THE HIGH COURT

1983 No. 5120P

 BETWEEN

GOLDEN VALE CO-OPERATIVE CREAMERIES LIMITED

PLAINTIFF 

-AND-

FRANCIS J. BARRETT, BREFFNI J. BYRNE, DENIS P. CREMIN, JAMES R. GALLAGHER, HARFORD M. ROBB AND ADRIAN BURKE PRACTISING UNDER THE STYLE AND TITLE OF ARTHUR ANDERSEN AND COMPANY

DEFENDANTS Judgment delivered by O'Hanlon J., the 16th March, 1987

The Plaintiff in this case claims damages against a firm of Accountants which it employed in the year 1980 to investigate on its behalf the affairs of Castlemahon Poultry Products Limited and to provide information which would assist the Plaintiff in reaching a decision as to whether it should participate in a rescue operation designed to keep the Castlemahon Company in business.  The claim alleges negligence and breach of contract against the Defendants in the manner in which they carried out the work, and the Plaintiff says, in effect, that it was induced by the Defendants1 report to sink a sum of £1 million in the Castlemahon Company and lost its money when the Castlemahon Company went into liquidation within a comparatively short period after the investment was made. By way of introduction it will be useful to give some background information concerning the two companies which were involved in the transaction when the Defendants accepted the assignment.

GOLDEN VALE

A large number of Creameries in the counties of Cork, Limerick and Clare banded together to form the Golden Vale Co-Operative which became one of the largest and most important of its kind in the country.  By the year 1980 some 7,000 farmers in the area were members of the Co-Op.  Its milk intake reached a maximum of over 90 million gallons in the year 1978, and its annual turnover figure exceeded £100 million. It had its registered office at Charleville, Co. Cork, and apart from selling milk and cream in their natural state it engaged in large-scale industrial activities in the manufacture of cheese, milk powders, cattle feed, and equipment for the dairy, brewing and chemical industries.  A new provender mill built at Kilmallock was completed and put into commission in the 1980/81 period, at a cost of £4,000,000.

The affairs of the Co-Op were conducted on behalf of the members by a Board of Directors - a large and somewhat unwieldy body of over seventy members on which all the amalgamated Creameries were represented, and which met on a monthly basis.  Tighter control was exercised over the running of the Co-Op by a Board of Management comprising seven members drawn from the Board of Directors, and this was augmented by two special advisers on financial and business matters drawn from outside the ranks of the Co-Op itself, who were entitled to attend the meetings of the Board of Management and take part in its deliberations, but not to take part otherwise in its decisions.  This Board met twice monthly.  The Officers of the Co-Op included a Chief Executive Officer who, at all times relevant to these proceedings, was Mr. T.A. Curtin, and a Group Secretary, Mr. Gerard Curley.	

Competition for milk supplies was keen among the Dairy Co-Operatives in the late 1970s and resulted in what was referred to in the course of the evidence in this case as a "milk war".  The Co-Ops had laid out vast sums of money on milk processing plant and had to maintain an adequate milk supply on an annual basis to make good the capital outlay
involved in the industry. They were contending with a period when more and more farmers were turning their backs on the laborious, if sometimes lucrative, way of life of the dairy farmer and were getting out of farming altogether or selling off their milk herds and moving into other areas of farming. On a nationwide scale the number of milk suppliers declined from 90,000 to 60,000 in the period from 1974 to 1983. Concern about this problem was expressed in the Annual Report of Golden Vale in the years 1980 and 1981.  In 1980 the Chairman reported as follows 

"Milk supplies declined for the third successive year milk price increases were completely inadequate to cover the increased costs...It is most essential for our
suppliers and Society that the full potential for milk growth is achieved...Every encouragement will be given to suppliers to help them increase their output. The
message from these figures is clear;  processing and assembly cost structures must be reviewed, to minimise the effects of reduced supply. It is also vital that our milk supplies are restored to at least 1978 levels."
 
The Annual Report for 1981 showed no improvement in the milk supply situation. The milk intake was held at the 1980 level only by means of increased purchases from federated and non-member creameries, and the figure of 81 million gallons from the Co-Op's own suppliers showed a further decrease of 3% as compared with the figures for 1980.  Once again, the message was that it was essential to restore the milk supplies to the 1978 levels :

"Difficult operating conditions are likely to continue for the foreseeable future - high inflation, difficult markets, the general effects of the recession.  The worst effects of these conditions can be offset by increased milk supplies.... restructuring programmes." 

Insofar as the "milk war" had broken out in the South-West of the country, two of the principal protagonists were Golden Vale and Kerry Co-Op, each struggling to hold onto its own suppliers and find new sources of supply, and each drawing supplies to some extent from the same territory as the other.

Accordingly, the picture of Golden Vale that emerges, as of the year 1980, is that of one of the biggest and most important Dairy Co-Operatives in the country, struggling to maintain that position;  operating an industry which required a huge annual intake of milk to keep it in existence, but having to fight tooth and nail to hold onto its milk suppliers and look for additional sources of supply; and the proud possessor of a new feed mill which had involved further large-scale capital outlay and which was just coming on stream and looking for business.

CASTLEMAHON

When the Golden Vale Co-Op was first established, one of the Dairy Co-Ops which amalgamated to form the new Society was Castlemahon, and in the process of so doing it hived off a large-scale poultry industry, which continued in operation as a separate entity known as Castlemahon Co-Operative poultry Products Limited.  This Co-operative engaged in the production, processing and marketing of poultry and poultry by-products and did so with considerable success over a number of years so that at one stage it had captured about 55% of the entire market in Ireland and in 1980 it still retained a 40% share of that market.   Its principal place of business was in Newcastle West, Co. Limerick, with another major location at Broombridge, Cabra, in the Dublin area.   In 1979/80 it embarked on an ambitious and ill-fated venture into the turkey market in the United Kingdom through the purchase of two companies or groups of companies which may be referred to briefly as Anvil and Hammond.

Other activities of Castlemahon included a frozen food business conducted from Inchicore, Dublin, by another subsidiary, Castlemahon Frozen Foods Limited;  a farm, known as Lemonfield Farm; an abattoir operated by a further subsidiary, Desmond Meats Limited, at Newcastle West;  a hardware store in Castlemahon village;  depots in many parts of Ireland used for the distribution of the Co-Op's products and a frozen foods business based at Reading in the United Kingdom operated by a subsidiary known as Castlemahon Foods Limited, incorporated in 1974.
 
The Castlemahon Group as a whole traded profitably up to the year 1979, when it recorded its first loss.   In that year, while sales were running at a figure of almost £33,000,000, it was unable to record a profit.  Bad times had overtaken the poultry business with the markets over-supplied and overhead costs increasing sharply at a time when prices could not be increased owing to constriction in the markets.   It appears that the demand for poultry and poultry products fell in the Republic of Ireland by as much as 14% in the year 1980 as compared with the previous year and price-cutting broke out as sellers competed for a share of a market which was over-supplied.

The fortunes of Castlemahon had declined to such an extent coming into the year 1980 that its Auditors, Messrs. Cooper and Lybrand, were unwilling to sign off the 1979 accounts by reason of their concern as to the Co-Operative's ability to continue in business.   In this difficult situation the Group had recourse to Foir Teoranta which provided a substantial injection of funds and this enabled operations to continue through the first part of 1980, but at that stage a new crisis in the affairs of Castlemahon was clearly imminent, and those in control of its business had to look around urgently for another financial backer to ward off the danger of liquidation.

One of the first potential private investors to manifest an interest in helping out Castlemahon in this difficult situation was Kerry Co-Op, which asked the firm of Craig, Gardner and Co., Chartered Accountants, to investigate the affairs of the Group on their behalf and this investigation was put in hand during the Summer of 1980. As Golden Vale and Castlemahon had close links already, with some directors and members common to both Co-Operatives, it was not surprising that news of Kerry's interest in the Poultry Group eventually leaked out, and Mr. Curtin, Chief Executive Officer of Golden Vale was confronted with these unwelcome tidings when he returned from holidays in the first half of August.  By this means the scene was set for the first    m involvement of the Defendants, Arthur Andersen and Company, in the affairs of Golden Vale and Castlemahon.

THE ASSIGNMENT

As soon as Mr. Curtin became aware of Kerry Co-Op's interest as a potential purchaser of Castlemahon, or as an investor capable of gaining control of that Group, he communicated the news without delay to his Board of Management.  A meeting of the Board took place on the 12th August at which the Chairman Mr. Martin Flanagan told the
members that over the previous six weeks negotiations had been going on between Kerry Co-Op. and Castlemahon with a view to Kerry acquiring an interest in Castlemahon.  Should these negotiations be successful, he said, it could create enormous difficulties for Golden Vale.  Mr. Curtin told the Board that it was quite possible a bid would be made by Kerry Co-Op. within the next few days.  It was agreed that he should ask for facilities for Golden Vale to put in a firm to investigate the position in Castlemahon.  At the same time some warning notes were sounded.   "Mr. T.A. Curtin said that it was a very big undertaking - £32m. in turnover, and it would take a	tremendous commitment in Management time....The Chairman said that he doubted if we would have time, to get the situation properly assessed...."

Further arrangements were, apparently, left in Mr. Curtin's hands, and having obtained agreement from Castlemahon to allow access to another firm of Accountants, he commissioned the Defendants to undertake the necessary investigation on behalf of Golden Vale.   He did so by telephoning the Defendant firm and arranging for one of the senior partners, Mr. Barrett, to come to Charleville to meet him on the 15th August, 1980. This meeting took place, and a long discussion ensued in the course of which Mr. Barrett agreed on behalf of the Defendants to undertake the assignment as requested by Mr. Curtin.  The agreement was made orally.   Mr. Barrett said he made contemporaneous notes of his interview with Mr. Curtin and these were produced in evidence.  One passage is descriptive of the assignment, as he understood it, which Arthur Andersen were undertaking at the time, and reads as follows:

"……  our assignment is 3 fold.

1.	B/S Hi spot review with special emphasis on unrecorded liabilities, uncollectable debtors and unsaleable stocks.   It has been clarified that this is not an 'opinion' report and client realizing this does not want a full audit. This report will also encompass a product profitability review bearing in mind the very complicated interco trading pattern which exists within the group.

2.	A review of C.M's cash flow projection procedures and its cash flow projections for the 5 years 1980-85 and a report on these (they look crazily optimistic to both the client and me).

