Auditor is not liable for trading losses incurred by company from November 2015 to mid-April 2020
[SINGAPORE] The apex court of Singapore has struck out insolvent oil trader Hin Leong Trading’s largest claim of US$2.6 billion against its former external auditor.
A five-judge Court of Appeal on Thursday (Jul 16) allowed an appeal by Deloitte & Touche that arose from a pre-trial application to strike out Hin Leong’s claim for trading losses.
The decision leaves Hin Leong with two remaining claims:
- one for US$90 million in dividends that were wrongfully declared by the family of its founder Lim Oon Kuin, and
- another for S$612,000 in audit engagement fees paid to Deloitte.
These claims will be determined at trial.
In a 96-page judgment, the court held that Deloitte was not liable for the trading losses Hin Leong had incurred from November 2015 to mid-April 2020.
It also held that an auditor’s duty of care does not include a “duty to consider the interests of creditors” of a company it audits when the said company is insolvent.
Hin Leong had argued that it would have been put into liquidation earlier and not have incurred further trading losses, had Deloitte “not been negligent in its the conduct of its audit” and “uncovered the fraudulent or improper conduct of the Lim family” in their management of the company’s affairs.
In rejecting such contentions, the court determined that the trading losses were “not reasonably foreseeable” by the auditor when it undertook the engagement.
The court noted that Deloitte did not have any involvement in Hin Leong’s trading activities, and that it “did not have any sight over” the trading strategies that the company employed.
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The court further noted that the auditor did not give any input to the Lim family – Hin Leong’s sole shareholders – on trading methodologies.
“This gaping hole in Deloitte’s knowledge makes it fanciful for (Hin Leong) to suggest that it could have been in Deloitte’s reasonable contemplation that it had essentially signed up to insure (Hin Leong’s) trading fortunes,” the judgment read.
“It is inconceivable that an auditor who does nothing more than perform a statutory audit could be taken to have assumed liability for such losses, since their occurrence depends on movements in the market and the decisions of the company’s management which the auditor has no control over or involvement in.”
In deciding that the trading losses were not reasonably foreseeable for Deloitte, the court also considered that it was “unlikely” the auditor would have assumed responsibility for Hin Leong’s losses based on a “lower degree of knowledge” than required by statute.
In short, the auditor only “signed up” for the risks defined by the law.
Hin Leong has accused Deloitte of professional negligence in failing to uncover and report the irregularities in its financial statements and affairs for a period of around six years prior to April 2020.
Through its liquidators, the company is demanding that the auditor make good on the losses caused by its founder, better known as OK Lim.
Deloitte, meanwhile, has argued that the Lim family, being in control of Hin Leong, already knew of what was going on in the company, and that the losses are irrecoverable from the auditor.
WongPartnership represented Deloitte, while Drew & Napier acted for Hin Leong in the appeal.
