Moore Stephens v Stone Rolls Ltd
Encyclopedia
Moore Stephens v Stone Rolls Ltd [2009] UKHL 39 is a leading case relevant for UK company law and the law on fraud and ex turpi causa non oritur actio
. The House of Lords decided by a majority of three to two that where the director and sole shareholder of a closely held private company deceived the auditors with fraud carried out on all creditors, subsequently the creditors of the insolvent company would be barred from suing the auditors for negligence from the shoes of the company. The Lords reasoned that where the company was only identifiable with one person, the fraud of that person would be attributable to the company, and the "company" (or the creditors standing in its insolvent shoes) could not rely on its own illegal fraud when bringing a claim for negligence against any auditors.
) had successfully sued both the company and Mr Stojevic. The company went into liquidation. Now the company's creditors, acting in the name of the company, wished to sue the auditors for failing to detect the fraud, since both the company and Mr Stojevic were out of money. They claimed US$174m. The auditors, Moore Stephens, requested the claim be struck out even before any question of their negligence was raised. They argued that even if they had been negligent it would be contrary to public policy to let the company sue them, because that would involve breach of the principle that a claimant cannot come to court and make a plea whilst relying on his own illegal behaviour (ex turpi causa non oritur actio
).
, Keene and Rimer LJJ ([2008] EWCA Civ 644) reversed Langley J's decision holding that the illegality defence could not be removed simply because the very thing the auditors were meant to do was to detect fraud.
should be open to the auditors. Both Lord Walker and Lord Brown rejected that there should exist any principle that the ex turpi causa defence would be overridden when the duty involved was to protect against one's own criminality.
Lord Scott and Lord Mance dissented.
Ex turpi causa non oritur actio
Ex turpi causa non oritur actio is a legal doctrine which states that a claimant will be unable to pursue a cause of action if it arises in connection with his own illegal act...
. The House of Lords decided by a majority of three to two that where the director and sole shareholder of a closely held private company deceived the auditors with fraud carried out on all creditors, subsequently the creditors of the insolvent company would be barred from suing the auditors for negligence from the shoes of the company. The Lords reasoned that where the company was only identifiable with one person, the fraud of that person would be attributable to the company, and the "company" (or the creditors standing in its insolvent shoes) could not rely on its own illegal fraud when bringing a claim for negligence against any auditors.
Facts
Stone & Rolls Ltd was wholly owned and directed by Mr Stojevic. Moore Stephens was the firm of chartered accountants, hired to perform audits between 1996 and 1998. Mr Stojevic deceitfully siphoned assets of the company away and falsified accounts to show more profitable transactions than were real. In previous litigation, one of the main victims (a Czech bank, Komerční bankaKomercní banka
Komerční banka is one of the main banks in the Czech Republic. It serves about 1.5 million customers in more than 350 branches.The bank was founded in 1990 following separation of commercial activities from the former Státní banka československá . In 1992, the bank was partially privatized in...
) had successfully sued both the company and Mr Stojevic. The company went into liquidation. Now the company's creditors, acting in the name of the company, wished to sue the auditors for failing to detect the fraud, since both the company and Mr Stojevic were out of money. They claimed US$174m. The auditors, Moore Stephens, requested the claim be struck out even before any question of their negligence was raised. They argued that even if they had been negligent it would be contrary to public policy to let the company sue them, because that would involve breach of the principle that a claimant cannot come to court and make a plea whilst relying on his own illegal behaviour (ex turpi causa non oritur actio
Ex turpi causa non oritur actio
Ex turpi causa non oritur actio is a legal doctrine which states that a claimant will be unable to pursue a cause of action if it arises in connection with his own illegal act...
).
High Court
Langley J ([2007] EWHC 1826 (Comm)) held Mr Stojevic's actions and state of mind were to be attributed to the company. Because they were the same thing, it was artificial to describe the company as a "victim" of the fraud, and therefore to let the company sue the auditor. However, because detecting the fraud was the very thing the auditors were engaged to do, they would not be allowed to rely on the ex turpi causa defence to a negligence claim.Court of Appeal
MummeryJohn Mummery
Sir John Mummery PC, DL is a Lord Justice of Appeal and President of the Investigatory Powers Tribunal and member of the Court of Ecclesiastical Causes Reserved in the UK.-Biography:...
, Keene and Rimer LJJ ([2008] EWCA Civ 644) reversed Langley J's decision holding that the illegality defence could not be removed simply because the very thing the auditors were meant to do was to detect fraud.
House of Lords
Lord Phillips, Walker and Brown dismissed the appeal and held that the auditors, Moore Stephens, could rely on the ex turpi causa defence to debar the company's claim for negligence. They held that since Mr Stojevic was the exclusive owner and controller, it was logically necessary that his fraudulent intentions be attributed to the company. More Specifically, Lord Phillips identified that the fraudulent act was done for the benefit of the company, and therefore the act of Mr Stojevic was attributed to be the act of Stone & Rolls through the organic process of attribution. The company was therefore deemed to be "aware" of the fraud and primarily liable for it. The auditors owed a duty to perform their audit diligently to the company (not to individual shareholders or creditors), and so if the company tried to bring a claim for breach of that duty it would necessarily be relying on its own illegality. Accordingly the defence of ex turpi causa non oritur actioEx turpi causa non oritur actio
Ex turpi causa non oritur actio is a legal doctrine which states that a claimant will be unable to pursue a cause of action if it arises in connection with his own illegal act...
should be open to the auditors. Both Lord Walker and Lord Brown rejected that there should exist any principle that the ex turpi causa defence would be overridden when the duty involved was to protect against one's own criminality.
Lord Scott and Lord Mance dissented.
Significance
Commentators argue that the majority misapplied the facts and overlooking the relevance of insolvency to the application of attribution.- Safeway Stores Ltd v Twigger [2010] EWCA Civ 1472, if an undertaking is penalised by the OFT for infringing competition law, the company cannot recover money for penalties from its directors or employees, as that is contrary to ex turpi causa non oritur actio.
See also
- Caparo Industries plc v Dickman
- Hewison v Meridian Shipping Services Pte LtdHewison v Meridian Shipping Services Pte LtdHewison v Meridian Shipping Services Pte Ltd [2002] is an English tort law case, concerning an employer's liability for an employee's illegal acts.-Facts:...
[2002] EWCA Civ 1821
External links
- Case report (25.6.2009) The Daily TelegraphThe Daily TelegraphThe Daily Telegraph is a daily morning broadsheet newspaper distributed throughout the United Kingdom and internationally. The newspaper was founded by Arthur B...
- Moore Stephens' website