Stone and Rolls Ltd ((in Liquidation)) v Moore Stephens (A Firm)
| Jurisdiction | England & Wales |
| Judge | THE HONOURABLE MR JUSTICE LANGLEY |
| Judgment Date | 27 July 2007 |
| Neutral Citation | [2007] EWHC 1826 (Comm) |
| Docket Number | Case No: 2006/1378 |
| Court | Queen's Bench Division (Commercial Court) |
| Date | 27 July 2007 |
[2007] EWHC 1826 (Comm)
IN THE HIGH COURT OF JUSTICE
QUEEN's BENCH DIVISION
COMMERCIAL COURT
The Honourable Mr Justice Langley
Case No: 2006/1378
Mr Mark Simpson and Mr David Murray (instructed by Norton Rose) for the Claimant
Mr Mark Howard QC and Mr Tom Adam (instructed by Barlow Lyde & Gilbert) for the Defendants
Hearing dates: 9 and 10 July 2007
Approved Judgment
I direct that pursuant to CPR PD 39A para 6.1 no official shorthand note shall be taken of this Judgment and that copies of this version as handed down may be treated as authentic.
The Hon. Mr Justice Langley:
Introduction
The first-named Defendants, Moore Stephens, were, for the years 1996, 1997 and 1998, the auditors of the Claimant company (“S&R”). S&R alleges that in each year the audits were conducted negligently. The claim is for USD 173.6 million. There is an allegation of “shutting eyes” fraud in relation to the 1998 audit but that, like negligence, is strenuously denied and is of no relevance to the present issues. The damage claimed arises from a letter of credit fraud committed against banks. The fraud consisted of the presentation by S&R of false documents to the Banks, the receipt of funds by S&R and the payment away of those funds to other parties to the fraud. The documents were shams purporting to reflect a commercial transaction which had not occurred. The claim asserts that Moore Stephens should, by one route or another, have “blown the whistle” bringing the fraud to an end. S&R was owned, controlled and managed by a Mr Stojevic. He was the person who committed the fraud and, with S&R, was found liable for it in relation to the major losing Bank by Toulson J in 2002 in a decision entitled Komercni Banka AS v. Stone and Rolls Ltd and Another [2002] EWHC 2263(Comm). “Another” was Mr Stojevic.
The First Question
To my mind, the major question which arises on the present applications by Moore Stephens to strike out the claim and/or for summary judgment, is one to which there is no easy answer and on which there are lines of authority which it is not easy to reconcile. The issue has been very well argued. In short summary the question is whether and if so when can a claim by a company against its auditors infringe the maxim, still familiarly expressed in Latin, that ex turpi causa non oritur actio. The uncertainties, including the uncertain rationale of the maxim, have been adverted to by the Supreme Court of Canada in Hall v Hebert 101 D.L.R (4 th) 129 and by the Law Commission in Consultation Paper No 160 (May 2001) on the Illegality Defence in Tort.
If it is accepted, as I think it must be, that an individual cannot claim losses suffered as a result of his own criminal conduct the question which arises is when, if at all, does a similar principle apply to a claim by a corporation and does it make any difference that the defendant is an auditor whose duty of care to the company audited, if performed, would have led to the disclosure and end of the criminal conduct and the losses.
It is the submission of Mr Howard, QC, for Moore Stephens, that Mr Stojevic was the “one man” and the “controlling mind and will” of S&R which was a “one man band”; that S&R was itself guilty of fraud; and that S&R is therefore seeking to rely upon and recover a loss caused by its own fraud. At the forefront of this submission is the feature of the fraud, which on the evidence has been established, that S&R was never in any real sense deprived of its own money but was simply a conduit for the passage of fraudulently obtained funds. The funds were only obtained by fraud and, so Mr Howard submits, it is the consequent liability to repay the defrauded banks which is, or which on analysis is, the loss claimed. That, he submits, is the perhaps unusual feature of this claim which results in it falling foul of the maxim as stated by the House of Lords in Tinsley v Milligan [1994] 1 AC 340.
Mr Simpson, for S&R, submits that the claim by the company is for the losses occasioned by S&R paying away the monies and that the duty of care owed by Moore Stephens to S&R included a duty to detect the fraud and to blow the whistle. At the forefront of his submissions was the decision of the Court of Appeal in Reeves v Commissioner of Police for the Metropolis [1999] QB 169 that the rule has no application in circumstances where the alleged “turpitudinous act” is “the very thing” the defendant had a duty to prevent. In second place he relied upon the authorities which address the question in what circumstances is the knowledge and conduct of an individual to be attributed to the company and, he submits, that in the case of Mr Stojevic his dishonesty is not to be attributed to S&R which is not therefore seeking to rely upon its own dishonest actions in bringing this claim.
