Part 1 [Slide 8] United Project Consultants Pte Ltd v Leong Kwok Onn (Trading as Leong Kwok Onn & Co) (2005) Reasoning While it had to be conceded that a professional would, in the course of his engagement, have to rely upon the accuracy of the information provided, it could not be right to treat a professional tax agent as a mere form filler. Where some form of mistake had been brought to his attention, he could not remain strongly silent and seek to exculpate himself by saying that the company was the one responsible for providing him with accurate information. The court held that, the respondent was under a duty to warn of inaccuracies in the filing of tax returns and, having acquired the necessary knowledge in 1993, was in breach of his duties as a professional tax agent/auditor The court held that there was a duty for auditor/tax agents to warn of potential illegal actions if they were aware (or should reasonably have been aware) of the surrounding circumstances. The court allowed the claimant to recover damages from the auditor in respect of the penalty imposed on the claimant for faultlessly committing a tax offence as a result of the negligence of his auditor. [Slide 8] Gaelic Inns Pte Ltd v Patrick Lee (2007) Reasoning The court observed that whilst an auditor was not expected to be a detective, the duty to audit carried with it an incidental duty to warn the appropriate level of management or the company's directors of fraud or irregularities discovered during the course of the audit. A breach of the duty would have occurred if, in the course of the audit, the auditor uncovered matters which reasonably required him to take further steps that would have uncovered or led to him uncovering the fraud and he omitted to take such further steps. - The onus was on the plaintiff to show that the defendant's act or omission had caused it loss. It bears mention that the Singapore Standard on Auditing ("SSA") 11 and SSA 240 specifically provide that an auditor must "consider the risk of material misstatements in the financial statements resulting from fraud or error" when planning and performing audit procedures. As such, the appellant would not and should not be exempted from its duty to detect the existence of fraud and error. To rebute: To highlight that the imposition of such duty would impose unjustifiably onerous obligations on statutory auditors, who were not expected to conduct an audit with the conscientiousness of a forensic accountant and perform a complete audit of each and every transaction. To rely heavily on precedents such as in re Kingston Cotton Mill Company (No 2) [1896] 2 Ch 279 at 288 for the proposition that an auditor was "not bound to be a detective" or "to approach his work with suspicion or with a foregone conclusion that there [was] something wrong". While an auditor performed a watchdog function, he was not required to be a "bloodhound". The court held that the company itself had been contributorily negligent by reason of its own patent failure to put in place internal controls to prevent or detect Ang`s cash misappropriations. As a result, auditors` liability was reduced by 50% because of contributory negligence of the respondent company directors.
Contributory negligence could arise if the company was found to have failed to look after its own interests even though it had appointed an auditor. P S Marshall and A J Beltrami in their article, "Contributory negligence: a viable defence for auditors?" [1990] LMCLQ 416 at 421, accurately pointed out: “Having regard to the nature of the auditor's duty, the fact that an auditor is employed to report whether the accounts show a true and fair view of the company's financial position does not in itself mean that the company should be absolved from the responsibility to look after its own interests. Just because there is a watchdog on the premises, it does not follow that the occupants can safely forget to bolt the doors and omit to switch on the burglar alarm.” SSA 700 uncompromisingly sets out (at para 60) the duties of directors where audit reports are concerned: Directors' Responsibility for the Financial Statements The Company's directors are responsible for the preparation and fair presentation of these financial statements in accordance with the provisions of the Singapore Companies Act, Cap 50 ... and [the] Singapore Financial Reporting Standards. This responsibility includes: designing, implementing and maintaining internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error; selecting and applying appropriate accounting policies; and making accounting estimates that are reasonable in the circumstances. [Slide 9] In re Kingston Cotton Mill Company (No 2) (1896) Reasoning The basic duty of an auditor when conducting an audit is to use a reasonable degree of skill and care. Lord Justice Lopes stated that while the auditor must exercise a reasonable degree of skill and care, his role was to act as ‘a watch-dog, but not a bloodhound’. This means that an auditor is not bound to be a detective or to approach his work with forgone conclusion that there is something wrong. He need