3.  A review of the possibilities of generating further cash flow through hiving off some of C.M's tentacles principally, (at least for starters), the 2 English ones acquired in 1979.   Coupled with this a computation of the possible cash flow requirements of the acquisition and thoughts on how the offer might be structured e.g. £0.50 cash and £1 = redeemable (over 5 years) preference shares, (thus minimizing cash flow requirements).' There was a good deal of debate in the course of the hearing as to the actual nature of the assignment undertaken by the Defendants on behalf of the Plaintiff - Mr. Barrett insisting that they were not engaged to advise Golden Vale as to whether it should or should not take over castlemahon, or invest money in it, or how much money - if any - it should be prepared to sink in Castlemahon, or whether moneys made available by Golden Vale in the rescue operation should take the form of a loan or equity investment.   However, it does not appear to me that any argument about the exact terms of the assignment is crucial to my decision in the case, as I am satisfied that the evidence discloses the following measure of agreement between the parties as to the nature of that assignment:

1.	It was agreed that Arthur Andersen would investigate the affairs of Castlemahon on behalf of Golden Vale and report back as a matter of urgency within a month.

2.	Arthur Andersen were aware that information was required for the guidance of Golden Vale in a situation where Golden Vale were anxious to fight off a threatened bid by Kerry Co-Op to gain control of Castlemahon, and to do so by making some proposition to Castlemahon which would enable that Group to survive financially without selling out to Kerry Co-Op or forming an alliance with Kerry Co-Op.

3.	Both parties recognised that because of the time constraints brought about by the intervention of Kerry Co-Op the investigation could be of a limited character only and
would not permit of a full audit of Castlemahon being undertaken.

4.	While, initially, a review of Castlemahon's cash flow projections for the five-year period 1980-85 was to be undertaken as part of the over-all assignment, this idea was speedily jettisoned as impracticable by both parties.  Arthur Andersen were to provide as much information as they could about the affairs of Castlemahon in the limited time available, for the assistance of Golden Vale in making its decision whether or not it should embark on, or participate in, a rescue package for Castlemahon, with the likelihood of a very substantial financial commitment being undertaken if it elected to do so.

THE EXECUTION OF THE ASSIGNMENT

Mr. Barrett returned to Dublin by train and on the way he completed his note of the interview which he had commenced in Charleville. On the same day or the following day he contacted one of his Managers, John Gerard Murphy, who had been with the firm of Arthur Andersen from the year 1975, and put him in charge of the organisation of the work which had to be undertaken.  On the 19th August both men went to Adare, Co. Limerick, where they were met by Mr. Curley, Secretary of Golden Vale, and he brought them to see Mr. Geary, General Manager of Castlemahon.  A discussion followed; they visited the plant in Castlemahon and met some of the senior executives; they were given information about the Company's finances, with reference to the Cooper and Lybrand final draft accounts for 1979, and further information about the United Kingdom companies when acquired, what size they were, and so forth. Returning to Dublin, teams drawn from the Arthur Andersen staff were assigned to investigate the situation at Newcastle West, at Broombridge and Inchicore, but at the outset no one was assigned to investigate the situation in the United Kingdom. Mr. Barrett said in evidence:  "It was not contemplated at our first meeting that we would involve ourselves with the UK we should focus on necessity.  At the first meeting he (Mr. Curtin) wanted to get rid of them not terribly interested in them.  His view was that it was probably a mistake to have bought the UK subsidiaries in the first place and he would like to hive them off."  Mr. Murphy said that no one was assigned initially to the UK - "it was not envisaged we would do any work there."

Mr. Murphy at the outset organised the investigation from his office in Dublin, but as it progressed he paid six or seven visits to Newcastle West, and also visited Limerick for a discussion with Patrick Roche, the Cooper & Lybrand partner who was the statutory Auditor for Castlemahon from 1977 onwards. On the 29th August, Mr. Murphy says that he met Mr. Curtin in Dublin and discussed the progress to date, and the problems and
background to the UK operation. "He agreed that we should go ahead with the same type of review as for the Irish operation -not necessarily the same amount of work."

Mr. Barrett's recollection is that the question of the UK subsidiaries came to the fore in early September, having regard to a preliminary forecast put forward by the Castlemahon management suggesting that a net benefit of £1.3m. could arise from disposal of these companies.  This, Mr. Barrett described as "a terribly important number".  "We advised Tony Curtin we must look at the UK to see if the figure was justified - this was around the 5th September."

The documents disclose that Mr. Murphy telephoned the London Office of Arthur Andersen on the 2nd September, and asked to have an investigation carried out on the Castlemahon UK subsidiaries in the week beginning 8 September, 1980, with a report to be furnished by Friday 12 September, 1980.  This was followed by an inter-office memo from Dublin dated the 5th September, 1980, which stated (inter alia):  "We basically want a minimum amount of auditing done - the work should be more in the nature of a quarterly review with something like 1-2 days at each location."  London was also asked to contact Cooper & Lybrand and review their work-papers, and it was said that this review "should take less than half a day per entity."  Finally, "overall work should be kept to an absolute minimum."

While the investigation was in progress during the months of August and September, Mr. Curtin was heavily engaged on other aspects of the project.  He had to organise confidential discussions with the persons having the controlling interest in Castlemahon as to the type of arrangement that would be acceptable to them, if Golden Vale were to take part in a rescue operation; he had to canvass a number of financial institutions as to the availability of loan capital and interest rates which could be negotiated, and he had to liaise with Foir Teoranta who had already sunk a considerable amount of public money in the Castlemahon Group and were unwilling to make further advances unless a private
investor could be found to join with them in supporting the venture. I am prepared to accept that there was constant	 communication between him and the Arthur Andersen representatives as to the progress which was being made on his part and on their part during this critical period.

The next major development occurred on the 15th September, 1980, when a meeting took place by arrangement in the offices of Arthur Andersen, attended by Messrs Curtin,
Barrett and Murphy, at which it was proposed to brief Mr. Curtin with the information which had by that time come to light about Castlemahon.

A document was produced entitled, "Castlemahon – Summary of Situation at 15th September, 1980", and bearing the Arthur Andersen stamp - "Preliminary and Tentative For Purposes of Discussion only".  It painted a gloomy picture of the situation for the Group.  The opening paragraphs read as follows:

1.   The position with regard to credibility of final 1979 statements is worse than was initially supposed since the auditors have confirmed that they are not in a position to sign off on the draft accounts previously submitted to them. Under these circumstances, the 
figures referred to hereunder can only be regarded as tentative.  To obtain really reliable figures would require a very long time indeed.

2.	Group losses for the half year to 30th June, 1980 are reported as being £850,000.  Because of adjustments encountered in our review this figure should be increased by approximately £500,000 to £1,350,000.

3.	Losses for this fiscal year when account is taken of Broombridge redundancy payments and audit adjustments are likely to be in the £2m area.   This coupled with
the present level of its borrowings and creditors which include Elm PAYE accruals would prevent its survival even during a period of rapid reorganisation without
continued funding of at least Elm from Foir Teo.

4.	The Group's cash position is very precarious and unless a rescue operation is mounted immediately it is unlikely that the Group can survive for as much as one month without the appointment of a receiver.  Its survival beyond that time-span could conceivably be prolonged only with the continued support of Foir Teo….”

Mr. Barrett, in the course of his evidence said:  "I told him (Mr. Curtin) the 4th Paragraph was the most important thing.  We had become absolutely appalled by the state of the business.  Management in Castlemahon could give us no time at all they were fighting off creditors and getting in money to pay some of them.... Tony Curtin couldn't have been under any illusions about the position of the Company... We discussed disposal of the UK subsidiaries, and the problems of the UK companies.  The report from the UK was given to him at that time... The second most serious issue discussed that day was management.  It had been discussed on all other occasions.... was not happy that Tony Curtin was receptive to how bad the situation was and the urgent need for change, even after the meeting of the 15th September - the message was not getting across."

For this reason he says that a further meeting was arranged for the 20th September, at which Mr. Rafferty, one of the two outside advisers on the Golden Vale Board of Management, was to attend.  That meeting duly took place, attended by Messrs. Curtin, Rafferty Curley, Barrett and Murphy.  Another of the Arthur Andersen partners, Adrian        
Burke, also attended - more or less in the role of an observer.  Further information had come to hand, and on this occasion a handwritten Memo compiled by Mr. Barrett was used, entitled - "Summary of our findings, 20/9/80".

As the Plaintiffs place greater reliance on what took I place at these two meetings of the 15th and 20th September, 1980, than on the contents of the Final Report which was issued by the Defendants, in maintaining their claim for damages, it may be helpful to reproduce this "Summary" in full.  It reads as follows:

1.   	Reported loss for y/e 30.6.80 of £871,000 should be increased by £650,000 to £1,520,000 also On present basis of operation loss for calendar 1980 will be £2,300,000 (without Broombridge redundancies)  

2.   	Major contributory factors to 1980 loss are 

(a)  	Low sales price caused by market factors

(b)  	Very high overheads and distribution costs

(c) 	Very high interest costs (£542,000 for h year)

3.	Cash position now critical - several creditors supply	only on basis of cash in advance and some will not supply at all.
	
4.	English companies losing money and generally in bad trouble.
5.	Cash forecasts as adjusted by us show a worsening of the cash position by £1,100,000 (Limerick only) up to 31 Dec. 1980 and a further £610,000 in calendar 1981

6.	Financial controls, supervision and overall review very poor (basic organization is in place and a new and competent financial controller could rectify the position in a relatively short period of time.  See indirect labour and vehicle costs, maintenance).

7.       Management and shareholder position

8.        Statutory audit reports not yet signed for 1979 

Take-over considerations

1.   Management needs

2.   Re-financing

Foir Teo advances £lm

Re-structuring of other bank loans to Sec 84

£lm additional from AIB

Sale of English and other peripheral businesses

3.	Stream-lining of employees with resultant lay-offs possibly in Limerick but definitely in distribution areas.

4.	Basically a good business (assuming selling prices now at bottom of cycle) but needs a great deal of time and attention.

5    Take-over shares only - leave loan-stock."

A long discussion followed, covering the topics raised in this Summary.  Mr. Curtin said in evidence that "we"(presumably referring to the Golden Vale representatives who were in attendance) "had to come to finalize decision", so from his point of view he appears to have come to the meeting prepared to act on whatever information was then available concerning Castlemahon and without awaiting the formulation of a final report by Arthur Andersen.

He took it from Paragraph 1 that the loss for 1980 would be £2.3m.  He felt that substantial savings could be effected by cutting back on overheads and re-negotiating loan interest rates.  As regards the English companies he said his only concern was to know what would be the cash costs to withdraw from the UK and his general impression was that they could come out clear on a break-even basis - no cost or benefit arising. He regarded Paragraph 5 re cash forecasts as one of the more critical matters discussed and he concluded that the figure of El.lm. was the amount of money needed to keep the business running without improvement to the end of 1980, with a further £.6m. being required to the end of 1981. He said that the Summary and the discussion which followed conveyed to him that cash would be needed to tide the Company over to the end of 1981 only.  He had made arrangements with AIB and Foir which would have resulted in £2.4m being put in (inclusive of Golden Vale's contribution).	

He expressed his final conclusion as follows: "I thought after the meeting of the 20th September that we had adequate cash and time to effect the necessary changes.... [        knew we had a very tough job ahead but I was prepared to recommend it to my Board."  He accepted that considerable stress was laid by Mr. Barrett on the importance of getting in efficient management immediately.

