Southern Equities Corporation Ltd (in liq) v Arthur Andersen & Co

In this case, Southern Equities Corporation Ltd (SECL), in liquidation, sued its former auditors, Arthur Andersen & Co (AA), for negligence in their audit of SECL's accounts for the year ended 30 June 1988. SECL alleged that the audit had been improperly conducted, resulting in an overstatement of profits and understatement of losses. SECL further alleged that it relied on the audited accounts to incur liabilities and pay dividends, which would not have occurred if the true financial position had been disclosed. SECL also claimed that the auditors should have identified the need for provisions to be made for certain losses. AA argued that the allegations in SECL's Statement of Claim (SC) indicated that the relevant transactions were a fraud or a sham or involved trickery, intended to enable false profits to be recorded. AA further argued that the SC put in issue SECL's state of mind about the accounts and the transactions, making it unfair for SECL to withhold legal advice received about those transactions. AA also claimed that it had a statutory right to inspect documents containing legal advice given to SECL about the relevant transactions. The court considered whether legal professional privilege applied to the documents in question, and whether any waiver of privilege should be imputed as a matter of fairness. The court held that the Master rightly rejected the argument that the SC alleged a fraudulent or illegal or improper purpose on the part of SECL in relation to reporting profit or in relation to not making provisions in respect of the relevant transactions. However, the court found that there was an imputed waiver of privilege as a matter of fairness in relation to legal advice tendered to SECL and its subsidiaries about whether it was proper for SECL or the relevant subsidiary to recognise a profit or not to make a provision in respect of the relevant transactions. The matter was remitted to the Master for further application by AA to determine whether there were any documents in respect of which privilege was claimed.