not be unduly suspicious in his job. Lord Justice Lopes also observed that “auditors must not be made liable for not tracking out ingenious and carefully laid schemes of fraud, when there is nothing to arouse their suspicion and when those frauds are perpetrated by tried servants of the company”. This means that, though detection of errors and fraud is subsidiary object of auditing, yet an auditor will not be responsible for not being able to unearth such frauds as have been perpetrated cleverly. He can rely upon the probity of the employees of the company who enjoy a position of trust and confidence in the organization. What can be used in answers! Jackson had been so successful in falsifying the accounts that what he had done was never detected or even suspected by the directors. There was nothing on the face of the accounts to excite suspicion. Hence auditors should not be made liable for not tracking out ingenious and carefully laid schemes of fraud when there is nothing to arouse their suspicion, and when those frauds are perpetrated by tried servants of the company and are undetected for years by the directors. So to hold auditors accountable for the fraud would make the position of an auditor intolerable. Also, it is not the duty of an auditor to take stock since he is not a stock expert. There are many matters in respect of which the auditor must rely on the honesty and accuracy of others. Auditor does not guarantee the discovery of all fraud. Hence, the auditors are
justified in the case in relying on the honesty and accuracy of Jackson, and were not called upon to make further investigations. [Slide 10] JSI Shipping (S) Pte Ltd v TeoFoongWongLCLoong (A Firm) (2007) Reasoning The standard of care expected of an auditor is set out in S207(2). S207(2) states that the essence of an audit was to obtain and provide assurance that a company`s accounts provided a true and fair view of the financial position of the company. The court held that although it is not contemplated that an auditor must detect each and every material misstatement or instance of fraud in the discharge of his duties, there is an affirmative duty on the part of the statutory auditor to detect and prevent readily apparent and/or easily detectable types of fraud. Although the auditor is not required to undertake a full-fledge inquiry into the veracity of the account in all cases, the onus is on him to perform his duties with an attitude of professional skepticism and remain alive to the possibility of fraud. He must approach his task with an inquiring mind and remain constantly alert like a watchdog to the fact that a mistake or oversight could actually be the thin end of a wedge. An auditor would thus be obliged to pursue the matter and make further inquiries where reasonable suspicion would typically have been excited This principle, a corollary of the requisite standard of care, is mirrored in SSA 1, which mandates (at para 6) that: The auditor should plan and perform the audit with an attitude of professional scepticism recognizing that circumstances may exist which cause the financial statements to be materially misstated. For example, the auditor would ordinarily expect to find evidence to support management representations and not assume they are necessarily correct. SSA 1 is further reinforced by SSA 8, which unequivocally provides (at para 2) that "[t]he auditor should obtain sufficient appropriate audit evidence to be able to draw reasonable conclusions on which to base the audit opinion The absence of an employment contract or similar document in the circumstances of this case would have tolled the alarm bells in the mind of a reasonably competent auditor exercising the requisite skill and responsibility tempered by a healthy degree of professional scepticism. Given that an auditor's core competence entails the derivation of reasonable assurance that the underlying information contained in the accounting records are reliable and sufficient, the respondent should have, at the very least, made further inquiries into Riggs' anomalous position and uncompromisingly required independent verification. Notwithstanding Singh's general opinion that it was proper for the confirmation of Riggs' remuneration to come from Cullen in the form of a signed copy of the appellant's audited financial statements, we are of the view that the legitimacy of such a course of action can be sustained only if the relevant fields for verification were adequately drawn to Cullen's attention for specific review and confirmation. On the facts, Cullen was clearly unaware that his signature would be relied on by the respondent as confirmation of Riggs' entitlement to the specified remuneration. It simply did not suffice for the respondent to rely on the appending of Cullen's signature to the entire agglomeration of audited statements as confirmation of Riggs' remuneration without first breathing a word to Cullen or even hinting that his signature would be relied on for this purpose. To sanction such an unsatisfactory process would create a charter for the dereliction of core auditing responsibilities.
