Quinn Insurance Ltd (Under Administration) v Pricewaterhousecoopers (A Firm)

• Jurisdiction: Ireland
• Judge: O'Donnell J.
• Judgment Date: 08 March 2019
• Neutral Citation: [2019] IESC 13
• Court: Supreme Court
• Docket Number: S:AP:IE:2017:000079,[S.C. No. 79 of 2017]
• Date: 08 March 2019

Between/

QUINN INSURANCE LIMITED (UNDER ADMINISTRATION)

Plaintiff/Respondent

- and -

PRICEWATERHOUSECOOPERS (A FIRM)

Defendant/Appellant

[2019] IESC 13

O'Donnell Donal J.

Clarke C.J.

O'Donnell Donal J.

MacMenamin J.

Charleton J.

O'Malley Iseult J.

S:AP:IE:2017:000079

THE SUPREME COURT

Particulars – Understatement– Breach of contract – Appellant seeking particulars – Whether the figure for technical provisions in the annual accounts for the material years was significantly and materially understated

Facts: The plaintiff/respondent, Quinn Insurance Ltd (Quinn), was an insurance company with an extensive business in the Irish market which collapsed and went into administration on 15 April 2010. The deficit was substantial. The defendant/appellant, PricewaterhouseCoopers (PwC), was a firm of accountants and registered auditors who audited Quinn’s accounts and regulated returns for the years 2005, 2006, 2007 and 2008. In 2012, Quinn, in administration, commenced proceedings against PwC for breach of contract and negligence in relation to the auditing of the accounts and regulatory returns for the relevant years. In the immediate aftermath of the collapse of the company, the 2009 accounts remained to be finalised. The defendant was still the auditor. Initially, it recommended increasing the provisioning by €68 million, which would have provided for a total loss for the financial year of €115 million. The administrators retained another firm of actuarial experts, EMB Actuarial Consultants, to carry out a review, which concluded that the reserves had been underestimated by a figure of €380 million. The defendant agreed with this analysis in 2011, and therefore the plaintiff set aside additional reserves of €800 million to cater for the deficiencies. The 2009 accounts were signed off, and the defendant was replaced as auditor for the following years. Arising out of the matters which emerged in the finalisation of the 2009 accounts, the plaintiff retained the accountancy firm Mazars to report to it on the accounts. Mazars reported their conclusion that, in respect of the material years, the technical provisions were so far outside the range of reasonable estimates that they could not have been conducted properly in accordance with appropriate and relevant standards, and were therefore materially underestimated. This exercise was the basis upon which these proceedings were commenced, and the pleadings prepared. The essence of the plaintiff’s claim was its contention that the figures contained in the accounts and regulatory returns audited by the defendant, in respect of the technical provisions, were materially misstated, because Mazars had conducted a re-estimate of those figures which was so different that the estimate in the material years could not have been properly conducted.

Held by the Supreme Court (O’Donnell J) that the plaintiff should be obliged to supply the particulars sought by the defendant, either by saying directly why it contended the Quinn/Milliman figures were wrong, or by saying so indirectly by reference to the exercise the plaintiff had done through Mazars. O’Donnell J held that it was inconceivable that this case could be heard and determined without those fundamental issues being addressed, and indeed being the centre of the dispute between the parties.

O’Donnell J held that he would set aside the order of the Court of Appeal in that regard, restore the order of the High Court, and direct that the plaintiff respond to particulars 11 (3) II, V, VIII and XI (subject to an observation made in respect of the financial effect of each reason for the alleged understatement). O’Donnell J held that the replies should be furnished within six weeks, or such further time as may be agreed between the parties or directed by the High Court.

Appeal allowed.

Judgment of O'Donnell J. delivered the 8th day of March 2019.

Introduction

1 This appeal arises from one of the largest and most complex cases to come before the Irish courts, but raises an issue which is encountered almost on a weekly basis in courts across the country: what particulars of a claim must a party be obliged to provide in pleadings or in further and better particulars in advance of discovery, and, where relevant, the exchange of witness statements? The answer the law has given for more than a hundred years is well known to almost every lawyer: a pleading should contain ‘facts - not law’, and ‘facts - not evidence’. It is necessary that the pleadings set out in broad outline the case that a party proposes to make, so that the other party can prepare a defence, limit discovery, and will not be taken by surprise at the trial. However, the application of these well worn principles in particular cases is often difficult and unpredictable, and remains stubbornly resistant to much greater elucidation than the observation made by Murnaghan J. in Caulfield v. Bell and Company Ltd. [1958] I.R. 326 at p. 333 that the matter was ‘essentially a matter of degree’.

