Singapore Court of Appeal dismisses claim for trading losses against Auditors

Singapore Court of Appeal dismisses claim for trading losses against Auditors

This recent decision^₁ by a 5-judge coram affirmed the importance of having regard to the fundamental principles underpinning the cause of action in negligence under Singapore law.   

The decision addresses issues familiar to the defence of Auditors in many common law countries (being creditor duties and trading losses). Whilst involving particular case authorities under Singapore law, its treatment of these important points, along with its consideration of authorities in this area from other common law jurisdictions, will be of great interest to those wrestling with these arguments around the globe.

Background

This is the latest decision arising from the financial collapse of Hin Leong Trading (Pte) Ltd ("Hin Leong"), an oil trading company owned by Mr Lim Oon Kuin and some family members. In April 2020, due to its financial difficulties, Hin Leong filed an application in court for an interim moratorium. In that application, which was subsequently withdrawn, Mr Lim admitted on affidavit that there were misstatements in Hin Leong's financial statements.  

Eventually, Hin Leong was placed in compulsory liquidation and the liquidators ascertained that there were material misstatements in the financial statements of Hin Leong for the financial years 2014 to 2019, which falsely inflated the value of Hin Leong's assets. 

The Proceedings

Hin Leong, acting through its liquidators, commenced civil proceedings against its Auditors, alleging that they had failed to exercise reasonable care and skill (the “Negligence Claim”). In summary, Hin Leong alleged that a reasonably competent auditor would have detected the material misstatements in its financial statements, uncovered the fraud perpetrated by the Lim family and identified that Hin Leong was in fact insolvent years before its collapse in 2020.

Hin Leong sought damages under several heads. The most significant of which was a claim for trading losses of approximately US$2.6 billion incurred between November 2015 and mid-April 2020 (the “Trading Losses”). Hin Leong’s claim was that the Auditor's alleged negligence enabled the fraud and Hin Leong’s true financial position to remain concealed, which in turn allowed Hin Leong to continue obtaining financing and trading while insolvent. On this basis, Hin Leong contended that if the Auditors had exercised reasonable skill and uncovered the fraud earlier, Hin Leong would have entered liquidation earlier and the Trading Losses would not have been incurred.

The Auditors sought to strike out the Negligence Claim. One of its principal arguments was that Hin Leong was controlled entirely by the Lim family, who already knew the true state of affairs. Therefore, neither the Lim Family nor Hin Leong had relied on the audited financial statements, even if they contained inaccuracies (“the No Reliance Principle”). In the circumstances, any negligence on the Auditors' part did not cause Hin Leong’s losses. The Auditors also argued that its duty as an auditor was to report to Hin Leong’s shareholders i.e., the Lim family; and since they already knew of Hin Leong’s true state of affairs, any losses suffered by Hin Leong did not fall within the scope of the Auditors' duty of care.

In response, Hin Leong argued that because it was already insolvent during the relevant period, the creditors were the main economic stakeholders; and therefore, the Auditors' duties were not confined to providing information to the company’s shareholders but extended to protecting the interests of the creditors as well (“the Creditor Duty”).  

Separately, Hin Leong applied to introduce further claims, including a claim that the Auditors had a duty to report any fraud / irregularity likely to result in material loss to Hin Leong to government authorities / third parties (the “Reporting Duty Claim”).  

The Auditors resisted the introduction of the Reporting Duty Claim and applied to strike out the Negligence Claim.

In the court below, the judge permitted the introduction of the Reporting Duty Claim and permission to appeal against this was not granted. The judge in the court below also declined to strike out the Negligence Claim, and it is this decision which was the subject of the appeal to the Singapore Court of Appeal.