Returning to the wording of S391, relief from liability must be underpinned by the presence of the three elements of honesty, reasonableness and fairness. In relation to the first element, we find that the respondent had been undisputedly honest throughout the conduct of the audit. Its transgressions related to an error of judgment, ie, its failure to follow up on an inquiry due to a misguided reliance on the alleged oversight and control exercised by the parent company (JSISC). Regarding the second element, we are persuaded by the foregoing dicta in Re D'Jan of London Ltd ([161] supra) to the effect that auditors can undoubtedly be held to have acted reasonably for the purposes of the exculpatory section, notwithstanding that they are found to be negligent. In any event, the consideration of fault attribution would justifiably affect, as in this case, the degree to which the auditors can be said to have acted reasonably (by relying on the oversight, review and control exercised by the directors). The determination of reasonableness for the purposes of this section is not to be limited by the specific breach, but can encompass wider considerations such as the nature of the audit and other relevant circumstances. In particular, we note the views of the authors of a leading treatise to the effect that the court is required to take into account all relevant circumstances in considering whether an auditor ought fairly to be excused, an analysis which, in their words "ought surely to include the conduct of the directors" (Jackson & Powell ([32] supra) at para 17-083). We had earlier observed that it was Cullen's indifference, laxity in management and failure to properly carry out his fundamental obligation to oversee and monitor the appellant that permitted Riggs' defalcations (see [152] above). Sections 199(1) and 201(15) of the CA unequivocally state that the financial statements of a company are the responsibility of its directors. In our view, the contributory negligence of Cullen and Hora in exercising oversight and control, in particular, in reviewing the financial statements of the appellant, can legitimately and fairly be taken into account in partially relieving the respondent from liability, to the extent that the respondent cannot be fairly held to be completely responsible for the losses sustained. On this note, it bears highlighting that counsel for the appellant himself could not but acknowledge, during the appeal, that his client was not completely blameless in this regard. Having regard to all the circumstances of the case, we find this an appropriate case for an exercise of the discretion conferred by s 391, which was duly pleaded by the respondent, and partially excuse the respondent from liability flowing from the failure to adequately verify Riggs' entitlement to remuneration. The present allocation of responsibility under the auspices of s 391 remains consistent with the basic "principles of liability" by fairly attributing the fault between the auditors and the directors of the appellant, both of whom were negligent, in accordance with the respective degrees of culpability of these parties. From a broader perspective, this emphasises the dual responsibility imposed on auditors and directors to scrupulously adhere to the standard of care in the fulfilment of their occasionally overlapping duties. Effective corporate governance requires both sets of professionals to assiduously discharge their responsibilities. While s 391 does appear to provide an alternative platform for the court to partially excuse the respondent and to attribute liability in a manner somewhat akin to a plea of contributory negligence, it must be highlighted that s 391 requires the respondent's conduct to be both honest and reasonable, requirements which are clearly not prerequisites to a plea of contributory negligence. If the respondent fails to satisfy these mandatory statutory prerequisites, the court will be powerless to partially excuse the respondent under the section, notwithstanding any culpability attributable to the directors or to management. In view of the different and higher threshold requirements mandated by s 391, it would clearly be prudent, as a matter of practice, to plead both contributory negligence as well as s 391.
[Slide 11] Tay Kim Chuan Patrick v Public Accountants Board (2002) Reasoning The standard of care expected of an auditor is set out in S207(2). S207(2) states that the essence of an audit was to obtain and provide assurance that a company`s accounts provided a true and fair view of the financial position of the company. The court held that although it is not contemplated that an auditor must detect each and every material misstatement or instance of fraud in the discharge of his duties, there is an affirmative duty on the part of the statutory auditor to detect and prevent readily apparent and/or easily detectable types of fraud.
Part 2 [Slide 11] Greenhalgh v Arderne Cinemas Ltd Reasoning The subdivision of a class of ten-shilling shares into two-shilling shares was held not to vary the rights of Greenhalgh (a holder of existing two-shilling shares), although this multiplied the voting power of the former ten-shilling shareholders by five and thereby removed Greenhalgh’s power to block a special resolution. As Lord Greene MR put it: “Instead of Greenhalgh finding himself in a position of control, he finds himself in a position where control was gone, and to that extent…[his rights] are affected as a matter of business. As a matter of law, I am quite unable to hold that, as a result of the transaction, the rights are varied; they remain what they always were – a right to have one vote per share pari passu with the ordinary shares for the time being issued which include the new 2s ordinary shares resulting from the subdivision.” The court held that Greenhalgh`s rights had not been varied; instead, his enjoyment of those rights had been lessened. Although this narrow view of what amounts to a ‘variation’ may still be good law, it has been suggested that a different result would be reached if this case were brought under the oppression provision. [Slide 12] White v Bristol Aeroplane Co Ltd (1953) Facts The company’s constitution provided that class rights could only be “affected, modified, varied, dealt with, or abrogated in any matter” if sanctioned by the passage of an extraordinary resolution of the members of the class affected. The company made a bonus issue of new ordinary and preference shares to ordinary shareholders, thereby diluting in practical terms the preference shareholders’ voting power. A preference shareholder challenged the share issue on the basis that the preference shareholders’ voting rights had been “affected” without their consent. Reasoning The court held that there was no need to obtain the preference shareholders’ consent in making the bonus issue of new ordinary and preference shares to the existing ordinary shareholders. Their voting rights had not been affected by the bonus issue as they still had the right to one vote per share held. All that had been affected was the enjoyment of this legal right, which was “not the subject of any assurance or guarantee under the constitution of the company”.
