Tab 5 - US Case Law

House of Lords

Stone&Rolls Ltd (in liquidation) vMoore Stephens (a �rm)

[2008] EWCACiv 644

[2009] UKHL 39

2008 March 11, 12, 13;June 18

2009 Feb 10, 11, 12;July 30

Mummery, Keene, Rimer LJJ

Lord Phillips ofWorthMatravers, Lord Scott of Foscote,LordWalker of Gestingthorpe, Lord Brown of

Eaton-under-Heywood, LordMance

Company � Fraud � Knowledge of company � Company used as vehicle toprocure funds from bank for sham commercial transactions � Bank�s successfulaction against company and director resulting in company�s insolvency �Company�s claim for damages for auditors� failure to detect fraud � Whetheractions of fraudster to be attributed to company � Whether defence of ex turpicausa available to auditors � Whether defence overridden by fact that fraudrelied on very thing auditors enagaged to prevent

The claimant company, which was owned, controlled and managed by S,employed the defendant �rm of chartered accountants as its auditors between 1996and 1998. The company brought proceedings in December 2006 for damages foralmost US$174m alleging that the auditors had been negligent in carrying out theaudits in those years in failing to detect and prevent S�s dishonest activities inprocuring the company to engage in frauds on banks, in particular a Czech bank.The nature of the frauds was the company�s presentation together with an Austriancompany of false documents to the banks, re�ecting sham commercial transactions,the receipts of funds by the company and their payment away to the Austriancompany and other parties to the frauds. S bene�ted from the large amount offunds channelled through the company. The Czech bank obtained judgment forsubstantial damages in its action for deceit against the company and S. Thecompany was unable to pay the damages and went into liquidation. The auditorsdenied negligence and, on their application for summary judgment or for the claimto be struck out, the judge held that the actions and state of mind of S were to beattributed to the company and that it was arti�cial to describe the company as thevictim of the frauds, but that, since detection of fraud was the very thing theauditors were engaged to undertake, they were not entitled to rely on that fraud as adefence based on the principle of ex turpi causa non oritur actio, and he refused theapplication. On the auditors� appeal the Court of Appeal concluded that sincethe company was to be attributed with responsibility for the fraudulent activitiesagainst the banks and had relied on that illegality in its claim against the auditors,any failure by the auditors to detect the frauds, as ��the very thing�� they wereengaged to undertake, could not debar them from relying on the principle ofex turpi causa non oritur actio. They accordingly allowed the auditors� appeal andstruck out the company�s action.

On the company�s appeal�Held, dismissing the appeal (Lord Scott of Foscote and Lord Mance dissenting),

that, since S was the bene�cial owner and directing mind and will of the companywho, as its human embodiment, exercised exclusive control over it, the exception tothe rule of attribution, that it would be unjust to �x the company with the fraudulentintentions of its directors, did not apply; that, therefore, the company was to beimputed with awareness of the fraudulent activities against the banks and was

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E))[2009] 1 AC[2009] 1 AC

primarily liable for them; that any duty owed by the auditors was to the company as awhole and not to individual shareholders or its creditors; that all whose interestsformed the subject of any such duty, namely the company�s sole directing mind andwill, already knew about and were party to the illegal conduct which formed thebasis of the claim; and that, in the circumstances, the auditors could rely on thedefence of ex turpi causa to debar the company�s claim and the action had properlybeen struck out (post, paras 18, 19, 51—56, 84—87, 133—136, 167—168, 193—194,197—201, 205).

Per Lord Walker of Gestingthorpe and Lord Brown of Eaton-under-Heywood.There was no principle that, where the ��very thing�� from which the auditors owedthe company a duty to protect was its own criminality, the public policy defence ofex turpi causa was overridden (post, paras 177—183, 204).

Caparo Industries plc v Dickman [1990] 2AC 605, HL(E) applied.In re Hampshire Land Co [1896] 2 Ch 743, Tesco Supermarkets Ltd v Nattrass

[1972] AC 153, HL(E) and Berg, Sons & Co Ltd v Mervyn Hampton Adams (1992)[2002] Lloyd�s Rep PN 41 considered.

Decision of the Court of Appeal, post, p 1398; [2008] EWCA Civ 644; [2008]3WLR 1146; [2008] Bus LR 1579 a–rmed on di›erent grounds.

The following cases are referred to in the opinions of the Committee:

Abrath v North Eastern Railway Co (1886) 11App Cas 247, HL(E)Al Saudi Banque v Clarke Pixley [1990] Ch 313; [1990] 2WLR 344; [1989] 3All ER

361Alexander v Rayson [1936] 1KB 169, CAArab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�s Rep 262Archbolds (Freightage) Ltd v S Spanglett Ltd [1961] 1 QB 374; [1961] 2 WLR 170;

[1961] 1All ER 417, CAAttorney General�s Reference (No 2 of 1982) [1984] QB 624; [1984] 2 WLR 447;

[1984] 2All ER 216, CABank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse

[1997] BCC 584; [1998] BCC 617, CABank of Credit and Commerce International (Overseas) Ltd v Price Waterhouse

The Times, 2April 1998Bank of Credit and Commerce International SA, In re (No 15); Morris v Bank of

India [2004] EWHC 528 (Ch); [2004] 2 BCLC 279; [2005] EWCA Civ 693;[2005] 2 BCLC 328, CA

Bank of Credit and Commerce International SA v Ali (No 2) [2000] ICR 1354;[1999] 4All ER 83

Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191; [1996]3WLR 87; [1996] 3All ER 365, HL(E)

Barings plc v Coopers & Lybrand [2003] EWHC 1319 (Ch); [2003] Lloyd�s Rep IR566

Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250; [1978] 3WLR712; [1979] 1All ER 118, CA

Belmont Finance Corpn Ltd v Williams Furniture Ltd (No 2) [1980] 1 All ER 393,CA

Beresford v Royal Insurance Co Ltd [1938] AC 586; [1938] 2All ER 602, HL(E)Berg, Sons&Co Ltd vMervynHampton Adams (1992) [2002] Lloyd�s Rep PN 41Bily v Arthur Young&Co (1992) 3Cal 4th 370Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65; [1944] 2All ER 579, CABrink�s-Mat Ltd v Noye [1991] 1 Bank LR 68, CABroderip v Salomon [1895] 2 Ch 323; Vaughan Williams J and CA; sub nom

Salomon v A Salomon&Co Ltd [1897] AC 22, HL(E)Burrows v Rhodes [1899] 1QB 816, DCCanadian Dredge&Dock Co Ltd v TheQueen (1985) 19DLR (4th) 314

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E)) [2009] 1 AC[2009] 1 AC

Caparo Industries plc v Dickman [1989] QB 653; [1989] 2 WLR 316; [1989] 1 AllER 798, CA; [1990] 2AC 605; [1990] 2WLR 358; [1990] 1All ER 568, HL(E)

Cenco Inc v Seidman& Seidman (1982) 686 F 2d 449Citizens� Life Assurance Co Ltd v Brown [1904] AC 423, PCCity Equitable Fire Insurance Co Ltd, In re [1925] Ch 407, CACleaver vMutual Reserve Fund Life Association [1892] 1QB 147, CACorr v IBC Vehicles Ltd [2008] UKHL 13; [2008] AC 884; [2008] 2 WLR 499;

[2008] ICR 372; [2008] 2All ER 943, HL(E)Cross v Kirkby The Times, 5April 2000; [2000] CATranscript No 321, CADairy Containers Ltd v NZI Bank Ltd [1995] 2NZLR 30Daniels (formerly practising as Deloitte Haskins & Sells) v Anderson (1995)

16ACSR 607DukeGroup Ltd v Pilmer [1999] SASC 97; 73 SASR 64; [2001] 2 BCLC 773Edwards Karwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd (1994) 15 ACSR

502Euro-Diam Ltd v Bathurst [1990] 1 QB 1; [1988] 2 WLR 517; [1988] 2 All ER 23;

[1988] 1 Lloyd�s Rep 228, CAEveret vWilliams (1725) (1893) 9 LQR 197Exchange Banking Co, In re (Flitcroft�s Case) (1882) 21ChD 519, CAFederal Deposit Insurance Corpn v Ernst & Young (1992) 967 F 2d 166Federal Deposit Insurance Corpn vO�Melveny&Myers (1995) 61 F 3d 17Galoo Ltd v Bright GrahameMurray [1994] 1WLR 1360; [1995] 1All ER 16, CAGerrard (Thomas) & Son Ltd, In re [1968] Ch 455; [1967] 3 WLR 84; [1967] 2 All

ER 525Gray v Barr [1971] 2QB 554; [1971] 2WLR 1334; [1971] 2All ER 949, CAGray v Thames Trains Ltd [2008] EWCACiv 713; [2009] 1 AC 1339; [2009] 2WLR

351, CA; [2009] UKHL 33; [2009] 1 AC 1339; [2009] 3 WLR 167; [2009] 4 AllER 81, HL(E)

Group Josi Re (formerly Groupe Josi R�assurance SA) v Walbrook Insurance Co Ltd[1996] 1WLR 1152; [1996] 1All ER 791, CA

Hall v Hebert (1993) 101DLR (4th) 129Hampshire Land Co, In re [1896] 2Ch 743Hardy v Motor Insurers� Bureau [1964] 2 QB 745; [1964] 3 WLR 433; [1964] 2 All

ER 742, CAHart Building Supplies Ltd v Deloitte &Touche 2004 BCSC 55Hewison v Meridian Shipping Services PTE Ltd [2002] EWCA Civ 1821; [2003]

ICR 766; [2003] PIQR P252, CAHolman v Johnson (1775) 1Cowp 341Houghton (JC)&Co vNothard Lowe&Wills Ltd [1928] AC 1, HL(E)Howard v Shirlstar Container Transport Ltd [1990] 1 WLR 1292; [1990] 3 All ER

366, CAJack Greenberg Inc, In re (1999) 240 BR 486KR v Royal & Sun Alliance plc [2006] EWCACiv 1454; [2007] Bus LR 139; [2007]

1All ER (Comm) 161, CAKingston CottonMill Co, In re [1896] 1Ch 6, CAKinsela v Russell Kinsela Pty Ltd (1986) 4NSWLR 722Knauer v Jonathon Roberts Finance Group Inc (2003) 348 F 3d 230Komercni Banka AS v Stone & Rolls Ltd [2002] EWHC 2263 (Comm); [2003]

1 Lloyd�s Rep 383Kwei Tek Chao v British Traders, etc, Ltd [1954] 2 QB 459; [1954] 2 WLR 365;

[1954] 1All ER 779Lancashire County Council v Municipal Mutual Insurance Ltd [1997] QB 897;

[1996] 3WLR 493; [1996] 3All ER 545, CALaw Society v KPMG Peat Marwick (sued as KPMG Peat Marwick McLintock)

[2000] 1All ER 515; [2000] 1WLR 1921; [2000] 4All ER 540, CALennard�s Carrying Co Ltd v Asiatic PetroleumCo Ltd [1915] AC 705, HL(E)

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London andGeneral Bank, In re [1895] 2Ch 166, CALondon andGeneral Bank, In re (No 2) [1895] 2Ch 673, CALuscombe v Roberts (1962) 106 SJ 373McNicholas Construction Co Ltd v Customs and Excise Comrs [2000] STC 553Mahmud v Bank of Credit and Commerce International SA [1998] AC 20; [1997]

3WLR 95; [1997] ICR 606; [1997] 3All ER 1, HL(E)Marles v Philip Trant & Sons Ltd [1954] 1 QB 29; [1953] 2 WLR 564; [1953] 1 All

ER 651, CAMarlwood Commercial Inc v Kozeny [2006] EWHC 872 (Comm)Mediators (The) Inc, In re; TheMediators Inc vManney (1997) 105 F 3d 822Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC

500; [1995] 3WLR 413; [1995] 3All ER 918, PCMultinational Gas and Petrochemical Co v Multinational Gas and Petrochemical

Services Ltd [1983] Ch 258; [1983] 3WLR 492; [1983] 2All ER 563, CANCP Litigation Trust v KPMGLLP (2006) 901A 2d 871O–cial Committee of Unsecured Creditors v RF La›erty & Co Inc (2001) 267 F 3d

340Oger v Chiefscope Inc (1996) 29OR (3d) 215; (1998) 113OAC 373Paci�c Acceptance Corpn Ltd v Forsyth (1970) 92WN (NSW) 29Pendleburys Ltd v Ellis Green&Co (1936) 181 LT 410R vMcDonnell [1966] 1QB 233; [1965] 3WLR 1138; [1966] 1All ER 193RBGResources plc v Rastogi [2002] EWHC 2782 (Ch); [2004] EWHC 1089 (Ch)Reeves v Comr of Police of the Metropolis [1999] QB 169; [1998] 2 WLR 401;

[1998] 2 All ER 381, CA; [2000] 1 AC 360; [1999] 3WLR 363; [1999] 3 All ER897, HL(E)

Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378; [1995] 3 WLR 64; [1995]3All ER 97, PC

Sasea Finance Ltd v KPMG (formerly KPMGPeatMarwickMcLintock) [2000] 1AllER 676, CA

Saunders v Edwards [1987] 1WLR 1116; [1987] 2All ER 651, CASchacht v Brown (1983) 711 F 2d 1343Scholes v Lehmann (1995) 56 F 3d 750Segenhoe Ltd v Akins (1990) 1ACSR 691Selangor United Rubber Estates Ltd v Cradock (No 4) [1969] 1 WLR 1773; [1969]

3All ER 965Smith v Charles Baker& Sons [1891] AC 325, HL(E)Stansbie v Troman [1948] 2KB 48; [1948] 1All ER 599, CAStandard Chartered Bank v Pakistan National Shipping Corpn (Nos 2 and 4)

[2002] UKHL 43; [2003] 1 AC 959; [2002] 3 WLR 1547; [2003] 1 All ER 173,HL(E)

Sunpoint Securities Inc, In re (2007) 377 BR 513Sykes v Beadon (1879) 11ChD 170Tesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] 2WLR 1166; [1971] 2All

ER 127, HL(E)Thackwell v Barclays Bank plc [1986] 1All ER 676Tinsley vMilligan [1994] 1AC 340; [1993] 3WLR 126; [1993] 3All ER 65, HL(E)Trevor vWhitworth (1887) 12App Cas 409, HL(E)Ultramares Corpn v Touche (1931) 174NE 441; 255NY 170United Project Consultants Pte Ltd v Leong Kwok Onn [2005] SGCA 38; [2005]

4 SLR 214VGMHoldings Ltd, In re [1942] Ch 235; [1942] 1All ER 224, CAWallersteiner vMoir [1974] 1WLR 991; [1974] 1All ER 217, CAWestMercia Safetywear Ltd vDodd [1988] BCLC 250; 4 BCC 30, CAYukong Line Ltd of Korea v Rendsburg Investments Corpn of Liberia (No 2) [1998]

1WLR 294; [1998] 4All ER 82

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E)) [2009] 1 AC[2009] 1 AC

The following additional cases were cited in argument before the House of Lords:

Astley v Austrust Ltd [1999] HCA 6; 197CLR 1Barings plc v Coopers & Lybrand [2001] EWHC 461 (Ch); [2002] Lloyd�s Rep

PN 127Blackburn Low&Co v Vigors (1887) 12App Cas 531, HL(E)Bolton (HL) (Engineering) Co Ltd v TJ Graham & Sons Ltd [1957] 1 QB 159;

[1956] 3WLR 804; [1956] 3All ER 624, CACakebread v Hopping Bros (Whetstone) Ltd [1947] KB 641; [1947] 1 All ER 389,

CACanada Cement LaFarge Ltd v British Columbia Lightweight Aggregate Ltd (1983)

145DLR (3d) 385; [1983] 1 SCR 452Clunis v Camden and Islington Health Authority [1998] QB 978; [1998] 2 WLR

902; [1998] 3All ER 180, CACustoms and Excise Comrs v Barclays Bank plc [2006] UKHL 28; [2007] 1 AC 181;

[2006] 3WLR 1; [2006] 4All ER 256, HL(E)El Ajou v Dollar LandHoldings plc [1994] 2All ER 685, CAFairchild v Glenhaven Funeral Services Ltd [2002] UKHL 22; [2003] 1AC 32; [2002]

3WLR 89; [2002] ICR 798; [2002] 3All ER 305, HL(E)Haseldine v Hosken [1933] 1KB 822, CAInternational Nesmont Industrial Corpn v Coopers & Lybrand (unreported)

13November 1998, BCSCKennedy v Green (1834) 3My&K 699Kirkham v Chief Constable of the Greater Manchester Police [1990] 2 QB 283;

[1990] 2WLR 987; [1990] 3All ER 246, CALebon v Aqua Salt Co Ltd [2009] UKPC 2, PCNational Coal Board v England [1954] AC 403; [1954] 2WLR 400; [1954] 1 All ER

546, HL(E)Norberg vWynrib [1992] 2 SCR 226R v Fell (1981) 64CCC (2d) 456R vGomez [1993] AC 442; [1992] 3WLR 1067; [1993] 1All ER 1, HL(E)R v St Lawrence Corpn Ltd (1969) 3CCC (2d) 263Revill v Newbery [1996] QB 567; [1996] 2WLR 239; [1996] 1All ER 291, CARolland v Hart (1871) LR 6ChApp 678Smith v Jenkins (1970) 119CLR 397Supply of ReadyMixed Concrete, In re (No 2) [1995] 1AC 456; [1994] 3WLR 1249;

[1995] ICR 25; [1995] 1All ER 135, HL(E)Thabault v Chait (2008) 541 F 3d 512Waldy v Gray (1875) LR 20 Eq 238Webb v Chief Constable of Merseyside Police [2000] QB 427; [2000] 2 WLR 546;

[2000] 1All ER 209, CA

The following cases are referred to in the judgment of Rimer LJ in the Court ofAppeal:

Abrath v North Eastern Railway Co (1886) 11App Cas 247, HL(E)Addie vWestern Bank of Scotland (1867) LR 1 Sc&Div 145, HL(Sc)Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�s Rep 262Attorney General�s Reference (No 2 of 1982) [1984] QB 624; [1984] 2 WLR 447;

[1984] 2All ER 216, CABank of Credit and Commerce International (Overseas) SA, In re (No 15); Morris v

Bank of India [2005] EWCACiv 693; [2005] 2 BCLC 328, CABelmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250; [1978] 3WLR

712; [1979] 1All ER 118, CABerg Sons&Co Ltd vMervynHampton Adams [1993] BCLC 1045Caparo Industries plc v Dickman [1990] 2 AC 605; [1990] 2WLR 358; [1990] 1 All

ER 568, HL(E)

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Citizens� Life Assurance Co Ltd v Brown [1904] AC 423, PCClunis v Camden and Islington Health Authority [1998] QB 978; [1998] 2 WLR

902; [1998] 3All ER 180, CACross v Kirkby The Times, 5April 2000; [2000] CATranscript No 321, CAEl Ajou v Dollar LandHoldings plc [1994] 2All ER 685, CAEuro-Diam Ltd v Bathurst [1990] 1 QB 1; [1988] 2 WLR 517; [1988] 2 All ER 23;

[1988] 1 Lloyd�s Rep 228, CAHampshire Land Co, In re [1896] 2Ch 743Hewison v Meridian Shipping Services PTE Ltd [2002] EWCA Civ 1821; [2003]

ICR 766, CAHolman v Johnson (1775) 1Cowp 341Houghton (JC)&Co vNothard Lowe&Wills Ltd [1928] AC 1, HL(E)Kirkham v Chief Constable of the Greater Manchester Police [1990] 2 QB 283;

[1990] 2WLR 987; [1990] 3All ER 246, CAKomercni Banka AS v Stone & Rolls Ltd [2002] EWHC 2263 (Comm); [2003]

1 Lloyd�s Rep 383Lennard�s Carrying Co Ltd v Asiatic PetroleumCo Ltd [1915] AC 705, HL(E)McNicholas Construction Co Ltd v Customs and Excise Comrs [2000] STC 553Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC

500; [1995] 3WLR 413; [1995] 3All ER 918, PCR vMcDonnell [1966] 1QB 233; [1965] 3WLR 1138; [1966] 1All ER 193Reeves v Comr of Police of the Metropolis [1999] QB 169; [1998] 2 WLR 401;

[1998] 2 All ER 381, CA; [2000] 1 AC 360; [1999] 3WLR 363; [1999] 3 All ER897, HL(E)

Royal British Bank v Turquand (1856) 6 E&B 327Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378; [1995] 3 WLR 64; [1995]

3All ER 97, PCSaunders v Edwards [1987] 1WLR 1116; [1987] 2All ER 651, CAStansbie v Troman [1948] 2KB 48; [1948] 1All ER 599, CATesco Supermarkets Ltd v Nattrass [1972] AC 153; [1971] 2WLR 1166; [1971] 2All

ER 127, HL(E)Thackwell v Barclays Bank plc [1986] 1All ER 676Tinsley v Milligan [1992] Ch 310; [1992] 2 WLR 508; [1992] 2 All ER 391, CA;

[1994] 1AC 340; [1993] 3WLR 126; [1993] 3All ER 65, HL(E)United Project Consultants Pte Ltd v Leong Kwok Onn [2005] SGCA 38; [2005]

4 SLR 214

The following additional cases were cited in argument before the Court of Appeal:

Bank of Credit and Commerce International (Overseas) Ltd v Price WaterhouseThe Times, 2April 1998

Barings plc v Coopers & Lybrand [2003] EWHC 1319 (Ch); [2003] Lloyd�s Rep IR566; [2003] PNLR 639

Sasea Finance Ltd v KPMG (formerly KPMGPeatMarwickMcLintock) [2000] 1AllER 676, CA

APPEAL from Langley JBy a claim commenced on 22 December 2006 the claimant company,

Stone & Rolls Ltd, claimed damages against the defendant �rm ofchartered accountants, Moore Stephens, who had been the company�sauditors for the years 1996—1998 in that the auditors had negligentlyfailed in the course of their audits to detect the dishonest activities of aCroatian national, Mr Zvonko Stojevic, the company�s sole directingmind and will, when he had procured the company to engage in frauds onvarious banks.

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Stone & Rolls Ltd vMoore Stephens (CA)Stone & Rolls Ltd vMoore Stephens (CA) [2009] 1 AC[2009] 1 AC

In February 2007 the auditors applied by notice for summary judgmentof and/or to strike out the claim. On 27 July 2007 Langley J refused theapplication.

By an appellant�s notice �led on 28 September 2007 the auditors appealedon the grounds, inter alia, that (1) the judge should have concluded from his�ndings that the claim had to fail, since to allow it would be to allow adishonest company to recover from its auditors losses which it had broughton itself through its own conscious dishonesty; (2) the judge had erred inholding that the conscience of the ordinary citizen would not �nd the pursuitof the action by the company so repugnant that it should be barred, otherthan in a situation in which any recovery would enure to the bene�t ofMr Stojevic; (3) the judge should have considered only whether the companywas relying on its own dishonest act to found its cause of action, and onconcluding that it was he should have rejected the claim; (4) in any event thejudge had erred in the conclusion which he had reached on the application ofthat test in that (a) he had wrongly given weight to the consideration that theproceeds of any recovery by the company would bene�t the company�screditors, so that to allow the action to proceed would also be of substantialbene�t to the dishonest company, (b) he had given insu–cient weight to thefact that the duty of an auditor was limited to the protection of the companyand its shareholders, so that there was no principled justi�cation for takinginto account, when assessing the company�s claim against the auditors, theinterests of parties such as the company�s creditors to whom the auditors didnot owe a duty, (c) he had given insu–cient weight to the fact that on hisanalysis the entitlement of a company which had committed dishonest actsto maintain an action seeking compensation for the resulting liabilitiesdepended not on the nature of the claim or the action of the claimant butupon the happenstance of who would bene�t from any recovery in theaction, (d) he had wrongly given weight to the consideration that theauditors would be able to seek to reduce the damages to be awarded tothe company at trial by means of the Law Reform (Contributory Negligence)Act 1945, and (e) he had erred in stating that there was no principled basisfor a decision which would put defrauded creditors in a worse position thancreditors whose debts had arisen in the ordinary course of business; and (5) itwas unclear to what extent, if any, the judge had founded himself on theprinciple that, where a defendant owed a duty to prevent the claimant fromdoing the very thing which was then relied on as the turpitudinous act inquestion, the defence of ex turpi causa non oritur actio would not run; such aprinciple applied to defeat causation defences, and should not apply todefeat that defence since it was a matter of policy concerned exclusively withthe actions of the claimant, and in any event the principle should not havebeen applied on the facts of the case.

By a respondent�s notice �led on 26October 2007 the company sought touphold the judgment on the additional grounds (1) that the judge had erredin his application of the law to the facts of the case in attributing thefraudulent conduct of Mr Stojevic to the company for the purposes of themaxim ex turpi causa non oritur actio; but (2) that even if his fraudulentconduct were to be so attributed the auditors owed the company a duty ofcare which included a duty to detect that fraudulent conduct and, havingdetected it, to report it to the appropriate authorities thus preventing thelosses ultimately caused by that fraudulent conduct from occurring, and if

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Stone & Rolls Ltd vMoore Stephens (CA)Stone & Rolls Ltd vMoore Stephens (CA)[2009] 1 AC[2009] 1 AC

the auditors were to be allowed a defence to the claim based on theoccurrence of the very losses which it was their duty to prevent, the auditors�duty in relation to those losses would be deprived of meaningful content.

The facts are stated in the judgment of Rimer LJ.

Jonathan Sumption QC and Tom Adam (instructed by Barlow Lyde &Gilbert LLP) for the defendant auditors.

Michael Brindle QC, Mark Simpson QC and David Murray (instructedbyNorton Rose LLP) for the claimant company.

The court took time for consideration.

18 June 2008. The following judgments were handed down.

RIMER LJ

Introduction1 On 22 December 2006 Stone & Rolls Ltd (��the company��)

commenced a claim in the Commercial Court for damages against MooreStephens, chartered accountants (��the �rm��). The �rm had been thecompany�s auditors. The essence of the claim is that it is said that the �rmnegligently failed in the course of various audits to detect the dishonestbehaviour of Mr Zvonko Stojevic, who at the times relevant to the claimwas the sole directing mind and will of the company. The nature of hisdishonesty was to procure the company to engage in frauds on banks whichenabled substantial sums of money to be channelled through the companyand applied elsewhere for the bene�t of Mr Stojevic and others also party tothe fraud. The frauds gave rise to liabilities by the company to the banks, inparticular to a Czech bank. That bank sued the company andMr Stojevic indeceit and was awarded substantial damages against both. The companycould not pay and, upon the bank�s petition, went into liquidation. It isinsolvent. Its claim against the �rm, brought by its liquidators, is fordamages to compensate it for losses it is said to have su›ered in consequenceof the �rm�s alleged negligence in the conduct of its audits. The claim is forjust under US$174m.

2 The �rm denies negligence and there has as yet been no trial on thatquestion. Its position is that there is no need for one because the claim isdoomed to failure and should be struck out. Its point is that the companyis asking the �rm to indemnify it against the liabilities it has incurred by itsown fraud. It says that such a claim is barred by the principle of publicpolicy expressed in the maxim ex turpi causa non oritur actio. In February2007 the �rm issued an application notice for summary judgment on theclaim (CPR r 24.2), or its striking out: rule 3.4(2).

3 The application came before Langley J who gave his judgment on27 July 2007 [2008] Bus LR 304. He declined to strike the claim out. This isthe �rm�s appeal against his order. We had excellent arguments from bothsides. There was no issue as to the facts that have been found or mustbe assumed. As for the law, the debate came down to two questions.Mr Brindle, for the company, does not question the general operation of theex turpi causa maxim but submitted (i) that it cannot prevent the companyfrom suing for recovery in respect of its own losses caused by the individualwho was its directing mind and will in relation to the frauds. That is because

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Stone & Rolls Ltd vMoore Stephens (CA)Stone & Rolls Ltd vMoore Stephens (CA) [2009] 1 AC[2009] 1 ACRimer LJRimer LJ

the company is itself said to have been a victim of the frauds and should nothave any knowledge of them attributed to it; and (ii) that the maxim cananyway provide no defence to the �rm when the detection of dishonesty inthe operation of the company�s a›airs was ��the very thing�� that the �rm, asauditors, was retained to do. Mr Sumption, for the �rm, submitted that bothpropositions are wrong.

4 The judge found against the company on the �rst issue. It is not easyto identify his conclusion in relation to the second. He ultimately decidedthe case on the basis that the conscience of the ordinary citizen would not�nd the pursuit of the claim so repugnant that it ought to be prevented ��byuse of the unforgiving and uncompromising operation of the ex turpimaxim��: para 65(10). It was agreed before us that that approach involved amisapplication of the principles relating to the maxim that the judge hadearlier correctly identi�ed, and Mr Brindle did not defend that part of hisreasoning. His position was, however, that the judge had neverthelessarrived at the right result. The company�s case in respect of both issues wasraised in a respondent�s notice.

The facts

5 Langley J summarised the facts and none of what he said aboutthem gave rise to any di›erence before us. My summary is taken from hisjudgment. The damage su›ered by the company arises from a letter of creditfraud it committed in concert with an Austrian company called BCLTradingGmbH (��BCL��). The fraud consisted in the company�s presentation tobanks of false documents, the receipt of funds by the company and thepayment of them away to BCL and others party to the frauds. Thedocuments were shams purporting to re�ect commercial transactions whichhad not occurred. The individual behind the company who procured, andbene�ted from, the frauds was Mr Stojevic who owned, controlled andmanaged the company. The �rm were the company�s auditors for the years1996, 1997 and 1998, when the frauds were carried out. The claim is thatthe �rm negligently failed in the course of the audits to detect and stop thefrauds.

6 The major loser as a result of the frauds was Komercni BankaAS (��KB��). KB�s claim against the company andMr Stojevic for damages forfraud was tried by Toulson J, whose judgment is reported as KomercniBanka AS v Stone & Rolls Ltd [2003] 1 Lloyd�s Rep 383. Langley J [2008]Bus LR 304, paras 9—11 summarised Toulson J�s decision (��S & R�� is thecompany):

��9. The claimant (�KB�) was a Czech bank. It was the major victim ofthe fraud. The letters of credit were issued by the bank at the request ofan Austrian company called BCL Trading GmbH (�BCL�). The lettersof credit related to purported sales of agricultural products by S & R toBCL. S & Rwas the bene�ciary. The claims related to 30 letters of creditwhich were honoured upon presentation by S & R of the relevantdocuments but for which KB received no payment from BCL. They wereissued between July 1998 and July 1999. The �rst letters of credit wereissued at the end of December 1997 but they were paid on maturity. KB�scase was that the documents presented to it were false in particular byrepresenting that the issuing warehouse as S & R�s agent was holding the

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Stone & Rolls Ltd vMoore Stephens (CA)Stone & Rolls Ltd vMoore Stephens (CA)[2009] 1 AC[2009] 1 ACRimer LJRimer LJ

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 fraudulentpresentation of documents to it and that he and S & R were jointly liableto KB in deceit. The defendants denied dishonesty.

��10. Toulson J [2002] 1 Lloyd�s Rep 383 found that the documentspresented to KB by S & R were false to the knowledge of both S & R andMr Stojevic; that their presentation had caused KB to pay S & R or itsassignee (where discounted by S & R) the face value of the letters ofcredit; and so had caused the loss to KB arising from those payments.Toulson J also held that while KB had itself been negligent that wasno answer for a fraudster. He gave judgment for KB against bothdefendants for US$94.5m. That was the �gure paid out by KB under the30 unreimbursed letters of credit. The evidence before Toulson J showedthat of the total amount received by S & R from the fraud ofapproximately US$90m, some US$80m was paid to BCL or companiesconnected with BCL. The evidence before this court shows that theinwards receipt of moneys was promptly followed by the outwardpayments.

��11. The judgment (no doubt because it was not necessary) contains noanalysis of whether the liability of S & R was founded on vicariousliability for the fraud of Mr Stojevic, attribution of knowledge orotherwise.��

7 The judgment led, on the petition of KB, to the entry of the companyinto provisional and then compulsory liquidation. If the company�s claimagainst the �rm were to succeed, KB would be the major bene�ciary. Thereis no dispute that KB has no direct claim against the �rm, which owed it noduty of care.

8 Langley J summarised the lengthy particulars of claim. They assertedthat Mr Stojevic was a Croatian national, who was a shadow director of thecompany for which he held a power of attorney. Mr Stojevic controlled thecompany, which was owned by an Isle of Man company which was in turnowned by his family trust. The particulars asserted that Mr Stojevic was��a highly intelligent and secretive Croatian businessman who controllednumerous companies in various jurisdictions and used trustees and nomineedirectors in order to conceal his association with them��. The company�sfraud was conveniently summarised as follows in the particulars of claim, atpara 16:

��Mr Stojevic�s intention throughout was to use S & R as a vehicle offraud, i e it was intended to be, and became, a vehicle through whichfunds were extracted from banks which believed that they were �nancingbona �de commodity trades and then paid away to third parties whowere under the in�uence or control of Mr Stojevic. The fraudulenttransactions which he planned and executed through S & R became bothlarger and more obviously fraudulent as he realised that Moore Stephenshad failed to detect his earlier frauds and would probably not detect hisfrauds in the future.��

9 It is the essence of the company�s claim that Mr Stojevic was itscontrolling mind and will. Nobody else was in a like position. In a real sensethe company was his company. It was, for practical purposes, a ��one man

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company��. It is a further part of the claim that the company was throughoutused by Mr Stojevic as a vehicle for fraud, by extracting money from KB sothat it could then be paid away to the fraudsters. The application beforeLangley J proceeded on the assumed basis that, had the �rm discharged theduty of care it owed to the company in the performance of its audits, itwould have detected the frauds and brought them to an end for the future.

10 This, Mr Brindle submitted to us, was ��the very thing�� (or at leastone of the very things) that the �rm, as the company�s auditors, should havebeen astute to expose; and there can be no rule of public policy that ought toa›ord the �rm a defence to such a claim. He referred us to CaparoIndustries plc v Dickman [1990] 2AC 605, and in particular to the speech ofLord Oliver of Aylmerton, at p 630, where he explained the purpose of thestatutory requirement for an annual audit of a company�s accounts. In thatpassage, Lord Oliver referred to the auditor�s function:

��to ensure, so far as possible, that the �nancial information as tothe company�s a›airs prepared by the directors accurately re�ects thecompany�s position in order, �rst, to protect the company itself from theconsequences of undetected errors or, possibly, wrongdoing (by, forinstance, declaring dividends out of capital) . . .��

11 In what follows I will (i) explain the ex turpi causa principle, as towhich (subject to (iii) below) there is no dispute; (ii) consider whether or not(as the �rm contends but the company denies) knowledge of the fraud shouldbe attributed to the company, as to which there is a dispute; and (iii) considerthe ��very thing�� argument, as to which there is also a dispute. If the appeal isto succeed, the �rmmust succeed on both (ii) and (iii).

Ex turpi causa non oritur actio12 The principle of public policy expressed in this maxim goes back a

long way. Lord Mans�eld CJ explained it in Holman v Johnson (1775)1Cowp 341, 343:

��No court will lend its aid to a man who founds his cause of actionupon an immoral or an illegal act. If, from the plainti›�s own stating orotherwise, the cause of action appears to arise ex turpi causa . . . there thecourt says that he has no right to be assisted. It is on this ground the courtgoes; not for the sake of the defendant, but because they will not lendtheir aid to such a plainti›.��

13 Although there is no dispute as to how the principle works, it isnecessary to provide an explanation of it�and also to delve into a little bitof its history�in part to explain the basis on which the judge appearsultimately to have decided the application and in part to explain the mainauthority upon which Mr Brindle relied in support of his ��very thing��submission.

14 In this court�s decision in Tinsley v Milligan [1992] Ch 310, themajority (Nicholls and Lloyd LJJ) held that the application or otherwise ofthe ex turpi causa principle in any case in which a claim is tainted withillegality or immorality required a �exible approach. By reference to recentauthorities, Nicholls LJ explained that the applicable test was a so-called��public conscience�� test, namely whether it would be an a›ront to publicconscience to accede to the claim despite the fact that it was so tainted.

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This required the court to ��weigh, or balance, the adverse consequences ofgranting relief against the adverse consequences of refusing relief. Theultimate decision calls for a value judgment��: Nicholls LJ, at p 319H.Lloyd LJ, whilst agreeing with Nicholls LJ in the result, decided the appealon di›erent grounds but (at p 339C—G) also subscribed to the view that the��public conscience�� test was part of the civil law relating to illegality.

15 Tinsley v Milligan went to the House of Lords [1994] 1 AC 340which, by a majority, upheld this court�s decision on di›erent grounds. TheHouse unanimously rejected the ��public conscience�� test, which was nomore than the assumption of a judicial discretion as to whether or not in anyparticular case, despite the illegality or immorality, to grant or refuse relief.Although that test found support in the recent authorities upon whichNicholls LJ had drawn, they were out of line with prior binding authoritypointing the other way. The essence of the decision of the House in Tinsley vMilligan was (i) (with which all members of the Committee agreed) that the��public conscience�� test was abolished; and (ii) (with which the majorityagreed) that the correct test was as summarised by Lord Browne-Wilkinson,at p 376:

��In my judgment the time has come to decide clearly that the rule is thesame whether a plainti› founds himself on a legal or equitable title: he isentitled to recover if he is not forced to plead or rely on the illegality, evenif it emerges that the title on which he relied was acquired in the course ofcarrying through an illegal transaction.��

16 That statement of principle was expressed in the context of the factsof Tinsley v Milligan, a property dispute. But it is one I regard as applyinggenerally and which Langley J conveniently described as a ��reliance�� test.The relevant question it identi�es is whether, to advance the claim, it isnecessary for the claimant to plead or rely on the illegality. If it is, theTinsley case decided that the axe falls indiscriminately and the claim isbarred, however good it might otherwise be. There is no discretion to permitit to succeed. The absence of any such discretion emerges from all theirLordships� speeches. Lord Go› of Chieveley, who was in the minority withLord Keith of Kinkel, gave the leading speech for the rejection of the ��publicconscience�� test, with which the majority agreed. The essential di›erencebetween the minority and the majority views was whether the touchstone forthe application of the ex turpi causa maxim was the reliance test favoured bythe majority or the wider test favoured by the minority and regarded asapplicable to the particular facts before the court. But once the maxim isengaged, it applies indiscriminately. After referring to Holman v Johnson1 Cowp 341 and to the subsequent application of Lord Mans�eld CJ�sprinciple, Lord Go› said [1994] 1AC 340, 355:

��It is important to observe that, as Lord Mans�eld made clear, theprinciple is not a principle of justice; it is a principle of policy, whoseapplication is indiscriminate and so can lead to unfair consequences asbetween the parties to litigation. Moreover the principle allows no roomfor the exercise of any discretion by the court in favour of one party orthe other.��

17 The reliance test has since been applied. In Clunis v Camden andIslington Health Authority [1998] QB 978 this court dealt with a case in

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which the plainti› had killed a man in an unprovoked attack, was convictedof manslaughter and detained in a secure hospital. He had a history ofmental disorder and sued the health authority because of the allegednegligent failure of a hospital in which he had earlier been detained to treathim with reasonable professional care and skill. His case was that, had itdone so, he would not have committed manslaughter and su›ered theprolonged detention he faced. This court struck the claim out as barred bythe ex turpi causa principle. That principle applied to all causes of action,including claims in tort:

��But whether a claim brought is founded in contract or in tort, publicpolicy only requires the court to deny its assistance to a plainti› seeking toenforce a cause of action if he was implicated in the illegality and inputting forward his case he seeks to rely upon the illegal acts��: perBeldam LJ, delivering the judgment of the court [1998] QB 978, 987(emphasis added).

The plainti›�s counsel sought to invoke the ��public conscience�� test insupport of the proposition that, in the circumstances of the case, the courtought not to regard the ex turpi causa maxim as applicable. After referringto the rejection of that test by the House of Lords in Tinsley v Milligan[1994] 1AC 340, the court declined to accept the submission.

18 Cross v Kirkby The Times, 5 April 2000; [2000] CA TranscriptNo 321 can perhaps be read as broadening the reliance test. The claimanthad trespassed on the defendant�s land and assaulted the defendant with abaseball bat, which the defendant wrested from him and struck him with it,causing serious injury. This court allowed the defendant�s appeal against thejudgment against him. Beldam LJ, with whomOtton LJ agreed, found, as analternative ground for doing so, that the plainti› was barred from bringinghis claim because it arose from his own criminal and unlawful acts.The court referred to Tinsley v Milligan, but Beldam LJ did not accept thatstrict satisfaction of any ��reliance�� test was necessary before the ex turpicausa principle could be invoked, saying:

��I do not believe that there is any general principle that the claimantmust either plead, give evidence of or rely on his own illegality for theprinciple to apply. Such a technical approach is entirely absent from LordMans�eld CJ�s exposition of the principle. I would, however, accept thatfor the principle to operate the claim made by the claimant must arise outof criminal or illegal conduct on his part. In this context �arise out of�clearly denotes a causal connection with the conduct . . .��

19 Judge LJ expressed as follows the test in relation to thecircumstances before the court:

��In my judgment, where the claimant is behaving unlawfully, orcriminally, on the occasion when his cause of action in tort arises, hisclaim is not liable to be defeated ex turpi causa unless it is also establishedthat the facts which give rise to it are inextricably linked with his criminalconduct. I have deliberately expressed myself in language which goeswell beyond questions of causation in the general sense.��

20 The principles were further considered by this court in Hewison vMeridian Shipping Services PTE Ltd [2003] ICR 766. That was a claim for

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damages brought by a crane operator for negligence by his employer causinghim personal injury, the damages claimed including loss of future earningshe would otherwise have earned in his employment. Liability was admittedbut the employer�s case was that to award damages for loss of futureearnings would infringe the ex turpi causa principle. This was because theclaimant�s continued employment would have required him to continuefraudulently to deceive his employers that he did not su›er from epilepsy.Morland J agreed, refused to award such damages and this court, by amajority, also agreed. Clarke LJ, after referring to the Clunis case [1998]QB 978, said [2003] ICR 766, para 29:

��To my mind the authorities support that approach. They seem to meto support the proposition that where a claimant has to rely upon his orher own unlawful act in order to establish the whole or part of his or herclaim the claim will fail either wholly or in part.��

21 Tuckey LJ, also in the majority, said much the same, at para 51:

��For this reason I favour a broad test of the kind proposed byClarke LJ, viz: is the claim or the relevant part of it based substantially(and not therefore collaterally or insigni�cantly) on an unlawful act?��

22 It is unnecessary to consider further the precise limits of thecircumstances in which the ex turpi causa maxim will bar a claim. There isno dispute that, in the present case, the company�s claim relies upon, is basedsubstantially on, arises out of and is inextricably linked with the fraud thatwas perpetrated on the banks. That fraud was actually perpetrated byMr Stojevic, the company�s sole directing mind and will.

23 The next logical question is whether Mr Stojevic�s fraud canproperly be attributed to the company, which was the vehicle for the fraud.The general principles by reference to which the acts of individuals carriedout for or in relation to a company�s a›airs can or will be attributed to thecompany itself are not in dispute. Mr Brindle�s position is, however, thatthose principles preclude any such attribution in the present case because thecompany was itself a victim of Mr Stojevic�s fraud. He accepts, however,that if he is wrong on that, the ex turpi causa defence is in principle availableto the �rm, but that in the particular circumstances of this case itsapplication is trumped by his ��very thing�� submission.

Attribution: generally24 There is no dispute that a company may not merely be vicariously

liable for the acts of its agents, but can be directly liable for a dishonest actby reason of the attribution to it of its dishonest directing mind and will.There is also some degree of agreement that there will or may not be such anattribution to the company where the dishonesty of the company�s agents isdirected against the company itself. The �rm�s position is, however, thatthat is not this case. Mr Stojevic was not engaged in a fraud on, or directedat, the company. He was using it as the vehicle for a fraud of its own directedat the banks. It was the company which tendered the fraudulent documentsto the banks and it was the company that was dealing dishonestly with them.It was the banks that were the victims of the fraud, not the company.

25 There was a time in the development of English law when the beliefwas held by some that a company, a persona �cta, could have no dishonest

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motive attributed to it. It could at most, in certain cases, be vicariously liablefor the dishonest wrongs committed by its human agents. In Abrath v NorthEastern Railway Co (1886) 11 App Cas 247, in which a claim for maliciousprosecution was brought against a company, the jury acquitted the companyof the necessary malice and this court upheld the judge�s direction as havingbeen correct. The House of Lords dismissed the appeal but, at p 251, LordBramwell took the opportunity to advance the trenchant view�on a pointnot argued before the House�that the claim was anyway bound to fail��even if you assume the strongest case, namely, that of the very shareholdersdirecting it or the very directors ordering it, because it is impossible that acorporation can have malice or motive��. Lord Fitzgerald, at p 255, had nodoubt that Lord Bramwell�s weighty observations would be instructive inthe future and would ��always carry with them that force before any tribunalwhich they so eminently deserve��. The Earl of Selborne, at p 256, said muchthe same, but he would have wanted the point argued before expressing hisown opinion on it.

26 In the event Lord Bramwell�s view did not carry the prophesiedforce. Citizens� Life Assurance Co Ltd v Brown [1904] AC 423, a decisionof the Privy Council, involved a claim for malicious libel against a company.The libel was published, in the course of his employment, by an o–cer of thecompany against whom there was evidence of express malice. It was arguedbefore the Privy Council, in reliance on Lord Bramwell�s speech in theAbrath case, that the o–cer�s malice could not be attributed to the company.Lord Lindley, giving the advice of the Privy Council, referred to LordBramwell�s speech, and to one to like e›ect by Lord Cranworth in Addie vWestern Bank of Scotland (1867) LR 1 Sc & Div 145, and said [1904]AC 423, 426:

��But these opinions have not prevailed, and their Lordships are notprepared to give e›ect to them. If it is once granted that corporations arefor civil purposes to be regarded as persons, i e, as principals acting byagents and servants, it is di–cult to see why the ordinary doctrines ofagency and of master and servant are not to be applied to corporations aswell as to ordinary individuals. These doctrines have been so applied in agreat variety of cases, in questions arising out of contract, and inquestions arising out of torts and frauds; and to apply them to one class oflibels and to deny their application to another class of libels on the groundthat malice cannot be imputed to a body corporate appears to theirLordships to be contrary to sound legal principles.��

27 TheCitizens� Life case was not in fact one in which the company hadthe relevant malice directly attributed to it, it was one in which the casemade and proved was that it was vicariously liable for the acts of its o–cer.But the importance of Lord Lindley�s statement is that it rejected LordBramwell�s sweeping assertion that a company could not have attributed toit the malice or motive in�uencing the mind of its human agents.

28 Over a hundred years on, it is clear that, in an appropriate context,the mind of such agents can and will be attributed to the company itself.Lord Ho›mann�s judgment in the Privy Council decision ofMeridian GlobalFunds Management Asia Ltd v Securities Commission [1995] 2 AC 500provides an illuminating exposition of the principles, and I will devote alittle space to it since its guidance assists in understanding some of the cases

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to which I will later have to refer. Lord Ho›mann explained that acompany�s primary rules of attribution will be found in its constitution (forexample, a provision that a decision of its board shall be a decision of thecompany) and the acts of its duly appointed agents and servants will, by acombination of the general principles of agency and the company�s primaryrules of attribution, also count as the acts of the company. ��It is therefore anecessary part of corporate personality that there should be rules by whichacts are attributed to the company��: p 506. Lord Ho›mann continued,at p 507:

��There is in fact no such thing as the company as such, no ding an sich,only the applicable rules. To say that a company cannot do somethingmeans only that there is no one whose doing of that act would, under theapplicable rules of attribution, count as an act of the company. Thecompany�s primary rules of attribution together with the generalprinciples of agency, vicarious liability and so forth are usually su–cientto enable one to determine its rights and obligations. In exceptionalcases, however, they will not provide an answer. This will be the casewhen a rule of law, either expressly or by implication, excludesattribution on the basis of the general principles of agency or vicariousliability. For example, a rule may be stated in language primarilyapplicable to a natural person and require some act or state of mind onthe part of that person �himself�, as opposed to his servants or agents.This is generally true of rules of the criminal law, which ordinarily imposeliability only for the actus reus and mens rea of the defendant himself.How is such a rule to be applied to a company? One possibility is that thecourt may come to the conclusion that the rule was not intended to applyto companies at all; for example, a law which created an o›ence forwhich the only penalty was community service. Another possibility isthat the court might interpret the law as meaning that it could apply to acompany only on the basis of its primary rules of attribution, i e if the actgiving rise to liability was speci�cally authorised by a resolution of theboard or an unanimous agreement of the shareholders. But there will bemany cases in which neither of these solutions is satisfactory; in which thecourt considers that the law was intended to apply to companies and that,although it excludes ordinary vicarious liability, insistence on the primaryrules of attribution would in practice defeat that intention. In such a case,the court must fashion a special rule of attribution for the particularsubstantive rule. This is always a matter of interpretation: given that itwas intended to apply to a company, how was it intended to apply?Whose act (or knowledge, or state of mind) was for this purpose intendedto count as the act etc of the company? One �nds the answer to thisquestion by applying the usual canons of interpretation, taking intoaccount the language of the rule (if it is a statute) and its content andpolicy.��

29 The present case, Mr Sumption submitted, is not one in which thecompany could merely be said to be vicariously liable for Mr Stojevic�sactions in relation to the frauds. It is one in which the company was itselftheir perpetrator. The essential di›erence between the two concepts lies inthe degree to which the relevant agent is identi�ed with the company. If ajunior employee commits a fraud in the course of his employment, the

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company will be vicariously liable for the fraud, but the fraud will notautomatically be imputed to the company itself (although it may be if thecontext requires it). But if the board of directors resolves on the commissionof a fraud by the company, their dishonesty will be attributed to it, and it willitself be directly, and not just vicariously, liable for the fraud. That, saidMr Sumption, is this case, in which Mr Stojevic�s state of mind was that ofsomeone who for the relevant purpose was to be regarded as the company.He was not just its agent. He was someone to whom the relevant part of therunning of the company�s a›airs had been delegated. He had a power ofattorney to run it at his discretion. His acts on behalf of the company werethe company�s acts. He was the company�s directing mind and will.

30 Attribution on such a basis is illustrated by Lennard�s Carrying CoLtd v Asiatic Petroleum Co Ltd [1915] AC 705. A cargo on board ship waslost by a �re caused by the ship�s unseaworthiness. The shipowner was acompany that was managed by another company, of which the managingdirector was designated as the person to whom the ship�s management wasentrusted. He was, as Viscount Haldane LC said, at p 712, ��the activespirit�� in the managing company. The question was whether the shipownercould be relieved of the liability levelled against it. That depended onwhether, as it claimed, what had happened had happened without ��hisactual fault or privity��, those being the exempting words in section 502 ofthe Merchant Shipping Act 1894 (57 & 58 Vict c 60), the ��his�� being areference to the shipowner. The shipowner was held liable. ViscountHaldane LC said, at pp 713—714:

��My Lords, a corporation is an abstraction. It has no mind of its ownany more than it has a body of its own; its active and directing will mustconsequently be sought in the person of somebody who for somepurposes may be called an agent, but who is really the directing mind andwill of the corporation, the very ego and centre of the personality of thecorporation. That person may be under the direction of the shareholdersin general meeting; that person may be the board of directors itself, or itmay be, and in some companies it is so, that that person has an authorityco-ordinate with the board of directors given to him under the articles ofassociation, and is appointed by the general meeting of the company, andcan only be removed by the general meeting of the company. My Lords,whatever is not known about Mr Lennard�s position, this is known forcertain, Mr Lennard took the active part in the management of this shipon behalf of the owners, andMr Lennard, as I have said, was registered asthe person designated for this purpose in the ship�s register. Mr Lennardtherefore was the natural person to come on behalf of the owners and givefull evidence not only about the events of which I have spoken, and whichrelated to the seaworthiness of the ship, but about his own position and asto whether or not he was the life and soul of the company. For ifMr Lennard was the directing mind of the company, then his action must,unless a corporation is not to be liable at all, have been an action whichwas the action of the company itself within the meaning of section 502.It has not been contended at the Bar, and it could not have beensuccessfully contended, that section 502 is so worded as to exempt acorporation altogether which happens to be the owner of a ship, merelybecause it happens to be a corporation. It must be upon the true

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construction of that section in such a case as the present one that the faultor privity of somebody who is not merely a servant or agent for whom thecompany is liable upon the footing respondeat superior, but somebodyfor whom the company is liable because his action is the very action of thecompany itself. It is not enough that the fault should be the fault of aservant in order to exonerate the owner, the fault must also be one whichis not the fault of the owner, or a fault to which the owner is privy; andI take the view that when anybody sets up that section to excuse himselffrom the normal consequences of the maxim respondeat superior theburden lies upon him to do so.��

31 That is, for present purposes, an instructive case. The shipownerwas liable because its managing agent, who had the relevant knowledge, wasits directing mind and will for the relevant purpose. It could only escapeliability under the statute if his knowledge could not properly be attributedto it but it was held that it should be so attributed. The concept of the��directing mind and will�� was considered by this court in El Ajou v DollarLand Holdings plc [1994] 2 All ER 685 in which, at p 695J, Nourse LJ saidthe doctrine ��attributes to the company the mind and will of the naturalperson or persons who manage and control its actions��, explaining further,at p 696A: ��It is necessary to identify the natural person or persons havingmanagement and control in relation to the act or omission in point.��Ho›mann LJ, at p 705F, after referring to the Lennard�s Carrying Co case,said: ��A person held out by the company as having plenary authority or inwhose exercise of such authority the company acquiesces, may be treated asits directing mind.�� Later, at p 706D, in line with Nourse LJ, he said: ��Theauthorities show clearly that di›erent persons may for di›erent purposessatisfy the requirements of being the company�s directing mind and will.��

32 In the Lennard�s Carrying Co case the question of the attribution tothe company of its directing mind and will arose in the context of thecompany�s claim to enjoy the exemption from liability a›orded by astatutory provision. In the El Ajou case the question was whether theknowledge of a particular director could be attributed to the company so asto �x it with the liability of a constructive trustee for knowing receipt.Questions of attribution will also be relevant in bids to �x a company withcriminal liability for an o›ence involving the requirement of mens rea.Where there is such a requirement,

��a corporation is guilty of it if the o›ence is committed in the course ofthe corporation�s business by a person in control of its a›airs to such adegree that it may fairly be said to think and act through him so that hisactions and intent are the actions and intent of the corporation; in such acase his acts and state of mind are regarded in law as the acts and state ofmind of the company��: Halsbury�s Laws of England, 4th ed reissue(2006), vol 11(1), para 38.

The key question was identi�ed by Lord Reid in Tesco Supermarkets Ltd vNattrass [1972] AC 153, in two passages at pp 170 and 171 respectively:

��I must start by considering the nature of the personality which by a�ction the law attributes to a corporation. A living person has a mindwhich can have knowledge or intention or be negligent and he has handsto carry out his intentions. A corporation has none of these: it must act

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through living persons, though not always one or the same person. Thenthe person who acts is not speaking or acting for the company. He isacting as the company and his mind which directs his acts is the mind ofthe company. There is no question of the company being vicariouslyliable. He is not acting as a servant, representative, agent or delegate.He is an embodiment of the company or, one could say, he hears andspeaks through the persona of the company, within his appropriatesphere, and his mind is the mind of the company. If it is a guilty mind thenthat guilt is the guilt of the company. It must be a question of lawwhether, once the facts have been ascertained, a person in doingparticular things is to be regarded as the company or merely as thecompany�s servant or agent. In that case any liability of the company canonly be a statutory or vicarious liability.��

��Normally the board of directors, the managing director and perhapsother superior o–cers of a company carry out the functions ofmanagement and speak and act as the company. Their subordinates donot. They carry out orders from above and it can make no di›erence thatthey are given some measure of discretion. But the board of directors maydelegate some part of their functions of management giving to theirdelegate full discretion to act independently of instructions from them.I see no di–culty in holding that they have thereby put such a delegate intheir place so that within the scope of the delegation he can act as thecompany. It may not always be easy to draw the line but there are cases inwhich the line must be drawn. The Lennard�s Carrying Co case [1915]AC 705was one of them.��

33 Applying those principles to the facts of this case, Mr Sumptionsubmitted that a criminal prosecution for fraud (or whatever the appropriatecharge for the particular criminal acts the company committed) could havebeen brought against the company. Mr Stojevic�s acts were the acts not justof a servant or agent of the company. He was acting as its very embodiment.His dishonest intent would, for the purposes of such a prosecution, beregarded as the dishonest intent of the company itself. The reason thecompany could be so prosecuted is because the law recognises the concept ofthe guilty corporate mind. It recognises that a company can be made directlyresponsible, civilly and criminally, in consequence of the attribution to it ofthe dishonest actions of those who, in the context of the particular matter inquestion, can fairly be regarded as its directing mind and will. Mr Sumptionsaid there could be no clearer example of that than the present case, in whichMr Stojevic owned the company and controlled it in its every relevant act.There was no one else.

