Auditing the experts

Chris Mallon looks at past insolvency cases and suggests what not to look for when you are hiring an expert witness. Chris Mallon is head of insolvency at Biddle.

Since 1981, and particularly during the last 10 years, we have seen the appearance of the expert witness in almost every type of case, not always with salutary effect.

The field of insolvency is no exception. Expert witnesses, often accountants, have appeared in proceedings under s.236 of the Insolvency Act, and under the Directors Disqualification Act 1986.

Experts are also increasingly being called on in proceedings in relation to fraudulent trading (s.213), wrongful trading (s.213-4), transactions at an undervalue and preferences (s.238-241), and transactions defrauding creditors (s.243).

In British & Commonwealth Holdings Mr Justice Hoffman was faced with an application by the administrators of the company for an order under s.236 (2) that the auditors (Spicer & Oppenheimer) provide access to the audit papers for the 1987 accounts and the 1988 half-yearly figures. An informal application had been refused on the basis that to require inspection of “hundreds of files” would be oppressive.

An expert witness from Touche Ross came forward to support a floodgate's argument to the effect that the cumulative effect of similar orders in respect of many audit clients would cause “intolerable disruption” to the auditors' business.

Mr Justice Hoffman's judgment indicates the combined effect of the expert witness and the arguments he supported: “By requiring disclosure in this case of an insolvency running into hundreds of millions of pounds which has provoked a Department of Trade inspection, I do not think that I would be introducing a regime in which, as Mr James put it, 'Auditors could be required to disclose all documents… effectively on the mere ipse dixit of the administrators that those documents are required to facilitate their investigation.' The implications that registrars and judges exercising their discretion under s.236 are mindless rubber stamps could perhaps have been more tactfully phrased.”

Another example of expert witnesses falling foul of the court concerned an unreported application before Judge Reid QC (sitting as a deputy judge of the High Court) in proceedings under the Company Directors Disqualification Act 1986. There were a number of witnesses before the court, two of whom had been put forward as experts.

In his judgment, Judge Reid said in relation to those experts: “For the purpose of the summons before me I assume that the two deponents in question can properly be called experts, though I have to say there might have been some argument or doubt in the light of the paucity of material in their respective CVs.”

Having reviewed the functions and duties of experts, as set out in the judgment of Mr Justice Cresswell in Ikarian Reefer (1993), Judge Reid considered the expert evidence. In relation to the first expert he found:

1. The evidence made it clear that the expert was putting himself forward not as an independent and unbiased expert doing his best to assist the court, but as an advocate.

2. There were unparticularised attacks on the evidence put in by the applicant which the judge found were not supported by statements of sources, nor were they a necessary lead into statements of expert opinion on matters to which expert evidence properly related.

3. There were gratuitous statements in support of the respondent completely unconnected to issues in the proceedings.

4. When the judge found something that he thought might properly form an expert accountant view there were no explanations or workings. He therefore found it difficult to see what those views could be relevant to, or how they could be proper material to place before the court.

5. The judge later found material which he thought might be helpful, but it appeared to him to be stuck in a long series of submissions and hearsay evidence. He decided it would be undesirable to strike out the passages all around the helpful material and leave paragraphs standing on their own.

In conclusion, he found that the vast bulk of the report was irrelevant: it was advocacy, hearsay evidence and comment. It was not what could properly be regarded as being a proper expert's report aimed at specific matters on which expert opinion could properly be sought and on which expert opinion evidence would properly be admitted.

He therefore struck out the 'expert' evidence on the ground that it was irrelevant, but also on the basis that, as it stood, it was oppressive.

In Whitehouse v Jordan (1981) Lord Wilberforce held that: “Expert evidence presented to the court should be, and should be seen to be, the independent product of the expert uninfluenced as to formal content by the exigencies of litigation.”

One could do worse than to use the above as a checklist for what you do not want from an expert when you next call one.