[Slide 14] Re Holders Investment Trust Ltd Reasoning It has been held that shareholders voting in a class meeting in connection with a reduction of capital must have regard to the interests of the class as a whole. S74(1) allows members with at least 5% of the votes in the class to apply to the court to have the variation set aside. If an application is made, the alteration has no effect until the application is withdrawn or determined by the court. If the court believes the variation unfairly prejudices the members of the class represented by the applicant, it may set aside the alteration. By providing this mechanism for challenging an alteration, the Act ensures that a majority of a class of members cannot sacrifice the rights of their class to further their own interests in another capacity such as ordinary shareholder. The court therefore held that the scheme was unfair and refused to sanction the reduction, saying ‘it fell substantially below the threshold of anything that can justly be called fair’. The court therefore held that the vote by the preference shareholders was ineffective because majority of them had voted in their own interests without regard to what was best for the preference shareholders as a class.
Part 4 [Slide 4] Selangor United Rubber Estates Ltd v Cradock (No 3) (1968) Reasoning Any security, guarantee, or other transaction constituting unlawful financial assistance is illegal and any obligations undertaken by the company providing the financial assistance are unenforceable. If all that was happened is that the company has undertaken some commitment which amounts to the giving of unlawful financial assistance, a declaration that the commitment is unenforceable may be the only remedy that the company needs. However, if the company seeks to recover money or other property that it has parted with in purported performance of its contractual obligations S76(1) prohibits public companies or their subsidiaries to give financial assistance directly or indirectly for the purchase of the company`s shares. A loan that is camouflaged by a series of transactions designed to obfuscate the true purpose for which the loan is made will not escape the prohibitions. It was held in the case that there was clearly a breach of the provisions of the UK Companies Act 1948 prohibiting financial assistance for the purpose of acquisition of shares, when the company`s money was lent to Craddock through Woodstock in order to enable him to acquire the shares of the company.
[Slide 6-7] Intraco Ltd v Multi-pak Singapore Pte Ltd [Slide 8] Wu Yang Construction v Mao Yong Hui (2008) Reasoning The court in Intraco adopted the simplistic test that, so long as the transaction in question was entered into in good faith in the commercial interests of the company, S76 would not be breached. The court found that the transaction concerned (which was an “equity-debt swap”) was entered into bona fide in the commercial interests of Multi-Pak; and for that reason, the court held that the main purpose of that transaction was not to assist Intraco to acquire the Multi-Pak shares, and hence that there was no financial assistance in breach of S76. Later court of Wu Yang has cast doubt whether Intraco’s ruling on S76(1)(a) is correct. The court in Wu Yang held that even if a transaction is in the commercial interests of the target company, that does not thereby prevent it from offending the English equivalent of s 76 if the main purpose (S76(3)) or one of the purposes (S76(4)) of the transaction is to provide financial assistance to the intended purchaser to enable the latter to acquire shares in the target company. Rationale underlying S76 CA: The provision was enacted to prevent abuses in the form of persons or syndicates indirectly using the funds of the target company to acquire control of the target company by, first, obtaining bank loans to finance their purchase of the target company, and then, after gaining control of the target company, using the target company’s funds to repay those bank loans. Such practices might deplete the assets of the target company and thereby offend the rule on capital maintenance, which protects the interests of creditors. Even if there is no depletion of assets like Wu Yang case, the court still held there is a breach of S76. Section 76 also requires the court to determine, assuming financial assistance was indeed given, whether it was given for the purpose of or in connection with the acquisition of shares in the target company (see s 76(1)(a)). The expression “financial assistance” suggests any form of material assistance to which a monetary value can be ascribed, without which the party acquiring a company’s shares would have been unable to acquire the shares. The financial assistance may be direct or indirect. The provision is breached even where the assistance given is merely in connection with the acquisition of the target company’s shares. An analysis of whether a transaction entered into by the company contravenes s 76 necessarily involves a consideration of the following three issues: (a) whether there is an acquisition or proposed acquisition of shares of a company or units of shares in the holding company of the company; (b) whether the company has, directly or indirectly, rendered any assistance that was “financial” in nature; and (c) whether the assistance is for one of the proscribed purposes set out in s 76, that is, whether it is “for the purpose of” or “in connection with” the acquisition by any person, whether before or at the same time as the giving of financial assistance, of shares or units of shares in the company.
To talk about “in connection with”: - In reaching the conclusion, the court relied on the fact that s 76(4) refers, as an illustration of the phrase “in connection with”, to situations where the company was aware that its acts of financial assistance would assist the acquisition of its shares and this excluded a situation involving bona fide commercial transaction and where those acting for the company never even applied their minds to the potential effects that the transaction could have of financially assisting an acquisition of its shares. - Therefore, even where the company knows that the transaction would financially assist the acquisition of the shares but it is not the main purpose for such acquisition, it would not fall within s 76(3) but would fall within s 76(4).
