Stone and Rolls Ltd ((in Liquidation)) v Moore Stephens (A Firm)

JurisdictionEngland & Wales
JudgeLord Justice Rimer,Lord Justice Keene,Lord Justice Mummery
Judgment Date18 June 2008
Neutral Citation[2008] EWCA Civ 644
Docket NumberCase No: A2/2007/2223
CourtCourt of Appeal (Civil Division)
Date18 June 2008

[2008] EWCA Civ 644

IN THE SUPREME COURT OF JUDICATURE

COURT OF APPEAL (CIVIL DIVISION)

COMMERCIAL COURT

Mr Justice Langley

[2007] EWHC 1826 (Comm)

ON APPEAL FROM THE QUEEN'S BENCH DIVISION

Before:

Lord Justice Mummery

Lord Justice Keene and

Lord Justice Rimer

Case No: A2/2007/2223

Between:
Moore Stephens (a Firm)
Appellant
and
Stone & Rolls Limited (in liquidation)
Respondent

Mr Jonathan Sumption QC and Mr Tom Adam (instructed by Barlow Lyde & Gilbert LLP) for the Appellant

Mr Michael Brindle QC, Mr Mark Simpson and Mr David Murray (instructed by Norton Rose LLP) for the Respondent

Hearing dates: 11, 12 and 13 March 2008

Lord Justice Rimer

Introduction

1

On 22 December 2006 Stone & Rolls Limited (“the company”) commenced a claim in the Commercial Court for damages against Moore Stephens, chartered accountants (“the firm”). The firm had been the company's auditors. The essence of the claim is that it is said that the firm negligently failed in the course of various audits to detect the dishonest behaviour of Mr Zvonko Stojevic, who at the times relevant to the claim was the sole directing mind and will of the company. The nature of his dishonesty was to procure the company to engage in frauds on banks which enabled substantial sums of money to be channelled through the company and applied elsewhere for the benefit of Mr Stojevic and others also party to the fraud. The frauds gave rise to liabilities by the company to the banks, in particular to a Czech bank. That bank sued the company and Mr Stojevic in deceit and was awarded substantial damages against both. The company could not pay and, upon the bank's petition, went into liquidation. It is insolvent. Its claim against the firm, brought by its liquidators, is for damages to compensate it for losses it is said to have suffered in consequence of the firm's alleged negligence in the conduct of its audits. The claim is for just under US $174 million.

2

The firm denies negligence and there has as yet been no trial on that question. Its position is that there is no need for one because the claim is doomed to failure and should be struck out. Its point is that the company is asking the firm to indemnify it against the liabilities it has incurred by its own fraud. It says that such a claim is barred by the principle of public policy expressed in the maxim ex turpi causa non oritur actio. In February 2007 the firm issued an application notice for summary judgment on the claim ( CPR Part 24.2), or its striking out (Part 3.4(2)).

3

The application came before Langley J who gave his judgment on 27 July 2007. He declined to strike the claim out. This is the firm's appeal against his order. We had excellent arguments from both sides. There was no issue as to the facts that have been found or must be assumed. As for the law, the debate came down to two questions. Mr Brindle QC, for the company, does not question the general operation of the ex turpi causa maxim but submitted (i) that it cannot prevent the company from suing for recovery in respect of its own losses caused by the individual who was its directing mind and will in relation to the frauds. That is because the company is itself said to have been a victim of the frauds and should not have any knowledge of them attributed to it; and (ii) that the maxim can anyway provide no defence to the firm when the detection of dishonesty in the operation of the company's affairs was “the very thing” that the firm, as auditors, was retained to do. Mr Sumption QC, for the firm, submitted that both propositions are wrong.

4

The judge found against the company on the first issue. It is not easy to identify his conclusion in relation to the second. He ultimately decided the case on the basis that the conscience of the ordinary citizen would not find the pursuit of the claim so repugnant that it ought to be prevented “by use of the unforgiving and uncompromising operation of the ex turpi maxim”. It was agreed before us that that approach involved a misapplication of the principles relating to the maxim that the judge had earlier correctly identified, and Mr Brindle did not defend that part of his reasoning. His position was, however, that the judge had nevertheless arrived at the right result. The company's case in respect of both issues was raised in a respondent's notice.

