The appellants had audited the books of the respondent company, but had failed to identify substantial frauds by an employee of the respondent. The auditors appealed a finding of professional negligence, relying on the maxim ex turpi causa non oritur actio.
Held: (Mance and Scott LL dissenting) The appeal succeeded. The company could not bring a claim which was based upon its own unlawful actions. The Hampshire Land principle that knowledge of an agent would not be imputed to its principal where that knowledge related to the agents own breach of duty to the principal was a general principle of the law of agency and was not limited to claims. In the case of a one man company, the sole actor test could be applied to impute to the company the knowledge of its agent – in this case as to the fraud he was undertaking.
Lord Phillips summarised his conclusions: ‘1) Under the principle of ex turpi causa the court will not assist a claimant to recover compensation for the consequences of his own illegal conduct.
2) This appeal raises the question of whether, and if so how, that principle applies to a claim by a company against those whose breach of duty has caused or permitted the company to commit fraud that has resulted in detriment to the company.
3) The answer to this question is not to be found by the application of Hampshire Land or any similar principle of attribution. The essential issue is whether, in applying ex turpi causa in such circumstances, one should look behind the company at those whose interests the relevant duty is intended to protect.
4) While in principle it would be attractive to adopt such a course, there are difficulties in the way of doing so to which no clear resolution has been demonstrated.
5) On the extreme facts of this case it is not necessary to attempt to resolve those difficulties. Those for whose benefit the claim is brought fall outside the scope of any duty owed by Moore Stephens. The sole person for whose benefit such duty was owed, being Mr Stojevic who owned and ran the company, was responsible for the fraud.
6) In these circumstances ex turpi causa provides a defence to the claim.’
Lord Walker considered whether the liquidation of the ‘one man company’ made any difference, concluding: ‘It was argued for the appellants that the public policy defence should not bar claims brought by a company in insolvent liquidation, where the creditors were innocent parties who had been defrauded by Mr Stojevic. If that were right, it would create a very large gap in the public policy defence, since most fraudsters (individual and corporate) become insolvent sooner or later and have liabilities to those whom they have defrauded. Mr Brindle conceded that if Mr Stojevic had carried out his frauds directly (and not through a one-man company) neither he nor his trustee in bankruptcy could have resisted the public policy defence. That conclusion was reached by Langley J. (para 65(2)) and is clearly correct (see Fry LJ in Cleaver v Mutual Reserve Fund Life Association [1892] 1 QB 147, 156). There is no good reason to apply a different rule to a company in liquidation. Apart from special statutory claims in respect of misfeasance, wrong trading and so on, it cannot assert any cause of action which it could not have asserted before the commencement of its liquidation, as Mr Brindle concedes. That is especially true in the context of the duties of an auditor, which are not owed to a company’s creditors.’
Otherwise Stone and Rolls Ltd v Moore Stephens
Judges:
Lord Phillips of Worth Matravers, Lord Scott of Foscote, Lord Walker of Gestingthorpe, Lord Brown of Eaton-under-Heywood, Lord Mance
Citations:
[2009] UKHL 39, Times 11-Aug-2009, [2009] 1 AC 1391, [2009] Bus LR 1356, [2009] PNLR 36, [2009] 3 WLR 455
Links:
Jurisdiction:
England and Wales
Citing:
At First Instance – Stone and Rolls Ltd v Moore Stephens (A Firm) Comc 27-Jul-2007
The company claimed against its chartered accountants for negligence when acting as auditors. The sole directing mind of the company had used it as a vehicle for substantial frauds. The court was asked ‘whether and if so when can a claim by a . .
Appeal from – Moore Stephens (A Firm) v Stone and Rolls Ltd CA 18-Jun-2008
The company claimed against its accountants for negligence in not discovering the substantial dishonesty of the claimant’s employee, its directing mind and sole shareholder.
Held: Rimer LJ said that the critical question was whether it was . .
Cited – Re Hampshire Land Company 9-Jul-1896
A company had borrowed from a building society. The borrowing was not properly authorised by resolution of the shareholders in general meeting The court was asked whether whether the knowledge of the company secretary common to both the company and . .
Cited – Hall v Hebert 29-Apr-1993
(Canadian Supreme Court) After they had been drinking heavily together, Mr Hebert, who owned a muscle car, allowed Mr Hall to drive it, including initially to give it a rolling start down a road on one side of which there was a steep slope. The car . .