The Issues 

As stated, before the Court of Appeal, the only issue was whether the Negligence Claim should be struck out. The parties further agreed to distil this down to 2 core questions:

1. Whether the Auditors' duty of care included a duty to have regard to the interests of Hin Leong’s Creditors (“the Creditor Duty Question”); and
2. Whether Hin Leong’s Trading Losses are recoverable in law from the Auditors in the event that breach of duty is established (“the Trading Losses Question”)

Basic elements of a negligence claim

Before proceeding to the main body of its Judgment, the Court of Appeal took the opportunity to clarify the constituent elements of a cause of action in negligence under Singapore law and devoted a substantial portion of the Judgment on this. International readers will note with interest some divergence as compared with other common law regimes.

These elements under Singapore law, in summary, are as follows:

1. The damage suffered must be of a type that is actionable.

• The first element is that the claimant must have suffered some sort of damage which is legally recognised in the tort of negligence. "In this regard, “damage” is generally understood as “an abstract concept of being worse off, physically or economically, so that compensation is an appropriate remedy”" (Judgment at [45], quoting Rothwell v Chemical & Insulating Co Ltd [2008] 1 AC 281).

• As the case concerned a straightforward claim by Hin Leong for economic loss, which was a well-established form of actionable damage, this was swiftly addressed by the Court of Appeal (Judgment at [46]).

2. Existence of a duty of care owed by the defendant to the claimant.

• In Singapore, the existence of such a duty is determined by the framework set out in the Singapore Court of Appeal decision of Spandeck Engineering (S) Pte Ltd v Defence Science & Technology Agency [2007] 4 SLR(R) 100 (“Spandeck”) (Judgment at [47]).

• In broad terms, the Spandeck framework contemplates the court considering: (a) first, as a threshold matter, whether it was factually foreseeable that the claimant would have suffered damage from the defendant’s carelessness; (b) second, whether there is sufficient legal proximity between the parties for a prima facie duty of care to arise; and (c) third, whether there are any public policy considerations which negate the imposition of a duty of care (Judgment at [47])

• The Court observed that in most cases, the existence of a duty of care would not be disputed or open to any real dispute, as was the case on the facts (Judgment at [48]).

3. Breach of duty of care.

• This is a question of fact (Judgment at [50] and [77]).

• The Court emphasized that when a claimant frames an allegation of breach of duty, the ultimate question that has to be decided is not whether the defendant failed to do any specific thing but whether the failure to do a certain thing constituted a failure to act with due skill and care (Judgment at [50]).

4. The damage suffered was factually caused by the breach.  

• Ordinarily, apart from certain exceptional circumstances, this entails the application of the 'but for' test, i.e. "but for the defendant's wrongdoing, would the claimant have suffered the damage that he complains of?" (Judgment at [58]).

5. The damage falls within the limits of the defendant's legal responsibility.

• Broadly, this involves two main considerations:

  • The extent to which, in circumstances where there is more than one cause of the damage, responsibility for the damage should be attributed to the defendant (Judgment at [59(a)]).

  • The foreseeability of the damage, i.e. whether the loss is too remote (Judgment at [67]). Where the claimant owes duties of care concurrently in tort and contract, the narrower remoteness rules pertaining to contract, as set out in the case of Hadley v Baxendale (1854) 9 Exch 341, would apply (Judgment at [68]).  In that regard, the "rule in Hadley v Baxendale, in brief, contemplates that a defendant should be liable for such damage that he is taken to have assumed responsibility for based on it having been in his contemplation at the time of contracting" (Judgment at [68]).

Even if the above elements are satisfied, there may be operative defences (e.g. illegality or contributory negligence) (Judgment at [44]).  

The Court explained that its identification of the individual elements of a negligence claim was intended to foster clarity as to the true nature of the issue in question (Judgment at [70]).

The Court's Decision

As mentioned above, the appeal proceeded as a summary determination of two questions: (a) whether the Auditors' duty of care included the Creditor Duty, and (b) whether the Trading Losses are recoverable against the Auditors.