34 It follows, submitted Mr Sumption, that a company that brings acivil claim in reliance upon the dishonest or illegal actions of its own incircumstances in which a guilty knowledge of such actions is properlyattributed to it can and will be met by the plea of ex turpi causa, which willa›ord a complete defence to the claim. For the purposes of that principle, acompany can be as much a wrongdoer as can an individual.

35 Mr Brindle did not advance any submissions in support of areasoned disagreement with these propositions, although he did not concedethat the company could have been held liable to others for the fraud on thebasis that it was treated as having itself committed the fraud as opposed to

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1AC 2009�49

being liable vicariously. Toulson J had not made a speci�c �nding eitherway as to that in his judgment in KB�s claim and Mr Brindle did not acceptthat the authorities cited by Mr Sumption made good the point thatthe company could be personally liable for the fraud. But Mr Brindlenevertheless accepted that, for the purposes of the present debate, thecompany could be treated as having itself committed the fraud. Hissubmission was that, in the circumstances of this case, the attribution ofMr Stojevic�s fraud to the company is anyway excluded by what wasreferred to in the argument as the Hampshire Land principle, just as, hesaid, it would be so excluded if the company�s liability to others were merelya vicarious liability. I turn to that principle, which is in the nature of aprinciple of non-attribution.

The Hampshire Land principle

36 The �rst main di›erence between counsel arises in relation to theapplication or otherwise of this principle, which derives from the decision ofVaughan Williams J in In re Hampshire Land Co [1896] 2 Ch 743. Underthe articles of Hampshire Land Co Ltd (��Hampshire��), its directors couldnot borrow more than the amount of the paid-up capital unless the largerborrowing had been authorised by a general meeting. Hampshire wasclosely connected with Portsea Island Building Society (��Portsea��), thecompanies having four directors in common and Mr Wills being thesecretary of both. At a general meeting of Hampshire a resolution waspassed authorising the borrowing of £30,000, which exceeded the paid-upcapital by about £20,000. The money was then borrowed from Portsea.The notice convening the meeting had irregularly given no notice to theHampshire shareholders of the intention to propose the resolution, althoughunder Hampshire�s articles it should have done. Hampshire and Portseawent into liquidation and Portsea sought to prove in Hampshire�sliquidation for over £30,000, the money lent. There was no evidence thatWills had informed Portsea of the irregularity in the calling of the Hampshiregeneral meeting.

37 Vaughan Williams J commenced his judgment by identifying thequestion as being which set of shareholders�both sets being innocent�ought to bear the loss resulting from the irregular resolution. TheHampshire directors had no authority to borrow in the absence of a properlypassed resolution but the internal management rule explained in RoyalBritish Bank v Turquand (1856) 6 E& B 327 entitled Portsea to assume thatall the essentials of Hampshire�s internal management had been carried out.Portsea was therefore entitled to prove for the full amount of its loan unlessknowledge of the irregularities could properly be attributed to it. Shouldsuch knowledge be so attributed?

38 The argument that it should turned on Mr Wills�s dual role as acommon o–cer of the two companies. The judge accepted that he must betaken to have been aware of the irregularities. It was submitted that hisknowledge obtained as an o–cer of Hampshire must therefore be attributedto Portsea, of which he was also an o–cer. It was, however, also accepted onboth sides that there was no general proposition to the e›ect that theknowledge of an o–cer common to two companies is always the knowledgeof both companies. The judge�s view, expressed at p 748, was that:

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��the knowledge which has been acquired by the o–cer of onecompany will not be imputed to the other company, unless the commono–cer had some duty imposed upon him to communicate thatknowledge to the other company, and had some duty imposed on himby the company which is alleged to be a›ected by the notice to receivethe notice.��

The gravamen of his decision is at pp 749—750, where he said:

��The case is very much more like the one which [counsel forHampshire�s liquidator] had to admit was an exception to the general rulethat they sought to lay down, for they admitted that if Wills had beenguilty of a fraud, the personal knowledge of Wills of the fraud that he hadcommitted upon the company would not have been knowledge of[Portsea] of the facts constituting that fraud; because common sense atonce leads one to the conclusion that it would be impossible to infer thatthe duty, either of giving or receiving notice, will be ful�lled where thecommon agent is himself guilty of fraud. It seems to me that if youassume here that Mr Wills was guilty of irregularity�a breach of duty inrespect of these transactions�the same inference is to be drawn as if hehad been guilty of fraud. I do not know, I am sure, whether he was guiltyof actual fraud; but whether his conduct amounted to fraud or to breachof duty, I decline to hold that his knowledge of his own fraud or of hisown breach of duty is, under the circumstances, the knowledge of thecompany [which I take to mean Portsea]. I must, therefore, admit theproof.��

39 The essence of the principle is therefore that a company will not haveattributed to it knowledge of a fraud when that fraud is being practised onthe company itself. The law does not attribute knowledge of a deception tothe person who is being deceived. Why should it make such an attributionwhen its agent engaged on deceiving it would not himself disclose hisper�dy?

40 The Hampshire Land principle was approved and applied by theHouse of Lords in JC Houghton & Co v Nothard Lowe & Wills Ltd[1928] AC 1. I refer, without citation, to the speeches of Viscount Dunedinat pp 14—15, Viscount Sumner at p 19 and Lord Carson at p 33. LordAtkinson agreed with Viscount Dunedin and Lord Shaw of Dunfermlinedissented. A more recent example of its application, from the latter half ofthe last century, is Belmont Finance Corpn Ltd v Williams Furniture Ltd[1979] Ch 250. There the plainti› company�s claim was that it was thevictim of a dishonest conspiracy involving its acquisition of the shares inanother company for £500,000 (which it said was over eight times theirworth), under an arrangement under which the plainti› was itself then tobe sold to one of the defendants for £489,000. The claim included theassertion that the transaction involved the giving by the plainti› of illegal�nancial assistance for the purchase of its own shares contrary tosection 54 of the Companies Act 1948. The plainti›�s resolution to e›ectthe conspiratorial purchase had been passed at a board meeting attendedby three directors, two of whom were defendants who were alleged to beparty to the conspiracy. The third director was not alleged to be involvedin the conspiracy.

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41 Foster J dismissed the claim at the close of the plainti›�s case on thebasis that it was itself a party to the conspiracy upon which it sued and sowas disabled from suing. The only basis on which the plainti› could beregarded as party to the conspiracy was if the guilty knowledge of the twodefendant directors was attributed to it. This court held that theirknowledge could not be so attributed, so that the plainti› was not precludedfrom bringing its claim. Buckley LJ applied the Hampshire Land principle,albeit without reference to the case itself, which was not cited. He said, atpp 261—262:

��On the footing that the directors of the plainti› company who werepresent at the board meeting on 11 October 1963, knew that the sale ofthe Maximum shares was at an in�ated value, and that such value wasin�ated for the purpose of enabling the third, fourth, �fth and sixthdefendants to buy the share capital of the plainti› company, thosedirectors must be taken to have known that the transaction was illegalunder section 54. It may emerge at a trial that the facts are not as allegedin the statement of claim, but if the allegations in the statement of claimare made good, the directors of the plainti› company must then haveknown that the transaction was an illegal transaction. But in my viewsuch knowledge should not be imputed to the company, for the essence ofthe arrangement was to deprive the company improperly of a large part ofits assets. As I have said, the company was a victim of the conspiracy.I think it would be irrational to treat the directors, who were allegedlyparties to the conspiracy, notionally as having transmitted this knowledgeto the company; and indeed it is a well-recognised exception from thegeneral rule that a principal is a›ected by notice received by his agentthat, if the agent is acting in fraud of his principal and the matter of whichhe has notice is relevant to the fraud, that knowledge is not to be imputedto the principal. So in my opinion the plainti› company should not beregarded as a party to the conspiracy, on the ground of lack of thenecessary guilty knowledge.��

42 A case upon which Mr Sumption and Mr Brindle both placedreliance is Attorney General�s Reference (No 2 of 1982) [1984] QB 624.Two defendants were charged, either individually or jointly, with the theft ofmoney from companies they wholly owned and controlled. At theconclusion of the prosecution case, the judge withdrew the case from thejury and directed the acquittal of the defendants. That was on the groundthat they ��were�� the company and so could not steal from it. The AttorneyGeneral referred the case to the court for its opinion as to whether a personin sole control of a company was, or two such persons acting in concertwere, capable of stealing the company�s property. The judgment of the court(Watkins and Kerr LJJ) was delivered by Kerr LJ. The question before thecourt arose in relation to the de�nition of theft in the Theft Act 1968,the relevant provision being part of the de�nition of ��dishonestly�� insection 2(1)(b), which provides:

��A person�s appropriation of property belonging to another is not tobe regarded as dishonest . . . (b) if he appropriates the property in thebelief that he would have the other�s consent if the other knew of theappropriation and the circumstances of it . . .��

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43 Subject to that issue of dishonesty, the defendants conceded that theother ingredients of theft were prima facie satis�ed. Their case was that theywere the sole directing mind and will of the company, which was thereforebound to consent to that which they consented: consent by the defendants tothe appropriations necessarily involved consent by the company. Turning tothe authorities, the court referred to the Tesco Supermarkets Ltd case [1972]AC 153 as authority for the proposition that, in a case in which twoindividuals such as the defendants ��are�� the company, any o›encescommitted by them in relation to the a›airs of the company would becapable of being treated as o›ences committed by the company itself. Butthat case had no bearing on o›ences committed against the company. A casein which the courts considered the position when the controlling individualsacted illegally against the company was the Belmont Finance case [1979]Ch 250. The court cited the passage from Buckley LJ�s judgment that I havecited, held that it established a principle directly contrary to the defendants�argument and that there was no reason why it should not apply equally inthe criminal law: in short, the court held that the dishonest intentionsdirected against the company by those in control of it will not be attributedto the company. The court went on to hold that, in the circumstances,section 2(1)(b) could a›ord no defence to the defendants. The court said[1984] QB 624, 642:

��The essence of the defendants� argument is the alleged identity, inall respects, and for every purpose, between the defendants and thecompany. It is said, in e›ect, that their acts are necessarily the company�sacts; that their will, knowledge, and belief are those of the company, andthat their consent necessarily implies consent by the company. But howthen can the company be regarded as �the other� for the purposes of thisprovision? One merely has to read its wording to see that it cannot begiven any sensible meaning in a context such as the present, where themind and will of the defendants are also treated in law as the mind andwill of �the other.� It is for this reason that in such cases there can be noconspiracy between the directors and shareholders on the one hand andthe company on the other:R vMcDonnell [1966] 1QB 233.��

44 Mr Sumption said that there was a tension between the holding thatthe Belmont Finance principle applied and the holding that the companywas unable to consent to the defendants� acts because the company had nomind separate from those of the defendants. The tension lay, I understand,in the fact that, having held that the defendants� intention to steal from thecompany could not, because of the Belmont Finance principle, be attributedto the company, the court could not reach a point at which the questioncould arise as to whether the company was capable of consenting to thedefendants� acts: ex hypothesi it knew nothing of them. But Mr Sumptionsubmitted that the passage just quoted was part of the ratio of the court�sdecision and that it was correct in principle. Its essence was that there wasno one in the company capable of being deceived by the defendants� acts,just as in the present case there was no one in the company capable of beingdeceived byMr Stojevic�s acts.

45 Mr Sumption relied on the Attorney General�s Reference [1984]QB 624 in support of an argument that the Hampshire Land principle[1896] 2 Ch 743 cannot apply to a one-man company such as the present

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claimant�or to a two-man company such as that in the Attorney General�sReference. The basis of the argument was that that principle can only applyin cases in which there is at least one other human being in the company towhom the relevant dishonest knowledge might be capable of beingcommunicated. He said that, given that the rationale of the HampshireLand principle is that the dishonest agent is not to be treated as implicitlytransmitting to the company that which he would anyway not have disclosedto it�because it was the target of his dishonesty�it follows that there canbe no scope for the operation of the principle save in circumstances in whichthere is some other human agent engaged in the a›airs of the companywhom he is intending to deceive. The submission was that the principles ofjustice and common sense that underlie the Hampshire Land principlecannot be regarded as going the distance of requiring the �ction of separatelegal personality to be carried to the extreme point at which the company iseither mindless or else does not know what is in the only human mind that itin fact has. It can, therefore, have no application to a one-man companysuch as the company in the present case, in which Mr Stojevic was its soledirecting mind and will.

46 Whilst I follow the logic of this submission, I do not accept it. Thecourt in the Attorney General�s Reference [1984] QB 624 held it to beunsound. It held in terms that the Hampshire Land (or Belmont Finance)principle can apply to the case in which the fraud or dishonesty of acompany�s sole (or, in that case, joint) directing mind and will is targetedagainst the company itself; and in principle that appears to me to be right.As for the suggested tension in the court�s reasoning, Mr Brindle�ssubmission was that there was none and that the decision simply had tworatios. Whether or not that is correct, I would anyway accept and followwhat the court said about the application of the Hampshire Land principle.In the circumstances I will therefore do no more than list, withoutdiscussion, the further authorities that Mr Sumption invoked in support ofhis argument in relation to one-man companies. They were R v McDonnell[1966] 1 QB 233; Royal Brunei Airlines Sdn Bhd v Tan [1995] 2 AC 378,393 and Berg Sons & Co Ltd v Mervyn Hampton Adams [1993]BCLC 1045.

47 The real issue between counsel is whether the Hampshire Landprinciple applies to the facts of this case. I now turn to that.

Does the Hampshire Land principle apply in this case?

48 The critical question is this: should the court regard the company asvillain or victim? If it is to be regarded as the victim of Mr Stojevic�sdishonesty, the e›ect of the Hampshire Land principle is that his dishonestywill not be attributed to it, it will not be tainted with it and, in principle, itwill be entitled to bring its claim. If, however, the correct analysis is that itwas itself carrying out the frauds and that its claim to be a victim is (as it is)based on no more than the liabilities it incurred as an inevitable consequenceof those frauds�and it is not usually possible to defraud others withoutincurring liabilities to them�Mr Sumption�s submission was that, for thepurposes of the Hampshire Land principle, the company must be regardedas the villain. If it is a victim at all, it is only one in a subsidiary andimmaterial sense.

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49 Mr Sumption developed this by saying that it is quite unreal toregard the company as a victim. It was engaged, in concert with BCL, indishonestly extracting money from KB for non-existent goods that BCL waspretending to buy from it. The scheme was one under which BCL procuredthe opening of the letters of credit with KB in favour of the company, payinga modest proportion of the price as a security deposit. The company joinedin the pretence of a sale of the non-existent goods to BCL, tendering toKB false documents purporting to be those required by the letter of credit,including a purported warehouse warrant made out to the order of KB.Those documents represented KB�s main security, which it would hold untilBCL paid it in full. The payments from KB went into the company�saccount, whence they were promptly paid out to BCL. BCL used it to pay o›the debt to KB on the letter of credit, the object of that being to establish acredit record and so enable the obtaining of further and bigger letters ofcredit and so build up the purported scale of commodity dealing month bymonth. For most of the time the fraud was being committed, the KB moneyjust went round in circles. Ultimately, when the prize was big enough,BCL made o› with the money and KB was left with its worthless security.The warehouse warrants were forgeries and there were no goods in thewarehouse. This scenario was one in which the intended, and actual, victimof the fraud was KB. It was not the company. Whilst the company incurreda liability to KB, that was a necessary part of its fraud; and whilst it paid outto BCL the payments of which it had defrauded KB, that was simply part ofthe same scam. A villain such as the company, which defrauds a bank suchas KB of millions of dollars and then makes o› with the spoils, cannot claimto be a victim for the purpose of the Hampshire Land principle on theground that it has, in carrying out part of its own deliberate scheme, leftitself unable to repay its victim.

50 That approach to the limits of the Hampshire Land principle issaid by Mr Sumption to be supported by two decisions. McNicholasConstruction Co Ltd v Customs and Excise Comrs [2000] STC 553 is adecision of Dyson J. In that case the commissioners suspected that bogussubcontractors had issued VAT invoices to McNicholas, an engineeringcontractor, for services that had not been provided. The company had paidVAT to the subcontractors under their invoices and had claimed by way ofVAT relief as input tax the VAT so paid. The e›ect of the suspecttransactions on the company was therefore neutral; but if the invoicesproved to be bogus, the company would not have been obliged to pay theVAT to the subcontractors, nor entitled to claim the relief it did in itsVAT returns, and it would be liable to make good the loss to thecommissioners. In that turn of events, the transactions would cease to beneutral and would damage the company.

51 The commissioners raised assessments on the basis that the companyhad wrongly claimed relief in respect of payments of VAT to subcontractors.To make good their claim, the commissioners had to prove fraud; and theyclaimed that the company, through its site managers, was party to threefrauds directed at the commissioners. The VAT tribunal found theallegations proved in relation to most of the alleged subcontractors. By theappeal to Dyson J, the company sought to set aside that decision.

52 The tribunal had attributed the relevant acts and knowledge of thesite agents to the company. Those agents were not the company�s directing

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mind and will, but (applying the guidance in theMeridian Global Funds case[1995] 2 AC 500) the tribunal regarded such an attribution as required bythe policy of the Value Added Tax Act 1994. The judge agreed with thetribunal on this, subject to the question of whether the making of such anattribution was, as the company contended, excluded by the HampshireLand principle. The basis of that contention was, as the judge summarised[2000] STC 553, para 51:

��that the company was in a very real sense a victim of the fraud in thatit paid the VAT shown on each of the invoices, and, if the commissioners�argument is accepted, they were not entitled to claim input relief. On anyview, the company su›ered a cash �ow detriment in paying the VAT andonly subsequently being credited with the input relief.��

53 Thus the damage to the company was said to be at least the cash �owloss�and worse if the VAT relief had been wrongly claimed. After referringto the decisions in the Hampshire Land [1896] 2 Ch 743; JC Houghton[1928] AC 1 and Belmont Finance [1979] Ch 250 cases, the judge expressedas follows his reasons for rejecting the submission and upholding theattribution [2000] STC 553, paras 55—56:

��55. In my judgment, the tribunal correctly concluded that thereshould be attribution in the present case, since the company could notsensibly be regarded as a victim of the fraud. They were right to holdthat the fraud was �neutral� from the company�s point of view. Thecircumstances in which the exception to the general rule of attributionwill apply are where the person whose acts it is sought to impute to thecompany knows or believes that his acts are detrimental to the interestsof the company in a material respect. This explains, for example, thereference by Viscount Sumner in JC Houghton & Co v Nothard Lowe &Wills Ltd [1928] AC 1, 19 to making �a clean breast of their delinquency�.It follows that, in judging whether a company is to be regarded as thevictim of the acts of a person, one should consider the e›ect of the actsthemselves, and not what the position would be if those acts eventuallyprove to be ine›ective. As the tribunal pointed out, in In re Supply ofReady Mixed Concrete (No 2) [1995] 1 AC 456 the company su›ered alarge �ne for contempt of court on account of the wrongful acts of itsmanagers. The fact that their wrongful acts caused the company to su›era �nancial penalty in this way did not prevent the acts and knowledge ofthe managers from being attributed to it.

��56. The Hampshire Land principle or exception is founded incommon sense and justice. It is obvious good sense and justice that theact of an employee should not be attributed to the employer company if,in truth, the act is directed at, and harmful to, the interests of thecompany. In the present case, the fraud was not aimed at the company.It was not intended by the participants in the fraud that the interests ofthe company should be harmed by their conduct. In judging whether thefraud was in fact harmful to the interests of the company, one should notbe too ready to �nd such harm. In my view, the cash �ow point made byMr Purle [leading counsel for the company] comes nowhere near beingserious enough to trigger the principle. Looking at the facts of this casefrom a common sense point of view, there was no VAT fraud or harm to

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the interests of the company. The tribunal were entitled to reach thisconclusion. It was the correct conclusion to reach.��

54 That reasoning re�ects that, in considering the range of theHampshire Land principle, a common sense approach is required. The taskis to consider at whom the fraud is directed. If it is directed at the company,the exception will apply. In considering that matter, it is necessary toconsider the e›ects of the frauds themselves, not their consequential e›ectupon the company if they are eventually uncovered. So approaching thematter, the frauds were not directed at, nor intended to harm, the company.They were intended to be neutral as regards the company, with the realvictim being the commissioners. The cash �ow point represented inevitableharm to the company, but was not serious enough to trigger the HampshireLand exception. In assessing whether the acts do harm the company, thecourt should not be too ready to �nd such harm.

55 Applying that approach to this case, Mr Sumption submitted thatthe fraud of which Mr Stojevic was the architect was not directed at, norintended to harm, the company. It was directed at, and intended to harm,the banks. It was directed at stealing from them. The McNicholas case[2000] STC 553 shows that, in assessing whether the Hampshire Landprinciple applies, it is not appropriate to factor into the consideration theadverse consequences to the company when and if the fraud is found out.

56 That analysis is said to be endorsed by this court�s decision in In reBank of Credit and Commerce (International) SA (No 15); Morris v Bank ofIndia [2005] 2 BCLC 328. The liquidators of BCCI had brought a claimagainst the Bank of India (��BoI��) under section 213 of the Insolvency Act1986 for being knowingly a party to fraudulent trading by BCCI. Theapplication concerned six transactions, the issue being whether those at BoIresponsible for entering into �ve of them involving a Mr Samant knew thatthey were thereby assisting BCCI to perpetrate a fraud on its creditors.Patten J found that Mr Samant had the relevant knowledge in relation to thelast four of the �ve transactions and held that his knowledge should beattributed to BoI, whose board had been content to take his assurances inrelation to them. The judge made a contribution order against BoI.

57 BoI appealed. This court (Mummery, Neuberger LJJ and Munby J)dismissed the appeal, the court�s judgment being delivered by Mummery LJ.The key passages are in a section headed ��Attribution of fraud: points on theauthorities��. They read, at paras 114—118:

��114. Clearly there are some circumstances in which an individual�sknowledge of fraud cannot and should not be attributed to a company.The classic case is where the company is itself the target of an agent�s oremployee�s dishonesty. In general, it would not be sensible or realistic toattribute knowledge to the company concerned, if attribution had thee›ect of defeating the right of the company to recover from a dishonestagent or employee or from a third party. Mr Moss [leading counsel forBoI] argued that there should be no attribution of knowledge as this was acase in which BoI was the �secondary victim� of Mr Samant. His actionswere harmful to the interests of BoI, as he had exposed it to the risk ofpotential liability for fraudulent trading. We have no hesitation inrejecting that submission. If it were correct, it would never be possible toattribute the knowledge of the individual to a company under section 213

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[of the Insolvency Act 1986.] That is contrary to the agreed position thata company is capable of being made liable under section 213. Knowledgeof fraud may be attributed to a company even though such attributionmay expose it to the risk of liability under section 213.

��115. BoI criticised the judge for not applying to this case the principlethat the knowledge of an agent should not be attributed to the principalwhen the agent is acting fraudulently or otherwise in breach of duty andin circumstances where it was contrary to common sense to consider thatthe agent would have passed on his knowledge of the fraud to hisprincipal. It was argued by BoI that it was contrary to common sense toconclude that Mr Samant, who was found to have been dishonest and tohave acted in breach of duty in causing BoI to take part in the transactionswith BCCI, would have passed on to the directors of BoI his knowledgethat BCCI was conducting its business with an intention to defraud itscreditors.

��116. As appears from the principles laid down in theMeridian GlobalFunds case [1995] 2 AC 500 the terms of the legislation and thecircumstances of the case may make it appropriate to attribute knowledgeof fraud to the company, even though a person with knowledge of thefraud has acted dishonestly, in breach of his duty to his principal oremployer and in circumstances in which he would not have passed on hisknowledge to his agent or employer. For example in McNicholasConstruction Co Ltd v Customs and Excise Comrs [2000] STC 553 a sitemanager was dishonest in relation to the liability of his employer for VAT.It was held that the policy and content of the legislation overrode anyprinciple that knowledge of fraud was not attributable to a companythat was itself a victim of fraud. The company was held liable forVATevasion.

��117. It was submitted that Patten J was wrong to follow theMcNicholas case. It was distinguishable from the present case as it wasnecessary to have attribution of knowledge to the company in that case inorder to make the VAT legislation work. That was not, it was contended,the case here. There was no need to discern or fashion a special rule ofattribution in order to prevent the policy of the legislation from beingfrustrated. Section 213 can work perfectly well on the application of theprimary rules of corporate responsibility. On the judge�s �ndings the actsof the employee, Mr Samant, were dishonest. His knowledge should notbe attributed to BoI as the acts of Mr Samant were aimed at and harmfulto its interests and it cannot be inferred that he would have passed on hisknowledge of the fraud of BCCI to the board of BoI.

��118. We agree with Patten J on this point. As in theMcNicholas case,the acts of Mr Samant were not in fact targeted at BoI. He was acting for,and in what he apparently believed to be the interests of, BoI in seeking togross up the balance sheet for the purposes of the year end accounts.The potential liability of BoI under section 213 is irrelevant in decidingwhether BoI was a victim of Mr Samant and whether his knowledgeshould be attributed to it for the purposes of section 213.��

58 Part of that reasoning is, I consider, to the e›ect that the policyunderlying particular statutory provisions may require the attribution of thedishonest knowledge of a particular individual to a company, whether or not

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the company could be regarded as a victim (whether secondary or otherwise)of the dishonest individual. That view is supported by the latter part ofpara 114, in relation to the policy underlying section 213; and a similar pointis made in the latter part of para 116 in relation to the policy underlying theVAT legislation with which the McNicholas case [2000] STC 553 wasconcerned.

59 If that were the limit of what can be derived from this passage, itmight not be of direct help in the present case, in which the question ofattribution is not conditioned by legislative policy. But Mr Sumptionsubmitted that para 118 goes beyond what had preceded it. There the courtin terms endorsed Dyson J�s approach in the McNicholas case that, inconsidering whether or not the Hampshire Land principle is applicable, it isnecessary to consider against whom the dishonest acts were targeted. In thatcontext, as Dyson J had held, it had been irrelevant to take into accountMcNicholas�s potential liabilities if the site managers� frauds were exposed,just as in the Bank of India case [2005] 2 BCLC 328 it was irrelevant toconsider BoI�s potential liability under section 213 of the Insolvency Act1986 if a fraudulent trading claim were brought. By parity of reasoning,Mr Sumption submitted, the fact that Mr Stojevic�s scheme might, when andif the frauds were discovered, rebound upon the company was irrelevant inidentifying the victim of the frauds. As to that, there was only one answer, itwas the banks. The company might ultimately be made to answer for itsliabilities incurred in consequence of the frauds. But that did not make it atarget so as to enable it to invoke the Hampshire Land principle. There is,moreover, no good reason in principle for not attributing to a company thedecision of its board (or of its directing mind and will) to procure it todefraud a third party.

60 The only authority to which we were referred that was said to pointin a di›erent direction, and upon which Mr Brindle placed reliance, was thedecision of Rix J in Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�sRep 262. It was cited to the court in the McNicholas case [2000] STC 553,but not referred to in Dyson J�s judgment. It was also cited to, and discussedby this court, in the Bank of India case, and I shall return to that. Theassumed facts in the Arab Bank case were complicated but it is unnecessaryto detail them. Mr Browne, the managing director of JDW, was alleged tohave made some fraudulent valuations in JDW�s name. The claimantsobtained judgments against JDWand sought to enforce them against JDW�sinsurers, Zurich, under the Third Parties (Rights against Insurers) Act 1930.Zurich sought to avoid the policy on the basis that JDW had dishonestlyfailed to disclose Mr Browne�s alleged frauds. The argument required thecourt to attribute knowledge of the frauds to the company; but it failed onthe basis that such attribution was implicitly excluded by the terms of thepolicy. The importance of the decision is that Rix J also dealt withan alternative attribution argument as he explained in this passage, atpp 282—283:

��There remains the question, raised byMr Tomlinson�s submission [hewas leading counsel for Zurich], whether theHampshire Land doctrine iscon�ned to cases of fraud where the principal is himself the victim of thefraud, or whether, as VaughanWilliams J put it inHampshire Land itself,the doctrine extends to other breaches of duty where common sense

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would destroy the inference of transfer of knowledge. In the typical casein which the doctrine has been applied, the JC Houghton case, theBelmont Finance case, PCW Syndicates v PCW Reinsurers [1996]1 Lloyd�s Rep 241 and Group Josi Re v Walbrook Insurance Co Ltd[1996] 1 Lloyd�s Rep 345, fraud has been found or assumed. In thepresent case, fraud is also assumed, but the primary victim of the fraudhas been the lending institution which has relied on the valuation.I would accept, however, the plainti›s� submission that JDW was also avictim, even if only a secondary victim, of the assumed fraud. Oneconsequence of that assumed fraud has been JDW�s liability to theplainti›s, albeit in negligence. Moreover, even if it could be said thatJDW, unlike the plainti›s, was not the victim of Mr Browne�s fraud,Mr Browne has, on the assumed facts, been guilty of dishonesty, and onecan hardly visualise a graver dereliction of his duty to his company.Although the cases often involve fraud, Hampshire Land itself did notnecessarily do so, and I note that inGroup Josi Re Saville LJ was preparedto accept as a working de�nition of the scope of the principle the cases of�the agent�s or director�s fraud or other breach of duty to the company� (atp 367). In my judgment, Mr Browne�s fault comes within the concept ofan agent�s fraud on his principal, but, even if it does not, his fault is such abreach of duty to JDWas in justice and common sense must entail that itis impossible to infer that his knowledge of his own dishonesty wastransferred to JDW. That conclusion is consistent with the view ofColman J in Kingscroft v Nissan Fire and Marine Insurance Co Ltd(unreported) 4 March 1996, p 12. It follows that the Hampshire Landdoctrine would in any event prevent Mr Browne�s or Mr Pitts�sknowledge being attributed to JDW.��

61 Mr Sumption submitted that that part of Rix J�s reasoning wasobiter and that anyway, if that part of it commencing with the words��Although the cases�� was intended to be one of general principle, it wasincorrect. Rix J did not ask himself the question that in theMcNicholas case[2000] STC 553Dyson J was later to regard as the key one, namely what wasthe object of the fraud? Moreover, Rix J�s analysis cannot be reconciledwith this court�s approach in the Bank of India case [2005] 2 BCLC 328 asto the circumstances in which a director�s knowledge will be attributed tothe company. Putting it generally, the essence of the Hampshire Landprinciple is that the only circumstance in which the director�s knowledge willnot be attributed to the company is the one in which the director would nothimself disclose it because it is the company itself that is the target of hisdishonest scheme or his breach of duty. Rix J can, however, be read asexpressing the principle in signi�cantly wider terms.

62 The Arab Bank case [1999] 1 Lloyd�s Rep 262was cited to this courtin the Bank of India case [2005] BCC 739. The argument of Mr Moss QC,for BoI, was that the McNicholas case was inconsistent with the Arab Bankcase. At para 124 of its judgment, this court rejected the proposition that theArab Bank case was authority for the proposition that there can be noattribution of knowledge where the company is a ��secondary victim�� of theindividual�s wrongdoing or breach of duty.

63 Mr Brindle�s submission was that Rix J�s observations in the passageI have quoted from Arab Bank case [1999] 1 Lloyd�s Rep 262 formed a

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second ratio of his decision; and he made that good by referring to Rix J�sintroduction, at p 280, to his second line of reasoning, where he said:��Even if I am wrong about that construction,��i e the �rst reason for hisdecision��however, I think that Mr Boswood and Mr Goldsmith are rightin their reliance on the Hampshire Land exception��. Mr Brindle said thatthe Arab Bank case was therefore authority for the proposition that it is nota condition of the application of the Hampshire Land principle that thecompany should be the primary victim. It may be that KBwas a victim in thepresent case. But the question, as in all cases, is whether it can realisticallyand sensibly be said that the company is also a victim. If it can, theHampshire Land principle can apply. That is supported by Rix J�sapproach. Why, asked Mr Brindle, should the company have to be theprimary victim? He accepted that the company�s victimhood had to besigni�cant and not merely theoretical and unconvincing. But, subject to this,there was no reason in principle why there should not be more than onevictim of an agent�s dishonest stratagem. As to whether the company was avictim in this case, the fraud may well have been directed primarily againstKB, but its consequential e›ect was to strip the company bare and leave itexposed to liabilities to KB for the amounts of which KB was defrauded. Onany footing, the company was worse o› after the frauds than before. Thepresent case, he said, was quite di›erent from theMcNicholas case, in whichthe essential loss su›ered by the company itself was a cash �ow loss, and inwhich the key to Dyson J�s reasoning is in the �rst two sentences of para 55(quoted above). The damage to McNicholas is to be contrasted with thepotential damage to the company in the present case. Mr Brindle said thatDyson J was not holding that the company could not be a secondary victim.He was saying no more than that, on the facts, McNicholas was not a realand substantial victim so as to engage theHampshire Land principle.

64 As for the Bank of India case [2005] BCC 739, Mr Brindle said thatthe only detriment that BoI relied upon as entitling it to invoke theHampshire Land principle was the very liability that the liquidators ofBCCI were seeking to impose on it, so that it was not surprising that thecourt rejected the argument�on the basis that, if it were accepted, it woulddeprive section 213 of, in many cases, all practical utility. Mr Brindlesubmitted further that, in para 118, the court was simply making the pointthat, as in theMcNicholas case, BoI was not a victim at all. Mr Samant was,the court there acknowledged, acting in what he believed to be BoI�s bestinterests. As for the court�s comment on the Arab Bank case in para 124 ofits judgment (summarised above), Mr Brindle said that if it was there sayingthat the Arab Bank case was not authority for the proposition that��secondary victimhood�� could entitle a company to claim the bene�t of theHampshire Land principle, the statement was not justi�ed. Rix J�s judgmentwas plainly authority for that proposition. Mr Brindle submitted that allthat the court was really saying in para 124, taking that paragraph incontext, was that it is not enough for a company simply to put up a �agsaying ��secondary victim�� and thereby claim that there should be noattribution. What instead has to be done�as the McNicholas caseshows�is to consider whether the company was in a realistic sense a victim.Considerations of whether it was a primary or secondary victim do not comeinto it. If the answer is yes, the Arab Bank case [1999] 1 Lloyd�s Rep 262 isauthority for the proposition that theHampshire Land principle can apply.

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Discussion and conclusion on the Hampshire Land issue65 The di›erence between counsel turns, therefore, on whether or not

this is a case to which the Hampshire Land principle applies. Mr Sumptionsubmitted that it does not, and Mr Brindle that it does. Mr Brindlerecognised that the principle is of limited scope and will not ordinarily beavailable to protect a company from liability (civil or criminal) as a result ofthe dishonest or other wrongful acts of its agents directed at third parties. Inparticular, it will not prevent such agents� dishonesty or other wrong frombeing imputed to the company itself in such a context. That appears to me tobe in principle correct.

66 The area in which the Hampshire Land principle does come intoplay is one in which, were the agent�s dishonesty or wrongdoing to beattributed to the company, it would have the consequence of prejudicing thecompany in the pursuit of its own claims or rights against others. That willbe because so to attribute the knowledge would bar the claim or extinguishthe right. In the Hampshire Land case itself [1896] 2 Ch 743, the caseproceeded on the basis that had Mr Wills�s knowledge of the irregularity ofthe meeting been attributed to Portsea, Portsea could not have proved for itsloan. In the Belmont Finance case [1979] Ch 250, the attribution to theplainti› company of the conspiratorial intentions of the two defendantdirectors would have made the company a knowing party to the conspiracydirected against it in respect of which it sued and would have disabled itfrom suing. Mr Sumption�s submission was that the principle can only applyin circumstances in which the company was the intended victim of thedishonest agent and that this is not such a case. The frauds in which thecompany engaged admittedly resulted in its incurring liabilities of its own tothose it defrauded. But that was a necessary consequence of the frauds, itwas not the object of the enterprise and it does not make it a victim for thepurposes of the relevant principle. The reason why the company wasexposed to liability to KB was because it was the perpetrator of the fraud,not the victim of it.

67 Mr Brindle�s general point was that the principle cannot be such asto preclude the company, in the circumstances of a case such as this, frombringing a claim against Mr Stojevic himself (for breach of his various dutiesto the company resulting in its incurring of liabilities to third parties) oragainst an outsider such as the auditors for negligently failing to identify thefrauds, blow the whistle and so stop it from stealing yet more money.Mr Brindle submitted that the frauds, even if directed against the banks, alsohad materially damaging consequences upon the company su–cient to makeit a real victim as well. It must, therefore, be the case that such a claim couldbe brought; and it must in turn follow that the Hampshire Land principlemust enable it to be brought. His proposition was, in e›ect, that evenaccepting (as he did) that the company can, as regards the third parties whowere defrauded, be regarded as itself having committed the frauds, it mustbe notionally acquitted of any imputation of dishonesty so as to leave it freeto sue those who could be said to have caused (by not stopping) theconsequential damage that its own frauds caused it to su›er.

68 The logic of Mr Brindle�s submission led him into territory that heappeared to recognise as posing di–culties. The claim is brought by thecompany at the suit of its liquidators. If the company is entitled to the chosein action against the �rm that it now asserts, it must have been entitled to the

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same chose in action immediately before the liquidation, at a time whenMr Stojevic was in control: the liquidation did not give it the bene�t of acause of action it did not have before. Let it be assumed that at some pointbefore the company went into liquidation, Mr Stojevic had procured itto bring a like claim against the �rm as the present one, for damages tocompensate it for the incurring of its liability to KB. Mr Brindle�s positionwas that in a hypothetical scenario such as that, in which Mr Stojevic waspulling the strings behind the litigation, there could be no question of thecompany being allowed to bring such a claim. He adopted the company�sposition as acknowledged before Langley J, namely that ��we would belaughed out of court��. His submission to us on the point was:

��The court is going to �nd some way of making sure that claim isknocked out. The Hampshire Land principle is �exible enough, wesubmit, to cater for such a situation. It is indeed a �exible doctrine. It isthere to protect, where they exist, the rights of innocent interests in thecompany. That is the whole point behind the Belmont Finance case andthe other cases that we have looked at. In a case where it is simply anelaborate and rather cheeky claim brought by Mr Stojevic e›ectively toget back on behalf of the company moneys which he has himselfpocketed, qua crook, the court is simply not going to apply any [such]principle. There are no innocent parties to be represented and there is noreason why the court should [not] say, �In that case we will not apply thespecial rule of [non-] attribution which we would otherwise normally,namely Hampshire Land.� The beauty of Lord Ho›mann�s elegantanalysis in the Meridian Global Funds case of the rules of attribution isthey are �exible. It says it all depends on what the situation is.��

69 I respectfully disagree with that submission, which appears to me tobe unprincipled. As I have said, if the company, now in liquidation, has aclaim in negligence against the �rm, it must have had the same claim beforeit was in liquidation. Mr Brindle�s proposition that the Hampshire Landprinciple is in the nature of a discretionary judicial switch that the court canturn on or o› according to the identity of the assumed pockets into whichthe fruits of a particular corporate claim will or may ultimately go appearsto me to be wrong in principle, as well as unsupported by authority.The Hampshire Land principle is a principle of non-attribution that, incircumstances in which it is properly applicable, will enable a company tobring a claim or pursue a right that it could not otherwise have brought.Its application cannot depend on a consideration of who will or mightultimately bene�t from the bringing of such a claim or the pursuit of such aright, which would often be an impossible inquiry.

70 If Mr Brindle were right that the company could not have brought apre-liquidation claim, it must follow that it cannot bring one now. But sinceI have rejected his submission in relation to that, there still remains thequestion of whether or not the Hampshire Land principle applies. Theessential issue is whether (a) asMr Sumption submitted, the principle appliesonly in the case in which the company is the intended victim of its agents, itbeing irrelevant that it may also su›er incidental or consequential damage;or (b) as Mr Brindle submitted, it applies also in the case where a third partyis the intended victim but the company also su›ers material consequentialdamage. Mr Sumption�s submission can be said to derive support from the

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McNicholas case [2000] STC 553 and the Bank of India case [2005]2 BCLC 328. Mr Brindle�s relies on the Arab Bank case [1999] 1 Lloyd�sRep 262.

71 I �nd it a little surprising that the McNicholas and Bank of Indiacases emerge as authorities contributing to the jurisprudence on theapplication of the Hampshire Land principle. They were both concernedwith �xing liability on a company at the suit of a third party and a centralquestion in each was whether the relevant statutory policy (respectively theVAT legislation and the insolvency legislation) required the attribution to thecompany of the acts of its agents, being agents who were not its directingmind and will. Once, as in each case it did, the court held that the applicablepolicy did require such attribution, I �nd it di–cult to see on what basis itwas considered that such attribution could or might be trumped by theHampshire Land principle, which is primarily concerned not with acompany�s liabilities to others but rather with its claims against others.

72 But, surprising or not, there is no escaping that both in theMcNicholas case and in the Bank of India case the court discussed the scopeof the Hampshire Land principle. In my judgment both cases supportMr Sumption�s submission that the principle will ordinarily only apply incircumstances in which the agents intend to harm the company (theMcNicholas case [2000] STC 553, para 56), or it is the target of their acts(the Bank of India case [2005] 2 BCLC 328, para 118), and that it is notenough to engage the principle that an agent�s acts may result in harm to thecompany. In the former case it made no di›erence that the agents� fraudswere found out and resulted in material harm to McNicholas in the shape ofassessments to tax of more than £1m: see [2000] STC 553, para 1; and in thelatter case it made no di›erence that Mr Samant�s actions resulted in BoIbeing made liable under section 213 to a judgment of over US$80m: see[2005] 2 BCLC 328, para 1. In both cases the companies were, in the phraseused in argument, left ��holding the baby��, just as the company is said to havebeen here. Both authorities support the view that being a ��secondary�� victimof this nature is not enough to engage the principle; what counts is theidenti�cation of the victim against whom the fraudulent acts are directed.The logic underlying this approach is that it is irrelevant in the presentcontext to take account of the adverse consequences to the fraudster of beinga fraudster: those are simply the consequences that the law visits onfraudsters, but they do not, in the present context, make the fraudster avictim. Whilst I recognise the Arab Bank case [1999] 1 Lloyd�s Rep 262 aspointing in a di›erent direction, I take the view that this court in the Bank ofIndia case preferred and approved the reasoning in the McNicholas case,and in my judgment we should take our lead from the Bank of India case.

73 In these circumstances I am of the opinion that this is not a case inwhich theHampshire Land principle has any application. The essence of thecase is that it is one in which the sole directing mind and will of the companyprocured it to enter into fraudulent transactions with banks. It was thecompany that dealt with the banks and, so it seems to me, clear that, asbetween the company and the banks, the principles of attribution requirethe dishonesty of the company�s sole human agent to be imputed to thecompany. Mr Sumption�s submissions satis�ed me that this is a case inwhich such an imputation should be made and that the company shouldtherefore itself be liable for the frauds. Whilst, as I have said, Mr Brindle did

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not accept that this is the correct analysis, he did not argue against it and hewas prepared to accept it for the purposes of the present debate. It is nottherefore a case in which the company was the target, or the victim, of itsagent�s dishonesty. It was itself the fraudster, it was not the target of thefraud, and in my view it can make no di›erence that its frauds were likely,when and if found out, to result in the incurring of liabilities by the companyitself. It now seeks to be notionally absolved of the dishonesty that must beattributed to it in order to bring claims for compensation for the losses thatits own frauds have brought upon itself. Unless it is so absolved, its claim isadmittedly (but subject to its separate ��very thing�� argument) barred by theprinciple of ex turpi causa.

74 In my judgment, subject as aforesaid, the company�s claim is sobarred. I would uphold this part of Langley J�s decision.

The ��very thing�� argument

75 The essence of the company�s ��very thing�� argument is this. If, asI have held, Mr Stojevic�s fraud is to be attributed to the company, then it isrecognised that the making of the claim by the company against the �rmdoes require the company to allege and rely on its fraud committed upon thebanks. On the face of it, that means that it runs head on into the ex turpicausa principle of public policy barring it from bringing such a claim.

76 In response to that consequence, the company confesses and seeks toavoid. By way of avoidance, it is said that the public policy point simplydoes not apply in the particular circumstances of the case. That is because��the very thing��or at least one of the very things�that the �rm�sengagement as the company�s auditors required it to do was to detectwhether the company was engaged in frauds of the nature that it was in factengaged in. The assumed facts require the court to assume that the �rmnegligently failed to detect the frauds and that, had it done so, they wouldhave blown the whistle and stopped them. It is said that the ex turpi causaprinciple cannot bar a claim based on the commission of a fraud when theprevention of that fraud was ��the very thing�� that the defendants had beencharged to do.

77 The �rm�s answer to the point is that it is wrong and that ��the verything�� argument is no answer to the public policy point represented by theex turpi causa principle. Mr Sumption submitted that the principle thecompany seeks to invoke is, on analysis, nothing to do with the applicationor otherwise of the ex turpi causa principle�which sweeps indiscriminatelyacross the board and bars all turpitudinous cases, however good they mightotherwise be�but is all to do (and only to do) with principles of causation.In particular, it is one that is capable of being deployed in answer to a varietyof causation defences, for example volenti non �t injuria and novus actusinterveniens. It is basic that in every claim in contract or tort the claimantmust show that the loss he has su›ered is within the scope of the duty heasserts. Put generally, if the particular misfortune that the claimant hassu›ered is ��the very thing�� that the defendant had a duty to prevent, it willnot be open to the defendant to say that the occurrence of the misfortunebroke the chain of causation. But, Mr Sumption said, accepting that thenature of the claim is a ��very thing�� claim, it still cannot succeed if it isreliant on illegality. In that event the ex turpi causa principle will bar it.

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78 Mr Sumption illustrated his point by concrete examples. Indiscussing the illegality cases, I referred to Clunis v Camden and IslingtonHealth Authority [1998] QB 978. The central element of Mr Clunis�s claimwas that the psychiatrist ought to have realised that he was in urgent need oftreatment and was dangerous, that he should have been assessed beforehe was released and that, had he been, he would have been detainedor consented to become a patient and would not have committedmanslaughter. Consistently with the principle that the nature of the claimedloss must be within the scope of the claimed duty, his case was essentiallythat the doctor owed him a duty of care to take steps that would haveavoided his commission of manslaughter. Beldam LJ recorded, at p 987,that ��the claim against the defendant is founded on the assertion that themanslaughter of Mr Zito was the kind of act which Dr Sergeant oughtreasonably to have foreseen and that breaches of duty by the defendantcaused the plainti› to kill Mr Zito��. Prevention of the manslaughter was,therefore, one of the very things that the psychiatrist�s duty required of her.But Mr Clunis�s claim was still defeated by the application of the ex turpicausa maxim.

79 Similarly, Mr Sumption said that Cross v Kirkby The Times, 5 April2000 was a ��very thing�� case. The defendant owed the claimant a duty notto hit him with a baseball bat and injure him. He did the very thing (or oneof the very things) he should not have done to the claimant, who sued him.The claim was defeated on ex turpi causa grounds. In Hewison v MeridianShipping Services PTE Ltd [2003] ICR 766 too the employer owed theclaimant a duty of care, the scope of which included a duty (one of the ��verythings�� comprised in it) not to cause a loss of future earnings. The bid torecover such damages was defeated by the ex turpi causa principle. The�rm�s position is that, logically, almost every claim in contract or tort inwhich the claim has been defeated by that principle is, on analysis, a ��verything�� case.

80 It appears to me that that probably rather overstates the width of thesubmission that Mr Brindle makes, which is essentially that ��the very thing��principle applies only to cases in which the commission of the illegality isitself the thing that the due performance of the duty was intended to avoid.On that basis, it seems to me, neither Cross v Kirkby The Times, 5 April2000 nor the Hewison case is within the principle, although I should havethought that, if the argument is correct, the Clunis case ought to have beenwithin it, althoughMr Brindle disagreed.

81 The main authority upon which Mr Brindle founded the submissionis this court�s decision in Reeves v Comr of Police of the Metropolis [1999]QB 169, a case with certain similarities to the Clunis case. Both cases wereargued before di›erent constitutions of this court in October 1997, withjudgment being given in the Reeves case on 10 November 1997 and in theClunis case on 5 December 1997. Neither case makes reference to theother, of which presumably each constitution was respectively unaware.I have said all that I need to say about how the Clunis case dealt with theex turpi causa issue. In order to understand the Reeves case in so far as itdeals with the like issue, it is necessary to look �rst at the earlier, alsosimilar, case of Kirkham v Chief Constable of the Greater ManchesterPolice [1990] 2QB 283.

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82 Mr Kirkham committed suicide whilst on remand at a remandcentre. The police had known of his suicidal tendencies but failed to passthis information on to the prison authorities. Had they done so, the judgefound, the probability is that he would have been placed on the hospitalwing at the centre rather than in an ordinary cell. The claim was by hiswidow against the chief constable for damages for negligence. The judgeupheld her claim and rejected a defence of ex turpi causa. The chiefconstable appealed to this court, reopening his defences of volenti non �tinjuria (which was rejected) and ex turpi causa.

83 Lloyd LJ explained, at p 290F—G, that the judge had rejected theex turpi causa defence on the simple basis that as, since the Suicide Act 1961,suicide was no longer a crime, it was not available: the widow�s claim wasnot based on any illegality. He said that the judge had not, however, beenreferred to three recent authorities on the topic of illegality, namelyThackwell v Barclays Bank plc [1986] 1 All ER 676; Saunders v Edwards[1987] 1 WLR 1116 and Euro-Diam Ltd v Bathurst [1990] 1 QB 1. Theyshowed that the ex turpi causa defence rested on a principle of public policythat the courts will not assist a plainti› who has been guilty of illegal orimmoral conduct. As Kerr LJ had put it in the Euro-Diam case, at p 35:

��It applies if in all the circumstances it would be an a›ront to thepublic conscience to grant the plainti› the relief which he seeks becausethe court would thereby appear to assist or encourage the plainti› in hisillegal conduct or to encourage others in similar acts . . .��

84 The three cases just listed were those which later (in 1991) in�uencedNicholls LJ in Tinsley v Milligan [1992] Ch 310 (in this court) to recognisethe ��public conscience�� test as the touchstone of how the courts should dealwith assertions of illegality. That test was of course later (in 1993) outlawedby the decision of the House of Lords in the Tinsley case [1994] 1 AC 340.It follows that, although it did not realise it at the time, the court in theKirkham case [1990] 2 QB 283 approached the ex turpi causa principle onan erroneous basis.

85 Lloyd LJ asked himself whether to a›ord relief to the widow woulda›ront the public conscience and held that it would not. The Suicide Act1961 had abolished the crime of suicide and suicide was anyway no longerregarded with the same abhorrence as formerly. Importantly, the evidencewas also that, whilst Mr Kirkham was sane in the legal sense, he was not ofsound mind: he su›ered from clinical depression and his judgment wasimpaired. In holding that the ex turpi causa defence did not apply,Lloyd LJ quali�ed his decision by saying, at p 291H, it did not apply ��at anyrate where, as here, there is medical evidence that the suicide is not in fullpossession of his mind��. Farquharson LJ said much the same, at p 296B—D,with the same quali�cation. Sir Denys Buckley, at p 297D, agreed with bothLords Justices.

86 I now come to the Reeves case [1999] QB 169. The facts were these.Martin Lynch was in custody at a police station. The o–cers responsible forhis custody knew he was a suicide risk. Three months before he hadattempted to strangle himself with his belt in a cell at a magistrates� court.After a morning�s visit to court, when he again tried to strangle himself,he was returned to custody where he saw the police surgeon who gaveinstructions that, as a suicide risk, he should be kept under observation.

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Shortly after that examination, Mr Lynch hanged himself. He could do sobecause the hatch in the cell door had been left down, which enabled him totie his shirt through the spyhole on the outside of the door and hang himselfwith it. Sheila Reeves, his administratrix, sued the police commissioner foralleged negligence. The judge found that the police owed Mr Lynch a dutyof care because they knew he was a suicide risk. The content of that dutywas to take reasonable care to prevent such a person being held by themfrom committing suicide. It was negligent of the police o–cers not toshut the hatch because it was reasonably foreseeable that it gave Mr Lynchthe opportunity to strangle himself in the way he did. Subject to twomatters, the judge found a causative link between the negligent act andMr Lynch�s death.

87 The judge, however, held that the commissioner could avoid liabilityin reliance on the defences of volenti non �t injuria and contributory fault,which latter he �xed at 100%. He was attracted to the view that the ex turpicausa principle also a›orded a defence but did not decide the case on thatground. On Mrs Reeves�s appeal to this court, the commissioner ran allthree points plus the defence of novus actus interveniens, to which the judgehad given no separate consideration, treating it as closely bound up with thevolenti defence. It is necessary to consider each of the three judgmentsdelivered by the court.

88 Buxton LJ, delivering the leading judgment, dealt �rst with volenti,which he held a›orded no defence. In so deciding he referred to theKirkhamcase. He gave several reasons for rejecting this defence, but I need refer onlyto the �rst. For that he drew in particular on Farquharson LJ�s opinion at[1990] 2 QB 283, 295C, that ��the [volenti] defence is inappropriate wherethe act of the deceased relied on is the very act which the duty cast upon thedefendant required him to prevent�� (emphasis added). As Buxton LJ put it[1999] QB 169, 178:

��If the police�s obligation was to guard against suicide, that is, toprotect Mr Lynch from a deliberate act against his own life, I do not seehow they can be or should be exempted from liability because thatdeliberate act in fact occurred.��

89 Buxton LJ then turned to novus actus interveniens. The point madewas that Mr Lynch�s death was caused by his own act, not by the acts oromissions of the police and so the necessary link between their negligenceand any damage su›ered by Mr Lynch was broken. Buxton LJ rejected thattoo, drawing this time on the observations of Tucker LJ in Stansbie vTroman [1948] 2KB 48. As Buxton LJ explained [1999] QB 169, 180:

��Tucker LJ said, at pp 51—52, that the general rule with regard toresponsibility for acts done by a third party was �even though A is in fault,he is not responsible for injury to C which B, a stranger to him,deliberately chooses to do� (seeWeld-Blundell v Stephens [1920] AC 956,986, per Lord Sumner), but that principle did not apply where �the act ofnegligence itself consisted in the failure to take reasonable care to guardagainst the very thing that in fact happened�.�� (Emphasis added.)

90 Buxton LJ then dealt with the defence of contributory fault. Herejected that as well. After referring to the need for the commissionerto show that the claimed damage was su›ered as a result ��partly of

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[Mr Lynch�s] own fault�� (section 1 of the Law Reform (ContributoryNegligence) Act 1945), he said, at pp 181—182:

��The basic problem in applying that test to this case is the same as withthe other defence relied on by the commissioner: that it is simply arti�cialto contend that a defence to liability can rest upon the performance by thedeceased of the very act that the defendant was under a duty to takereasonable steps to prevent.�� (Emphasis added.)

91 Buxton LJ explained further di–culties inherent in that defence,which I need not relate. That brought him to the �nal defence, ex turpicausa. He summarised the approach of Lloyd and Farquharson LJJ to thelike question in the Kirkham case [1990] 2 QB 283, referring to the ��publicconscience�� test they had applied. The point made in the Reeves case wasthat, unlike Mr Kirkham, Mr Lynch was of sound mind and so his case hadbeen speci�cally reserved by the Kirkham case. The case made on behalf ofthe commissioner in the Reeves case was, as Buxton LJ said, at p 185B, that��we should hold that the defence of ex turpi causa does indeed hold in thiscase��. Buxton LJ then said, at p 185B—C:

��When a judge is asked to hold that a particular outcome woulda›ront the public conscience or shock the ordinary citizen it behoves himto proceed with caution, as did this court in the Kirkham case. Noevidence will be available to him on which to base such conclusions, andtherefore the exercise must be one of speculation, albeit one would hopeintelligent speculation. In the present case, however, I feel able to addressthe issue without descending into the arena in that way, because there arein my view clear reasons why the defence of ex turpi causa cannot, as amatter of logic and of legal principle, be available in this case.��

92 The �rst two sentences of that passage re�ect, with respect, an errorof approach. They show that the court was being asked to decide theex turpi causa issue by reference to the ��public conscience�� test. Whilst it isunderstandable why the court in the Kirkham case went down that route, bythe time of the Reeves case [1999] QB 169 it had been closed o› by theHouse of Lords in Tinsley v Milligan [1994] 1 AC 340. The inference fromBuxton LJ�s judgment�indeed from all three judgments in the Reevescase�is that the case was nevertheless argued on the basis that the ��publicconscience�� test was still good law and that this court in the Kirkham casehad correctly directed itself on it. The arguments of counsel as summarisedin the law reports do not re�ect that they made any reference to the Tinsleycase. But Buxton LJ, as one might expect, was himself aware of it, because,at p 185F, he said that ��the actual application of Kerr LJ�s exposition of exturpi causa in the Euro-Diam case itself has been disapproved: see Tinsley vMilligan [1994] 1 AC 340, 363��. Having said that, he then said:��Nevertheless, the exposition in my view remains a valuable guide to thebasis of the defence, and was accepted as such by Lloyd LJ in the Kirkhamcase [1990] 2QB 283.��

93 If I may respectfully say so, at that point Buxton LJ took a wrongturn. Tinsley v Milligan shows that the discretionary ��public conscience��test does not have�nor strictly ever had�any part in the consideration bythe courts of an ex turpi causa defence. Buxton LJ could not correctly regardit as providing any guide, let alone a valuable one, as to the basis of that

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defence. The question for the court in the Reeves case under this head wassimply whether or not the claimant was relying on an illegal or immoral actcommitted byMr Lynch. If yes, her claim must fail. If no, the ex turpi causadefence was not available. Buxton LJ did not direct himself in those terms.

