A company called KLM, manufacturers of electrical equipment, was the target of a takeover by ABS Industries. KLM was not doing well. In March 2019, KLM had issued a profit warning, which had halved its share price. In May 2019, KLM’s directors made a preliminary announcement in its annual profits for the year up to March. This confirmed that the position was bad. The share price fell again. At this point, ABS had begun buying up shares in large numbers. In June 2019, the annual accounts, which were done with the help of the accountant Dinesh, were issued to the shareholders, which now included ABS. ABS reached a shareholding of 29.9% of the company, at which point it made a general offer for the remaining shares, as the City Code’s rules on takeovers required. But once it had control, ABS found that KLM’s accounts were in an even worse state than had been revealed by the directors or the auditors. It sued Dinesh for negligence in preparing the accounts and sought to recover its losses. This was the difference in value between the company as it had and what it would have had if the accounts had been accurate. Which of the following answers in incorrect? (Answer the question after reading the following paragraph.)

Directions: Apply the legal principles to the facts given below and select the most appropriate answer.
Legal Principles: 1. Negligence is a legal wrong that is suffered by someone at the hands of another who has a duty to take care but fails to take proper care to avoid what a reasonable person would regard as a foreseeable risk.
2. The test of liability requires that the harm must be a reasonably foreseeable result of the defendant’s conduct, a relationship of proximity must exist and it must be fair, just and reasonable to impose liability.
3. The claimant must prove that harm would not have occurred ‘but for’ the negligence of the defendant.
4. Duty of care is a legal obligation which is imposed on an individual requiring adherence to a standard of reasonable care while performing any acts that could foreseeably harm others.
5. Conversations between a doctor and patient are generally confidential but there are few exceptions.

Option A: No duty of care had arisen in relation to existing or potential shareholders. The only duty of care the auditor`s owed was to the governance of the firm.

Option B: Dinesh is not liable as it is a case of pure economic loss in the absence of contractual agreements between parties.

Option C: There are circumstances where an auditor will owe a duty of care in respect of reports produced. These are conditional that at the time the report is prepared it is known by the auditors that the results are for a specific class and for a specific purpose.

Option D: An ability to foresee indirect or economic loss to another person as the result of a defendant’s conduct automatically impose on the defendant a duty to take care to avoid that loss.

Correct Answer

Option: d

Explanation

Negligence is the breach of a legal duty of care by the plaintiff which results in undesired damage to the plaintiff

Sample Mock Tests for Practice

DELHI LOWER JUDICIAL SERVICES 2018-2

THE INDIAN CONTRACT ACT, 1872 (PAPER – 10 Q. NO. 316 TO 350)

THE CONSTITUTION OF INDIA, 1949 (PAPER – 10 Q. NO. 316 TO 350)

DELHI LOWER JUDICIAL SERVICES 2022

AILET – National Law University Delhi Entrance Test (NLU 2020)

CLAT 2021

DELHI LOWER JUDICIAL SERVICES 2019

THE LIMITATION ACT, 1963 (PAPER 03 Q. NO. 81 TO 120)

AILET – National Law University Delhi Entrance Test (NLU 2021)

THE CODE OF CIVIL PROCEDURE, 1908 (PAPER – 14 Q. NO. 521 TO 560)

PUNJAB LOWER JUDICIAL SERVICES 2019

THE ADMINISTRATIVE TRIBUNALS ACT, 1985 (PAPER-01 Q. NO. 1 TO 21)

THE INDIAN EVIDENCE ACT, 1872 (PAPER – 08 Q. NO. 281 TO 320)

THE TRANSFER OF PROPERTY ACT, 1882 (PAPER 07 Q.NO. 241 TO 280)

HIMACHAL PARDESH LOWER JUDICIAL SERVICES 2019

THE ARBITRATION AND CONCILIATION ACT, 1996 (PAPER 01 Q. NO. 1 TO 30)

THE CONSTITUTION OF INDIA, 1949 (PAPER – 08 Q. NO. 246 TO 280)

THE HINDU SUCCESSION ACT, 1956 (PAPER 01 Q. NO. 1 TO 35)

THE CODE OF CIVIL PROCEDURE, 1908 (PAPER – 11 Q. NO. 401 TO 440)

THE INDIAN EVIDENCE ACT, 1872 (PAPER – 07 Q. NO. 241 TO 280)

GUJRAT LOWER JUDICIAL SERVICES 2019(1) & (2)

THE SPECIFIC RELIEF ACT, 1963 (PAPER – 04 Q. NO. 106 TO 140)

THE CODE OF CRIMINAL PROCEDURE, 1973 (PAPER – 17 Q. NO. 641 TO 680)

THE INDIAN EVIDENCE ACT, 1872 (PAPER – 17 Q. NO. 641 TO 680)

AILET – National Law University Delhi Entrance Test (NLU 2022)

THE LAW OF TORTS (PAPER 01 Q. NO. 1 TO 45)

AILET – National Law University Delhi Entrance Test (NLU 2014)

THE TRANSFER OF PROPERTY ACT, 1882 (PAPER 01 Q.NO. 1 TO 40)

THE INDIAN EVIDENCE ACT, 1872 (PAPER – 06 Q. NO. 201 TO 240)

THE CODE OF CIVIL PROCEDURE, 1908 (PAPER – 08 Q. NO. 281 TO 320)

MADHYA PRADESH LOWER JUDICIAL SERVICES 2019(1)

THE INDIAN CONTRACT ACT, 1872 (PAPER – 11 Q. NO. 351 TO 385)

CHHATTISGARH LOWER JUDICIAL SERVICES 2019

THE HIMACHAL PRADESH URBAN RENT CONTROL ACT, 1987 (PAPER 02 Q. NO. 31 TO 60)

RAJASTHAN LOWER JUDICIAL SERVICES 2021

THE JUVENILE JUSTICE (CARE AND PROTECTION OF CHILDREN) ACT, 2000 (PAPER 01 Q. NO. 1 TO 13)