Moore Stephens (a firm) (Respondents) v Stone Rolls Limited (in liquidation (Appellants)

By a majority, the House held that a company wholly controlled and beneficially owned by the person responsible for its fraud could not recover from its auditors for losses caused by continuation of that fraud. The controller’s dishonesty was attributable to the company, and the rule of ex turpi causa barred compensation for the consequences of its own unlawful conduct.

The auditors’ duty was owed to the company for the benefit of shareholders, not creditors or persons whom the company might defraud. Liquidation did not improve the company’s cause of action. The decision was confined to the exceptional case of a fraudulent one-person company. The position of a company with innocent shareholders was left open.

Stone & Rolls Ltd was controlled and beneficially owned by Mr Stojevic, who used it to obtain money from banks through fictitious commodity transactions and false documents. Komercni Banka obtained judgment in deceit against the company and Mr Stojevic for more than US$94 million. The company entered liquidation and, acting through its liquidators, sued its former auditors, Moore Stephens, in contract and tort.

For the preliminary issue it was assumed that the auditors had breached their duty of reasonable care and that proper auditing would have brought the fraud to an earlier end. Langley J refused to strike out the claim: [2007] EWHC 1826 (Comm). The Court of Appeal allowed the auditors’ appeal and struck it out: [2008] EWCA Civ 644.

The central question was whether the company’s claim was barred by ex turpi causa, including whether Mr Stojevic’s fraud should be attributed to the company and whether an auditor’s duty to detect fraud displaced that defence.

1. Appeal dismissed by a majority of three to two. Lord Phillips, Lord Walker and Lord Brown held that ex turpi causa barred the company’s claim. Lord Scott and Lord Mance dissented and would have permitted the action to proceed.

2. Per Lord Phillips, the court will not assist a claimant to obtain compensation for the consequences of its own illegal conduct. In this context the defence applies to personal or primary wrongdoing, although it does not ordinarily bar compensation for liabilities incurred merely vicariously. The majority in Tinsley v Milligan [1994] 1 AC 340 did not establish a universal reliance test for every illegality case. The underlying policy and the particular legal context remained material.

3. Per Lord Walker and Lord Brown, a company whose ownership and management were wholly embodied in the fraudster was subject to the sole-actor principle. Mr Stojevic was the company’s directing mind, will and beneficial owner. His fraud was therefore the company’s primary fraud. There was no innocent director or shareholder from whom the fraud was concealed. The company could not avoid attribution by describing itself as a secondary victim when the liabilities inherent in discovery of the fraud came home to it.

4. Per Lord Phillips, the Hampshire Land principle is principally an exception to attribution of an agent’s knowledge where that knowledge concerns the agent’s breach of duty to the principal. It is not a general rule preventing attribution of conduct. Neither that principle nor the adverse-interest rule prevented attribution on these extreme facts.

5. Per Lord Phillips, Lord Walker and Lord Brown, the auditor’s duty was owed to the company for the protection of the collective interests of its shareholders. It was not owed to creditors or to an indeterminate class of persons whom the company might defraud. Here the only shareholder and directing mind already knew and committed the fraud. Those whose interests fell within the scope of the duty were therefore complicit, while the creditors for whose practical benefit the liquidators sued fell outside it.

6. Per Lord Walker, the principle that a defendant may be liable where the harm was the very thing its duty required it to prevent is a principle of causation. It does not override ex turpi causa where that defence otherwise applies. Nor did liquidation improve the company’s cause of action.

7. Lord Scott and Lord Mance dissented. They considered that the company’s separate personality, the auditors’ duty to detect management fraud and the interests of creditors once insolvency intervened prevented attribution for this purpose. They would have restored the order refusing summary judgment.

1. House of Lords: By a majority of three to two, dismissed the company’s appeal and upheld the striking out of its claim: [2009] UKHL 39.
2. Court of Appeal: Allowed Moore Stephens’ appeal and struck out the claim as barred by ex turpi causa: [2008] EWCA Civ 644; [2008] 3 WLR 1146.
3. High Court, Commercial Court: Langley J dismissed the application for summary judgment or striking out, holding that the defence did not defeat a claim concerning the very fraud which the auditors were under a duty to detect: [2007] EWHC 1826 (Comm); [2008] Bus LR 304; [2008] 1 BCLC 697.