94 He did, however, anyway reject the ex turpi causa defence andI must cite the paragraph of his reasoning that is the inspiration for thecompany�s ��very thing�� argument. He said, at p 185 (immediately after thepassage at p 185B—C that I have quoted):

��First, the defence fails on a logical ground similar to that which isfatal to the defence of volenti. If it shocks the conscience of the ordinarycitizen that a suicide could recover, why is it the duty of the police, notmerely as public o–cers but in the private law of negligence, to takereasonable steps to prevent suicide? The case is, again, quite di›erentfrom the usual application of ex turpi causa, where the plainti› su›ersinjuries in the course of a criminal enterprise such as an a›ray or burglary.Here, the alleged turpitudinous act is the very thing that the defendanthad a duty to try to prevent, imposed by a law of negligence whichitself appeals to public conscience or at least to public notions ofreasonableness.�� (Emphasis added.)

95 That is the high point of the company�s argument, in particularthe last sentence. With respect, however, it appears to me to provide nosupport for it. It is right to note that in the passage immediately before,Buxton LJ disclaimed that he was going to descend into the ��publicconscience�� arena, although (i) if he was not going to do so, he did notindicate what di›erent test he was applying; and (ii) as the paragraph twice,and materially, refers to ��conscience�� and ��public conscience��, it appears tome that in fact Buxton LJ was applying the ��public conscience�� test.

96 The paragraph is premised on the basis that suicide is an illegal orimmoral act such that a damages claim reliant upon it will attract the publicpolicy defence, although it is not clear that Buxton LJ had in fact decidedthat suicide is such an act. The passage is also premised on the incorrectbasis that the operation of the ex turpi causa defence is a discretionary onegeared to considerations of possible a›ronts to the public conscience. The�rst point made is, in e›ect, that if it is just to impose a duty of care upon thepolice to take reasonable steps to prevent a suicide, why should it shockthe conscience of the ordinary citizen that the estate of the suicide shouldrecover compensation for a breach of that duty? Buxton LJ�s answer is thatit should not cause any such shock. Another answer might perhaps be that,whilst the police may be subject to a duty to take care to prevent thecommission of the (assumed) illegal or immoral act, it does not necessarilyfollow that the public conscience would not be a›ronted by the recovery ofdamages in reliance on that act. But there is no need to consider further therival answers, or their respective merits, to the hypothetical question becauseit is irrelevant for present purposes. The point of the whole paragraph is thatit was informed by the ��public conscience�� test, and it was in that contextthat Buxton LJ made his ��very thing�� reference, in e›ect a repetition of his�rst point and going to whether, as a matter of discretion, the ex turpi causadefence should be allowed to prevail.

97 The reason therefore why none of this helps the company�ssubmission is because Buxton LJ was applying the wrong test. He should

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have applied the indiscriminating, uncompromising reliance test explainedin Tinsley v Milligan [1994] 1 AC 340: i e if the claim relies on illegality orimmorality, it is automatically barred. Had he applied that principle, and onhis apparent assumption that the claim in the Reeves case [1999] QB 169was founded on an act attracting the ex turpi causa defence, he could nothave said that that defence was unavailable because of ��the very thing��point; or, perhaps more accurately, there is nothing in the context of what heactually said to suggest that he would have said that. He ought logically tohave held that the claim was defeated. If he was disposed not so to hold,he could not have done so without explaining why the Tinsley case did notcompel that result.

98 The outcome of Buxton LJ�s judgment was, therefore, that he was infavour of allowing the appeal. Morritt LJ, who would have dismissed it,focused �rst on the novus actus defence, referring to Mrs Reeves�s argumentthat ��the occurrence of the very thing which it was the duty of the defendantto use reasonable care to prevent cannot be a new intervening force so as tobreak the chain of causation:�� p 189C (emphasis added). He referred to theStansbie case [1948] 2 KB 48 and said that counsel were unable to refer toany case in which ��the very thing�� was the voluntary and intentional actionof a plainti› of sound mind: p 189G. In his view the fact that Mr Lynch wasof sound mind made all the di›erence. The police�s negligence may haveincreased the risk that he would take his own life, but it did not increase therisk in a causative sense. Morritt LJ would have dismissed the appeal on thatground. He also accepted that the claim was barred by volenti. As for exturpi causa, he appears also to have regarded the ��public conscience�� test asthe applicable one, but took the view that it was not appropriate for thecourt to brand as contrary to public policy an act of suicide when that wasno longer a crime: [1999] QB 169, 195F—G. Mr Brindle did not suggest thatanythingMorritt LJ said assisted his ��very thing�� argument.

99 Lord Bingham of Cornhill CJ agreed with Buxton LJ that the appealshould be allowed. He did not regard the suicide as a novus actus, becauseto do so would deprive the duty on the police of meaningful content. ��Thiswas, after all, the very thing against which the defendant was duty-bound totake precautions:�� p 196G (emphasis added). He too appears to haveregarded the ex turpi causa defence as turning on considerations of publicconscience, but did not regard it as available. Since Mr Brindle regardedpart of Lord Bingham CJ�s observations as supporting his submission, I willquote the part he relied upon, at p 197:

��It cannot, however, be said, in my judgment, that by permittingrecovery in a case such as this the law is covertly conniving at orcountenancing suicide: it is indeed imposing a civil penalty on thosewho, having a duty to try to prevent suicide, fail to do so. I do not,either, think that the conscience of the ordinary citizen would bea›ronted by the awarding of damages to the estate of a deceased in acase such as this.��

100 That can, I consider, be said to re�ect a similar approach to thatadopted by Buxton LJ. It can be said to assume that a claim based on asuicide is ex turpi causa but it re�ects that Lord Bingham CJ did not regardsuch a claim as likely to a›ront the conscience of the ordinary citizen.The remarks do not, however, support the view that the ex turpi causa

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defence in the present case is overridden by ��the very thing�� argument. Thereason is because, again, Lord Bingham CJ was applying the discretionarypublic conscience test, whereas�if he regarded the claim as arising ex turpicausa�he should have held it to be automatically barred.

101 The Reeves case went to the House of Lords [2000] 1 AC 360, butthe public policy defence was not pursued there. The argument was allabout causation, and it was in that context that the House referred to ��thevery thing�� point: see per Lord Ho›mann, at p 367H, and Lord Hope ofCraighead, at p 381B. There is no need to refer further to the decision of theHouse.

102 Mr Brindle also relied on a decision of the Singapore Court ofAppeal in United Project Consultants Pte Ltd v Leong Kwok Onn [2005]4 SLR 214. The respondent was the auditor of the appellant company. Theappellant was required to pay a tax penalty arising from its failure to make aproper return in respect of fees payable to its directors. The appellant suedthe respondent for negligence. The case was based on the proposition thatthe respondent ought to have discovered that the appellant had beenproviding incorrect information to the tax authorities. The trial judge foundthat the respondent was not in a position to know that the appellant hadbeen providing incorrect information and so it was unreasonable to imposeon the respondent a duty to discover the making of incorrect tax returns.The judge also found that the ex turpi causa defence barred the appellant�sclaim. An appeal against his decision was allowed. As regards the ex turpicausa defence, the court held that the appellant�s relevant conduct was notcriminal in nature nor could it be classi�ed as reprehensible or grosslyimmoral. ��In short, we were of the view that the appellant had not engagedin an act that was so culpable as to attract the application of the illegalitydefence��: para 57.

103 Having so found, the court also went on to hold that, even it werewrong in that conclusion, the illegality defence ��must fail for the simplereason that the loss su›ered by the appellant was precisely the loss that therespondent was engaged to avoid��: para 58. In the following paragraphs itexplained why, its explanation showing that the factual situation was ratherdi›erent from that in the present case. The real nature of the appellant�s casewas that the respondent had negligently failed so to advise it as to avoid thesubsequent incurring of the penalties. I will let the court speak for itself,at paras 60—61:

��60. The respondent, however, alleged that the commission by theappellant of a statutory o›ence constituted an illegal act that disentitledthe latter from pursuing its claim in tort. This argument placed theproverbial cart before the horse. On a proper appreciation of the facts,the appellant�s running afoul of the Act could be attributed solely tothe fact that the respondent had failed in his duty to warn. To allow therespondent to rely upon a consequence that was directly caused by hisown failings and to absolve him from liability, would be to reward thewrongdoer and punish the innocent party.

��61. An example would, perhaps, be apposite. Suppose a lay personwere to employ the services of a solicitor to execute a trust for the bene�tof his dependants. The solicitor reviews the manner in which the clienthas structured his a›airs and, whilst realising that there may be a

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potential statutory breach for evading stamp duties, chooses to remainquiet. IRAS subsequently imposes a penalty on the client for failing topay the requisite amount of stamp duty. In these circumstances, it cannotbe countenanced that the solicitor was not answerable to the client forhaving negligently failed to warn the latter of the potential liability forfailure to pay stamp duty merely because the client had committed astatutory o›ence.��

104 That description of the facts shows why the court was notsympathetic to the illegality defence. The case is, however, I considerultimately unhelpful because it appears that, although the court had thebene�t of the citation of a good deal of authority, it did not include Tinsley vMilligan [1994] 1 AC 340, and the court�s reasoning was not thereforedirected to whether or not, had it found illegality and been required to applythe strict Tinsley principle, the ex turpi causa defence would have succeeded.The most help thatMr Brindle can derive from the case is that the authoritiescited included the Reeves case [1999] QB 169; and, in para 62, the courtapparently regarded the Reeves case as decided in part on the basis that ��thevery thing�� argument is an answer to an ex turpi causa defence. The courtsaid, at para 62:

��The same court [the Court of Appeal] had also decided, in theearlier case of Reeves v Comr of Police of the Metropolis [1999]QB 169 ( para 53 supra) that the illegality defence could not be a›ordedto the police, in a situation concerning a claim by the dependants of adeceased who had committed suicide in police custody, where the policewere aware that the deceased was a suicide risk. The reason was thatthe claimant�s conduct was the very act that the police were under aduty of care to prevent.��

105 In my judgment that is not, with respect, an accurate summary ofthe decision in the Reeves case. It may be a fair re�ection of the particularbasis on which Buxton LJ explained his rejection of the illegality defence,and I have quoted and commented on the material part of his judgment.It was not the basis on which Morritt LJ or Lord Bingham of Cornhill CJdealt with matter. Morritt LJ decided that the public policy question did notcome into play because suicide was no longer a crime; and Lord Bingham CJappears to me simply to have applied the ��public conscience�� test. Theholding the Singapore court attributes to this court in the Reeves case wasnot part of the ratio of the decision in theReeves case.

Discussion and conclusion on ��the very thing�� submission

106 In the court below Langley J, having found against the company onthe attribution issues, said in his conclusions that he regarded the Reevespoint��the very thing�� argument�as the key question. He did not,however, expressly answer it. He expressed his reason for not striking theclaim out as follows [2008] Bus LR 304, para 65(10):

��But trying to stand back, and at the risk of fudging the strictures to befound in Tinsley v Milligan [1994] 1 AC 340 (albeit with some authorityto encourage me), I do not think that the �conscience of the ordinarycitizen� would �nd anything so repugnant in S & R pursuing this claim

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which would justify ruling it impermissible by the use of the unforgivingand uncompromising operation of the ex turpi maxim.��

107 As I said earlier, it is agreed that that re�ected an adoption by thejudge of the wrong approach to the ex turpi causa principle, which�in acase in which it applies�is an ��unforgiving and uncompromising�� one. It issurprising that the judge so expressed himself because, as I have also said, hehad earlier correctly identi�ed the applicable principles, including that the��public conscience�� test no longer formed part of them.

108 We do not, however, have the bene�t of the judge�s own thoughtson ��the very thing�� submission. Despite Mr Brindle�s sustained submissionin support of the proposition that the ex turpi causa principle can a›ord nodefence to a claim based on the illegality that it was the very duty of thedefendant to prevent, I have come to the conclusion that the submission ismistaken. I agree with Mr Sumption that ��the very thing�� concept is allabout causation. TheReeves case is a good example of that. The notion thatthe administratrix of a man of sound mind who chooses to kill himselfshould have a cause of action in tort against others for not taking reasonablecare to stop him doing so is not one that is obviously well founded; inparticular, it is likely to give rise to contentious causation issues. But if, onfacts of the sort that arose in the Reeves case, the defendant does owe dutiesof care that include a duty to take reasonable steps to prevent an occurrenceof an unusual type, being ��the very thing�� that in fact happened, then theclaimant may be able to overcome those causation di–culties.

109 There is, however, in my judgment no support in the authoritiesthat we were shown for the proposition that if ��the very thing�� from whichthe defendant owed a duty to save the claimant harmless is, or includes, thecommission of a criminal o›ence, the public policy defence based on the exturpi causa principle will be overridden so as to enable the bringing of theclaim that relies on the claimant�s illegality. For reasons I have explained,there is no support for it in the Reeves case. That is because there the courtwas applying the wrong, discretionary ��public conscience�� test with regardto the ex turpi causa principle. Whilst Buxton LJ [1999] QB 169, 185E used��the very thing�� phrase in the context of a discussion of whether the claimshould be barred as ex turpi causa, he was there saying no more than that, ifthe duty was to prevent the suicide, the public conscience would not beshocked by allowing the claimant to sue in respect of it.

110 It is accepted in the present case that the company�s claim reliesupon its own illegality. The question for us is whether the claim mustnecessarily fail on ex turpi causa principles. In my judgment, the teaching ofTinsley v Milligan [1994] 1 AC 340 is that it must and that there is nodiscretion in the matter. No member of the court gave consideration to thatin the Reeves case. In my judgment the Reeves case provides no authoritybinding on us for the proposition that the ex turpi causa principle is trumpedby ��the very thing�� argument. If the point were good, the Clunis case [1998]QB 978 ought not to have been decided on the public policy point in the wayit was. The Clunis case applied the ex turpi causa principle correctly,whereas the Reeves case did not. I would reject the company�s ��very thing��argument. I have no doubt that the public policy principle encapsulated inthe ex turpi causa maxim is intended to apply to a claim such as this one;and, if I may be forgiven just a little more Latin, to stop it in limine.

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Result111 It follows that, whilst I agree with Langley J�s conclusion on the

attribution issue, I consider that he ought to have held the company�s claimto be barred by the ex turpi causa public policy principle. I would allow the�rm�s appeal and strike out the company�s claim against the �rm.

KEENE LJ112 I agree, as I do with the judgment of Mummery LJ, which I have

had the bene�t of reading in draft.

MUMMERYLJ113 I agree with Rimer LJ�s admirable analysis of the authorities and his

conclusions on the overall legal position. I add a few comments on thisastounding claim.

114 Who was the victim of the fraud? The bank KB. Mr Brindle saidnot so: the victim was Stone & Rolls, the one-man company owned andcontrolled by Mr Stojevic. Acting entirely under his direction the companybecame party to his fraud. In my view, Mr Stojevic and his companytogether defrauded the bank KB. To suggest that the corporate creature usedby Mr Stojevic as the vehicle for the fraud was the victim of the fraudcommitted by him with it turns the world upside down. There is no prospectof establishing at trial that the company was the victim of the fraud.

115 Is the �rm potentially liable in negligence to this fraudulentcompany? No. The company�s case is that the �rm failed to use reasonablecare to detect Mr Stojevic�s fraud. In my view, the �rm did not owe a duty ofcare to the company, which was a fraudster in the total grip of anotherfraudster. As a general rule a fraudster, individual or corporate, is legallyliable for the losses that �ow directly from the fraud and cannot blame suchlosses on the negligence of another person, such as the victim or whoever.

116 What di›erence does the liquidation of the company make? None.The fact that the company is in insolvent liquidation is irrelevant to thecompany�s cause of action against the �rm. It is also irrelevant that, ifsuccessful, the claim could bene�t the victim bank KB. The company inliquidation is asserting the same cause of action that was vested in it prior toliquidation. Liquidation of the company did not alter the existing cause ofaction or create a new cause of action. Prior to liquidation the cause ofaction against the �rm could, if successful, bene�t the fraudulent company.The same is true post-liquidation and is a reason for striking the claim out.

117 How about ��the very thing��the claim against the �rm being for��the very thing�� that they were retained and paid to do (i e to take reasonablecare to detect fraud in the a›airs of the company)? Does this a›ect thenegligence claim against the �rm? No. No duty of care is owed by the �rmto the fraudster company, which was party to, and not itself a victim of, thefraud, to take reasonable care to detect its fraud.

118 What about the primary and secondary rules on attribution to thecompany of knowledge and of a guilty mind? They are relevant to whoseacts count as acts of the company for the purposes of the substantive rule inquestion and to �xing it with responsibility for/liability for the fraud of itsdirector or vicarious liability. In my judgment, in this case the knowledge ofthe fraudulent mastermind and the knowledge of his creature company areidentical in targeting the victim bank. It is not a case of a company itself

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being an innocent victim of deception by one of its o–cers. This companywas party to the fraud, not an innocent victim of it.

119 Does common sense matter? Yes. It is contrary to all commonsense to uphold a claim that would confer direct or indirect bene�ts on thecorporate vehicle, which was used to commit the fraud and was not thevictim of it, and the fraudulent driver of the fraudulent vehicle.

Appeal allowed with costs, includingcosts of action.

Interim payment of £700,000 onaccount of costs.

Permission to appeal refused.

RVR

APPEALThe claimant company appealed with leave of an Appeal Committee of

the House of Lords (Lord Phillips of Worth Matravers, Lord Carswell andLordMance) granted on 30October 2008.

The facts are stated in the opinions of the Committee.

Michael Brindle QC, Mark Simpson QC and David Murray (instructedbyNorton Rose LLP) for the claimant company.

The main issue is whether the auditors have a complete defence to thecompany�s claim under the maxim ex turpi causa non oritur actio. Tosucceed in that defence the auditors must establish (1) that the fraudulentknowledge and conduct of S, its director, is primarily attributable to thecompany, and if so, (2), that the company has to rely on that illegality tofound its claim against the auditors. The question also arises whether, in anyevent, the ��very thing�� principle applied in Reeves v Comr of Police of theMetropolis [1999] QB 169; [2000] 1 AC 360 applies so as to prevent theclaim being defeated on public policy grounds.

Whether the ex turpi causa defence applies is context-speci�c, beingdependent both on the particular case and by reference to the particularduty. If there is no question of the wrongdoer actually bene�ting from hisillegality the defence will not be available. The test for establishing thedefence is not that the claimant�s action would be an a›ront to the publicconscience (see Euro-Diam Ltd v Bathurst [1990] 1 QB 1) but that theclaimant relies on his own illegality to found his claim (the ��reliancetest��): see Tinsley v Milligan [1994] 1 AC 340; Holman v Johnson (1775)1 Cowp 341; Cakebread v Hopping Bros (Whetstone) Ltd [1947] KB 641;Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65; Revill vNewbery [1996] QB 567; Law Commission Consultation Paper No 160,The Illegality Defence in Tort (2001) and Consultation Paper No 189, TheIllegality Defence (2009).

While the wrongdoing of S, the company�s fraudulent director, shouldnot go completely disregarded, the courts should be unwilling to apply theex turpi causa defence where the law can give appropriate weight tomanagement involvement in fraud and arrive at a just apportionment ofliability by applying the rules of contributory fault and provisions of theCompanies Acts: see Gray v Thames Trains Ltd [2009] 1 AC 1339; LawReform (Contributory Negligence) Act 1945 and Companies Act 1985,

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Stone & Rolls Ltd vMoore Stephens (CA)Stone & Rolls Ltd vMoore Stephens (CA) [2009] 1 AC[2009] 1 ACMummery LJMummery LJ

section 727 (now section 1157(1) of the Companies Act 2006). Use of thosemechanisms,, so long as it does not diminish the seriousness of the auditors�breach of duty, is consistent with the courts� general approach of reducingthe scope of the illegality defence: seeNational Coal Board v England [1954]AC 403; Cakebread v Hopping Bros (Whetstone) Ltd [1947] KB 641 andHall v Hebert (1993) 101DLR (4th) 129, 154.

Questions of attribution are also context-speci�c and are to bedetermined in accordance with principles set out in Meridian Global FundsManagement Asia Ltd v Securities Commission [1995] 2 AC 500, 505, 507.Di›erent rules of attribution apply where a company is a claimant, and theissue concerns its rights, from the position where the company is a defendantand the question relates to its liabilities. In the present case two distinctattribution questions arise: (1) whether the company�s liability to thedefrauded banks for S�s frauds was vicarious only and not personal; and(2) whether, if the company was capable of incurring personal liability forthe purposes of its claim against the auditors, it was nevertheless a victim ofS�s frauds and therefore excepted from liability under the Hampshire Landprinciple that a court will not infer a company�s knowledge of a fact knownto its agent or director where, because of his fraud or breach of duty to thecompany, such inference would be contrary to justice and common sense:see In re Hampshire Land Co [1896] 2Ch 743.

The �rst question is to be answered a–rmatively. The company wasvicariously liable for S�s deceit to the defrauded banks: see Komercni BankaAS v Stone & Rolls Ltd [2003] 1 Lloyd�s Rep 383 The doctrine of vicariousliability is the way in which liability for fraud is imposed on a person, legalor natural, other than the natural person who actually committed the tortand there are no special rules which apply to companies in the presentcontext. The e›ect of holding a company vicariously liable for the tortscommitted by its servants or agents involves no imputation of wrongdoing.It is merely a rule of law under which the company, as principal, is strictlyliable for the wrongdoing of another and in that situation the ex turpidefence does not apply: see Citizens� Life Assurance Co Ltd v Brown [1904]AC 423; Lennard�s Carrying Co Ltd v Asiatic Petroleum Co Ltd [1915]AC 705; El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 andStandard Chartered Bank v Pakistan National Shipping Corpn (Nos 2 and 4)[2003] 1AC 959.

In other contexts, where a particular substantive rule of law creates aright or liability based on a person�s own actions or state of mind, as incriminal proceedings, vicarious liability does not supply the answer and it isnecessary, if the rule applies to companies at all, to determine whose act,knowledge or state of mind, is to count as that of the company for thepurposes of the substantive rule in question: see Tesco Supermarkets Ltd vNattrass [1972] AC 153.

With regard to the second question, the Court of Appeal wronglyattributed the frauds primarily, rather than vicariously, to the company onthe basis that S was its directing mind and will and then treated that assu–cient in itself to dispose of the attribution question so as automaticallyto bar the claim. However the primary/vicarious liability argument isirrelevant because even if the company were primarily liable to the banks theHampshire Land principle could still apply when the company later broughtits claim against the auditors. The language ��directing mind and will�� is

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E))[2009] 1 AC[2009] 1 ACArgumentArgument

unhelpful; it fails to answer the question whether knowledge should beattributed to the company for the purpose of the substantive rule underconsideration and it should be replaced by the language of ��Meridianattribution��; thus in every case the inquiry is whose act, knowledge or stateof mind was for the relevant purpose intended to count as that of thecompany? The answer is to be found by applying the usual canons ofinterpretation, taking into account the language of the rule (if it is a statute)and its content and policy: see theMeridian case, p 509. [Reference was alsomade to Gower & Davies, Principles of Modern Company Law, 8th ed(2008), para 7-29.]

The Court of Appeal should have asked that question because thesubstantive rule, the illegality defence, attaches legal consequences (thedefeat of the claim) to a claimant�s reliance on his own conduct. The contextof the present claim, where the auditor has failed to detect and so prevent S�sfraud, is that the company, at the suit of the liquidator, brings the claim forthe bene�t of the victims of that fraud, that is the creditors. In that contextwhere the auditor should, given competence, have discovered the fraudulentdirector�s wrongdoing, the director�s knowledge of his own fraud cannot beattributed to the company for the purposes of its claim against the auditorunder the Hampshire Land principles: see In re Hampshire Land Co [1896]2 Ch 743; Belmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch250; JC Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1;Attorney General�s Reference (No 2 of 1982) [1984] QB 624;Group Josi Re(formerly Groupe Josi R�assurance SA) v Walbrook Insurance Co Ltd[1996] 1WLR 1152;R vGomez [1993] AC 442;KR v Royal & Sun Allianceplc [2007] Bus LR 139 and Arab Bank plc v Zurich Insurance Co [1999]1 Lloyd�s Rep 262.

The Hampshire Land principle is essentially a principle ofnon-attribution which, when it applies, forms part of the special rule ofattribution which must be applied as part of the attribution inquiryidenti�ed in the Meridian case. The essence and rationale of the principle isthat a court will not infer that a company has knowledge of a fact known toits agent or director where, because of the fraud of that agent or director, itwould be contrary to justice and common sense to draw such an inference.That principle will not ordinarily apply so as to deny attribution to acompany of knowledge or actions which, if attributed, would have the e›ectof rendering it liable, either civilly or criminally, as a defendant: seeMcNicholas Construction Co Ltd v Customs and Excise Comrs [2000]STC 553 and In re Bank of Credit and Commerce International SA (No 15);Morris v Bank of India [2005] BCLC 328. But where it does, the claim isbrought by the company seeking redress on behalf of its shareholders andcreditors in relation to the very fraud or breach of duty which engages theprinciple, whether from its perpetrator or from a relevant third party.As auditor the defendant is for that purpose a relevant third party because ithad a duty of care which included a duty to detect S�s fraud: the very thingabout which the company complains. The company could itself bring aclaim against S for his defalcations: see RBG Resources plc v Rastogi [2002]EWHC 2782 (Ch); [2004] EWHC 1089 (Ch) and Yukong Line Ltd ofKorea v Rendsburg Investments Corpn of Liberia (No 2) [1998] 1WLR 294.In logic, as the case law shows, such a company, applying the HampshireLand principle, must also be able to sue third parties, here auditors whose

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own breach of duty to the company has allowed the director to breach his:see Brinks-Mat Ltd v Noye [1991] 1 Bank LR 68; Selangor United RubberEstates Ltd v Cradock (No 4) [1969] 1WLR 1773 and RBG Resources plc vRastogi [2002] EWHC 2782 (Ch); Belmont Finance Corpn Ltd v WilliamsFurniture Ltd [1979] Ch 250; Sasea Finance Ltd v KPMG (formerlyKPMG Peat Marwick McLintock) [2000] 1 All ER 676 and Arab Bank plc vZurich Insurance Co [1999] 1 Lloyd�s Rep 262.

The language of the Hampshire Land inquiry of ��victim�� and��perpetrator�� has been developed in the context of whether an agent isacting in fraud of his principal. Where the agent is so acting his knowledgewill not be attributed to the principal when the latter seeks to recover againstthird parties. Here the company was �rst exposed to a liability to thirdparties by S and then wrongfully deprived of ability to meet it by thesubsequent dissipation of the proceeds of those frauds by S. In thosecircumstances the frauds should not be attributed to it for the purposes of itspresent claim. The company was the victim of S�s fraud and the HampshireLand principle is engaged: see Brinks-Mat Ltd v Noye [1991] 1 Bank LR 68.

A similar function to that principle is achieved in the United States by the��adverse interest exception��: see Cenco Inc v Seidman & Seidman (1982)686 F 2d 449 and Schacht v Brown (1983) 711 F 2d 1343. The courts�general approach is to ensure that by use of that principle innocent victims offraud are properly compensated: see Federal Deposit Insurance Corpn vO�Melveny & Myers (1995) 61 F 3d 17 and Scholes v Lehmann (1995)56 F 3d 750; and contrast O–cial Committee of Unsecured Creditors vRF La›erty&Co Inc (2001) 267 F 3d 340.

A broader approach could be adopted to the attribution of knowledge inthe present context, namely, whether it is fair, just and reasonable that thefraudster�s knowledge should be attributed to the company: see CaparoIndustries plc v Dickman [1990] 2 AC 605;Group Josi Re (formerly GroupeJosi R�assurance SA) vWalbrook Insurance Co Ltd [1996] 1WLR 1152 andArab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�s Rep 262. On eitherbasis the company should not be attributed with S�s fraud for the purposes ofits present claim.

The ��very thing�� principle is a principle of logic which applies in rarecircumstances where the claim arises out of the act or omission which it wasthe defendant�s special duty to prevent; if, in such a situation, a claim couldnot be brought it would empty the defendant�s duty of all meaningfulcontent and would be illogical and contradictory. Where such a duty existsit cannot be defeated by the very illegality to which it was addressed. Theprinciple applies here because the auditor�s duty was to detect and so preventthe frauds which occurred: see Reeves v Comr of Police of the Metropolis[1999] QB 169; [2000] 1 AC 360; Kirkham v Chief Constable of the GreaterManchester Police [1990] 2 QB 283; Smith v Charles Baker & Sons [1891]AC 325; Clunis v Camden and Islington Health Authority [1998] QB 978and United Project Consultants Pte Ltd v Leong Kwok Onn [2005]4 SLR 214; and contrast Luscombe v Roberts (1962) 106 SJ 373. Corr vIBC Vehicles Ltd [2008] AC 884; Cross v Kirkby The Times, 5 April 2000and Hewison v Meridian Shipping Services PTE Ltd [2003] ICR 766 aredistinguishable on their facts.

The purpose of a statutory audit is to provide the company�s shareholderswith an independent report of its accounts; the auditors� duties involve the

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planning and performance of their audit procedures, evaluating andreporting the results in the recognition that fraud or error may materiallya›ect the �nancial statements and, where they discover fraud during thecourse of the audit, they are obliged to report it to the management or,if necessary, externally. Their role is vital in creating and maintainingcon�dence in the �nancial system as a whole and it is appropriate that claimssuch as the present are brought against them at the suit of liquidators torecover on behalf of creditors. It have never been suggested that the ex turpicausa defence would be applied to bar such a claim: see Statement ofAuditing Standards 110; Berg, Sons & Co Ltd v Mervyn Hampton Adams[2002] Lloyd�s Rep PN 41; Sasea Finance Ltd v KPMG (formerlyKPMG Peat Marwick McLintock) [2000] 1 All ER 676; Bank of Credit andCommerce International (Overseas) Ltd v Price Waterhouse The Times,2 April 1998; Bank of Credit and Commerce International (Overseas) Ltd vPrice Waterhouse [1997] BCC 584; [1998] BCC 617; Barings plc v Coopers& Lybrand [2002] Lloyd�s Rep PN 127; Barings plc v Coopers & Lybrand[2003] Lloyd�s Rep IR 566 and Bank of Credit and Commerce InternationalSA v Ali (No 2) [2000] ICR 1354.

Although an auditor generally only owes a duty of care to the auditedcompany and not to shareholders or creditors (see Caparo Industries plc vDickman [1990] 2 AC 605 and Al Saudi Banque v Clarke Pixley [1990]Ch 313) that is not so where auditors breach their duty: then the companycan bring a claim against them in its own name, the fruits of which willbene�t the shareholders, if it is solvent, and the creditors, if it is not. That isthe safety net which protects shareholders or creditors and obviates theneed for any separate duty to be owed by the auditors. The ex turpi causadefence has not been seen as a bar to defeat a company�s claim in thosecircumstances: see the Caparo case [1989] QB 653; [1990] 2 AC 605, 626,653 and Law Society v KPMG Peat Marwick (sued as KPMG Peat MarwickMcLintock) [2000] 1 All ER 515; [2000] 1 WLR 1921. Galoo Ltd v BrightGrahameMurray [1994] 1WLR 1360 is not in point.

In the case of an insolvent company, its interests are, in a practical sense,those of its creditors because it is their assets, not those of its shareholders,that are under the management of the directors: seeWest Mercia SafetywearLtd v Dodd [1988] BCLC 250 and Kinsela v Russell Kinsela Pty Ltd (1986)4NSWLR 722. That means that the duties owed to the company, which in asolvent company are owed to shareholders as a class, are, in an insolventcompany, owed to its creditors as a class: see the Caparo case [1990]2 AC 605, 626, 653. The insolvent company itself is inevitably a victim offraudulent conduct by its agents, o–cers or employees which depletesits assets available for satisfying its creditors. That is the universalunderstanding of the law of auditors� liability in relation to negligentlyundetected fraud: see Sasea Finance Ltd v KPMG (formerly KPMG PeatMarwick McLintock) [2000] 1 All ER 676; Bank of Credit and CommerceInternational (Overseas) Ltd v Price Waterhouse The Times, 2 April 1998andBarings plc v Cooper&Lybrand [2003] Lloyd�s Rep IR 566.

While a liquidator cannot bring a claim against the company�s auditorswhich the company did not have before liquidation, the auditors hadadmitted duties before and after liquidation either in contract or tortwhich they owed to the company: that they would conduct the audit withreasonable care. The company therefore, before and after liquidation, had a

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cause of action of breach of contractual duty of care against them. Theillegality defence which would have availed the auditors, had the companyremained in S�s hands, ceased to be available when the claim was brought bythe liquidator for the bene�t of creditors: see In re Jack Greenberg Inc(1999) 240 BR 486 and NCP Litigation Trust v KPMG LLP (2006)901A 2d 871.

Cases from foreign jurisdictions are only of limited, if any, assistance.Attribution rules in the United States are governed by state, not federal, lawand di›erences exist between states which make it dangerous to attemptclose analogy; the case law is strongly in�uenced by the twin aims ofcompensating the innocent victims of fraud and deterring wrongdoing. Thatis achieved by applying the law of attribution �exibly so as to allow fraudvictims, usually creditors of companies, to recover from defaultingprofessionals such as auditors. A special rule of attribution exists for thatpurpose, so as to preclude reliance, as a defence to the claim, on the veryfraud the auditors were obliged to detect and prevent. The positioninvolving the sole actor exception to the adverse interest principle is complexbut does not detract from the substantial body of case law which supportsthe company�s case and a claim against auditors realistically for the bene�tof creditors is broadly permissible. The adverse interest exception performsa similar function to that of the Hampshire Land principle and would applyin the present case: see Federal Deposit Insurance Corpn v O�Melveny &Myers 61 F 2d 17; Ultramares Corpn v Touche (1931) 173 NE 441; CencoInc v Seidman & Seidman 686 F 2d 449; NCP Litigation Trust vKPMGLLP 901A 2d 871; Thabault v Chait (2008) 541 F 3d 512; In re JackGreenberg Inc 240 BR 486 and Schacht v Brown 711 F 2d 1343. The caselaw from Australia, while providing no conclusive position, accords withEnglish law with respect to certain rules of attribution and its approach isgenerally supportive of the company�s claim: see Duke Group Ltd v Pilmer(1999) 73 SASR 180; Astley v Austrust Ltd (1999) 197 CLR 1; EdwardsKarwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd (1994)15 ACSR 502 and Paci�c Acceptance Corpn Ltd v Forsyth (1970)92 WN (NSW) 29. In Canada the issue of attribution is treated di›erentlyand less �exibly than in England. Although Canadian case law isinconclusive it is not consistently hostile to a claim such as the companymakes here. [Reference was made to Canadian Dredge & Dock Co Ltd vThe Queen (1985) 19 DLR (4th) 314; International Nesmont IndustrialCorpn v Coopers & Lybrand (unreported) 13 November 1998; Oger vChiefscope Inc (1996) 29OR (3d) 221; (1998) 113OAC 373;Hart BuildingSupplies Ltd v Deloitte & Touche 2004 BCSC 55 and Hall v Hebert101DLR (4th) 129.]

Jonathan Sumption QC and Tom Adam QC (instructed by Barlow LydeGilbert LLP) for the defendant auditors.

The claimant company is precluded by the public policy defence ofex turpi causa from any claim for breach of duty against the auditors. Thenature and extent of the defence is de�nitively determined in terms of the��reliance test�� that a claimant cannot succeed where to do so requires him tofound his claim on his own illegal conduct: see Tinsley v Milligan [1994]1 AC 340. The defence is not based on the courts� disinclination to granta remedy in circumstances that would a›ront the public conscience: see

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1AC 2009�50

Euro-Diam Ltd v Bathurst [1990] 1 QB 1. It is based on the principle thatcourts, being concerned with the integrity of the legal system, will not permittheir process to be used to further an object which is, on its face, illegal. Thecurrent formulation of the defence has reduced it to the narrowest possibletest, short of discarding it altogether: see Holman v Johnson 1 Cowp 341;Hall v Hebert 101 DLR (4th) 129; Canada Cement LaFarge Ltd v BritishColumbia Lightweight Aggregate Ltd (1983) 145 DLR (3d) 385;Norberg vWynrib [1992] 2 SCR 226; Archbolds (Freightage) Ltd v S Spanglett Ltd[1961] 1 QB 374; Bowmakers Ltd v Barnet Instruments Ltd [1945] KB 65;Marles v Philip Trant & Sons Ltd [1954] 1 QB 29; Clunis v Camden andIslington Health Authority [1998] QB 978; Hewison v Meridian ShippingServices PTE Ltd [2003] ICR 766; Cross v Kirkby The Times, 5 April 2000;Law Commission Consultation Paper No 160, The Illegality Defence in Tort(2001) and Consultation Paper No 189, The Illegality Defence (2009),paras 7.53, 7.67 and Clerk & Lindsell on Torts, 19th ed (2006),paras 3.12—3.13; and contrast Smith v Jenkins (1970) 119 CLR 397. Thereliance test is subject to the quali�cation that it is the unlawful conduct ofthe claimant himself that is relied on to found the claim, not conduct forwhich he is vicariously liable, or which is otherwise attributed to him underthe law of agency. The test is applied by considering the essential avermentsof the particulars of claim: see Tesco Supermarkets Ltd v Nattrass [1972]AC 153; Webb v Chief Constable of Merseyside Police [2000] QB 427;Canada Cement LaFarge Ltd v British Columbia Lightweight Aggregate Ltd145 DLR (3d) 385; R v St Lawrence Corpn Ltd (1969) 3 CCC 263; R v Fell(1981) 64 CCC (2d) 456 andHL Bolton (Engineering) Co Ltd v TJ Graham& Sons Ltd [1957] 1QB 159.

The critical feature which brings the present claim within the publicpolicy defence even at its narrowest is that the auditors� breach of duty, toreport not prevent the frauds, enabled a deliberate course of criminality tocontinue for longer than it would have done if they had exposed it earlier.The essence of the fraud which, it is claimed, should have been discoveredis that there was no real business at all, that it was a fraud by the companyitself. The victim was the Komercni Banka who were prejudiced by thenon-existence of goods on which they were relying and against whomthe deceit was practised. The essential question is therefore whether thosefrauds were acts of the company itself or of S, for which the company wasonly vicariously liable; a �nding of vicarious liability does not mean thatthe company committed the fraud, only that it must answer for S havingdone so.

A company can incur personal liability for any tort, including that ofdeceit: see Citizens� Life Assurance Co Ltd v Brown [1904] AC 423, 426.[Reference was also made to Abrath v North Eastern Railway Co (1886)11 App Cas 247.] Where a company incurs liability to a third party it will benecessary to decide as between them whether that liability is vicarious orpersonal or both. But the legal consequences of the company�s liability, asbetween itself and others, may depend on how it was incurred. That maya›ect questions of contribution, recovery under insurance or, as here, theavailability of a claim against a professional adviser and the outcome maycritically depend on whether the company was dishonest: see Cleaver vMutual Reserve Fund Life Association [1892] 1 QB 147; Hardy v MotorInsurers� Bureau [1964] 2 QB 745; Lancashire County Council v Municipal

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Mutual Insurance Ltd [1997] QB 897;Haseldine v Hosken [1933] 1 KB 822andGray v Barr [1971] 2QB 554.

The essential di›erence between vicarious and personal liability lies inthe nature of the connection between the company and the relevanthuman actor. The dishonest acts of an agent, however lowly, who isacting in the course of his employment, may give rise to vicarious liabilityon the part of the employer company. But the fact that an agent is actingin the course of his employment is insu–cient to establish personalliability. For that it must be shown either that (i) the individual having therelevant state of mind was the company for the relevant purpose, as itsdirecting mind and will, or (ii) that although that individual was not thecompany, his knowledge is to be imputed to it under the law of agencybecause his particular function was to know or report on the relevant fact:see El Ajou v Dollar Land Holdings plc [1994] 2 All ER 685 andMeridian v Global Funds Management Asia Ltd v Securities Commission[1995] 2 AC 500. While (i) and (ii) are usually su–cient to determine therights and obligations of companies, in exceptional cases both the primaryrule of attribution and the ordinary operation of the law of agency mightbe excluded and another rule of attribution substituted as a result of astatute or the nature of the right or obligation in question: see theMeridian case, at p 507.

The primary rule of attribution seeks to identify those persons whoseposition in the constitution of the company or whose practical control oftheir a›airs are such as to be identi�ed with the company, so that its stateof mind is the company�s: see Blackburn Low & Co v Vigors (1887)12 App Cas 531; Lennard�s Carrying Co Ltd v Asiatic Petroleum Co Ltd[1915] AC 705 and Clerk & Lindsell on Torts, 16th ed, paras 5.71—5.72.That is the basis on which mens rea is attributable to companies incriminal cases, where liability is necessarily personal and the samequestion arises in civil cases which depend on proof of some mental state:whether the human actor is the company�s directing mind and will. Thelegal consequence of that identi�cation is to make the company personallyliable on the basis that the human actor�s acts and state of mind are thecompany�s: see Tesco Supermarkets Ltd v Nattrass [1972] AC 153 andStandard Chartered Bank v Pakistan National Shipping Corpn (Nos 2and 4) [2003] 1 AC 959. The company is vicariously liable for S�s frauds;but that is not inconsistent with its also being personally liable on thesame facts for its own frauds. If a natural person knowingly employs anagent to commit frauds against third parties, both are liable personally tothe victims and the principal is also vicariously liable. The same applies ifa company does so.

That analysis applies subject to the Hampshire Land principle, the e›ectof which when in applies is that there is not to be imputed to a company afraud which is practised against it even if it is being practised by a personwhose acts and state of mind in the ordinary way are attributable to it: seeIn re Hampshire Land Co [1896] 2 Ch 743; JC Houghton & Co v NothardLowe & Wills Ltd [1928] AC 1; Belmont Finance Corpn Ltd v WilliamsFurniture Ltd [1979] Ch 250; Kennedy v Green (1834) 3 My & K 699;Rolland v Hart (1871) LR 6Ch App 678 andWaldy v Gray (1875) LR 20 Eq238. The rationale of the principle lies in the combination of two criticalfeatures: (i) that the company is deceived by its agent, (ii) for the purpose of

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injuring it. Knowledge of a deception cannot be imputed to the person whois deceived because the fraud by its nature depends on non-disclosure.In circumstances where the human agent would not in fact disclose his owndishonest acts to the company, the law will not treat him as having done soimplicitly merely because of his position in the company which he hasbetrayed. The principle exists to protect others interested in the companywho are not implicated in the fraud.

That principle is an exception to the ordinary rules of attribution and hasnothing to do with the case where it is the company itself which hascommitted the frauds against the third party. The distinction between fraudscommitted by the company against third parties and frauds committed by itsmanagement against itself is fundamental to both English and Americanjurisprudence. S�s acts in procuring the company�s assets to be paid out forhis own bene�t would not be treated as turpitude on the company�s partbecause that would be a wrong against the company. But the illegality onwhich the auditors found the public policy defence is the course of the fraudswhich produced the payments to the company, which the company assertcontinued longer than if that course had been exposed. Applying thereliance test, the company could sue S for the abstraction of its assets, butnot the auditors for allowing it to commit the frauds.

Alternatively, the Hampshire Land exception cannot apply in this casesince no one but the fraudster is interested in the company. On that footingthere is no one else from whom the truth could be concealed and in nomeaningful sense were the relevant frauds perpetrated against the company:the Komercni Banka was the victim.

Where there is no human embodiment of the company except thefraudster, S, there is no one from whom the truth can have been concealed,and accordingly there is no basis for applying theHampshire Land principle.It is not that special principles apply to a one-man company: simply that inthat factual situation there is no one to deceive and implication of the fraudto the company is, in consequence, inevitable: see R v McDonnell [1966]1QB 233;Royal Brunei Airlines Sdn Bhd v Tan [1995] 2AC 378; Berg, Sons& Co Ltd v Mervyn Hampton Adams [2002] Lloyd�s Rep PN 41 andAttorney General�s Reference (No 2 of 1982) [1984] AC 624.

Although care must be taken in transposing the jurisprudence of theUnited States to an English context, the same principles have beenrecognised there for many years. Despite variations between states, mostrecognise the adverse interest exception to the ordinary rules for imputingknowledge, which applies when the agent is acting in a way adverse to theinterests of the person to whom it is sought to impute his knowledge. It isa constant theme of the case law that this is subject to the ��sole actor��doctrine that where the agent is the sole human representative of thecompany, it does not matter whether he was acting against the company�sinterests or not, because the company must be taken to know what hedoes: see In re The Mediators Inc; The Mediators Inc v Manney (1997)105 F 3d 822; Federal Deposit Insurance Corpn v Ernst & Young (1992)967 F (2d) 166 and O–cial Committee of Unsecured Creditors vRF La›erty & Co Inc 267 F 3d 340.

The requirement that the fraud should have been practised on thecompany is integral to the Hampshire Land principle in English,Commonwealth and United States case law. It is arti�cial and absurd to

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suggest that the company is a victim of the process by which the frauds werecommitted against the Komercni Banka: see Cenco v Seidman & Seidman686 F 2d 449. Nor is the company a secondary victim simply because it wasexposed to liability to the Komercni Banka and left without the means ofdischarging it because of S�s payments out of the company in breach of hisduty to it: see McNicholas Construction Co Ltd v Customs and ExciseComrs [2000] STC 553; In re Supply of Ready Mixed Concrete (No 2)[1995] 1 AC 456; In re Bank of Credit and Commerce InternationalSA (No 15) [2005] 2 BCLC 328; Canadian Dredge & Dock Co Ltd v TheQueen 19DLR (4th) 314;Duke Group Ltd v Pilmer 73 SASR 180 andHartBuilding Supplies Ltd v Deloitte & Touche 2004 BCSC 55; and contrastBrink�s-Mat Ltd v Noye [1991] 1 Bank LR 68; Arab Bank plc v ZurichInsurance Co [1999] 1 Lloyd�s Rep 262 and Lebon v Aqua Salt Co Ltd[2009] UKPC 2.

The operation of the Hampshire Land principle must depend on whowas the target of the fraud. The question is whether the agent�s dishoneststate of mind is to be imputed to the company. That depends on his stateof mind and the nature of the dishonesty. The reason why the agent�sstate of mind is not imputed to the company in cases where the principleapplies is that the agent is not deemed to transmit his state of mind to thecompany if his purpose was adverse to that of the company. If hisintention in causing the company to act as it did was to harm not thecompany but a third party, there is no reason why his state of mind shouldnot be imputed to the company. It follows that the victim of a fraud is notto be identi�ed by asking what will be the �nancial consequences of itsdiscovery and of the resultant liabilities; that identi�es the perpetrator, notthe victim. The prospect that the company might be unmasked and madeliable to a third party is irrelevant. Equally the victim is not identi�ed byasking whether in the course of defrauding a third party, the agentincidentally committed breaches of his duties to his principal. For thepurpose of the public policy defence, the relevant breach of duty is thefraud committed on the Komercni Banka; that is the illegal act on whichthe company must rely to make out its case. The concept of secondaryvictimhood is inconsistent with both the Hampshire Land principle andthe public policy defence.

It is nothing to the point that the company is in liquidation, or that beforeit went into liquidation, it was insolvent; nor is the analysis a›ected by thefact that the assets are currently held on a statutory trust by the liquidatorsfor distribution in accordance with the Insolvency Act and Rules. Thewinding up can make no di›erence to the company�s rights and liabilitiesand United States case law does not support a contrary position: see NCPLitigation Trust v KPMG LLP 901 A 2d 871; In re Jack Greenberg Inc240 BR 486;O–cial Committee of Unsecured Creditors v RF La›erty & CoInc 267 F 3d 340; Scholes v Lehmann (1995) 56 F 3d 750; Schacht v Brown711 F 2d 1343 and Knauer v Jonathon Roberts Finance Group Inc (2003)348 F 3d 230.

The imposition of liability on the basis that it is ��fair, just and reasonable��for auditors to be held liable in this context would amount to anunprincipled fragmentation of the law into a mosaic of special cases: thereis no reason why auditors should be treated di›erently from otherprofessionals whose function is to protect their clients from various

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misfortunes. In any event the ��fair, just and reasonable�� test in the contextof the existence of a duty of care is far from straightforward and gives rise todi–culties of application: see Customs and Excise Comrs v Barclays Bankplc [2007] 1AC 181, paras 6, 35—36, 71—73, 93.

The ��very thing�� principle is a principle of causation which arises whenthe claimant�s act has broken the chain of causation between the breach ofduty and the damage caused. The defendant cannot claim that theclaimant�s e›ective cause of damage was the claimant�s own act or anexternal event not of the defendant�s doing if that act or event was the verything it was his duty to prevent: see Reeves v Comr of Police of theMetropolis [1999] QB 169; [2000] 1 AC 360 and Kirkham v ChiefConstable of the Greater Manchester Police [1990] 2 QB 283. But toestablish liability in tort for negligence the claimant must show that the losshe su›ered was within the scope of the defendant�s duty of care: see BanqueBruxelles Lambert SA v Eagle Star Insurance Co Ltd [1997] AC 191 andFairchild v Glenhaven Funeral Services Ltd [2003] 1 AC 32. That is noanswer to the illegality defence, which is not a principle of causation but ofpublic policy. It is not concerned with the nature of the duty owed or thescope of the recoverable loss, but with the matters on which the claimantseeks to bring his claim. It therefore operates at a di›erent jurisprudentiallevel and applies to bar what might otherwise be a legally sound claim: seeLuscombe v Roberts 106 SJ 373 and Law Society v KPMG Peat Marwick[2000] 1All ER 515; [2000] 1WLR 1921.

There is no justi�cation for moderating the operation of the public policydefence in the case of auditors in the interests of the creditors of insolventcompanies or, more generally, in the public interest in the properperformance of their duties. An auditor owes his duty to particular classes ofpersons for particular purposes deducible from the Companies Acts. Heowes his duty in contract and in tort to the company exclusively. He mayknow that in practice shareholders will rely on his report but he owes themno duty of care except as a general body and then only for the purpose ofenabling them to exercise their rights under the company�s constitution. Forthe same reason he owes creditors no duty of care: see Caparo Industries plcv Dickman [1990] 2 AC 605 and Al Saudi Banque v Clarke Pixley [1990]Ch 313. Where a company is insolvent or likely shortly to be so the interestsof creditors are paramount and directors must put their interests abovethose of the shareholders (see West Mercia Safetywear Ltd v Dodd [1988]BCLC 250) but that does not a›ect the company�s rights against its advisersor the public policy defences available to them. The exclusion of claims bycreditors against auditors is a considered policy position of long standingand re�ects the scheme of successive legislation: see Galoo Ltd v BrightGrahame Murray [1994] 1 WLR 1360 and Lord Ho›mann, ��CommonSense and Causing Loss��, 15 June 1999.

The suggestion that resort might be had to principles of contributorynegligence or to relief under section 727 of the Companies Act 1985 (nowsection 1157 of the 2006 Act) is not well founded and cannot displacereliance on the public policy defence in the present context.

Brindle QC replied.

The Committee took time for consideration.

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30 July 2009. LORD PHILLIPSOFWORTHMATRAVERS

Introduction1 My Lords, Mr Stojevic is a fraudster. He used the appellant company

(��S & R��) as a vehicle for defrauding banks. The fraud was discovered andboth S & R and Mr Stojevic were successfully sued for deceit by theprincipal victim, Komercni Banka AS (��the bank��). The respondents,Moore Stephens, were S & R�s auditors. Moore Stephens accept that theyowed S & R a duty to exercise reasonable skill and care in carrying out theirduties as auditors. For purposes of the present argument they also acceptthat they were in breach of that duty and that, but for their breach, thefraud that Mr Stojevic was perpetrating through S & R would have endedearlier. In this action S & R seek to recover losses caused to them inconsequence of the extension of the period of their fraudulent activity thatthey submit was caused by Moore Stephens�s breach of duty. MooreStephens contend that this claim cannot succeed because it is founded onS & R�s fraud and is met by the defence commonly described by the Latinmaxim ��ex turpi causa non oritur actio�� (��ex turpi causa��). Whetherex turpi causa provides a defence to the claim advanced by S & R is thepreliminary issue raised by this appeal.

2 Although he was a ��shadow director�� acting under power of attorneyand the shares in S & R are held in the name of a family trust it has beencommon ground that Mr Stojevic was the sole directing mind and will andthe bene�cial owner of S&R.

3 I have had the bene�t of reading in draft the opinion of each of yourLordships. Each has summarised the nature of the fraud perpetrated byMr Stojevic through S & R. It involved S & R obtaining payments underletters of credit by presenting to banks false documents in relation to�ctitious commodity trading. My noble and learned friend, Lord Mancehas explained in a little more detail how the fraud worked. When thefraud was ultimately discovered, the moneys fraudulently obtained byS & R had all been paid away to other participants in the fraud. Thedamages awarded to the bank against S & R and Mr Stojevic exceed$94m. Neither defendant could satisfy the judgment. The liquidators havestarted the present action in the name of S & R in an attempt to recoverdamages for the bene�t of S & R�s creditors, who are the banks defraudedby S & R. The claim for breach of Moore Stephens�s duty of care isbrought in both contract and tort.

4 Mr Stojevic had planned to use S & R to perpetrate this fraud beforeMoore Stephens were engaged, indeed the engagement of Moore Stephenswas part of his plot. S & R, which was not at the material time carrying onany signi�cant business, had an auditor who was a sole practitioner basedin Rotherhithe. Mr Stojevic decided to replace him with Moore Stephens aspart of a strategy to make S & R appear respectable in the eyes of Europeanbanks. In persuading Moore Stephens to become S & R�s auditors,Mr Stojevic gave a �ctitious account of the business that S & R had beendoing and of the business whose accounts Moore Stephens would beauditing.

5 My initial reaction to S & R�s claim was that, as a matter of commonsense, it could not succeed. There were three reasons for this reaction. The�rst was that S & R are seeking to put themselves forward as the victims of

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E))[2009] 1 AC[2009] 1 ACLord Phillips of WorthMatraversLord Phillips of WorthMatravers

fraud when they were, in fact, the perpetrators of the fraud. The true victimsof the fraud were the banks. True it is that S & R are now subject to a paperliability to the Komercni Banka of over $94m, but common sense wouldsuggest that this is not really a loss that they have su›ered. They started withnothing and their alleged losses are sums that they acquired by fraud andthen paid away as part of the same fraudulent transaction. If a person startswith nothing and never legitimately acquires anything he cannot realisticallybe said to have su›ered any loss. This was the reasoning of Mummery LJwho, in a short judgment in the Court of Appeal, ante, p 1398, agreed withRimer LJ that the claim of S&R should be struck out. Keene LJ agreed withboth judgments. Mummery LJ concluded his judgment, at para 119:

��Does common sense matter? Yes. It is contrary to all common senseto uphold a claim that would confer direct or indirect bene�ts on thecorporate vehicle, which was used to commit the fraud and was not thevictim of it, and the fraudulent driver of the fraudulent vehicle.��

The second reason why common sense led me, initially, to consider thatS & R�s claim should not succeed was that Moore Stephens were also thevictims of S & R�s fraud. They were induced to agree to act as S & R�sauditors by a �ctitious and fraudulent account of S & R�s business, given tothem on behalf of the company by Mr Stojevic, and they were deceived incarrying out their audits by accounts fraudulently prepared on behalf of thecompany, albeit that it is for present purposes to be assumed that they werenegligent in not detecting the fraud. It does not seem just that, in thesecircumstances, S & R should be able to bring a claim in respect of the veryconduct that S & R had set about inducing. The �nal reason of commonsense that predisposed me against this claim was one which would not,unlike the other two, occur to the man in the street but might occur to astudent with knowledge of the principles of the law of negligence. Lookingat the realities, this claim is brought for the bene�t of banks defrauded byS & R on the ground that Moore Stephens should have prevented S & Rfrom perpetrating the frauds. Why, if this is a legitimate objective, shouldthe banks not have a direct cause of action in negligence against MooreStephens? One answer, I would suggest, is that a duty of care in negligencewill only arise where this is fair, just and reasonable. It would not beconsidered fair, just and reasonable for auditors of a company to owe a dutyof care to an indeterminate class of potential victims in respect of unlimitedlosses that they might sustain as a result of the fraud of the company. If itwould not be fair, just and reasonable for the banks to have a direct claim,then it would not seem fair just and reasonable that they should achieve thesame result through a claim brought by the company�s liquidators for theirbene�t. In a lecture to the Chancery Bar Association entitled ��CommonSense and Causing Loss�� given on 15 June 1999 Lord Ho›mann commentedadversely on the practice of those judges who justify their decisions byreference to ��common sense��. He suggested that this was far too often anunsatisfactory alternative to the identi�cation of the relevant principles. Thedi›erences of opinion between the members of the Committee underlinethe need to identify the relevant principles that apply in this case. It alsounderlines the di–culty of that task. The �rst step is to identify the issuesraised by the parties.

