Prosolvia was a successful consultancy and software company within the IT sector. In 1997, it won the “service company of the year” award by Dagens Industri. The company was listed on the Stockholm stock exchange and the share price rose as it reported turnover and results which far exceeded market expectations. However, the impressive annual report for 1997 was questioned by media and they wrote about inflated profits due to bogus transactions and too early revenue recognition.
The media storm resulted in a mounting loss of trust among clients and partners, leading to a fall in sales and delayed payments. The stock market’s reaction was also negative – the share price plummeted and the new issue that had been planned had to be cancelled. The loss of trust was so vast that despite state owned Industrifonden becoming the main owner and providing substantial capital and other resources, it was impossible for the company to survive.
After a thorough investigation, the trustee concluded that the company’s accountants from PwC had been negligent in not discovering and reporting essential faults and deficiencies in the management affairs and the accounts and that this was the main reason why Prosolvia went bankrupt.
In 2001, the bankruptcy estate sued PwC, claiming damages for the deficiency in the bankruptcy as well as the loss of business. PwC won the case in the District Court, but in 2013, the Court of Appeal ruled in favor of the estate, demanding the accountants to pay damages of 890 million SEK. Including interest and legal costs, PwC had to pay over 2.1 billion SEK (250 million Euro). This is one of the largest damages in the world ever against an accounting firm and by far the largest amount ever in Sweden. (The previous record was 80 million SEK paid by PwC to Haningehem in 1998. Haningehem was also represented by Michael Frie and Ulf Mellqvist). Finally the parties agreed on a settlement in the autumn of 2013 whereby PwC paid 742.5 million SEK (90 million Euro).
The estate of Prosolvia was represented by a team from Bird&Bird, led by Michael Frie and Ulf Mellqvist.
How we won the case
First of all the win is the result of hard work and complete dedication from the whole of our team of attorneys, assistants and secretaries.
Why did the estate lose in the District Court?
We were already very close to winning in the District Court in 2010. The court agreed with us that PwC had been negligent in the audit, and that this had caused damage to the estate. However, the court did not agree that the causal link between the negligence of the auditors and the bankruptcy of Prosolvia, was sufficiently clear in order for PwC to be required to pay damages.
What did we do after the District Court ruling?
Obviously, it was a tough loss, since we were so close to winning. But once the initial disappointment had settled, we realized that the chance of turning it around in the Court of Appeal was high. We had won on all aspects of the case in the District Court but one; the causal link. We started working intensively with only one goal – persuading the court that there was a sufficiently strong causal link between the auditor’s negligence and the damage suffered by Prosolvia. All our efforts were put into this. The other parts of the case ¬– the bookkeeping and the auditing – were put aside; we had faith in that the Court of Appeal would follow the same reasoning as the District Court. This strategy was proven to be 100 % right. The Court of Appeal did not change anything in these parts.
What did we do more in detail in order to succeed?
Our work on the causal link followed two main directions – legal analysis and presentation technique. The judicial analysis was carried out by a team of our own experts on the law of damages from our offices in Stockholm and London in cooperation with external law professors and attorneys from Sweden and the US. The reason for us to turn to experts abroad was mainly that cases on auditor‘s liability are much more common in England and the US and we wanted to benefit from that knowledge and experience.
In disputes, it is not only a question of being right, but being proven right. The Court must be convinced that you are right. In order to succeed in this, we decided on a new approach, presenting the causal link not only in writing but also in pictures and graphics. We wanted to try a new way of communication, using graphic design in order to visualize our argumentation in pictures as a complement to the wording. It may sound like a cliché, but in a business that almost exclusively uses language, a picture can say more than a thousand words.
Instead of describing the causal link only in words, we used information graphics in our presentation. By cooperating closely with the brand agency Essen International, who together with us produced a number of pictures and graphic representations, we managed to clearly visualize the causal link step by step. This new take doubtlessly contributed to our success in managing to persuade the Court of Appeal that the negligent auditing indeed had caused damage to Prosolvia.
Our strategy was proven to be right; the Court of Appeal agreed with us that the causal link between the negligent acts and the damages was sufficiently strong.
Innovative solutions; one of our core values
One our core values is always to seek innovative solutions that could be of benefit to our clients. We were recently named “the most innovative law firm in Sweden”. The Prosolvia case is an excellent example of our ability to combine hard legal work with creative solutions to accomplish results that exceed our clients’ expectations.
Are you curious to know more about this case or how we can help you reach your company’s goals?
Contact Michael Frie or Ulf Mellqvist in our Dispute Resolution Team or our CEO Katarina Åhlberg.
Or visit one of our seminars.