The facts

5

Langley J summarised the facts and none of what he said about them gave rise to any difference before us. My summary is taken from his judgment. The damage suffered by the company arises from a letter of credit fraud it committed in concert with an Austrian company called BCL Trading GmbH (“BCL”). The fraud consisted in the company's presentation to banks of false documents, the receipt of funds by the company and the payment of them away to BCL and others party to the frauds. The documents were shams purporting to reflect commercial transactions which had not occurred. The individual behind the company who procured, and benefited from, the frauds was Mr Stojevic, who owned, controlled and managed the company. The firm were the company's auditors for the years 1996, 1997 and 1998, when the frauds were carried out. The claim is that the firm negligently failed in the course of the audits to detect and stop the frauds.

6

The major loser as a result of the frauds was Komercni Banka AS (“KB”). KB's claim against the company and Mr Stojevic for damages for fraud was tried by Toulson J, whose judgment is reported as Komercni Banka AS v. Stone & Rolls Ltd and Another [2002] EWHC 2263 (Comm); [2003] 1 Lloyd's Rep. 383. Langley J summarised Toulson J's decision as follows (S&R is the company):

“9. The claimant (KB) was a Czech Bank. It was the major victim of the fraud. The letters of credit were issued by the Bank at the request of an Austrian company called BCL. The Letters of Credit related to purported sales of agricultural products by S&R to BCL. S&R was the beneficiary. The claims related to 30 letters of credit which were honoured upon presentation by S&R of the relevant documents but for which KB received no payment from BCL. They were issued between July 1998 and July 1999. The first letters of credit were issued at the end of December 1997 but they were paid on maturity. KB's case was that the documents presented to it were false in particular by representing that the issuing warehouse as S&R's agent was holding the invoiced goods in favour of KB when in fact there were no goods at all. KB alleged that Mr Stojevic was responsible for procuring the fraudulent presentation of documents to it and that he and S&R were jointly liable to KB in deceit. The defendants denied dishonesty.

10. Toulson J found that the documents presented to KB by S&R were false to the knowledge of both S&R and Mr Stojevic; that their presentation had caused KB to pay S&R or its assignee (where discounted by S&R) the face value of the letters of credit; and so had caused the loss to KB arising from those payments. Toulson J also held that while KB had itself been negligent that was no answer for a fraudster. He gave judgment for KB against both defendants for US $94.5 million. That was the figure paid out by KB under the 30 unreimbursed letters of credit. The evidence before Toulson J showed that of the total amount received by S&R from the fraud of approximately US $90 million, some 80 million was paid to BCL or companies connected with BCL. The evidence before this court shows that the inwards receipt of monies was promptly followed by the outward payments.

11. The judgment (no doubt because it was not necessary) contains no analysis of whether the liability of S&R was founded on vicarious liability for the fraud of Mr Stojevic, attribution of knowledge or otherwise.”

7

The judgment led, on the petition of KB, to the entry of the company into provisional and then compulsory liquidation. If the company's claim against the firm were to succeed, KB would be the major beneficiary. There is no dispute that KB has no direct claim against the firm, which owed it no duty of care.

8

Langley J summarised the lengthy particulars of claim. They asserted that Mr Stojevic was a Croatian national, who was a shadow director of the company for which he held a power of attorney. Mr Stojevic controlled the company, which was owned by an Isle of Man company which was in turn owned by his family trust. The particulars asserted that Mr Stojevic was “a highly intelligent and secretive Croatian businessman who controlled numerous companies in various jurisdictions and used trustees and nominee directors in order to conceal his association with them.” The company's fraud was conveniently summarised as follows in the particulars of claim:

“16. Mr Stojevic's intention throughout was to use S&R as a vehicle of fraud, i.e. it was intended to be, and became, a vehicle through which funds were extracted from banks which believed that they were financing bona fide commodity trades and then paid away to third parties who were under the influence or control of Mr Stojevic. The fraudulent transactions which he planned and executed through S&R became both larger and more obviously fraudulent as he realised that Moore Stephens had failed to detect his earlier frauds and would probably not detect his frauds in the future.”

9

It is the essence of the company's claim that Mr Stojevic was its controlling mind and will. Nobody else was in a like position. In a real sense the company was his company. It was, for practical purposes, a “one man company”. It is a further part of the claim that the company was throughout used by Mr Stojevic as a vehicle for fraud,...

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