Creditor Duty issue

Regarding the Creditor Duty issue, the Court of Appeal considered it to be academic (Judgment at [91]) because, based on how the parties ran their respective cases, the Creditor Duty, if any, "really does not have a separate existence outside of the Negligence Claim and the framework for negligence" (Judgment at [92]). In particular, Hin Leong’s counsel, in the course of the appeal, had accepted that it was not advocating that there was some independent duty on the part of an auditor to take into account the interests of creditors when the company is insolvent.

The Court did, however, make some observations about the Creditor Duty issue, to provide general guidance for future cases. In this regard, it observed that, because an auditor plays a different role from a director, and given that an auditor generally is not involved in making decisions for the company, the proposition that "an auditor...has a duty to "have regard to the interests of creditors" is unintelligible" (Judgment at [114]). The Court considered that, for any Creditor Duty to be meaningful, it would have to be related to a specific act or omission (Judgment at [115]).

Ultimately, the Court found that many of the issues raised by Hin Leong under the rubric of a “Creditor Duty” were, properly analysed, questions concerning whether the Auditors had breached their general duty of care, rather than whether there was a separate and distinct duty altogether. Further, being a question of fact as properly framed, it was held not appropriate for summary determination (Judgment at [117]).

Trading Losses issue

To recap, Hin Leong was claiming that as a result of the Auditors' alleged negligence, it should be liable for about USD 2.6 billion in Trading Losses i.e., losses sustained by Hin Leong because the misstatements in its audited financials allowed it to continue trading.

The Court of Appeal began its analysis by observing that whilst there was "a steady body of authority that supports its position that a company’s losses from continued trading are typically not recoverable from a negligent auditor, there is little consistency in terms of the reasoning to this conclusion" (Judgment at [120]).

On reviewing the cases submitted by the parties, the Court of Appeal found that there were two main legal bases on which the Courts have rationalised absolving an auditor from liability for a company’s losses suffered through continued trading:

1. legal causation; and
2. the SAAMCo principle i.e., the principle, derived from the case of English House of Lords case of South Australia Asset Management Corporation v York Montague Ltd [1997] AC 191, that trading losses fall, as a matter of principle, outside the scope of an auditor’s duty in the first place.

The Court of Appeal found both approaches to be unsatisfactory. Instead, it analysed the issue from the perspective of remoteness.

On legal causation, the Court of Appeal held that the approach adopted by previous cases such as the New South Wales Court of Appeal case of Alexander v Cambridge Credit Corporation Ltd (1987) 12 ACLR 202 and the English Court of Appeal case of Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360 led to analytical uncertainty because they ultimately rested on a vague allusion to “common sense”.

On the SAAMCo principle, the Court considered that SAAMCo had generated unnecessary complexity (and uncertainty) by introducing a separate "scope of duty" doctrine, which stood distinct from the usual principles of causation and remoteness, but only applied in the specific context of professional negligence or situations analogous to it.

Indeed, the Court of Appeal observed that where a rule is defined with reference to a specific case and is limited in application “in a somewhat arbitrary fashion to a specific type or context of negligence claims”, that is often a sign of difficulty in understanding its rationale (Judgment at [63]).

Instead, the Court of Appeal considered that the mischief which SAAMCo sought to address was the intuitive unfairness of the defendant having to bear all the consequences resulting from his wrongful conduct (Judgment at [142]). Properly framed and understood, that is an issue of remoteness rather than causation (Judgment at [144] and [147]). Accordingly, that mischief can and should be addressed through orthodox negligence principles, such as the contractual remoteness test under Hadley v Baxendale, in which the defendant’s knowledge at the time of contracting is used to limit recoverable loss (Judgment at [149]).  

Ultimately, therefore, the Court considered that "the Trading Losses Question raises an issue of remoteness of damage: are [Hin Leong's] Trading Losses too remote to [the Auditors'] breach of duty so as to be irrecoverable?" (Judgment at [153])

On the facts, the Court of Appeal held that the Trading Losses were too remote because, amongst other things, the Auditors had not been involved in the trading activities of Hin Leong (Judgment at [155]) and an auditor who does no more than undertake a statutory audit cannot be said to have assumed liability for losses arising from the company's trading activities, given that the occurrence of such losses "depends on movements in the market and the decisions of the company's management which the auditor has no control over or involvement in" (Judgment at [155]).