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E)) [2009] 1 AC[2009] 1 ACLord Phillips of WorthMatraversLord Phillips of WorthMatravers

The issues raised by the parties6 This appeal arises out of a strikeout application in which only one of a

number of possible defences to the claim is advanced. Mr Sumption QC forMoore Stephens has admitted that his clients owed S & R a duty to exercisereasonable care in relation to the auditing of S & R�s accounts and, for thepurpose of these proceedings, that they were in breach of that duty. Hesubmits, however, that S & R are precluded from claiming a remedy for thatbreach of duty by a defence of public policy, namely ex turpi causa. Hesubmits that the nature and extent of this defence has been de�nitivelydetermined by the decision of this House in Tinsley v Milligan [1994]1 AC 340. It involves the application of what he has described as a��reliance�� test. A claimant cannot succeed if, in order to make good hisclaim, he has to aver and rely upon his own illegal conduct. This principle,so he submits, is not based as it was once thought to be upon a disinclinationby the courts to award a remedy in circumstances where this would be ��ana›ront to the public conscience��. It is simply a principle that the court willnot allow its process to be used to further an object which is, on its face,illegal. The principle applies automatically and in�exibly. The ��e›ect ofillegality is not substantive but procedural��Tinsley v Milligan, at p 374.To apply the test you have to do no more than consider the essentialaverments of the particulars of claim. Mr Sumption submits that in Tinsleyv Milligan this House reduced ex turpi causa to ��the narrowest possible testfor the public policy defence short of actually discarding it��.

7 Mr Sumption submits that the best explanation of the reason for theex turpi causa defence is that suggested by McLachlin J in Hall v Hebert(1993) 101DLR (4th) 129, 165:

��to allow recovery in these cases would be to allow recovery for whatis illegal. It would put the courts in the position of saying that the sameconduct is both legal, in the sense of being capable of recti�cation by thecourt, and illegal. It would, in short, introduce an inconsistency in thelaw. It is particularly important in this context that we bear in mind thatthe law must aspire to be a uni�ed institution, the parts of which�contract, tort, the criminal law�must be in essential harmony. For thecourts to punish conduct with the one hand while rewarding it withthe other, would be to �create an intolerable �ssure in the law�sconceptually seamless web�: Weinrib��Illegality as a Tort Defence�(1976) 26 UTLJ 28, 42. We thus see that the concern, put at its mostfundamental, is with the integrity of the legal system.��

8 Mr Sumption has accepted that the ��reliance�� test is subject to oneimportant quali�cation. The unlawful conduct relied on must be that of theclaimant himself, not conduct for which he is vicariously liable or which isotherwise attributed to him under principles of the law of agency.

9 The �rst answer to Mr Sumption�s case advanced on behalf of S & Rby Mr Brindle QC founds on that quali�cation. He submits that S & R�sliability to the banks for Mr Stojevic�s fraud is vicarious. The second answeris that, whether the �rst answer is right or wrong, for the purposes of theapplication of ex turpi causa, Mr Stojevic�s fraud cannot be attributed toS & R. In support of this submission Mr Brindle relies (i) on a principle ofthe law of agency known as theHampshire Land principle after the decisionin In re Hampshire Land Co [1896] 2 Ch 743, and (ii) on the principles

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governing the attribution of actions and states of mind to companiesidenti�ed in the speech of Lord Ho›mann in Meridian Global FundsManagement Asia Ltd v Securities Commission [1995] 2AC 500.

10 Both Mr Brindle�s �rst and second answers proceed on the premisethat Mr Sumption�s ��reliance�� test is correctly formulated. They accept thatthe reliance test applies to the facts of this case and that, in applying it, acompany has to be treated in the same way as a natural person. He has,however, an alternative and more fundamental answer to Mr Sumption.He submits that ex turpi causa does not provide a defence where theclaimant�s illegal conduct was the very thing that the defendant was under aduty to prevent. Here again he founds his argument on jurisprudence thatrelates to natural persons.

11 Finally, and very much as a fall-back position, Mr Brindle submitsthat ex turpi causa applies only where this is ��fair, just and reasonable�� andthat it is not fair, just and reasonable that the defence should apply in thecircumstances that have given rise to this appeal.

12 The debate between the parties has largely centred on the natureand e›ect of the Hampshire Land principle. Mr Sumption summarised thisprinciple as follows in oral argument: ��There is not to be imputed to acompany a fraud which is being practised against it even if it is beingpractised by someone whose acts and state of mind in the ordinary way areattributed to the company.�� Mr Sumption submits that this principle doesnot prevent attribution to S & R of Mr Stojevic�s fraud which was directednot against S&R but against the banks.

13 Mr Brindle does not accept that the Hampshire Land principle is asnarrow as this. He submits that it also applies in respect of fraud on the partof an agent of the company that is directed against a third party in as muchas the fraud is likely ultimately to come home to roost with consequentdetriment to the company. Thus the company is a secondary victim of thefraud. That is precisely what has happened in this case, for S & R has beenheld liable forMr Stojevic�s fraud.

14 Mr Sumption has a fallback position that meets this argument.It turns on the fact that Mr Stojevic was, in e›ect, the sole shareholder inS & R and also solely responsible for S & R�s activities. Mr Sumptionsubmits that where there is no human embodiment of the company otherthan the fraudster, attribution of the fraud to the company is inevitable.

The decisions of the courts below15 Both Langley J at �rst instance [2008] Bus LR 304 and the Court

of Appeal ante, p 1398 accepted that the relevant issues were those thatI have just described. Langley J rejected the �rst two answers advancedby Mr Brindle to ex turpi causa. He held that S & R were primarily, andnot just vicariously, responsible for the fraudulent conduct and that theHampshire Land principle did not apply. Mr Stojevic�s fraud was properlyattributed to S & R. He accepted, however, Mr Brindle�s third answer.He held that ex turpi causa could not prevent a claim founded on fraud thatwould not have occurred had Moore Stephens properly complied with their��very duty�� as auditors of the company.

16 Rimer LJ, in giving the leading judgment in the Court of Appeal,agreed that Hampshire Land did not apply, but for a di›erent reason.He held that the critical question was whether it was right to treat S & R as

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the villain or the victim. In the former case the fraud would be attributed toS & R in the latter case it would not. He held that S & R was the villain andnot the victim, Hampshire Land did not apply and ex turpi causa was adefence to S & R�s claim. Thus he accepted Mr Sumption�s de�nition ofHampshire Land and rejectedMr Brindle�s wider de�nition.

17 Rimer LJ rejected Mr Brindle�s argument based on the principle thathe described as ��the very thing��. He accepted Mr Sumption�s submissionthat this was a principle that related to causation and that it did not displacethe operation of the defence of ex turpi causa.

A summary of my conclusions

18 In order to assist in following this lengthy opinion I propose at thisstage to summarise my conclusions. (1) Under the principle of ex turpicausa the court will not assist a claimant to recover compensation for theconsequences of his own illegal conduct. (2) This appeal raises thequestion of whether, and if so how, that principle applies to a claim by acompany against those whose breach of duty has caused or permitted thecompany to commit fraud that has resulted in detriment to the company.(3) The answer to this question is not to be found by the application ofHampshire Land or any similar principle of attribution. The essential issueis whether, in applying ex turpi causa in such circumstances, one shouldlook behind the company at those whose interests the relevant duty isintended to protect. (4) While in principle it would be attractive to adoptsuch a course, there are di–culties in the way of doing so to which no clearresolution has been demonstrated. (5) On the extreme facts of this case itis not necessary to attempt to resolve those di–culties. Those for whosebene�t the claim is brought fall outside the scope of any duty owed byMoore Stephens. The sole person for whose bene�t such duty was owed,being Mr Stojevic who owned and ran the company, was responsible forthe fraud. (6) In these circumstances ex turpi causa provides a defence tothe claim.

The duties of auditors

19 I agree with my noble and learned friend, Lord Mance, that thestarting point for considering the issues raised by this appeal is the dutiesundertaken by Moore Stephens as auditors. I am grateful for his detailedand helpful analysis. I would summarise the position as follows. Theleading authority is Caparo Industries plc v Dickman [1990] 2 AC 605. Theduties of an auditor are founded in contract and the extent of the dutiesundertaken by contract must be interpreted in the light of the relevantstatutory provisions and the relevant auditing standards. The duties areduties of reasonable care in carrying out the audit of the company�saccounts. They are owed to the company in the interests of its shareholders.No duty is owed directly to the individual shareholders. This is because theshareholders� interests are protected by the duty owed to the company. Noduty is owed to creditors�Al Saudi Banque v Clarke Pixley [1990] Ch 313.The auditing standards require auditors who have reason to suspect thatthe directors of a company are behaving fraudulently to draw this to theattention of the proper authority. The scope of the duty of care owed byauditors is a matter to which I shall return later in this opinion. For present

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purposes it su–ces to note that the duty is unquestionably imposed in theinterests of, at least, the shareholders of the company.

Ex turpi causa20 Ex turpi causa is a principle that prevents a claimant from using

the court to obtain bene�ts from his own illegal conduct. In the yearsimmediately before the decision in Tinsley v Milligan [1994] 1 AC 340 thecourts had developed a �exible approach to the defence of illegality,applying the test of whether, having regard to the illegality involved inthe case, it would ��shock the public conscience�� to a›ord the claimantthe relief sought. This test has been said to have originated from thejudgment of Hutchison J in Thackwell v Barclays Bank plc [1986] 1 AllER 676 although reference to shocking the public conscience can be tracedback at least to the judgment of Salmon LJ in Gray v Barr [1971]2 QB 554, 581. Tinsley v Milligan involved a dispute between two singlewomen as to title to a house. The house had been purchased with theirjoint funds, but put into the sole name of the appellant. The reason forthis was to facilitate fraudulent claims by the respondent on theDepartment of Social Services. The respondent claimed that, as theproperty had been bought with joint funds it was held on a resulting trustunder which she had an equitable interest. The appellant contended thatthe respondent was precluded from asserting her claim because of theillegal purpose of the arrangement. The Court of Appeal, by a majority,had found in favour of the respondent, applying a test of whether, havingregard to the illegality, it would be ��an a›ront to the public conscience�� togrant the relief sought. This House was in agreement that this was not thecorrect test. There was not, however, unanimity as to the correctapproach to illegality. Lord Keith of Kinkel and Lord Go› of Chieveleywould have allowed the appeal on the basis that the respondent was notentitled to equitable relief because the e›ect of the illegality was that shedid not come to the court with ��clean hands��. The reasoning of themajority appears from the following passages of the speech of LordBrowne-Wilkinson, at pp 369, 375 and 377:

��it is now clearly established that at law (as opposed to in equity),property in goods or land can pass under, or pursuant to, such acontract. If so, the rights of the owner of the legal title therebyacquired will be enforced, provided that the plainti› can establish suchtitle without pleading or leading evidence of the illegality . . . A partyto an illegality can recover by virtue of a legal or equitable propertyinterest if, but only if, he can establish his title without relying on hisown illegality . . . In a case where the plainti› is not seeking to enforcean unlawful contract but founds his case on collateral rights acquiredunder the contract (such as a right of property) the court is neitherbound nor entitled to reject the claim unless the illegality of necessityforms part of the plainti›�s case.��

21 The House in Tinsley v Milligan did not lay down a universal test ofex turpi causa. It was dealing with the e›ect of illegality on title to property.It established the general principle that, once title has passed, it cannot beattacked on the basis that it passed pursuant to an illegal transaction. If thetitle can be asserted without reliance on the illegality, the defendant cannot

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rely on the illegality to defeat the title. This principle had been appliedin the case of personalty in Bowmakers Ltd v Barnet Instruments Ltd[1945] KB 65. The House held that it also applied in the case of both legaland equitable title to realty. The House did not hold that illegality will neverbar a claim if the claim can be advanced without reliance on it. On thecontrary, the House made it plain that where the claim is to enforce acontract the claim will be defeated if the defendant shows that the contractwas for an illegal purpose, even though the claimant does not assert theillegal purpose in making the claim: see Alexander v Rayson [1936]1KB 169, approved by Lord Browne-Wilkinson at p 370.

22 Hewison v Meridian Shipping Services PTE Ltd [2003] ICR 766illustrates another situation in which ex turpi causa defeated a claim albeitthat the illegality was not asserted by the claimant.

23 In Cross v Kirkby The Times, 3 April 2000; [2000] CA TranscriptNo 321 Beldam LJ remarked:

��I do not believe that there is any general principle that the claimantmust either plead, give evidence of or rely on his own illegality for theprinciple to apply. Such a technical approach is entirely absent from LordMans�eld CJ�s exposition of the principle.��

I agree with that observation.24 In Tinsley v Milligan the ex turpi causa defence failed because the

respondent did not need to plead the illegal agreement in order to establishher equitable title. Mr Sumption relies on the decision as establishing ageneral principle that is the converse of that applied by the majority of theHouse. This is that if the claimant has to rely on his own illegality toestablish his claim the courts will never entertain the claim (��the reliancetest��). I have already noted that Mr Sumption advanced one quali�cation tothis rule�it only applies where the illegality is personal to the claimant, notvicarious. In the course of argument, when dealing with United ProjectConsultants Pte Ltd v Leong Kwok Onn [2005] 4 SLR 214, he acceptedanother quali�cation. The illegality must involve turpitude. The defencemay not apply where the claimant�s illegality consists of an o›ence of strictliability of which he is unaware. Those, as I shall shortly show, are validquali�cations to the defence of ex turpi causa in the context in which it israised on this appeal. They are not, however, of general application to thedefence of ex turpi causa.

25 Although Tinsley v Milligan does not establish a general rule that if aclaimant founds his claim on his own illegal conduct the defence of ex turpicausa will apply, earlier cases support this principle:Marles v Philip Trant &Sons Ltd [1954] 1 QB 29 and Archbolds (Freightage) Ltd v S Spanglett Ltd[1961] 1QB 374. I do not believe, however, that it is right to proceed on thebasis that the reliance test can automatically be applied as a rule of thumb.It is necessary to give consideration to the policy underlying ex turpi causa inorder to decide whether this defence is bound to defeat S & R�s claim.As Lord Ho›mann recently remarked in Gray v Thames Trains Ltd [2009]1AC 1339, para 30:

��The maxim ex turpi causa expresses not so much a principle as apolicy. Furthermore, that policy is not based upon a single justi�cationbut on a group of reasons, which vary in di›erent situations.��

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The underlying policy

26 The policy underlying ex turpi causa was explained by LordMans�eld CJ in 1775 inHolman v Johnson 1Cowp 341, 343:

��The objection, that a contract is immoral or illegal as betweenplainti› and defendant, sounds at all times very ill in the mouth of thedefendant. It is not for his sake, however, that the objection is everallowed; but it is founded in general principles of policy, which thedefendant has advantage of, contrary to the real justice, as between himand the plainti›, by accident, if I may so say. The principle of publicpolicy is this; ex dolo malo non oritur actio. No court will lend its aidto a man who founds his cause of action upon an immoral or an illegalact. If, from the plainti›�s own stating or otherwise, the cause ofaction appears to arise ex turpi caus½, or the transgression of a positivelaw of this country, there the court says he has no right to be assisted.It is upon that ground the court goes; not for the sake of the defendant,but because they will not lend their aid to such a plainti›. So if theplainti› and defendant were to change sides, and the defendant was tobring his action against the plainti›, the latter would then have theadvantage of it; for where both are equally in fault, potior est conditiodefendentis.��

The policy can be subdivided into two principles in relation to contractualobligations. (i) The court will not enforce a contract which is expressly orimpliedly forbidden by statute or that is entered into with the intentionof committing an illegal act. (ii) The court will not assist a claimant torecover a bene�t from his own wrongdoing. This extends to claims forcompensation or an indemnity in respect of the adverse consequences of thewrongdoing: see Beresford v Royal Insurance Co Ltd [1938] AC 586. It isthe second principle that is in play on this appeal.

Quali�cations to the second principle

27 The two quali�cations recognised by Mr Sumption apply in respectof the second but not the �rst principle. Thus they apply to the type of claimwith which your Lordships are concerned. S & R are not seeking to enforcean illegal agreement. They are seeking compensation for the adverseconsequences of having engaged in unlawful conduct. A number ofauthorities to which we have been referred support Mr Sumption�sacceptance that in these circumstances the defence of ex turpi causa willonly apply where the claimant was personally at fault and thus where hisresponsibility for wrongdoing was primary rather than vicarious: Burrows vRhodes [1899] 1 QB 816; Hardy v Motor Insurers� Bureau [1964]2 QB 745, 760; Lancashire County Council v Municipal Mutual InsuranceLtd [1997] QB 897, 908 and United Project Consultants Pte Ltd v LeongKwok Onn [2005] 4 SLR 214. Furthermore, there has never been anysuggestion that it is contrary to public policy for a company to insure againstliabilities that it may vicariously incur as a consequence of the wrongdoingsof its agents. Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�s Rep262was such a case.

28 Thus Mr Sumption is correct to accept that, in the context of a claimfor compensation for the adverse consequences of wrongdoing, ex turpi

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causa applies where the wrongdoing is personal, or primary, but not where itis vicarious.

The consequences ofMoore Stephens�s primary case

29 The consequences of Moore Stephens�s primary case are bestconsidered in a case where the facts are not as extreme as those with whichyour Lordships are concerned. Assume that a company carries on legitimatebusiness, owns legitimate assets and has shareholders who are not complicitin the conduct of the man who runs the company, ��the directing mind andwill�� of the company. Assume that the directing mind and will, in breach ofhis duties to the company, involves the company in fraudulent trading andthat this causes the company to sustain losses. On Moore Stephens�sprimary case, as Mr Sumption accepted, a claim for damages formisfeasance against the directing mind and will would be defeated by thedefence of ex turpi causa on the ground that the directing mind and will�sturpitude was attributed to the company.

30 Assume that the auditors of the company had negligently failed toidentify the fact that the directing mind and will was acting fraudulently,with the consequence that his fraud was permitted to continue. Thecompany�s claim against the auditors for the bene�t of its shareholders,whose interests the auditors should have protected, would be barred by thevery wrongdoing that the auditors� negligence had permitted to occur.

31 Mr Brindle would avoid these consequences in one of two ways.First he says that the fraud of the directing mind and will does not fall to betreated as the fraud of the company for the purposes of ex turpi causa. Thisis because where the company becomes a victim of the fraud, although thefraud is directed at a third party, theHampshire Land principle prevents thefraud from being attributed to the company. Alternatively he argues thatwhere the fraud is ��the very thing�� that the defendant was under a duty toprevent, ex turpi causa does not apply at all.

The opinions of the Committee

32 My noble and learned friends Lord Walker of Gestingthorpe andLord Brown of Eaton-under Heywood have not adopted the reasoning ofRimer LJ in �nding in favour of Moore Stephens. They have based theirdecisions on Mr Sumption�s fallback position. Each has held thatHampshire Land [1896] 2 Ch 743 does not apply, that Mr Stojevic�sfraudulent conduct is to be treated as the conduct of S & R and that ex turpicausa defeats S & R�s claim. In doing so, however, their Lordships haverestricted their reasoning to the situation where the directing mind and willof the company is also its owner. This leaves open the question of whetherex turpi causa will bar a claim by a company with independent shareholderswhere those shareholders have been unaware that the directing mind andwill of the company has been involving the company in fraud.

33 My noble and learned friend, Lord Scott of Foscote, considers thatMr Stojevic�s fraud would not be attributed to S & R so as to bar a claim byS & R against Mr Stojevic. This is because his fraud constituted a breach ofthe duty that he owed to S & R as an o–cer of the company. Lord Scottapplies the same reasoning to the claim that is brought against MooreStephens. They too, as auditors, owed duties as o–cers of S & R and the

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claim brought by S & R is for breach of those duties. In these circumstances,Mr Stojevic�s fraud should not be attributed to S & R. This result is notreached by the application of Hampshire Land on the facts of this case.Rather, so it seems to me, Lord Scott accepts the force of ��the very thing��argument, at least where the very thing relates to a duty imposed on thedefendant as an o–cer of the claimant company.

34 Lord Mance starts by considering what the position would havebeen as between S & R and Mr Stojevic if the latter had not been the soleshareholder in S & R. He concludes that if S & R had sued Mr Stojevicex turpi causa would not have applied as there would be no question ofMr Stojevic bene�ting from his own wrong and it would be nonsensical toattribute his wrong to the company in such circumstances. He also considersthatHampshire Landwould apply in that situation, because S&R had to beconsidered as a separate legal entity from Mr Stojevic and Mr Stojevic�sconduct could properly be characterised as a fraud on S&R.

35 Lord Mance next turns to consider whether the position is a›ectedby the fact that Mr Stojevic was sole shareholder in S & R. He concludesthat had S & R been solvent there might have been di–culty in establishingany claim against Mr Stojevic. As, however, it was insolvent, Mr Stojevicwas in breach of duty in failing to have regard to the interests of thecreditors. S & Rwould have been able to sue him for breach of this duty andex turpi causa could not be relied upon as a defence.

36 Lord Mance then considers whether S & R could have claimedagainst Moore Stephens if S & R had had independent shareholders ratherthan Mr Stojevic. Applying similar reasoning Lord Mance concludes thatex turpi causa could not defeat a claim against Moore Stephens for failing todetect the very fraud that was asserted by way of that defence.

37 Does it make a di›erence that Mr Stojevic was the sole shareholderin the company? Had S & R been solvent Moore Stephens would not havecommitted any actionable breach of duty in failing to draw the attention ofthe owner of the company to his own fraud. Lord Mance concludes that thecritical factor is that S & R was insolvent. Just as Mr Stojevic was in breachof his duty to have regard to the interests of the creditors, so the auditors�duty to the company extended beyond the interests of the shareholders tothe interests of the creditors. Ex turpi causa a›ords no defence to breach ofthis duty.

38 Having summarised the conclusions reached by your LordshipsI turn to consider the topic that has formed the central bone of contentionbetween the parties, namely the application of the Hampshire Landprinciple.

Attribution andHampshire Land39 The principles governing the attribution of conduct and states of

mind to companies have been helpfully analysed by Lord Ho›mann inMeridian Global Funds Management Asia Ltd v Securities Commission[1995] 2 AC 500, an appeal to the Privy Council from New Zealand. Theappellant company, Meridian, was an investment management company.Its chief investment manager and senior portfolio manager had acquiredshares for the company without the knowledge of the managing director orthe board of the company. The company was under a statutory obligation togive notice of this acquisition, but failed to do so. It appears to have been

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common ground that the company was only in breach of this obligation if ithad knowledge of the acquisition in question. The issue was whether thecompany had the requisite knowledge.

40 At p 506 Lord Ho›mann �rst dealt with what he described as the��primary rules of attribution�� of acts of a company, namely those set out inthe articles of association of the company or implied by company law.He then referred to the application to a company of the ��general rules ofattribution�� that apply equally in the case of natural persons, such asprinciples of agency, estoppel, ostensible authority in contract or vicariousliability in tort.

41 LordHo›mann commented, at p 507:

��The company�s primary rules of attribution together with the generalprinciples of agency, vicarious liability and so forth are usually su–cientto enable one to determine its rights and obligations. In exceptionalcases, however, they will not provide an answer. This will be the casewhen a rule of law, either expressly or by implication, excludesattribution on the basis of the general principles of agency or vicariousliability. For example, a rule may be stated in language primarilyapplicable to a natural person and require some act or state of mind onthe part of that person �himself�, as opposed to his servants or agents.This is generally true of rules of the criminal law, which ordinarilyimpose liability only for the actus reus and mens rea of the defendanthimself. How is such a rule to be applied to a company? One possibilityis that the court may come to the conclusion that the rule was notintended to apply to companies at all; for example, a law which createdan o›ence for which the only penalty was community service. Anotherpossibility is that the court might interpret the law as meaning that itcould apply to a company only on the basis of its primary rules ofattribution, i e if the act giving rise to liability was speci�cally authorisedby a resolution of the board or an unanimous agreement of theshareholders. But there will be many cases in which neither of thesesolutions is satisfactory; in which the court considers that the law wasintended to apply to companies and that, although it excludes ordinaryvicarious liability, insistence on the primary rules of attribution would inpractice defeat that intention. In such a case, the court must fashion aspecial rule of attribution for the particular substantive rule. This isalways a matter of interpretation: given that it was intended to apply to acompany, how was it intended to apply? Whose act (or knowledge, orstate of mind) was for this purpose intended to count as the act etc of thecompany? One �nds the answer to this question by applying the usualcanons of interpretation, taking into account the language of the rule(if it is a statute) and its content and policy.��

42 While initially Lord Ho›mann had spoken of attribution of acts herehe spoke of attribution of an act or knowledge or a state of mind. Normallythe attribution of an act will carry with it the attribution of knowledge of theact, but this is not necessarily the case, as Lord Ho›mann made plain,at p 511:

��But their Lordships would wish to guard themselves against beingunderstood to mean that whenever a servant of a company has authority

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to do an act on its behalf, knowledge of that act will for all purposes beattributed to the company. It is a question of construction in each case asto whether the particular rule requires that the knowledge that an act hasbeen done, or the state of mind with which it was done, should beattributed to the company.��

Hampshire Land43 Lord Walker has summarised the relevant authorities where the

Hampshire Land principle has been applied. The important point to note isthat Hampshire Land [1896] 2 Ch 743 is an exception to the normal rulesfor the attribution of an agent�s knowledge to his principal. It is not a ruleabout the attribution of conduct. Hampshire Land applies where an agenthas knowledge which his principal does not in fact share but which undernormal principles of attribution would be deemed to be the knowledge of theprincipal. The e›ect ofHampshire Land is that knowledge of the agent willnot be attributed to the principal when the knowledge relates to the agent�sown breach of duty to his principal. The rationale for Hampshire Land hasbeen said to be that it is contrary to common sense and justice to attributeto a principal knowledge of something that his agent would be anxious toconceal from him.

44 The cases demonstrate some confusion as to the precise nature andscope of the Hampshire Land principle and doubt has even been expressedas to whether it exists�see Bowstead & Reynolds on Agency, 18th ed(2006), paras 8-188 and 8-213 and Watts, ��Imputed Knowledge in AgencyLaw�Excising the Fraud Exception�� (2001) 117 LQR 300, 319—320.There is a tendency to confuse the Hampshire Land principle with a similarprinciple developed by the courts of the United States, referred to as ��theadverse interest exception to imputation��.

45 The nature of what I shall call ��the adverse interest rule�� varies fromstate to state. It is an exception to the imputation principle under whichboth the knowledge and the conduct of an employee or agent are attributedto his principal where that person is acting in the course of his employmentor within his apparent authority. Under the adverse interest rule theknowledge and conduct of an agent will not be attributed to the principalwhere the agent�s actions are adverse to the interests of his principal. Insome states the agent�s conduct must be targeted against the principal if therule is to apply. In others, the rule applies more widely, in circumstanceswhere the agent�s conduct is done for his personal bene�t and is adverse tothe interests of his principal, but is not aimed against his principal. A helpfuloverview of United States law on this topic has been provided by AmeliaT Rudolph and Elizabeth V Tanis in a paper entitled ��Invoking In PariDelicto to Bar Accountant Liability Actions Brought by Trustees andReceivers�� (2008) ALI-ABA StudyMaterials.

46 The adverse interest rule would, so it seems to me, operate at least insome circumstances as a normal rule of attribution under establishedprinciples of the English law of agency, rather than as an exception to thenorm. Under it an English court would not attribute to a company the act ofits managing director in dishonestly transferring the company�s funds intohis own account.

47 The operation of a similar principle in the context of the criminalliability of a company for the acts of its directing mind and will is to be found

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in the decision of the Canadian Supreme Court inCanadian Dredge &DockCo Ltd v The Queen (1985) 19 DLR (4th) 314. In the course of giving thejudgment of the court Estey J put the position as follows, at p 351:

��Where the directing mind conceives and designs a plan and thenexecutes it whereby the corporation is intentionally defrauded, and whenthis is the substantial part of the regular activities of the directing mind inhis o–ce, then it is unrealistic in the extreme to consider that the manageris the directing mind of the corporation . . . Where the criminal act istotally in fraud of the corporate employer and where the act is intended toand does result in bene�t exclusively to the employee-manager, theemployee-directing mind, from the outset of the design and execution ofthe criminal plan, ceases to be a directing mind of the corporation andconsequently his acts could not be attributed to the corporation under theidenti�cation doctrine.��

This statement was made in relation to criminal charges brought against thecompany. It describes a principle of attribution that I would accept asapplicable under English common law.

48 I believe that Mr Sumption�s de�nition of the Hampshire Landprinciple that I have quoted in para 12 above more accurately describes theadverse interest rule. Confusion between the two principles has tended toobfuscate what, at the end of the day, is a question of attribution that is notdi–cult to answer on the facts of this case.

Attribution in this case

49 Mr Brindle submits that this case involves two questions ofattribution. The �rst is whether S & R�s liability to the banks was primaryor vicarious. The second is whether, for the purpose of ex turpi causa,Mr Stojevic�s fraudulent conduct falls to be attributed to S & R. These aretwo di›erent ways of posing the same question. The purpose for which thequestion of attribution has to be answered is in order to decide whether thedefence of ex turpi causa applies. If Mr Sumption�s reliance test is applied,the question that has to be answered is whether S&R is relying upon its ownfraud, rather than fraud for which it is only vicariously liable, in order tofound its claim. If the underlying principle of public policy is applied, thequestion that has to be answered is whether S & R is seeking to obtaincompensation for the consequences of its own fraud rather than for theconsequences of fraud for which it is only vicariously liable. To answer thequestion it is necessary to decide whether the fraud of Mr Stojevic falls to betreated as the fraud of S&R itself.

50 As between a company that has committed fraud and the victim ofthe fraud, the question of whether the company�s liability is primary orvicarious seldom, if ever, arises. As Estey J remarked in Canadian Dredge &Dock Co Ltd v TheQueen, at pp 324—325:

��At common law there was no di–culty in �nding liability in acorporation in the law of torts, even though the state of mind ofthe corporation was established by imputing to that corporation theintentions and the conduct of its servants and agents. Thus, in the law oftorts, the courts from the earliest times found vicarious liability in thecorporation on the principles of agency.��

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In this case, however, it is necessary to distinguish between vicarious andprimary liability for the purpose of considering the application of ex turpicausa. There is no way of doing this other than by applying the sameapproach as applies in other circumstances where this exercise is necessary.Indeed Bowstead & Reynolds at p 8-188 identi�es ��the supposed fraudexception to the rules as to imputation of the agent�s knowledge to theprincipal�� as one of the situations where it may be necessary to considerwhether conduct ranks as the act of the corporation itself. The words ofLord Reid in Tesco Supermarkets Ltd v Nattrass [1972] AC 153, 170 aredirectly in point:

��A living person has a mind which can have knowledge or intentionor be negligent and he has hands to carry out his intentions.A corporation has none of these: it must act through living persons,though not always one or the same person. Then the person who acts isnot speaking or acting for the company. He is acting as the companyand his mind which directs his acts is the mind of the company. Thereis no question of the company being vicariously liable. He is not actingas a servant, representative, agent or delegate. He is an embodiment ofthe company or, one could say, he hears and speaks through thepersona of the company, within his appropriate sphere, and his mind isthe mind of the company. If it is a guilty mind then that guilt is theguilt of the company. It must be a question of law whether, once thefacts have been ascertained, a person in doing particular things is to beregarded as the company or merely as the company�s servant or agent.In that case any liability of the company can only be a statutory orvicarious liability.��

51 Where those managing the company are using it as a vehicle forfraud, or where there is only one person who is managing all aspects of thecompany�s activities, there is no di–culty in identifying the fraud as thefraud of the company. Thus in Royal Brunei Airlines Sdn Bhd v Tan [1995]2 AC 378, 393, a case concerning a company, BLT, that was owned andmanaged by one man, Lord Nicholls of Birkenhead, when giving the adviceof the Privy Council, observed:

��Set out in these bald terms, the defendant�s conduct was dishonest.By the same token, and for good measure, BLT also acted dishonestly.The defendant was the company, and his state of mind is to be imputed tothe company.��

52 Lord Nicholls returned to this theme in Mahmud v Bank of Creditand Commerce International SA [1998] AC 20, 34 where he said this aboutBCCI:

��The bank operated its business dishonestly and corruptly. On theassumed facts, this was not a case where one or two individuals, howeversenior, were behaving dishonestly. Matters had gone beyond this. Theyhad reached the point where the bank itself could properly be identi�edwith the dishonesty. This was a dishonest business, a corrupt business.��

53 A similar issue of attribution arose in KR v Royal & Sun Alliance plc[2007] Bus LR 139 in relation to a clause in a policy of liability insurance.The clause excluded the insurers� liability in respect of ��Injury damage or

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�nancial loss which results from any deliberate act or omission of theinsured��. The insured was a company that operated children�s homes. Theissue was whether the clause exempted the insurers from liability in respectof the company�s liability for physical abuse perpetrated by the managingdirector and major shareholder in the company. The Court of Appeal held,at para 65, that the intention of the clause was to exclude liability fordamage or injury caused by the deliberate acts of the person who was to beregarded as, in e›ect, the company, as opposed to the acts of those who weremere employees. As such it excluded liability in respect of the acts of themanaging director:

��It is not just the case that he was managing director and majorityshareholder of the company; he was [the company]. He treated thecompany as his own and nothing of consequence happened without hissay so.��

54 In this case it might be said that S & R was not a business beingcarried on corruptly but rather that there was no business at all. Mr Stojevic,in the name of the company, was pretending to carry on a �ctitious business.With false pretences and fabricated documents he was fraudulently inducingKomercni Banka and other banks to pay large sums to S & R. It might beargued that the adverse interest rule, as formulated by Estey J in CanadianDredge & Dock Co Ltd v The Queen 19 DLR (4th) 314, applies, in thatMr Stojevic was, from the outset, acting pursuant to a criminal plan that wasexclusively for his own bene�t. Such an argument would, however, befallacious. Mr Stojevic was using S & R for his own dishonest purposes, butin a manner that resulted in substantial payments being made to S & R.It has never been suggested that Mr Stojevic�s conduct did not fall to beattributed to S & R so as to render S & R liable in deceit. That S & Rwas properly held liable is the basis of S & R�s claim. The fraudulentbusiness must be treated as the business of S & R carried on, in the �rstinstance, to bene�t S&R.

55 Mr Brindle submits that the Hampshire Land principle applies so asto prevent attribution in this case. For the reasons that I have given I do notconsider that that principle has any application. Nor does the adverseinference rule apply so as to prevent the attribution of Mr Stojevic�sfraudulent conduct to the company. Mr Brindle has not suggested that thebanks are not to be treated as the primary victims of the fraud thatMr Stojevic has caused S & R to commit. He submits, however, that thefraud should not be attributed to S & R because it has come home to roost,making S & R a secondary victim. Neither authority nor common sensesupports this proposition. As Mr Sumption points out, a company thatcommits fraud is always liable to �nd itself a secondary victim in this way.Mr Brindle�s submission amounts, on analysis, to an argument that ex turpicausa should never prevent a company from recovering compensation forthe consequences of fraud which those managing the company have causedit to commit. That submission falls to be considered in the context of thealternative way thatMr Brindle advances his case.

56 For the reasons that I have given I �nd that neither the HampshireLand principle nor the adverse interest rule prevents the attribution ofMr Stojevic�s fraud to S&R.

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The very thing

57 This argument is founded upon the fact that Mr Sumption hasconceded that Moore Stephens owed a duty of care to S & R and that it is tobe assumed for the purposes of the ex turpi causa issue that the duty of carehas been broken. Mr Brindle�s argument is, in essence, that if a duty exists totake action that will prevent a claimant from committing an illegal act, theclaimant must have a remedy for breach of that duty, otherwise the duty willbe rendered nugatory. Mr Brindle relies on reasoning of Buxton LJ to thise›ect in Reeves v Comr of Police of the Metropolis [1999] QB 169. Therelevant issue under consideration was whether, on the premise that suicidewas to be treated as illegal conduct, ex turpi causa would bar a claim againstthe police for negligently permitting a prisoner to commit suicide. In holdingthat it would not Buxton LJ observed, at p 185:

��Here, the alleged turpitudinous act is the very thing that the defendanthad a duty to try to prevent, imposed by a law of negligence which itselfappeals to public conscience or at least public notions of reasonableness.��

58 Mr Brindle�s argument is that fraud by S & R was one of the verythings that Moore Stephens owed a duty of care to prevent. It follows thatex turpi causa should not defeat a claim for breach of that duty. I propose,when approaching Mr Brindle�s alternative argument, to consider it initiallyin relation to a solvent company with independent and innocentshareholders which su›ers damage because its directing mind and willinvolves it in fraud.

Claim by the company against the directing mind and will

59 Lord Scott and LordMance consider that a company must be able tobring a claim against a director who, in breach of duty, causes the companydamage by involving it in fraud. I sympathise with their reaction. Imaginea group of investors who �oat a company to own and operate a yachtcommercially. They engage a skipper to whom they entrust the managementof the business. In breach of duty he charters the yacht to drug smugglers,with the consequence that the vessel is seized and con�scated. It would seemcontrary to justice if the company could not bring an action against theskipper for misfeasance for the bene�t of the shareholders. Why should theskipper be entitled to pray in aid the very thing that his breach of duty hadbrought about? On what principled basis can one avoid the application ofex turpi causa in such circumstances?

60 LordMance considers thatHampshire Land [1896] 2 Ch 743 can bepressed into service. For the reasons that I have given I do not agree.It makes no sense to say that the fraud should not be attributed to thecompany. The fact that fraud has been attributed to the company is the verything about which the company is complaining. The company�s complaintis that its directing mind and will has infected it with turpitude. If ex turpicausa is not to apply in such circumstances, the reason should simply be thatthe public policy underlying it does not require its application.

61 One can readily reach that conclusion where all the shareholdersare innocent. Recovery from the directing mind and will does not result inany individual recovering compensation for his own wrong. The positionbecomes unclear, however, if some of the shareholders were complicit in the

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directing mind and will�s misconduct. Lord Mance states that in suchcircumstances some process designed to achieve the ends of justice would��without doubt�� prevent the fraudulent shareholders from pro�ting fromtheir dishonesty. Lord Mance may well be right, but it is not apparent to methat the law provides a mechanism for achieving this. What would seem tobe involved would be a lifting of the veil of incorporation in order to ensurethat shareholders who were complicit in the illegal manner of operating thecompany would not be able to share in the recovery from the directing mindand will. This would, I believe, be without precedent.

62 The situation becomes more complicated when one considers aclaim against auditors, such as that with which this appeal is concerned, by acompany that has independent shareholders. Here the argument is thatauditors should not be entitled to pray in aid the very illegality that theirbreach of duty has permitted to occur. The same problem arises where someof the shareholders are complicit in the fraud being perpetrated on the banksby the directing mind and will. But more intractable is the problem ofcontributory negligence. The duty owed by the auditors to the company is aduty of care. It would not seem just for a company to make a full recovery ofdamages against auditors for the bene�t of banks which have themselvesnegligently failed to carry out appropriate ��due diligence�� before advancingmoneys to the company. Mr Brindle recognised this, for he opened his caseby submitting that any apparent unfairness in holdingMoore Stephens liableto S&Rwould be met by contribution under the LawReform (ContributoryNegligence) Act 1945. But it is not easy to see how the Act would apply.Moore Stephens�s liabilities would re�ect S & R�s liabilities to the banks andthe damages paid byMoore Stephens would be paid, indirectly to the banks.Lack of care on the part of the banks in their dealings with S&Rought to betaken into account for the purposes of contributory negligence. Yet suchlack of care could not be prayed in aid by S & R in answer to claims framedby the banks in deceit: Standard Chartered Bank v Pakistan NationalShipping Corpn (Nos 2 and 4) [2003] 1 AC 959. Nor is there any obviousmechanism by which such lack of care could be relied upon by MooreStephens in answer to the claim brought by S&R.

63 My Lords, I would not think it right to hold as a matter of generalprinciple that ex turpi causa does not apply to a claim by a company againstits auditors for failing to detect that the company has been operatingfraudulently unless it were demonstrated how the di–culties to which I havereferred could be resolved. There has been no such demonstration in thiscase. Thus I am not able to join Lord Scott and Lord Mance in concluding,for the reasons that they have given, that ex turpi causa does not apply toS & R�s claim. At the same time, I have not been persuaded byMr Sumption�s primary case that the reliance test, or the principle of publicpolicy that underlies it, would necessarily defeat S & R�s claim if S & Rwerea company with independent shareholders that had been ��high-jacked�� byMr Stojevic. In that, at least, I believe that I share common ground with allyour Lordships.

The signi�cance of the fact that S&Rwas a ��one man company��64 I turn to consider Mr Sumption�s fallback position. This applies to

what, by way of shorthand, is described as a ��one man company��, that is acompany where the sole shareholder is also the person who runs the

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company or, if there is more than one shareholder, where the shareholderstogether run the company. Mr Sumption argued that where all who haveownership and control of a company are complicit in a fraud carried out bythe company there is no room for the application of the Hampshire Landprinciple. In support of this argument he drew attention to United Statesjurisprudence that establishes a ��sole actor�� exception to the adverseinterest rule.

65 Lord Brown and Lord Walker have based their decision onMr Sumption�s fallback position. Lord Walker identi�es the reason for theHampshire Land principle to be that it would be ��unjust to its innocentparticipators (honest directors who were deceived, and shareholders whowere cheated)�� to �x a company with its directors� fraudulent intention.Where there are no honest directors or shareholders there is ��ex hypothesino innocent participator��. It follows that there is no room for theapplication ofHampshire Land.

66 Lord Scott and Lord Mance do not accept this analysis. They wouldinclude among the ��innocent participators�� the creditors of a company incircumstances where the company is insolvent or is threatened withinsolvency. They postulate that the duty owed by auditors is owed for thebene�t of these participators also, and that ex turpi causa should not defeat aclaim brought for their bene�t.

67 For the reasons that I have already given, I consider that the real issueis not whether the fraud should be attributed to the company but whether exturpi causa should defeat the company�s claim for breach of the auditor�sduty. That in turn depends, or may depend, critically on whether the scopeof the auditor�s duty extends to protecting those for whose bene�t the claimis brought.

68 One fundamental proposition appears to me to underlie thereasoning of Lord Walker and Lord Brown. It is that the duty owed by anauditor to a company is owed for the bene�t of the interests of theshareholders of the company but not of the interests of its creditors. It seemsto me that here lies the critical di›erence of opinion between Lord Walkerand Lord Brown on the one hand and Lord Mance on the other. LordMance considers that the interests that the auditors of a company undertaketo protect include the interests of the creditors.

69 I was initially doubtful as to whether it would be right to decide thisstrikeout application on the basis that the interests of creditors fall outsidethe scope of the duty of care that auditors owe to a company. I wasconcerned that such an approach was precluded by Mr Sumption�sconcession of the existence both of a duty and, for the purposes of argument,a breach. In oral submissions, however, Mr Sumption made it plain that hisconcession in respect of the duty owed byMoore Stephens was a limited one.

70 Mr Sumption conceded that Moore Stephens owed a duty to S & Rto ensure, so far as reasonable care permitted, that S & R�s accounts showeda true and fair view of its a›airs. He conceded that, for the purpose of thestrikeout application, it should be assumed that Moore Stephens was inbreach of this duty. He further conceded that, had they performed this duty,they would have discovered the fraud that was taking place. Finally heconceded that Moore Stephens would then have reported the fraud to theauthorities, which would have brought S & R�s operations to a halt. Thus,as a matter of causation, the assumed breach of duty resulted in the losses

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sustained by S & R as a result of the continuing fraud. What Mr Sumptiondid not accept, however, was that reporting the fraud to the authoritiesformed any part of the duty owed to S&R.

71 Mr Sumption submitted that the duty owed to a company by itsauditors was exclusively for the bene�t of its shareholders. No duty wasowed to creditors. The duty of the auditors to exercise due care whenreporting on the accounts enabled the shareholders to hold the managementof a company to account. Accounting standards and duty to the public wentbeyond the auditor�s duty to the company. Indeed it overrode the duty ofcon�dentiality that would otherwise be owed to the company. It was thispublic duty that might require an auditor to ��shop�� a company if there wasreason to think that it was involved in crime. Mr Sumption submitted that

��against that background it is very di–cult to see how the law canrationally hold an auditor liable when the entire shareholder body andthe entire management is embodied in a single individual who knowseverything because he has done everything.��

72 Those submissions were largely founded on the decision of thisHouse in Caparo Industries plc v Dickman [1990] 2 AC 605. While theplainti› in that case was a company, its primary claim was in its capacity aspurchaser of the shares in a public company (��Fidelity��) of which thedefendants were the statutory auditors. The claim was in the tort ofnegligence. The plainti› alleged that the defendants had been negligent inauditing Fidelity in that they had approved accounts which, inter alia,overvalued the assets of the company. The plainti› alleged that, foreseeably,reliance on the audited accounts had led it to pay an excessive amount forthe shares of Fidelity in a successful take-over bid. The question of whetherthe defendants owed a duty of care to the plainti› was tried as a preliminaryissue.

73 After lengthy consideration of authorities dealing with the duty ofcare in relation to negligent misstatements, Lord Bridge of Harwichremarked, at p 623:

��These considerations amply justify the conclusion that auditors of apublic company�s accounts owe no duty of care to members of the publicat large who rely upon the accounts in deciding to buy shares in thecompany. If a duty of care were owed so widely, it is di–cult to see anyreason why it should not equally extend to all who rely on the accounts inrelation to other dealings with a company as lenders or merchantsextending credit to the company. A claim that such a duty was owed byauditors to a bank lending to a company was emphatically andconvincingly rejected by Millett J in Al Saudi Banque v Clarke Pixley[1990] Ch 313 . . .��

74 After considering the provisions in the Companies Act 1985 thatrelate to auditors, Lord Bridge added, at p 626:

��No doubt these provisions establish a relationship between theauditors and the shareholders of a company on which the shareholder isentitled to rely for the protection of his interest. But the crucial questionconcerns the extent of the shareholder�s interest which the auditor has aduty to protect. The shareholders of a company have a collective interest

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in the company�s proper management and in so far as a negligent failureof the auditor to report accurately on the state of the company�s �nancesdeprives the shareholders of the opportunity to exercise their powers ingeneral meeting to call the directors to book and to ensure that errors inmanagement are corrected, the shareholders ought to be entitled to aremedy. But in practice no problem arises in this regard since the interestof the shareholders in the proper management of the company�s a›airs isindistinguishable from the interest of the company itself and any losssu›ered by the shareholders, e g by the negligent failure of the auditor todiscover and expose a misappropriation of funds by a director of thecompany, will be recouped by a claim against the auditors in the name ofthe company, not by individual shareholders. I �nd it di–cult to visualisea situation arising in the real world in which the individual shareholdercould claim to have sustained a loss in respect of his existing shareholdingreferable to the negligence of the auditor which could not be recouped bythe company.��

75 Lord Oliver of Aylmerton also gave detailed consideration to therole of auditors in the light of the relevant statutory provisions. Thefollowing passages from his opinion, at pp 630 and 631, are of particularrelevance:

��It is the auditors� function to ensure, so far as possible, that the�nancial information as to the company�s a›airs prepared by thedirectors accurately re�ects the company�s position in order, �rst, toprotect the company itself from the consequences of undetected errors or,possibly, wrongdoing (by, for instance, declaring dividends out of capital)and, secondly, to provide shareholders with reliable intelligence for thepurpose of enabling them to scrutinise the conduct of the company�sa›airs and to exercise their collective powers to reward or control orremove those to whom that conduct has been con�ded . . . Thus thehistory of the legislation is one of an increasing availability ofinformation regarding the �nancial a›airs of the company to thosehaving an interest in its progress and stability. It cannot fairly be said thatthe purpose of making such information available is solely to assist thoseinterested in attending general meetings of the company to an informedsupervision and appraisal of the stewardship of the company�s directors,for the requirement to supply audited accounts to, for instance,preference shareholders having no right to vote at general meetings andto debenture holders cannot easily be attributed to any such purpose.Nevertheless, I do not, for my part, discern in the legislation anydeparture from what appears to me to be the original, central andprimary purpose of these provisions, that is to say, the informed exerciseby those interested in the property of the company, whether asproprietors of shares in the company or as the holders of rights secured bya debenture trust deed, of such powers as are vested in them by virtue oftheir respective proprietary interests.��

76 Both Lord Bridge and Lord Oliver cited with approval the decisionof Millett J in Al Saudi Banque v Clarke Pixley [1990] Ch 313. That was anaction brought in negligence against the auditors of a company by a numberof banks. They alleged that they had relied upon favourable auditors�

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reports, negligently given, in advancing money to the company. Some ofthe banks were already creditors of the company at the time that the reportswere made. The question of whether the auditors owed a duty to the bankswas tried as a preliminary issue. Millett J held that no duty was owed,relying in part on the reasoning of the majority in the Court of Appeal inCaparo [1989] QB 653. He held that the necessary proximity between thebanks and the auditors was not established. He went on, however, to holdthat it would not be just and reasonable to impose such a duty on theauditors. This was because breach of the duty would expose the auditorsto liability for sums advanced by the banks to the company of anindeterminate amount, which would be unknown to the auditors andunforeseeable by them.

77 Mr Sumption also relied upon the decision of Hobhouse J in Berg,Sons & Co Ltd v Mervyn Hampton Adams (1992) [2002] Lloyd�s RepPN 41. The relevant claim in that case was brought by a company inliquidation (��Berg��) against its auditors (��Dearden Farrow��) for negligentlyfailing to qualify the accounts of the company, as a consequence of which thecompany incurred further liabilities. The company had only one activedirector, a Mr Golechha, who was also the ultimate bene�cial owner of allthe shares in the company. Hobhouse J outlined the nature of Berg�s case,at p 44:

��The essence of the claim made by the �rst plainti›s, Berg, againstDearden Farrow is that Mr Surrey ought not to have accepted thestatements made, and the assurances given, to him by Mr Golechha. It isno part of the plainti›s� case that Mr Golechha, nor any director orshareholder of Berg, was in any way misled by anything which DeardenFarrow said or did; nor is it alleged that Mr Golechha, or any member ofthe company, in any way relied upon anything Dearden Farrow said ordid. It further is not alleged that Mr Golechha was not fully aware of allrelevant facts and considerations. Under these circumstances, it will beappreciated that there are serious further di–culties in the way offormulating and substantiating the claim of Berg against the defendants.The existence of a contractual duty to exercise proper skill and care in andabout the audit owed by the defendants to Berg is not in dispute. Butwhether, assuming that there has been some breach, there is on any view aright to recover anything more that nominal damages is very de�nitelyin dispute. The defendants submit that the �rst plainti›s� claim ismisconceived and cannot succeed even if some breach of contract isestablished.��

78 Hobhouse J considered the implications of the decision inCaparo onthe duty of care owed by auditors and reached the following conclusion,at p 53:

��It also follows that the purpose of the statutory audit is to provide amechanism to enable those having a proprietary interest in the companyor being concerned with its management or control to have access toaccurate �nancial information about the company. Provided that thosepersons have that information, the statutory purpose is exhausted. Whatthose persons do with the information is a matter for them and fallsoutside the scope of the statutory purpose. In the present case the �rst

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plainti›s have based their case not upon any lack of information on thepart of Mr Golechha but rather upon the opportunity that the possessionof the auditor�s certi�cate is said to have given for the company tocontinue to carry on business and to borrow money from third parties.Such matters do not fall within the scope of the duty of the statutoryauditor.��

79 At p 53, Hobhouse J referred to an accurate statement of theHampshire Land principle in Bowstead on Agency, 15th ed (1985), art 102:

��Where an agent is party or privy to the commission of a fraud uponor misfeasance against his principal, his knowledge of such fraud ormisfeasance, and of the facts and circumstances connected therewith, isnot imputed to the principal.��

He commented [2002] Lloyd�s Rep PN 41, 54:

��In the present case it has not been proved that there was any fraud byMr Golechha in relation to the 1981 audit, still less that at that timeMr Golechha was practising any fraud upon his principal, Berg. Therewas no entity which it can be said he misled or in relation to which it canbe said that he was acting fraudulently in relation to the audit in October1982. However one identi�es the company, whether it is the headmanagement, or the company in general meeting, it was not misledand no fraud was practised upon it. This is a simple and unsurprisingconsequence of the fact that every physical manifestation of the companyBerg was Mr Golechha himself. Any company must in the last resort,if it is to allege that it was fraudulently misled, be able to point tosome natural person who was misled by the fraud. That the plainti›scannot do.��

80 This comment demonstrates that Hampshire Land [1896] 2 Ch 743had no application to the facts of that case, but it has wider implications.Taken with the other passages in the judgment to which I have referred, itsupports Mr Sumption�s proposition that it is very di–cult to see how thelaw can rationally hold an auditor liable when the entire shareholder bodyand the entire management is embodied in a single individual who knowseverything because he has done everything. If that proposition is correct, itfollows that any breach of duty on the part of Moore Stephens will notsound in damages because it has caused no loss.

81 I have had di–culty in this case in distinguishing between questionsof duty, breach and actionable damage and, indeed, it is questionablewhether it is sensible to attempt to distinguish between them. In Caparo[1990] 2AC 605, 627 Lord Bridge stated:

��It is never su–cient to ask simply whether A owes B a duty of care.It is always necessary to determine the scope of the duty by reference tothe kind of damage from which A must take care to save B harmless.�The question is always whether the defendant was under a duty to avoidor prevent that damage, but the actual nature of the damage su›ered isrelevant to the existence and extent of any duty to avoid or prevent it�:see Sutherland Shire Council v Heyman, 60 ALR 1, 48, per Brennan J.Assuming for the purpose of the argument that the relationship betweenthe auditor of a company and individual shareholders is of su–cient

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proximity to give rise to a duty of care, I do not understand how thescope of that duty can possibly extend beyond the protection of anyindividual shareholder from losses in the value of the shares which heholds.��

LordOliver made a similar comment, at p 651:

��It has to be borne in mind that the duty of care is inseparable from thedamage which the plainti› claims to have su›ered from its breach. It isnot a duty to take care in the abstract but a duty to avoid causing to theparticular plainti› damage of the particular kind which he has in factsustained.��

82 These comments were made in relation to duty of care in tort.In Banque Bruxelles Lambert SA v Eagle Star Insurance Co Ltd (sub nomSouth Australia Asset Management Corpn v York Montague Ltd) [1997]AC 191 Lord Ho›mann held that precisely the same reasoning applied to aduty of care in contract. He said, at p 211:

��A duty of care such as the valuer owes does not however exist in theabstract. A plainti› who sues for breach of a duty imposed by the law(whether in contract or tort or under statute) must do more than provethat the defendant has failed to comply. He must show that the duty wasowed to him and that it was a duty in respect of the kind of loss which hehas su›ered. Both of these requirements are illustrated by CaparoIndustries plc v Dickman [1990] 2 AC 605. The auditors� failure to usereasonable care in auditing the company�s statutory accounts was abreach of their duty of care. But they were not liable to an outsidetake-over bidder because the duty was not owed to him. Nor were theyliable to shareholders who had bought more shares in reliance on theaccounts because, although they were owed a duty of care, it was in theircapacity as members of the company and not in the capacity (which theyshared with everyone else) of potential buyers of its shares. Accordingly,the duty which they were owed was not in respect of loss which theymight su›er by buying its shares.��

83 Mummery LJ held that Moore Stephens owed no duty of care toS & R, ��a fraudster in the total grip of another fraudster��: ante, p 1435,para 115. Although Mr Sumption has renounced any reliance on thisholding, it is one with which I have sympathy. Moore Stephens wereretained by Mr Stojevic by deception and with the object of enhancing theapparent respectability of S & R for the purposes of his proposed fraud.The details of the business that he retained Moore Stephens to audit werewholly �ctitious. If these motives and this dishonesty are to be attributed toS & R, as it seems to me they must be, then it is at least arguable that theillegal purpose of the contract under which Moore Stephens were retainedrendered it unenforceable at the suit of Moore Stephens by reason of theapplication of the principle in Alexander v Rayson [1936] 1 KB 169. Morefundamentally, if party A, by deceit, induces party B to agree to play a part ina venture that is wholly �ctitious, I �nd it hard to see how this can give rise toany duty on the part of party B.

