Significant extensions to liabilities and risks for professional services firms and LLP members

 

There have been a couple of recent but significant decisions that change the landscape of liabilities for professional services firms and their members, which every LLP should be aware of and take action in relation to.

 First up was the High Court case of The Secretary of State for Business, Energy and Industrial Strategy v Geoghegan & Ors [2021] EWHC 672 (Ch) which confirmed that all members of an LLP are potentially liable to face disqualification proceedings under s6 of the Company Directors Disqualification Act 1986 in the event of that LLP becoming insolvent whilst, or subsequent to, them being a member.

The court confirmed that the test to be applied to a member of an LLP is the same as that which applies to a director of a limited company, i.e. whether the conduct done in the capacity of a member of the LLP makes the individual unfit to be concerned in the management of a company or an LLP; the conduct does not need to relate to central management activities or activity at management board level. This makes the case of wide interest to members of LLPs, particularly those in larger firms, where there are several levels of membership. For example, a junior member of such an LLP who makes mistakes in handling a client matter could now be subject to disqualification proceedings on this basis. In this particular case the members who were subject to disqualification were not on the firm’s management board; instead, the misconduct potentially justifying their disqualification related to their handling of a client matter.  This new risk will also be something to draw the attention of new members who join an LLP to, falling within the ambit of shared responsibilities for the LLP trading with the benefit of limited liability.

Of even greater concern may be the Supreme Court judgment in Manchester Building Society v Grant Thornton UK LLP [2021] UKSC 20, which has provided guidance on determining the scope of duty of care and liability of professional advisers in professional negligence claims.In this significant decision, the court held that the scope of a professional’s duty of care is governed by the purpose of the duty, looking objectively at the reason why their advice is being given. In cases of professionally negligent advice, courts should first consider the risk the duty was supposed to guard against, before determining whether the loss suffered represented a realisation of that risk.  In particular, the Supreme Court highlighted that the previously well-established distinction between ‘information’ and ‘advice’ cases, as laid down in South Australia Asset Management Corpn v York Montague Ltd [1997] AC 191 (SAAMCO) was not a rigid rule, with the focus instead being on identifying the purpose of the duty of care assumed by the professional adviser to determine both liability and damages.The SAAMCO principles had previously been applied to professional negligence claims on the basis of whether the professional had provided ‘information’ or ‘advice’. If a professional had provided ‘advice’ in regard to a whole transaction, that professional could be liable for ‘all the foreseeable consequences of entering into the transaction’. If, however, a professional had merely provided certain ‘information’ then the court would apply a counterfactual test: ie for each item of loss, the claimant must show that it would not have suffered that loss if the incorrect information, as described by the professional, had in fact been correct.This represents a potentially substantial widening of the circumstances in which damages can be recovered from negligent professionals, particularly where professionals have advised only in relation to discrete aspects of a transaction as they no longer appear able to rely on the SAAMCO distinction of ‘information’ to reduce or cap liability.

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