Appeal court backs Downer, PwC
- Throws out J$14m Caribbean Steel judgment
Barbara Gayle, Court Reporter
The Jamaican appeals court has reversed a decision against Pricewater-houseCoopers Jamaica (PwC) that clears the auditing/ consultancy firm of negligence for advice given to Caribbean Steel Company Limited, which ended up costing the latter millions of dollars on a bad investment.
The decision clears PwC of a J$13.8-million judgment by Supreme Court Justice Roy Jones five years ago that held that PwC had failed to highlight pertinent information on Caribbean Cable Company Limited's indebtedness in its valuation of the shares.
Caribbean Steel was in the process of purchasing majority interest in the cable company at the time of the valuation, which was done by then PwC partner Richard Downer.
PwC's attorney, Sandra Minott-Phillips of the law firm Myers Fletcher & Gordon, said her client and their expert witness Stephen Holland, a chartered accountant, were vindicated by the judgment of the Court of Appeal.
The court found that PwC was not negligent in relation to the valuation of the shares nor in its audit of the financial statements of Caribbean Cable.
Downer, a chartered accountant, said in court documents that he had been doing valuations for decades and that Caribbean Cable was 'the only valuation' done by him that had been challenged by a client.
PwC said in its appeal that the fee of J$937,783.40 for the audit done a decade and a half ago was unpaid. The court ordered Caribbean Steel to pay the amount with interest at 15 per cent per annum.
In the Supreme Court judgment delivered in May 2006, Jones had ordered PwC to pay to Caribbean Steel J$13.849 million with interest applied at a rate of 24.55 per cent from January 1995 to the date of judgment.
Caribbean Steel had taken PwC to court to recover losses it said it incurred as a result of its acquisition of the majority shares of Caribbean Cable in reliance on the valuation of shares done by PwC.
The steel company said it relied on PwC's valuation report in its acquisition of 50.1 per cent of the shares for which it paid J$32.1734 million.
Richard Lake, the chairman of Caribbean Steel, said that the report did not disclose the fact that the two owners/managers of Caribbean Cable had borrowed heavily from the pension fund.
Lake said the loans were described as trade payable and were not separately identified for the scrutiny of Caribbean Steel's board.
PwC denied that a loan from the pension scheme to Caribbean Cable had depleted the pension scheme or caused loss or damage to Caribbean Steel, a shareholder of Caribbean Cable.
The firm said the existence of the J$400,000 loan to Caribbean Cable did not affect its estimate of the value of existing ordinary shares, as reflected in Cable's unaudited accounts at August 31, 1994.
Assets not depleted
Downer said when he did his valuation, the borrowings from the pension fund was J$400,000. However, by March 1995, the borrowings stood at J$3.5 million, but Downer said the loans did not deplete the assets of the pension fund as the money was due to be repaid and so was booked as a receivable and, therefore, an asset of the fund.
In her argument before the Court of Appeal judges, Minott-Phillips asked the court to set aside the finding that PwC made representations in the audit which guided Caribbean Steel in the purchase of the shares.
She said it was a 'chronological impossibility' as the shareholder's agreement under which Caribbean Steel subscribed to the shares in Caribbean Cable was dated February 1995, while PwC's financial statements covered the 15-month period ending March 31, 1995 and were certified on September 22, 1995.
The appellate court found that Justice Jones gave 'insufficient regard' to the testimony of expert witness, Stephen Holland, a chartered accountant with experience in valuations of shares, and erred in giving preference to the evidence of Caribbean Steel's witness Collin Greenland on matters where expert evidence ought to have been helpful.
Greenland is a certified fraud examiner, a certified financial services auditor and a forensic accountant.
"Had he given due value and weight to the evidence of the witnesses called on behalf of Price, he would have concluded that Price had, indeed, fulfilled the terms of its contract with Steel," the appeal court held.
Justice Seymour Panton, president of the Court of Appeal, Justice Howard Cooke and Justice Algernon Smith (both now retired) disagreed with Jones that Greenland - who on the evidence, was neither an auditor nor a chartered accountant and who had never prepared a share valuation of a company - was competent to give expert evidence relating to a share valuation and audited financial statements.
They found that Justice Jones erred in finding admissible Greenland's evidence of what is, or is not, an acceptable standard of service rendered by registered public accountants.
In its written judgment, the appellate court pointed to evidence that Downer of PwC has been doing valuations for decades and that this was the only valuation he has done that had been challenged by a client.
The court concluded that once the valuation was rendered by PWC, there was no change in the price of J$32 million set out in the previously existing Heads of Agreement covering the terms of the proposed acquisition by Caribbean Steel.
The court said that had Caribbean Steel relied on the valuation, it would have reduced the price it agreed to pay.
"Certainly Price cannot be blamed for Steel's decision. Steel must therefore bear the consequences of its decision to proceed along the lines set out in the Heads of Agreement," the court held.
The court also ordered Caribbean Steel to pay PWC's legal costs both in the Supreme Court and Court of Appeal.
Caribbean Steel was represented by Hilary Phillips, QC, who is now a judge of the Court of Appeal, and Minett Lawrence.
Minott-Phillips was assisted by Alexis Robinson and instructed by Peter Goldson.