Accountability - November 2014

21 minute read
27 November 2014

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

Disclosure ordered to assist liquidators in investigating claims

In Re: Comet Group Ltd (in liquidation); Khan and others v Whirlpool (UK) Ltd and another, the Chancery division allowed the liquidators' application for disclosure of documents under s.236 Insolvency Act 1986 in order to investigate possible claims against the respondents.

The facts

The respondents, Whirlpool (UK) Ltd (Whirlpool) and Embraco Europe srl (Embraco) were both part of the Whirlpool corporate group which manufactures and supplies white goods including fridges and freezers. Embraco manufactured and supplied refrigeration compressors to Whirlpool group companies including, indirectly Whirlpool (UK) Limited. Whirlpool (UK) Limited then sold finished white goods to the electrical retailer Comet, among others.

In December 2011, the European Commission found that Embraco and its Italian parent company had infringed EU competition law by participating in a cartel. The cartel activity was believed to have inflated prices paid by Whirlpool group companies for the refrigeration compressors manufactured by Embraco. The Whirlpool participants were fined more than €54 million for their participation in the cartel.

The liquidators of Comet applied to court for an order that the respondents disclose papers which, they asserted, they required in order to assess whether or not Comet had suffered loss as a result of the cartel activity and to decide whether or not to bring proceedings in relation to the same.

Whirlpool contested the application on a number of grounds, arguing that the court did not have the jurisdiction to grant the order sought; alternatively that it should not exercise its discretion to do so.


First, Whirlpool submitted that the court did not have the jurisdiction to order production of anything other than material relating to the insolvent company, and that information on the respondents' sales and pricing (which the liquidators had also requested) did not fall into that category. Secondly, it argued that there was no jurisdiction to order the provision of information (as opposed to documents) except by granting an order for summons - which the liquidators had not sought.

The court was satisfied that, in the circumstances of Embraco's admitted participation in a cartel, documents relating to the price at which compressors were sold could have a direct bearing on Comet's affairs, and that therefore giving such disclosure would support the proper carrying out of the Liquidators' functions.

As to the second submission, the court agreed that there was no jurisdiction to order supply of information other than pursuant to a summons. By agreement with the liquidators, it concluded that the order would be restricted to "documents containing" information in the categories the liquidators had sought.


Turning to discretion, the respondents argued that disclosure was not required as it was evident from the liquidators' pre-action correspondence that they had already decided to issue proceedings and had formed a view on quantum. In the circumstances, the documents sought could not reasonably be required for the purpose of assessing losses or deciding whether or not to bring proceedings.

They also argued that it would be oppressive to the respondents to order disclosure, as it would provide the liquidators with information which ordinarily would only become available at a later stage in proceedings. This would give the liquidators an unfair advantage and allow them to obtain information without giving security for costs.

Having weighed up the submissions, the judge was satisfied that the Liquidators did reasonably require the documents sought in order to carry out their statutory functions. He also found that, in light of the admitted infringement by Embraco, the only advantage to be gained by the liquidators was early sight of documentation, which might even lead to a saving of costs.

He also found that, in light of Embraco's admitted participation in the cartel, Embraco must already have collated the information being sought. As such, it would not be oppressive for the respondents to produce documents requested and the court granted an order for supply of such documents accordingly.

Useful guidance on the Bermudan courts' approach to assisting foreign liquidators

The Privy Council in Bermuda has handed down judgment in the connected cases of Singularis Holdings Limited (Appellant) v PricewaterhouseCoopers (Respondent) and PricewaterhouseCoopers (Appellant) v Saad Investments Company Limited (Respondent).

Both cases provide useful guidance on the stance the Bermudan courts will take in relation to assisting foreign liquidators and make clear that the courts will only assist to the extent of the laws of the jurisdiction in which such liquidators have been appointed permit.

The facts

These connected cases concerned two related companies incorporated in the Cayman Islands. Both companies were wound up in Grand Cayman and three individuals from Grant Thornton Specialist Services (Grand Cayman) were appointed as the joint official liquidators.

Following their appointment, the liquidators made various attempts to obtain information from the companies' auditors, PricewaterhouseCoopers (PwC), on the basis that they believed PwC had, in their possession, either in Bermuda or in Dubai, relevant information or documentation which the liquidators needed to further their investigations.

In September 2010, the liquidators obtained an order from the Cayman Grand Court for delivery up of what amounted to PwC's working files relating to every aspect of the companies' businesses, including their annual audited accounts, statutory records, tax affairs, bank statements and records and notes relating to all other aspects of the businesses. Having received such disclosure, the liquidators were of the view that many of the documents that had been provided had been heavily and, unjustifiably, redacted.

In view of this limited disclosure, the liquidators tried to invoke the jurisdiction of section 195 of the Companies Act 1981 in Bermuda - which is broadly equivalent to section 236 of the Insolvency Act 1986 here and allows for wide ranging disclosure.

