Professional Negligence

Accountants Held Liable for Breach of Duty to Previous Shareholders of Company


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Accountants Held Liable for Breach of Duty to Previous Shareholders of Company – Professional Negligence

The case of Boyd v Ackley involved a claim against accountants for professional negligence. The plaintiffs in the case were a husband and wife who owned all of the shares in a company. They had a history with the defendant accountants, being personal friends, as well as having used them previously to handle matters for another company. When they acquired a new company they again employed the defendant accountants to handle the accounting for the business. The plaintiffs brought an action against the defendants for breach of duty and negligence in issuing an erroneous statement which resulted in overpayment by the plaintiffs.

The Facts

The company acquired by the plaintiffs operated a hotel and beer parlour. The company leased the beer parlour to “Pierce” and the plaintiffs, with information provided by Pierce, sent monthly statements to the accountants for the purposes of the defendants maintaining the accounts of the business. An agreement was reached between the plaintiffs and Pierce regarding distribution of income from the business and there were some expenses to be paid by Pierce and others by the company. The accounts between the parties were to be settled at yearly intervals, with Pierce only withdrawing wages in the interim.

Sometime later, by written agreement, the plaintiffs sold all of their shares in the business to Mr and Mrs Sherdahl. By that agreement, the plaintiffs assumed all of the debts of the business, including anything owing to Pierce prior to the time when the agreement took effect.

After the plaintiffs had ceased to be shareholders in the company, the defendants prepared a statement showing the amount owing to Pierce up to the time when the sale agreement took effect. Consequently, the plaintiffs provided a personal cheque to Pierce for that amount. Pierce incorrectly claimed that this amount was insufficient and the accountants then prepared two additional statements, ultimately leading the plaintiffs, who relied on these erroneous statements, to overpay Pierce.

Issues in the Case

There was sufficient evidence in the case that seeking to recover the overpaid amounts from Pierce would not be an option. It was therefore up to the court to determine whether the defendants could be held liable for negligence and ordered to repay the loss incurred by the plaintiffs.

The plaintiffs argued three things; that there was a contractual relationship between the parties, that there was a fiduciary relationship between the parties, or that the defendants at least owed them a duty not to be negligent. The defendants argued that their contractual relationship was with the company, not with the plaintiffs personally and that no duty of care was owed to them.

Was there a contractual relationship?

The judge in the case arrived at the conclusion that there was a contractual relationship between the plaintiffs and the defendant accountants. While the defendants argued that the contract was only with the company, the judge determined that they were aware that the plaintiffs had assumed the company’s debt and that the Sherdahl’s were therefore looking to the plaintiffs, not the company, for the repayment of those debts. Therefore in working to determine that amount of debt, they were working for the plaintiffs, not the company. Further, for that work, the defendants were paid by the plaintiffs personally.

Was there a duty owed by the defendants to the plaintiffs?

It was held that, as in the circumstances where a doctor or lawyer would owe a duty of reasonable care to a patient or client in rendering their services, it was implicit in the contract between the parties in this particular case, that a duty of reasonable care and skill was owed by the accountants to the plaintiffs. Therefore the judge held that the plaintiffs would be entitled to damages if this implied duty of care was breached.

The judge felt it was unnecessary to determine whether a duty was owed outside of this implied contractual duty, however did mention that had it been necessary to decide this, it probably would have been determined that under the special circumstances, there was a duty. This was distinguished from the case of Candler v. Crane Christmas & Co where, on similar facts, no duty was owed. This was because in that case, the previous shareholder had no connection to the company when the information was given. However in contrast, the defendants in this case had the knowledge that the plaintiffs had recently been shareholders in the company and the information they were asked to provide was in regards to debts the plaintiffs had incurred in their capacity as shareholders. It was remarked that based on that reasoning, it was likely that the relationship between the parties was close enough to give rise to a duty of care.

Outcome

The plaintiffs were successful in their claim against the defendants and were able to recover from the accountants the amount that was overpaid to Pierce due to the defendant’s negligence, as well as costs of the court proceedings.

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