Question Tag: Legal Liability

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  • 4 Marks

BCL – Nov 2016 – L1 – Q6b – Accounts and Audit

Define professional negligence and its implications in a legal context.

Briefly explain what is meant by professional negligence.

Professional Negligence refers to a situation where an individual or a group of people who profess to have special skills and training apply those skills for the assistance of another person, who relies on such skills to act, resulting in a financial or other loss. The key elements of professional negligence include:

  1. Duty of Care: The professional owes a duty of care not only to their client but also to all those whom they know will rely on their statements, information, and advice in a transaction for which the statements, information, or advice are provided.
  2. Breach of Duty: The professional must exhibit the degree of skill, care, and diligence that is expected of a reasonably competent member of their profession. Failing to do so may result in a breach of their duty of care.
  3. Causation: The breach of duty must cause a loss to the person relying on the professional’s expertise.
  4. Legal Liability: If a loss occurs due to the professional’s failure to meet the expected standard of care, they can be held legally liable for the damages caused by their negligence.

Professionals such as lawyers, accountants, auditors, valuers, and surveyors, among others, may be subject to claims of professional negligence if they fail to render services with the required skill, prudence, and diligence expected by their clients.

(4 marks)

  • 6 Marks

BCL – Nov 2016 – L1 – Q6a – Accounts and Audit

Assess whether Capare Industries Ltd. would be justified in taking legal action against the firm of auditors.

Capare Industries Ltd, which already held shares in a company known as Logotex Co., later made a takeover bid on the strength of its accounts prepared by Dickman Ltd., a firm of auditors. Capare Industries Ltd realized that the accounts were inaccurate in that they showed a pre-tax profit of GH¢1.3 million when in actual fact there had been a loss of GH¢400,000. It was the case of Capare Industries Ltd that if they had known the true situation, they would not have made a bid at the price they did or may not have made a bid at all. They argued that they were owed a duty of care by the auditors as new investors and as existing shareholders who in reliance on the accounts had bought more shares.

Required:
Explain whether Capare Ltd would be justified in taking action against the firm of auditors.

Capare Industries Ltd would be justified in taking action against the firm of auditors for the following reasons:

  1. Duty of Care: The firm of auditors has a duty to provide an independent and professional inquiry into the financial matters of a company to ascertain whether the financial records generated by management and the financial statements prepared by the directors disclose the true state of affairs of the company.
  2. Primary Audience: Every audit report of a company has the membership of the company as its primary audience, and therefore, the auditors owe a duty of care to the members of the company, which includes Capare Industries Ltd.
  3. Reliance on Audit Report: Capare Industries Ltd, being a shareholder in Logotex Co. Ltd, relied on the audit report prepared by Dickman Ltd. to make a takeover bid. The inaccuracies in the audit report directly influenced their decision.
  4. Professional Negligence: As professionals, the auditors are required to maintain high standards in their financial investigations. The erroneous financial report prepared by Dickman Ltd., which Capare Industries Ltd relied on, constitutes a breach of this duty of care, amounting to professional negligence.
  5. Legal Action: Capare Industries Ltd can take legal action against the firm of auditors for damages caused by their reliance on the inaccurate financial statements, which resulted in financial loss.

(6 marks)

  • 20 Marks

BCL – Nov 2015 – L1 – Q4 – Legal Implications Relating to Companies in Difficulty or in Crisis

Discuss the circumstances under which the courts may lift or pierce the veil of incorporation of a limited liability company.

What are the reasons for which the courts are prepared to lift or pierce the ‘veil of incorporation’ of a limited liability company? (20 marks)

With the ‘Veil of Incorporation’, the company is separate from its members, such that, although the corporate veil principle is regarded as fundamental to company law, there are instances where it has been lifted or ignored in favor of the economic realities of the situation.

This occurs where the Courts are prepared to take judicial notice of the identities of the owners, directors, or controllers with a view of fixing them with some legal liability. The reasons the Court gives for lifting the veil may be several but notable among them are:
i) Agency principle
ii) Fraud principle
iii) Capital flight
iv) Public policy
v) Facade principle/Evasion of contractual obligation
vi) Statutory provisions

Examples of statutory provisions are:
a) Failure to publish annual returns
b) Operating with less than two directors
c) No membership (a company without any member)
d) Failure to display the company’s name

(20 Marks)

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