84 If I put those reservations on one side and assume that MooreStephens undertook a contractual duty to S & R to exercise due care in

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relation to the auditing of S & R�s accounts, the question arises of whetherthat duty extended further than the exercise of reasonable care in theprovision of information to the directors and those who had a proprietaryinterest in the company. The authorities relied upon byMr Sumption lead tothe conclusion that it did not.

85 The exercise of an auditor�s duties to a company will, in somesituations, have the e›ect of preserving the assets of the company. Suchpreservation will, whenever there is a risk that the company�s assets mayprove inadequate to meet its liabilities, protect not merely the interests of theshareholders but those of the creditors. It is arguable that the scope of theduty undertaken by the auditors of a company should extend to protectingthe interest that the creditors have in the preservation of the assets of thecompany. So to hold would involve departing from, or at least extending,the reasoning of this House in Caparo. Such an extension would not,however, assist S & R in this case. To recover damages in this case S & Rwould have to establish that the scope of the duty undertaken by MooreStephens extended to taking reasonable care to ensure that the company wasnot used as a vehicle for fraud and that this duty was owed for the bene�t ofthose that the company might defraud. I see no prospect that such a dutycould be established.

86 The scope of Moore Stephens�s duty is not directly in issue on thisappeal. What is in issue is whether ex turpi causa provides a defence toS & R�s claim that Moore Stephens was in breach of duty. That is not,however, a question that I have been able to consider in isolation from thequestion of the scope of Moore Stephens�s duty. I have reached theconclusion that all whose interests formed the subject of any duty of careowed by Moore Stephens to S & R, namely the company�s sole will andmind and bene�cial owner Mr Stojevic, were party to the illegal conductthat forms the basis of the company�s claim. In these circumstances I joinwith Lord Walker and Lord Brown in concluding that ex turpi causaprovides a defence.

87 For these reasons I would dismiss this appeal.

LORD SCOTTOF FOSCOTE

Introduction

88 My Lords, I have found this a very di–cult case. Three of my nobleand learned friends, Lord Phillips of Worth Matravers, Lord Walker ofGestingthorpe and Lord Mance, have prepared and circulated lengthyopinions, totalling very nearly 200 paragraphs but reaching di›eringconclusions. Lord Phillips and LordWalker have concluded that the ex turpicausa principle provides a complete defence to this action and that theappeal by Stone & Rolls Ltd (in liquidation) (��S & R��) against the strikingout of its action should therefore be dismissed. Both take the view that thefraud and dishonesty of Mr Stojevic is properly to be attributed to S & R.Lord Mance, however, has concluded that this action, brought by S & Ragainst its auditors, Moore Stephens, for contractual and tortiousnegligence, cannot be defeated, at least at the present strike-out stage, bythat attribution. My Lords I have come to the same conclusion as LordMance and without, as I hope, adding unnecessarily to the length of theopinions of your Lordships, I must explain why.

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89 It is of critical importance, in my opinion, to notice that the casecomes before your Lordships as a �nal appeal on a strikeout application.The application was made by Moore Stephens, defendants in the action butrespondents before the House, on the ground that the claim by S& R had noreal prospect of success. Many of the facts pleaded by S & R in theiramended particulars of claim are admitted by Moore Stephens in theirdefence. It is not contended that any of the pleaded facts that are notadmitted in the defence can at this stage be regarded as incapable of proof.It follows that for present striking out purposes those facts must be assumedto be true.

The facts90 S & R is a company incorporated in England and Wales. At all

material times until its provisional liquidation in November 2002, S & Rwas controlled by Mr Stojevic. The shares in S & R are, or were, held by anIsle of Man company, Law Investments Ltd, the shares in which are, or were,held by trustees of what has been described as Mr Stojevic�s family trust.S & R had directors but they took no part in the running of S & R�s businessand, it appears, exercised no control over its �nances. Mr Stojevic, via apower of attorney granted to him by S & R�s faceless directors, was incomplete managerial control of every aspect of S&R.

91 Moore Stephens were, for the years 1996, 1997 and 1998, theauditors of S & R and signed unquali�ed audit reports for those three�nancial years. During this period, therefore, Moore Stephens were o–cersof S & R for the purposes, for example, of section 212 of the Insolvency Act1986 and had a contractual relationship with S&R for the purpose, at least,of the preparation of the annual audit reports.

92 Mr Stojevic, throughout the period that Moore Stephens wereS&R�s auditors but unknown toMoore Stephens, used S&R as a vehicle offraud. He used S & R as a vehicle through which funds, fraudulentlyextracted from banks which believed they were �nancing bona �decommodity trades, were then paid away to third parties under the in�uenceor control of (or in league with) Mr Stojevic. The moneys paid by thedefrauded banks to S & R and paid away by S & R to the third parties werethe proceeds of the frauds. The most substantial of the frauds wascommitted against a Czech bank, Komercni Banka AS (��KB��) whicheventually, and inevitably, brought proceedings against S & R andMr Stojevic for fraud. The proceedings led to Toulson J on 15 November2002, giving judgment against both defendants for over US$94m: KomercniBanka AS v Stone & Rolls Ltd [2003] 1 Lloyd�s Rep 383. The result of thejudgment was that S & Rwent into provisional liquidation on 15November2002 and on 15 January 2003 the provisional liquidatiors were appointedliquidators of S & R. There were other defrauded banks and companies aswell as KB and S& Rwas hopelessly insolvent. Mr Stojevic has, apparently,no assets worth pursuing or at any rate none that the liquidators have beenable to discover.

93 The appointment of the provisional liquidators brought to an endMr Stojevic�s control over S & R and on 22 December 2006 S & R, underthe control of the liquidators, commenced the action against MooreStephens that is the target of the striking out application that has nowreached your Lordships� House.

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E))[2009] 1 AC[2009] 1 ACLord Scott of FoscoteLord Scott of Foscote

The issue

94 S & R�s action against Moore Stephens seeks damages fornegligence. The pleaded case is, in very brief summary, that MooreStephens, when carrying out their audit and preparing their auditreport in each of the three audit years, were negligent in not detecting��(a) Mr Stojevic�s dishonesty; and (b) a pattern of fraud involving numerousfraudulent and/or irregular payments out by S & R to entities controlled byMr Stojevic and his associates��: see para 12 of the amended particulars ofclaim. It is pleaded that if this alleged negligence had not occurredMr Stojevic would have been unable to procure the continuance of thefraudulent and irregular payments made out of S & R. In short, thefraudulent scheme would have come to an end.

95 Moore Stephens, in their defence, deny any negligence or otherbreach of duty owed to S & R but plead that, in any event, ��the claimadvanced is inextricably linked with [S & R�s] own dishonest acts��( para 3(1)) and that the claim is barred by the ex turpi causa rule.

96 The issue�an easy one to state but, at any rate for me, a di–cult oneto decide�is whether S & R�s claim as pleaded must inevitably founder onthe ex turpi causa rule.

The ex turpi causa rule

97 Both Langley J [2008] Bus LR 304 at �rst instance and Rimer LJ inthe Court of Appeal, ante, p 1398, commenced their consideration of theex turpi causa rule by citing the well known statement made by LordMans�eld CJ inHolman v Johnson (1775) 1Cowp 341, 343:

��No court will lend its aid to a man who founds his cause of actionupon an immoral or an illegal act. If, from the plainti›�s own stating orotherwise, the cause of action appears to arise ex turpi causa . . . there thecourt says he has no right to be assisted.��

The ex turpi causa rule was the subject of careful consideration in Tinsley vMilligan [1994] 1 AC 340 where this House unanimously rejected theproposition that the application of the rule depended ��on such animponderable factor as the extent to which the public conscience would bea›ronted by recognising rights created by illegal transactions��: per LordBrowne-Wilkinson, at p 369. It is necessary, therefore, to put �rmly to oneside any question of whether, or to what extent, public conscience would bea›ronted by the spectacle of Moore Stephens being held liable to paynegligence damages to S & R, thus enabling the liquidators to pay dividendsto the defrauded creditors of S & R, and to concentrate on whether S & R isfounding its action on its ��own dishonest acts��: para 3(1) of the defence.

98 For that purpose it is desirable to be clear about what cause of actionone is talking about. S & R has pleaded its case as one based both oncontractual negligence and on tortious negligence. I doubt whether at theend of the day the point makes any di›erence but, for my part, I regard a casebased on contractual negligence as the more apt approach. The complaint isa complaint of negligent auditing and Moore Stephens�s duty to conduct theaudit with due professional skill and care was a duty owed to S & Rpursuant to the contract between them. There was no relationship betweenthem other than the contractual one. It was that relationship that imposed

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E)) [2009] 1 AC[2009] 1 ACLord Scott of FoscoteLord Scott of Foscote

the duty of care and, although it is now common to regard such a duty notonly as contractual but also as tortious, it seems to me more logical to speakof it as a contractual duty. It is to be noted, moreover, that the amendedparticulars of claim, in describing the scope of the duty of care relied on, atparas 51 and 52, relies on ��an implied term of Moore Stephens�s retainer��and that para 53 simply says that ��Moore Stephens owed the claimantstortious duties co-extensive with the contractual duties set out above��.I propose, therefore, to address myself to the question whether S & R�scontractual cause of action is founded upon its ��own dishonest acts��.

S&R�s contractual cause of action99 A cause of action for breach of contract requires no more than a

valid contract and a breach of that contract. If the complaint is one ofprofessional negligence made against a professional, such as an auditor whohas been retained by the complaining client, no more need be pleaded andproved than that in the performance of his contractual duties theprofessional failed to exercise the standard of professional care that wasowing to the client under their contract. For an action in tort, on the otherhand, recoverable damage must be alleged and proved, for without suchdamage the tortious cause of action is not complete. Not so for an actionbased on breach of contract. If the breach is proved the complainant isentitled to judgment and to nominal damages at least.

100 The retainer of Moore Stephens by S& R to act as S & R�s auditorsfor the years 1996, 1997 and 1998 is admitted in Moore Stephens�s defence:see paras 15 and 16. The implied term alleged in para 51 of the amendedparticulars of claim is admitted, and so, too, is the bulk of the allegedrequirements of a duty of ��reasonable skill and care��: para 17. What is, ofcourse, denied is that Moore Stephens failed to meet the requisite standardof reasonable skill and care: para 18. But their contractual duty to exercisethat care is not in issue. And their failure to meet that standard is, for presentstriking out purposes, to be assumed.

101 So, as it appears to me, S & R can found a cause of action againstMoore Stephens without reliance on the fraudulent nature of Mr Stojevic�sscheme.

102 But, of course, this action is not being brought in order to recovermerely nominal damages. It is being brought in order to recover substantialdamages, namely, damages representing the losses incurred by S & R inhaving paid out large sums to the third parties and thereby having denudeditself of funds which could have been set against the liabilities it has incurredto those who were defrauded. Prominent among them, of course, is KB withits $94m-odd judgment debt.

103 Whether, even if the ex turpi causa rule did not stand in the way,S &Rcould recover as damages anything like the full amount of its losses, orindeed anything at all, will, I do not doubt, raise all sorts of issues ofcausation. These causation issues are for later, to be addressed at trial ifS & R can surmount the ex turpi causa hurdle. For present purposes,however, it must be assumed that some amount of substantial loss could beshown to have been caused by Moore Stephens�s breaches of duty andwould, subject to the ex turpi causa rule, be recoverable as damages. But ithas to be accepted that in order to succeed in recovering more than nominaldamages S & R has had to plead the dishonest scheme under which the

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1AC 2009�51

money extracted from the banks went via S & R to the third parties. Soalthough, in my opinion, S & R does not have to found its cause of action onthe dishonesty of the scheme, it cannot recover substantial damages withoutpleading the details that show the scheme to have been dishonest. Does thisinvolve S & R in relying ��on its own dishonest acts��? The answer dependson whether the dishonesty of Mr Stojevic should be attributed to S & R forthe purposes of S & R�s claim against Moore Stephens. This is, in myopinion, the short but determinative issue in the case.

Attribution104 An incorporated company is a statutory legal person. It has

corporate personality but can act only by agents and, as ViscountHaldane LC memorably said in Lennard�s Carrying Co Ltd v AsiasticPetroleumCo Ltd [1915] AC 705, 713:

��It has no mind of its own any more than it has a body of its own; itsactive and directing will must consequently be sought in the person ofsomebody who for some purposes may be called an agent, but who isreally the directing mind and will of the corporation, the very ego andcentre of the personality of the corporation.��

Lord Haldane�s remarks were examined by Lord Ho›mann in giving thejudgment of the Board in Meridian Global Funds Management Asia Ltd vSecurities Commission [1995] 2 AC 500, on an appeal from the Court ofAppeal of New Zealand. Lord Ho›mann, at p 506, noted that anyproposition about a company�s directing mind and will necessarily involveda reference to a set of rules of attribution. The company�s primary ruleswould, he said, generally be found in the company�s constitution, typicallyits articles of association, but would include also rules implied by companylaw, such as, for example, the rule that the unanimous decision of all theshareholders in a solvent company to do something that the company hadpower to do under its memorandum of association would be the decision ofthe company. He went on to say, at p 506:

��These primary rules of attribution are obviously not enough to enablea company to go out into the world and do business. Not every act onbehalf of the company could be expected to be the subject of a resolutionof the board or a unanimous decision of the shareholders. The companytherefore builds upon the primary rules of attribution by using generalrules of attribution which are equally available to natural persons,namely, the principles of agency. It will appoint servants and agentswhose acts, by a combination of the general principles of agency andthe company�s primary rules of attribution, count as the acts of thecompany.��

105 These remarks of Lord Ho›mann have, as it seems to me, aparticular resonance in the present case. Your Lordships have not beenshown the memorandum of association or the articles of association ofS & R nor the power of attorney granted to Mr Stojevic. It may reasonablybe assumed, I think, that the articles gave the directors power to grant apower of attorney to Mr Stojevic to enable Mr Stojevic to take managementdecisions on behalf of S & R. But it may con�dently be asserted also thatthe directors� power could not have extended so as lawfully to authorise

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Mr Stojevic to treat the company as a vehicle for defrauding the banks andothers in the way that he did or, indeed, in any other way to cause S & R toengage in fraudulent trading. Either the power of attorney would have beenon its face unlawful and devoid of e›ect or, much more likely, Mr Stojevic�sactions in using S & R as a vehicle for implementing the fraudulent schemehe had devised would have been outside the powers conferred on him by thepower of attorney. This feature of the relationship between Mr Stojevic andS & R has no relevance whatever so far as dealings between S & R and thosedefrauded by the scheme are concerned. They were entitled to hold S & Rliable for the frauds in which S & R had participated. But it does haverelevance, in my opinion, to the question whether S & R was itself a victimof Mr Stojevic�s fraudulent scheme and, thus, to the critical questionwhether, for the purposes of S & R�s action against Moore Stephens,Mr Stojevic�s dishonesty should be attributed to S&R.

106 In re Hampshire Land Co [1896] 2 Ch 743 established the rule thatthe knowledge of an o–cer of a company of his own fraud or breach of trustdirected at third parties will not necessarily be imputed to that company: seethe statement of the rule by Rimer LJ in para 39 of his judgment in the Courtof Appeal: ante, p 1411. Where the knowledge in question was the o–cer�sknowledge of his own fraud or breach of duty, Vaughan Williams J declinedin In re Hampshire Land Co to hold that the knowledge was to be attributedto the company: see [1896] 2 Ch 743, 749—750. In particular, if the directorin breach of duty has an adverse interest to that of the company, theknowledge of the breach of duty will not be imputed to the company: seeJC Houghton & Co v Nothard Lowe & Wills Ltd [1928] AC 1, 19 whereViscount Sumner said that it would be ��contrary to justice and commonsense to treat the knowledge of such persons as that of their company, as ifone were to assume that they would make a clean breast of theirdelinquency��.

107 There are, however, cases, sometimes referred to as ��sole actor��cases, where the company has no human embodiment other than thefraudster and where, therefore, there is no one in the company forthe fraudster to deceive, no one in the company to whom ��a clean breastof . . . delinquency�� could be made. In these ��one actor�� cases, it is said, theHampshire Land Co rule can have no sensible application. The knowledgeof the fraudster simply is the knowledge of the company. An example ofthis proposition in action is Royal Brunei Airlines Sdn Bhd v Tan [1995]2 AC 378. This was a case in which the issue was whether the company,BLT, had been guilty of fraud or dishonesty in relation to money it held intrust for the plainti› airline. The company had become insolvent and theairline sued its controlling director, Mr Tan, on the ground that he hadknowingly assisted in the dissipation by BLTof the money. Lord Nicholls ofBirkenhead said, at p 393:

��The defendant accepted that he knowingly assisted in that breach oftrust. In other words, he caused or permitted his company to apply themoney in a way he knew was not authorised by the trust of which thecompany was trustee. Set out in these bald terms, the defendant�sconduct was dishonest. By the same token, and for good measure,BLTalso acted dishonestly. The defendant was the company, and his stateof mind is to be imputed to the company.��

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108 But the attribution to BLT of Mr Tan�s dishonesty for the purposesof the airline�s claim against, in e›ect, BLT and Mr Tan, could not be takento bar misfeasance proceedings by the liquidator of BLT against Mr Tan oragainst any other o–cer of BLTwho, in relation to the trust money, ��has . . .been guilty of any misfeasance or breach of any . . . other duty in relation to��BLT�section 212(1) of the Insolvency Act 1986�assuming, of course, thatsection 212 or some similar statutory provision were applicable to BLT�sinsolvent liquidation.

109 It is noteworthy that there appears to be no case in which the ��soleactor�� exception to the Hampshire Land Co rule has been applied so as tobar an action brought by a company against an o–cer for breaches of dutythat have caused, or contributed to, loss to the company as a result of thecompany engaging in illegal activities. I can easily accept that, for thepurposes of an action against the company by an innocent third party, withno notice of any illegality or impropriety by the company in the conduct ofits a›airs, the state of mind of a ��sole actor�� could and should be attributedto the company if it were relevant to the cause of action asserted against thecompany to do so. But it does not follow that that attribution should takeplace where the action is being brought by the company against an o–cer ormanager who has been in breach of duty to the company.

110 It appears that the liquidators of S & R know of no assets ofMr Stojevic that could become the fruits of successful proceedings againsthim for breach of duty. But suppose that were not so. There can surely be nodoubt that the liquidators could issue a misfeasance summons against himunder section 212(1)(c) of the Insolvency Act 1986. Could Mr Stojevic, onsuch a summons, contend that his dishonesty should be attributed to thecompany that, in breach of his �duciary duties under the power of attorney,he had turned into his vehicle for fraud? It is long established thatsection 212, like its statutory predecessors, is procedural and does not createa cause of action where none previously existed�although it is to be notedthat section 212(3)(b) confers on the court a judgmental discretion as to thequantum of compensation that would not in an ordinary damages action beapplicable. But Mr Stojevic could not, in my opinion, reduce his liability forbreach of duty to S&Rby attributing to S&Rhis own dishonesty, praying inaid the ��sole actor�� exception and the application of the ex turpi causa rule.

The liability ofMoore Stephens111 It is not clear to me why Moore Stephens, or any other o–cer of

S & Rwhose breach of duty had contributed to the liabilities to which S&Ris now subject, should be in any di›erent position, so far as attribution toS & R of Mr Stojevic�s dishonesty is concerned, to that of Mr Stojevichimself. Moore Stephens were not, as Lord Walker in para 190 of hisopinion has pointed out, directors or managers of the company�s business.But they, too, as o–cers of the company (see section 212(1)(a)) could havebeen, and could still be, the recipients of a section 212 misfeasancesummons. The damages claimed in this action could have been claimed ascompensation under section 212(3). Indeed this action is, to my mind,indistinguishable in substance from a section 212 misfeasance applicationand, if necessary, a simple amendment to the pleadings could make thatclear. The same causation problems as lie beneath the surface in the presentaction would apply equally to a section 212 misfeasance application.

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No doubt the same ex turpi causa objection would have been taken but thenature of the claim, as one being brought for the bene�t of S & R�s creditors,would have been more openly apparent and not in the least a matter ofobjection.

112 So I return to what I regard as the determinative issue, short butdi–cult. Why should the dishonesty of Mr Stojevic be attributed to S & Rfor the purposes of an action by S & R against its auditors, o–cers of thecompany who, on the assumed facts, had committed breaches of contractualduty that had a causative role in producing the liabilities to which S & R issubject? There are, in my opinion, two reasons why that attribution shouldnot be made: the �rst is a procedural reason, the second is substantive.

The procedural reason113 This is a strikeout application. There has been no trial and no

factual �ndings but, none the less, the argument has proceeded on thefooting that Mr Stojevic was the bene�cial owner of the S &R shareholding.This derives, I think, from para 2 of the agreed statement of facts and issues,which says that ��Mr Stojevic was, indirectly through his family trust and acompany incorporated in the Isle of Man, [S & R�s] ultimate bene�cialowner��. It is not clear to me what was meant in this context by ��ultimate�� orwhether an ��ultimate bene�cial owner�� is the same as an owner who isabsolutely bene�cially entitled. There is nothing in the pleadings that saysMr Stojevic was the absolute bene�cial owner of the S & R shares. Para 2 ofS & R�s amended particulars of claim says that he was a ��shadow director��of S & R and held a power of attorney on behalf of S & R and para 14 saysthat ��S & R was controlled by Mr Stojevic and owned by Law InvestmentsLtd . . . an Isle of Man company which was in turn owned by Mr Stojevic�sfamily trust��. None of this justi�es the assumption that Mr Stojevic wasabsolutely bene�cially entitled to the S&R shares.

114 In the action in the Commercial Court brought by KB against S&Rand Mr Stojevic, evidence was given about the relationship betweenMr Stojevic and S & R. In his judgment [2003] 1 Lloyd�s Rep 383, 384,para 7, Toulson J describedMr Stojevic as S&R�s chief executive o–cer andcontinued: ��SR�s ultimate ownership is obscure, but Mr Stojevic was incommand of its dealings with BCL and the bank.�� He returned to the pointin para 25:

��The shares in SR are held by an Isle of Man company called LawInvestments Ltd, whose shareholders are nominee companies operatingunder an Isle of Man trust known as the Lucia trust. Mr Stojevicacknowledged that he was one of the bene�ciaries of the trust. Objectionwas taken to his being asked to identify the other bene�ciaries or theextent of his own bene�cial interest, and the matter was not ultimatedlypressed byMr Doctor QCon behalf of [KB].��

None of this justi�es the assumption that Mr Stojevic was the absolutebene�cial owner of the shares in S&R.

115 Langley J, in his judgment on the striking out application [2008]Bus LR 304, referred to paras 2 and 14 of S&R�s pleading (cited in para 113above) and said, in para 21, that it was part of S & R�s case that Mr Stojevicwas ��the controlling mind and will of S & R��. He went on ��There was noone else. In a real sense he was the company��. The judge could not have

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meant that Mr Stojevic was the absolute bene�cial owner of the S & Rshares. There was nothing in the pleadings to justify such an assumption.In the Court of Appeal, on the other hand, Rimer LJ did say, ante, p 1399,para 5, that Mr Stojevic ��owned, controlled and managed [S & R]�� and, inpara 9, that ��In a real sense the company was [Mr Stojevic�s] company.It was, for practical purposes, a �one man company� ��. AndMummery LJ, atpara 114, referred to S &R as ��the one-man company owned and controlledbyMr Stojevic��.

116 These references to S & R as being wholly controlled byMr Stojevic were fully justi�ed on S & R�s own pleading; but references toS & R as ��owned�� by Mr Stojevic were not. A trial, if there is one, mayestablish that Mr Stojevic was indeed the absolute bene�cial owner of theS & R shares but a conclusion to that e›ect cannot be reached at the presentstage and I do not regard the single sentence in para 2 of the agreedstatement as justifying the description of S & R as a ��one-man company��otherwise than for the purpose of emphasising that he was in completemanagerial control.

117 This point bears on the status of S & R as a victim of Mr Stojevic�sdishonesty. Mr Stojevic derived his powers of control of S & R not from thestatus of director, for he was not one, but from the power of attorney that hehad been granted by, presumably, Law Investments Ltd or nominees oftheirs. That power of attorney had been used by Mr Stojevic to turn S & Rinto, so to speak, a corporate automaton. The power of attorney, if valid,could not have authorised the frauds in which S & R at Mr Stojevic�sdirection participated. Everything done by S & R at the direction ofMr Stojevic and in pursuance of his scheme of fraud must have been ultravires his powers under the power of attorney. This feature could not enableS & R to resist the claims made by the defrauded third parties such asKB but, in my opinion, establishes S & R as a victim of the fraudulentscheme. In causing S & R to pay away to third parties the moneyfraudulently extracted from KB and the other victims of the fraudsMr Stojevic was abusing his powers under the power of attorney. Thatabuse was an essential feature of Mr Stojevic�s fraudulent scheme and, as itseems to me, S&Rwas a victim of that abuse.

118 The emphasis placed by my noble and learned friends Lord Walkerand Lord Phillips, and also by my noble and learned friend, Lord Brown ofEaton-under-Heywood, on the assumed absolute bene�cial ownership byMr Stojevic of the S & R shareholding, coupled with his undoubted absolutemanagerial control, indicates, I suggest, that they are, in e›ect, lifting thecorporate veil and treating S & R as if it were Mr Stojevic himself who wasseeking to repel the ex turpi causa defence. But if the corporate veil cannotbe lifted, and it cannot, in my opinion, if Mr Stojevic was not the absolutebene�cial owner of the shares, the attribution of Mr Stojevic�s dishonesty toS & R for the purpose of defeating an admitted breach of duty by S & R�so–cers, a breach of duty that had caused S & R to incur liabilities that itwould not otherwise have incurred, cannot, in my opinion, be justi�ed eitherin principle or on authority. S&R is a legal persona in its own right.

The substantive reason119 Caparo Industries plc v Dickman [1990] 2 AC 605 established that

auditors who prepare and submit to the company of which they are auditors

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negligently prepared accounts and reports may be in breach of the duty theyowe to the company but are not in breach of any duty they owe to theshareholders. The company can recover in damages any loss caused by thebreach of duty and the shareholders have no independent cause of action.Where a company is insolvent, loss caused to the company by a similarbreach of duty by its auditors can similarly be remedied by an action indamages brought by the company. Its creditors, like the shareholders of asolvent company, are owed no duty of care by the auditors and can have noindependent cause of action. None of this is in doubt. There is, however, adi›erence between a cause of action in negligence brought by a solventcompany and a similar cause of action brought by an insolvent company. Inthe former case any damages recovered will bene�t the shareholders; in thelatter case the damages will bene�t the creditors.

120 The ex turpi causa rule is a procedural rule based on public policy.The perpetrators of illegality, a fortiori of dishonest illegality, ought not to beallowed to bene�t from their reprehensible conduct. If S&R had remained asolvent company, an action against Moore Stephens that would haveenabled Mr Stojevic to bene�t from any damages that were recovered wouldhave o›ended the ex turpi causa rule. Take the case of a solvent companythat under the direction of its managing director engages in an unlawful and,in the event, loss making activity that could and should have been preventedby a timely report made by its auditors. Let it be supposed the managingdirector is also a shareholder and that he and the auditors are together suedfor negligent breach of duty. I know of no authority that would bar such anaction on ex turpi causa grounds. The action, assuming it succeeded againstboth defendants, could be expected, via contribution proceedings, to leavethe delinquent managing director with no bene�t from any damagesrecovered from the auditors. And why, if that were so, should public policyrequire the auditors to be relieved of liability for their breach of duty?

121 In a case, such as the present, where the company is insolvent andwill stay so whatever damages are recoverable from the auditors, the need toensure that the delinquent director does not bene�t from the damages doesnot present a problem. There is no possibility of Mr Stojevic bene�ting fromany damages recoverable from Moore Stephens. So, I repeat, why shouldthe ex turpi causa rule, a rule based on public policy, bar an action againstthe auditors based on their breach of duty?

122 The wielding of a rule of public policy in circumstances wherepublic policy is not engaged constitutes, in my respectful opinion, badjurisprudence.

123 For all these reasons, and in general agreement with the reasonsgiven by Lord Mance, I would allow this appeal and allow this action toproceed to trial.

LORDWALKEROFGESTINGTHORPE

Introduction

124 My Lords, this is an appeal by Stone & Rolls Ltd (in liquidation)(��S & R��) against an order of the Court of Appeal made on 18 June 2008,ante, p 1398. The Court of Appeal (Mummery, Keene and Rimer LJJ)allowed an appeal byMoore Stephens, a �rm of chartered accountants, froman order of Langley J made on 11 September 2007, [2008] Bus LR 304, and

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struck out S&R�s claim againstMoore Stephens (who had been its auditors)as barred by the ex turpi causa principle of public policy.

125 The fullest account of the facts is to be found in the judgment ofToulson J in Komercni Banka AS v Stone & Rolls Ltd [2003] 1 Lloyd�s Rep383. There is also a full statement of the facts which must be assumed (forthe purposes of Moore Stephens�s strikeout application) in the lengthyamended statement of claim (running to 398 paragraphs, with supportingschedules) setting out S & R�s case against Moore Stephens. The briefsummary that follows is based on these sources as well as the judgmentsbelow.

126 S & R, a company registered in England, was dormant when in1995 it came under the control of Mr Stojevic, the second defendant in theaction brought by Komercni Banka AS (��KB��), a Czech bank. Mr Stojevic, aCroatian, was at all material times in sole control of S & R and (througharti�cial arrangements set up in the Isle of Man) e›ectively the bene�cialowner of its share capital. He was described by Toulson J as having a veryquick mind, but as having been evasive and untruthful. He was in fact themastermind behind a fraudulent scheme which eventually resulted inKB obtaining judgment against S & R andMr Stojevic for a sum in excess of$94m. Provisional liquidators of S & R were appointed on 15 November2002 followed by a full winding up order on 15 January 2003. Theconsequential claim against Moore Stephens is for about $94m togetherwith several years� accrued interest.

127 The frauds were e›ected by means of letters of credit issued byKB in favour of S & R at the request of an Austrian company namedBCLTrading GmbH (��BCL��). BCL was controlled by Mr Barak Alon, whoappears to have been an accomplice of Mr Stojevic. Payment under theletters of credit was obtained by the presentation of false documentscertifying the existence in distant warehouses of non-existent stocks ofagricultural produce. These payments were promptly passed on to BCL,which initially met its liabilities to KB, so building up its con�dence (KB wasalso found to have been negligent, but that was immaterial in a claim fordeceit). Eventually however there were 30 letters of credit (totalling $94m)for which KB was not reimbursed. About $80m of this was promptly passedon to BCL, or companies connected with it, and it has never been traced.

The illegality defence128 No one can found a cause of action on his own criminal conduct.

This is not a technical rule, but a fundamental principle of public policy.In the well-known words of Lord Mans�eld CJ inHolman v Johnson (1775)1Cowp 341, 343:

��No court will lend its aid to a man who founds his cause of actionupon an immoral or an illegal act. If, from the plainti›�s own stating orotherwise, the cause of action appears to arise ex turpi causa, or thetransgression of a positive law of this country, there the court says he hasno right to be assisted. It is upon that ground the court goes; not for thesake of the defendant, but because they will not lend their aid to such aplainti›.��

The same principle has been described by McLachlin J in the SupremeCourt of Canada, writing for the majority, as based on the need to preserve

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the integrity of the legal system: Hall v Hebert (1993) 101 DLR (4th) 129,160, 165.

129 The leading modern English authority on the scope of the principleis the decision of this House in Tinsley v Milligan [1994] 1 AC 340. In thatcase the House was unanimous in disapproving the ��public conscience�� testapplied by the Court of Appeal (in reliance on the earlier decisions of theCourt of Appeal in Saunders v Edwards [1987] 1 WLR 1116; Euro-DiamLtd v Bathurst [1990] 1 QB 1 and Howard v Shirlstar Container TransportLtd [1990] 1 WLR 1292). But the House was divided over the correct test.The majority identi�ed the test as whether the claimant had to plead or relyon his own illegality: see Lord Browne-Wilkinson, at p 376. The minorityfavoured a broader test of whether the claim was tainted by illegality: seeLord Go› of Chieveley, at p 363.

130 Tinsley v Milligan is in some ways a di–cult and controversialdecision. It raised issues as to equitable interests in property, and theequitable ��clean hands�� doctrine, which do not arise here. The LawCommission is well advanced, after lengthy deliberation and consultation,with proposals for the reform of this area of the law (Consultation PaperNo 160, The Illegality Defence in Tort (2001) and ConsultationPaper No 189, The Illegality Defence (2009)). These proposals, ifenacted by Parliament, would introduce more �exibility into this areaof the law (although without reintroducing a general ��public conscience��discretion).

131 It is not necessary to go further into the Law Commission�sproposals. The present state of the law is as laid down by the majority of theHouse in Tinsley v Milligan [1994] 1 AC 340. Any legislative change islikely to widen the test, not to narrow it. It is common ground that ifMr Stojevic had carried out his frauds on his own, and not through acorporate vehicle, neither he nor his trustee in bankruptcy would have had aclaim against the auditors, since the illegality defence would have beenunanswerable. The main area of dispute is as to the imputation to S & R ofMr Stojevic�s criminal acts and intentions.

Primary or vicarious liability?132 The �rst issue, within this main area of dispute, is whether S & R

was primarily (or directly, the term used by Rimer LJ) liable for the fraudpractised on KB, or was merely vicariously liable for the fraud ofMr Stojevic. In the Court of Appeal and before your Lordships Mr Brindlecontended that S & R�s liability was vicarious only, while also contending(rather more vigorously) that the point was in any case of no realsigni�cance. Even if S & R�s liability was more than merely vicarious, hesubmitted, the principle in In re Hampshire Land Co [1896] 2 Ch 743 wasstill capable of applying in the context of a claim by S & R against itsauditors. He criticised Rimer LJ for failing to distinguish between theattribution exercise called for in two di›erent situations, that is (i) KB�sclaim for fraud against S & R, and (ii) S & R�s claim for negligence againstthe auditors.

133 In my opinion Rimer LJ (with whom Mummery and Keene LJJagreed) was clearly right in holding that S & R was primarily (or directly)liable for the frauds. He recognised that Citizens� Life Assurance Co Ltd vBrown [1904] AC 423 (a case of malicious libel on appeal to the Judicial

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Committee from New South Wales) was decided on the basis of vicariousliability. But its historical importance is as a decisive rejection of LordBramwell�s view (in Abrath v North Eastern Railway Co (1886) 11 AppCas 247) that a company could never have a dishonest motive attributedto it. The present law was clearly explained by Lord Reid in a passagewhich Rimer LJ cited from Tesco Supermarkets Ltd v Nattrass [1972]AC 153, 170:

��I must start by considering the nature of the personality which by a�ction the law attributes to a corporation. A living person has a mindwhich can have knowledge or intention or be negligent and he has handsto carry out his intentions. A corporation has none of these: it must actthrough living persons, though not always one or the same person. Thenthe person who acts is not speaking or acting for the company. He isacting as the company and his mind which directs his acts is the mind ofthe company. There is no question of the company being vicariouslyliable. He is not acting as a servant, representative, agent or delegate.He is an embodiment of the company or, one could say, he hears andspeaks through the persona of the company, within his appropriatesphere, and his mind is the mind of the company. If it is a guilty mind thenthat guilt is the guilt of the company.��

134 In this case there is no doubt that Mr Stojevic was the persona ofS & R. He was ��really the directing mind and will of the corporation,the very ego and centre of the personality of the corporation��: ViscountHaldane LC in Lennard�s Carrying Co Ltd v Asiastic Petroleum Co Ltd[1915] AC 705, 713. In his written case Mr Brindle criticised Rimer LJ for ameaningless inquiry for a single directing mind and will. He drew attentionto a leading textbook suggesting that Lord Ho›mann has castigated thatapproach as a misleading ��general metaphysic of companies�� (Gower &Davies, Principles of Modern Company Law, 8th ed (2008), para 7-29,commenting on Meridian Global Funds Management Asia Ltd v SecuritiesCommission [1995] 2 AC 500, 509). That comment is, I think, overstated.In Meridian Lord Ho›mann approved Viscount Haldane�s search for theperson who was, within Lennard�s Carrying Co, the equivalent of anindividual shipowner. He then pointed out that as the company seemedto have no business other than ship-owning, the functions of generalmanagement and responsibility for ship-owning coincided; and, at p 509:��It was this coincidence which left Viscount Haldane LC�s speech opento the interpretation that he was expounding a general metaphysic ofcompanies.�� In short not every company has a single directing mind andwill, but some companies do.

135 The criticism is therefore quite inapposite in relation to S & R,because it is common ground that Mr Stojevic really was the embodiment ofS&R for all purposes. As Rimer LJ put it, ante, pp 1400—1401, para 9:

��It is the essence of [S & R�s] claim that Mr Stojevic was its controllingmind and will. Nobody else was in a like position. In a real sense thecompany was his company. It was, for practical purposes, a �one mancompany�. It is a further part of the claim that the company wasthroughout used by Mr Stojevic as a vehicle for fraud, by extractingmoney from KB so that it could then be paid away to the fraudsters.��

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136 I conclude that S & R was primarily liable for the frauds and onthat basis I go on to the Hampshire Land principle, bearing in mind thatI have not yet fully addressed Mr Brindle�s submissions about theimportance of context�that is, the type of claim, by or against the company,in which the question of attribution arises.


137 In In re Hampshire Land Co [1896] 2 Ch 743 Mr Wills wassecretary of a trading company, Hampshire Land, and of a building society,Portsea Island. The company borrowed £30,000 from the building society.This was irregular because it was done without the authority of the companygiven at a properly-convened general meeting. The company then went intoliquidation, and the building society claimed to be a creditor for £30,000.The claim depended on whether the building society was to be imputed,throughMrWills, with knowledge of the irregularity. It was accepted that ifMr Wills had been fraudulent, his knowledge would not have been imputedto the building society; and VaughanWilliams J applied the same principle toa breach of duty (even if it did not amount to fraud) sinceMrWills could notbe expected to disclose something to his own detriment.

138 That principle (which is a general principle of agency) was appliedby this House in JC Houghton & Co v Nothard Lowe & Wills Ltd [1928]AC 1. Two brothers, the Lowes, owed duties to two di›erent tradingcompanies, NLFP (an old-established company) and NLW (a new jointventure company partly owned by a competitor). The Lowes committedNLW to commercial arrangements that were against its best interests, andfavourable to NLFP. The issue was whether the Lowes� guilty knowledgeestopped NLW from obtaining relief. This House held that there was noestoppel. Viscount Dunedin observed, at p 14:

��My Lords, there can obviously be no acquiescence withoutknowledge of the fact as to which acquiescence is said to have takenplace. The person who is sought to be estopped is here a company, anabstract conception, not a being who has eyes and ears. The knowledgeof the company can only be the knowledge of persons who are entitledto represent the company. It may be assumed that the knowledge ofdirectors is in ordinary circumstances the knowledge of the company.The knowledge of a mere o–cial like the secretary would only be theknowledge of the company if the thing of which knowledge is predicatedwas a thing within the ordinary domain of the secretary�s duties. Butwhat if the knowledge of the director is the knowledge of a director whois himself particeps criminis, that is, if the knowledge of an infringementof the right of the company is only brought home to the man who himselfwas the arti�cer of such infringement? Common sense suggests theanswer, but authority is not wanting.��

He then referred toHampshire Land. Similarly Viscount Sumner said of theLowes, at p 19:

��Their silence was accordingly a notable breach of duty. It has longbeen recognised that it would be contrary to justice and common sense totreat the knowledge of such persons as that of their company, as if onewere to assume that they would make a clean breast of their delinquency.

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Hence, for the purpose of estopping the company, some knowledge otherthan theirs has to be brought home to other directors, who can bepresumed not to be concerned to suppress it. This was laid down,following earlier cases, in In re Hampshire Land Co, and was even thentreated as incontestable.��

139 The same principle was applied by the Court of Appeal in BelmontFinance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250. It was anappeal against the summary dismissal of Belmont�s claim on the ground thatBelmont was a party to the fraudulent conspiracy, and so shut out by theex turpi causa rule. Belmont�s directors (apparently in collusion with theshareholders in a company that I shall call Maximum) agreed to buyMaximum for £500,000, although it was said to be worth little more than£60,000. Maximum�s ex-shareholders then bought all the shares in Belmontfrom the Williams Furniture group for £489,000, so committing an o›enceunder section 54 of the Companies Act 1948. Later Belmont, in liquidation,brought proceedings for misfeasance against its former holding companiesand various individuals. The Court of Appeal allowed the appeal anddirected that the claim should go to trial. The leading judgment was givenby Buckley LJ, who did not refer toHampshire Land or JC Houghton & CovNothard Lowe&Wills Ltd, but stated the same principle, at pp 261—262:

��It may emerge at a trial that the facts are not as alleged in thestatement of claim, but if the allegations in the statement of claim aremade good, the directors of the plainti› company must then have knownthat the transaction was an illegal transaction. But in my view suchknowledge should not be imputed to the company, for the essence of thearrangement was to deprive the company improperly of a large part of itsassets. As I have said, the company was a victim of the conspiracy. I thinkit would be irrational to treat the directors, who were allegedly parties tothe conspiracy, notionally as having transmitted this knowledge to thecompany; and indeed it is a well-recognised exception from the generalrule that a principal is a›ected by notice received by his agent that, if theagent is acting in fraud of his principal and the matter of which he hasnotice is relevant to the fraud, that knowledge is not to be imputed to theprincipal. So in my opinion the plainti› company should not be regardedas a party to the conspiracy, on the ground of lack of the necessary guiltyknowledge.��

It should be noted that Belmont was not, on any view, a one-man company;and it was, as Buckley LJ observed, the victim of a conspiracy.

140 The decision in Belmont was not entirely straightforward, but inmy view it was correct. The case can be understood only by reference to thefuller statement of its facts in the judgments in the second appeal to theCourt of Appeal, Belmont Finance Corpn v Williams Furniture Ltd (No 2)[1980] 1 All ER 393. The �rst appeal was from Foster J�s order striking outBelmont�s claim on the ground that it was seeking to rely on its ownillegality. The second appeal, paradoxically, was from the same judge�sdismissal of the claim at trial, on the ground that what had taken place was abona �de commercial transaction involving no illegality.

141 The alleged illegality was in the company providing �nancialassistance for the purchase of its shares, contrary to what was then

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section 54 of the Companies Act 1948. That provision is one re�ection ofthe basic principle of company law requiring a limited company to maintainits capital: see the explanation by Lord Watson in the leading case ofTrevor v Whitworth (1887) 12 App Cas 409, 423—424. The generalprohibitions on a limited company purchasing its own shares, or providing�nancial assistance for their purchase by another person (both now subjectto carefully limited exceptions) have the purpose of preserving the limitedcompany�s capital for the protection of those who trade with it.

142 For present purposes there are two essential points to note in regardto the complicated manoeuvres undertaken in Belmont. First, there was apurchase (of the shares in Maximum) at a gross overvalue, and this (quiteapart from section 54 of the Companies Act 1948) was a breach of �duciaryduty by those of Belmont�s directors who were complicit: see especially thejudgment of Go› LJ in Belmont (No 2) [1980] 1 All ER 393, 411. Secondly,as part of the same prearranged plan the £0.5m extracted from Belmont wasthen recycled by purchasing the shares in Belmont, so infringing section 54.The former shareholders in Belmont did not su›er under the prearrangedscheme, since they wanted to sell the company and were no worse o›through the purchase of Maximum at an overvalue (but they were heldaccountable as constructive trustees). The real victims, after predictions asto Maximum�s pro�t-earning capacity proved mistaken, were Belmont�screditors (and especially its depositors, who apparently took priority to thedebenture-holders).

143 Looking at the earlier Belmont decision [1979] Ch 250 again in thelight of the fuller facts in Belmont (No 2) I think that Buckley LJ was right tosay that Belmont was a victim. It lost over £0.4m in assets (though its formershareholders did not su›er that loss until the court made them accountable)and, on the Hampshire Land principle, the guilty knowledge of some of thedirectors was not to be attributed to Belmont. Section 54 was certainlyenacted to protect company funds and the interests of shareholders as well ascreditors, as Scarman LJ said in Wallersteiner v Moir [1974] 1 WLR 991,1032—1033, but I do not see that this undermines the reasoning ofBuckley LJ (who referred toWallersteiner vMoir at p 261).

144 In all these cases there was a company which was the victim of afraud or serious breach of duty, and the court held that it was not to beprejudiced by the guilty knowledge of an individual o–cer who could not beexpected to disclose his own fault. (The fact that duties were owed to twodi›erent companies in the Hampshire Land and Houghton cases is, I think,an irrelevant coincidence). This principle is sometimes referred to in theUnited States of America as the ��adverse interest�� exception to the usual ruleof imputation (see for instance Rudolph and Tanis, ��Invoking In Pari Delictoto Bar Accountant Liability Actions Brought by Trustees and Receivers��(2008) ALI-ABA Study Materials). It is applied, typically, in cases in whichthe corporate victim is the claimant and the defence seeks to rely on thecorporate victim�s notice, knowledge or complicity. It will be necessaryto consider some recent English cases which do not �t so neatly into thesame mould.

145 In reviewing some of the recent cases Rimer LJ, ante, p 1424,para 71, expressed surprise at the Hampshire Land principle being referredto in the context of �xing liability on a party. He saw the principle as��primarily concerned not with a company�s liabilities to others but rather

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with its claims against others��. Most of the early cases do fall into thatcategory (though in Houghton NLW�s claim was a counterclaim against athird party which was seeking delivery of bills of lading). But I can see noreason why the principle should be limited to claims. It is, as I have said, ageneral principle of agency which can apply to any issue as to a company�snotice, knowledge or complicity, whether that issue arises as a matter ofclaim or defence.

Sole actors and secondary victims

146 Mr Brindle has relied on the Hampshire Land principle to insulateS & R, for the purposes of the ex turpi causa rule, from Mr Stojevic�sfraudulent conduct. Mr Sumption, for Moore Stephens, has in the Court ofAppeal and before the House deployed two lines of argument against that.The �rst is that the principle has no application in a case where the person orpersons with ownership and control of the company are entirely complicit inthe fraud, so that there is no single individual connected with the companywho can be regarded as an innocent party deceived and prejudiced by thefraud. This is, in the terminology used in the United States, the ��sole actor��exception to the ��adverse interest�� rule�which is itself an exception to theordinary rules of imputation. In England the phrase ��one-man company��is sometimes used, but it is an imprecise expression which calls forexplanation. The other line of argument is that the Hampshire Landprinciple does not apply to cases where the victim of the fraud is not thecompany itself, but a third party. This leads on to arguments as to whetherthe company in question, although not a primary victim, should be regardedas a secondary victim (and so within the principle).

147 In the Court of Appeal, ante, pp 1413—1414 and 1422—1425,Rimer LJ (with the concurrence of the other members of the court) rejectedthe �rst line of argument, at paras 45 and 46, but acceded to the second, atparas 65—73. I would add, however, that Rimer LJ�s summary of hisreasoning, in para 73 of his judgment (quoted in para 169 below), beginswith a couple of sentences which suggest to me that his discussion on the��victim�� issue may have begun to raise some degree of doubt about hisconclusion on the ��sole actor�� issue. I shall discuss these issues in turn. Butas some of the modern cases touch on both issues it is convenient tosummarise them �rst, in chronological order.

The modern cases

148 Both sides relied on the decision of the Court of Appeal in AttorneyGeneral�s Reference (No 2 of 1982) [1984] QB 624. This was concernedwith a point of criminal law:

��Whether a man in total control of a limited liability company (byreason of his shareholding and directorship) is capable of stealing theproperty of the company; and whether two men in total control of alimited liability company (by reason of their shareholdings anddirectorships) are (while acting in concert) capable of jointly stealing theproperty of the company.��

Two men, who were between them in total control of a company, hadplundered its assets in extravagant living and it was insolvent to the extent of

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about £2.5m. The case was largely concerned with the application to thatsituation of the language of section 2(1)(a) and (b) of the Theft Act 1968.For my part I do not think that the decision assists either side. It is reallyconcerned with the correct construction of a criminal statute and itsapplication to a situation which Parliament may not have contemplatedwhen the Theft Act 1968was being enacted.

149 Brink�s-Mat Ltd v Noye [1991] 1 Bank LR 68 was not cited to theCourt of Appeal (indeed Mr Sumption told us that it seems never to havebeen cited in any reported case before). Brink�s-Mat was bailee of veryvaluable gold bullion stolen in a notorious armed robbery which took placein 1983. Two of the conspirators, Chappell and Palmer, smelted and recastsome of the bullion and used a company, Scadlynn Ltd, to sell the recast gold(some was sold to its true owner, Johnson Matthey). Scadlynn had a smallissued capital owned by Chappell and Palmer. Between September 1984 andthe end of January 1985 over £10mwas withdrawn in cash from Scadlynn�saccount with Barclays Bank. Brink�s-Mat sued Chappell, Palmer, Scadlynnand Barclays Bank. The issue before the Court of Appeal was a proposedre-amendment of the statement of claim to add new claims against BarclaysBank. These were claims for wrongs to Scadlynn which Brink�s-Matclaimed to be able to enforce as bene�ciary under a constructive trust. Thatwas the very unusual context in whichMustill LJ said, at p 72:

��Here the corporate entity named Scadlynn was, however odd thenotion may seem at �rst sight, the victim of wrongful arrangements todeprive it improperly of a large part of its assets: see Belmont FinanceCorpn Ltd vWilliams Furniture Ltd [1979] Ch 250, 261—262. If the factswere such that the bank should have recognised the possibility of such animpropriety, and if the scope of the bank�s duty of care was wide enoughto impose an obligation to take steps to forestall it, I see no reason whythe cause of action should not be enforced by Scadlynn for the ultimatebene�t of the creditors who would look to those assets for satisfaction oftheir debts.��

Similarly Nicholls LJ said, at p 73:

��On the facts alleged in the proposed amendments, Scadlynn was at allmaterial times being used by Chappell and Palmer and others for afraudulent purpose, viz, to realise the proceeds of sale of the robbery. Butthe plainti› was not implicated in any such fraudulent purpose. On thecontrary, along with the owners of the gold, the plainti› was the intendedvictim of the scheme. Likewise, Scadlynn itself was an intended victim, inthat Scadlynn was being used as a vehicle for committing a fraud on itscreditors and a fraud on those bene�cially interested in property held byScadlynn. In those circumstances the fraudulent purposes of thosecontrolling Scadlynn are not to be imputed to the company itself: seeBelmont Finance Corpn Ltd v Williams Furniture Ltd [1979] Ch 250, perBuckley LJ, at pp 261—262.��

150 In Berg, Sons & Co Ltd v Mervyn Hampton Adams (1992) [2002]Lloyd�s Rep PN 41, Berg was, on any view, a one-man company.Mr Golechha was the only active director and sole bene�cial owner of itsshares. Berg became insolvent (without fraud being proved or, so far as I cansee, alleged) and its liquidator sued some former partners in the auditors,

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Dearden Farrow. Hobhouse J held that the auditors had negligently treatedcertain bad debts as recoverable, but that only nominal damages could berecovered. The reason was explained byHobhouse J, at p 54:

��In the present case it has not been proved that there was any fraudby Mr Golechha in relation to the 1981 audit, still less that at that timeMr Golechha was practising any fraud on his principal, Berg. There wasno entity which it can be said he misled or in relation to which it can besaid that he was acting fraudulently in relation to the audit in October1982. However one identi�es the company, whether it is the headmanagement, or the company in general meeting, it was not misled andno fraud was practised upon it. This is a simple and unsurprisingconsequence of the fact that every physical manifestation of the companyBerg was Mr Golechha himself. Any company must in the last resort,if it is to allege that it was fraudulently misled, be able to point tosome natural person who was misled by the fraud. That the plainti›scannot do.��

Hobhouse J distinguished Belmont because there was no conspiracy todefraud Berg. He referred to Attorney General�s Reference (No 2 of 1982)[1984] QB 624 as ��nearer to the point�� but only, as I understand it, becausein that case also there was no individual victim. But again the casewas distinguishable because it involved fraud, and there was no fraudagainst Berg.

151 Group Josi Re (formerly Groupe Josi R�assurance SA) v WalbrookInsurance Co Ltd [1996] 1 WLR 1152 was concerned with contracts ofreinsurance which (lacking statutory authorisation) were void for illegality.It is of interest as being the �rst of the modern cases decided after MeridianGlobal Funds Management Asia Ltd v Securities Commission [1995]2 AC 500. After referring to Meridian Saville LJ said [1996] 1 WLR 1152,1170:

��In the present case the reinsurers rely upon cases where knowledgehas been attributed, while the reinsured rely upon cases dealing with whathas been called �the fraud exception� or the rule in In re Hampshire LandCo [1896] 2 Ch 743, i e cases where knowledge of the fraudsters of afraud on a corporation has been unsuccessfully sought to be attributed tothat corporation. Mr Bartlett [for the reinsurers] accepted that there werecircumstances in which the �fraud exception� meant that knowledge wasnot attributed. In his submission, the essence of the relevant principle isthat the court will not infer that a company has knowledge of a factknown to an agent or director of the company where, because of theagent�s or director�s fraud or other breach of duty to the company, itwould be contrary to justice and common sense to draw such inference.For the purposes of this case at least, I am prepared to proceed on thebasis of this proposition.��

152 Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�s Rep 262involved a fraudulent valuation made by a managing director, Mr Browne(who was not however the directing mind and will of his company, JDW).Both JDW and Mr Browne were separately covered by a �delity policy,subject to a proviso excluding from indemnity ��any person knowinglycommitting, making or condoning [a dishonest or fraudulent] act��.

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This context had an important bearing on the way in which Rix Japproached the issue of attribution (see at p 279, where he said that theposition might have been di›erent with a ��one man company��). But Rix Jalso discussed the ��victim�� issue. He observed, at pp 282—283:

��There remains the question . . . whether the Hampshire Landdoctrine is con�ned to cases of fraud where the principal is himself thevictim of the fraud, or whether, as Vaughan Williams J put it inHampshire Land itself, the doctrine extends to other breaches of dutywhere common sense would destroy the inference of transfer ofknowledge. In the typical case in which the doctrine has been applied,Houghton, Belmont, PCW and Group Josi Re, fraud has been found orassumed. In the present case, fraud is also assumed, but the primaryvictim of the fraud has been the lending institution which has relied on thevaluation. I would accept, however, the plainti›s� submission thatJDW was also a victim, even if only a secondary victim, of the assumedfraud. One consequence of that assumed fraud has been JDW�s liabilityto the plainti›s, albeit in negligence. Moreover, even if it could be saidthat JDW, unlike the plainti›s, was not the victim of Mr Browne�s fraud,Mr Browne has, on the assumed facts, been guilty of dishonesty, and onecan hardly visualise a graver dereliction of his duty to his company.Although the cases often involve fraud, Hampshire Land itself did notnecessarily do so, and I note that in Group Josi Re, Saville LJ wasprepared to accept as a working de�nition of the scope of the principle thecases of �the agent�s or director�s fraud or other breach of duty to thecompany� (at p 367). In my judgment, Mr Browne�s fault comes withinthe concept of an agent�s fraud on his principal, but, even if it does not, hisfault is such a breach of duty to JDWas in justice and common sense mustentail that it is impossible to infer that his knowledge of his owndishonesty was transferred to JDW.��

153 McNicholas Construction Co Ltd v Customs and Excise Comrs[2000] STC 553 is the �rst of the cases in which Rimer LJ was surprised to�nd Hampshire Land being used in the context of a claim against acompany. McNicholas was a civil contractor and often had contracts to digtrenches for cable ducts. It had some employed sta› but also used gangs ofself-employed labourers. Customs and Excise suspected that McNicholaswas paying fraudulent invoices for VAT on services which had never beenprovided, and was then claiming to deduct this as input tax. Customs andExcise raised assessments to recover lost tax and (so far as the assessmentswent back more than three years) had to establish dishonesty on the part ofMcNicholas. The tribunal found that some of its site managers werecomplicit in the fraud, and that their dishonesty was to be attributed toMcNicholas for the purposes of the VAT legislation.

