why the auditor should be out of pocket if the company increases the costs of the discharge of his duty by commencing proceedings under the section which fail. Indeed there are substantial reasons of policy why the auditor should not be deflected from discharging his duty by any concern that he will be out of pocket if he acts properly and if the company improperly reacts by instituting proceedings. It must be borne in mind that payment of costs on the standard basis is likely to leave the auditor very substantially out of pocket;
(2) in any proceedings instituted under Section 394(3), the company must allege that the auditor acted in bad faith in using the statement to secure needless publicity for defamatory matter. Counsel for Jarvis submitted that the section requires no allegation of bad faith: it is sufficient to allege that the statement (however innocent the mind of the auditor) in fact secures needless publicity for defamatory matter. That is plainly wrong. The critical words of Section 394(6) are "using the statement to secure needless publicity", focusing on the purpose or motive behind the making of the statement. This is a most serious allegation, tantamount to an allegation of dishonesty, against professional accountants. When such an allegation is made and not substantiated, the court has long shown itself ready to respond by ordering payment of costs on an indemnity basis;
(3) the opportunity afforded by Section 394(3) to companies to delay the dissemination of statements by commencing proceedings is susceptible of abuse by the unscrupulous. The court must be alert to question whether the decisions taken to commence and subsequently to continue the proceedings were made in good faith and not for some ulterior purpose, for example to put pressure on the auditor or prevent the statement being disseminated at an inconvenient time or to obtain a breathing period to prepare a counter or response to the statement. If an ulterior purpose is found to underlie the decision making, again the court may be expected to express its disapproval vigorously by appropriate orders against those responsible.
17. In a case where the Company's proceedings fail, the first two considerations to which I have referred alone amply suffice for a court in the exercise of its discretion to order the company to pay costs on an indemnity basis. Proceedings which seek to silence, and which pending judgment do silence, auditors reporting matters which may require urgent communication to interested persons are high risk and are not to be undertaken lightly. Counsel for Jarvis referred me to the decision of the Court of Appeal in Re Dicetrade [1994] BCC 371 that the Secretary of State cannot ordinarily recover from the respondent the costs of director's disqualification proceedings on an indemnity basis. That decision affords no contra indication. It is sufficient to say that: (a) the Secretary of State in such proceedings takes the decision and initiative to commence such proceedings: he is the claimant, and not (as is the auditor) the respondent in the proceedings; and (b) it is not of the nature of directors' disqualification proceedings that serious unfounded allegations are made against the Secretary of State by the respondent (as is the case in proceedings against the auditor under Section 394(3): rather it is the reverse, for the Secretary of State is making the serious allegation of unfitness against the director..
18. Turning now to the facts of this case, these proceedings failed: indeed as it appears to me (not least from the fact of the discontinuance and the unequivocal withdrawal of the allegations against PwC) these proceedings were bound to fail. PwC at all times acted with total propriety. The most serious allegations of impropriety were made against PwC supported by statements of three directors of Jarvis, which were only withdrawn in the course of the hearing in circumstances to which I have already referred to. The proceedings were discontinued only at the very last moment and no reason was then given. Jarvis refused to cooperate in obtaining the expedited hearing of the proceedings, again until the last minute. On these grounds alone I think that justice requires that an order should be made that Jarvis pay the costs of PwC on an indemnity basis and I so order. The disturbing facts to which I have referred raise serious questions as to whether these proceedings were prosecuted until the 3rd July 2000 in good faith. Fortunately it is unnecessary to decide this question and it may be (as Jarvis contends) that I should only decide the issue against Jarvis after cross-examination has taken place of Mr Sutton and possibly Mr Mackey. I must however say that I do not find their evidence or explanations satisfactory, and that I am very troubled about the conduct of Jarvis on this score. It suffices to say that companies should at all times both act, and be seen to act, in total good faith if they invoke the right to apply under Section 394(3): by way of example they should accordingly cooperate in obtaining an expedited trial and not allow any concern to operate as a pretext for commencing or continuing proceedings which may be allayed by an assurance from the auditor without first seeking that assurance from the auditor. Any abuse of the right to apply is viewed by the court with the utmost severity and will be treated accordingly.
*****
© 2000 Crown Copyright