High Court orders disclosure of audit files in NMCN insolvency case

Background

The High Court of Justice, Business and Property Courts of England and Wales, recently ruled in favour of the joint liquidators of NMCN Plc and its subsidiary NMCN Sustainable Solutions Limited, ordering BDO LLP to disclose audit files from 2018 and 2019. The case, presided over by Insolvency and Companies Court Judge Burton, revolved around the liquidators' need to investigate the company's sudden collapse into insolvency.

The Companies and Their Collapse

NMCN Plc and NMCN Sustainable Solutions Limited were part of a larger group involved in infrastructure projects, primarily in the water and built environment sectors. The group reported a turnover exceeding £400 million in 2019, but by 2021, both companies had entered administration and subsequently liquidation. The joint liquidators, Helen Dale, Jonathan Roden, and Amanda Wade, sought to understand the reasons behind the financial collapse, particularly focusing on the audits conducted by BDO LLP.

The Legal Proceedings

The liquidators applied for an order under sections 235 and 236 of the Insolvency Act 1986, which require cooperation from company officers and allow the court to summon individuals capable of providing information about the company's dealings. The liquidators argued that the audit files were crucial to determine whether BDO breached its duties during the audits, which could potentially lead to claims against the auditors and former company management.

BDO's Defence

BDO LLP opposed the application, asserting that the liquidators had not demonstrated a reasonable requirement for the audit files. They contended that the liquidators already had access to extensive documentation and that the request for the audit files was too broad and lacked specificity. BDO also argued that the disclosure would be oppressive and circumvent the Professional Negligence Pre-Action Protocol, which provides a framework for resolving disputes before litigation.

The Court's Decision

Judge Burton ruled in favour of the liquidators, stating that the audit files were reasonably required to assess potential claims against BDO and the company's management. The court found that the audit files, maintained in accordance with International Standards on Auditing, would provide a unique record of BDO's audit process and the information provided by the company's management. The judge concluded that the potential benefits of disclosing the audit files outweighed the burden on BDO.

Implications of the Ruling

This ruling underscores the court's willingness to support insolvency practitioners in uncovering the truth behind a company's financial collapse. It highlights the importance of transparency and accountability in the auditing process, particularly when significant financial discrepancies arise. The case also illustrates the court's discretion in balancing the needs of liquidators with the potential burden on auditors.

Future Considerations

The decision to order the disclosure of audit files could set a precedent for future insolvency cases, where liquidators seek to investigate the actions of auditors and company management. It may also influence how auditors document their work and interact with company management, knowing that their files could be subject to court-ordered disclosure.

Conclusion

The High Court's decision in this case reinforces the role of the judiciary in facilitating the work of insolvency practitioners and ensuring that all relevant information is available to assess potential claims. As the liquidators proceed with their investigation, the disclosed audit files could play a pivotal role in determining the next steps in the liquidation process.

Learn More

To explore key legal considerations for contractors and auditors, view BeCivil's Contractor Law Guide.