Neither counsel submitted that this was a case in which further evidence or information was likely to or might affect the outcome although Mr Simpson understandably stressed the final nature of the relief sought and Mr Howard, also rightly, stressed that the applications necessarily proceed on the assumption, despite their denial, that the matters alleged in the claim would be established at a trial.
The Second Question
The claim includes a claim for compound interest as special damage in an amount of some USD 81 million. Moore Stephens submit that this claim is in any event unsustainable and should be struck out/dismissed accordingly.
The CPR
In context it is accepted that the two rules of the CPR on which Moore Stephens rely come to the same thing. CPR 3.4(2)(a) enables the court to strike out a statement of case which “discloses no reasonable grounds for bringing…the claim”. CPR 24.2(a)(i) enables the court to give summary judgment against a claimant on the whole of a claim or on a particular issue if “it considers that that claimant has no real prospect of succeeding on the claim or issue” and there is no other compelling reason for a trial. Mr Simpson has not sought to put forward any case for any “other compelling reason”.
The Decision of Toulson J
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.
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 USD 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 USD 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.
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.
Liquidation of S&R
Following, and as a result of, the judgment of Toulson J, S&R went into provisional liquidation on 15 November 2002. The present claim is brought by the liquidators. Should the claim succeed there is no doubt that KB (or its assigns, if any) will be the main beneficiary as the major creditor of S&R. It is not in dispute that as a matter of law KB would itself have no direct claim against Moore Stephens because Moore Stephens did not owe a duty of care to the creditors of S&R including KB. It is in dispute whether that legal analysis has any relevance to the present issue. Mr Howard submits that the liquidation of S&R cannot “improve” the claim in the sense that if S&R is caught by the ex turpi maxim then the liquidator can be in no better position. Mr Simpson, on the other hand, places some emphasis on the fact that if this claim succeeds it will enure to the benefit of the “defrauded creditors” because he acknowledges that if and to the extent that Mr Stojevic himself were to benefit from a successful claim that would fall foul of the maxim, whether that benefit came by way of payment of sums due to him from S&R or as a shareholder or otherwise. The present claim is undoubtedly a claim by the company for what is said to be its own loss and not by “an innocent third party” save as the indirect beneficiary of the claim should it succeed: compare Gardner v Moore [1984] 1 AC 548 at 560.
The Particulars of Claim
The Particulars of Claim is a daunting...
To continue reading
Request your trial
-
Safeway Stores Ltd and Others v Twigger and Others
... ... Flaux Case No: 2009 FOLIO 881 IN THE HIGH COURT OF JUSTICE QUEEN'S BENCH ... [2009] UKHL 33 ; [2009] 3 WLR 167 and Stone & Rolls Ltd (in liquidation) v Moore Stephens (a firm) [2009] UKHL 39 ; [2009] 3 WLR 455 ... It is ... ...
-
HM Revenue and Customs v Greener Solutions Ltd
... ... The following cases were referred to in the decision: Bank of India v ... & C Commrs VAT [2010] BVC 638 Moore v I Bresler Ltd UNK [1944] 2 All ER 515 ... C-539/08) [2010] ECR I-3581 Stone & Rolls v Moore Stephens ELR [2009] 1 AC 1391 ... so that the lender could claim in the liquidation of the borrower. 21.The real issue was ... ...
-
Safeway Stores Ltd v Twigger
... ... becoming liable to pay penalty for engaging in anti-competitive practices Claimants bringing ... Stone & Rolls Ltd v Moore Stephens [ 2009 ] Bus LR ... ...
-
EC-Asia International Ltd (in liquidation) v PricewaterhouseCoopers
... ... the English Court of Appeal case of Moore Stephens (a ... firm) v ne & Rolls Limited (in liquidation) [2008] ... English Court of Appeal which is reported as Stone & ... Rolls Ltd (in liquidation) v ... ...
-
Accountants Liability Update
...Court of Appeal. Stone and Rolls Ltd (In Liquidation) v Moore Stephens [2007] In Stone and Rolls Ltd (In Liquidation) v Moore Stephens [2007] EWHC 1826 the defendant auditors failed, at for now, in their attempt to strike out the claim against them by relying on the ex turpi causa maxim, a ......
-
Auditors' Liability For Failure To 'Blow Whistle' On Fraud
...of the maxim would be unforgiving. Case Stone & Rolls Limited (in liquidation) v. Moore Stephens (a firm) and Another [2007] EWHC 1826 (Comm). This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to Law-Now infor......