Accountability - July 2014

26 minute read
31 July 2014

Accountability highlights the legal and industry news affecting accountants and other professionals on a range of liability risk management issues.

Legal update

Expert witnesses must disclose all potential conflicts of interest

The need to ensure an expert witness does not have a conflict of interest in providing expert evidence for a party is one of many key principles to be considered when parties are engaged in litigation. The case of Rowley v Dunlop & others provides a reminder of the importance of ensuring any potential conflicts are disclosed.

The primary claim related to recovery in respect of loan notes guaranteed by shareholders in a company (the Company), which had entered into administration. A part 20 misrepresentation claim was also made by the shareholders against the finance director of the Company. This part 20 claim had been assigned to the shareholders by another company, CFL, who in turn had had the claim assigned to it by the Company.

The defendant in the part 20 claim applied to strike out the claim made against him, on the grounds that the expert report on which the claim depended was fatally flawed. In the first instance this was because of the expert's conflict of interest, and secondly because of what he alleged was the unsustainable contents of the report. If the expert report was found to be inadmissible the claim would not be sustainable (unless a further report could be submitted by another expert).

On the conflict of interest point the defendant argued that the expert had a conflict of interest because the principal (the Principal) of his accountancy firm, where the expert was a partner, was also the sole director of CFL. Under the terms of the assignment between CFL and the shareholders, CFL would obtain a benefit if the part 20 claim succeeded.

The court at first instance found that the expert did not owe CFL any duties and there was no evidence that the expert, or the firm of accountants in which he was a partner, would benefit from any gain CFL might make from the claim. On the evidence before it, there was no conflict of interest arising. The defendant appealed to the High Court.

The High Court stressed the essential character of expert evidence, "that it should be the independent product of the expert uninfluenced by the pressures of litigation and that it should be objective and unbiased evidence on matters within the expert's evidence." It went on to say that the qualities of independence and lack of bias may be compromised by the expert's connections with the litigation. The three most common types of connection were highlighted:

  • The expert may have a financial interest in the claim - such evidence will only rarely be admitted;
  • The expert may have a conflicting duty - whether the evidence will be admitted will depend on the circumstances of the case;
  • The expert may have a personal or other connection with a party which might consciously or sub-consciously influence or bias his evidence - such connections will not normally disqualify the witness but will go to the weight to be attached to the evidence.

On the basis of the information before the court there was nothing to suggest the expert had any financial interest in the part 20 claim. Furthermore the Principal was paid an hourly rate for the services he provided to CFL and he expressly stated he had no other interest in the success or outcome of CFL.

Counsel for the defendant was critical of the expert's and the Principal's failure to provide evidence of their connections and asked the court to infer a greater degree of involvement than that disclosed. The court did not accept it could find a conflict of interest resulting from such inferences; there was insufficient evidence to establish that the expert had an interest in the outcome of the proceedings.

The appeal was dismissed. However, the court did go on to say there was force in the criticism as to the failure by the expert to disclose in his report his connection with the Principal and the Principal's directorship of CFL.

The judge said it is "important that the other parties to the litigation and the court should have available to them information as to any connection of an expert to the litigation or to the parties to the litigation or to any person who may benefit from the litigation". Only then would the court have all the information needed to determine whether the expert's evidence is admissible and if so the weight to be attached to it.

The expert and the Principal had considered whether there was a conflict of interest and had concluded there was not. However, the fact that they had to consider the matter showed there was 'material information' which needed to be disclosed.


If an expert has any connection with the litigation in respect of which he has been appointed to provide expert evidence that connection should be disclosed, even if the expert and those instructing him do not believe the connection amounts to a conflict of interest.

Disclosure up front will allow the court to assess all of the relevant factors and satisfy itself that the evidence is admissible - and it may well prevent costly and time consuming applications being made should the connection or potential conflict of interest subsequently come to light.

Default judgment will not prevent an inconsistent defence being advanced by another defendant

An interesting point has been determined by the High Court in Page v Champion Financial Management Limited & Others. Although this was a fairly specialist financial services case, the issue was simple - where Party B is responsible for the acts of Party A, will a default judgment against Party A bind Party B.

In this case Mr Page had invested in two film finance schemes. In doing so, he dealt with an intermediary (Party A), who was exempt from regulation under the Financial Services and Markets Act 2000 (FSMA) as an 'appointed representative' of Party B.

When the investments turned sour, Mr Page sought to pursue a professional negligence claim against Party A. He also brought a claim against Party B pursuant to Section 39(3) of FSMA, which effectively provides that the principal of an appointed representative is responsible for any acts or omissions by the appointed representative.

