Moore Stephens v Stone Rolls Ltd (in liq): Important Court Ruling Explained

In a significant court ruling, Moore Stephens v Stone Rolls Ltd (in liq) established that a professional services firm can be held liable for the acts of its partners.

The case involved a liquidator who sued Moore Stephens, a firm of accountants, for damages resulting from the alleged negligence of one of its partners.

This ruling has important implications for professional services firms, as it means they can be held accountable for the actions of their partners.

The court found that Moore Stephens had a duty of care to the company, despite the fact that the partner's actions were not authorized by the firm.

As a result, the firm was held liable for the damages caused by the partner's negligence.

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The Appellant's arguments in Moore Stephens v Stone Rolls Ltd (in liq) are centered around the idea that the auditors, Moore Stephens, were negligent in their duty to detect and report the credit fraud committed by Stone Rolls' owner, Zvonko Stojevic.

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The Appellant argues that the auditors' failure to spot the fraud was a breach of their duty, and that this breach led to the company's insolvency.

The Appellant also claims that the auditors owed a duty to prevent the fraud, which is the very thing they were retained to accomplish.

The Appellant points out that once the company became insolvent, its interests aligned with those of its creditors, bringing them within the scope of the auditor's duty.

The Appellant argues that even if some attribution of the fraud to the company is possible, equity would prevent fraudulent shareholders (in this case, Stojevic) from benefiting, and therefore the action should proceed.

The Appellant disputes the idea that the company's fraud should be imputed to the auditors, arguing that the auditors are, at least secondarily, victims of the fraud.

The Appellant claims that the defence of ex turpi causa, which would normally bar the action, should not apply in this case because the auditors' duty was to prevent the wrongdoing, not to benefit from it.

Here are the main points of the Appellant's arguments:

The court's decision in Moore Stephens v Stone Rolls Ltd (in liq) was a significant one, as it clarified the application of the ex turpi causa principle in cases where a company is used as a vehicle for fraud.

The majority judges held that the principle operates automatically, meaning that Company A must plead its own fraud to establish causation, and thus its claim was barred.

In this case, the court emphasized that the auditors' statutory duty is aimed at protecting shareholders, but once shareholders and management are identical, no duty actionable by the company remains.

The court also noted that insolvency does not enlarge that duty to creditors, and that permitting recovery would indirectly reward wrongdoing and create an "intolerable fissure" in the law's coherence.

The dissenting judges, on the other hand, argued that the principle should not apply in this case, as Company A was the victim of the fraud, not the perpetrator.

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The dissenting judges pointed out that the Hampshire Land principle, which precludes attribution of knowledge of fraud to a company when the company is itself the victim of the fraud, should be applied in this case.

The dissenting judges also argued that the court's decision would emasculate the audit function, as auditors would not be held liable for their failure to detect the fraud.

Here is a summary of the key points:

The claimant company, Stone & Rolls, was controlled and managed by Mr Stojevic, who used it to defraud several banks.

Stojevic engaged Moore Stephens, a firm of accountants, to act as the claimant's auditor, but failed to disclose his fraudulent activities.

The claimant went into provisional liquidation after the bank most severely affected successfully brought an action against Stojevic and Stone & Rolls for deceit.

Moore Stephens sought to have the claim struck out on the grounds of illegality, arguing that the claim should fail as it was founded on Stone & Rolls' own illegal conduct.

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The issue of whether Stojevic's fraudulent acts could be attributed to Stone & Rolls arose for decision, with the company arguing that it should not be imputed with knowledge of the fraud.

Relying on the Hampshire Land principle, Stone & Rolls argued that Stojevic's fraud could not be attributed to it, as the principle provides that a company will not be imputed with knowledge of a fraud when that fraud was being perpetrated on the company itself.

The 'reliance test' from Tinsley v Milligan was also relevant, which provides that claimants cannot succeed if, in order to make good their claim, they have to rely on their own illegal conduct.

Moore Stephens argued that the reliance test should apply in this case, as Stojevic's acts were attributable to Stone & Rolls.

The trial judge, Langley J, declined to strike out the claim, but the Court of Appeal reversed this decision, holding that Stojevic's acts could be attributed to Stone & Rolls and that the defence arose on the present facts.

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