Pre-action disclosure plays a crucial role in audit negligence and professional negligence claims within the Commercial Courts, enabling parties to obtain documents before litigation begins in earnest. This early disclosure helps clarify the strengths and weaknesses of claims, facilitating informed decision-making and potentially encouraging settlement.
In complex and usually vast ranging audit negligence disputes, auditors’ working papers and financial documents frequently hold key evidence that is essential for managing the dispute effectively. The main way that parties can obtain these documents before formal disclosure is through either CPR 31.16 or section 236 Insolvency Act 1986 (IA). This article examines the effectiveness of both approaches in the context of accountancy negligence claims.
CPR 31.16 and traditional pre-action disclosure
Carillion v KPMG
Following Carillion’s collapse in 2018, the liquidators of the company sought pre-action disclosure from its former auditors, KPMG. They intended to bring professional negligence proceedings on the basis that KPMG failed to detect that the financial statements were unreliable. The liquidators relied upon CPR 31.16, believing the disclosure was essential to preparing their claim.
The Commercial court refused this application, on the grounds that:
- Carillion could satisfactorily plead its case without the documents requested, as demonstrated by the detailed letter and witness statement which had already been issued;
- Seeking a "concluded" and "fully informed" view of the case was an inappropriate justification for pre-action disclosure;
- Even after narrowing the request, pre-action disclosure would require KPMG to review 8,500 documents, which was disproportionately burdensome and went beyond “key documents” anticipated by the pre-action-protocol;
- KPMG would likely need to repeat the exercise later once the full scope of Carillion's claims was known; and
- Carillion had not provided a Letter of Claim, making it impossible to say that KPMG had breached the protocol.
This judgement clarifies that applications for extensive pre-action disclosure of auditors’ “working papers” will only be permitted in exceptional circumstances.
Where a claimant already has sufficient information to draft a Letter of Claim, the court is unlikely to impose a burdensome exercise on the auditor; particularly where disclosure would need to be repeated in any event. The Court also noted that this disclosure would be unlikely to resolve the dispute at an early stage.
Section 236 Insolvency Act 1986 and broader statutory powers
Dale v BDO
Following NMCN Plc’s unexpected collapse in 2021, the liquidators requested an order requiring the company’s former auditors, BDO, to deliver up audit files relating to the company’s 2018 and 2019 accounts so that the liquidators could investigate whether BDO had been negligent in its performance of the audits. They relied on section 236 IA in order to access these files.
In this case, the Court found that the liquidators reasonably required the “Working Papers” to be disclosed to them and ordered that they be disclosed for the following reasons:
- The "self-contained" Working Papers captured all relevant information and were a unique record. BDO’s 80TB of raw company data was an inadequate substitute, and would have been overly burdensome on the liquidators to go through;
- The Working Papers were easy for BDO to produce and far more cost-effective, rather than the liquidators trying to reconstruct the companies’ records. Crucially, unlike in Carillion v KPMG, this request was not oppressive; and
- By seeing the Working Papers, the liquidators could reach a reasonably informed, preliminary view as to whether the auditor, BDO, had complied with its duties, thus furthering the overriding objective by potentially facilitating an early resolution.
The judge ordered disclosure even though BDO argued that the exercise would involve administrative time, effort and cost. This judgment underscores the broad powers available to liquidators under section 236 IA. While auditors and other third parties may raise concerns about the burden of compliance, the courts will balance these against the public interest in a proper investigation. The case reaffirms that audit files are often central to audit negligence and accountancy negligence investigations and that auditors may, in some circumstances, be deemed officers of the company.
Comparing the two approaches in audit negligence claims
In summary, the Carillion judgment underscores the restrictive nature of traditional pre-action disclosure under the CPR, with a strong emphasis on protocol compliance and proportionality. In contrast, Dale demonstrates a more claimant-friendly approach under section 236 IA, prioritising the need for disclosure to ensure both parties can have a more complete picture of the situation.
This is not a one size fits all difference, simply applying for pre-action disclosure under section 236 IA will not work in every case. Judicial attitudes will inevitably vary upon the facts of each case and will ultimately depend on whether granting an order will further the overriding objective.
Summary in simple terms
This article explains the two main ways someone can obtain important audit documents before bringing a professional negligence claim:
- CPR 31.16 – strict and rarely granted. You must show you cannot properly set out your case without the documents. This was the situation in Carillion v KPMG, where the Court said the request was too broad and too burdensome.
- Section 236 IA – more flexible, but available only in insolvency situations. This was applied in Dale v BDO, where the Court agreed that the Working Papers were essential for the liquidators’ investigation.
In short: CPR pre-disclosure is potentially more difficult to obtain, but insolvency powers can be more persuasive. Understanding which route applies helps businesses, insolvency practitioners and auditors prepare for audit negligence disputes.
Audit negligence solicitors in Cheltenham and Gloucestershire
For businesses, directors, insolvency practitioners and professionals across Cheltenham, Gloucestershire and the wider South West, understanding when pre-action disclosure may be available is essential when navigating potential audit negligence or accountancy negligence claims.
The Litigation team at BPE are experts in audit negligence and professional negligence disputes. You will receive pragmatic and proactive advice at all stages of a claim. To speak to a member of the team, please click here.