154 Dyson J dismissed McNicholas�s appeal. He approved thetribunal�s reliance on the context of the VAT legislation as calling for aspecial rule of attribution. He also made some interesting observationstouching on the ��victim�� issue, at para 55:

��In my judgment, the tribunal correctly concluded that there shouldbe attribution in the present case, since the company could not sensibly beregarded as a victim of the fraud. They were right to hold that the fraud

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was �neutral� from the company�s point of view. The circumstances inwhich the exception to the general rule of attribution will apply are wherethe person whose acts it is sought to impute to the company knows orbelieves that his acts are detrimental to the interests of the company in amaterial respect. This explains, for example, the reference by ViscountSumner in JC Houghton&Co v Nothard Lowe&Wills Ltd [1928] AC 1,19 to making �a clean breast of their delinquency�. It follows that, injudging whether a company is to be regarded as the victim of the acts of aperson, one should consider the e›ect of the acts themselves, and notwhat the position would be if those acts eventually prove to beine›ective.��

I have to say that I �nd it di–cult to understand, as a matter of fact, why thefraud was ��neutral�� from the point of view of McNicholas. But theimportant point is Dyson J�s view that in principle

��in judging whether a company is to be regarded as the victim of theacts of a person, one should consider the e›ect of the acts themselves, andnot what the position would be if those acts eventually prove to beine›ective.��

155 The last of the recent cases is the decision of the Court of Appeal inIn re Bank of Credit and Commerce International SA (No 15); Morris vBank of India [2005] 2 BCLC 328, one of the many cases concerned with thefallout from the collapse of BCCI. Mr Samant, a senior manager (but not adirector) of the Bank of India, committed it to a series of transactions whichamounted to assisting BCCI to defraud its creditors. The Court of Appealupheld Patten J [2004] 2 BCLC 279, who had held Bank of India liable undersection 213 of the Insolvency Act 1986. Again, the statutory context guidedthe court�s approach to the appropriate rule of attribution. Patten J had beenright to followMcNicholas ( para 118):

��As inMcNicholas, the acts of Mr Samant were not in fact targeted atBoI. He was acting for, and in what he apparently believed to be theinterests of, BoI in seeking to gross up the balance sheet for the purposesof the year end accounts. The potential liability of BoI under section 213is irrelevant in deciding whether BoI was a victim of Mr Samant andwhether his knowledge should be attributed to it for the purposes ofsection 213.��

156 The Court of Appeal also commented onArab Bank ( para 124):

��In our judgment, the facts and the contractual context make ArabBank a di›erent case. It did not lay down a general principle ofattribution of knowledge which governs this case of statutory liability tomake compensation to victims of fraudulent trading. Arab Bank is not, asMr Moss contended, authority for the proposition that knowledge offraud can only be attributed to a company if the individual with therelevant knowledge was a director or directing mind of the company, orwhere it can be inferred from all the circumstances that the individualtransferred his knowledge to the company or to its directing mindand will; nor is it authority for the proposition that there can be noattribution of knowledge where the company is a �secondary victim� ofthe individual�s wrongdoing or breach of duty.��

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Discussion of the ��sole actor�� exception

157 The ��sole actor�� exception was applied (although not by thatname) by the Privy Council (on appeal from Brunei) in Royal BruneiAirlines Sdn Bhd v Tan [1995] 2 AC 378. The airline had been defraudedby Mr Tan who was the principal director and shareholder in a travelagency company called Borneo Leisure Travel (��BLT��). The only otherdirector and shareholder was Mr Tan�s wife. BLT owed �duciary duties tothe airline for money which it received, but misappropriated it for its ownpurposes. Lord Nicholls of Birkenhead formulated the issue, at p 384, as��whether the breach of trust which is a prerequisite to accessory liabilitymust itself be a dishonest and fraudulent breach of trust by the trustee��.He answered that question in the negative, adding, at p 392: ��although thiswill usually be so where the third party who is assisting him is actingdishonestly�� (as Mr Tan was). But as BLT was a one-man company it wasitself dishonest, at p 393:

��Set out in these bald terms, [Mr Tan�s] conduct was dishonest. By thesame token, and for good measure, BLT also acted dishonestly. [Mr Tan]was the company, and his state of mind is to be imputed to the company.��

Belmont was referred to in the Judicial Committee�s judgment, but only onthe issue of the degree of improbity required for accessory liability.

158 Berg [2002] Lloyd�s Rep PN 41was another clear case of a one-mancompany. It was not a case involving fraud, but Hobhouse J�s judgmentexplains why it can be seen as a sort of mirror-image of theHampshire Landsituation. In Hampshire Land [1896] 2 Ch 743 the company secretary hadbeen guilty of a serious breach of duty which he could be expected to keepquiet about, and not disclose to the directors and members of the buildingsociety. His guilty knowledge was not therefore attributed to the buildingsociety. In Berg, by contrast, Mr Golechha knew all about the irrecoverableloans, and there was no other individual concerned in the management orownership of his company from whom his knowledge could be concealed,because there simply was no such individual��a simple and unsurprisingconsequence��, as Hobhouse J put it, ��of the fact that every physicalmanifestation of the company Berg wasMrGolechha himself��.

159 In situations like those in Royal Brunei [1995] 2 AC 378 and Berg[2002] Lloyd�s Rep PN 41 denial of attribution on ��adverse interest��grounds would not serve the ends of justice. It would on the contraryoperate as a reversion to the views of Lord Bramwell in Abrath v NorthEastern Railway Co 11 App Cas 247, reducing a one-man company to amindless creature in the eyes of the law. Instead it has the mind of its humanembodiment, though that is not treated as a separate mind for the purposesof the crime of conspiracy:R vMcDonnell [1966] 1QB 233, 245.

160 As I have said, the concept of a one-man company calls for someexplanation. It was severely criticised by Lord Macnaghten in the leadingcase of Salomon v A Salomon&Co Ltd [1897] AC 22, 53:

��It has become the fashion to call companies of this class �one mancompanies�. That is a taking nickname, but it does not help one much inthe way of argument. If it is intended to convey the meaning that acompany which is under the absolute control of one person is nota company legally incorporated, although the requirements of the

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[Companies Act 1862] may have been complied with, it is inaccurate andmisleading: if it merely means that there is a predominant partnerpossessing an overwhelming in�uence and entitled practically to thewhole of the pro�ts, there is nothing in that that I can see is contrary tothe true intention of the 1862 Act, or against public policy, or detrimentalto the interests of creditors.��

161 But Salomon�s case was not concerned with the attribution of anystate of mind to Mr Aron Salomon�s company. On the contrary, it wasargued (successfully at �rst instance and in the Court of Appeal: Broderip vSalomon [1895] 2 Ch 323) that the company was a sham, a mindless maskfor Mr Salomon as the real owner of the business. In this appeal, bycontrast, the issue is the attribution to S & R of a dishonest state of mind.Where that is the issue the notion of a one-man company does becomemeaningful, as Royal Brunei demonstrates. In this context I would treat theexpression as covering cases where there is one single dominant directorand shareholder (such as Mr Tan in Royal Brunei, Mr Golechha in Berg, orMr Stojevic in the present case) even if there are other directors orshareholders who are subservient to the dominant personality (such asMr Tan�s wife in Royal Brunei, the inactive solicitor-director in Berg, orS & R�s nominee directors). I would also treat it as covering cases wherethere are two or more individual directors and shareholders acting closelyin concert, such as the anonymised directors in Attorney General�sReference (No 2 of 1982) or Mr Chappell and Mr Palmer in Brink�s-MatLtd v Noye [1991] 1 Bank LR 68. It may be simplest to propose a test innegative terms, on the lines of what Hobhouse J said in Berg, that is acompany which has no individual concerned in its management andownership other than those who are, or must (because of their recklessindi›erence) be taken to be, aware of the fraud or breach of duty withwhich the court is concerned.

162 The principle of the ��sole actor�� is more fully developed in UnitedStates case law. In his printed case Mr Sumption referred to a number ofUnited States authorities (not cited to the Court of Appeal) while acceptingthat they have to be treated with caution, both because of variations betweenstate laws and because of the rather di›erent basis of the public policydefence in the United States (which inclines to in pari delicto potior estconditio defendentis as the guiding principle). I accept that caution isneeded, but I �nd the general reasoning in these cases persuasive and in linewith the English authorities just mentioned.

163 In In re The Mediators Inc; The Mediators Inc v Manney (1997)105 F 3d 822, a decision of the Second Circuit of the United States Court ofAppeals, applying the law of New York, the court upheld the rejection (ongrounds of illegality) of a claim on behalf of a company�s unsecuredcreditors against bankers, lawyers and accountants said to have assistedMr Manney, the company�s president and sole shareholder, in breach of�duciary duties to the company. The court stated the principle as follows,at p 827 (omitting references):

��Second, the adverse interest exception does not apply to cases inwhich the principal is a corporation and the agent is its sole shareholder.As noted, the adverse interest exception is to a presumption that an agenthas discharged the duty of disclosing material facts to the principal.

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Under New York law, where the agent is defrauding the principal, suchdisclosure cannot be presumed because it would defeat�or havedefeated�the fraud. However, where the principal and agent are oneand the same, the adverse interest exception is itself subject to anexception styled the �sole actor� rule. This rule imputes the agent�sknowledge to the principal notwithstanding the agent�s self-dealingbecause the party that should have been informed was the agent itselfalbeit in its capacity as principal. Where, as here, a sole shareholder isalleged to have stripped the corporation of assets, the adverse interestexception to the presumption of knowledge cannot apply.��

164 In O–cial Committee of Unsecured Creditors v RF La›erty & CoInc (2001) 267 F 3d 340 the Third Circuit of the United States Court ofAppeals, applying the law of Pennsylvania, reached a similar conclusion.Two companies, Walnut and its wholly-owned subsidiary ELCOA, were runand owned byMrWilliam Shapiro and other members of the Shapiro family,assisted by various professionals. The two companies ran a fraudulent Ponzischeme. The court decided, at p 357, that it must evaluate the in pari delictodefence without regard to whether the committee was an innocent successor.On that basis the court applied the sole actor exception (treating the Shapirofamily as a single entity) and held the companies to be in pari delicto,at p 359 (references omitted):

��The second part of the imputation test�whether fraudulent conductwas perpetrated for the bene�t of the debtor corporation�is oftenanalysed under the �adverse interest exception�. Under this exception,fraudulent conduct will not be imputed if the o–cer�s interests wereadverse to the corporation and �not for the bene�t of the corporation�.The committee argues that the Shapiro family�s fraud was adverse to theinterests of the debtors, and indeed, caused damage to them through�deepening insolvency�. Thus, the committee maintains that theShapiros did not act for the bene�t of the debtors and their fraudulentconduct cannot be imputed to those corporations. However, evenassuming that the Shapiros� interests were adverse to the debtors�interests, the committee cannot prevail because the �adverse interestexception� is itself subject to an exception�the �sole actor� exception.The general principle of the �sole actor� exception provides that, if anagent is the sole representative of a principal, then that agent�sfraudulent conduct is imputable to the principal regardless of whetherthe agent�s conduct was adverse to the principal�s interests. Therationale for this rule is that the sole agent has no one to whom he canimpart his knowledge, or from whom he can conceal it, and that thecorporation must bear the responsibility for allowing an agent to actwithout accountability.��

165 There is also a very interesting discussion of these problems in thejudgment of the Supreme Court of Canada in Canadian Dredge & Dock CoLtd v The Queen (1985) 19 DLR (4th) 314. It was the �nal appeal in amajor criminal trial of both corporate and individual defendants forbid-rigging of tenders in the dredging industry. Top executives hadconspired together and companies which had won contracts by illegal meansdivided their ill-gotten gains, some of which ended up in the hands of

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individual executives. The whole judgment (given by Estey J) deserves study.Its general conclusion (at the end of the headnote on p 316) is this:

��The corporation could not be said to have been defrauded in anyrelevant sense when the only thing of which it was deprived was part orindeed all of the product of the crime with which it was charged. It wasno defence that some of the illegal compensation was diverted to theindividuals.��

166 Rimer LJ did not accept Mr Sumption�s submissions on this point(and did not, as I have noted, have the United States and Canadianauthorities cited to him). He did so primarily in reliance on the statement inAttorney General�s Reference (No 2 of 1982) [1984] QB 624, 642 that theprinciple in Belmont can apply even though it was true of the twocontrolling directors ��that their acts are necessarily the company�s acts; thattheir will, knowledge and belief are those of the company, and that theirconsent necessarily implies consent by the company��. But the Court ofAppeal rejected that reasoning, as I see it, only because it could not bereconciled with the words ��the other�� in section 2(1)(b) of the Theft Act1968. The Court of Appeal felt itself compelled by the wording of the statuteto look for a separate will as it had in R v McDonnell [1966] 1 QB 233, thecase about conspiracy.

167 There is no special statutory context of that sort here. On this pointI respectfully disagree with Rimer LJ and the other members of the Court ofAppeal. In the case of a one-man company (in the sense indicated above)which has deliberately engaged in serious fraud, I would follow RoyalBrunei (and the strong line of United States and Canadian authority) inimputing awareness of the fraud to the company, applying what is referredto in the United States as the ��sole actor�� exception to the ��adverse interest��principle.

168 In particular I would apply the ��sole actor�� principle to a claimmade against its former auditors by a company in liquidation, where thecompany was a one-man company engaged in fraud, and the auditors areaccused of negligence in failing to call a halt to that fraud. Here I return toMr Brindle�s point ( para 132 above) about the need to decide any questionof attribution by reference to its context. Looking at the context, I cannotaccept his submission that a claim against auditors is a context in whichS & R should not be treated as primarily (or directly) liable for its fraudagainst KB, and so disabled by the ex turpi causa principle. Mr Sumptionconceded, in line with the pleadings, that the auditors did owe a duty of careto S & R, although Mummery LJ (with whom, as with Rimer LJ,Keene LJ agreed) considered, ante, p 1435, para 115, that ��the �rm did notowe a duty of care to the company, which was a fraudster in the total grip ofanother fraudster��. On the assumption that the auditors did owe a duty ofcare to S & R, it was a duty owed to that company as a whole, not toindividual shareholders, or potential shareholders, or current or prospectivecreditors, as this House decided in Caparo Industries plc v Dickman [1990]2 AC 605. If the only human embodiment of the company already knew allabout its fraudulent activities, there was realistically no protection that itsauditors could give it. In Caparo this House approved the decision ofMillett J in Al Saudi Banque v Clarke Pixley [1990] Ch 313, the facts ofwhich were comparable to those of the present case.

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Discussion of secondary victims

169 In para 73 of his judgment, ante, pp 1424—1425, Rimer LJ set outhis conclusions on what he called theHampshire Land issue:

��In these circumstances I am of the opinion that this is not a case inwhich theHampshire Land principle has any application. The essence ofthe case is that it is one in which the sole directing mind and will of thecompany procured it to enter into fraudulent transactions with banks.It was the company that dealt with the banks and, so it seems to me, clearthat, as between the company and the banks, the principles of attributionrequire the dishonesty of the company�s sole human agent to be imputedto the company. Mr Sumption�s submissions satis�ed me that this is acase in which such an imputation should be made and that the companyshould therefore itself be liable for the frauds. Whilst, as I have said,Mr Brindle did not accept that this is the correct analysis, he did not argueagainst it and he was prepared to accept it for the purposes of the presentdebate. It is not therefore a case in which the company was the target, orthe victim, of its agent�s dishonesty. It was itself the fraudster, and it wasnot the target of the fraud, and in my view it can make no di›erence thatits frauds were likely, when and if found out, to result in the incurring ofliabilities by the company itself.��

170 As I have mentioned (at para 147 above), at the beginning of thispassage Rimer LJ seems to be showing some sympathy for the one-mancompany approach which he had earlier rejected. In the latter part of thepassage he draws a clear distinction between a company as victim and acompany as villain. Where a company has carried out large-scale frauds it islikely to end up in insolvent liquidation, and facing claims from those whomit has defrauded. It can therefore be regarded as a sort of secondary victim.But in the last sentence of the passage quoted Rimer LJ (without using thatterm) discounts the ��secondary victim�� theory as not material to the rules ofattribution which he has been considering.

171 The expression ��secondary victim�� seems to have originated (at anyrate in this context) in Brink�s-Mat [1991] 1 Bank LR 68. That case wasconcerned with large-scale, �agrant, organised crime. From beginning toend legal title in the stolen bullion was shared between Brink�s-Mat as baileeand Johnson Matthey as owner. But if it is necessary to construct a sort ofparallel universe in which the conspirators� activities are supposed to havebeen lawful, I can see no reason to suppose that Scadlynn would have beenthe owner of the bullion. The bullion would surely have belonged to theconspirators as a sort of partnership. Scadlynn (with a small capital andonly two of the conspirators as shareholders) would have been a bailee forreward, entrusted with the task of recasting the bullion and selling it as anagent. The directors of Scadlynn would have expected remuneration fortheir services. In short I can see no basis for the assumption by Mustill LJthat Scadlynn was ��the victim of wrongful arrangements to deprive itimproperly of a large part of its assets��. I do not think that the decision canbe given much weight; as my noble and learned friend, Lord Phillips ofWorth Matravers, observes, in para 5 of his opinion, ��If a person starts withnothing and never legitimately acquires anything he cannot realistically besaid to have su›ered any loss��.

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172 A similar point may arise in the present case, since it is pleaded thatmoney fraudulently obtained by S & R became the subject of ��numerousfraudulent and/or irregular payments out by S & R to entities controlled byMr Stojevic and his associates��. Any contractual arrangements betweenS&R and BCL (or similar companies) for division of the fruits of their fraudwould of course have been void for illegality. To describe such arrangementsas fraudulent and/or irregular does not to my mind turn S & R into a victimin any ordinary sense. Mr Sumption�s submissions on this point, which I aminclined to accept, are recorded in para 49 of Rimer LJ�s judgment, ante,p 1415.

173 However it is unnecessary to speculate further about thecommercial terms on which gangs of robbers or fraudsters might beexpected to organise their criminal activities. There is in my opinion aclearer and �rmer basis on which to determine what (if any) signi�cance togive to the notion of a company being the secondary victim of the fraud(aimed at a third party) of one or more of its directors. It is necessary to keepwell in mind why the law makes an exception (the adverse interest rule) for acompany which is a primary victim (like the Belmont company, which wasmanipulated into buyingMaximum at a gross overvaluation). The companyis not �xed with its directors� fraudulent intentions because that would beunjust to its innocent participators (honest directors who were deceived, andshareholders who were cheated); the guilty are presumed not to pass on theirguilty knowledge to the innocent. But if the company is itself primarily (ordirectly) liable because of the ��sole actor�� rule, there is ex hypothesi noinnocent participator, and no one who does not already share (or must by hisreckless indi›erence be taken as sharing) the guilty knowledge. That isconsistent with the analysis by Rix J inArab Bank [1999] 1 Lloyd�s Rep 262.In that case Mr Browne was not the directing mind of JDW, which was nota one-man company; Rix J accepted that the position might have beendi›erent if it had been.

174 I would therefore limit my ground of decision in this appeal to theproposition that one or more individuals who for fraudulent purposes run aone-man company (in the sense described above) cannot obtain anadvantage by claiming that the company is not a fraudster, but a secondaryvictim. McNicholas [2000] STC 553 and Bank of India [2005] 2 BCLC 328may be best analysed as depending on a special rule of attribution requiredby the scheme of the legislation relating to VAT or fraudulent trading(as the case may be). It is not necessary to the disposal of this appeal, orprudent, to address every situation that may be described as involving asecondary victim.

Three cases relied on by S&R175 Mr Brindle argued that if an ex turpi causa defence is available in

this case, it must have been overlooked in other well known cases conductedby skilled and experienced counsel and solicitors. In particular, he referredto three pieces of litigation which he had cited to the Court of Appeal, butwhich had not been mentioned in the judgment of Rimer LJ: Barings, BCCIand Sasea. The actual decisions cited to the Court of Appeal are listed asBank of Credit and Commerce International (Overseas) Ltd v PriceWaterhouse The Times, 2 April 1998, Laddie J, Barings plc v Coopers &Lybrand [2003] 1 Lloyd�s Rep IR 566 and Sasea Finance Ltd v KPMG

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(formerly KPMG Peat Marwick McLintock) [2000] 1 All ER 676, but therewere some other strands in the litigation about Barings, and many otherstrands in the BCCI litigation (Mr Brindle�s printed case refers in particularto the judgment of Lightman J in Bank of Credit and CommerceInternational SA v Ali (No 2) [2000] ICR 1354, and to Bank of Creditand Commerce International (Overseas) Ltd v Price Waterhouse [1998]BCC 617, the judgment of the Court of Appeal reversing Laddie J [1997]BCC 584).

176 In an earlier draft I commented on these cases at some length.I have omitted that passage because it is not necessary, I think, or helpful, totry to reach any �rm conclusion about these other litigious struggles.Mr Brindle is right to say that S & R�s public policy defence is novel (at leastin England). Mr Sumption�s comments on the Barings, BCCI and Saseacases do suggest that there may have been good reasons why skilled andexperienced counsel and solicitors did not attempt to deploy the publicpolicy defence in those cases. But however novel the issues in this appeal,they must be decided on their merits, and not by reference to other cases inwhich (for whatever reason) they were not raised.

The ��very thing�� issue

177 In the context of ��the very thing that the defendant was under aduty to take care to prevent�� the phrase the ��very thing�� may �rst have beenused over 60 years ago by the unnamed county court judge whose judgmentwas upheld by the Court of Appeal in Stansbie v Troman [1948] 2 KB 48.That was the case of the decorator who left the door of his client�s houseunlocked when he went out to buy more wallpaper, with the result that someof the client�s jewellery was stolen by an opportunistic thief. What thecounty court judge actually said (see p 51) was that the decorator failed totake reasonable care ��to guard against the very thing that happened�� and thedecorator�s counsel argued (unsuccessfully) that his job was to decorate hisclient�s house, and not to look after its security. But the phrase has come tobe used as a convenient label for the principle that if there is a duty (incontract or tort) to prevent harm caused by a third party, the person underthat duty may be liable for the loss, and cannot excuse himself by saying thatit was caused by the third party (though the third party will normally beconcurrently liable). Reeves v Comr of Police of the Metropolis [1999]QB 169; [2000] 1 AC 360 and Corr v IBC Vehicles Ltd [2008] AC 884 (bothconcerned with suicide, though in a context of di›erent duties of care) areextreme illustrations of this principle, where the (self-) harm was caused notby a third party but by the person to whom the duty was owed.

178 The principle is therefore a principle of causation. Mr Brindleaccepts that, but submits that it is also a wider principle (he calls it aprinciple of logic) capable of excluding the public policy defence in a casewhere fraud on the part of a company is the very thing that it is the auditors�duty to detect (and so prevent for the future). He submits that a point madeby Lord Ho›mann in Reeves [2000] 1 AC 360, 372 applies to all defences,and not just causation defences:

��whatever views one may have about suicide in general, a 100%apportionment of liability toMr Lynch gives no weight at all to the policyof the law in imposing a duty of care upon the police. It is another

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di›erent way of saying that the police should not have owed Mr Lynch aduty of care.��

In Reeves illegality was run as a defence in the Court of Appeal, but not inthis House. On the other hand volenti non �t injuria was run in this House,and was rejected. Mr Brindle submits (on the strength of Smith v CharlesBaker & Sons [1891] AC 325, 360) that that is not a principle of causation.The volenti principle is far from precise and it may sometimes operate not asa principle of causation, but to negative any duty (or any breach). But in thiscontext it operates as an element in causation. As Lord Ho›mann said inReeves [2000] 1AC 360, 367:

��In the present case, volenti non �t injuria can only mean thatMr Lynch voluntarily caused his own death to the exclusion of any causale›ect on the part of what was done by the police. So I think it all comes tothe same thing: was the breach of duty by the police a cause of the death?��

179 Checking for fraud is part of an auditor�s task, but it is not his soleor primary task (for a reputable auditor to discover that the client company�sbusiness is wholly fraudulent and criminal must be quite unusual). Butsuppose for the sake of argument that a trader engages an accountant for theprimary and express purpose of preparing �nancial statements that complywith all the requirements of company law and tax law, so that the lawfulnessof the �nancial statements is the very thing that the accountant undertakes todo; and suppose that the accountant negligently fails to perform this task,and the trader is in consequence liable to some penalty or criminal sanction.Could the accountant meet a claim for professional negligence by pleadingthe ex turpi causa defence? It is obviously impossible to answer thatquestion without knowing more about the facts. If the trader had honestlysupplied information which he believed to be correct and complete, and theaccountant had negligently failed to notice that the information could not becorrect and complete, it seems unlikely that such a regulatory breach, notinvolving dishonesty, would bring the ex turpi causa principle into play.

180 That seems to have been the principle of the decision of the Court ofAppeal of Singapore in United Project Consultants Pte Ltd v Leong KwokOnn [2005] 4 SLR 214, paras 55—57, where the claimant trading companyhad been �ned for incorrect tax returns prepared by the defendant. Thecourt went on, at paras 58—62, to express the view that the ��very thing��principle would have excluded the ex turpi causa defence even if the factshad been serious enough to be capable of attracting it, saying at para 60:

��The respondent, however, alleged that the commission by theappellant of a statutory o›ence constituted an illegal act that disentitledthe latter from pursuing its claim in tort. This argument placed theproverbial cart before the horse. On a proper appreciation of the facts,the appellant�s running afoul of the Act could be attributed solely tothe fact that the respondent had failed in his duty to warn. To allow therespondent to rely upon a consequence that was directly caused by hisown failings and to absolve him from liability, would be to reward thewrongdoer and punish the innocent party.��

In my opinion that shows confusion of thought, since if the trader had beenconvicted of the more serious o›ence under section 96 of the Singapore

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Income Tax Act it would have been guilty of deliberate and dishonest taxevasion and could not have been described as an innocent party.

181 In that situation the law would not permit the trader to claimagainst the accountant, not because there was no fault on the part of theaccountant, but because public policy requires the dishonest trader to bedenied a remedy. It is not a matter of rewarding a wrongdoer. To repeat thewords of Lord Mans�eld CJ inHolman v Johnson (1775) 1 Cowp 341, 343:��It is upon that ground the court goes; not for the sake of the defendant, butbecause they will not lend their aid to such a plainti›.��

182 In United Project Consultants the Singapore Court of Appealreferred to the decision of the Court of Appeal in Reeves [1999] QB 169 assupporting their view on the ��very thing�� point. But as I read that case onlyBuxton LJ, at p 185, relied on that point as one of his reasons for rejectingex turpi causa. Lord Bingham of Cornhill CJ and Morritt LJ relied on thesimple ground that suicide is no longer a crime. As already note, illegalitywas not an issue whenReeves came on further appeal to this House.

183 Rimer LJ considered this point at length, ante, pp 1425—1433,paras 75—105, and rejected it, at paras 106—110. In my opinion he was rightto do so. His reasoning was, I think, essentially the same as mine. Theessential point is that a principle of causation cannot, as Rimer LJ put it,trump ex turpi causa where the latter principle applies, however short ofmerits the defendant may be.

The e›ect of liquidation

184 It was argued for the appellants that the public policy defenceshould not bar claims brought by a company in insolvent liquidation, wherethe creditors were innocent parties who had been defrauded by Mr Stojevic.If that were right, it would create a very large gap in the public policydefence, since most fraudsters (individual and corporate) become insolventsooner or later and have liabilities to those whom they have defrauded.Mr Brindle conceded that if Mr Stojevic had carried out his frauds directly(and not through a one-man company) neither he nor his trustee inbankruptcy could have resisted the public policy defence. That conclusionwas reached by Langley J [2008] Bus LR 304, para 65(2), and is clearlycorrect: see Fry LJ inCleaver vMutual Reserve Fund Life Association [1892]1 QB 147, 156. There is no good reason to apply a di›erent rule to acompany in liquidation. Apart from special statutory claims in respect ofmisfeasance, wrong trading and so on, it cannot assert any cause of actionwhich it could not have asserted before the commencement of itsliquidation, as Mr Brindle concedes. That is especially true in the context ofthe duties of an auditor, which are not owed to a company�s creditors.

Contributory negligence

185 Mr Brindle put in the forefront of his case the general submissionthat ex turpi causa is a blunt instrument, and that a more satisfactory toolfor doing justice would be the doctrine of contributory negligence. The exturpi causa principle is indeed a blunt instrument. Rimer LJ referred to it,quoting Langley J at �rst instance, as ��unforgiving and uncompromising��.That is its nature. But I am far from convinced that (if the public policydefence were not available) contributory negligence would provide a more

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sensitive or e›ective tool, any more than it does in the suicide cases: seeReeves [2000] 1 AC 360, especially Lord Ho›mann at pp 371—372.A company�s fraud and its auditors� negligence are incommensurable interms of blameworthiness and causal potency, just as lethal self-harm andnegligent custody are incommensurable in those terms.

The opinions of the minority

186 My Lords, after trying to analyse the intricacies of a complex anddi–cult case it is often helpful to stand back, as we say, and try to identifythe essentials. Had Mr Stojevic acted alone in his fraud (for instance, hadS & R been a completely �ctitious company, never properly incorporated) itis perfectly clear that he would have had no cause of action against MooreStephens because of (among other reasons) the ex turpi causa rule. Thatwould have been the case even if the action had been taken by his trustee inbankruptcy acting solely for the bene�t of the defrauded bank and otherinnocent creditors. That was the clear view of Langley J (in his conclusionsat para 65(2)) and it has not been challenged. The ex turpi causa rule isdistinct from the general principle that a claimant should not obtain apersonal pro�t from his ownwrong, although the two often overlap.

187 The same results would follow if Mr Stojevic had an individualpartner in crime (as Mr Alon may have been, although his participation hasnot formed part of the argument). Two highwaymen may be partners incrime but neither can sue the other for an account: Everet v Williams (1725),a case which was once thought to be apocryphal, but is veri�ed by a note in(1893) 9 LQR 197 (see also Jessel MR in Sykes v Beadon (1877) 11 ChD170, 195—196). The bill in equity for a partnership account would also havebeen dismissed out of hand if it had been brought, not by Everet himself butby the administrator of his insolvent estate, after Everet had been hanged atTyburn, even though the administrator might have been suing exclusivelyfor the bene�t of those whom the pair had robbed.

188 Why then does it make a di›erence that S & R, Mr Stojevic�spartner in crime, was not an individual but a corporation? For presentpurposes there is an obvious parallel between an action by a company ininsolvent liquidation, and an action by the trustee in bankruptcy of anindividual, or the administrator of the estate of an individual who has diedinsolvent. In each case the action is being brought by or under the control ofa �duciary for the bene�t of innocent creditors. But in each case the�duciary can have no better cause of action than the insolvent companyor individual, since the ex turpi causa rule is ��unforgiving anduncompromising��. I can see no reason why the corporate status of S & Rshould alter the analysis. Once it is accepted (�rst) that a company can havea guilty mind (Tesco Supermarkets Ltd v Nattrass [1972] AC 153; RoyalBrunei Airlines Sdn Bhd v Tan [1995] 2 AC 378) and (second) that S & Rwas directly (and not merely vicariously) liable for the frauds, then it seemsto me to be in just the same position as one of the highwaymen.

189 My noble and learned friend, Lord Scott of Foscote, considers thatthe position is di›erent because S & R was itself a victim. It had beenturned, in his view, into a corporate automaton. That view contradicts notonly the Court of Appeal but also the judge. Langley J observed [2008]Bus LR 304, para 65(6):

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��The primary victims of the fraud were KB and the other losers. Thefraud undoubtedly exposed S&R to liabilities to KB and the other losers,which it could not meet once, as was intended, the moneys fraudulentlyobtained were paid away as they were to those responsible for the fraud.On the other hand S&R lost nothing to which it was ever entitled. S&Rwas in a real sense the perpetrator of the fraud on KB and the banks andthe liability to which it was thereby exposed was not just the product ofthat fraud but the essence of it. In the particular circumstances of thiscase in my judgment it would be arti�cial not to �x S & R with theknowledge and wrongdoing of Mr Stojevic and also arti�cial to describeS&Reven as a secondary victim of the fraud.��

That puts the point very clearly. Lord Scott�s view seems to me to treat themost obvious and extreme situation of a company which has a guilty mind(a one-man company engaged in wholly fraudulent activities) as amountingto a situation in which the company has no mind at all. That view, withgreat respect, seems to me to be inconsistent with Royal Brunei Airlines vTan [1995] 2 AC 378 (which is generally regarded as a decision of highauthority) and to put the clock back to Abrath v North Eastern Railway Co11 App Cas 247.

190 Some of the reasoning in Lord Scott�s opinion proceeds on the basisthat Moore Stephens, as auditors, were o–cers of S & R. There islong-standing authority that an auditor is an o–cer for the purpose of amisfeasance summons under what is now section 212 of the Insolvency Act1986: In re London and General Bank [1895] 2 Ch 166, a decision of theCourt of Appeal which was followed by another constitution of that court(though with Lord Herschell expressly withholding his opinion) in In reKingston Mill Cotton Co [1896] 1 Ch 6. In the leading case of In re CityEquitable Fire Insurance Co Ltd [1925] Ch 407, 422, counsel for theauditors reserved this point but the case did not reach this House. The lawmay now be taken as settled that for the purposes of a misfeasance summonsunder section 212�a procedural provision�an auditor is an o–cer of acompany. But he is in a quite di›erent position from a director or manager,as Bingham LJ pointed out in Caparo [1989] QB 653, 681, cited by LordBridge of Harwich in this House [1990] 2AC 605, 625—626:

��In carrying out his investigation and in forming his opinion theauditor necessarily works very closely with the directors and o–cersof the company. He receives his remuneration from the company.He naturally, and rightly, regards the company as his client. But he isemployed by the company to exercise his professional skill and judgmentfor the purpose of giving the shareholders an independent report on thereliability of the company�s accounts and thus on their investment.�No doubt he is acting antagonistically to the directors in the sense that heis appointed by the shareholders to be a check upon them�: In re KingstonCottonMill Co [1896] 1Ch 6, 11, per VaughanWilliams J.��

His part is, and must be, independent (section 27(1) of the Companies Act1989 provides that a person is ineligible for appointment as companyauditor of a company if he is an o–cer or employee of the company). Inshort, even if an auditor is for some purposes an o–cer of the company forwhich he acts, he is in a totally di›erent position from that of the directors

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and managers who are running its business. In my respectful opinion it doesnot assist the task of analysis to equate them.

191 Someone who had been robbed by the highwaymen would havehad a direct civil claim against both as joint tortfeasors, just as in this caseKB had a claim (which it pursued to judgment) against S & R andMr Stojevic. But KB had no possibility of a direct claim against MooreStephens. That is clear from the judgment of Millett J in Al Saudi Banque vClarke Pixley [1990] Ch 313 (decided after the decision of the Court ofAppeal but before the decision of this House in Caparo Industries plc vDickman [1989] QB 653; [1990] 2 AC 605) and by the decision of thisHouse in the latter case, approving the decision in Al Saudi Banque. Muchof the opinion of my noble and learned friend, Lord Mance, seems to me,with great respect, to be seeking to attenuate by indirect means the House�sdecision inCaparo, although we are not invited to depart from it.

192 Lord Mance is rightly concerned at the di–culty of pinning downthe concept of a one-man company. What if there are innocent minorityshareholders who have no say in the management of the company? What ifmajority shareholders, even, have been ��hijacked�� by a fraudulent butdominant managing director? These are di–cult questions but what can besaid with con�dence is that cases of that sort would plainly not be suitablefor a strikeout (compare the unreported case ofMarlwood Commercial Inc vKozeny [2006] EWHC 872 (Comm) mentioned in paras 48—51 of thejudgment of Langley J [2008] Bus LR 304). In a case of that sort the courtwould have to inquire closely into the facts in order to see (as Saville LJ put itinGroup Josi) whether it would be contrary to justice and common sense totreat the company as complicit. But here it was the claimant�s own case thatthe position was clear. As Rimer LJ said (to repeat para 9 of his judgment,ante, pp 1400—1401),

��It is the essence of the company�s claim that Mr Stojevic was itscontrolling mind and will. Nobody else was in a like position. In a realsense the company was his company. It was, for practical purposes, a�one-man company�. It is a further part of the claim that the companywas throughout used by Mr Stojevic as a vehicle for fraud, by extractingmoney from KB so that it could then be paid away to the fraudsters.��

Some observations in Lord Scott�s opinion appear to overlook this point.193 I add a �nal comment on the ��very thing�� argument. It is

nonsensical, the argument goes, to assert that there is a duty (for an auditorto detect fraud, or for the police to protect a man in custody from self-harm)but at the same time to empty that duty of content, either on grounds ofcausation or by applying the ex turpi causa rule. I see the force of thatargument, but the analysis seems to me to rely on a good deal of hindsight.When the police hold a man in custody they owe him a variety of duties,including the duty to keep him safe from harm (whether from the policethemselves, or from other detained persons, or from self-harm). The duty totake precautions against suicide is part of this duty. If a man in a good stateof mental health deliberately kills himself while in police custody, his estatemay be unable to recover damages, but that does not to my mind drainthe police duty of care of all content. In Reeves [1999] QB 169 onlyBuxton LJ seems to have been troubled by this point. Similarly withauditors. The detection of fraud is only a small part of the total statutory

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and common law duties owed by auditors, and the discovery that anapparently respectable and prosperous company is carrying on activitiesthat are wholly fraudulent must be a very rare occurrence. This case is,as Mr Sumption emphasised in his written and oral submissions, a rareand extreme case, so extreme that it is in my opinion appropriate forsummary disposal.

Conclusion

194 For these reasons I would dismiss this appeal.

LORDBROWNOF EATON-UNDER-HEYWOOD195 My Lords, suppose as a solicitor practising on my own account

I engage an accountant to complete my annual tax return. I have earned feesof £200,000 but, with a view to defrauding the revenue, I tell him that myfees were only £100,000 and provide him with my fee book for only sixmonths of the year. He neglects to query this despite being provided withdocuments showing travelling expenses incurred over the full 12-monthperiod. The revenue are not so stupid and eventually my fraud is uncovered,I am charged the shortfall and heavily �ned into the bargain. Can I sue myaccountant in negligence or for breach of his contractual duty of caretowards me? Plainly not. There could hardly be a more obvious applicationof the ex turpi causa principle to bar my claim. Luscombe v Roberts (1962)106 SJ 373 illustrates the point. Suppose then I am bankrupted. Can mytrustee in bankruptcy bring the claim for the bene�t of my creditors?Equally plainly not. He enjoys no better claim than I had.

196 Suppose then essentially the same scenarios but this time I haveincorporated my practice and carry it on as a one-man company. Would thatbring about a di›erent result? Would the accountant in those circumstancesbecome liable for whatever losses the fraud ultimately occasioned thecompany? It would be odd were it so and in my opinion it is not so andcould not be so ever since the rejection, over a century ago, of LordBramwell�s view expressed in Abrath v North Eastern Railway Co (1886)11 App Cas 247, 251 that a company, as a �ctitious person, is ��incapable ofmalice or of motive��. Once it is recognised that a company can itself befraudulent there could be no clearer instance of it than that suggested above,unless perhaps it is this very case.

197 The facts of this case are fully set out in the opinions of others ofyour Lordships and need not be repeated. Here, as my noble and learnedfriend, Lord Walker of Gestingthorpe, makes plain, not merely wasMr Stojevic ��the directing mind and will of the corporation, the very ego andcentre of the personality of the corporation�� (Viscount Haldane LC inLennard�s Carrying Co Ltd v Asiastic Petroleum Co Ltd [1915] AC 705,713), but Stone & Rolls Ltd (S & R) was, even on the most exactingde�nition of the term, a one-man company. As Mr Sumption put it,uncontentiously, at the beginning of his printed case:

��[Mr Stojevic] was as completely identi�ed with the company as it ispossible for a human agent to be. He had sole control over the company�severy act. He was the company�s sole bene�cial owner. There were noindependent or innocent directors whom Mr Stojevic had to deceive tomake the fraud happen. There were no innocent shareholders relying

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upon the auditors to monitor the management. There were noemployees.��

198 How in these circumstances there is any room for the application ofthe Hampshire Land principle�see In re Hampshire Land Co [1896] 2 Ch743�I cannot for the life of me see. That principle, otherwise described asthe adverse interest rule, operates as an exception to the ordinary rule ofattribution, itself a general principle of agency, that ordinarily one imputesto the company (the principal) the knowledge of a director (the agent) on thebasis that the agent may be presumed to have discharged his duty to discloseall material facts to his principal. TheHampshire Land exception recognisesthat in reality agents will not disclose to their principals the fact that they arecommitting fraud, least of all when they are defrauding the principalsthemselves, and that it would be contrary to common sense and justice forthe law to presume otherwise. Indeed, the Hampshire Land principle maywell go wider than this and extend also to breaches of duty by the agentshort of fraud�consider, for example, Vaughan Williams J�s judgment inHampshire Land itself and Rix J�s judgment in Arab Bank plc v ZurichInsurance Co [1999] 1 Lloyd�s Rep 262�and to agents� frauds even ifcommitted against others than their principals, and perhaps irrespective ofwhether the principal is to be regarded as ��a secondary victim��see againRix J�s judgment in Arab Bank. For the purposes of the present appeal,however, it is quite unnecessary to explore, let alone decide, any of this.

199 In the present case Mr Stojevic and S&Rwere in e›ect one and thesame person. It is absurd to describe Mr Stojevic as the agent and S & R asthe principal for all the world as if, but for the Hampshire Land principle,the law would presume that Mr Stojevic had been disclosing to S & R hisfraudulent conduct towards the Czech Bank. As Lord Reid said in TescoSupermarkets Ltd v Nattrass [1972] AC 153, 170:

��He is not acting as a servant, representative, agent or delegate. He isan embodiment of the company or, one could say, he hears and speaksthrough the persona of the company, within his appropriate sphere, andhis mind is the mind of the company. If it is a guilty mind then that guilt isthe guilt of the company.��

200 For this reason I �nd the concept of the ��sole actor�� exception tothe adverse interest exception (the Hampshire Land principle) a somewhatpuzzling one. Why is it necessary to except from an exception a category ofcase which cannot logically fall into the exception in the �rst place?Assuming, however, that there is scope for such an exception to theHampshire Land principle, then the need for it seems to me compelling andas good a statement of it as any is to be found in In re The Mediators Inc;The Mediators Inc v Manney (1997) 105 F 3d 822 already fully set out atpara 163 of LordWalker�s opinion.

201 It is on this basis and this basis alone�the one-man company orsole actor basis�that I would uphold the Court of Appeal�s judgment thatS & R is in no di›erent or better position than Mr Stojevic himself to resistthe ex turpi causa defence (and the liquidator of S & R in no better positionthan either of them).

202 Lord Mance, as I understand his opinion, would �nd liability herein respect of all such losses as were occasioned by the fraud from the time

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E)) [2009] 1 AC[2009] 1 ACLord Brown of Eaton-under-HeywoodLord Brown of Eaton-under-Heywood

when the auditors should have uncovered it. But what is this if not ��liabilityin an indeterminate amount for an indeterminate time to an indeterminateclass�� of claimants�whoever came to be defrauded by the company in thetrading period after the fraud should have been ended to whatever was theextent of their loss. (The quoted phrase comes, of course, from Cardozo CJ�sjudgment in Ultramares Corpn v Touche (1931) 174 NE 441, adopted byMillett J in Al Saudi Banque v Clarke Pixley [1990] Ch 313, a judgmentapproved by the House in Caparo Industries plc v Dickman [1990 ]2 AC 605.) The company, through its liquidator, would be suing to recoveron behalf of all those whom it had defrauded. That, indeed, is precisely thenature of this claim. Such an approach seems to me to run diametricallycounter to the principles established in Caparo. I also �nd it di–cult toreconcile with Hobhouse J�s decision in Berg, Sons & Co Ltd v MervynHampton Adams (1992) [2002] Lloyd�s Rep PN 41, an authority whichLord Mance prays in aid. Applying Caparo and rejecting a liquidator�sclaim against the company�s former auditors, Hobhouse J said, at p 53, thatthe company

��have based their case not upon any lack of information on the partof Mr Golechha [the company�s directing mind] but rather upon theopportunity that the possession of the auditor�s certi�cate is said to havegiven for the company to continue to carry on business and borrowmoney from third parties. Such matters do not fall within the scope of theduty of the statutory auditor.��

Here too, by the assumed negligence on the part of the auditors, thecompany was able to continue to carry on business, in this case stealingrather than borrowing money from third parties.

203 I recognise, of course, that con�ning the ex turpi causa defence, asI would, to one man company frauds means that, where any innocentshareholders are involved, a claim against the auditors may well lie (throughthe company) at their suit. This, however, would not be an open-endedclaim, wholly indeterminate as to its potential scope and extent at the time ofthe audit, such as that presently brought. Quite how it would fall to becon�ned is no doubt open to argument. But on one view it might be limitedto the innocent shareholders� own loss su›ered through the continuingfraud from the time when, following a diligent audit, it should have beenuncovered and brought to an end. A claim of that nature would seem to meto accord altogether more readily with the policies and principles generallyunderstood to apply in this context.

204 With regard to the ��very thing�� argument, I agree entirely withwhat LordWalker says and wish to add nothing on the point.

205 For these reasons, which really do no more than echo those of LordWalker, I too would dismiss this appeal.

LORDMANCE

Introduction

206 My Lords, the world has su–cient experience of Ponzi schemesoperated by individuals owning ��one man�� companies for it to bequestionable policy to relieve from all responsibility auditors negligentlyfailing in their duty to check and report on such companies� activities.

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E))[2009] 1 AC[2009] 1 ACLord Brown of Eaton-under-HeywoodLord Brown of Eaton-under-Heywood

1AC 2009�52

The speeches of my noble and learned friends in the majority have thate›ect. In my opinion, English law does not require it. I consider that the keyto a proper resolution of this appeal is to bear �rmly in mind: (a) theseparate legal identities of a company and its shareholders; (b) the commonlaw and contractual duties which it is common ground that auditors oweand which included in this case an express undertaking to comply withauditing standard SAS 110 on fraud and error of the Auditing PracticesBoard; (c) the rights that a company has as a result as against those who,whether as o–cer or auditor, commit wrongs against it; (d) the distinctionbetween on the one hand a company�s claim for its own net losses, for whichit is entirely consistent with Caparo Industries plc v Dickman [1990]2 AC 605 that it should be able to sue auditors whose negligence led to suchlosses, and on the other hand its creditors� losses, for which under Caparo itscreditors cannot sue negligent auditors; (e) the basic company law principlethat the interests and powers of shareholders yield to those of creditors in acompany which is actually or potentially insolvent. I di›er from themajority speeches in this case because they fail in my respectful opinion totake these points duly into account.

207 Within the majority speeches, although their reasoning di›ers,there can be found (i) an inversion of the decision in Caparo�whereby thedenial to creditors in that case of recovery against auditors because thecompany would have its own claim is deployed to deny the company�s claimagainst auditors because this would indirectly bene�t the company�screditors; (ii) a suggestion, never pleaded or raised by the auditors, that theauditors� contractual engagements might be unenforceable ab initio;(iii) a suggestion that the company did not su›er any loss at all�a surprisingproposition, when its assets were over years steadily abstracted from itleaving it with a large de�cit out of which it was unable to meet its liabilitiesto the banks; (iv) a suggestion that a company might be unable to recoveragainst auditors, if some or apparently even one of its shareholders werecomplicit in fraud committed by the company�s directing mind and willcausing the company to su›er loss�a suggestion which if good would haveprovided auditors with immunity in a large number of auditors� negligenceclaims. I will explain my disagreement with each of points (i) to (iv) in thecourse of this speech. However, it is points (d), (e) and (i) together whichultimately divide the House and are, or ought to be, central to this appeal.I address them in paras 265—273 and 275—277 below.

208 The appeal�against an order of the Court of Appeal expressed tobe ��for summary judgment on, or to strike out, the whole�� of a company�sclaim against its auditor�raises for the �rst time in this jurisdiction the issuewhether the maxim ex turpi causa non oritur actio can apply to a claim incontract and/or tort by a company against its auditors for professionalnegligence. Moreover, the issue is raised in an acute form by the auditor�sprimary submission, that there are only three preconditions to theapplication of the maxim: (a) fraud should have been committed by a personcounting as the company�s directing mind and will; (b) it should have beencommitted by the company, not against it; and (c) the company should alsohave to rely on the fraud in order to plead its case against the auditor. Onlyin the alternative does the auditor submit that, if those conditions do notalone engage the maxim, then the fact that the fraud was committed bythe sole bene�cial owner of the company delivers the coup de grace.

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E)) [2009] 1 AC[2009] 1 ACLordManceLordMance

In response, the company submits, inter alia, that the auditor�s submissionsundermine the purpose of an audit, and that, at least in circumstances wherethe company was insolvent at the relevant audit date, the company�sinterests can no longer be equated with those of its shareholders and thecompany can recover for loss it sustained by a scheme of fraud, which wouldhave been detected and stopped by a careful audit.

Facts209 The essential facts to be assumed for the purposes of this appeal

can be shortly stated. The appellant company, Stone & Rolls Ltd(��S & R��incorporated in England and Wales and in liquidation sinceNovember 2002), was at all material times under the complete control ande›ective ownership of a Mr Stojevic. (Mr Stojevic was not formally adirector�the only such director was a resident of Sark�and the bene�cialownership which Mr Stojevic is admitted in the agreed statement of facts tohave had of S & R�s shares was indirect and covert, through an Isle of Mancompany the shares of which were held by a trust.) The respondent acted asS & R�s auditors for periods ending 31December in the years 1996 to 1999,in each case under a separate contractual engagement. Mr Stojevic wasthroughout those years using S & R as a vehicle for fraud. The fraudinvolved the extraction from various banks, principally it appears KomercniBanka AS (the former State Bank of Czechoslovakia), of increasingly largeamounts under letters of credit providing for deferred payment at maturitydates as long as 180 or even 360 days. The banks believed they were�nancing bona �de commodity trades, but the documents presented werefalse and did not relate to actual goods. S & R obtained funds withoutwaiting for the expiry of the deferred periods by assigning or forfeiting theletters of credit. The funds were then paid away to third parties under thein�uence or control of Mr Stojevic, and used, in part only, to reimbursethe banks in respect of previous maturing letters of credit (and so secure theissue of further larger letters of credit). The sums outstanding under thesecircular transactions grew steadily until eventually reimbursement of thebanks ceased, and the banks were left with unsecured and very substantiallosses. In proceedings before Toulson J in 2002, Komercni BankaAS exposed the fraud and obtained judgment in deceit against S & R forUS$94,470,382.28: Komercni Banka AS v Stone & Rolls Ltd [2003]1 Lloyd�s Rep 383. S & R, having been stripped of its assets by Mr Stojevicand his associates, has nothing with which to meet this or any other liabilityor indebtedness, and is in liquidation.

210 S & R�s claim against Moore Stephens is also capable of quite briefsummary. It is agreed for present purposes that it is to be considered a claimin negligence only (though there is in relation to the 1998 audit a stronglydenied and presently irrelevant allegation that Moore Stephens shut aNelsonian eye to the fraud). The alleged negligence, put as a breach both ofcontract and of a duty of care, consists of failure on Moore Stephens�s partto detect various aspects of the scheme of fraud. In this respect S & Raccepts that no distinction can be drawn between the obtaining of moneysunder the letters of credit and their payment out. The two were integralparts of Mr Stojevic�s scheme, and much of the negligence alleged againstMoore Stephens consists of failure to react to clear signs that the goodspurportedly being sold and represented by documents presented to the banks

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Stone & Rolls Ltd vMoore Stephens (HLStone & Rolls Ltd vMoore Stephens (HL(E))(E))[2009] 1 AC[2009] 1 ACLordManceLordMance

did not exist. The causation alleged is that, if Moore Stephens haddiscovered the fraud, they would have had to resign and report the matter toregulatory authorities. The loss claimed consists in the amounts paid out ofS & R after the end of each of the audits upon which it is alleged the fraudshould have been discovered.

The audit role211 The proper starting point for consideration of this appeal is the

nature of an audit and the duties which Moore Stephens as an auditorundertook each year. Both the statutory context and the terms of theparticular engagement are important. But the existence of Moore Stephens�scontractual engagement in each year is common ground, and it was neitherpleaded (see defence, para 3) nor suggested in oral submissions that it wasinvalid or unenforceable as such; had any such point had any validity, onemay be con�dent that those advising Moore Stephens would not haveoverlooked it, particularly bearing in mind the novelty and nature of somepoints which have been argued. The existence of a duty on the part ofMoore Stephens to the company and its general scope are for presentpurposes also common ground. As the company�s case puts it, MooreStephens ��owed the company a duty to take care to detect . . . the fraud; and. . . breached that duty�� or, asMoore Stephens�s own case puts it, they

��owed the company a duty to report whether its accounts showed atrue and fair view of its �nancial a›airs. One of the things that they hadto do to perform that duty was take such steps as were reasonable in thecircumstances to discover that the company�s business was fraudulent.��

The audits were undertaken under the Companies Act 1985, and CaparoIndustries plc v Dickman [1990] 2 AC 605 and Al Saudi Banque v ClarkePixley [1990] Ch 313 (Millett J), approved in Caparo, therefore containrelevant further guidance as toMoore Stephens�s role and duties. In so far asthese are prescribed by statute, such role and duties are necessarilyin�exible�they cannot be changed or waived by the company, itsmanagement or its shareholders.

212 An auditor�s primary duty is to report to shareholders on theannual accounts and report to be prepared by the directors: sections 226(1),227(1), 233(1)(3) and 234(1) of the 1985 Act, as inserted by section 9 of theCompanies Act 1989. Section 235, as so inserted, states the duty:

��(1) A company�s auditors shall make a report to the company�smembers on all annual accounts of the company of which copies are to belaid before the company in general meeting during their tenure of o–ce.

��(2) The auditors� report shall state whether in the auditors� opinionthe annual accounts have been properly prepared in accordance with thisAct, and in particular whether a true and fair view is given . . .

��(3) The auditors shall consider whether the information given in thedirectors� report for the �nancial year . . . is consistent with thoseaccounts; and if they are of opinion that it is not they shall state that factin their report.�� (Emphasis added.)

213 In Caparo [1990] 2 AC 605, 625D—626C, Lord Bridge of Harwichapproved the following summary by Bingham LJ [1989] QB 653, 680—681of the position of auditors in relation to shareholders:

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��The members, or shareholders, of the company are its owners. Butthey are too numerous, and in most cases too unskilled, to undertake theday to day management of that which they own. So responsibility for dayto day management of the company is delegated to directors. Theshareholders, despite their overall powers of control, are in mostcompanies for most of the time investors and little more. But it would ofcourse be unsatisfactory and open to abuse if the shareholders received noreport on the �nancial stewardship of their investment save from those towhom the stewardship had been entrusted. So provision is made for thecompany in general meeting to appoint an auditor (section 384 of theCompanies Act 1985), whose duty is to investigate and form an opinionon the adequacy of the company�s accounting records and returns and thecorrespondence between the company�s accounting records and returnsand its accounts: section 237. The auditor has then to report to thecompany�s members (among other things) whether in his opinion thecompany�s accounts give a true and fair view of the company�s �nancialposition: section 236 [sic]. In carrying out his investigation and informing his opinion the auditor necessarily works very closely with thedirectors and o–cers of the company. He receives his remuneration fromthe company. He naturally, and rightly, regards the company as his client.But he is employed by the company to exercise his professional skill andjudgment for the purpose of giving the shareholders an independentreport on the reliability of the company�s accounts and thus on theirinvestment. �No doubt he is acting antagonistically to the directors in thesense that he is appointed by the shareholders to be a check upon them�:In re Kingston CottonMill Co [1896] 1Ch 6, 11, per VaughanWilliams J.The auditor�s report must be read before the company in general meetingand must be open to inspection by any member of the company:section 241. It is attached to and forms part of the company�s accounts:sections 238(3) and 239. A copy of the company�s accounts, including theauditor�s report, must be sent to every member: section 240. Any memberof the company, even if not entitled to have a copy of the accounts sent tohim, is entitled to be furnished with a copy of the company�s last accountson demand andwithout charge: section 246.��

214 Caparo establishes that the auditor�s statutory duty is not to anyindividual shareholder as a purchaser or potential shareholder of shares inthe company, but to the shareholders collectively, and that their remedy forany breach lies through the company. As Lord Bridge put it, at p 626:

��in practice no problem arises in this regard since the interest of theshareholders in the proper management of the company�s a›airs isindistinguishable from the interest of the company itself and any losssu›ered by the shareholders, e g by the negligent failure of the auditor todiscover and expose a misappropriation of funds by a director of thecompany, will be recouped by a claim against the auditors in the name ofthe company, not by individual shareholders.��

Consistently with this, Lord Oliver of Aylmerton, at p 630, described theauditor�s function as being

��to protect the company itself from the consequences of undetectederrors or, possibly, wrongdoing (by, for instance, declaring dividends out

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of capital) and, secondly, to provide shareholders with reliableintelligence for the purpose of enabling them to scrutinise the conduct ofthe company�s a›airs and to exercise their collective powers to reward orcontrol or remove those to whom that conduct has been con�ded.��

At p 653H, he quoted with approval the statement by O�Connor LJ in theCourt of Appeal [1989] QB 653, 714 to the e›ect that loss by ��fraudulentabstraction of assets by directors or servants . . . is recoverable by thecompany��.

