In a landmark decision for auditor liability, the Court of Appeal has held that auditors are not liable for a company’s trading losses incurred after a negligent audit. The decision significantly curtails the ability of liquidators to recover losses from auditors, and sets an analytical framework for professional negligence claims in Singapore. The case arose from the collapse of Hin Leong Trading (Pte) Ltd (“HLT”). Its liquidators sought approximately US$2.6 billion in trading losses from Deloitte & Touche LLP (“Deloitte”), HLT’s former auditor, on the basis that undetected misstatements in the audited accounts had concealed a deepening insolvency and allowed the company to keep trading from 2015 until insolvency proceedings began in 2020. The Court struck out that claim, holding that even if Deloitte’s audits were ultimately shown to have been negligent, the trading losses were not losses for which Deloitte could fairly be held responsible.
Background Facts
Deloitte was HLT’s external auditor from at least 2003 until September 2020, and issued unqualified audit opinions on its financial statements for FY2014 to FY2019. After HLT entered judicial management and then compulsory liquidation, its liquidators alleged that fraud and irregularities had affected the company’s affairs for years. They claimed that HLT’s audited financial statements materially misstated its true financial position, including by recording fictitious profits and overstating receivables and inventory. This allegedly presented a misleading picture of HLT’s financial health, allowing it to continue trading and incur further losses until insolvency proceedings began.
The liquidator’s claim was for professional negligence. They alleged that Deloitte’s failure to detect the misstatements concealed HLT’s deepening insolvency and allowed it to continue trading until insolvency proceedings began in 2020. They claimed trading losses (US$2.6 billion), dividends paid to the Lim family (US$90 million), and Deloitte’s audit fees (S$612,000). Deloitte applied to strike out the claims, and the issue reached the Court of Appeal.
The Appeal
The appeal raised two issues: first, whether Deloitte’s duty of care included a duty to have regard to HLT’s creditors’ interests (the “creditor duty”), assuming HLT was insolvent at the time of the audits; and second, whether HLT’s trading losses were legally recoverable from Deloitte if breach of duty was established. The Court did not decide whether Deloitte had been negligent or whether auditors owe any “creditor duty” when auditing an insolvent company. However, the Court gave important guidance on how such claims should be approached.
In practical terms, the Court made clear that auditors are not in the same position as directors. Directors have a duty to act in the best interests of the company. When a company is insolvent or near insolvency, creditors become the company’s main economic stakeholders and directors must take their interests into account when making corporate decisions. Auditors, by contrast, do not run the company. Their role is to exercise reasonable skill and care in carrying out the audit. The key question is therefore whether the auditor’s conduct fell below the standard expected of a reasonably competent auditor, for example by failing to detect or report serious irregularities. That factual question was not decided at this stage.
The Court also explained that a negligence claim must be worked through step by step. It is not enough to say that an auditor owed a duty and that the company later suffered loss. The claimant must still show that the auditor fell short of the standard expected of a competent auditor, that this made a real difference to what happened, and that the particular loss claimed is one the auditor should fairly be responsible for. The Court then turned to the trading-loss question. The liquidators argued that, if Deloitte had identified the problems earlier, HLT would have entered insolvency proceedings sooner and would not have continued trading between 2015 and 2020. The key question was whether Deloitte could fairly be held responsible for the US$2.6 billion trading losses. The Court held that it could not.
The Court declined to apply the English SAAMCo principle, under which a professional is liable only for those consequences attributable to the respect in which its conduct was wrongful, rather than for every loss that would not have occurred but for its negligence. Instead, the Court clarified that where the claim arises out of a retainer, the the limits of liability are set by the ordinary contractual remoteness rules in Hadley v Baxendale – the question being what loss the professional should reasonably be taken to have assumed responsibility for when the engagement was made.
Deloitte was engaged to perform a statutory audit. It did not decide what trades HLT entered into, what prices it charged, what credit it took on, or what commercial risks it assumed. Those decisions were matters for management. The Court also noted that the statutory liability regime for wrongful or fraudulent trading generally depends on actual knowledge of, or involvement in, the trading and so, it was unlikely that Deloitte had taken on responsibility for HLT’s trading losses simply by agreeing to act as statutory auditor. Finally, this was not a case involving a specific loss-making contract or transaction that continued to generate losses. The losses arose from new trades entered into year by year, making it difficult to treat HLT’s trading business as one continuing source of loss for which Deloitte should bear responsibility.
In those circumstances, the Court considered it unrealistic to treat Deloitte as having assumed responsibility for HLT’s trading performance or insured it against commercial failure. The trading losses were therefore too remote and the US$2.6 billion claim was struck out.
Significance and Commercial Impact
The Court of Appeal rejected the English SAAMCo principle as a standalone doctrine in Singapore, holding instead that the limits of a professional’s liability are determined by the remoteness rules in Hadley v Baxendale. Claims against professionals should now be framed and defended in those terms.
The decision also confirms that an auditor’s role is not to insure a client’s commercial fortunes. Auditors are not responsible for business decisions they do not control: what trades to enter into, what credit to extend, what risks to assume. Liquidators seeking to convert a period of continued trading into a quantum against the auditor should note a structural obstacle they face – losses generated by fresh trades year by year are unlikely to be treated as a single continuing consequence of an audit failure.
The decision does not give auditors a free pass where serious red flags are missed. The strike-out went only to the trading losses; the claims for wrongful dividends and audit fees remain live, and whether Deloitte’s audits met the standard of a reasonably competent auditor is a question for trial.