Mr. Curley's recollection of the discussions was as follows: "Frank Barrett went through the document; said Castlemahon management very bad;  the Society needed a Chief
Executive Officer.   He pointed out that with control the Company could be pulled round.   He said management was crucial.  The over-all impression was one of a positive recommendation while pointing out (the causes for concern); fundamentally a good core of business in the Society. My understanding was that it was a summary of the findings of Arthur Anderson."

Mr. Barrett denied that the Summary and discussion were put forward as, or intended to be, a definitive report.  He said that he told the Golden Vale people:  "If you can't take       over active management from Day 1, don't touch it."   Work continued on the Report after the date of that meeting, on the basis that it had to be ready by the end of the month.

On the day prior to the meeting of the 20th September, 1980, the Castlemahon issue had been canvassed at a meeting of the Golden Vale Board of Management.  A brief minute of the meeting was kept by Mr. Curley, which reads as follows:

"Mr. T.A. Curtin reported that Kerry had approached Castlemahon to open talks today.   Kerry wanted exclusivity on the talks - if they get involved, it is possible that they will succeed.   He suggested that Golden Vale should continue the talks.
 
It was agreed that the only way to go was to keep talking.

Mr. T.A. Curtin said that if we went on the basis of a- 

1.	Castlemahon not appearing on the Balance Sheet.

2.	Keep Golden Vale exposure to a minimum.	

3.	Protect the milk pool.  

4.	Advantage for milling sales.

"Mr. T. Mulcahy said that unless Castlemahon got some injection of money - they would have to close.  Foir Teo turned down their application for an extra Elm. Foir Teo said that they would re-consider the applications if somebody else was involved.  Kerry are proposing a complete takeover.  Chicken business is difficult.  He questioned why Kerry were in.  His considered opinion was to make an attempt to capture the milk pool of Golden Vale in west Limerick.  Kerry have said that they were not interested in the business in England.

"He would be in favour of giving Castlemahon some type of loan - if it would safeguard the milk supply.  If it was some other Company, other than Kerry, he might have a different opinion."

(Mr. Mulcahy was one of the Golden Vale Directors resident in and representing the Castlemahon area).

It is apparent that the Golden Vale representatives must have come to the meeting of the 20th September in a state of heightened apprehension as to the imminence of a possible take-over bid by their Kerry rivals for the Castlemahon business, and the evidence of Mr. Curtin was to the effect that he had his mind made up from the conclusion of the meeting of the 20th that he should go ahead and make a firm recommendation to the Golden Vale Boards to intervene actively in the battle for control of Castlemahon.

In the meantime, Arthur Andersen completed the written report - albeit still in draft form  and dispatched it to their clients under cover of a letter dated the 30th September, 1980.   It was marked, "Preliminary and Tentative For Purposes of Discussion Only". Mr. Murphy said it was sent to Mr. Curtin on the 1st October, or given to Mr. Curtin or Mr. Curley in the Arthur Andersen office that day.   Mr. Curtin was unable to say when the full written report reached him for the first time, but thought it occurred on the 2nd October.   Further revised drafts followed all bearing the same formula, and all dated as of the 30th September, 1980.  There was a good deal of uncertainty on both sides as to the dates of delivery of the various drafts.   It appears that the second draft came within about a week of the first, and the final report was delivered in late-November or early-December.   Mr. Barrett said it was ready and available for collection in mid-October7 that Mr. Curtin was so informed, but said "to leave it until he asked for it".  Messrs. Andersen sent their account for a very substantial fee for their services on the 24th November, 1980, and this was paid without delay.

The form and content of the different drafts remained substantially the same, but a small number of significant changes were made in the different drafts and in the report proper and also in the covering letter which was intended to be read as part of the report.

THE DECISION MADE BY GOLDEN VALE

In the meantime, Mr. Curtin was pressing ahead without awaiting the arrival of the report in its final form.  At a meeting of the Board of Management of Golden Vale held on the 2nd October, 1980, he gave an account of the information which had come to him from the investigating Accountants, and of his negotiations with the financial institutions.  The minutes, in their usual abbreviated form record him as saying:  "For the Society (Castlemahon) to remain in the business it will be necessary to get £2.4m...The deal with the Lending Institutions is 90% complete... Golden Vale will have to make a contribution as well.  This would be in the form of a Elm secured loan... Under these proposals Golden Vale would be pretty well insulated.  The business would be properly financed for the first time."

The Board of Management decided to recommend the proposals, as outlined by Mr. Curtin, to the main Board of Directors of Golden Vale and a meeting of that Board was arranged for the 10th October, 1980.  The draft written report of Arthur Andersen was in Mr. Curtin1s posession prior to the 10th October, but it seems clear that it was not distributed to the members of the Board of Directors - Mr. Curtin confined himself to saying in evidence that he may have told them of its existence.  The modus operandi adopted by him in making his proposal to the board was a slide presentation with each slide containing a short text dealing with different aspects of the situation and an oral discourse was given by him on the matters suggested by the text appearing on the slides.  He said that he gave the Board of Directors a full account of the contents of the Arthur Andersen Report and relied on it in making his proposal that Golden Vale should advance the sum of Elm as part I of the Castlemahon rescue package. The proposal was to set up p        a new company to take over the assets and liabilities of Castlemahon, with a small issued share capital of which 25% would be held by Golden Vale and 75% by named individuals who would sign blank transfers in favour of Golden Vale, so that effective control would exist from the outset, while on the face of it Golden Vale would appear as minority shareholders, and as making a loan of Elm to the new company. On this basis, the view put forward by Mr. Curtin was that it would be unnecessary to consolidate the accounts of the new company with Golden Vale;  the Balance Sheet of Golden Vale would appear to be as sound as ever, and if the affairs of the new company did not prosper Golden Vale would be able to extricate itself gracefully from its association with an enterprise which had proved unsuccessful.

After a very lengthy discussion the proposal was adopted by the Board of Directors.   Between that date and the end of the year the Castlemahon Company passed the necessary resolutions to give effect to the Golden Vale proposals, and some management changes took place within the Castlemahon structure at the instigation of Golden Vale.   It was not until the month of December, 1980, however, that the formal agreement was entered into as between the old Castlemahon Company and the new entity, Castlemahon Poultry Products Limited, providing for the transfer to the new Company of the assets and liabilities of the old Company as defined in the said Agreement. The 11th P       November, 1980, is given as the date on which the Board of Management of Golden Vale implemented the decision taken by the Board of Directors on the 10th October, 1980 by agreeing to the transfer of engagements in Castlemahon.

In sending to Mr. Curtin the final draft of the Agreement on the 10th December, 1980, the Solicitors for Golden Vale sounded a number of warning notes in the long explanatory letter which accompanied the draft.  They expressed clear reservations about the proposal to structure the new Company in a way intended to avoid the obligation of consolidating the accounts of the new Company with those of Golden Vale.  Other  matters of concern were referred to by them as follows:

"Golden Vale's loan of £1,000,000 is to be secured after the existing lenders (and possibly IDA) by way of Fixed and Floating Charge over the assets and undertaking of the new company. The information available to us to date would suggest that in the short term at least, Castlemahon must be regarded as a high risk venture, by any standards, notwithstanding the extremely favourable re-financing terms you have negotiated so successfully with the various lending institutions.  It is necessary, therefore, to give careful consideration to Golden Vale's prospect of recovering its loan in the event that the new Company does not survive."

They went on to point out that in the event of liquidation, "only the current assets will be available to meet the realisation of Goiden Vale's security and the value of these will obviously depend on adequate provision for bad and doubtful debts, slow moving and obsolete stock etc." The writer also concluded by saying:
 
"My difficulty with the whole question of liabilities is that they will not be adequately quantified until the audited accounts are available and it seems to me, therefore, that the new Company will have to reserve some means of protecting itself against taking over
potential liabilities which could seriously prejudice the Company's prospects of succeeding in the event that they fail to be paid."

The draft Agreement provided in Clause 8 thereof as follows:-

"8. Auditor's Report:

The Vendor shall procure that consolidated audited	Accounts of the Vendor shall be prepared to 31st October, 1980 and made available to the Purchaser prior to completion".

Clause 9 provided that the Agreement was to be completed within 14 days of the date upon which the consolidated Accounts of the Vendor to the 31st October, 1980 were made available to the Purchaser.

In the event, however, the parties went ahead and completed the Agreement without awaiting the audited accounts referred to in the said clauses.

THE DEFENDANTS' REPORT

I now propose to turn back to the contents of the Report as furnished by the Defendants to the Plaintiff.  It is necessary to look at the preliminary drafts, since these were the documents available to Mr. Curtin in making his proposal to the Golden Vale Board of Directors, and on which they must be assumed to have acted, but the final report is also important as it appears to me that the Defendants are entitled to say that everything else was put forward by them on an interim and provisional basis until they committed themselves without reservation to the statements and conclusions to be found in the final report, subject only to the qualifications expressed in the text of the document itself.
I propose to refer to some of the salient points which emerge from the documents, while recognising and accepting the validity of the contention made on behalf of the Defendants that the report should not be judged on the basis of extracts therefrom, but should be considered in its entirety.

The title page to the First Draft reads as follows:

"Report on Limited Investigation of the 30th June, 1980 Management Accounts and 1980 and 1981 Profit and Cash Forecasts of Castlemahon Co-Operative Poultry Products Limited."

-and this limited character of the work undertaken by the Defendants, (on their understanding of the assignment), is stressed again in the opening paragraph of the covering letter, dated 30th September, 1980:

"At your request we have carried out a limited review, but without audit, of the financial position of Castlemahon Co-operative Poultry Products Limited (the "Co-Operative") at 30th June, 1980.  Our work consisted primarily of a review and analysis of the Co-Operative's principal asset and liability accounts as at that date, and of its cash flow projections for 1980 and 1981 as well as discussions with its management, bankers and statutory auditors.  Matters of special significance are set out below and, where necessary, further amplified in the body of our report.  It is stressed, however, that since an audit would have been totally impracticable in the time scale of our work there could be further matters of significance which did not come to our attention because of this limitation."

The letter then refers to the interim management accounts up to the 30th June 1980, showing a loss for the six months of £851,000 and stated that they (Arthur Andersen) had found it necessary to make very substantial adjustments to this figure put forward by management, increasing the six-month loss by £867,000 to £1,718,000.  It continued: "On the present basis of operation it seems likely that the loss for the full year i.e. up to 31st December, 1980, will amount to approximately £2,600,000 without taking account of Broombridge redundancy payments, the preliminary estimate of which is £300,000."

The Co-Operative's cash position was described as "now critical".  The letter continues: "Our review shows that on the present basis of operation the cash position will deteriorate
by £1,800,000 by the end of the year and by a further £600,000 in 1981."