215 In addition to the auditor�s primary responsibility to theshareholders as a whole, the legislation recognises certain obligations inrespect of others. LordOliver noted [1990] 2AC 605, 631:

��the history of the legislation is one of an increasing availability ofinformation regarding the �nancial a›airs of the company to those havingan interest in its progress and stability. It cannot fairly be said that thepurpose of making such information available is solely to assist thoseinterested in attending general meetings of the company to an informedsupervision and appraisal of the stewardship of the company�s directors,for the requirement to supply audited accounts to, for instance,preference shareholders having no right to vote at general meetings and todebenture holders cannot easily be attributed to any such purpose.��

Further, section 394 of the Companies Act 1985 provides that:

��(1) Where an auditor ceases for any reason to hold o–ce, he shalldeposit at the company�s registered o–ce a statement of anycircumstances connected with his ceasing to hold o–ce which heconsiders should be brought to the attention of the members or creditorsof the company or, if he considers that there are no such circumstances, astatement that there are none.�� (Emphasis added.)

Section 394(3) provides that the company must either send a copy of anystatement identifying any such circumstances to every member, debenture-holder and person entitled to notice of general meetings or apply to the court.

216 Moore Stephens�s statutory duties were reinforced by thecontractual terms of their engagement letter dated 19 December 1996 andsigned by Mr Stojevic for S & R on 14 January 1997. This letteracknowledged their statutory duties and identi�ed their ��professionalresponsibility to report if the �nancial statements do not comply in anymaterial respect with applicable accounting standards, unless in our opinionthe non-compliance is justi�ed in the circumstances��. The audit was to be��conducted in accordance with the auditing standards issued by the AuditingPractices Board��, and the letter stated that

��(11) The responsibility for safeguarding the assets of the companyand for the prevention and detection of fraud, error and non-compliancewith law or regulations rests with yourselves. However, we shallendeavour to plan our audit so that we have a reasonable expectationof detecting material misstatements in the �nancial statements oraccounting records (including those resulting from fraud, error ornon-compliance with law or regulations) but our examination should notbe relied upon to disclose all such material misstatements or frauds, errorsor instances of non-compliance as may exist . . .��

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217 Auditing standard SAS 110 (issued January 1995) deals withfraud and error. It contains statements of auditing standards (SAS) andexplanatory text in numbered paragraphs. SAS 110.1 states:

��Auditors should plan and perform their audit procedures andevaluate and report the results thereof, recognising that fraud or errormaymaterially a›ect the �nancial statements.��

SAS 110.10 ( para 50) states that, on becoming aware of a suspected oractual instance of fraud, auditors

��should (a) consider whether the matter may be one that ought to bereported to a proper authority in the public interest; and where this is thecase (b) except in the circumstances covered in SAS 110.12, discuss thematter with the board of directors, including any audit committee.��

SAS 110.12 ( para 52) provides that

��When a suspected or actual instance of fraud casts doubt on theintegrity of the directors auditors should make a report direct to a properauthority in the public interest without delay and without informing thedirectors in advance.��

The text at para 56 explains that matters to be taken into account whenconsidering whether disclosure is justi�ed in the public interest may include��the extent to which the suspected or actual fraud is likely to a›ect membersof the public��. Plainly, one situation in which members of the public wouldbe a›ected is where the fraud conceals or risks bringing about the company�sinsolvency. The viability of a company as a going concern is always a matterof audit importance.

218 The relationship of company and auditor is not therefore a simpletwo-party relationship. The company cannot in the audit context beequated with its board of directors or management. The company�sshareholders are�at least while the company is solvent�the main focus ofan auditor�s activity and duties. The auditor, in undertaking the statutoryrole and contractual and tortious duties, is ��acting antagonistically to thedirectors��: see para 213 above.

Analysis219 Moore Stephens�s case, accepted by the Court of Appeal, is that the

company, S&R, in order to show negligence on the part ofMoore Stephens,has to plead and so rely on a scheme, to which it was through Mr Stojevicparty and one aspect of which was fraud on S & R�s banks; Mr Stojevic wasS & R�s directing mind; and the claim therefore falls within the coreprinciple in Tinsley v Milligan [1994] 1 AC 340, which, it is submitted,precludes a party from pursuing a contractual or tortious claim if, in order todo so, it has to plead and rely on its own iniquity. Mr Sumption accepts thatwhether there is iniquity su–cient to trigger the maxim may sometimesrequire careful examination of the facts (see e g Burrows v Rhodes [1899]1 QB 816 and United Project Consultants Pte Ltd v Leong Kwok Onn[2005] 4 SLR 214), but Mr Stojevic�s iniquity is not here in doubt.The Court of Appeal accepted Moore Stephens�s analysis, without drawingany distinction between cases where the directing mind of a company wasand was not sole shareholder. S & R in resisting it draws on the nature and

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purpose of an audit (summarised above) as well as on two general principlesof law: the �rst, that fraud on a company by even its most senior o–cer(s)constituting its directing mind is not to be attributed to the company: In reHampshire Land Co [1896] 2 Ch 743; Belmont Finance Corpn Ltd vWilliams Furniture Ltd [1979] Ch 250 and Attorney General�s Reference(No 2 of 1982) [1984] QB 624; and the second, that a person should not beentitled to deny liability for a breach of contract or duty consisting in failureto do the ��very thing�� (here, it is said, to check for and detect fraud) which itwas his duty to do, reliance in this connection being placed on Reeves vComr of Police of theMetropolis [2000] 1AC 360.

220 A company, once legally incorporated, ��must be treated like anyother independent person with its rights and liabilities appropriate toitself��: Salomon v A Salomon & Co Ltd [1897] AC 22, 30 per LordHalsbury LC. But a company ��has no mind of its own any more than it hasa body of its own��: Lennard�s Carrying Co Ltd v Asiastic Petroleum Co Ltd[1915] AC 705, 713. For some purposes it is necessary to attribute orimpute to a company the mind, knowledge or intentions of one or morehuman beings. In a criminal law context, where the company standsaccused, the law is likely to look at the acts and state of mind of a personwho can be regarded as the embodiment of the company�its alter ego ordirecting mind�rather than at those of a person acting merely as servant,agent or delegate, for whom the company might in a civil law context bevicariously liable: Tesco Supermarkets Ltd v Nattrass [1972] AC 153,170E—G per Lord Reid. When and how far a company will be attributedwith the state of mind of individuals who have acted for it depends on thecircumstances and context. My noble and learned friend, Lord Brown ofEaton-under-Heywood, refers to the rejection of Lord Bramwell�s view inAbrath v North Eastern Railway Co (1886) 11 App Cas 247, 251 that acompany, as a �ctitious person, is ��incapable of malice or of motive��. Butthe corollary of that rejection is not that the company is always to beattributed with the malice or motive of anyone acting for it or even of itstop management (or indeed that it is always necessary to attribute to acompany itself any state of mind at all).

221 The locus classicus in this area is now the advice of the PrivyCouncil given by Lord Ho›mann in Meridian Global Funds ManagementAsia Ltd v Securities Commission [1995] 2 AC 500. Lord Ho›mannidenti�ed the provisions of a company�s constitution as its primary rules ofattribution. He instanced provisions making decisions of the majority of itsboard decisions of the company and the common law rule that theunanimous decision of all the shareholders in a solvent company aboutanything which the company under its memorandum of association haspower to do are also decisions of the company. He cited in the latterconnection Multinational Gas and Petrochemical Co v Multinational Gasand Petrochemical Services Ltd [1983] Ch 258. A company�s primaryrules of attribution are supplemented by general principles of agency andvicarious liability.

222 At p 507, Lord Ho›mannwent on to say that these together

��are usually su–cient to enable one to determine its rights andobligations. In exceptional cases, however, they will not provide ananswer. This will be the case when a rule of law, either expressly or by

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implication, excludes attribution on the basis of the general principles ofagency or vicarious liability.��

He gave as examples situations where the law requires some act or state ofmind of a person ��himself�� as opposed to his servants or agents, and the ruleof the criminal law ��which ordinarily impose[s] liability only for the actusreus and mens rea of the defendant himself��. The court might then �nd thatthe rule of law was not intended to apply to companies at all, or that it couldapply only on the basis of the company�s primary rules of attribution or thatneither of these solutions was satisfactory. In that case, at p 507:

��the court must fashion a special rule of attribution for the particularsubstantive rule. This is always a matter of interpretation: given that itwas intended to apply to a company, how was it intended to apply?Whose act (or knowledge, or state of mind) was for this purpose intendedto count as the act etc of the company? One �nds the answer to thisquestion by applying the usual canons of interpretation, taking intoaccount the language of the rule (if it is a statute) and its content andpolicy.��

223 Although Lord Ho›mann in these passages focused on situations inwhich the primary rules of attribution might not alone su–ce, he was notexcluding the possibility of cases in which not even the primary rules ofattribution should apply; and Mr Sumption for Moore Stephens rightly didnot suggest that he was, though submitting that such cases would be ��veryrare indeed��. One issue before your Lordships is whether the audit contextmay be such a case.

Mr Stojevic�s position as the company�s directing mind

224 I start with the company�s position vis-¼-vis Mr Stojevic. MooreStephens�s case has changed at each instance. But before the HouseMr Sumption�s submission was that S & R could only claim againstMr Stojevic on a narrow basis for abstraction of its moneys (a proprietaryclaim like that mentioned by O�Connor LJ in Caparo [1989] QB 653, 714:see para 214 above); and that any claim against him for damages for breachof duty as an o–cer would be barred by the maxim ex turpi causa because itwould involve pleading S & R�s fraud on the banks. I do not accept thissubmission. It would mean that, if one element of Mr Stojevic�s fraud on thebanks had involved persuading the banks to pay the funds direct into anaccount represented as being S & R�s but in fact Mr Stojevic�s, S & R couldnot sue Mr Stojevic. Mr Stojevic�s common law duty as a director to S & Rwas to conduct its a›airs honestly and properly. Section 172(1) of theCompanies Act 2006 now states the duty, in terms expressly based oncommon law rules and equitable principles (see section 170(3)), as being to��act in the way he considers, in good faith, would be most likely to promotethe success of the company for the bene�t of its members as a whole��a duty made expressly ��subject to any enactment or rule of law requiringdirectors, in certain circumstances, to consider or act in the interests ofcreditors of the company��: see section 172(3). Section 212 of the InsolvencyAct 1986 provides a summary remedy available in the course of winding upagainst anyone who is or has been an o–cer of the company in respect of,inter alia, ��any misfeasance or breach of any �duciary or other duty in

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1AC 2009�53

relation to the company��. (This is in addition to the speci�c remedies thatapply in circumstances of fraudulent or wrongful trading under sections 213and 214.)

225 As between S & R and Mr Stojevic, Mr Stojevic�s fraud on thebanks was and is just as objectionable as the later abstraction of moneys towhich it was designed to lead. In holding a director responsible in such acase, a company is as a separate legal entity enforcing duties owed to it bythe director. It is not acting inconsistently, or asking the court to actinconsistently, with the law. It is a remarkable proposition, that thedirecting mind of a company can commit the company to a scheme of fraudand then avoid liability in damages if the company would have to plead andrely on this scheme to establish such liability. It is even more remarkable,indeed paradoxical, when it is, I conceive, clear beyond doubt that thecompany has a remedy against its auditor for negligent failure to detect andreport fraud by a company�s directing mind where (at the very least) thecompany has innocent shareholders: see paras 241—245 below.

Ex turpi causa as between S&R andMr Stojevic

226 It follows that one would not expect the maxim ex turpi causa,however mechanistic it may be, to have any operation in a context such asthe present. Mr Sumption stressed that ��the true rationale for the defence ofillegality associated with the maxim ex turpi causa non oritur actio�� is ��thepreservation of the integrity of the justice system��meaning the need toavoid permitting a claimant ��to indirectly pro�t from his or her crime, in thesense of obtaining remuneration for it�� or in the sense of evading ��a penaltyprescribed by criminal law��, to avoid putting ��the courts in the positionof saying that the same conduct is both legal, in the sense of beingcapable of recti�cation by the court, and illegal��: Hall v Hebert (1993)101 DLR (4th) 129, 160—165, 167 and 168 per McLachlin J. In Hall vHebert two drunken men had set o› home by car. The defendant initiallydrove but stalled the car and lost the ignition key, and both then decided totry to push-start the car, with the plainti› now as driver. The car turnedover injuring the plainti›. The defence of ex turpi causa failed, because theplainti› was not seeking to make a pro�t from his wrongful act, but merelyto claim damages for personal injury. The integrity of the legal system wasnot a›ected. No more do I think that it is here. On the contrary, S & Rwould be enforcing, and not seeking to pro�t from but to obtaincompensation for, breach of the duties which Mr Stojevic owed to it. Thelawmust enable that.


227 Though not essential to my reasoning, I also consider that theprinciple established in In re Hampshire Land Co [1896] 2 Ch 743, BelmontFinance [1979] Ch 250 and Attorney General�s Reference (No 2 of 1982)[1984] QB 624 points towards the same result. It prevents a company beingtreated as party to a fraud committed by its o–cers ��on�� or ��against�� thecompany, at least in the context of claims by the company for redress foro›ences committed against the company: Belmont Finance [1979] Ch 250,261D—H, per Buckley LJ, and p 271F—G, per Go› LJ, and Attorney General�sReference (No 2 of 1982) [1984] QB 624, 640A—B, per Kerr LJ; and see

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Edwards Karwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd (1994)15 ACSR 502, 515—517. Thus, in Belmont Finance the company�s directorswere party to an illegal conspiracy, ��part and parcel�� of which was that thecompany bought shares at an in�ated price (p 264A), but their knowledge ofthis illegality was not imputed to the company and did not bar the companysuing them for the conspiracy. The principle has also been applied in thecontext of a claim or allegation of estoppel against a company, seeking tohold the company responsible for a transaction in fraud of the company, byattributing to it knowledge of the fraud possessed by directors or agentswho did not represent or act for the company in the transaction but hadknowledge of it which they withheld from the company: JC Houghton &Cov Nothard Lowe & Wills Ltd [1928] AC 1 and Kwei Tek Chao v BritishTraders and Shippers, etc, Ltd [1954] 2QB 459, 471—472.

228 Mr Sumption submits that the principle has no present relevancefor two reasons. The �rst is based on its original rationale: that, since anagent deceiving a company will not disclose his own fraud to the company,the company cannot be imputed with knowledge of or treated as party to thefraud. This rationale, Mr Sumption submits, postulates a company withan ��innocent constituency�� (other o–cers and/or shareholders) to whomMr Stojevic could have disclosed, but from whom he would and did actuallyconceal, his misdeeds. If the suggestion is that theHampshire Land principleor the thinking behind it can only apply where a company alleges lossthrough being deceived, I see no reason why it should be so con�ned.Whether knowledge should be attributed to a company is irrelevant incontexts like the present, where S & R�s claim is not that there were otherswithin the company who relied on misleading statements byMr Stojevic, butrather that Mr Stojevic�s actions were in breach of his duties to S & R andthat, had Moore Stephens detected them, no further breaches of duty wouldhave been possible.

229 Neither in Belmont Finance nor in Attorney General�s Reference(No 2 of 1982) is there any suggestion that the application of the principle inHampshire Land depends upon there being some innocent constituencywithin the company to whom knowledge could have been communicated.Moreover, Attorney General�s Reference (No 2 of 1982) [1984] QB 624 isdirect authority to the contrary. The two defendants were charged withtheft, consisting of the abstraction of the assets of companies, of which theywere ��the sole shareholders and directors�� and ��the sole will and directingmind��: pp 635D—F, 638F—G. They contended that the companies were boundby and had consented to the abstractions precisely because they were its soleshareholders, directors and directing mind and will: pp 634E—F, 638F—H.The Court of Appeal acknowledged the rule of attribution attributing to asolvent company the unanimous decision of all its shareholders (p 640A—D),but roundly rejected its application to circumstances where the soleshareholders, directors and directing minds were acting illegally ordishonestly in relation to the company. The court cited Belmont Finance as��directly contradict[ing] the basis of the defendants� argument��: p 641B—C.The defendants� acts and knowledge were thus not to be attributed to thecompanies�although there was no other innocent constituency within thecompanies. Another justi�cation for this conclusion may be that the e›ect ofthe limitations recognised by Lord Ho›mann in Meridian ( para 221 above)is that in such situations there is another innocent constituency with interests

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in S&R, since it is not open even to a directing mind owning all a company�sshares to run riot with the company�s assets and a›airs in a way whichrenders or would render a company insolvent to the detriment of itscreditors.

230 The second reason advanced by Mr Sumption is that, if theHampshire Land principle could otherwise apply, the fraud here wascommitted on the banks, not on S & R. The Court of Appeal agreed withthis submission. The company�s exposure when it was left ��holding thebaby�� was merely a ��secondary exposure�� which was not enough to engagethe principle: see paras 72—73. In so reasoning, Rimer LJ was in�uenced bythe fact that Mr Stojevic�s fraud would be (and was by Toulson J) attributedto S & R itself in the context of any claims by the banks against S & R. Thisdistinction between personal and vicarious liability towards third partiescould have been relevant if, for example, S & R had been prosecuted forfraud (see e g Attorney General�s Reference (No 2 of 1982) [1984] QB 624,640A—B) or if (more fancifully) there had been a general banking facilitybetween Komercni Banka and S & R under which the latter�s liabilitydepended upon whether it was personally as opposed to vicariously liablefor the deception of Komercni Banka. But it is irrelevant in the presentcontext where S & R is seeking recourse from persons who, whatever theirstatus vis-¼-vis the company in the eyes of the outside world, owe duties andhave committed wrongs towards S & R. The truth behind the HampshireLand principle as explained in Belmont Finance and Attorney General�sReference (No 2 of 1982) is that such situations are di›erent. They compelby their nature a separation of the interests and states of mind of thecompany and those owing it duties.

231 In the present case, the focus is on the separate interests of S & Ronthe one hand and Mr Stojevic (and the auditors, though I consider theirposition more fully later) on the other. In this context, there is no di–cultyabout characterising the whole scheme as one of fraud on the company. Thescheme treated the company as a mere tool or conduit and left it at the endwith a large de�cit, in complete disregard of Mr Stojevic�s duty to respect itsseparate identity and property. This is in no way to suggest that S & R didnot incur liability to the banks. On the contrary, it is because Mr Stojevicquite wrongly involved it in a scheme of fraud of which this was one aspectthat S & R is entitled to claim against him. (In fact of course, the liabilitywhich S & R incurred to its banks in deceit did not lead to S & R incurringthe loss, or anything like the loss, it claims against Mr Stojevic�Mr Stojevic�s abstraction of the moneys from S&R did that. I note that, in apassage (para 5) with a biblical echo (I Timothy ch 6, v 7), my noble andlearned friend, Lord Phillips ofWorthMatravers, suggests that S&R startedlife with nothing, never legitimately acquired anything and cannotrealistically be said to have su›ered any loss. This either ignores theabstraction of S & R�s assets or wrongly assumes that a de�cit rendering acompany insolvent is not a loss.

232 The same conclusion is indicated by authorities concerning schemesof fraud directly parallel to the present�that is, �rst, the defrauding of thirdparties and then the stripping from the company of its resulting assets for thebene�t of its directing minds and bene�cial owners: see RBG Resources plc vRastogi [2002] EWHC 2782 (Ch); Brink�s-Mat Ltd v Noye [1991] 1 BankLR 68 and, from Ontario, Oger v Chiefscope Inc (1996) 29 OR (3d) 215;

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upheld (1998) 113OAC 373. InRBGResources plc v Rastogi Laddie J held,in trenchant terms, that the company had an arguable claim against directorsfor trial in a claim involving a parallel scheme of fraud to the present (raisingfunds from �nanciers in respect of bogus trades and paying them over tofraudulent counter-parties): and, when the case went to trial before Hart J,the directors in question did not pursue any defence to the contrary andjudgment was given against them [2004] EWHC 1089 (Ch). The case wasmoreover similar to the present in that one of the fraudulent directors wasregarded as the sole ultimate controlling shareholder: see [2002]EWHC 2782 at [3] and [51]. In support of his conclusion, Laddie J referredboth to Belmont [1979] Ch 250 and Attorney General�s Reference (No 2 of1982) [1984] QB 624 and to the company�s ��fallback position�� (to whichI return below) that ��in the case of an insolvent company, the directors arenot at liberty to ignore the interests of the creditors��: Kinsela v RussellKinsela Pty Ltd (in liquidation) (1986) 4 NSWLR 722, per Street CJ, citedwith approval in West Mercia Safetywear Ltd v Dodd [1988] BCLC 250.The fallback position to which Laddie J referred is likely to have been madewith particular reference to the fraudulent director�s position as solecontrolling shareholder, to which I shall return.

233 The fraud inOger involved procuring the owners of aMercedes carto hand over the car to the company on terms that the company wouldwithin 90 days either sell it or purchase it for $55,000, whereas thecompany�s principals and owners always intended to and did decamp with itor its proceeds (as well as it appears other cars or their proceeds). At �rstinstance,Molloy J said bluntly, 29OR (3d) 215, 221:

��the fraudulent actions of Barry and Vithoulkas [the principals] werefor their own �nancial gain. The corporation was merely a tool or vehiclewhich they implemented as an instrument of their fraud and to give thescheme a veneer of respectability. There was no bene�t to the companyfrom their actions. Rather, they stripped from the company all of itsassets, both in terms of cash and consigned vehicles, and then abscondedwith them, leaving the corporation an empty shell with nothing butliabilities. In my view, it cannot be said that Barry and Vithoulkas have inthese circumstances acted as the ego of the company itself and for thebene�t of the company so as to bring the identi�cation principles intoplay.��

On appeal, the Court of Appeal dealt summarily with a submission that itcould not be said that the actions constituted a fraud on the company, when,it was submitted, the corporation was set up for the very purpose of e›ectingtheir fraudulent scheme. The court said, 113OAC 373:

��There was no admissible evidence before the trial judge which wouldallow her to conclude that the corporation was set up with a view toperpetrating the frauds. Further, we do not read these comments of thetrial judge as meaning anything other than Vithoulkas and Barryperpetrated a fraud on the corporation as a means of achieving personalgain. It does not detract from the main thrust of the judge�s �nding thatBarry and Vithoulkas were acting for their own bene�t only.��

I agree with the last two sentences, and add that it cannot sensibly make anydi›erence whether or not the corporation there or S & R here was originally

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incorporated with a view to perpetrating the relevant fraud. Whatever themotives with which it was incorporated, it was not a sham. Onceincorporated as a separate legal entity, it was entitled to be respected assuch�even (indeed especially) by those who created and became itsdirecting minds, wills and bene�cial owners�and was not to be treated astheir puppet.

234 In Arab Bank plc v Zurich Insurance Co [1999] 1 Lloyd�s Rep 262,282—283 Rix J, and in Brink�s-Mat Ltd v Noye [1991] 1 Bank LR 68 (a caseinvolving a scheme of fraud with analogies to the present) the Court ofAppeal considered that a company exposed to third party liability by fraudcould be regarded as a victim of the fraud for the purposes of a claim againstother persons allegedly in breach of duty to it. In distinguishing betweenprimary and secondary victims, the Court of Appeal in the present case was,however, in�uenced by reasoning in McNicholas Construction Co Ltd vCustoms and Excise Comrs [2000] STC 553 (Dyson J) and in In re Bank ofCredit and Commerce International SA (No 15); Morris v Bank of India[2005] 2 BCLC 328 (Court of Appeal). Both those cases were (asRimer LJ noted) concerned with claims against the company by injured thirdparties, rather than claims by the company against others in breach of dutyto it. So it is not clear why theHampshire Land issue arose at all, and in myview the statements in them are of no assistance in resolving any issue ofattribution in the present context.

Directing minds and will who are also sole shareholders235 Does it make any di›erence to the result if the company�s directing

mind(s) also own all its shares? Here it is necessary to return to the commonlaw rule of attribution to which Lord Ho›mann referred inMeridian [1995]2 AC 500, that the unanimous decision of all the shareholders in a solventcompany about anything that the company has power to do under itsmemorandum of association counts as a decision of the company. LordHo›mann cited Dillon LJ�s statement in the Multinational Gas case [1983]Ch 258, 288G—H, that ��so long as the company is solvent the shareholdersare in substance the company��. In consequence, Kerr LJ said in AttorneyGeneral�s Reference (No 2 of 1982) [1984] QB 624, 640,

��the decisions alleged to have been taken negligently or in breach ofduty [in Multinational Gas] were the decisions of the company itselfand�the transactions being intra vires the company�s memorandum�there was no basis for any claim by the liquidator.��

236 However, the limitations mentioned by Lord Ho›mann areimportant. The transactions must be within the company�s power under itsmemorandum of association; and it is only the unanimous decision of all theshareholders in a solvent company that can authorise or ratify an act thatwould otherwise constitute a breach of duty to the company, and make it thecompany�s. No argument was addressed to the House on the formerlimitation, which in the present context probably overlaps with the latter.Transactions entered into by directors amounting in substance to no morethan the fraudulent abstraction of increasingly large sums from anincreasingly insolvent company with no other assets are unlikely to bewithin the scope of the company�s powers; and the breach of duty involvedin entering into such transactions cannot be answered by pointing to the

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directing mind�s ownership of all the company�s shares. This, as I havenoted (para 229 above), is what was decided by the Court of Appeal inAttorney General�s Reference (No 2 of 1982) [1984] QB 624, a decisionwhich was clearly right. In summary, at latest once directors know that acompany is or would be insolvent, a disposition of the company�s assets indisregard of the general creditors of the insolvent company will beactionable by the company, whatever the shareholders may wish or approve:see also per Dillon LJ in West Mercia Safetywear Ltd v Dodd [1988]BCLC 250, 252, distinguishing the situation in Multinational Gas as onewhere the company was ��amply solvent, and what the directors had done atthe bidding of the shareholders had merely been to make a business decisionin good faith, and act on that decision��; and also per Kerr LJ in AttorneyGeneral�s Reference (No 2 of 1982) [1984] QB 624, 640D—641Cdistinguishing Multinational Gas [1983] Ch 258 as not ��concerned withallegations that the shareholders and directors had acted illegally ordishonestly in relation to the company��.

237 The current edition (2007) of Palmer�s Company Law AnnotatedGuide to the Companies Act 2006 states the position, at p 169:

��The scope of the common law duty requiring directors to consider theinterests of creditors is more controversial. Cases support a variety ofpropositions, but the better accepted view is that a duty is owed bydirectors to the company (and not to the creditors themselves: KuwaitAsia Bank EC v National Mutual Life Nominees Ltd [1991] 1 AC 187,217, PC; Yukong Line Ltd of Korea v Rendsburg Investments Corpn ofLiberia (No 2) [1998] 1 WLR 294 [Toulson J]), and this duty requiresdirectors of insolvent or borderline insolvent companies to have regard tothe interests of the company�s creditors (West Mercia Safetywear Ltd vDodd [1988] BCLC 250, CA).��

238 I agree with this analysis. The Court of Appeal was therefore alsocorrect in West Mercia to hold that directors who know the company to beinsolvent owe to the company an enforceable duty to have regard to theinterests of the company�s creditors. In Yukong Line [1998] 1 WLR 294Toulson J was likewise right to consider that that would be so: p 314F—G.There, as inWest Mercia, the directing mind and owner of a company whichhad incurred a large liability sought to put the company�s assets out of thereach of its creditor by transferring them to another of his companies.A claim by the creditor against the director failed on the basis that thedirector owed no direct �duciary or other duty towards creditors. Hisliability was, as inWest Mercia, to the company for disregard of the interestsof its creditors. Far from undermining the integrity of the common law ifsuch a liability were recognised and enforced, it would undermine theconcept of separate corporate identity and the protection for creditors ininsolvent situations at which company law aims, if a company were notentitled to claim against its directing mind and sole controlling shareholderin such a situation. The English cases of RBG Resources plc v Rastogi andBrink�s-Mat Ltd v Noye and the Canadian case of Oger v Chiefscope Inc(cited above), in all of which the directing minds of the relevant companieswere the only shareholders, reach the same conclusion.

239 In In re The Mediators Inc; The Mediators Inc v Manney (1997)105 F 3d 822 (USAC, 2nd Cir), the court held inadmissible a claim by a

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creditors� committee standing in the company�s shoes brought against thecompany�s sole shareholder, chief executive o–cer and chairman togetherwith its bankers, lawyers and accountants for deliberately devising a scheme,which stripped the company of its assets in order to shield them fromliquidation and from the company�s creditors, while rendering the companyliable for the cost of so doing. The reasoning was that, in a case of a soleshareholder and decision-maker, ��whatever decisions he made were, byde�nition, authorised by, and made on behalf of, the corporation�� ( p 827)and that the company had ��no standing to assert aiding-and-abetting claimsagainst third parties for co-operating in the very misconduct that it hadinitiated��: p 826. This is not English law. But an important element tounderstanding this rule is that in American law ��Where third parties aid andabet a �duciary�s breach of duty to creditors�as is claimed here�thecreditors may bring an action in their own right against such parties��: p 825.

240 In summary, it is no answer in English law to a claim by S & Ragainst Mr Stojevic that Mr Stojevic had, as S & R�s sole directing mind andsole shareholder, authorised the scheme of fraud which to his knowledgemade the company increasingly insolvent to the detriment of its existing andfuture creditors. For present purposes it is to be assumed (and in fact it seemsclear) that Mr Stojevic must have known that, as a result of his scheme offraud, S&Rwas (increasingly) insolvent at each audit date.

The auditors� liability where the company�s directing mind is fraudulent241 I turn against this background to the auditor�s position. Leaving

aside situations in which the directing mind(s) is or are the sole bene�cialshareholder(s), it is obvious�although the Court of Appeal�s judgment issurprisingly silent on the point�that an auditor cannot, by reference to themaxim ex turpi causa, defeat a claim for breach of duty in failing to detectmanagerial fraud at the company�s highest level by attributing to thecompany the very fraud which the auditor should have detected. It wouldlame the very concept of an audit�a check on management for the bene�t ofshareholders�if the higher the level of managerial fraud, the lower theauditor�s responsibility. When Lord Bridge noted in Caparo Industries plc vDickman [1990] 2 AC 605, 626E that shareholders� remedy in the case ofnegligent failure by an auditor to discover and expose misappropriation offunds by a director consisted in a claim against the auditors in the nameof the company, he cannot conceivably have had in mind that it would makeall the di›erence to the availability of such a claim whether the director wasor was not the company�s directing mind. The fact that a ��very thing�� thatan auditor undertakes is the exercise of reasonable care in relation to thepossibility of �nancial impropriety at the highest level makes it impossiblefor the auditor to treat the company itself as personally involved in suchfraud, or to invoke the maxim ex turpi causa in such a case. Context is onceagain all, as Kerr LJ recognised in Attorney General�s Reference (No 2 of1982) [1984] QB 624, 640D—642H: see especially at p 642D. (I interpose thatI do not read the discussion starting there at p 641E as proceeding on a basisinconsistent with that preceding it�I understand Kerr LJ there to have beenaddressing the factual question whether a jury would be bound to concludethat there was no dishonesty, which would arise if he were wrong in hislegal analysis at pp 640A—641E.) Deception of auditors is the necessarystock-in-trade of fraudulent top management, as auditors and those

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responsible for auditing standards are and have long been very well aware.Lord Phillips�s statement (para 5) that ��common sense�� might suggest thatS & R�s claim should fail because Moore Stephens were victims ofdeceitfully prepared company accounts must be categorically rejected. Itwould emasculate audit responsibility and the auditor�s well-recognisedduty to approach their audit role if not as bloodhounds, then certainly aswatchdogs�planning and performing their audit with the ��attitude ofprofessional scepticism�� required by paras 27 and 28 of auditing standardSAS 110 in relation to the possibility of fraud as well as of error inmanagement representations and company records and documents.

242 Auditing standards and procedures have changed signi�cantly overthe years. But the potential responsibility of auditors for negligent failure todetect accounting de�ciencies or managerial fraud�leading the company tosustain further loss connected with such de�ciencies or the continuation ofsuch fraud�dates back to the early days of auditing: see e g In re Londonand General Bank (No 2) [1895] 2 Ch 673 (liability for a dividend voted byshareholders on the basis of misleading accounts on which the auditorsfailed adequately to report) and In re Thomas Gerrard & Son Ltd [1968] Ch455 (liability for dividends voted and tax liabilities incurred on the basis ofaccounts containing fraudulent in�ation of the company�s pro�ts byMr Croston, its managing director and holder of 18,000 of its shares, whichthe auditors negligently failed to discover and report on). In the latter case,the auditors argued (somewhat faintly), that Mr Croston knew and was notmisled about the true position and that the payment of the dividends and tax�owed from his or the directors� actions; pp 469D—E and 471C—D.Pennycuick J gave short shrift to the argument: pp 477G—478G.

243 In Galoo Ltd v Bright Grahame Murray [1994] 1 WLR 1360auditors were allegedly negligent in failing to detect fraudulentovervaluation of Galoo Ltd�s stock by Mr Sanders, who was clearly thedirecting mind of Galoo Ltd and its 100% parent. The claim was that, butfor such negligence, both companies would have been wound up in 1986instead of in 1993 and would have avoided losses made in subsequentadverse trading in that eight-year period. The claim was rejected on groundsof causation (the losses were caused by the subsequent adverse trading, andthe ��but for�� link to the auditors� negligence was insu–cient). There was nosuggestion that Mr Sanders� knowledge of or involvement in the fraud coulddefeat it.

244 More recently, in Sasea Finance Ltd v KPMG (formerlyKPMG Peat Marwick McLintock) [2000] 1 All ER 676, the auditors werealleged to have failed to report promptly during the audit evidence ofimpropriety by two dominant �gures in the group (neither however then adirector). The auditors argued that it would have been no use to report tosenior management consisting of the two dominant �gures. In response, theCourt of Appeal noted that there were six directors of whom no criticismwas made and, in any event, that the Auditing Guidelines of the Institute ofChartered Accountants (Feb 1990 ed)

��acknowledge that there may be occasions when it is necessary for anauditor to report directly to a third party without the knowledge orconsent of the management. Such would be the case if the auditorsuspects that management may be involved in, or is condoning, fraud or

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other irregularities and such would be occasions when the duty to reportoverrides the duty of con�dentiality.��

The Court of Appeal cannot have thought such a duty in shareholders�interests would only exist if senior management below the level of thecompany�s directing mind or board were complicit in the fraud.

245 It is in principle therefore no answer to an auditor who has failed todiscover fraud to point to involvement or knowledge on the part of thecompany�s directing mind. This conclusion is justi�ed on groundsparalleling those applicable between the company and its directing mind: seeparas 224—232 above. That is not surprising, since both senior managementand auditors owe duties to the company intended to protect shareholders�interests, and such duties must be enforceable. The two sets of relationshipare essentially complementary, although the duty is in one case primary andin the other con�rmatory. However the present scheme of fraud iscategorised, it cannot in the context of the audit engagement be attributed tothe company itself, so as to relieve the auditors from their duty or prevent thecompany complaining of its breach. Again, this is so as a matter of generalprinciple having regard to the nature of the roles and duties undertaken.Again, however, it can be supported by reference to the Hampshire Landprinciple, which, in this context also, means that the interests and activitiesof S & R and of Mr Stojevic must be distinguished, precisely because it wasamong Moore Stephens�s functions as auditor to ensure to the former adegree of protection against the latter.

246 In view of some observations made by my noble and learned friend,Lord Brown of Eaton-under-Heywood, (in paras 202—203) I add a word onthe nature of an auditor�s potential liability for negligent failure to detect,report and so stop a continuing course of management fraud. This was oneof a number of topics on which the House did not hear argument, and someauthorities relevant to it were not therefore cited. But in principle, theauditor is potentially liable for further frauds committed in the same courseof management fraud. An auditor may argue that loss su›ered by acontinuing scheme of fraud which the auditor ought to have detected wasoutside the scope of the auditor�s duty or too remote or that there was abreak in the chain of causation, but success in such an argument may beunlikely in circumstances where, ex hypothesi, the auditor was negligent infailing to detect the same continuing scheme. The relevant considerationswere canvassed by Evans-Lombe J in Barings plc v Coopers & Lybrand[2003] Lloyd�s Rep IR 566, paras 816—838. Hobhouse J�s comments in Berg[2002] Lloyd�s Rep PN 41 (discussed below) andGaloo [1994] 1WLR 1360( para 243 above) have nothing to do with this question. In both those cases,the losses and insolvency were caused by subsequent adverse tradingdecisions unconnected with the fraud. (Galoo is no doubt the case to whichLord Ho›mann referred extra-judicially on this point in his Chancery BarAssociation lecture ��Common Sense and Causing Loss�� of 15 June 1999.)

247 Examples of cases where auditors have been held liable for furtherlosses in a continuing scheme of fraud include Paci�c Acceptance Corpn Ltdv Forsyth (1970) 92 WN (NSW) 29 (see p 41E—F�quantum was ultimatelycompromised: see p 133D—E); Dairy Containers Ltd v NZI Bank Ltd [1995]2NZLR 30 (see, at p 52 lines 15—20 and at p 73 lines 23—29) and Barings plcv Coopers & Lybrand itself (subject in that case to a �nding of a break in the

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chain of causation occurring some 18 months after the negligent audit as aresult of the fault of management not involved in the fraud: paras 839—878.The position in such cases parallels that where auditors failed to detect acontinuing negligent course of foreign exchange dealings: Daniels (formerlypractising as Deloitte Haskins & Sells) v Anderson (1995) 16 ACSR 607 (seeat p 703, line 48 to p 705, line 3, p 717, line 27 to p 718, line 3 and p 720,lines 34—43). It is auditors� exposure in such respects which has led themover the years to press for some mitigation of liability over and above anyo›ered under section 727 of the Companies Act 1985, now section 1157 ofthe Companies Act 2006. One suggestion was that their liability should bemade proportionate. This suggestion was rejected by the Law Commissionin a Feasibility Investigation of Joint and Several Liability for theDepartment of Trade and Industry (1996). More recently, auditors havehowever obtained a statutory right to limit their liability contractually undersections 534 to 536 of the 2006Act.

Overseas authority on attribution

248 The House was shown a range of common law authority,particularly from Canada, Australia and the United States. It amplyillustrates the variety of ideas and solutions current in this �eld. Ultimately,I derive no more than an increasing reluctance in recent case law to hold thattop management fraud provides a defence to a negligent auditor. While thiscorresponds with my own conclusion as to the right direction in principlefor English law, I have relegated detailed examination of the overseasauthorities to an annex.

The auditor�s position where some of the shareholders have engaged in fraud

249 Fraud of the company�s directing mind is as such, therefore, no barto a claim by the company against its auditor for loss sustained by thecompany due to negligent failure to detect such fraud: paras 241—247 above.It cannot in principle make any di›erence if (as will very commonly be thecase) the same person owns some shares in the company. As a matter ofbasic company law, the company�s separate legal personality entitles it toclaim, and the situation mentioned by Lord Ho›mann in the Meridian case[1995] 2 AC 500 ( paras 221—235 above) in which it is legitimate to lookbehind the veil at the shareholders, applies only when all the shareholders ina solvent company concur in committing the company to some decisionwithin its memorandum of association.

250 Lord Phillips expresses the view (para 61) that the position��becomes unclear . . . if some of the shareholders were complicit in thedirecting mind and will�s misconduct�� because of the possibility of ��thefraudulent shareholders pro�ting from their dishonesty��. Self-evidently thisfocuses only on the presently irrelevant situation of a solvent company. Buteven in a situation of solvency, I consider that the doubt expressed by LordPhillips about the company�s right of recovery con�icts with the principleprecluding the lifting of the corporate veil. In reality, it would, if accepted,transform the law regarding auditors� responsibility, since in many casesfraudulent management own some shares.

251 The concern behind the doubt is that auditors might be liable to thecompany in amounts which would then enure to the bene�t of guilty

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shareholders. This is however an insubstantial spectre, whether or not thecompany is insolvent. In cases of insolvency (such as In re London andGeneral Bank (No 2) [1895] 2 Ch 673 and In re Thomas Gerrard [1968]Ch 455 and the present), there is commonly no conceivable prospect of anyshareholder bene�ting by any recovery, however large, made against anegligent auditor. A claim against auditors will not in practice reimburse thecompany for all its loss, because the very basis of the claim will be that futureloss was caused by failure on one or more audits to detect a continuingscheme of fraud which will already have caused past loss. This is quite apartfrom the fact that auditors� negligence cases are commonly compromisedbefore trial. Further, if a guilty shareholder is identi�able and has currentassets, the company will often look �rst to them and any recovery from theauditor will be reduced accordingly (as apparently happened in In reThomas Gerrard). And, if this does not happen, auditors commonly joinfraudulent directors and others as third party defendants, and take steps tofreeze any assets that they may have.

252 Nevertheless, it is appropriate to give some further consideration tothe position of a solvent company (or a company which would be renderedsolvent if it recovered damages from its auditors), on the remote hypothesisthat, if it were to recover in full, then shareholders who had alreadybene�ted by or were involved in the wrongdoing might bene�t by an increasein value of the company. A similar spectre of double recovery may besummoned in respect of the recovery from negligent auditors of dividendswhich a company has wrongly paid out to shareholders on the faith offraudulent accounts. In that situation, the shareholders may either beentirely innocent or may include shareholders aware of the accounts� falsity.The spectre of double recovery was thus raised, brie�y and unsuccessfully, asan objection to the recovery of damages against negligent auditors inIn re Thomas Gerrard [1968] Ch 455. Counsel submitted that it would be��monstrous for the shareholders to receive again what they had alreadyreceived in excess dividends��: p 469F. Pennycuick J�s response was simplythat the auditors were ��of course entitled to credit for the account [sic]recovered fromMr Croston��: p 478G. As stated above, Mr Croston was notonly the managing director, but also a signi�cant shareholder. However, thecompany was in liquidation, so that the factual basis for counsel�ssubmission that the shareholders might ��receive again what they had alreadyreceived in excess dividends�� is also unclear.

253 The whole topic was however comprehensively revisited byGiles J in the Supreme Court of New South Wales in Segenhoe Ltd v Akins(1990) 1 ACSR 691 where he held that it did not matter whether thecompany paying the dividend was solvent rather than insolvent. In eithercase the company as a separate entity was out of pocket to the extent of themoney paid away. To prevent recovery by the company because the moneywas paid to shareholders rather than to a third party ��would negate thecompany�s status as a legal entity separate from its shareholders�� and inany event, even if the shareholders remained the same, they would notnecessarily be paid twice over. Giles J�s full reasoning at pp 701—702 repaysreading. The only contrary suggestion in any authority appears to consist ofa single dictum of Cotton LJ in In re Exchange Banking Co (Flitcroft�s Case)(1882) 21 ChD 519. This was another case where dividends were over aperiod of years wrongly paid out of capital on the basis of accounts showing

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false pro�ts prepared by directors who as shareholders received some of suchdividends. The company, by now in liquidation, sued the directors for thetotality of the dividends wrongly paid out. Jessel MR and Brett LJ heldunequivocally that the dividends were recoverable in full, and would havebeen even had the company remained solvent. However Cotton LJ drew adistinction, saying, at p 536:

��The corporation is not a mere aggregate of shareholders. If thecorporation were suing for the purpose of paying over again to theshareholders what the shareholders had already received the court wouldnot allow it. But that is not the case here, the company is insolvent, andthere is no objection to allowing it to get back its funds for the purpose ofpaying debts. The case of the liquidator is stronger, for in some respectshe, as a quasi trustee for creditors as well as shareholders, stands in adi›erent position from the company. But I rely on this, that the moneywas not paid to the corporation, but was paid improperly to individuals,and the corporation can sue the directors to get it back that it may beapplied in payment of the debts of the corporation.��

As Giles J observed in Segenhoe Ltd v Akins, Cotton LJ�s ��reference to �theshareholders� was probably to the particular shareholders who had receivedthe dividends, rather than to the shareholders as a �uctuating body��, andlater case law has tended to explain Cotton LJ�s dictum as a reference to thecourt�s power to give directions in a liquidation as to the proceedings whicha liquidator may pursue. However, the dictum is on any view irrelevant inthe present case where the company is irredeemably insolvent. If a case everarose of a solvent company, the English courts would have the opportunity,as Giles J did, of reconsidering the dictum, and of either taking the sameview as Giles J or fashioning the dictum into a rule preventing any possibledouble recovery (perhaps building on theVGM principle: see below).

254 I turn now to situations where the loss consists not of dividendspaid out to shareholders, but of other payments fraudulently extracted fromthe company. In these situations, by de�nition, the only shareholders, whomight conceivably bene�t twice over if a company were able to recoversuch losses from wrongdoers such as its directors or auditor, would beshareholders participating in the fraud. Again, the issue would only arise ina case where (unlike the present) the company was solvent or (improbably)would be made so by recovery from its directors or auditor. In my view,English law would �nd, as some American courts have found, a way ofaddressing this issue, even though it may be a di›erent way. First, if thepoint ever arose where a company, which had still not received fullcompensation for injury done to it by management fraud, were due to makea distribution to a manager shareholder, the company could impound thedefaulting manager/shareholder�s share of the distribution under theprinciple identi�ed in In re VGMHoldings Ltd [1942] Ch 235 and SelangorUnited Rubber Estates Ltd v Cradock (No 4) [1969] 1 WLR 1773. Thatprinciple not only enables the impounding, as in VGM, of a defaultingdirector�s entitlement to satisfy his own liability, but also enables theimpounding of the amounts due to a defaulting director in his capacity asshareholder to satisfy the liability of other defaulting directors liable jointlyand severally with him. In Brink�s-Mat Ltd v Noye [1991] 1 Bank LR 68,72 Nicholls LJ suggested and Mustill LJ in his judgment accepted that this

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��or some other process designed to achieve the ends of justice�� would��without doubt�� prevent the fraudulent shareholders from pro�ting by theirdishonesty. I also believe that would be so. The common law is not sobarren as to be unable to achieve in this area what Lord Go› of Chieveleyonce described in another context as ��practical justice��.

255 One approach that could not, with respect, be adopted is thatsuggested by my noble and learned friend, Lord Brown, in his judgment atpara 202. That paragraph ignores separate corporate personality when itrefers to ��a claim against the auditors [which] may well lie (through thecompany) at their [i e innocent shareholders�] suit��. A company (all themore so when in insolvent litigation) sues in its own right, not for or atthe suit of its shareholders. I am also aware of no ��policies and principles��,generally understood or not, which might limit a company�s recovery for awrong done to it by reference to whatever loss its innocent shareholdersmight, if the corporate veil were lifted, be said themselves to have su›ered.The suggestion that this could be the measure of a company�s recovery againignores the company�s separate legal identity and interests. Suppose seniormanagement own 50% of the shares, and are operating a scheme of fraudwhich the auditor should have detected at the end of year 1, and that fraudcosts the company £1m in year 2. Why should it matter whether, but for the£1m abstraction in year 2, shareholders� equity would or would not haveincreased in value? What if the £1m abstraction imperils the company orrenders it insolvent? The company has su›ered a loss of £1m, and is entitledto recover this for its own purposes including payment of its debts. The onlyquali�cation on full recovery that might, theoretically, exist in a solventsituation (other than those inherent in conventional contractual and tortiousprinciples of causation and remoteness) is one tailored to ensuring that noguilty shareholder actually bene�ts, and this could be achieved, if it wereever to be a real concern, under or by development of the VGM principlein the manner respecting corporate identity: see para 254 above. Further, asCotton LJ recognised in In re Exchange Banking Co (Flitcroft�s Case)21 ChD 519, 536, whatever view one may take about the position where acompany is solvent, ��there is no objection to allowing it to get back its fundsfor the purpose of paying debts��. In an insolvent situation like the present,Lord Brown�s suggestion is also in con�ict with the decision in In re ThomasGerrard [1968] Ch 455 where Mr Croston�s shareholding and its valuewere, rightly, treated as irrelevant to the company�s recovery against itsnegligent auditors.

The auditor�s position where all the shareholders have engaged in fraud256 The issue which is, or should be, critical to this appeal arises where

the person(s) responsible for the scheme of fraud own all the company�sshares. The auditor is there to check on management and report toshareholders. But the shareholders know the true position. In a situation ofsolvency, the straightforward analysis is that there is nothing to report,no-one to complain and no loss. It might also be questioned whether there isany breach of duty, at least in tort and perhaps also in contract, in failing toreport to persons who already know; however, this may overlook the factthat the negligent auditor will by de�nition not know that the shareholdersdo know, and it also needs to be considered in the light of the auditor�sstatutory role and the duties, here largely express, which an auditor

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undertakes. More pertinently, ��so long as the company is solvent theshareholders are in substance the company�� ( para 235), and the companycannot therefore say that it was ignorant or misled or su›ered loss.

257 Two cases illustrate the application of this straightforward analysisto companies solvent at the audit date. In Pendleburys Ltd v Ellis Green &Co (1936) 181 LT 410 a company claimed against its auditor loss caused byits cashier�s defalcations. It sought to attribute such loss to the auditor�sfailure, when reporting on the accounts, to disclose weaknesses in thecompany�s book-keeping systems arising from the absence of certain booksand internal checks. The company�s only three directors were its soleshareholders and debenture-holders, and the auditor had reported theweaknesses to them from time to time. Swift J in dismissing the claimobserved that the defendants had made their reports to the three men whohad ��every pecuniary interest in the company��, and that, ��although they, asauditors, were there to protect the shareholders it could not seriously be saidthat the shareholders did not receive the information and protection whichthe law desired should be secured to them��: p 411. The reference to thedirectors as having ��every pecuniary interest in the company�� and theabsence in the report of any contrary suggestion indicate that the companyremained solvent at all times.

258 The second case is Hobhouse J�s decision in Berg [2002] Lloyd�sRep PN 41. Berg & Co was solvent at the date of the relevant 1982 audit.(It became insolvent some years later by reason of a trading debt incurredin 1984.) The negligence it alleged against its former auditors related to areceivable of £2.39m shown in the 1982 accounts as due from a companycalled Gimco, in respect of which the auditors had simply accepted theuncorroborated and unsupported assurances of Gimco and Mr Golechha,Berg & Co�s sole active director and ultimate bene�cial owner. At p 44Hobhouse J pointed out that, although Berg & Co was a separate anddistinct legal entity, Mr Golechha was its directing mind, his knowledge wasthe company�s and ��There was never any general body of shareholders norany minority shareholders. In addressing their certi�cate to �the members�of Berg, [the auditors] were for all practical purposes addressing it toMr Golechha alone��. ApplyingCaparo he said, at p 53:

��the purpose of the statutory audit is to provide a mechanism to enablethose having a proprietary interest in the company or being concernedwith its management or control to have access to accurate �nancialinformation about the company. Provided that those persons have thatinformation, the statutory purpose is exhausted. What those persons dowith the information is a matter for them and falls outside the scope of thestatutory purpose. In the present case the �rst plainti›s [the company]have based their case not upon any lack of information on the part ofMr Golechha but rather upon the opportunity that the possession of theauditor�s certi�cate is said to have given for the company to continue tocarry on business and to borrow money from third parties. Such mattersdo not fall within the scope of the duty of the statutory auditor.��

259 In this passage, Hobhouse J was identifying a situation analogousto that applying where a person (A) undertakes to report to a professionalbody on the a›airs of a third person (B) to enable B to continue to engage inprofessional practice. If B procures A to issue the relevant certi�cate by

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deceiving A about matters which A, had he been careful, should anywayhave observed, B cannot then turn round and blame A: Luscombe v Roberts(1962) 106 SJ 373. But the professional body, if it incurs loss throughallowing B to continue in practice, can in such a situation claim against A:Law Society v KPMG Peat Marwick (sued as KPMG Peat MarwickMcLintock) [2000] 1 All ER 515; [2000] 1 WLR 1921 (Court of Appeal).In a case like Berg, once it is established that all relevant persons within acompany know the true position, the company falls to be treated as a singleperson (B) in relation to its auditor (A).

260 The company argued in Berg [2002] Lloyd�s Rep PN 41 that theHampshire Land principle precluded the attribution to it of Mr Golechha�sknowledge. The argument failed in limine (because it was not shown thatMr Golechha was guilty of any fraud on the audit or towards the company),but Hobhouse J, at p 54, also addressed the position as it would have beenhad there been any fraud:

��However one identi�es the company, whether it is the headmanagement, or the company in general meeting, it was not misled andno fraud was practised upon it. This is a simple and unsurprisingconsequence of the fact that every physical manifestation of the companyBerg was Mr Golechha himself. Any company must in the last resort, if itis to allege that it was fraudulently misled, be able to point to somenatural person who was misled by the fraud. That the plainti›s cannotdo.��

In the result, the company was entitled only to nominal damages for thetechnical breach of contract involved in the failure to qualify the auditreport. Hobhouse J�s words must be taken in context. The company wassolvent at the relevant dates. There was no-one but Mr Golechha to think oract for or be interested in it.

261 American case law supports a conclusion barring recovery from aauditor who has negligently failed to detect that the company�s soleshareholder and controller (a ��sole actor��) has been engaging in fraud,e g, by falsifying the company�s accounts and conducting its businessfraudulently to his own bene�t and the injury of depositors and creditors(Federal Deposit Insurance Corpn v Ernst & Young (1992) 967 F 2d 166) orby operating a Ponzi scheme leading the company into ever deeperinsolvency (O–cial Committee of Unsecured Creditors v RF La›erty & CoInc (2001) 267 F 3d 340 (3rd Cir)). In the former case (decided under Texaslaw), the court left open the possibility that the creditors or the liquidator ontheir behalf might have a cause of action against the auditors. In the lattercase, decided under Pennsylvania law, the court said that the nature ofthe claim (for the company�s loss through ��deepening insolvency��a problematic head of loss in English law in any event) made it one whichcould only be pursued by the company, and that section 541 of theUS Bankruptcy Code meant that the liquidator in pursuing it could be in nobetter position than the company had been before its liquidation.

262 Moore Stephens argue, and I understand the majority of yourLordships to consider, that this appeal is covered by the same analysis. Inshort, Mr Stojevic was S & R�s sole directing mind and its sole bene�cialowner; and the company cannot in consequence complain that it succeededin deceiving Moore Stephens and was in consequence not stopped by others

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(regulatory or investigating authorities) from pursuing its scheme of fraud.Such a conclusion could be explained in various ways: the auditor�s duty didnot extend to supplying information which all persons who can represent thecompany already have; or whistle-blowing on S & R was and is outsidethe statutory purpose of the audit as between the company and the auditor;or the principle ex turpi causa applies. Which way was adopted would bepresently immaterial.

263 In my opinion, Moore Stephens�s argument and the majorityconclusion overlook a critical distinction between a company which issolvent and a company which is insolvent at the audit date. Let me,however, �rst consider two other reasons suggested by S & R for rejectingMoore Stephens�s argument. They are: (a) the ��very thing�� principle and(b) the fact that S & R is currently insolvent and in liquidation. The �rst,that the maxim ex turpi causa is incapable of defeating a claim againstMoore Stephens for failure to discover and report the very continuing fraudwhich is the basis of the claim to rely on the maxim, makes no sense if and solong as S & R and its directing mind and sole shareholder are to be identi�edwith each other. An auditor or reporting accountant (A) cannot be in breachof duty, to a person (B) committing a fraud, by failing to report to a thirdperson (C) B�s own fraud about which B well knows (and which B couldperfectly well have reported himself, had that not been the opposite of whathe wished). This is so, even if such a report would have led to B being unableto continue the fraud. These points are demonstrated by both Luscombe106 SJ 373 and Berg [2002] Lloyd�s Rep PN 41. Reeves v Comr of Police ofthe Metropolis [1999] QB 169 has in my opinion no real relevance. It standsfor a principle of causation which does not sensibly extend to situations offraud and could not override the maxim ex turpi causa if otherwiseapplicable.

264 The second reason, that S & R�s current insolvency and liquidationshould make a di›erence since any recoveries will be held on the statutorytrust for creditors, is touched on in the American case law considered in theannex to this speech. Mr Brindle accepts that S & R cannot in liquidationhave a claim which it did not have pre-liquidation. But he submits that thedefence ex turpi causa may cease to apply to a one-man company which goesinto liquidation, because in liquidation its assets are held and will bedistributed under the statutory scheme for the bene�t of creditors. I cannothowever accept the argument. Under English law, the company inliquidation cannot in this respect be in a better position than it waspre-liquidation, merely by virtue of the fact that it has become insolvent andgone into liquidation: see also the Berg case: paras 258—260 above.

