Moore Stephens (A Firm) v Stone & Rolls Ltd (In Liquidation)

The ex turpi causa principle bars a claim where the claimant must plead or rely on its own illegality. Once engaged, it operates without discretion; public-conscience or fairness considerations cannot save the claim. Corporate attribution means that a sole directing mind’s fraud may be the company’s own fraud. A company used as the vehicle to defraud a third party is not treated as the victim merely because the fraud leaves it liable to that victim. The Hampshire Land non-attribution principle is confined to fraud directed at the company itself. The very thing doctrine concerns causation and the scope of duty. It does not override ex turpi causa. A negligent-audit claim by the fraudster company was therefore struck out.

Stone & Rolls Ltd, now in liquidation, claimed damages from its former auditors for allegedly failing to detect frauds carried out through the company by its sole directing mind, Mr Stojevic. The firm applied for summary judgment or strike-out under the Civil Procedure Rules.

Langley J rejected the company’s attribution argument but declined to strike out the claim, applying a public-conscience approach to ex turpi causa. The firm appealed. The central questions were whether Mr Stojevic’s fraud was attributable to the company, whether the Hampshire Land principle prevented attribution because the company was said to be a victim, and whether detecting the fraud was the very thing the auditors had been retained to do.

The Court of Appeal unanimously allowed the appeal and ordered that the company’s claim against the firm be struck out.

1. The House of Lords’ decision in Tinsley v Milligan [1994] 1 AC 340 abolished the public-conscience test. The applicable reliance test asks whether the claimant must plead or rely on its own illegality. If so, the claim is barred, without a discretion to permit it on grounds of fairness. Clunis v Camden and Islington Health Authority [1998] QB 978 correctly applied that principle.
2. The rules of corporate attribution permit the acts, knowledge and state of mind of a company’s directing mind and will to count as the company’s own. The authorities, including Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500, Lennard’s Carrying Company, Limited v Asiatic Petroleum Company, Limited [1915] AC 705 and Tesco Supermarkets Ltd v Nattrass [1972] AC 153, supported that conclusion. Mr Stojevic’s fraud was the company’s fraud for the relevant purpose.
3. The Hampshire Land principle is a rule of non-attribution where an agent’s fraud is directed at the company itself. It can apply to a one-man company, as recognised in Attorney-General’s Reference (No 2 of 1982) [1984] 1 QB 624. It did not apply here. The intended victims were the banks. The company’s liabilities were consequential consequences of its own fraud, not evidence that it was a secondary victim. McNicholas Construction Co Ltd v Customs and Excise Commissioners [2000] STC 553 and Bank of India v Morris [2005] BCC 739 supported that approach. The broader reasoning in Arab Bank PLC v Zurich Insurance Co [1999] 1 Lloyd’s Law Reports 262 was not followed.
4. The very thing concept concerns causation and the scope of a duty. It may assist where the defendant’s duty was to prevent the event that occurred, but it cannot override ex turpi causa. Reeves v Commissioner of Police of the Metropolis [1999] QB 169 did not establish such an exception because its public-conscience reasoning applied the wrong test. The Singapore decision in United Project Consultants Pte Ltd v Leong Kwok Onn [2005] 4 Singapore Law Reports 214 did not alter the result.
5. Liquidation did not create a new cause of action or alter the effect of the company’s pre-existing illegality. The claim therefore necessarily failed at the strike-out stage.

• Court of Appeal (Civil Division): In [2008] EWCA Civ 644, the appeal was allowed and the company’s claim was struck out.
• Queen’s Bench Division, Commercial Court: Langley J’s decision, [2007] EWHC 1826 (Comm), declined to strike out the claim, applying an impermissible public-conscience approach to ex turpi causa.