Deloitte must pay €42,000 in damages over Priceclub supermarket fiasco

Audit firm Deloitte has been ordered to pay nearly €42,000 to former Priceclub supermarket suppliers Valle Del Miele (VDM) after losing an appeal it had filed against a judgment which had found it to have been negligent.

In 2000, the defendants Deloitte had been auditors of a debtor of Valle Del Miele who owed the company €182,373. A statutory report it published had painted a rosy picture of the troubled Priceclub supermarket chain’s finances and had misled Valle Del Miele into allowing this credit to increase to over €350,000.

Up to 200 suppliers and other creditors lost between Lm8 to Lm12 million when the Priceclub crashed into bankruptcy.

VDM was owed over €350,000 by the bankrupt Priceclub supermarket for merchandise sold to the supermarket. Deloitte had been engaged to carry out an audit for Priceclub on the basis of audited accounts from 2000, a year before the supermarket chain went belly-up.

VDM accused Deloitte of having portrayed an optimistic picture of Priceclub’s business without indicating that the supermarket had financial difficulties, and on that basis decided to continue to supply merchandise to Price Club.

Despite the published accounts, Priceclub stopped payments to its creditors in April 2001, owing millions to various suppliers.

VDM claimed Deloitte had acted in a negligent or fraudulent manner when it prepared Priceclub’s accounts, and that its partners were liable in damages, claims that Deloitte categorically denied.

In 2003, the courts declared that Deloitte had been negligent in connection with the work carried out for Priceclub Operators.

Deloitte appealed, but in 2004, the Court of Appeal ruled that the appeal was inadmissable as it had not been filed within the legal time limit – 20 days from the date of the judgment and not within 20 days from the authorisation to appeal.

Deloitte then filed a constitutional case in the First Hall of the Civil Court in its constitutional jurisdiction, claiming the Appeal Courts’ decision had violated its fundamental human right to a fair hearing. In 2006, that court ruled in Deloitte’s favour.

Subsequently, the Attorney General appealed to the Constitutional Court, which in turn overturned the previous court’s ruling in 2007.

So, Deloitte partners Raphael Aloisio, Malcolm Booker, Steve Cachia, Edward Camilleri, Andrew Manduca, Paul Mercieca and Stephen Paris took the decision to Strasbourg, where in 2011 the ECHR found that their rights had been breached, ordering that compensation of €6,000 is paid to them for a breach of their right to a fair hearing.

However, Deloitte filed a new case based on the ECHR’s findings in 2013, requesting that the Maltese courts grant them the power to appeal the Valle del Miele decision. But both the First Hall of the Civil Court constitutional jurisdiction in 2017, and later the Constitutional Court, refused Deloitte’s request.

In a 56-page judgment handed down on Thursday in another appeal filed by both parties, quoting volumes of local and foreign jurisdprudence, judges Giannino Caruana Demajo, Joseph R. Micallef and Anthony Ellul agreed with the original finding of negligence on the part of the defendants and reversed it where it had said that they were not answerable in damages.

While it was true that accounts are prepared by the directors, it was the duty and responsibility of the auditors to verify the accounts and state whether they were reliable and trustworthy, said the court. This was why the law imposed the obligation on auditors to declare whether the annual accounts were compiled correctly. Besides this, there was a duty on the creditor to seek expert advice – but this advice would presuppose that the accounts were objectively correct, added the judges.

Despite having insufficient capital from the outset, the debtor had loaned €400,000 to one of its shareholders, which ended up in the loss of €237,458. Besides this, the company to which the money was loaned, was itself the means through which shares in the debtor company were bought – effectively meaning that the debtor was financing the purchase of its own shares.

But the court also stressed that the fact that the debtor company did not act in good faith did not necessarily mean that the defendant auditors were complicit in the deception.

“Rather, the court doesn’t believe that the defendants, who have a famous and well-respected firm, would ever stain their good name with complicity in something like this.” This was not fraudulent behaviour, but negligence, said the court, stating that with their vast experience and resources, Deloitte should have recognised the signs which indicated the true capital structure and financial position of Priceclub and the corollary for its creditors.

The court awarded VDM €41,911 in damages plus interest from the date the case was filed.

Lawyers Shazoo Ghaznavi, Robert Galea and Mario Calleja appeared for VDM. Lawyers Tonio Azzopardi and Stefan Frendo appeared for the appellants.