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Note: Stone & Rolls Ltd (Claimant) had been the beneficiary of various L/Cs. In collusion with the Applicant, it had presented false documents to various banks, had received the proceeds of the L/Cs, and had paid them to various third parties. The major victim of the fraud was Komercni Banka SA (Issuer), a Czech bank. In 30 of 51 L/Cs, the bank received no repayment from BCL, the applicant. The documents presented were false in representing that the issuing warehouse as the Claimant's agent was holding the invoiced goods in favour of Issuer when in fact there were no goods at all. The documents were also shams, purporting to reflect commercial transactions which had not occurred. The Claimant had been owned, controlled and managed by Mr. Stojevic (Managing Director), who had personally been found jointly liable with the Claimant for the fraud by Toulson, J., in the earlier case of Komercni Banka SA v. Stone and Rolls Ltd. [2002] EWHC 2263, abstracted at 2003 Annual Survey 214. The trial judge gave judgment against both the Claimant and Mr. Stojevic for US$94,500,000.00. Claimant then sued Moore Stephens (Former Auditor), alleging negligence in his audits. The English Commercial Court, Langley, J., ruled that the cause of action should be struck out based on the doctrine of ex turpi causa non oritur actior. On appeal, the Court of Appeal, Civil Division, Mummery, Keene and Rimer, LJJ., struck the cause of action based on the doctrine of ex turpi causa non oritur actior.

Former Auditor had audited the Claimant during the years 1996, 1997 and 1998. Claimant's argument was that Former Auditor should have "blown the whistle" bringing the fraud to an end.

The fundamental issue in this case was whether a company can claim losses suffered as a result of its own unlawful conduct. English law has the general doctrine of policy: "ex turpi causa non oritur actior", i.e. no unlawful act can be the foundation of a claim.

Because English law recognises no general duty of care owed by auditors to the creditors of the insolvent Claimant, the instant claim was brought by the liquidator of the insolvent Claimant.

The Former Auditor argued that the liquidation of the Claimant could not improve the claim in the sense that if the Claimant is a wrongdoer, the liquidator can be in no better position than the company on whose behalf he acted.

It was also accepted that when an auditor becomes aware of or suspects fraud and concludes that the matter ought to be reported to "an appropriate authority in the public interests" it is for auditors to report it if the company does not. This duty applies with greater force where the fraud is the fraud of the directing mind and will of the audited company (in this case, Mr. Stojevic) as in this situation it is arguably futile for the auditor to report the fraud to the directors of the company, who would be the pawns of the wrongdoer.

It was also assumed for the purposes of the application that if the Former Auditor had discharged his reporting duty, the fraudulent conduct would have been detected and brought to an end.

The Claimant argued that it was the victim of the fraud rather than a fraudster itself. The court noted that this was not a straightforward issue. Although the fraud exposed the Claimant to liabilities to Issuer and others, it had lost nothing to which it was ever entitled. Hence the court concluded that in the factual circumstances of the case it would be artificial not to fix the Claimant with the knowledge and wrongdoing of Managing Director.

The trial court concluded that the "conscience of the ordinary citizen" would not find it so repugnant for the Claimant to pursue the claim that it should be struck out even though it was arguably based on the Claimant's own fraud. The trial court noted that it could preclude recovery which would enure to the benefit of the individual perpetrator or perpetrators of the impugned conduct, who were amongst the company's creditors and the defrauded creditors of the company (including Issuer), should not be in any worse position than those whose debts arose in the ordinary course of business.

On Former Auditor's appeal, the ruling as to the interpretation of the doctrine of ex turpi causa non oritur actior was reversed. The appellate court stated that while the actions were caused by Mr. Stojevic, the actions could, under certain circumstances, be attributed to the Former Auditor creating liability other than under the doctrine of vicarious liability. Such circumstances would arise where the acts were caused by the company's "dishonest directing mind and will."

It was accepted by the parties to the suit "in the present case that the company's claim relies upon its own illegality. The question for [the court] is whether the claim must necessarily fail on ex turpi causa principles." The court ruled that the action was barred under the principle and that the Former Auditor's appeal should be allowed and the Claimant's claim should have been struck out.

[JEB/krp]

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