With regard to the U.K. subsidiaries it was stated that they had proved disappointing; had failed to make profits, and that it was proposed to dispose of them.  Attention was drawn to the fact that sums amounting to £844,000 classified as deferred liabilities in the Company's accounts were still due in respect of the acquisition of these companies; that litigation was pending against the vendor of one of them for alleged fraudulent misrepresentation in the sale of the company, while he, in turn was owed £678,000.  The letter continued: "Likewise it appears likely that a related asset i.e. Goodwill of £447,000 arising in connection with the acquisitions will have to be written off as worthless."

Some comments then follow as to the problems facing the Co-Operative and the reasons for these problems, and one of the concluding paragraphs reads as follows:

"Apart from its immediate cash or credit needs of some £2.5m in order to cut the Co-Operative's losses and place it on a reasonably sound business footing, it will need a very strong commitment of authoritative and expert management.  Urgent action is needed principally in the areas of overhead expenditure including indirect labour and distribution costs. Strict financial control over the next few months will be crucial to the Co-Operative's survival even with the provision of the necessary finance."

The draft report itself contains pro-forma consolidated balance sheet and profit and loss accounts as at 30th June, 1980, after adjustments, together with related notes. The next    
section outlines the profit forecasts for 1980 and 1981, as prepared by the Castlemahon management and spells out the assumptions on which these were based; there follows a critical analysis of these assumptions. The third section is concerned with a projected borrowing requirement for the Co-Operative as at 31st December, 1980, and the fourth section contains a summary of the operations of the united Kingdom subsidiaries.     

The four Appendices which follow contain:
 
(1) Pro-forma Statements of Profit and Loss by entity for each company in the Castlemahon Group for the period ending 30th June, 1980;

(2)	Pro-forma Balance Sheets of U.K. entities at 30th June, 1980;

(3)	Consolidated forecasted Profit and Loss Accounts and Cash Accounts for the six months ending 31st December, 1980, and the year ending 31st December, 1981, as prepared by Management and as adjusted by Arthur Andersen.

(4)	Summary of the Adjustments made to the Profit and Loss Account for the six-month period ending 30th June, 1980, resulting in an increase in the loss figure of £867,000. 
When the second draft of the Report came to hand a week or so after the first draft had been sent, the adjustment to the loss figure for the six months ending the 30th June, 1980, had declined from the figure of £867,000 given in the first draft, to a figure of £725,000 giving a total loss for that period of £1,576,000.  The projected loss for the full year to 31st December, 1980, (excluding the figure for Broombridge redundancy, estimated now at £200,000), was £2.3m.  The deterioration in the cash position by the end of the year 1980 was projected at £1,802,000 (as compared with £1,800,000 previously).  Other figures undergoing amendment were the sums owed to the vendors of one of the U.K. subsidiaries; amount due to the Co-Operative for VAT; gross profit for the half-year, and one or two others.  The introductory letter referred on this occasion to the Co-Operative's "immediate cash needs of some £1,800,000 to place it on a reasonably sound business footing", and this figure (in contrast with the figure of £2.5m. referred to in the first draft) was retained in the subsequent drafts and in the report in its final form.

The covering letter which was annexed to and formed part of the final report contains the following paragraph on the last page thereof, which did not appear in the first or second versions of the same letter:

"It could be possible for the Co-Operative, if the U.K. operations are disposed of satisfactorily, to achieve profitable operations in 1981.  If increased sales prices and reduced overhead costs could be attained, then a profit before interest and tax in excess of £1,000,000 might be recorded. This would require not only an improvement in the market but also strict cost control. Given present operating conditions a profit of £100,000 - £200,000 seems more likely."

Other material changes which took place between the compilation of the Draft Report and the Final Report were as follows:

Page 11, Par.3:  The following words were added: "But items requiring specific consideration include distribution and vehicles costs, workforce size, labour rates and better stock planning. Possible savings resulting from action on overhead costs could be in the region of £500,000.

Thus the PBIT, given good controls and higher sales prices, could be increased to in excess of £1,000,000."

Page 12, Par.2: Additional sentence in Final Report: "Should the legal action fail, then these payments would become due."

Page 15, Par.l:  Additional sentence: "There is also the possibility that the legal action could fail with the remaining monies due to the vendors of the Hammond Group becoming payable together with related legal costs."

The following important section, concerning the U.K. subsidiaries was not contained in the First Draft, but was included in the Second Draft and retained in the Final Report:

ITEMS REQUIRING SPECIFIC CONSIDERATION

It is management's present intention to dispose of the U.K. operations as soon as possible, and the principal reason being that excess funds are tied up in these companies which are not profitable.  Specific factors requiring consideration in a disposal situation are:

(1)	There is a pending legal action against the vendors of the Hammond Group.  This is unlikely to be resolved prior to 1981 and in such circumstances the possibilities of sale to a third party are remote.

(2)	The total purchase consideration for Anvil and Hammond was £1,160,000 sterling of which £610,000 sterling relating to Hammond has yet to be paid. This was considerably in excess of the value of the underlying assets and accordingly a figure relating to goodwill of IR£447,000 appears in the consolidated balance sheet at 30th June, 1980.  It appears unlikely, based on present results, that the original purchase price can be recovered, which would mean that the goodwill would have to be written off as valueless.

(3)	The legal Group structure in the U.K. seems unclear. For instance, although Anvil and Hammond are deemed subsidiaries of Castlemahon Foods Limited (U.K.) only £100,000 sterling is recorded in its books as investments, the balance being recorded in the Co-Operative's books at Newcastle West.

(4)	Castlemahon Foods Limited is .echnically insolvent at 30th June, 1980.  Continued trading may make the officers of the company personally liable to creditors      
under the provisions of the Companies Act 1948 (U.K.).

(5)	In the event that the U.K. operations cannot be disposed of to outside purchasers and it is decided to close down certain of them, it is extremely unlikely that the U.K. companies would be able to discharge their liabilities.  In such an event, the value of
intercompany balances due to Ireland of £783,000 must be dubious."

The report was a very comprehensive one, having regard to the limited amount of time available for its compilation, and obviously must have entailed intensive work on the part of the staff engaged on the investigation during the months of August    H and September, 1980.  The adjustments made to the management accounts for the six-month period to 30th June 1980 were of an  extraordinarily high order, almost doubling the loss figure as originally disclosed.  It was not found possible to secure agreement on the part of management to the greater part of the adjustments made, but subsequent history was to show that the Arthur Andersen team were more than justified in the conclusions they reached concerning the reliability of the accounts. One can only conclude that they found them to be completely untrustworthy, and similarly in relation to all management forecasts for the latter half of 1980, and for the year 1981 - these must have been adjudged to be quite unrealistic and hopelessly optimistic. Certain assumptions underlying the forecasts made by management are set out in Appendix IV of the Report, together with a statement of the manner in which Arthur Andersen felt that these assumptions should be qualified, and did qualify them, when making their own profit and cash forecasts.

These assumptions, with the Arthur Andersen qualifications of same were as follows:

Profit Forecasts

1.  "No increase in selling price for the remainder of 1980 and an increase of 0.9 pence per lb at the beginning of 1981. Sales mix as at present." Arthur Andersen assumed instead that the then current selling price of chicken (58p per lb) would continue unchanged through 1981 - price increases had already been sanctioned but had been found to be irrecoverable due to intense competition in an over-supplied market.

2.  "No increase in cost of sales." Arthur Andersen comment: "Cost of sales has not been adjusted on the assumption that any related cost increases can be recovered through sales
price.  Any increase in sales price is obviously subject to market acceptance."
 
3.  "No inflation to the end of 1981."  Arthur Andersen: "The adjusted forecasts include estimated overhead inflationary increases of 8% for the latter half of 1980 and 13% for 1981."

4.	"Estimated weekly throughput of 160,000 chickens (501,600 lbs)."

5.	"Interest is included at full cost, i.e. no tax based or concessionary financing has been anticipated."
 
6.	"The basis for forecasting future overheads was the actual amount recorded in the management accounts for the six months ended 30th June, 1980."  Arthur Andersen comment: "Adjustments to the management accounts for the first half of 1980 totalled £725,000 - an increase in the net loss to that date. Certain of these adjustments affect the base used by management in predicting overheads."

7.	"Operations will remain at the present level for 1980, with the exception of the Broombridge plant, which will close in  October 1980.  Its market will then be supplied by the Newcastle West plant."

8.	"All U.K. operations to be disposed of by the end of 1980."  Arthur Andersen comment:  "As the Hammond takeover is the subject of legal action it is assumed that further payments  will not be made and consequently only Anvil payments have been included.  Management have estimated sales proceeds of IR £1,100,000 for these U.K. subsidiaries.  Due to the uncertainty of the U.K. turkey market, and the fact that the related net assets at 30th June, 1980 were IR £709,000 (which almost match the balance of IR £677,000 due to the vendors of Hammond) the adjusted forecasts do not reflect
any disposal revenues for these two U.K. operations. As Castlemahon Foods Limited has negative shareholders' funds of £314,000, any cash payment by a purchaser seem unlikely.  Consequently, £200,000 proceeds estimated by management are excluded."

9.	"The 1981 forecast relates only to the scaled down Newcastle West operation and Dublin Frozen Foods."  Arthur Andersen comment:  "The adjusted forecasts assume the same      m level of contribution form non-poultry activities as was achieved in the first six months of 1980, adjusted for increased turkey sales during the Christmas period."

Cash Forecasts

(a)	"Profits as derived above."

(b)	"Redundancy payments in 1980 relating to the Broombridge plant."

(c)	"Present terms of trade are assumed to prevail with certain exceptions which are detailed in the forecasts."

(d) "Management has estimated proceeds arising in 1981 on the disposal of certain assets as follows:"
 
									IR £ OOO
Broombridge plant								500

Castlemahon Foods Limited	
(U.K. Frozen Foods)								200

Anvil and Hammond								1,100

Desmond Meats								180

Lemonfield Farm								180
--------
2,160
 
(e) "Management has estimated that	a moratorium on loan interest and principal outstanding will be in operation in 1980 and 1981.  Any such moratoria will obviously have to be agreed with the Co-Operative1s Bankers."
 
Having regard to the manner in which Arthur Andersen expressly dissociated themselves from a number of the assumptions so made by Management, when making their adjustments to the Management figures, I think Golden Vale would have been justified in concluding that where no such dissent was expressed, Arthur Andersen were willing to proceed upon the same assumptions.

					THE TAKE-OVER

 We now come to the take-over situation.  It appears that both Golden Vale and Castlemahon were willing to act on the faith of their verbal discussions and agreements, in advance of the execution of the written agreement between the outgoing Castlemahon Company and the new company which was being formed to take over its enterprise.  On the 21st October, 1980, a Special General Meeting of Castlemahon was convened to pass the necessary resolutions for the transfer of the assets and liabilities of the Society to a new company to be nominated by Golden Vale and to hand over exclusive control of the day to day management of the business of the Society to the Board of the new Company pending completion of the formal transfer, and these resolutions appear to have come into effect on the 5th November, 1980.

