The Supreme Court has found that losses arising from a new lender’s refinance of a borrower’s original loans could not be claimed from accountants who negligently advised in relation to the original advance: Lowick Rose LLP (in liq) v Swynson Ltd & Hunt  UKSC 32
The decision will be of interest to those acting both for lenders and professionals who provide services to lenders. It is also a reminder that company owners should not treat their companies as extensions of themselves.
In 2006, S, which was owned by H, a wealthy businessman, lent £15m to a company, Evo Medical (E), for a year. Before entering into this transaction S and E jointly instructed accountants (LR) to carry out due diligence on E. It was common ground that (i) LR owed a duty of care to S (but not H); (ii) that LR’s report was negligent and failed to draw attention to significant issues with E’s finances, and (iii) that if LR had reported on those problems, the loan would not have gone ahead. During 2007 and 2008, S then made further advances to E, and H also purchased the majority shareholding in E. Ultimately, in December 2008, H personally entered into a short-term loan with E, which was to be used by E to refinance the outstanding balances of the 2006 and 2007 loans, and which were then discharged from S’s books. Against this background, the question before the Courts was what the effect of the discharge of the 2006 and 2007 loans was, and whether LR was still liable for their value.
The High Court and Court of Appeal found for the claimants, on the basis that the December 2008 refinancing was a “collateral payment” that had been received independently of the circumstances giving rise to S’s loss in making the original advances, and did not affect that loss.
The Supreme Court disagreed. The “refinancing” loan made by H to E, which was in turn used by E to repay the 2006 and 2007 loans to S, could not be regarded as a collateral payment. This was because that transaction discharged the very liability upon which S’s loss was based, and the money lent by H to E was not an “indirect payment” to S (even though it ultimately reached it). Rather, H’s loan to E, and the earlier loans between S and E, were separate transactions between different parties, for valuable consideration. The Supreme Court also found that H’s refinancing could not be recovered as a step in mitigation, as it was not a step taken by S, and was not attributable to LR’s breach of duty of care. The Supreme Court also rejected other arguments by the claimants relating to the principle of transferred loss and unjust enrichment, and the judgment contains a useful discussion of the law in all three areas.
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