Party A had by this time ceased trading and did not file a Defence, so Mr Page obtained judgment in default against Party A. Although Mr Page initially sought to enforce this judgment in default directly against Party B, he later accepted that he could not. He did however seek to amend his Particulars of Claim as against Party B to plead that Party B was liable to Mr Page under Section 39 as a result of the judgment he had obtained against Party A. Party B refused to agree to the amendments and the point was heard as a preliminary issue.

The thrust of Mr Page's argument was that the court could not re-open the issue of whether or not Party A was negligent (in which case Party B would be liable) as this had already been determined. Even though there had been no trial, Mr Page had obtained judgment in default on his claim against Party A, a fundamental element of which was that Party A was negligent.

If this issue was re-opened, as a result of Party B advancing a defence that was inconsistent with the default judgment obtained against Party A, there was the risk of inconsistent judgments - one finding that Party A was negligent, the other finding that it was not. This would defeat the principle of res judicata.

Party B's case in response was simple - while inconsistent judgments are undesirable, there is no absolute rule against them.

Perhaps unsurprisingly, the judge sided with Party B, finding that the public policy interest in allowing a defendant to properly defend a claim outweighed the public policy interest of avoiding conflicting judgments. He agreed that judgment in default against one defendant should not prevent the other defendant from advancing a defence inconsistent with that judgment.

A peripheral issue was whether, if Party B was bound by the judgment against Party A, Party B could have it set aside, notwithstanding a delay of three months or so in making the application. The answer to this was yes, he could. Delay in making the application would not necessarily be fatal.


Although a specific case, this judgment is interesting in that it demonstrates the court placing the public policy interest in justice above other competing public policy interests.

Draft judgments MUST remain confidential

A stark warning was given to a Defendant and his solicitors by the Court of Appeal in O'Connell v Rollings & Others. Delighted at finding out that they had succeeded in having an appeal dismissed, the solicitors in question informed solicitors acting for a third party funder of that fact. The client also told the funder direct, who then told the funder's investors. Good news spread fast.

Unfortunately, the Court of Appeal was none too impressed. Although the partner with overall conduct of the case and the solicitor with day to day conduct both apologised unreservedly, the court took the opportunity to publicly condemn their actions, producing a six paragraph judgment on this point alone, saying that "we wish to express our disapproval of these breaches in the strongest possible terms." It also ordered that the other party, the failed appellant, should have his costs of the hearing on this point on an indemnity basis.

The judgment confirms that 'draft judgments' are provided to "promote the effective administration of justice", allowing minor amendments to be highlighted, submissions to be prepared and consequential orders to be drafted. However, as draft judgments can be amended at any time they should not be passed to third parties.


The message from this case is clear. Be very careful who you tell about a judgment before it is formally handed down. It is perhaps worth a look again at Practice Direction 40E of the Civil Procedure Rules (CPR).

This clearly provides that draft judgments provided to the parties should not be disclosed to any other person - this will include litigation funders, after the event insurers and any associates of the party. If in doubt, act on the side of caution.

The price to pay is an adverse costs order, heavy judicial criticism and potentially a finding of contempt of court. You have been warned.

A new test for obtaining relief from sanctions - new guidance issued

The Mitchell v News Group Newspapers Ltd case made it clear that the courts will not tolerate litigating parties who breach the court procedure rules, even if those breaches are trivial. That has led to numerous cases where parties to litigation seek to rescue themselves from minor breaches (e.g. missed deadlines) and the other party seeks to take advantage of the breach and seek a claim to be struck out or otherwise dismissed.

New guidance has now been issued by the Court of Appeal to be applied in all future applications for relief from sanction under CPR 3.9. The guidance, if applied correctly by the courts, should soften the perceived undue harshness and disproportionate penalties imposed on litigants pursuant to the court's earlier decision in Mitchell.

The court has also taken the opportunity to forewarn litigants that failure to co-operate with each other, the opportunistic taking advantage of minor inadvertent breaches and unreasonable refusals to agree to applications for relief from sanctions are likely to lead to heavy costs penalties in the future.

Further guidance has been given by the Court of Appeal in the conjoined appeals in Denton v TH White Ltd and other cases, on how relief from sanctions applications under CPR 3.9 should be dealt with following that previously given in the Mitchell decision.