At the request of Golden Vale, Messrs. Cooper and Lybrand agreed on the 20th October, 1980, to second two Chartered Accountants from their staff as special project accountants to help in the reorganisation of the Castlemahon business.  A new General Manager was appointed as and from the 1st November, 1980, Diarmuid O'Donovan, who was formerly Production Head of Golden Vale.

Other appointments were made in January 1981 leaving the top management team in the new Castlemahon as follows:

General Manager - Diarmuid O'Donovan;

Commercial Manager - Eamonn Keating, a new appointment, formerly employed as Manager with Kingscourt Construction; Financial Controller, John Dudley, formerly Deputy General Manager in the old Castlemahon company; Production Manager, Liam Carney, appointed in February, 1981; Procurement Manager, Patsy Scannell, who had been Production Manager with the old company; Sales Manager, Paddy Whelan, retaining his position with the old company;

Purchasing - Willie O'Brien, also retaining his old position.

Golden Vale had four nominees on the Board of Directors, one of them being Mr. Curtin and Mr. Curley was appointed Secretary to the new company.

Mr. Curtin had organised additional finance for the new J Company in the sum of £2.4m., of which Elm. was advanced by Golden Vale as an interest-free loan on a long-term basis with an option to convert into redeemable preference shares at some future time, and the balance was made available by Foir Teoranta and Allied Irish Banks.  In addition, Mr. Curtin was able to organise very favourable terms of interest on the loans from the institutions.

At a meeting of the Board of Directors of castlemahon on the 16th January, 1981, Mr. Curtin proposed that that Company should lend back a sum of £500,000 to Golden Vale, and this was agreed to - although the evidence in the present case suggested that the sum actually advanced was £400,000. This was repaid, with interest, at 12% per annum, later in the same year by equal instalments on 24th March and 1st April, 1981.

Arrangements were made to have the audit for the old Castlemahon Company completed by Cooper and Lybrand, up to the 31st October, 1980, and to let the accounts for the new Company run for 14 months to 31st December, 1981, on the basis that the new Company should be regarded as having taken over effective control as and from the end of October, 1980.

			THE COOPER AND LYBRAND AUDIT

The ten month audit to 31st October, 1980, was duly completed and the statutory Auditors reported on the 9th June, 1981, without any qualification save to draw attention to Note 14(b) which made reference to a pending legal case.

The picture which emerged from the audit can only be described as calamitous.  The turnover for the ten-month period of £27m. was fairly comparable to the figure of £29,566,000 for the whole of the previous year.  Losses, however, had risen from £51,000 for the year 1979, to £3,036,000 for the ten months to 31st October, 1980, and to this figure was added a further figure for "Extraordinary Items" of £2,797,000, giving an over-all loss figure for the ten months amounting to £5,852,000, as compared with £152,000 for the year 1979. Current liabilities, made up of Creditors and short Term Borrowings had risen from a figure of £7,571,000 in the Consolidated Balance Sheet as of 31st December, 1979, to a figure of £13,199,000 as of 31st October, 1980, exceeding current assets by £7,160,000.  Liabilities over-all were shown to exceed assets by £2,687,000, whereas on the 31st December, 1979, assets had been shown to exceed liabilities by £3,486,000. The figure of £2,797,000 for "Extraordinary Items" was made up as follows:

1.	Provision for balances due by and investments in the U.K.
	subsidiaries								£1,417,000

2.	Redundancy Costs							£  390,000

3.	Provision for costs relating to cessation of
	operations in the U.K.							£ 400,000

4.	Provision for write-down of plant					£ 380,000

5.	Loss on sale of farm							£  80,000

In the notes to the Accounts, at Par.14 (referring to Contingent Liabilities) the following statement appears:
	
(a)	Guarantees

The Parent Society has guaranteed certain of the bank borrowings of its U.K. subsidiaries.  The sun of IR£250,000 has been provided in these accounts in respect of this contingency.  It is unlikely that this provision will be exceeded based on the best
available information at the present time.

(b) Legal Case No provision has been made in these accounts in respect of a claim made by the principal shareholder of the Hammond Group.  The amount of IR£633,000 plus costs would become payable immediately in the event that the claim is upheld by the Courts."

While the Report of the statutory auditors is dated the 9th June, 1981, the accounts in draft form had been available for some months prior to that date, and had been seen and studied by Mr. Curtin.  They were a source of concern and apprehension to him and he arranged a further meeting with the Arthur Andersen representatives to discuss the enormous variation which, at first sight, appeared to exist between the figures for 1980 as forecasted by them in their Report, and the actual figures which had emerged as a result of the audit.

Letters and documents were exchanged, and a meeting was arranged between Mr. Murphy of Arthur Andersen and Messrs. Roche and Carew of Cooper and Lybrand.  What was really concerning Mr. Curtin at the time was the amount of additional capital that would be needed to make Castlemahon viable, and where it was to be found.  Meetings took place with Foir Teoranta and the IDA.  Foir Teoranta were not disposed to sink more money in the venture, and they asked Arthur Andersen to prepare an up-to-date report on the Castlemahon situation.	

This was duly provided and was entitled: "Review of 1980 Results and Additional Financing required together with Audited Statement of Assets and Liabilities - 21st. February, 1981." The Report and covering letter are dated the 3rd June, 1981.

		THE REPORT TO FOIR TEORANTA	

Some of the most significant extracts from the report made to Foir Teoranta read as follows:

Two of the U.K. companies, Anvil Turkeys Ltd and Hammond Turkeys Ltd. are in receivership.  In addition, further sums of £475,000 to £610,000 (IR£625,000 to IR£803,000) have yet	to be paid to the vendors at Hammond.  This money together with monies already paid are presently the subject of legal action and it is not possible to predict the outcome of the case....No provision for any payment has been included in the
forecasts prepared to date. Clearly this could have serious repercussions from a cash flow standpoint. Settlement is unlikely to arise pending resolution of this matter through the courts.  It requires separate consideration.

No close-down costs have been included in respect of the UK... this matter requires clarification when more reliable data is available particularly considering, based on discussion with management, that guarantees totalling £725,000 (IR£955,000) have been given by Castlemahon to the banks involved with Anvil and Hammond and an additional unlimited guarantee has been given in respect of Reading, although we understand this 
is unutilised at present.
 
-The 21st February, 1981 statement of assets and liabilities reveals an underfinanced situation due to exceptional losses in 1980 - net liabilities at 21st February were IR£3,636,000.  There is now a cash requirement of IR£2,083,000 to correct excessive credit taken by the Company and to finance current losses and capital requirements. This
is net of proceeds from the disposal of assets.

-During 1980 significant trading losses were incurred by Castlemahon both in the U.K. and in Ireland. Trading losses from January to June (including IR£456,000 in the U.K.) were IR£l,463,000. July to October show Irish trading losses of IR£l,589,000.

-The forecast loss for 1981 is IR£623,000.

-The forecasts assume that any additional finance provided  will be free of interest...

-Both Anvil and Hammond will probably be wound up.  Both were engaged in turkey production and the market in the U.K. has been depressed for last few years. Castlemahon Foods Limited is based in Reading and is involved in the distribution of frozen foods.  It has been consistently loss making and a decision to cease trading has been made to take effect from the end of Hay, 1981.  Should further losses/costs arise on termination of U.K. operations it is possible that non-legal considerations could arise which could result in further funds being required.  For example, the involvement of Golden Vale or Irish State Agencies could result in a demand that U.K. creditors should not be abandoned.

-Overall, the new management team appears more disciplined and controlled than previous management but there is significant room for improvement particularly in overall financial management and control...Management of working capital is of critical importance...and has been one of the weaknesses of the group.  It is important to note that the support team in this area has been basically the same over the past few years...

-The Company's audited statement of assets and liabilities as at 21st February, 1981 reveals a highly illiquid and underfinanced situation.  The principal reasons for this relate to unprecedented losses in the Irish operations and U.K. subsidiaries during 1980.  These losses were due to depressed market conditions exacerbated by serious management deficiencies.

-The total loss by the Castlemahon Group in the 10 months to 31st October was IR£5,508,000. (The 31st October, 1980 net liabilities are extracted from Coopers & Lybrand draft audited accounts of Castlemahon at that date. This audit is complete subject to a final review of Broombridge debtors and creditors which have now been included in Castlemahon1s own accounts).

- A summary of the losses incurred in the period July to October, 1980 is as follows:

Exceptional Items - U.K.							 IR£696,000 

Broombridge									IR£776,OOO 

Farm										IR£132,000

Other										IR£129,000

										IR£l,733,000

Accounting Policy Changes  							    610,000

Balance attributable to operating losses					1,589,000
										-------------

										3,932,000

- The detailed cash flow by month for 1981...based on the 1981 profit forecast indicates a funding requirement of IR£774,000 and this, together with capital needs results in total cash needs of £2,993,000 - net cash needs £2,083,000 allowing for proceeds from asset disposals (Broombridge and Lemonfield Farm) and repayment of the loan made to Golden Vale.

			THE SCHEME OF ARRANGEMENT

Having regard to the figures which emerged from the Cooper & Lybrand audit and from the Arthur Andersen report to Foir Teoranta, it became apparent that the Castlemahon company could not continue in business throughout the year 1981 unless a further substantial cash injection could be obtained from some source.  A scheme of arrangement was entered into with the creditors of the company, under which Golden Vale was required to contribute a further sum of £175,000 in subscribing for redeemable preference shares, with additional funding coming from the financial institutions, and the creditors agreed to defer the enforcement of their claims for some years.

By this means the Company was able to continue in business for a further period of three years, but it was eventually put into liquidation in or about the month of September, 1984.  The business at that stage was taken over by another firm, freed from the colossal debts which had accumulated over the years, and has traded successfully ever since.  The liquidation did not yield any payment in favour of Golden Vale in respect of the payments, totalling £1,175,000 which it had made to Castlemahon, and this money has been irretrievably lost.

	THE PLAINTIFF'S CLAIM AND THE DEFENDANTS' REPLY 

The Plaintiff now claims that it should be recouped by the Defendant for the loss of those moneys, and certain other items of ancillary loss which it says arose by reason of the fact that it was induced by advice given and information furnished by the Defendants to enter into commitments with the Castlemahon Company as outlined above.  It is alleged that the Defendants failed to comply with their contractual obligations and were negligent in the manner in which they investigated the affairs of the Castlemahon Group and reported thereon to the Plaintiff and that the Plaintiff, in consequence, embarked upon a venture which it would never have embarked upon had it been given better advice and a more correct appraisal of the state of affairs in the Castlemahon group at the time the project was being considered.

In support of this claim the Plaintiff relies heavily on the contrast to be drawn between the actual and projected state of the Castlemahon finances as of the year 1980, as shown in the audited accounts for the ten-month period ending 31st October, 1980, and the figures put forward in their report by Arthur Andersen.

