Stone & Rolls Ltd v Moore Stephens [2009]

Stone & Rolls Ltd v Moore Stephens [2009] UKHL 39 is a landmark case in UK company law, particularly addressing issues related to fraud and the illegality defence (ex turpi causa non oritur actio). The House of Lords, in a split decision, ruled that a company's creditors could not sue auditors for negligence when the company's director, who was also the sole shareholder, had committed fraud against the company. The case explored the attribution of the director's fraud to the company and the application of the illegality defence.

Stone & Rolls Ltd, wholly owned and directed by Mr Stojevic, engaged Moore Stephens as auditors between 1996 and 1998. Mr Stojevic deceitfully diverted company assets and falsified accounts, engaging in fraud against creditors. The company entered liquidation, and its creditors, acting on behalf of the company, sought to sue the auditors for negligence in failing to detect the fraud.

The High Court held that Mr Stojevic's actions and state of mind should be attributed to the company. While the auditors could not rely on the illegality defence, they could still be liable for negligence. However, the Court of Appeal reversed part of the High Court's decision, asserting that the illegality defence could not be removed simply because detecting fraud was the auditors' duty. However, they agreed with the attribution of Mr Stojevic's actions to the company.

In a 3-2 ruling, the House of Lords dismissed the appeal. The majority, comprising Lords Phillips, Walker, and Brown, held that the ex turpi causa defence barred the company's claim against the auditors. They attributed Mr Stojevic's fraudulent intentions to the company, making the company aware of the fraud and primarily liable for it. The auditors owed a duty to the company, and allowing a claim for negligence would involve relying on the company's own illegality.

The case explored the attribution of a director's fraud to the company, especially when the company was closely held by a single individual. The decision reinforced the principle of ex turpi causa non oritur actio, barring a claimant from relying on their own illegal behaviour in court. The majority held that allowing the company to sue the auditors would be against public policy. The case clarified that the duty of auditors extends to the company itself, and allowing a claim based on the company's illegal conduct would be inconsistent with this duty.

The decision faced criticism for potential misapplication of facts and misunderstanding of the rules of attribution. Some argued that it created a dangerous precedent and did not deliver a satisfactory result. The principles established in Moore Stephens were revisited and reviewed in later cases, including Jetivia SA v Bilta (UK) Limited [2015], where the Supreme Court clarified certain aspects related to fraud and auditor liability.
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