2 The background facts to this case are set out in very clear judgments delivered in the High Court (Costello J.) ( [2015] IEHC 303), and the Court of Appeal (Hogan J.; Ryan P. and Irvine J. concurring) ( [2017] IECA 94), and it is accordingly sufficient to set them out in brief outline. The plaintiff, Quinn Insurance Limited (‘Quinn’) is an insurance company with an extensive business in the Irish market which collapsed and went into administration on 15 April 2010. The deficit was very substantial indeed. At the time of the High Court judgment, it was estimated that €1.6 billion, and certainly by that point €1.2 billion, had been drawn down from the Insurance Compensation Fund to meet the deficit. The defendant, PricewaterhouseCoopers (‘PwC’), is a well-known firm of accountants and registered auditors who audited Quinn's accounts and regulated returns for the years 2005, 2006, 2007 and 2008, which are the ‘relevant years’ for the purposes of these proceedings. In 2012, Quinn, in administration, commenced proceedings against PwC for breach of contract and negligence in relation to the auditing of the accounts and regulatory returns for the relevant years. It is said that the claim for damages may amount to as much as €800 million. It is agreed that the trial of the case will be enormously complex, and could last for 12 months or more. One indicator of this is that the quest for particulars and replies thereto already runs to more than 800 pages.

3 These proceedings are made more complex by some features that are common to many claims by insolvent companies in liquidation or administration brought against their former auditors. Although the legal entity bringing the claim is the same, the persons running it are quite different. This gives the plaintiff a certain legal advantage, in that the administrators have the benefit of a contractual relationship with the former auditors, and a certain moral advantage, in that they can distance themselves from any wrongdoing on the part of the company, and present themselves as seeking recovery on behalf of the creditors. However, this comes with a significant informational and evidential deficit, since the administrators or liquidators will not have been involved in the company at the relevant time, and may have difficulty securing the cooperation of those who were. On the other hand, it is said that auditors, by necessity, obtain a very full understanding of the business of a company, and to that extent may indeed know more about the events in issue than their immediate adversaries.

4 These proceedings have an added layer of complexity in comparison to other claims in negligence against auditors, in that Quinn was a very substantial insurance company. The accounts of an insurance company cannot simply record the transactions occurring in each accounting year setting premiums received against claims paid. Many insurance liabilities will only materialise in future years. It is necessary, therefore, in order to provide a true and fair view of the accounts of an insurance company, and to make proper regulatory returns, that the accounts should include figures for what are described as ‘technical provisions’: that is, an estimate of the future costs of claims. The plaintiff's core allegation in these proceedings is that the figure for technical provisions in the annual accounts for the material years was significantly and materially understated.

5 It is agreed that the estimation of technical provisions is an actuarial exercise. First, the company produces its own ‘best estimate’ of future claims. This is done in conjunction with actuarial advice. The company then adjusts that figure applying a margin for risk and prudence, and produces a technical provisions figure, which is then the subject of a statement of actuarial opinion. Unusually, Quinn did not have or use in-house actuarial expertise. Instead, Quinn utilised the services of an independent firm of actuaries, Milliman. A further complication in this case is that Milliman have neither been sued as co-defendants, nor, it appears, are their papers available to Quinn for these proceedings, at least at the moment. In PwC's case, it also had to have recourse to actuarial assistance in auditing the technical provisions, and in this case used the services of its own actuarial arm, PwC AIMS, when carrying out the audit.

6 The claim that the technical provisions were materially understated emerged in the following way. In the immediate aftermath of the collapse of the company, the 2009 accounts remained to be finalised. The defendant was still the auditor. Initially, it recommended increasing the provisioning by €68 million, which would have provided for a total loss for the financial year of €115 million. The administrators retained another firm of actuarial experts, EMB Actuarial Consultants, to carry out a review, which concluded...