At first sight, the differences between the two sets of figures appear to be staggering. Arthur Andersen had forecast losses for the year ending 31st December, 1980, at £2,600,000 approximately, with additional provision to be made for the Broombridge redundancies amounting to a possible £200,000/£300,000. Cooper & Lybrand came up with a figure of £5,852,000 for the ten-month period ending 31st October, 1980.  It was agreed that the periods referred to - ten months as against the full calendar year - were nevertheless fairly comparable as a break-even situation could be anticipated to prevail during the last two months of the year when poultry sales would be at a high level.

The Arthur Andersen projected loss for the year was reduced from £2,650,000 to £2,300,000 in the second draft, and remained at that figure in the Final Report. The Plaintiffs claim that the Defendants were so wide of the mark in their estimate of the probable losses for 1980 and in their over-all assessment of the financial standing of the
Castlemahon Group, that it went well beyond the margin of error which should reasonably be allowed when dealing with projections into the future.  They say that the over-all picture which emerged from the Defendants1 Report was much more favourable than it would have been had the affairs of the Castlemahon Group been properly investigated, and misled the Plaintiff into believing that a cash injection of £1.8m would       suffice to put the Group on a sound business footing and that a figure of £2.4m would be more than adequate to meet its needs until it could become self-financing.

The Defendants acknowledge the wideness of the gap between the figures thrown up by the Cooper & Lybrand audit, and their own projections as made in 1980, but contend that this divergence is not of itself sufficient to cast any doubt on the efficacy of their own work, and they set about reconciling the two sets of figures along the following lines:

1.  The Arthur Andersen figure for loss for the ten months to 31st October, 1980, (£2.3m) was exclusive of the Broombridge redundancy figure (£200,000) thereby increasing it to £2.5m.

2.   Their Report suggested that the moneys invested in the acquisition of the U.K. subsidiaries was unlikely to be recoverable, and that accordingly, the figure for goodwill
appearing in the consolidated balance sheet at 30th June, 1980, would have to be written off as valueless.  This would narrow the gap between the two sets of figures by a further £447,000.

3.	The Report also referred to the possibility that it might prove necessary to close down some of the U.K. operations without finding purchasers, and commented that in such eventuality the value of the intercompany balances due to the Irish Group of £783,000 must be dubious.  In other words, while not writing off the figure, as happened
later, the Report drew attention to the possibility that it might well prove irrecoverable.

4.	Arthur Andersen claim that a significant part of the loss figure for 1980 which emerged as a result of the Cooper & Lybrand audit resulted from accounting policy changes and not from any down-turn in the fortunes of Castlemahon which they had failed to detect when conducting their investigation in August and September, 1980.  These were detailed at p.19 of the Report to Foir Teoranta.  They included non-consolidation and related write-off of intercompany balances (U.K. Companies) £270,000; general provision for 10% of debtors not previously provided, 1 £115,000; discounts provision for debtor balances unpaid at 31.10.1980, £50,000; general stock provisions, £210,000.  Arthur Andersen also claimed that such a change in accounting policy was a common enough practice in a situation where a new company had taken over a loss-making company and it was considered desirable to give the new company a good start in life.
 
5.   Referring to the provision for "Extraordinary Items" in the Cooper & Lybrand audit, totalling £2,797,000, the following comments are made:

(a) The provision for balances due by and investments in the U.K. subsidiaries - £1,417,000 - is reflected in the Arthur Andersen advice as to the probable need to write off the figure of £447,000 for goodwill, and inter-company balances of £783,000 should a closedown situation arise in the U.K.

(b) The Cooper & Lybrand figure for redundancy costs of £390,000 was made up of £300,000 for Broombridge and £90,000 for Head Office Management redundancies.  It
was claimed on behalf of Arthur Andersen that the correct figure for Broombridge should be £200,000 and not £300,000, on the assumption that the statutory refund had been claimed and paid - no one was able to say whether this had happened or not.  It was further	claimed that the sum of £90,000 for management redundancies had never, in fact, been paid out.

(c) Provision for costs relating to cessation of operations in the U.K. £400,000.  It was said that Arthur Andersen had no reason to believe the U.K. subsidiaries would be put into liquidation, and that they adopted a sufficiently conservative approach in discounting completely the forecast made by the Castlemahon management that a cash flow of £1.3m could be generated by disposing of these companies.
 
(d) Provision for write down of plant - £380,000. This referred to the close-down at Broombridge. Arthur Andersen commented that the figure included -incorrectly - a figure of £80,000 in respect of closure of the Wexford depot, which, in fact was not closing down.  As to the balance of £300,000 they expressed themselves mystified by the fact that such provision had to be made. They had been led to believe by the Castlemahon management that the plant in Broombridge was to be transferred in whole or in part to Newcastle West or was to be sold off in so far as it was not required at Newcastle West, and on this basis they felt justified in merely writing down the value of the plant by a sum of £50,000, whereas the Cooper & Lybrand approach was to write off the plant completely. Arthur Andersen were unable to say what had been the ultimate fate of the plant in question.

(e)	Loss on sale of farm, £130,000. This referred to the loss incurred on the sale of Lemonfield Farm, Co. Dublin, which had been purchased for a sum in the region of £240,000, and was sold in or about the month of September, 1980, for a sum of £110,000. Having regard to the price paid for the farm, not long before the year 1980, Arthur Andersen had again adopted what they considered to be a reasonably conservative and
prudent course in estimating the sale value at £180,000, representing a drop of £60,000 on the purchase price, but this figure was, in fact, £70,000 greater than the sum which was realised.

(f) Goodwill, £80,000.  This figure refers, apparently, to a number of miscellaneous items, which were not spelt out in detail and were not made the subject of special comment by Arthur Andersen.

	REASONS FOR THE CASTLEMAHON COLLAPSE

It now becomes necessary to make an attempt to determine the principal causes for the ultimate collapse of the Castlemahon Group, coupled with the necessary write-off of the Group's indebtedness to Golden Vale. The impression left with me by the evidence is that Castlemahon had little prospect of survival in the long-term once a more complete picture of its financial position emerged in the first half of 1981.  Additional finance in the sum of £2.4m had been provided only with great difficulty in the year 1980 and to be faced with the necessity of seeking a further equivalent amount in 1981 spelt disaster for the Group's long-term prospects of survival.

Arthur Andersen, at the request of Mr. Curtin, prepared a draft letter dated 27th April, 1981, the purpose of which was expressed to be, to reconcile the net liability position of £51,000 included in our projections up to 31st December, 1980, with that shown on the 31st October, 1980 balance sheet, i.e. £2,437,000 and, at the same time to explain why an additional cash amount of £2,400,000 is now required over and above the £1,800,000 projected by us.
 
The draft letter contains the following passages:

"The principal reasons for the increased deficit are the exceptional losses reported for the U.K. based operations and in relation to Broombridge trading and closure. These amount to approximately £1,700,000 and had not been anticipated by management at the time of our report. Our report, while commenting on these operations, specifically excluded any provision for losses or a net borrowing requirement relating to their closure. "In order to reinstate the minimum current asset excess on which our previous projections were based it is clear that further cash of at least £1,456,000 needs to be provided for current operations. The sufficiency of such a sum will depend on the optimum management and employment of the Co-operative's remaining assets and the absence of a need for further rationalization or entrenchment.  Until such time as the achievement of these conditions can be foreseen with some degree of assurance, management's estimate of a need for a further £944,000 i.e. for a total borrowing increase of £2,400,000 appears prudent and reasonable."

The reconciliation of the two figures for net liabilities was outlined in summary form in the Appendix annexed to the draft letter, and was as follows:

Net liabilities as at 31st December, 1980 as projected by Arthur Andersen & Co. 	 51

Broombridge losses not anticipated by management:

Additional redundancy requirement							100

Write-off of machinery, the need for which was not anticipated by management     400

Trading loss between 30th June, 1980 and closure not anticipated by management and not
yet subjected to audit									350

UK losses to 31st October, 1980 but not yet subjected to audit			1,200

Provision incorporated in Arthur Andersen
& Co. report									(344)  850

Loss on sale of farm - not anticipated by management Exceptional losses in Frozen Foods apparently due to write-downs of unsaleable stocks and not provided for in Arthur Andersen & Co. report Legal fees relating to litigation etc.

Compensation for loss of office to Castlemahon executives etc., not provided for      90 

Other - principally relating to closure of hardware division 			    	140
											------
Net liabilities - Co-operative's balance sheet as at 31st October, 1980               IR£2,437

Items requiring increased borrowing £1,927,000 (including items totalling IR£41,000 not specifically identified as cash items above).

Among the major factors contributing to the serious financial instability of the Castlemahon Group and its ultimate collapse, I think the following can be clearly identified:
 
1. Trading losses for the latter half of 1980 were much heavier than had been anticipated by management, or by Arthur Andersen when they made their projections in September, 1980.  This applied particularly to trading losses at Broombridge and in the case of the U.K. subsidiaries.

2.	Even after rationalisation by the winding down of Broombridge and the concentration of the Group's activities at Newcastle West, this was not sufficient to stem the tide of trading losses during the year 1981. Competition for the available trade in the poultry market became even more cut-throat than it had been previously, with Castlemahon1s competitors sensing its weakness and applying tremendous pressure to the Group by squeezing prices to an uneconomic level.

3.	The closure of Broombridge and the transfer of its operations to Newcastle West did not take place in the orderly and uneventful manner which management had hoped for.  The projected transfer of plant to the Co. Limerick venue did not  materialise, or only materialised to a very limited extent, giving rise to a necessity to write down or write off very large sums under this heading.

4.	The U.K. subsidiaries, so far from providing a source of revenue for the parent Group by their trading operations or on disposal, continued to be loss-makers and had to be wound up.  

This did not result in a break-even situation as hoped for by Arthur Andersen, but left Castlemahon with a legacy of actual and contingent liabilities which proved most difficult to evaluate.
5. Lemonfield Farm was sold off at a loss of £130,000 approx., the figure realised being some £70,000 below the written-down value taken by Arthur Andersen for the purpose of their report.

The security for the Golden Vale loan proved quite illusory when Castlemahon went into liquidation.  There was little hope at any stage of any payment in their favour if Castlemahon had to be wound up.

		FORESEEABILITY OF THESE FACTORS

To what extent should Arthur Andersen have foreseen these developments, given the limited nature of the investigation undertaken by them and the time-scale within which it had to be completed?

Dealing first with the home operation and in particular with the situation regarding Broombridge, the Arthur Andersen investigation took place at the very time when the closure of Broombridge was taking place.  The decision to close it as a production facility had been taken at the meeting of the Castlemahon Board of Directors on the 21st August, 1980.  It involved making a work-force of 230 redundant.

