The UK’s Supreme Court on Friday backed a £32 million negligence claim from Manchester Building Society against its former auditor Grant Thornton.
Legal experts said the outcome is a landmark ruling that could make it easier to bring claims against professional advisers.
The High Court and Court of Appeal had sided with Grant Thornton in the case but the Supreme Court unanimously backed the building society.
“In 2006 and annually thereafter, Grant Thornton incorrectly and negligently advised the society that its accounts could be prepared according to a method known as ‘hedge accounting’ and that accounts prepared using that method gave a true and fair view of the society’s financial position,” said the Supreme Court in a press summary.
“In reliance on that advice, the society carried on a strategy of entering into long-term interest rate swaps as a hedge against the cost of borrowing money to fund its lifetime mortgages business.
“The misstated accounts served to hide volatility in the society’s capital position and what became a severe mismatch between the negative value of the swaps and the value of the mortgages which the swaps were supposed to hedge.
“When, in 2013, Grant Thornton realised its error, the society had to restate its accounts, showing substantially reduced assets and insufficient regulatory capital.
“To remedy the situation, the society closed out the interest rate swap contracts early at a cost of over £32m …
“The Supreme Court unanimously allows the appeal.
“It holds that the society suffered a loss falling within the scope of the duty of care assumed by Grant Thornton, having regard to the purpose for which it gave its advice on the use of hedge accounting.
“Grant Thornton is liable for the loss suffered by the society in breaking the swaps early, subject to a reduction in damages of 50% for contributory negligence.”
Manchester Building Society said in a stock exchange statement: “The Supreme Court has today handed down its decision in the case of Manchester Building Society v Grant Thornton UK LLP
“The case related to audit services provided by Grant Thornton UK LLP, former auditors of Manchester Building Society.
“The Supreme Court has overturned the decision of the lower courts and awarded damages of approximately £13.4m to the Society.
“Costs and interest on damages have not yet been assessed. Until a determination is made, it is not possible to assess fully the impact on the Society’s capital position.
“The Society will assess its ability to make coupon payments on its Permanent Interest Bearing Shares (PIBS) closer to the date of payment and, in respect of the 2005 PIBS, no more than 30 days prior to the coupons becoming due, in line with the Condition 3(3) of the conditions of issue of the 2005 PIBS.”
Manchester Building Society chairman David Harding said: “It was always clear to the Society that our claim had merit and that it was in the interests of our members to pursue the claim up to the highest Court to recover compensation from Grant Thornton.
“We will now work with our advisers and the regulators to establish what the judgment will mean for the Manchester, our members and other stakeholders.”
Grant Thornton said it was disappointed by the Supreme Court judgment — but that it had always accepted that its 2006-2011 audits for Manchester Building Society fell below the standards it strives for.