Accountant's liability to underlying shareholders

An accountant is liable if he has not acted as could be expected of a reasonably competent and reasonably acting advisor. If there is professional misconduct, then the question arises as to whom the accountant is liable. Sometimes shareholders (or other interested parties) of a company that commissioned the accountant seek redress, for example when the company that originally commissioned the accountant has since gone bankrupt. The question is whether this can be done and whether the auditing firm in question can then invoke general terms and conditions now that these are in principle only applicable in a contractual relationship between client (the company) and contractor (the auditing firm) and do not automatically apply to underlying shareholders of the client.

Professional error in the application of the BOR

A case before the Gelderland District Court involved a construction company that fell on hard times during the crisis. The shares in that construction company are held through personal holding companies by two fathers and his two sons. The accounting firm was asked to advise on the tax supervision of the business succession by the sons, who would take over both fathers' interests in the company. The accusation against the accounting firm boils down to the fact that the accounting firm failed to mention the requirement that the business successor (read: the sons) must continue the business for at least five years when applying the business succession regulation (BOR). While the transfer was notarized in December 2012, a few months later, in March 2013, the company's own bankruptcy was filed. As a result, the tax authorities imposed a gift tax assessment of approximately €400,000.00 each on the two sons, because the business was discontinued within five years of the transfer of the business by way of a gift, which meant that they were no longer entitled to the exemption under the BOR.

Below, I focus on the accounting firm's liability to the two sons, rather than whether there was professional misconduct or not.

Liability of accountant against others than client?

The construction company was conducted through a limited liability company (BV). The BV had paid the accounting firm and was therefore, in a formal sense, the client of the accounting firm. That in itself raises the first eyebrow because this is guidance of tax interests of two underlying shareholders (the two sons). One can question whether the corporation has a sufficient interest in the advice and can act as principal to the accounting firm, but at least that is how it went down. Nevertheless, two questions arise here:

1. Was the accountant, whose client was the now bankrupt construction company, also liable to the two sons as underlying shareholders?
2. Could the accounting firm rely against the two sons on general conditions applicable to the relationship between the construction company as client and the accounting firm as contractor?

The court rules on the first question that the accounting firm is liable for (part of) the damages suffered by the two sons. Not completely, because the court considers that the sons themselves also have a share in the damages. Thus, the court steps over the argument that the two sons were not, in a formal sense, clients of the accounting firm. This in itself is not new. There is more case law assuming such liability.

General terms and conditions as protection against third-party claims

As for the second part of the question, namely whether the accounting firm can rely on general terms and conditions even though there is no formal assignment relationship with the two sons, the court does not comment on that. This does matter in connection with the limitation of liability that will normally be included in general terms and conditions. Many models used by accountancy firms (such as the SRA conditions), for example, provide for an indemnification by the client for the benefit of the contractor, against all claims by third parties such as shareholders, directors, supervisory directors, et cetera. However, an indemnity is only as strong as the party giving the indemnity and if that party is bankrupt it will usually lose all value. In short, limitation of liability in general terms and conditions does not only make sense in relation to the principal but also to the aforementioned interested parties, such as shareholders. In my opinion, moreover, based on case law, it is defensible that the accountancy firm, as in the case described above, can rely on the limitation of liability since the two sons were actually interested parties in the accountant's advisory work and therefore should have taken into account a limitation of liability in general terms and conditions.