It is important to note that Broombridge was not merely a distribution venture for Newcastle West but was a production centre, with a capacity (according to the Arthur Andersen Report) of 100,000 chickens a week.  The Minute of 21 August, 1980 refers to a plan to produce the Broombridge output as follows...."Limerick, 154,000 birds/week Co-pack 30,000 birds/week".  This probably refers to the total output anticipated at Newcastle West after the change-over. The chickens were purchased from outside growers, a large proportion of whom were located in the Cavan/Monaghan area.

The proposal was to relocate the sales and marketing function from Broombridge to Inchicore (Frozen Foods).

The Newcastle West plant had a processing capability (again according to the Arthur Andersen Report) of 180,000 birds a week and the transfer of the Broombridge operation
could only be achieved by bringing the Newcastle West plant up to its full capacity.  Problems in channelling all supplies to Co. Limerick from the Dublin area and the Northern counties were bound to arise, and the September Minutes of the Castlemahon Board of Directors record the fact that the Dublin growers were refusing to supply Newcastle West.

I think that it was more than optimistic to hope that the rationalisation process could be carried through within a short period or without major teething troubles, and it is obvious       that considerable difficulties were, in fact, experienced.  The Minutes of the new Board of Directors for the 16th January, 1981, record that the sales performance suffered a set back during the two months of mid-September to mid-November, particularly in the Dublin area due to disruption caused by close-down of Cabra plant, and quality problems due to increasing the through-put at Castlemahon by 40%".
Even at this late stage it has not proved possible to  determine the correct figure which should have appeared in the accounts for the Broombridge redundancy payments - the sum of £300,000 as in the Cooper & Lybrand audited accounts or the sum of £200,000 as in the Arthur Andersen Report (save in Draft No. 1 where it was given as £300,000).  

Arthur Andersen contend that the figure should have been reduced to the lower figure by payment of the statutory refund, while for Golden Vale it is said that there is no record of any such refund ever having been received by Castlemahon. It appears that Broombridge records were lost when the business was transferred to Limerick.

With regard to the write off of the Broombridge plant, Patrick Roche of Cooper & Lybrand said that there was a drop off in trade at Broombridge from mid-1980 when the closure was announced.   The through-put declined from 60,000 chickens per week to 40,000. The plant in Broombridge was old plant;  very little of it was moved to Limerick, and what was moved was of very little value.  The plant was in the Dublin books at net book value and was not removable save at great cost.  He could not say what was sold or transferable, save to say that it was of very small value.

Gerard Murphy of Arthur Andersen said that they were told by the Castlemahon management that the Broombridge plant and machinery was a recent acquisition and would be transferred to Limerick;  they (Arthur Andersen) assumed a reserve of over £50,000 to cover possible loss or damage.   An additional £300,000 was written off in the audited balance sheet without reference to whether it was sold or transferred to Limerick.
My conclusion is that in relation to this very substantial write-off of plant and machinery, the accounts as audited should be accepted as correct.

				THE U.K. SUBSIDIARIES

Cooper and Lybrand were asked by Golden Vale to arrange for the disposal of the UK subsidiaries, when the take-over of Castlemahon was in the process of being implemented.  Reports were sought from Castlemahon (UK) Limited concerning Anvil and Hammond and their future trading prospects and these came to hand in November 1980.   Both groups of companies were stretched to the limit of their resources and trading at a loss in a depressed and overstocked market.  The outlook for the future was one of considerable uncertainty for them, as for the turkey industry as a whole in the United Kingdom, with American and French imports making a significant impact on the market.

For their continued operation, both groups were dependent on new finance being made available by the banks, and the prospects of obtaining the necessary substantial financial backing were poor, having regard to their poor trading performance in 1980.  As events turned out, both groups were put into receivership by the banks in the early part of 1981 and liquidation followed in due course.
The Arthur Andersen Report referred to a sum of £610,000 sterling which still remained payable for the purchase of Hammond; the amount due is referred to in their Report to Foir Teoranta as "further sums of £475,000 to £610,000 (IR£625,000 to IR£803,000) .  A law-suit was commenced in the closing . stages of 1980 in which damages were claimed against the Hammond vendors for alleged fraudulent misrepresentation on the sale of the Company.  Castlemahon were also involved in guarantees given to the banks totalling IR£725,000/IR£955,000 (Foir Teoranta Report).  The third U.K. subsidiary, Castlemahon
Foods Limited was described in the Arthur Andersen Report to Foir Teoranta as consistently loss making" and a decision to cease trading had been made to take effect from the end of May, 1981.

				CONCLUSIONS

I have reached the following general conclusions about the manner in which Arthur Andersen carried out the work entrusted to them by Golden Vale:

1.   I believe the work was undertaken promptly and vigorously, and that a vast amount of research was completed within a limited time.   Fees were charged on the basis that 1,330 hours had been expended on the work over a period of approximately six weeks. I was informed, and I am prepared to accept, that 5,000 pages of Working Papers were compiled.   The Cooper and Lybrand estimate of the time spent by them on the full audit was 1,800 hours.

2.	I am prepared to accept the description of the assignment as given in the note made by Mr. Barrett on the occasion of his first interview with Mr. Curtin, and as described on the title page of the Report which was ultimately furnished to Golden Vale
by Arthur Andersen.   The nature of the assignment undertaken is again spelt out correctly, I believe - in the first paragraph of the letter of the 30th September, 1980, which accompanied, and formed part of, the Report.

3.	The Management Accounts of Castlemahon to the 30th June, 1980, were presented by Arthur Andersen with very substantial adjustments made by them and the figures as so adjusted have not been shown to be incorrect, nor indeed have they been seriously challenged in the course of the present proceedings.

4.	The claim for damages for negligence and breach of contract is, accordingly, concerned mainly with the profit and cash forecasts made in respect of the latter half of the year 1980, and the whole of 1981.  The Report is not made up entirely of figures, however, and insofar as it contains expressions of opinion on conclusions which can be drawn from the figures and from the over-all investigation of the Castlemahon operation, Arthur Andersen in voluntering such opinions must accept responsibility for them, if the client acted on the faith of them and was reasonable in doing so. 

5.	With regard to Broombridge, I cannot escape the conclusion that Arthur Andersen failed to apprehend the extent of the upheaval in the affairs of Castlemahon that would be brought about by the closing down of this plant and the organising of the entire production from Newcastle West.  I am satisfied on the evidence that it became necessary to write off plant and machinery having a book value of some hundreds of thousands of
pounds, and that heavy trading losses were brought about in the latter half of 1980, at a time when the finances of Castlemahon were already in a critical state.

6.	With regard to the U.K. subsidiaries, it appears to me that the assignment undertaken by Arthur Andersen required, of necessity, and from the very outset, a full examination of the relationship between these subsidiaries and the parent company.  For all Golden Vale or Arthur Andersen knew, as of the 15th August, 1980, the O.K. subsidiaries might have been in a position to make a major contribution to the prosperity of the parent Group, or, alternatively, might have been facing financial disaster, with very serious implications for the parent company in such matters as inter-company balances and guarantees given to cover their indebtedness. If this was not in the forefront of  Curtin's mind then it was, in my opinion, the duty of the Arthur Andersen representatives to bring it home to him, so that the U.K. subsidiaries would be made the subject of the same type of searching investigation as all other offshoots of the Castlemahon enterprise.

It appears to me that the work on the U.K. subsidiaries was undertaken too late in the day, and that too little time was devoted to it.  It seems strange to me that the Arthur Andersen staff engaged on the investigative work in the U.K. were never informed that it was the intention to dispose of these companies as soon as possible, so that they could consider whether there was any possibility of finding a buyer for them, or if not, how they could be wound up, and what the outcome was likely to be if a winding up should take place. Neither were they informed of the litigation which was just commencing and which was certain to prejudice any prospect there might have been of disposing of the Hammond group in a manner which would cut the losses of the parent Group.  It does not appear to me that the Arthur Andersen team were in a position to state the position vis-a-vis the U.K. subsidiaries with any degree of certainty by the end of September, 1980.

The amount due to the Hammond vendor is stated in the Report as IR£677,000, but in the Report to Foir Teoranta early in 1981 it is given as IR£625,000 to IR£803,000, suggesting that even at that time the amount of the possible claim could not be stated
accurately.  The Report to Foir Teoranta also brings to light -apparently for the first time  guarantees totalling IR£955,000 given by Castlemahon to the banks involved with Anvil and Hammond and an additional unlimited guarantee given in respect of Castlemahon Foods Limited, based at Reading.    

The report from Arthur Andersen (U.K.) in September 1980 had referred to a £20,000 overdraft facility in favour of the Hammond Group covered by an unlimited guarantee from the Irish parent, but I have been unable to discover references to the much greater potential liability as guarantor which was mentioned in the later report to Foir Teoranta.
Mr. Murphy of Arthur Andersen, in the course of his evidence made the point that the U.K. trading losses in 1980, which were extremely heavy, had no significance for Castlemahon at the time since the parent Company was not called upon to fund the loss, and there was no cash movement from Ireland to the U.K.  It appears to me that while that view may have been correct in the short term, it was not valid in the long-term as  
these heavy trading losses were leading on to a situation where the U.K. subsidiaries could no longer continue to trade and could not be disposed of save by winding-up, with all the knock-on consequences involved for the Irish parent at that stage, some of which have already been referred to.

He said: "The net assets of the U.K. Company were very strong at the end of June 1980, and we were criticised for saying nothing would come of it" but the Report of 30
September, 1980, states the net assets of the U.K. operations (excluding Northern Ireland) as being "only £395,000".

I am impressed by the very comprehensive report on the U.K. subsidiaries which was compiled by Arthur Andersen (U.K.) within a matter of days, but it seems to me that the U.K. staff could have provided much more useful information if they had been given a good deal more time to do so, and if it had been made clear to them that they had to investigate the companies on the basis that it was proposed to dispose of them immediately, and that the situation was complicated by the pending litigation between Castlemahon and the Hammond vendor.

As in the case of the view taken by Arthur Andersen in relation to the Broombridge close-down, I am of opinion that they were unduly optimistic in the comment made on p. 12 of their Report: "In summary, it is assumed that the U.K. operations can be disposed of without any cash flow impact." 7.  Lemonfield Farm had been purchased by castlemahon for approximately £240,000.   (The purchase price is given at £250,000 in the Castlemahon Minutes of 24 July, 1980).   It was offered for sale in July 1980, the Board's attitude to price then being, "Asking £250,000, Happy with - £175,000;  Would accept - £150,000".   As no purchaser was forthcoming it was put up for auction on the 25th September, 1980, with a reserve fixed at £130,000, and was sold shortly after that date for £110,000.   For the purpose of their Report Arthur Andersen accepted a Management estimated value of £180,000.  They had no access to the Minutes of the Castlemahon Board which might have led them to hit upon a more conservative figure.   It appears to me that they could have shown more diligence in enquiring about the outcome of the sale negotiations (if any) and the auction at the time they were finalising their Report, and even after the 30th September had passed, so as to be able to provide an exact figure.   This would have reduced the figure anticipated to arise on disposal of assets by £70,000, but I do not attach much importance to this particular item. Clearly, the discrepancy between the two figures would have made no difference to Golden Vale in making their decision.