The Court of Appeal consisting of the Master of Rolls, Vos LJ and Jackson LJ held that an application for relief should be addressed in three stages. Judges should:

  1. Identify and assess the seriousness and significance of the "failure to comply with any rule, practice direction or court order" which engages CPR 3.9(1);

    The focus is no longer on whether the breach is trivial but whether it is serious or significant, if it is not relief will usually be granted;
  2. Consider why the default occurred;

    The court declined to give an encyclopaedia of good and bad reasons for failure to comply and referred back to the examples given in Mitchell, confirming that they were no more than examples. Where there is good reason for a serious or significant breach, relief is likely to be granted;
  3. Evaluate all the circumstances of the case to enable the court to deal justly with the application including the need (a) for litigation to be conducted efficiently and at proportionate cost (CPR 3.9(1)(a)); and (b) to enforce compliance with rules, practice directions and orders (CPR 3.9(1)(b));

    Even if the breach is serious or significant and there is no good reason for it, the application will not automatically fail. The court has to consider all the circumstances of the case to enable it to deal justly with the application. This was the element of CPR 3.9 that many of the decisions post Mitchell seemed to have simply ignored.


The key message from the judgment is that although a culture of non-compliance will not be tolerated, relief should not be automatically denied where there has been a serious or significant breach without good reason; all the circumstances of the case should be considered.

The test of "triviality" has gone, but as little guidance was given as to what "serious and significant" means, further satellite litigation is likely to follow, certainly in the short term, in borderline cases as parties and the judges grapple with those concepts. Those guilty of minor breaches should however now fare better and it will be a brave opponent who takes the point where there is no obvious detriment to the opponent or to the conduct of the litigation.

For a more detailed analysis of the judgment see New guidance on applications for relief from sanctions.

Refusing to mediate? A brave decision...

Although the courts can strongly encourage parties to litigation to engage in alternative dispute resolution (ADR), including mediation, it is not compulsory. A long line of cases confirm that the courts can, and do, visit serious cost consequences upon a party for unreasonable refusing to engage in ADR.

Even if a party considers it has reasonable grounds for refusing to mediate, following the High Court decision in Phillip Garritt-Critchley & Others v Andrew Ronnan & Solarpower PV Limited, it will be a brave decision to refuse to so engage.

In Garritt-Critchley, the court held that considering the parties to be "too far apart"; believing the claim or defence was watertight; viewing ADR as having no realistic prospects of success; and that the acrimonious relationship between the parties would prevent settlement were not reasonable justifications for refusing to mediate. It considered all such issues could be dealt with by a skilful mediator trained to deal with such situations. In this case, the defendant's refusal to mediate for such reasons led to the court awarding the successful claimant its costs on an indemnity basis.


There will be few cases where it is appropriate to refuse point blank to enter into some form of ADR at some stage in the proceedings. This case shows that there may be a costly disagreement between a party and the court as to what is a reasonable refusal.

For a fuller analysis of this case see Refusing to mediate? A brave decision...

Industry news

Graham review on pre-packs

In response to widespread concerns about pre-packaged sales in administrations, the government has published the outcome of the independent review carried out by Teresa Graham in to pre-packs.

In the summer of 2013, Ms Graham was charged with the task of assessing the usefulness of the procedure in the context of business rescue generally, considering whether it encouraged growth, employment and best value for creditors, or whether practices associated with the procedure caused any harm, in particular to unsecured creditors.

Ms Graham accepted that there were valid criticisms to be made of pre-packs, such as a lack of transparency, inadequate marketing of pre-pack companies, inadequate explanations of the valuation methodology and insufficient attention being given to the potential viability of the new company.

On the positive side, pre-packs could preserve jobs, were cheaper than an upstream procedure, and on average, pre-packaged new companies were more likely to succeed than business sales out of trading administrations. In many circumstances, a pre-pack was the least poor outcome for all stakeholders, including all classes of creditors. Ms Graham thus concluded that the procedure should not be banned and should maintain its place in the insolvency arena.

A series of recommendations have nevertheless been proposed in order to "clean up" the procedure, improve its perception, increase returns to creditors and reduce the failure rate of pre-packed new companies. These include the following:

  • Connected parties to approach a pre-pack pool before the sale and to disclose details of the deal for the pool member to opine upon;
  • Connected parties to complete a "viability review" on the new company;
  • The Joint Insolvency Committee to consider a redrafted Statement of Insolvency Practice 16 (SIP16);
  • All marketing of pre-pack businesses to comply with six principles of good marketing and any deviation from these to be brought to the creditors' attention;
  • SIP16 to be amended to the effect that valuations must be undertaken by a valuer holding professional indemnity insurance;
  • The Insolvency Service to withdraw from monitoring SIP16 statements and monitoring to be carried out by Recognised Professional Bodies instead.