First instance decisions

In relation to Singularis, the Bermudan court made an order recognising the status of the Grand Cayman liquidators in Bermuda and granted an order requiring PwC to disclose documents as if such order had been granted in accordance with section 195 of the Companies Act 1981 in Bermuda.

PwC appealed the decision and, on appeal, the Court of Appeal set aside the first instance decision on the basis that it doubted that there was jurisdiction to make a section 195 order at common law in circumstances where section 195 didn't apply in Grand Cayman. The Court of Appeal went on to say that the court should not make an order in support of a Cayman liquidation which could not have been made by the Cayman court itself.

Interestingly, in relation to Saad, the company itself was wound up in the Supreme Court of Bermuda, being the court in the jurisdiction in which PwC was registered. Following the winding up, the court then granted an order under section 195 for PwC to disclose the relevant documents to the liquidators.

The Privy Council appeals

In the Singularis case, the liquidators appealed and the two issues on appeal were as follows:

  1. whether the Bermuda court has a common law power to assist a foreign liquidation by ordering the production of information in circumstances where the Bermuda court has no power to wind up an overseas company such as Singularis and its power to order the production of information is limited to cases where the company has been wound up in Bermuda; and
  2. whether such a power is exercisable in circumstances where an equivalent order could not have been made by the court in which the foreign liquidation is proceeding.

In the Saad case, PwC appealed the order and the question was whether the court at first instance had jurisdiction to wind Saad up in circumstances where the company did not carry on business in Bermuda. PwC argued that, if the Supreme Court did not have such jurisdiction, it could not then exercise its jurisdiction to require PwC to produce documentation and attend court for examination.

The Privy Council decisions

In the Singularis case, the liquidators' appeal was dismissed with a majority of the Board holding that a common law power of assistance does exist, but this power is subject to a number of important limitations and should not therefore be exercised in this case.

The Board reaffirmed that the principle of "modified universalism", which is to say a power to assist foreign winding up proceedings so far as the court properly can, exists at common law and extends to assisting a foreign court of insolvency jurisdiction by ordering the production of information which is necessary for the administration of a foreign winding up.

However, and importantly, it was noted that such power is limited to only enabling liquidators to do what they would be entitled to do under the laws by which they are appointed and it is only available when necessary for the performance of the officeholder’s functions.

In this case, given that the material which the liquidators were seeking would not have been obtainable under the law of the Cayman Islands, their appeal was dismissed.

In the Saad case, the Privy Council agreed with PwC. The Board held that the Supreme Court did not have jurisdiction to wind Saad up. The mere fact that Saad held assets in Bermuda (being shares held in another Bermudan company) was not sufficient to constitute the "carrying on of business", which statute required in order for the court to take jurisdiction.

The Board then went on to consider whether, despite the fact that the Supreme Court did not have jurisdiction to wind Saad up, PwC could still be required to comply with an order of that court, requiring disclosure.

In considering this, the court noted that, as a general proposition, it was no doubt correct that a court would not normally be prepared to entertain submissions from "strangers" to a winding up on the issue of whether or not a winding up order should have been made.

However, the court went on to say that there were two differentiating factors in this case. The first was that the ground of opposition to the winding up order was based purely on jurisdiction and the second was that PwC was only a "stranger" in the most technical sense. In fact, it was clear that the sole basis of the winding up in Bermuda was that it would enable the liquidators to invoke section 195 of the Companies Act 1981 against PwC.

For these reasons and the fact that the Privy Council stayed the winding up, PwC's appeal was successful.


The Singularis case is important as, although it confirms the concept of assistance and comity between courts, it does lay down the limitations of such concepts. It is clear that, although the courts are willing to assist, they will only do so to the extent that what is being ordered is allowed in the local courts where the officeholders have been appointed and that any such order is consistent with the substantive law and public policies of the assisting court.

The Saad case sets out quite clearly the statutory basis that needs to be satisfied before the Bermudan court can, and will, take jurisdiction of insolvency proceedings. This clarification is welcomed.

Advisers successfully exclude liability for giving recommendations

In Crestsign Ltd v National Westminster Bank plc and another, the High Court considered the duty owed by the defendants (the Banks) to the claimant (Crestsign) when selling an interest rate hedging product, and whether the Banks had breached that duty.

The facts

In 2008, Crestsign contacted the Banks to discuss options for refinancing its business. Ultimately, the Banks offered Crestsign a loan of £3.2 million at 1.5% above Bank of England base rate, with a five-year interest-only term. The loan was subject to conditions, including that Crestsign also take an interest rate management product with the Banks.

The Banks then visited Crestsign to discuss interest rate management products, and presented four options to Crestsign. Crestsign ultimately accepted a swap product with a discount for the first two years, and a fixed swap rate of 5.65% thereafter. The Bank of England base rate at that time was 5%. The swap also had a 10-year term - longer than that of the underlying loan.