8.	I am prepared to accept that the Cooper & Lybrand audit for the period ending the 31st October, 1980, did involve significant accounting policy changes as referred to in the Arthur Andersen Report to Foir Teoranta in 1981, and that the  effect of these changes was to convey an impression that Arthur Andersen were much further out of line in their forecasts for 1980 than was really the case.  However, even when due allowance is made for this feature of the Cooper & Lybrand audit, I think the conclusion is inescapable that the Castlemahon Group entered 1981 in much worse financial straits
than had been forecasted by the Arthur Andersen Report.

9.	I have also come to the conclusion that certain passages in the Arthur Andersen Report were not supported by the information which was available to them when compiling the Report, or which would have been available to them had greater diligence been exercised. The following extracts are referred to by way of example of what I have in mind:

(a)   "Apart from its immediate cash needs of some £1,800,000 to place it on a reasonably sound business footing..." (p.3 of covering letter).  On the information available to Arthur Andersen, it seems to me that they were very unwise to suggest to' their client that a sum of £1,800,000 would suffice to place Castlemahon on a sound business footing, having regard to the trading difficulties it was experiencing, the imponderable situation arising from the imminent closure of Broombridge, and the very gloomy report which had come to hand concerning the U.K. subsidiaries. 

(b)    "It could be possible for the Co-operative, if the U.K. operations are disposed of satisfactorily, to achieve profitable operations in 1981. If increased sales prices and reduced overhead costs could be attained, then a profit before interest and tax in excess of £1,000,000 might be recorded. This would require not only an improvement in the market but also strict cost control.  Given present operating conditions a profit of £100,000 - £200,000 seems more likely." (Covering letter - p.3).

It seems to me that Arthur Andersen were very unwise to dangle this carrot before their client when there were no real grounds for supposing that, the U.K. operations could be
disposed of satisfactorily.  Nor did trading conditions at the time of the Report lend much support to the alternative forecast of a profit of £100,000 - £200,000.  This passage appeared in the covering letter annexed to the Final Report, but not in the earlier drafts, and therefore may be said not	to have influenced the Golden Vale decision, which had been made well in advance of the receipt of the Final Report.  It is said by Mr. Murphy to have been put in at the instigation of Mr. Curtin, who wanted to see more optimism expressed in the Report, and I am prepared to accept that this was probably correct, but if so, it indicates a willingness on the part of the reporting Accountants to go along with the wishes of the client, rather than maintain the strict objectivity which was necessary for the competent performance of the task in hand.

(c)	"This" (ie the Broombridge closure) "will certainly lead to some economies of scale in that the operating loss for the first half of the year of £1,039,000 is expected to
be significantly reduced in the second half when a loss of only £197,000 is estimated ..." Report p.9 This forecast appears to have been very wide of the mark (the Arthur Andersen Report of Foir Teoranta in 1981 giving the Irish trading losses for July to October, 1980, of IR£l,589,000), and seems to have failed to anticipate the disruptive effect which was likely to flow in the short-term from the Broombridge closure.	

(d)	"Thus the PBIT, given good controls and higher sales prices, could be increased to in excess of £1,000,000". (P.11).

It would appear to have been somewhat unwise to incorporate this in the Report at a time when the Company had been unable to achieve any increase in its selling prices, notwithstanding that it had sanction for an increase.  Arthur Andersen had elsewhere assumed for the purposes of their Report that management was being too sanguine in assuming a price increase of 0.9p per lb for 1981.

(e)	"In summary, it is assumed that the U.K. operations can be disposed of without any cash flow impact ... The enhancement of the operating capability of the U.K. operations coupled with a return to a normal turkey market could obviously make these companies more valuable." (p.12) 

I do not think they were justified in making this assumption, even on the information available to them, and the report from Arthur Andersen (U.K.) did not suggest that
there was any prospect of a return to a "normal" turkey market.

10.  To summarise the foregoing it is my impression that Arthur Anderson, while doing an extremely good job of work both in Ireland and the United Kingdom, within a remarkably short space of time, and while producing a massive amount of useful information for the benefit of their client, nevertheless failed in certain limited respects to protect their client from falling into error and must be regarded as having been guilty of some degree of negligence and breach of contractual duty in the way in which they I         carried out their assignment.  It seems clear to me that those in am charge of the affairs of Golden Vale, and particularly their Chief Executive, Mr. Curtin, were eager to be told that they could push  ahead with the take-over of Castlemahon without too much risk to Golden Vale - Mr. Murphy went so far as to describe Mr. Curtin as being "paranoid" about the threat to the milk supply from Kerry Co-Op.  I am quite sure this was the frame of mind of many of the directorate of Golden Vale.  In this situation there was an even greater onus than usual on Arthur Andersen to exercise a restraining influence over the client and to couch their Report in terms which could be justified objectively in every p        respect.  They had to ensure that their client would have all the information which could be garnered in the time available, and could lead it to draw back from the project, if that was the wiser course to adopt.  I think this duty applied not only to the hard information supplied, but even more to the run commentary which accompanied it.  While all kinds of reservations were expressed in the Report I think the over-all impression conveyed by the extracts I have quoted was much more encouraging than was warranted by the trading and financial state of the Castlemahon Group as known to Arthur Andersen.  In these circumstances it appears to me that the Plaintiffs have made out a claim for damages against the Defendants.

				THE MEASURE OF DAMAGES

Golden Vale claim that they were induced by the Report to make a loan of Elm. to Castlemahon and that it has been irretrievably lost. I accept that this is correct.  They
say, further, that they had to lay out a further sum of £175,000 in the Scheme of Arrangement in a last-ditch effort to save Castlemahon from extinction, and with it the £lm loan they had already made.  They claim that further loss arose, by reason of feed supplies sold to Castlemahon which it was unable to pay for, and as interest on moneys raised for the purpose of bailing out Castlemahon. It is clear, however, that the issue of damages is not as KB) straightforward as would appear at first sight. It is repeated over and over again in the Minutes of the Board of Management and of the Board of Directors of Golden Vale, that the real purpose of the Castlemahon venture was to protect the milk pool against the dangers inherent in Kerry Co-Op establishing a beach-head in Castlemahon.   It was considered that there was as much as 20m. gallons of milk per annum at risk, if Kerry Co-Op took over the  ailing poultry group. They would be regarded, in the words of Mr. Murphy, as the "White Knight" locally, having come in to save the industry, and with it the jobs of hundreds of local people.   Many of the same people filled the role of milk suppliers and providers of poultry, and a link would be established between the Boards of Directors of the Dairy Co-Op and the Poultry Group.  All .in all, the Golden Vale management felt that not merely were the 20m. gallons of milk at risk, but a threat was being posed to the whole Golden Vale operation which it was essential to resist.   On this basis, it was contended on behalf of the Defendants that even if the Elm. used to fight off the designs of Kerry Co-Op. were lost, it was money well-spent - assuming a profit margin of 5p or 10p per gallon of milk.

Secondly, the acquisition of a controlling interest in Castlemahon provided a valuable customer for supplies from the newly-commissioned feed mill at Kilmallock.   From 1981 onwards sales by Golden Vale provided about one-third of Castlemahon's requirements, or approximately 5,500 tons per annum, making a contribution of close on £250,000 to Golden Vale's profits during the period from 1980 to 1983.   Kerry Co-Op were also in a position to supply this demand, had they achieved a take-over of Castlemahon.

The "milk war" eventually came to an end, with a peace formula being worked out as between Kerry Co-Op and Golden Vale, but while it lasted Mr. Curtin said, "they were ruthless - we all were", and it is possible that the truce might never have been declared had Kerry Co-Op brought off a deal with Castlemahon in 1980.

The Golden Vale accounts continued to include the Elm. loan due from Castlemahon in the list of debtors long after it was apparent that repayment could not be expected, and it was put to their witnesses that this course could only be justified if the expenditure were regarded as having funded the acquisition of an asset in the nature of goodwill when the milk pool was being protected and the new custom built up for the feed mill. I accept that there is a good deal of substance in these submissions. Golden Vale were warned by their Solicitors prior to entering into the formal agreement with Castlemahon, of the high risk nature of the venture, and it is obvious that they knew this already when they were at such pains to ensure that the association with Castlemahon would not feature in the Golden Vale accounts save as a debtor/creditor relationship. I am of opinion that Mr. Curtin and the Board of Golden Vale embarked on the Castlemahon project in the knowledge that they were putting Elm. at risk, but in the belief that even if the money were never to be repaid that would at least have achieved something of value for their Co-operative.   In this belief, I think they were correct.

Of the sums claimed by the Plaintiff, I do not consider that a valid claim has been made out for the expenditure claimed to have arisen after the initial outlay of Elm.   In relation to that sum I think that £1/2M. can fairly be attributed to expenditure reasonably incurred in the protection of the milk pool and should not be regarded as loss incurred by the
Plaintiffs by the fault of the Defendants or otherwise.  I  attribute a further £^m. to the profits achieved on sales by the Golden Vale milling enterprise to Castlemahon, thus reducing the potential claim to £250,000.  I consider that a valid claim for contributory negligence has been made out against the Plaintiffs, in that the evidence satisfied me that,       having been warned repeatedly by the Defendants of the urgent need to clear out the old management of Castlemahon and install a new and dynamic team, "from Day One" they failed to do this in an effective manner, but continued with a large leavening of the old and unsuccessful management team.  If they had confidence in the new management team they had installed they would not have considered it necessary to withdraw £400,000 from their control in the month of January, 1981.

I apportion the degrees of fault as between the parties, as to 80% against the Defendants and as to 20% against the Plaintiff, thus reducing the figure of £250,000 by a further amount of £50,000.  On this basis I arrive at a figure for R. J. O'Hanlon. 16th March 1987
damages of £200,000 and I propose to give a decree for this amount in favour of the Plaintiff and against the Defendants, by way of damages for negligence and breach of contract.

Counsel for the Plaintiffs: 	

							Brian McCracken, SC Dermot 								Gleeson, SC Peter Kelly, 3L
							
							(instructed by Maurice M.A. Power 								& Son, Solicitors)

Counsel for the Defendants:
 
							Eognan Fit2simons, 
							SC John Cooke, 										SC Ian Finlay, 3L

							(instructed by A. & L. Goodbody, 								Solicitors).

Cases referred to:

Roche v Peilow, 1986 ILRM 189
O'Donovan v Cork Co Council, (1967) IR 
Meskell v CIE, (1973) IR 134
Grand Restaurants of Canada Ltd v City of Toronto 123 D.L.R. 349
Sisk and Son Ltd. v Donal P. Flinn and Ors.
(Finlay P. 18.7.1984).