Given the nature of the services which Hin Leong had engaged the Auditors to undertake, the Court considered it unlikely that the Auditors would have contemplated being liable for the Trading Losses if they were negligent, since those services did not have anything to do with Hin Leong's trading activities (Judgment at [157]).

To conclude, the Court held that the Trading Losses were not recoverable as they were too remote. Hin Leong's pleadings relating to the claim for Trading Losses were, therefore, ordered to be struck out, leaving the following two remaining heads of loss claimed by Hin Leong: (a) dividends allegedly wrongfully declared for financial years 2017 and 2018 (totalling US$90m); and (b) the Auditors' audit engagement fees from financial years 2015 to 2019 (totalling $612,000), which will proceed to trial.

Brief concluding thoughts

This is an important decision of the Singapore Court of Appeal.

The Trading Losses issue was of huge practical significance to the parties in this case as Hin Leong was claiming about US$2.6 billion of trading losses. Striking out the claim reduced the claim to c.US$90+ million.

More generally, the Court of Appeal’s decision is of broader significance for auditors and other professionals, as it makes clear that their liability (if any) would not extend to cover trading losses. In recent years in Singapore, there have been several trading houses that have entered liquidation in circumstances where there has been the taint of fraud. In these cases, the former auditors tend to be a target for the liquidators of the insolvent companies (and their litigation funders), with the main draw being the potentially astronomical claims for trading losses. If trading losses are excluded, the commercial attractiveness of such claims will inevitably diminish.

Further, the Court of Appeal has provided greater conceptual clarity to the analysis of negligence by emphasising the distinct role played by each constituent element of the cause of action under Singapore law; and also clarified, decisively, the SAAMCo principle does not apply in Singapore. It is now clear, that cases involving professional negligence should be approached on the usual principles of causation and remoteness, and that there is no separate unique “scope of duty” argument that may be imported.

Accordingly, the Court has pushed back against a proliferation of “duties” and confirmed the focus on the fundamental duty to exercise reasonable skill and care.  

Finally, the Judgment reiterates that auditors are not directors, nor should their services be treated as underwriting trading losses. The good news for auditors is that insolvency does not transform their duties, and they may take comfort from the focus of the Court of Appeal on first principles.  

Implications for other jurisdictions 

It will be interesting to see how the reasoning of the Singapore Court of Appeal in this case is dealt with in England, Australia and other common law jurisdictions when it comes to be judicially considered in due course, and the extent to which it brings about changes to the law of negligence beyond Singapore.  

There is now a global market in claims against auditors, with those pursuing and funding them seeking to transplant convenient legal doctrine across jurisdictions.  This rejection of the perennial scourge of trading losses, with its potential grossly to inflate claim values, will serve as a welcome bulwark that will be prayed in aid by defence lawyers dealing with these claims in many countries.

To take one example, the Court’s reasoning resonates strongly with Australian common law. In particular, the post-SAAMCo reasoning of the Australian High Court in Kenny & Good Pty Ltd v MGICA (1992) Ltd [1999] HCA 25 recognised the importance of the nature and scope of the professional’s undertaking in identifying recoverable loss. However, Australian auditors operate under a statutory reporting regime: s.311 of the Corporations Act 2001 (Cth) requires auditors to notify ASIC where they become aware of circumstances giving reasonable grounds to suspect a contravention of the Act. This gives rise to the interesting question as to whether, if a reasonably competent auditor would have discovered circumstances triggering s.311, a negligent failure to discover them can feed into the common law breach analysis even though the auditor never actually acquired the relevant knowledge. It may be that the Singapore Court of Appeal’s approach in this case ultimately provides the framework for analysing that issue under Australian law.  

[1]  Reported as Deloitte & Touche LLP v Hin Leong Trading (Pte) Ltd (in compulsory liquidation) [2026] SGCA 33