By 2011, the Bank of England base rate had dropped to 0.5%, the initial discount on the swap had fallen away and Crestsign was paying 5.15% (the difference between the base rate and the fixed rate swap) on a debt profile of £3.5m, as well as 2% interest on the underlying loan. The swap had become substantially more expensive than anyone had foreseen. Crestsign attempted to extricate itself from the relationship with the Banks, but realised that it was unable to refinance due to the high break costs (c.£600,000) of the swap.

Crestsign issued a negligence claim against the Banks - essentially for mis-selling the interest rate product. It pleaded that the Banks had owed (and breached) a duty to Crestsign to use reasonable skill and care to ensure that when giving advice or recommendations to Crestsign on products, that advice was suitable; and to ensure that when giving information, that information was accurate and enabled Crestsign to make a decision on an informed basis.

The decision

The court determined that:

While the Banks did in fact give Crestsign advice (rather than simply information) about interest rate products, the giving of advice does not automatically mean there is an assumption of responsibility and a duty of care in tort to give the advice carefully.

In fact, the Banks had gone out of their way in documents provided to Crestsign to establish that they were acting on a non-advisory basis and to disclaim any responsibility for advice given. These disclaimers were drawn to Crestsign's attention and understood by it. Accordingly, the Banks owed no duty to advise Crestsign with reasonable care and skill.

In giving information to Crestsign on its products, the Banks were under a duty to explain fully and accurately the nature and effect of products which they wanted to sell; to correct any obvious misunderstandings of those products; and to answer any reasonable questions about them. They had not breached this duty. The Banks were not however obliged to explain other products which Crestsign might have wanted to buy but which the Banks did not want to sell. In the circumstances the court found that the Banks did not breach their duty when giving Crestsign information on the Bank's products.

The judge made some interesting obiter comments. He had accepted the Banks' terms of business contained 'basis' clauses which determined the basis of the parties relationship. As they were 'basis' clauses they were not exclusion clauses. If they had been the judge would have found they were unreasonable. Furthermore, if the disclaimers had not worked the judge would have found that the Banks had been in breach of their duty to advise competently - in particular in relation to the length of the interest rate product Crestsign eventually entered into.

Industry news

HMRC Guidance to assist financial institutions to comply with the Foreign Account Tax Compliance Act (FATCA)

HMRC has published guidance on its online reporting service which will allow UK financial institutions to comply with the provisions of FATCA - US legislation designed to obtain information on offshore accounts held by US citizens and thus deter tax evasion.

Under FATCA, Foreign Financial Institutions (FFIs) are required to enter into an agreement with the US Internal Revenue Service (IRS) and report to IRS details of accounts held by US customers. If a FFI fails to enter into an agreement with IRS and report the account details, it will be subject to 30% withholding tax on payments made to it from US sources.

Thanks to an Inter-Governmental Agreement between the US and the UK however, UK FFIs will not be required to enter into an agreement directly with IRS, but can instead report to HMRC who will then liaise with IRS at national level.
In brief, the process for FFIs is:

  • Register with IRS in order to obtain a "Global Intermediary Identification Number" which will be used for reporting. The deadline for registration is 1 January 2015, but professional bodies in the UK recommend that FIs register as soon as possible in order to meet the deadline.
  • Enrol for the UK FATCA online service with HMRC.

First returns must be made to HMRC by 31 May 2015. HMRC can impose penalties for non-compliance and late filing.

A key point is for organisations to determine if they are a FFI for the purposes of FATCA. The definition of a FFI is wide and includes depository institutions (e.g. banks), custodial institutions (e.g. trusts); investment entities; certain insurance companies; group treasury companies; and holding companies of financial groups.

New code of practice issued by the Chartered Institute of Public Finance and Accountancy (CIPFA)

CIPFA has issued a new code of practice on 'Managing the risk of fraud and corruption' (the Code).

The five key principles of the Code are to:

  • acknowledge the responsibility of the governing body for countering fraud;
  • identify the fraud and corruption risks;
  • develop an appropriate counter fraud and corruption strategy;
  • provide resources to implement the strategy;
  • take action in response to fraud and corruption.

The Code also gives recommendations and guidance on applying the Code in practice and it provides suggested wording to be included in an annual governance report, if a statement is being made about compliance with the Code.

Accountants licensed to carry out probate services

Since the Institute of Chartered Accountants in England and Wales' (ICAEW) role as a licensing authority (for probate and ABS (Alternative Business Structure) services) became effective on 14 August 2014 a number of accounting firms have been granted licenses to provide probate services. The process started with Kingston Smith LLP and Hope Shaw in October. Since then other firms have followed suit.

The ICAEW expect numbers to increase further, with some 250 firms having expressed an interest in accreditation.

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