Cited – Gray v Barr CA 1971
A husband had accidentally shot and killed his wife’s lover after threatening him with a shotgun.
Held: The court confirmed the decision at first instance. He was not liable to be indemnified by his insurers for the losses claimed against him . .
Cited – Thackwell v Barclays Bank plc 1986
The plaintiff was party to a fraudulent scheme under which a cheque had been made payable to him. The plaintiff’s signature endorsing the cheque to a third party was forged and in reliance on the forgery the bank credited the third party. The . .
Cited – Al Saudi Banque v Clarke Pixley 1990
An auditor does not generally owe a duty of care in tort to a company’s creditors. Millet J referred to the Court of Appeal decision in Caparo: ‘In my judgment, Caparo’s case is binding authority for the following propositions. (i) In cases of . .
Cited – Caparo Industries Plc v Dickman and others HL 8-Feb-1990
Limitation of Loss from Negligent Mis-statement
The plaintiffs sought damages from accountants for negligence. They had acquired shares in a target company and, relying upon the published and audited accounts which overstated the company’s earnings, they purchased further shares.
Held: The . .
Cited – Meridian Global Funds Management Asia Ltd v Securities Commission PC 26-Jun-1995
(New Zealand) The New Zealand statute required a holder of specified investments to give notice of its holding to a regulator as soon as it became aware of its holding. Unbeknown to any others in the company apart from one colleague, its chief . .
Cited – Tinsley v Milligan HL 28-Jun-1993
Two women parties used funds generated by a joint business venture to buy a house in which they lived together. It was vested in the sole name of the plaintiff but on the understanding that they were joint beneficial owners. The purpose of the . .
Cited – Alexander v Rayson CA 1936
The action was for arrears of rent. The evidence at trial was that the plaintiff granted a lease to the defendant at a rent of andpound;1200 and contracted that certain services in connection with the flat would be performed. The plaintiff sent the . .
Cited – Hewison v Meridian Shipping Pte, Coflexip Stena Offshore Ltd, Flex Installer Offshore Ltd CA 11-Dec-2002
The claimant was awarded damages for injuries suffered in his work as a seaman. The respondents claimed that he should not receive damages, since he had made false declarations as to his health in order to obtain employment, hiding his epilepsy . .
Cited – Cross v Kirkby CA 18-Feb-2000
The claimant was a hunt saboteur and the defendant a local farmer. The claimant shouted to the defendant ‘You’re fucking dead’ and jabbed him in the chest and throat with a broken baseball bat. In order to ward off further blows, the defendant . .
Cited – United Project Consultants Pte Ltd v Leong Kwok Onn 16-Aug-2005
(Supreme Court of Singapore – Court of Appeal) A taxpayer sought to recover from his accountant an administrative penalty under a statutory provision dealing with the innocent submission of an incorrect tax return.
Held: In determining whether . .
Cited by:
Cited – Les Laboratoires Servier and Another v Apotex Inc and Others SC 29-Oct-2014
Ex turpi causa explained
The parties had disputed the validity a patent and the production of infringing preparations. The english patent had failed and damages were to be awarded, but a Canadian patent remained the defendant now challenged the calculation of damages for . .
Cited – Jetivia Sa and Another v Bilta (UK) Ltd and Others CA 31-Jul-2013
Defendants appealed against refusal of their request for a summary striking out for lack of jurisdiction, of the claims against them arising from their management of the insolvency of the first defendant. . .
Cited – Bilta (UK) Ltd and Others v Nazir and Others ChD 30-Jul-2012
The company was said to have engaged in a fraud based on false European Trading Scheme Allowances, and had been wound up by the Revenue. The liquidators, in the company name, now sought recovery from former directors and associates.
Held: The . .
Not to be followed – Jetivia Sa and Another v Bilta (UK) Ltd and Others SC 22-Apr-2015
The liquidators of Bilta had brought proceedings against former directors and the appellant alleging that they were party to an unlawful means conspiracy which had damaged the company by engaging in a carousel fraud with carbon credits. On the . .
Cited – Singularis Holdings Ltd v Daiwa Capital Markets Europe Ltd SC 30-Oct-2019
The Court was asked whether a claim against a bank for breach of the Quincecare duty is defeated if the customer is a company, and the fraudulent payment instructions are given by the company’s Chairman and sole shareholder who is the dominating . .
Lists of cited by and citing cases may be incomplete.
Professional Negligence, Company, Agency
Updated: 02 May 2022; Ref: scu.368929