Ms Graham emphasised that she was a "de-regulator at heart" and that the recommendations made should be voluntary in nature, at least in the first instance. If, following a period of monitoring, compliance from the insolvency industry appeared to be low, then the government should consider introducing new legislation in order to adopt the proposals.

Consultations on simplification of employee benefits in kind

In response to the recommendations made by the Office of Tax Simplification, the government has launched four related consultations on the issue of employee benefits in kind (BIKs) and expenses. The aim is to reduce the onerous administrative burden relating to BIKs and expenses for employers, individuals and HMRC.

The first consultation seeks views on the proposed abolition of the current threshold of £8,500 for the taxation of BIKs, to hear views on whether those affected by this change should have some protection, and if so, in what form.

The failure to increase the threshold since 1979 has meant that the majority of employees who receive BIKs now earn more than £8,500 per year and are liable to tax on the full range of BIKs. Furthermore, employers are required to calculate whether an employee's total income from employment, including all BIKs and taxable expenses, is more or less than £8,500 per year, in order to determine whether a form P11D or P9D should be completed and submitted to HMRC.

The second consultation invites views on how the proposed statutory exemption of "trivial" BIKs should be structured, and how a "trivial" BIK should be defined. There is currently no minimum cost threshold for the taxation of BIKs, but employers can apply to HMRC for agreement to exclude certain BIKs from being reported to it on the basis of them being "trivial" in nature (such as a bouquet of flowers or box of chocolates).

The third consultation seeks views on the proposal to replace the expenses dispensation regime with an exemption for allowable expenses that are paid or reimbursed by employers. The proposal would address the current disparities that exist at employer and employee level, remove the need for employers to apply for and update dispensations, and enable employees to benefit from tax relief on qualifying expense payments, rather than solely those paid under a dispensation.

The final consultation invites views on the proposed introduction of a voluntary system of payrolling for real time collection of tax on BIKs and expenses. It is primarily aimed at employers who already payroll, payroll bureaux and software developers, so that best practice can be obtained as to matters such as which items are appropriate for payrolling, what rules are required to support customers and the potential timescales for implementing payroll.

All consultations will close on 9 September 2014.

IFRS 15: IASB issues new guidance on revenue recognition

On 28 May 2014, the International Accounting Standards Board (IASB) and the US Financial Accounting Standards Board (FASB) released a converged standard on the recognition of revenue from contracts with customers.

The objective of International Financial Reporting Standard (IFRS) 15, "Revenue from Contracts with Customers", is to create a single comprehensive model for revenue recognition. Previous IFRS and US GAAP guidance was not harmonised, which often resulted in different accounting treatment of economically similar transactions. The new guidance will improve comparability of the 'top line' of financial statements globally and will facilitate investors' evaluation of a company's financial performance.

IFRS 15 replaces previous IFRS and US guidance, including International Accounting Standard (IAS) 11 "Construction Contracts," IAS 18 "Revenue," and some related interpretations. It will apply to contracts including licencing of intellectual property and construction contracts.

However, it will not apply to insurance contracts, leases, financial instruments or certain non-monetary exchanges. If a contract is partially within the scope of IFRS 15 and partially within the scope of another standard, any separation and/or measurement requirements within that other standard should be applied first.

IFRS 15 provides a framework for determining when and how much revenue should be recognised. The core principle is that revenue is recognised to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the company expects to be entitled in exchange for those goods or services.

In order to determine when and how much revenue should be recognised, a company should apply the following five steps:

  1. Identify the contract(s) with the customer.
  2. Identify the performance obligations in the contract, i.e. the promises to deliver goods or services to the customer.
  3. Determine the transaction price, i.e. the expected amount of consideration that the customer will pay.
  4. Allocate the transaction price to each performance obligation.
  5. Recognise revenue when (or as) the company transfers a good or service to the customer and consequently satisfies a performance obligation.

The new standard also includes an enhanced set of disclosure requirements: it requires companies to provide information about the opening and closing balances of contract assets and liabilities (including reasons for the changes in those balances).

The extent to which IFRS 15 affects entities will vary considerably. It is unlikely to impact on the amount and timing of revenue recognition in many straightforward retail transactions. Entities involved in long-term service contracts and multiple-element arrangements may find the impact to be more pervasive.

IFRS 15 is effective for reporting periods beginning on or after 1 January 2017, although earlier application is permitted.

NOT LEGAL ADVICE. Information made available on this website in any form is for information purposes only. It is not, and should not be taken as, legal advice. You should not rely on, or take or fail to take any action based upon this information. Never disregard professional legal advice or delay in seeking legal advice because of something you have read on this website. Gowling WLG professionals will be pleased to discuss resolutions to specific legal concerns you may have.