Court decision to spark stampede of accountants

The shock decision on Binder Hamlyn will prompt a rush for limited liability, writes John Willcock

The shock decision by the High Court yesterday to award record damages and interest of pounds 105m against Binder Hamlyn will transform the move by accountancy firms from partnership to limited liablity into a stampede, industry sources said last night.

Although there have been claims for damages running into the hundreds of millions of pounds against accountancy firms since the UK went into recession in 1989, this is by far the highest award by a court.

Other firms are particularly alarmed by the circumstances of the case against Binder, and the way it could personally bankrupt up to 150 present and past partners. The award for pounds 65m was swollen to pounds 105m by interests and costs, but Binder's professional indemnity only stretched to pounds 71m, creating a pounds 34m shortfall for the partners. Binder is appealing against the decision.

The case revolved around the purchase by ADT, Michael Ashcroft's car auctions and electronic alarms group, of Britannia Securities Group in February 1990.

Binder audited Britannia, and signed off its audit in October 1989 with Britannia's net assets listed as pounds 36.5m. The firm had no further contact with Britannia until 5 January 1990 when it asked a Binder partner to attend a meeting with ADT, which wanted to buy the company.

The High Court case hinged on ADT's claim that Martyn Bishop, audit partner of Binder, assumed responsibility to it at the January 1990 meeting by restating that the 1989 accounts, which his firm had audited, showed a true and fair view of the state of affairs of BSG.

ADT claimed that the accounts did not give a true picture, that this was caused by Binder's negligence and it had suffered loss.

On Binder's information, ADT believed that a premium over the BSG share price of 25 per cent would lead to an agreed takeover.

An ADT director, John Jermine, told the court that at the crucial meeting Mr Bishop had told him that he had no reason to change his mind over the BSG accounts, which showed a true and fair view of the company's financial position.

Mr Justice May said in his judgment: "I judged Mr Jermine's oral evidence to be generally quietly impressive and entirely credible. I was less impressed with Mr Bishop's credibility." He said that if Mr Bishop had qualified his statements on BSG, ADT would have taken stock.

"The more serious the qualification, the less likely it would have been that ADT would have proceeded with the bid on the terms then contemplated."

The judge went on: "I have held that on 5.1.90 Mr Bishop stood by the accounts and thereby assumed responsibility to ADT for the professional competence with which they had been prepared and I have held that ADT relied on what Mr Bishop said.

"Insofar as Binder's admit that they were in certain respects negligent in the auditing and certification of those accounts, it follows that they were in breach of the responsibility which I have held that they assumed."

The decision has alarmed other accountancy firms. Although KPMG has already sought to escape crippling professional indemnity insurance rates by switching from partnership to limited liability status, other are now under severe pressure to follow suit.

The managing partner of one leading accountancy firm said that the ADT award would inevitably spur the move towards incorporation. "I don't think it's a sea change - but it's certainly a high crested wave."

Arthur Andersen itself looks to have escaped any liability for the award. Former Binder partners who wound up at Stoy Hayward and Grant Thornton may not be so lucky. There was considerable confusion on this point last night.

Comment, page 25

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