The signi�cance of insolvency at the audit date265 The fact that S & R was insolvent at each audit date is, in contrast,

in my opinion critical. The powers of directors and shareholders incircumstances of insolvency or potential insolvency are quali�ed (asdescribed in paras 235—240 above). The issue as between the company andits auditors is whether the auditors� duty to the company extends, like thedirectors�, beyond the protection of the interests of shareholders in asituation where the auditors ought to have detected that the company was(in fact, as a result of the fraud which the auditors ought to have discovered)insolvent. Despite the immense and highly skilled attention that the appeal

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has had generally, both prior to and during its presentation before theHouse, I fear that the centrality of this point may have been a little obscuredby the spread of argument over other issues. Hobhouse J touched on it inBerg [2002] Lloyd�s Rep PN 41, 54—55. But in Berg the problem did notarise because the insolvency arose after the 1982 audit certi�cate from Berg�ssubsequent unconnected trading misfortune and also because the auditorcould not be said to have been ��implicated in a breach of the company�sduties to its creditors�� in any way paralleling the way in which the directorsinWest Mercia [1988] BCLC 250were: Berg, p 55. On the latter possibility,Hobhouse J added:

��The West Mercia case was a clear case of a director abusing hisposition for his own advantage but the same principle applies wherever itcan be shown that those in charge of the a›airs of a company or in controlof it are acting contrary to the principles governing insolvency. It is onlyin this sense that it can be said that once a company is insolvent theinterests of the company become those of its creditors. The duty of thecompany and its directors is then to preserve the assets of the company.The present case does not involve any such situation at any material time.The company may have been trading imprudently; but there is noevidence that in 1982 it was trading in fraud of its creditors. There isno allegation that Dearden Farrow were a party to any breach byMrGolechha of any of his �duciary duties.��

This passage shows that the earlier passage in Hobhouse J�s judgment,at p 54, quoted in para 260 above must be read in context. It does not meanthat a company�s only claim against its o–cers (including in this term itsauditor) lies in deceit. It does not mean that a company is always to beequated with its directing mind. It does not address the context ofinsolvency.

266 None of the previous cases, Pendleburys 181 LT 410,Galoo [1994]1WLR 1360 and Berg [2002] Lloyd�s Rep PN 41, deals with the position ofa company insolvent at the date of the audit due to past fraud, where the lossclaimed consists in the continuation of the scheme of fraud to the furtherdetriment of the company and its creditors, existing or future. In WestMercia [1988] BCLC 250 and Yukong Line [1998] 1WLR 294 the directorsknew of the company�s potential insolvency and their actions constitutedbreaches of �duciary duty designed to defeat creditor rights in insolvency.A director may now also incur responsibility to the company for wrongfultrading under the Insolvency Act 1986, section 214; and the common lawduty discussed in paras 235—240 above covers some of the same ground.Here, however, there is no doubt that Mr Stojevic was in deliberate breachof �duciary duty. If Moore Stephens had known about or shut a Nelsonianeye to Mr Stojevic�s breach of duty, there could be little doubt about theirliability (see Hobhouse J�s dicta in Berg, p 55 (quoted in para 265 above).But the present appeal proceeds on the basis that they negligently failed todetect the scheme of fraud and the company�s insolvency and so allowed thescheme to continue to the company�s further detriment.

267 The decisions in Caparo [1990] 2 AC 605 and Al Saudi Banque[1990] Ch 313 establish that auditors� duties are normally limited to theprotection of the company�s interests for the bene�t of its shareholders.There was no question of any insolvency on the facts ofCaparo. The facts in

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Al Saudi Banquewere closer, and the scheme of fraud remarkably similar, tothe present. But the claimants were the banks, and their claim was dismissedon the basis that the auditors had not been appointed by them and ��wereunder no statutory obligation to report to them��: p 336E. In both Caparoand Al Saudi Banque, the concern was about the uncertain and unknownexposure in respect of third party investment or lending which would followfrom permitting third party claims.

268 Other than in special situations, therefore, auditors owe no directduties towards third parties. But none of the above cases addresses thepresent situation of a claim by the company against its auditors for failureto pick up a fraudulent scheme rendering it increasingly insolvent. But inCaparo [1990] 2 AC 605, both Lord Bridge and Lord Oliver recognised thecompany�s standing to bring claims for loss which it has su›ered by itso–cers� fraud (see para 214 above); and, further, Lord Oliver described anauditor�s duty as being, �rst of all, ��to protect the company itself fromthe consequences of undetected errors or, possibly, wrongdoing��, beforeidentifying a second duty ��to provide shareholders with reliable intelligence��( para 214 above).

269 In my opinion it is in no way inconsistent with Caparo or ClarkePixley to hold auditors responsible to the company they audit in the presentcircumstances. I underline four points in this connection. First, the concernabout inde�nite exposure to third parties does not exist in the context of aclaim by the company. S & R�s claim is to recover its own (not its creditors�)loss by reason of the continuing scheme of fraud. Loss to the company is notthe same as loss to its creditors, although there may or may not be anoverlap. An insolvent company may by fraud raise £1m from bank Awhichit uses in a Ponzi type scheme to pay o› a borrowing from bank B. Bank A is£1m worse o›, and bank B £1m better o›. But the company itself is noworse o› from the continuing fraud. It is liable to pay bank A £1m, but ithas bene�ted by £1m by paying o› bank B using bank A�s £1m. Of course if(as here) it raises £1m by fraud and pays only £500,000 to bank B and if itsdirecting mind makes o› with the other £500,000, then the company is£500,000 worse o› due to the continuation of the fraud, but that is andremains its own loss. Secondly, S&R�s claim is for precisely the same loss asa company with some shareholders innocent of involvement in topmanagement�s fraud would be entitled to claim from negligent auditors whohad failed to detect and report the fraud: paras 249—255 above. Thirdly, itcannot be suggested that the care to be expected of Moore Stephens asauditors varied according to whether all of S & R�s shares happened to beowned and/or controlled byMr Stojevic. Their express contractual duty wasunder auditing standard SAS 110.10 and 110.12 to report to a properauthority without delay where suspected or actual fraud cast doubt on theintegrity of directors. This duty in fact exists under SAS 110 irrespective ofwhether there are or are not independent shareholders of integrity. Auditorswould not in any event necessarily have any idea whether any suchshareholders exist.

270 Fourthly, quite apart from the express provisions of auditingstandard SAS 110, a situation of insolvency introduces new considerationsfor reasons previously explained. The identity of interest which normallyexists between a company and its shareholders ceases, and the duties ofauditors, like those of directors, must recognise this. The company as a legal

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personality continues and the auditors� duty continues to be, in LordOliver�s words in Caparo [1990] 2 AC 605, 630, ��to protect the companyitself from the consequences of undetected errors or, possibly, wrongdoing��.If, in Hobhouse J�s words in Berg [2002] Lloyd�s Rep PN 41, 55, ��those incharge of the a›airs of a company or in control of it are acting contrary tothe principles governing insolvency��, then the auditors can no longer treatthem as representing the company, and must take other action�accordingto SAS 110 ��without informing the directors in advance��. In reality, a publicreport to shareholders (however many of them were involved in the fraud)would itself bring matters to an end. Resignation�and it is part of S & R�spleaded case that Moore Stephens should, after detecting the fraud, haveresigned as well as reported it to the authorities�would by statute haveinvolved an express duty on the part of Moore Stephens to report tocreditors: section 394(1) of the Companies Act: para 215 above. I believethat it would in any event probably be auditors� professional and commonlaw duty to report suspicions of fraud to the proper authorities. But auditingstandard SAS 110 puts this beyond doubt. Even if Moore Stephens had beenaware that directors known or suspected to be acting fraudulently were thebene�cial owners of all the company�s shares, they would under SAS 110still have been obliged to report the circumstances to regulators or otherauthorities, without informing management in advance, in order to protectthe interests of the company. In fact, as I have said, auditors may often notknow whether or not all such directors own all the shares. It would be astrange policy and law that exempts auditors from all responsibility to thecompany, according to the chance that the directors on whose integrity theyundertake to report prove to be the sole ��bene�cial owners�� of all thecompany�s shares.

271 It follows that in my opinion Moore Stephens cannot invoke themaxim ex turpi causa or deny causation by reference to the knowledge ofand involvement in the fraud of Mr Stojevic, if Moore Stephens ought withproper skill and care to have detected that S & R was subject to a continuingscheme of fraud in circumstances in which S & R was insolvent and beingrendered increasingly so. Under English law, S & R is thus in my opinionentitled to pursue its present claim againstMoore Stephens.

272 American cases appear to have taken a di›erent view on thisparticular point under Texan and Pennsylvanian state law: Federal DepositInsurance Corpn v Ernst & Young 967 F (2d) 166 andO–cial Committee ofUnsecured Creditors v RF La›erty & Co Inc 267 F 3d 340 (3rd Cir): seepara 261 above. They come from a di›erent legal background, one wherecreditors may at least in some states have direct remedies, and theirreasoning does not answer the considerations which lead me to a di›erentconclusion. For the reasons I have given, I do not consider that theyrepresent English law.

Contributory fault273 The last matter on which I wish to comment�though not to reach

any conclusions�is the question of contributory fault. Mr Brindle openedhis oral submissions by accepting that it would be open to the court toapportion fault between the company and its auditor if recovery against theauditor were permitted in respect of fraud by the company�s directing mind.It suited Mr Brindle�s case to present Moore Stephens�s defence of ex turpi

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causa as an extreme and novel response to the present situation, and topro›er at the outset the more balanced discretionary possibility of areduction of the claim on account of the company�s contributory fault.However, I regret that, as part of the whole picture, the House has not heardfull argument on this aspect. (Indeed, I consider that the House�s resultinginability on this appeal to review the complete picture is a further reason fornot determining the whole claim against Moore Stephens at this stage.If contributory negligence is available as a defence, it would cater for orassuage concerns about the general appropriateness of allowing recoveryexpressed in some of the majority judgments.) The starting point would beto consider the extent to which contributory fault is available in respect ofnon-fraudulent management failings, either the very failings which theauditors ought with care to have identi�ed or di›erent management failingswhich none the less contributed to the same loss as that which the auditor�snegligence allowed to occur. The House�s decision in Reeves [2000]1 AC 360 makes clear that, in a simple two-party situation, it is possible forrecovery, for breach of a duty to prevent the very thing complained ofhappening, to be reduced on a broad brush basis on account of theclaimant�s conduct in bringing about the thing. In Jackson & Powell,Professional Liability, 6th ed (2007), ch 17, a number of authorities are citedin which contributory fault has also been recognised as a ground forreduction of liability in auditor�s negligence claims.

274 However, the obvious conundrum, if the fraud of top managementis not attributed to the company for the purpose of the maxim ex turpicausa, is why it should be attributed to the company for the purpose ofcontributory fault under the Law Reform (Contributory Negligence) Act1945. Mr Brindle�s justi�cation for doing this is that, when considering theallocation of fault to the company under the Act, the court is in e›ectconsidering a claim against the company. But, even if a ��fault�� is in this wayequated with a claim, the question arises in the context of an audit of asolvent company, how management fraud may be balanced against anauditor�s negligence, when an auditor�s primary responsibility is in respectof innocent shareholders, whose conduct will not usually be susceptible tocriticism. And a similar di–culty arises about weighing the signi�canceof fraud by a directing mind who is also sole bene�cial shareholder, if, asI consider, the auditor may be answerable to the company for negligentfailure to detect and report on such a fraud. Despite such problems,contributory fault, including Leeson�s fraud which the judge had held(rightly or wrongly, I need not consider) to be attributable to the company,was recognised as a ground for a substantial reduction in recovery againstthe auditors in Barings plc v Coopers & Lybrand [2003] Lloyd�s Rep IR 566.The subject was also discussed by the Full Court of South Australia in DukeGroup Ltd v Pilmer (1999) 73 SASR 64 (reversed in part on a di›erent point[2001] 2 BCLC 773). The court there concluded that, while the company�sdirectors� knowledge of their own fraud on the company would not beattributed to the company, the company could and would none the less beliable vicariously for such directors� misconduct and treated as at fault onthe same basis, for the purposes of enabling negligent auditors to reducetheir liability in tort. (This was a Pyrrhic victory, since at the timecontributory negligence was not available in Australia in relation tothe concurrent contractual claim against the auditors.) The Full Court�s

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reasoning was avowedly pragmatic and it relied as it said on its ��viewthat this is the fairer and more appropriate outcome��. There is obviousattraction in such pragmatism in the present context. Not having heardargument on any such aspects, I say no more.

Conclusion275 For the reasons I have given, I consider that this appeal should be

allowed on the ground that Moore Stephens�s duty was to the company, thatit is not su–cient for Moore Stephens to argue that every relevant emanationof the company consisted of Mr Stojevic as its directing mind and soleshareholder, if Moore Stephens failed in breach of duty to the company todetect the continuing scheme of fraud being pursued by Mr Stojevic and todetect that the company was (in fact, due to such scheme of fraud) insolventor potentially so. In that context, Moore Stephens cannot attribute to thecompany itself, for the purpose of invoking against it the maxim ex turpicausa, the knowledge of and involvement in the fraud of Mr Stojevic which(it is for present purposes to be assumed) they ought to have detected andreported to regulators or other proper authorities in the company�s interests.What would have happened upon such detection and report is simply amatter of causation.

276 The company�s ability to recover its own loss in such circumstancesis in my view not only also right in principle, but also desirable. It meansthat recovery does not depend on the happenstance of whether or not all thecompany�s shareholders were involved in the fraud. Whether a company is aone-person company or not may itself also be unclear, until one haspenetrated a web of nominee or trust shareholdings. The result I reachre�ects the various categories of person interested in the company, withwhom in mind the auditors ought to plan and conduct their work. Thecontrary result espoused by the majority of your Lordships will weaken thevalue of an audit and diminish auditors� exposure in relation to preciselythose companies most vulnerable to management fraud. The (too topical)lesson for creditors or depositors might be said to be that they should notexpose themselves to one-person companies, at least without extensivedue diligence. That is neither attractive nor realistic as an answer, whenone-person companies can be large �nancial enterprises o›ering bankingfacilities to or inviting deposits or investments frommany ordinary membersof the public. It is in relation to exactly such companies that auditors oughtto be encouraged to exercise the skill and care anyway due, rather than tofeel that the risks of incurring liability to the company for a negligent auditare reduced. For completeness and not because it in any way in�uences myconclusion, I note that auditors are now also able to enter into fair andreasonable liability limitation agreements under sections 534 to 538 of theCompanies Act 2006, though how far this is proving acceptable to theirclient companies or others I am unaware.

277 I would therefore allow this appeal, and restore the judge�s orderdated 11 September 2007 dismissing Moore Stephens�s application forsummary judgment on, or to strike out, the claim against them and givingdirections for the further conduct of the proceedings. The critical issuedividing the House is ultimately whether auditors, who should, in theperformance of their contractual and tortious duties towards a company,have detected and (under the express terms of their engagement) then have

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reported to the appropriate authorities a scheme of fraud by topmanagement rendering the company as a separate legal person increasinglyinsolvent, owe any enforceable duty towards the company to do this, soavoiding further loss to the company. In my opinion, they do.

Appeal dismissed.

ANNEX

Overseas authority on attribution (para 248)(i) Canadian Dredge & Dock Co Ltd v The Queen (1985) 19 DLR (4th) 314

was decided by the Canadian Supreme Court, after reference to English case lawincluding Tesco Supermarkets Ltd v Nattrass [1972] AC 153. It concerned a criminalprosecution. Not surprisingly in this context, the Supreme Court took a limited viewof the circumstances in which the company could disclaim the acts and state of mindof its directing mind. Estey J described these as being ��when the directing mindceases completely to act, in fact or in substance, in the interests of the corporation��,or ��where all of the activities of the directing mind are directed against the interests ofthe corporation with a view to damaging that corporation, whether or not the resultis bene�cial economically to the directing mind��. Only then, might there ��be said tobe fraud on the corporation�� or an act ��totally in fraud of the corporate employer��:p 351. Two comments may be made. First, the language of fraud on a company wasbeing used in the unfamiliar context of a charge against the company. In such acontext, as I have said, the hurdle for disclaimer of responsibility was, notsurprisingly, set high. Second, the phraseology developed in the judgment and usedin subsequent Canadian cases (and some other common law cases: see e g In re TheMediators Inc, paras 6—7, discussed in para 239 above, and Duke Group Ltd vPilmer 73 SASR 64, para 632), indicates a test which is both more rigid and moreextreme than that which English law would adopt, particularly since the PrivyCouncil�s decision inMeridian [1995] 2AC 500.

(ii) Despite the �rst point, the reasoning in Canadian Dredge has been transposedin Canada to the context of an auditor�s negligence claim in a �rst instance decision.Hart Building Supplies Ltd v Deloitte & Touche [2004] BCSC 55 was a case whereMr Larson, a director and the directing mind and a 15% shareholder, had falsi�edHart�s inventory records and in�ated its pro�ts by false invoices ��to try to help Hart�sbusiness��, and so misled the auditors. The company�s claim was brought at theinstance of its innocent 85% shareholder against the auditors for negligence. Thejudge in applying ��the law as set out in Canadian Dredge�� took principles which maybe appropriate when determining a company�s liability to the third party and appliedthem, without question, to the di›erent situation of a company seeking redress froma third party on the face of it in breach of duty to the company. For reasons I havegiven, this does not represent English law, and it has also been subjected to trenchantCanadian critique: ��Emaciating the Statutory Audit�AComment on Hart BuildingSupplies Ltd v Deloitte & Touche�� by Ass Prof Darcy MacPherson, University ofManitoba (2005) 41Can Bus LJ 471.

(iii) Australian authority has adopted a more sceptical attitude to the scope andappropriateness of application of Canadian Dredge in the audit context: EdwardsKarwacki Smith & Co Pty Ltd v Jacka Nominees Pty Ltd 15 ACSR 502, where theSupreme Court of West Australia, after reviewing inter alia Canadian Dredge,refused summary disposal of a claim against auditors for negligently failing todiscover that the directing mind of a ��one-man company�� had been fraudulentlyconcealing the true state of the business and so fraudulently inducing investors in it.

(iv) American authority is copious and less easy to digest (as well appears from theMay 2008 continuing legal education study paper of the American Law Institute andBar Association which the House was shown: Rudolph and Tanis, ��Invoking In PariDelicto to Bar Accountant Liability Actions Brought by Trustees and Receivers��

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(2008) ALI-ABA StudyMaterials). Various broad approaches emerge. One takes thegeneral law�s theory of attribution or ��imputation�� and subjects it to an ��adverseinterest�� exception (itself stated in di›ering terms, some resembling the CanadianDredge test, others considerably more nuanced), which is then in turn subject to a��sole actor�� exception. Another suggests that, in the context of a professional duty tocheck upon and report fraud such as the audit duty, either the general theory ofimputation or the ex turpi causa doctrine (known in the United States as the in paridelicto defense) itself requires modi�cation.

(v) The early case of Cenco Inc v Seidman & Seidman (1982) 686 F 2d 449(USCA, 7th Cir) concerned a claim by a still solvent company to recover damagesfrom auditors who had failed to discover a fraud at top management and board level,consisting of in�ating the value of inventory, and so of stock which was used to buyup other companies. Speaking for the court and applying the common law of Illinois,Judge Posner upheld the trial judge�s directions to a jury which had led the jury todismiss Cenco�s claim. He di›erentiated fraud by top management involving theftfrom the company from the actual fraud which involved ��turning the company intoan engine of theft against outsiders��. The case is therefore distinguishable from thepresent, which I would, for reasons indicated in paras 230—234 above, place in theformer category for the purposes of the company�s claim against Mr Stojevic or itsauditors. Judge Posner went on to say that, even in deciding how to treat the lattercategory, the Illinois courts would be guided by ��the underlying objectives oftort liability��. Holding that these justi�ed the judge�s directions, he adopted atwo-pronged ��cost-bene�t�� analysis. To allow recovery would, �rst, bene�tstockholders without di›erentiating between innocent and guilty stockholders and,second, shift the loss to all stockholders (who the court said were ��slipshod in theiroversight [of their chosen board] and so share responsibility for the fraud��), thus, inthe court�s view, reducing the incentive for stockholders to hire and monitor honeststockholders: pp 455—456.

(vi) In Schacht v Brown (1983) 711 F 2d 1343 (also USCA, 7th Cir), topmanagement had fraudulently continued an insurance company in business past itspoint of insolvency and systematically looted it of its most pro�table and least riskybusiness and income, aggravating its insolvency. Cencowas distinguished on variousgrounds: �rst, as decided under Illinois law, whereas the issue in Schacht arose underfederal law and the court could say that ��we therefore write on a clean slate and maybring to bear federal policies in deciding the estoppel question��; second, on theground that the fraud in Schacht, including the ��Pyrrhic �bene�t� �� of its arti�ciallyprolonged life, was not su–cient to engage the Cenco analysis of a companyoperating as the engine of fraud on others; and, third, on the ground that thetwo-pronged analysis adopted in Cenco led in Schacht to a di›erent answer, becausein Schacht the company was insolvent, there was no indication that the fraudulenttopmanagement would bene�t from any recovery and

��no evidence here of the existence of large corporate shareholders capable ofconducting an independent audit, as in Cenco, and whose lack of investigatoryzeal would be rewarded by a decision favourable to the [liquidator]��: p 1349.

(vii) Similar thinking appears in (a) In re Jack Greenberg Inc (Larry Waslow,Trustee v Grant Thornton LLP) (US Bankruptcy Court, ED Penn, Phil Div) (1999)240 BR 486, where the court emphasised that ��while the imputation doctrine may beapplied in auditor liability cases, the doctrine was not crafted with that purpose inmind�� and should be allowed ��to be invoked only where the objectives of tort liabilitydictate�� ( p 508); (b)NCP Litigation Trust v KPMG LLP (2006) 901 A 2d 871 (NJ),where the Supreme Court of New Jersey di›erentiated between shareholders engagedin a fraud involving in�ation of pro�ts and other innocent shareholders, holding thatimputation could only be asserted to preclude recovery by the former, disagreed withthe suggestion in Cenco that ��imputation must be applied to shareholder suits todeter future such wrongdoing��, noted di›erences between Illinois and New Jersey

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law, and, referring to Schacht, also concluded that the management�s fraud ��in�atinga corporation�s revenues and enabling a corporation to continue in business �past thepoint of insolvency� cannot be considered a bene�t to the corporation��, but that, evenif it could, ��any bene�t would not be a complete bar to liability, but only a factor inapportioning damages�� ( p 888); and (c) In re Sunpoint Securities Inc (US BankruptcyCourt, ED Texas, Tyler Div) (2007) 377 BR 513.

(viii) One, though by no means the only, strand of the reasoning in Schacht andJack Greenberg, involves a possible distinction between situations of solvency andinsolvency. This is controversial in American law, particularly in the light ofsection 541 of the Federal Bankruptcy Code (according to which the bankruptcyestate ��is comprised of . . . all legal or equitable interests of the debtor in property asof the commencement of the case��), and there is authority rejecting such a distinctionin cases covered by section 541: O–cial Committee of Unsecured Creditors vRF La›erty & Co Inc 267 F 3d 340 (3rd Cir). Earlier authorities had rejected thedefence of in pari delicto as an answer to claims by receivers against negligentauditors: Federal Deposit Insurance Corpn v O�Melveny &Myers (1995) 61 F 3d 17,19 and Scholes v Lehmann (1995) 56 F 3d 750, 754. The court in La›ertydistinguished these authorities on the ground that receivers are not withinsection 541: La›erty, p 358. However, in a still more recent decision, Knauer vJonathon Roberts Financial Group Inc (2003) 348 F 3d 230, the Court of Appeals forthe Seventh Circuit has taken the view that receivers do stand in the shoes of thecompany in relation to entities deriving no bene�t from the fraud, as opposed todirect bene�ciaries of the fraud.

(ix) The ��cost-bene�t�� analysis and other techniques deployed in American caselaw do not �nd any easy match in English law. Case law in some states permittingdirect claims against auditors by injured third parties (including creditors) alsocomplicates any appreciation of the practical signi�cance of American authority: seee g Bily v Arthur Young&Co (1992) 3Cal 4th 370. However, the general message inthe recent case law that I have examined is one of increasing reluctance to hold thattop management fraud provides a defence to a negligent auditor, and this at leastcorresponds with my conclusions as to the right approach in principle in English law.

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ENDOFVOLUMEANDOFAPPEAL CASES SERIES FOR 2009

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CASES DETERMINED BY THE

KING'S BENCH DIVISION OF THE

HIGH COURT OF JUSTICE

AND BY THE

COURT OF APPEAL ON APPEAL THEREFROM

AND BY THE

COURT OF CRIMINAL APPEAL AND BY THE

RAILWAY AND CANAL COMMISSION.

PARKINSON v. COLLEGE OF AMBULANCE, LIMITED, AND HARRISON.

1924 July 29, 30, 31.

[1923. P. 1114.]

Contract—Illegality—Public Policy—Bargain for Acquisition of Knighthood —Gift to Charity — Fraudulent _Misrepresentations — Repudiation of Contract—Action to recover back Money paid.

If a contract which is illegal as being contrary to public policy has any element of turpitude in it the parties to the contract are in pari delicto, and if one of the parties to the contract has been defrauded, no action for damages can be maintained by the party defrauded, even though the contract is not of a criminal nature.

The secretary of a charity fraudulently represented to P. that he or the charity was in a position to undertake that P. would receive a knight-hood if P. made a large donation to the funds of the charity, and under-took that the title would be conferred if the donation was made. P., relying upon those representations and in the belief that the secretary

VoL. II. 1925. B 2

2 KING'S BENCH DIVISION. [1925]

1924

PARKINSON V .

COLLEGE OF AMBULANCE,

LB., AND HARRIS ON.

was authorized by the charity to give the undertaking, made a large donation to the funds of the charity. As P. did not receive the knight-hood he brought an action against the charity and its secretary to recover back the money he had paid as money had and received or as damages for deceit or breach of contract :—

Held, that a contract for the purchase of a title, however the money is to be expended, is an improper and illegal contract, as being against public policy, and that as P. knew that he was entering into an improper and illegal contract he could not recover back the money he had paid from the charity as money had and received nor recover damages from the charity or its secretary nor claim to repudiate the contract as being still executory and recover back the money paid.

FURTHER consideration of an action tried before Lush J. and a special jury.

The defendants, the College of Ambulance, Ld., were incorporated in September, 1918, under the Companies Acts, 1908-1917, as a company limited by guarantee without share capital. The objects with which the college was formed were (inter alia) to establish a college or school for the teaching of the principles and practice of first aid and ambulance work, and to organize and carry on the administration of immediate aid and assistance to poor persons. The president of the college at the material times was H.R.H. Princess Christian, and it was governed by a council composed of a number of distinguished persons. The defendant Harrison was the managing secretary of the college and, subject to the direction of the principal, Sir James Cantlie, K.B.E., was the responsible administrative officer, and had control of the staff and the general business of the college. He was also mainly responsible for collecting funds for the college.

In October, 1921, the plaintiff, Colonel Parkinson, was approached by a gentleman, who asked whether he was interested in the subject of a knighthood. Subsequently the plaintiff was introduced to the defendant Harrison at the College of Ambulance. Harrison at an interview on October 10, 1921, told the plaintiff that he himself or the College of Ambulance had the power to nominate persons to receive titles of honour, and that he himself or the college through their president H.R.H. Princess Christian had a call upon a certain number of royal honours as distinguished

2 K. B. KING'S BENCH DIVISION. 3

from political honours, that he or the college had already 1924

arranged for the grant of a peerage and a baronetcy in the PARKINSON

then forthcoming list of honours, and that he or the College of E OF

Ambulance would arrange for the grant to the plaintiff of the Amp LDuL""'

honour of a knighthood, provided that the plaintiff would HeiLsoN.

make a substantial payment by way of donation to the College of Ambulance. Harrison suggested that the plaintiff should pay 20,0001. to the college. At another interview on the following day Harrison repeated his former statements and said that the college would require 10,0001. He suggested that the plaintiff should purchase certain property at Birkenhead for the college and that he should also rebuild the college hall in Queen Anne Street. Ultimately it was agreed that the plaintiff should pay down 30001. and that he should purchase the property at Birkenhead for 20001., which he should convey to the college, and provide other moneys, bringing the total amount up to 10,0001., when he received his knighthood. Relying on Harrison's representations, the plaintiff handed to Harrison a cheque for 30001. drawn in favour of the College of Ambulance. This money was paid into the banking account of the College of Ambulance. The plaintiff on October 13 received a letter of thanks for the donation from the council of the college, which was signed by the president, H.R.H. Princess Christian. On the fol-lowing day the plaintiff received a letter from H.R.H. Princess Christian expressing her great appreciation and sincere gratitude for his splendid gift to the College of Ambulance, and that she was very pleased to hear of his promise to pur-chase property for the College of Ambulance in Liverpool and build the new lecture hall in Queen Anne Street. Princess Christian added that she had heard with interest of Colonel Parkinson's work for the country during the war.

The plaintiff was introduced to an official at the Unionist offices who, when the plaintiff informed him of the object of his visit and that he had paid 30001. to obtain a knighthood, told the plaintiff that he had been fooled. The plaintiff did not receive a knighthood.

The plaintiff's solicitors wrote to Harrison on December 23, B2 2


1924 1921, demanding the return of the 30001. On June 28, 1922, PiatiaNsoN there was an interview between the plaintiff and his solicitor

COLLEGE or and Harrison, when the plaintiff again demanded the return AMBULANCE, of the 30001. Harrison asked that the matter might be left

LD., AND Haitursorr. over to the New Year. On February 8, 1923, the plaintiff's

solicitors again demanded the return of the 30001. Harrison replied on February 20, 1923, that the plaintiff gave 30001. to the College of Ambulance as an act of charity and that it would be an unheard of thing for the college to return the money.

The plaintiff thereupon brought this action, in which he alleged that he paid the 30001. relying on the representations of the defendant Harrison that he or the college could and would arrange for the grant to the plaintiff of the honour of a knighthood ; that the defendant Harrison made the repre-sentations on behalf of himself and of the College of Ambu-lance ; that all the representations which Harrison made were false, and were made fraudulently with intent to induce the plaintiff to pay the 30001. The plaintiff claimed to recover the 30001. as damages for deceit, or alternatively as money had and received by the defendants to the use of the plaintiff, or as damages for breach of warranty of authority.

The questions left to the jury and their answers were as follows :-

(1.) (a) Did Harrison represent that he was in a position to undertake that the plaintiff would receive a knighthood ? —Answer : Yes. (b) Or did he only promise to use his influence for that purpose ?—Answer : No.

(2.) (a) Was that statement false ? — Answer : Yes. (b) Fraudulent ?—Answer : Yes.

(3.) Was the plaintiff induced thereby to part with his 30001. ?—Answer : Yes.

(4.) Did the plaintiff contract with Harrison personally, looking only to him for securing the knighthood ?-'-Answer : No.

(5.) Did he contract with him in the belief that he was acting for and had the authority of the college in giving the undertaking ?—Answer : Yes.


L (6.) Was Harrison in fact so authorized, or was he held 1924 out by the college as so authorized ?—Answer : Certainly. PAitiamoN.

V. he was held out as so authorized, and we consider he was so COLLEGE OF authorized. , AMBULANCE; .

LD., AND (7.) Did the plaintiff knowingly mislead the council into TI" --ARRISON.

thinking that he was making a voluntary donation ?-Answer : No.

(8.) Damages ?—Answer : 30001.

F. B. Merriman K.C. and St. John Field for the plaintiff asked for judgment.

Stuart Bevan K.C. and D. N. Pritt for the College of Ambulance. There is no evidence that Harrison was in fact authorized by the college to give the undertaking that the plaintiff would receive a knighthood or that he was held out by the college as being so authorized. The contract which the plaintiff made with Harrison was an illegal contract, as it was contrary to public policy. It is a case of the plaintiff giving money in order to receive an honour. It is immaterial that the inducement for the contract was not a bribe to an individual, but a donation to a charity. The material con-sideration is what had to be done in exchange for the payment. With regard to this matter Harrison was in the position of a stranger to the college, and the plaintiff can no more recover the 30001. from the college than he could recover it from a hospital with which Harrison had no connection if the plaintiff had given the money to that hospital at Harrison's suggestion. The plaintiff cannot recover the money, because in order to maintain the action it is necessary for him to set up his illegal bargain. It is immaterial in that respect whether the contract is illegal or whether it is also immoral. The plaintiff also cannot recover the money as money had and received. It is true that money paid to a stakeholder can be recovered either before or after the event, but before it has been handed over, but money paid under an illegal contract cannot be recovered back where the property in it has passed : Taylor v. Chester (1); nor can it be recovered in a case where the illegal

(1) (1869) L. R. 4 Q. B. 309.

6 BING'S BENCH. DIVISION. [1925]

1924 contract has been partly performed : Kearley v. Thomson. (1) PARIaNsox Any performance by the party receiving the money is

sufficient to prevent the party paying the money from COLLEGE or AMBULANCE, recovering it.

LD., AND HARRISON. Rayner Goddard K.C. and Croom-Johnson for the defendant

Harrison. The plaintiff can only bring an action against Harrison to recover damages for fraudulent misrepresentation ; the plaintiff cannot recover from him the money he has paid as money had and received, because Harrison never received the money. A man cannot be heard to say that he is entitled to damages because he has been induced by fraud to enter into an illegal contract. Every man is presumed to know the law, therefore the plaintiff must be assumed to have known that the contract into which he was entering was an illegal contract and that he could not take any benefit under it. The plaintiff cannot recover, because to do so he would have to set up his own illegality. The general rule is contained in the maxim " Ex turpi causa non oritur actio." Fry L.J. in Kearley v. Thomson (2) said : " As a general rule, where the plaintiff cannot get at the money which he seeks to recover without shewing the illegal contract, he cannot succeed." Wilmot C.J. in Collins v. Bluntern (3) said : " Whoever is a party to an unlawful contract, if he hath once paid the money stipulated to be paid in pursuance thereof, he shall not have the help of a Court to fetch it back again." To that general rule there are some exceptions—one is the case of oppressor and oppressed, in which case the oppressed party may recover the money back from the oppressor as the parties are not in pari delicto ; a second exception is where a statute has been intended to protect a class of persons and the person seeking to recover is a member of the protected class. A third possible exception is where the person who has paid money for an illegal purpose seeks to recover it back before the illegal purpose is carried out : Taylor v. Bowers. (4) In some cases however where

(1) (1890) 24 Q. B. D. 742. . (3) (1767) 1 Sm. L. C., 12th ed., 417; (2) 24 Q. B. D. 745.

2 Wile. 347, 350. (4) (1876) 1 Q. B. D. 291.

2 K. B. KING'S BENCH DIVISION. 7.

the moral turpitude is great the Courts will not allow a locus pcenitentice. A person who has been a party to such a bargain as the plaintiff in this case entered into is guilty of moral turpitude. In Fivaz v. Nicholls (1) it was held that one of two parties to an agreement to suppress a prosecution for felony cannot maintain an action against the other for an injury arising out of the transaction. The Court held that as he could not make out his case except through the illegal transaction to which he was a party the action would not lie. In the present case the plaintiff by his statement of claim set up the illegal contract to which he was a party in order to make out his case. No distinction has ever been drawn between cases involving moral turpitude and cases of unlawful contracts, but not involving moral turpitude. In England compounding a felony is prohibited by the common law, but in Hermann v. Charlesworth (2) a contract to stifle a prosecution was put in the same category as a contract in restraint of trade which involves no moral turpitude. Vaughan Williams L.J. said in Gordon v. Chief Commissioner of Metropolitan Police (3) that the maxim " Ex turpi causa non oritur actio " " applies not only where the contract is on its face illegal, but also where the contract is opposed to public policy as arising out of an illegal transaction." It does not make any difference what the illegality is or how it arises. The fact that Harrison was fraudulent does not make any difference to the plaintiff's rights. The plaintiff could not have recovered if he had lost money in playing at cards, and the fact that his opponent had cheated by having five kings in the pack would not make the plaintiff's losses any the more recoverable. The element of fraud was present in Fivaz v. Nicholls (1), but nevertheless the plaintiff was held not entitled to recover.

[Luse J. referred to Reynell v. Sprye. (4)] That case is the authority for the proposition that where

the parties are not in pari delicto the maxim does not apply.

(1) (1846) 2 C. B. 501. (3) [1910] 2 K. B. 1080, 1087. (2) [1905] 2 K. B. 123, 136. (4) (1852) 1 D. M. & G. 660.

1924

PARKINSON V.

COLLEGE-OF AMBULANCE,

LD , AND HARRISON.

8 KING'S BENCH DIVISION: [19251

1924 There one party had advice, and intentionally misled the other PARKINSON who had no advice.

V. F. B. Merriman K.C. and St. John Field for the plaintiff. COLLEGE OF AvIkBVIANCE) The plaintiff is entitled to recover the money he has paid

J,D. AND HARRISON. back from the College of Ambulance on the ground that

the council of the college are responsible for the fraud of their agent Harrison. The council authorized him to collect funds for the college, and the fraud of which Harrison has been guilty was committed in connection with the collection of the money which he was authorized to collect and not in connection with any other matter. The council delegated to Harrison the work of raising funds for the college. They never prohibited Harrison from holding out the prospect of obtaining titles for persons who gave large donations to the charity. They drew special attention to the fact that their president was H.R.H. Princess Christian. There is ample evidence to support the finding of the jury that Harrison was authorized by the council to give the under-taking that the plaintiff would receive a knighthood if he gave a large donation to the college in the letters from Princess Christian and the minutes of the Finance and General Purposes Committee. Further, the college have received the money which has been obtained through the fraud of Harrison, and they are liable for it as money had and received to the use of the plaintiff. The plaintiff is also entitled to recover the money on the ground that he retired from the contract before it was executed, as it was an illegal contract : Taylor v. Bowers. (1) In Taylor v. Chester (2), which has been relied upon by the defendants as an authority for the proposition that the plaintiff can not recover, there was no fraud, and further the contract had been carried out, whereas in the present case there was fraud on the part of Harrison, and the contract which the plaintiff entered into has not been executed. It may be that if a person is seeking to enforce an illegal contract there are no degrees of turpitude with regard to it. But where a person who has entered into an illegal contract seeks to

(1) 1 Q. B. D. 291, 300. (2) L. R. 4 Q. B. 309.


retire from it on the ground that it is illegal, and claims to 1924 recover back the money paid under it before the contract pAR„,,,,s„ has been carried out, a distinction has always been drawn V.

COLLEGE of between contracts disgraceful in themselves and those which AMBULANCE,

LD., AND are merely illegal : see Tappenden v. Randall (1), where HARBISON.

Lord Alvanley C.J. said : " In the present transaction there was no moral turpitude whatsoever : and though it has sometimes been held that where there is moral turpitude in the contract, the Court will not allow the party who has advanced money on such a contract to recover it back; yet no argument of that sort can be urged in the present case." Heath J. also said " there may be cases where the contract may be of a nature too grossly immoral for the Court to enter into any discussion of it. . . . . But where nothing of that kind occurs I think there ought to be a locus pcenitentim." In Aubert v. Walsh (2) it was held that as the action brought to recover back moneys paid for premiums on an illegal wager was brought before the period of time had elapsed on the expiration of which the decision of the wager depended, the plaintiff was entitled to recover, because he had rescinded the illegal contract. In Hermann v. Charlesworth (3) it was held that money paid under a marriage brokage con-tract, and which was therefore illegal on the ground of public policy, could be recovered back by the person who had paid it, although the other party to the contract had brought about introductions and incurred expense in doing so. That case shows that though something may have been done under an illegal contract, still the money paid can be recovered before the contract is in a real sense executed. Lowry v. Bourdieu (4) shows that where there is fraud on the part of one of the parties to an illegal contract they are not in pari delicto. In Hughes v. Liverpool Victoria Legal Friendly Society (5) the agent of the insurance society had made fraudulent misrepresentations to the plaintiff, thereby inducing her to make payment of premiums on policies which were

(1) (2)

(1801) 2 Bos. & P. 467, (1810) 3 Taunt. 277.

470. (3) (4)

[1905] 2 K. B. 123. (1780) 2 Doug. 468.

(5) [1916] 2 K. B. 482.


1924 illegal and void through want of interest, and it was held pARKTNsoN that the plaintiff was entitled to recover back the moneys

COLLEGE OF paid, as the parties were not in pari delicto. In Kettlewell

AMBULANCE, v. Refuge Assurance Co. (1) the plaintiff was also held entitled Lip., ANT)

H.Annison. to recover back premiums on policies which she paid owing to the fraudulent misrepresentation of the company's agent. In Harse v. Pearl Life Assurance Co. (2) on the other hand it was held that the plaintiff could not recover back the premiums paid, as the parties were in pari delicto, the representations having been innocently made by the insurance company's agent.

In Fivaz v. Nicholls (3) the plaintiff had to set up the fraud as part of the transaction and therefore he could not recover, whereas in the present case the fraud was antecedent to the contract and induced the contract ; the parties are therefore not in pari delicto : see Reynell v. Sprye. (4) In all the cases cited as authorities for the proposition that the plaintiff cannot recover, the bargain that was set up by the plaintiff was of a criminal nature. A contract to purchase a knighthood is not prohibited by statute, and there is no moral turpitude in entering into such a bargain. Baronetcies were regularly purchased in the reign of James I. The most that can be said against it is that it may be contrary to public policy and unenforceable. In Hanington v. Du-Chatel (5) it was held that a bond granted for the purchase of an office of honour was void as against public policy. In Earl of Kingston v. Pierepont (6), where 10,0001. having been left by will to acquire a dukedom to the head of the family, it was held upon a demurrer to an action to have the money applied accordingly that it was illegal to acquire honour for money. That judgment was based upon the fact that a peer of the realm exercised judicial powers in judging and determining upon the rights and properties of the people of England. In In re Wallace (7) it was held that a gift to an individual provided

(1) [1908] 1 K. B. 545. (4) 1 D. M. & G. 660. (2) [1904] 1 K. B. 558. (5) (1781) 1 Bro. C. C. 124. (3) 2 C. B. 501. (6) (1681) 1 Vern. 5.

(7) [1920] 2 Cb. 274.


the donee acquired a baronetcy or a superior title was 1924 not void as being contrary to public policy. It is difficult to RARKulsoN

see the distinction between that case and the present case of v. COLLEGE or

a gift to a hospital provided the donor received the honour of ArrANCE,

a knighthood. The Legislature and not the Courts ought to HARE"

say that such contracts should be prohibited. The plaintiff, having been induced by the fraud of the defendants' servant to enter into this contract, is entitled to recover back the money paid by him. The college cannot benefit by the fraud of their servant, and therefore are not entitled to keep it. The plaintiff is entitled to recover the 30001. from the defendant Harrison as damages for his deceit or as damages for breach of his warranty of authority.

Stuart Bevan K.C. in reply. Hughes v. Liverpool Victoria Legal Friendly Society (1) does not decide that where there is fraud the parties to an illegal contract are not in pari delicto, notwithstanding that they entered into it with knowledge of its illegality. In that case one of the parties entered into the contract innocently, believing it to be a lawful contract. In Taylor v. Chester (2), where it was held that the plaintiff could not recover back the money he had paid, the transaction was an immoral one, but not a criminal offence, and therefore it is not true to say that in every case in which it has been held that a plaintiff cannot recover because the contract was an illegal one, the bargain was with regard to a criminal offence. A contract to buy a knighthood is against public policy and is disgraceful, as it involves an insult to the Crown and a tendency to promote unlawful acts : see In re Wallace. (3)

[Rayner Goddard K.C. referred to Egerton v. Earl Browniow. (4)]

Cur. adv. volt.

1924. July 31. LUSH J. read the following judgment : This case raises questions of considerable public importance. Before discussing them and stating what my view is with regard to them, there is a finding of the jury with regard

(1) [1916] 2 K. B. 482. (3) [1920] 2 Ch. 274, 297. (2) L. R. 4 Q. B. 309. (4) (1853) 4 H. L. C. 1, 172, 177.


1924

Pemailsorr V.


LD., AND HARRISON.

Lush J.

to authority which I must deal with. I asked the jury whether the College of Ambulance in fact authorized or held Harrison out as authorized to give an undertaking to the plaintiff that he would receive the honour of knighthood if he contributed 10,0001. to the college. I do not think that the question of authority is really a material one. If the contract which the plaintiff made was a lawful one, he does not need to rely on it. If it was unlawful, his case is not strengthened by the jury's finding, as I will point out later. But I thought it better to take the jury's opinion. I reserved the question whether there was any evidence in support of such findings, should the jury answer the question in the plaintiff's favour. I had grave doubts whether the facts on which Mr. Merriman relied, and which I told the jury to consider, afforded any sufficient evidence. I told the jury that I thought that there was very little, if any, evidence of holding out, and that I thought that the question of actual authority was rather a question of law for me than a question of fact for them. After hearing arguments on the question, I am of opinion that there was no sufficient evidence either of holding out or of actual authority. I do not think that the council who control the affairs of the college or the committee did anything to mislead the plaintiff. There is no evidence at all that they held Harrison out as their ostensible agent. Nor do I think that the facts on which Mr. Merriman relied : the minute that he put in, the fact that the letter of December 23, 1921, claiming a return of the 30001. was on the file, the statement by Mr. Pritchard that Harrison had been over zealous, but that he had not been suspended, or the letter of H.R.H. Princess Christian, the president of the college, are sufficient to justify the finding that there was an actual authority. In law there clearly was no implied authority. Harrison's duty was to collect subscriptions, not to make contracts or give under-takings as to securing titles for subscribers. So far as the evidence is concerned, the utmost that it does is to suggest that some of those who were interested in the affairs of the college—possibly the committee—knew that Harrison was


telling subscribers that the conferring of an honour might follow. But that is entirely different from contracting to secure it. I must, therefore, deal with the case on the footing that Harrison acted throughout without the authority, actual or ostensible, of the college.

I come, then, to the main questions in the case, and the first that I will deal with is the question whether the contract was against public policy and therefore illegal. In spite of Mr. Merriman's able argument I cannot feel any doubt that a contract to guarantee or undertake that an honour will be conferred by the Sovereign if a certain contribution is made to a public charity, or if some other service is rendered, is against public policy, and, therefore, an unlawful contract to make. Apart from being derogatory to the dignity of the Sovereign who bestows the honour, it would produce, or might produce, most mischievous consequences. It would tend to induce the person who was to procure the title to use improper means to obtain it, because he had his own interests to con-sider. It would tend to make him conceal facts as to the fitness of the proposed recipient. Moreover, if the contract was lawful, an action could be brought if the stipulated title was not obtained or if the money was not paid. A person in the position of this plaintiff could claim and be awarded damages for the loss of a title or for obtaining one of a less degree than that for which he had bargained ; a person in the position of these defendants could claim and be awarded damages for not receiving the promised contribution, although the title had been obtained. No Court could try such an action and allow such damages to be awarded with any propriety or decency.

The contract, in my opinion, is one that could not be sanctioned or recognized in a Court of justice. Such a contract as that which the plaintiff and Harrison made is, in my judgment, an illegal and improper contract to enter into. I do not, of course, say that it involves the same degree of moral turpitude that an actually immoral contract involves ; still less a contract to commit a crime ; such, for example, as a contract between a man and woman that, in

1924

PARKINSON V .


LD., AND HARRISON.

Lush 3.

14 SING'S BENCH DIVISION. [1925]

1924 consideration of money paid to her, the woman should PARKINSON commit an act of immorality with the man, or, to use the

COLLEGE OF illustration which Mr. Rayner Goddard suggested in the course AmBuLANvE, of the trial, a contract with a procurer that he should procure

LD., AND HARRISON. a woman for an immoral purpose. The money paid by the

Lush a. plaintiff was not paid as the price or " wages " of immorality. It was not paid as a bribe to Harrison. It was paid to a public charity, a meritorious service in itself. But the con-tract which was entered into is not a contract which one can describe as innocent in itself. There are contracts which the law prohibits which are of that description. To take the case which I put to Mr. Stuart Bevan during the argument : the law does not allow an employer to bind his servant, after the service is over, not to carry on a competing business except within a reasonable area. If it is unduly extended the contract is in restraint of trade, and therefore against public policy, and therefore illegal. But it is not in itself an improper contract to make. The same may be said of a contract for the sale of certain classes of articles which are prohibited by statute unless certain conditions are fulfilled. But a contract for the purchase of a title, however the money is to be expended, is in itself an improper contract.

Now the , first question to consider is this. The contract being against public policy, and being of the character that I have described, can the plaintiff still rely upon the fraud of Harrison and recover damages against him ; and can he, as against the college, recover the 30001. which the college has received through that fraud, as money had and received to his use ? I am not prepared to hold—it is not necessary that I should decide the question—that in every case where a contract is against public policy, where one of the parties to it is defrauded by the other, he is prevented from recovering. It may be that whenever one party to a contract which is not improper in itself is unaware that it is illegal and is defrauded, the parties may not be in pari delicto. However that may be, I am of opinion that if the contract has any element of turpitude in it the parties are in pari delicto and no action for damages can be maintained by the party


defrauded. It is not correct to say, as was contended before 1924

me, that it is only if the contract is of a criminal nature that pARium„

the plaintiff is precluded from recovering. The case of .

CO GLLEE OF Taylor v. Chester (1) is an authority against this proposition. AMBULANCE,

LD., AND No criminal offence was committed there. And in Fivaz v. HARRISON.

Nicholls (2), although a criminal offence was committed, the Lush

decision was not founded on that fact, but on the illegality and impropriety of the contract. It was also contended that fraud has the same effect as duress, and that it would be contrary to public policy to allow a party who has defrauded another to retain the fruits of his fraud. I cannot agree with that contention. The case of Hughes v. Liverpool Victoria Legal Friendly Society (3), which appears to support it, does not do so when the facts are considered. The fraud there was committed by an agent of the defendants who deceived the plaintiff into believing that an insurance could be properly effected and would be valid, although there was no insurable interest. The fraud there related to the validity of the contract. The agent of the insurance com-pany, who knew that the contract was illegal, deceived the policy holder as to its validity. It was held that the parties were not in pari delicto, and that an action would lie to recover the premiums which the plaintiff had paid. The decision of the Court of Appeal in Kettlewell v. Refuge Assurance Co. (4) is another illustration of the same principle. These cases are very different from the present case. In the present case the plaintiff knew that he was entering into an illegal and improper contract. He was not deceived as to the legality of the contract he was making. How then can he say that he is excused ? How can he say that he has suffered a loss through being defrauded into making a contract which he knew he ought never to have made ? The answer is that he ought not to have made it. Where he was deceived was that he thought he would make a profit, derive a benefit from his unlawful act. He cannot be heard to say that. He has himself to blame for the loss that he has incurred. It is no

(1) L. R. 4 Q. B. 309. (3) [1916] 2 K. B. 482. (2) 2 C. B. 501. (4) [1908] 1 K. B. 545.


1924 excuse to say that Harrison was more blameworthy than he, PARKINSON' which is all that he really can say. That being the position,

v. the plaintiff is in this difficulty. He cannot recover damages COLLEGE OF

AIM:MANCE, either against Harrison or the college, because he is disclosing LD., AND

HARRISON. or setting up a contract which is unlawful, and which he had Lush J. no right to make. For the same reason he cannot recover

the 30001. from the college as money had and received. It is quite true that a principal cannot benefit by his agent's fraud, or a master by that of his servant. But the plaintiff is not in a position to rely on the fact that the college have benefited by their servant's fraud. He cannot reach that part of his case. He is precluded by the illegality of the contract from relying on it. Then can he rely on the principle which has been acted on in the cases that were cited to me that the contract being executory he can claim back from the college or Harrison the 30001. that he has paid ? Can he resile from the contract, abandon it, and sue for the 30001. ? The first difficulty in the plaintiff's way is that he is not in truth resiling from the contract at all. He is really bringing this action because he has failed to obtain the promised title. It seems to be something like an abuse of language to say that he is resiling from the contract, as the plaintiff did in Hermann v. Charlesworth. (1) If there is any locus pcenitenthe in a case like this, which I do not think there is, there has been no pcenitentia. But if there has been, the plaintiff still cannot recover on the ground that the contract is executory. He cannot get back the 30001. from Harrison, who never received it ; the college received it, and the college were never parties to any executory contract. Harrison was the contractor. Even if the college had authorized the contract, the other answer that I have given to the plaintiff's contention is, I think, complete. He never has resiled from an executory contract at all. But, further than that, the 30001. was given to the college as a donation. The plaintiff received his letter of thanks for it from Princess Christian. His name would be in the list of donors. The matter was at an end so far as the

(1) [1905] 2 K. B. 123.


college was concerned. How can the plaintiff recall the gift 1924

and claim back the money ? PARKINSON

In the result I must dismiss the action. The plaintiff has COLLEGE OF

said that he brought it in order to put a stop to an improper AM2, 1TLANCE

P AND

practice, and not to recover the money for himself. Be that HARRISON.

as it may, I am compelled to hold that it is not maintainable. Lush J.

I must give judgment for the defendants. As regards Harrison he has increased the costs of the litigation by denying the fraud, and having a long cross-examination administered to the plaintiff, and has not gone into the witness box or called any witnesses to meet it. He has acted oppressively, and I make an order depriving him of his costs.

Judgment for defendants.

NOTE.—An appeal was entered against this decision, but was subsequently withdrawn on terms.

Solicitors for plaintiff : H. S. Wright & Webb. Solicitors for College of Ambulance : Vizard, Oldham,

Crowder & Cash. Solicitors for defendant Harrison : Speeehly, Mumford &

Craig. R. F. S.

Vat,. II. 1925. C 2

The Weekly Law Reports 15 April 1988 735

2 W.L.R.

A [QUEEN'S BENCH DIVISION]

B

LEMENDA TRADING CO. LTD. v. AFRICAN MIDDLE EAST PETROLEUM CO. LTD.

[1986 L No. 229]

1987 Oct. 13, 14, 15, 19; Phillips J. Nov. 3

Contract—Illegality—Public policy—Agreement to procure renewal of oil supply contract with national corporation of Qatar—Commission payable on renewal of contract—Commission agreements in relation to oil supply contracts void under Qatar law—Whether contrary to English public policy—Whether to be

C enforced

In August 1984 the defendants entered into an agreement with the national oil corporation of Qatar, owned and controlled by the Government of Qatar, for the supply to the defendants of 750,000 barrels of crude oil per month. At the time of the execution of the supply contract the defendants signed a side letter in which they confirmed that the supply contract had been

D negotiated without agents or brokers, and without the payment of commission to anyone, and that any contravention of those terms would lead to termination of the contract. It was agreed that the supply contract was governed by Qatar law, and that under that law contracts which were contrary to public policy were void. It was also agreed that it was official Qatar Government policy to prohibit agreements for commission in respect of oil supply contracts. Early in 1985 the plaintiffs

E entered into an agreement with the defendants under which, if the plaintiffs procured the renewal of the supply contract, they would be paid commission of 30 U.S. cents a barrel. The supply contract was renewed as from 1 August 1985 for a quantity of 30,000 barrels a day. The defendants claimed that commission was payable only if the supply contract was renewed by 1 April 1985. Both parties conceded that the commission agreement was

F governed by English law. On the plaintiffs' claim for commission under the

agreement:— Held, dismissing the action, that English courts would not

enforce an English law contract which fell to be performed abroad where the contract related to an adventure which was contrary to English public policy founded on general principles of morality, and the same public policy applied in the country

G of performance; that it was undesirable that an intermediary in a position to use personal influence to obtain a benefit for another should charge for using his influence, particularly if his pecuniary interest was not apparent to the person being influenced, and that it was also undesirable to charge for using influence to obtain benefits from a person in a public position; that, accordingly, since the influence to be exercised by the

H plaintiffs was to be exercised on the controlling minister of a state-owned corporation in circumstances where it was essential for the minister to be unaware of the plaintiffs' pecuniary interest, and in view of the enormous amounts at stake, the commission agreement was void by reason of public policy both in England and in Qatar (post, pp. 744c–D, 747A–E).

Montefiore v. Menday Motor Components Co. Ltd. [1918] 2 K.B. 241 applied.

Kaufman v. Gerson [1904] 1 K.B. 591, C.A. distinguished.


Lemenda Ltd. v. African Middle East Co. (Q.B.D.) [1988]

The following cases are referred to in the judgment: A Foster v. Driscoll [1929] 1 K.B. 470, C.A. Kaufman v. Gerson [1904] 1 K.B. 591, C.A. Kleinwort Sons & Co. v. Ungarische Baumwolle Industrie Aktiengesellschaft

[1939] 2 K.B. 678; [1939] 3 All E.R. 38, C.A. Libyan Arab Foreign Bank v. Bankers Trust Co., The Times, 19 September

1987 Missouri Steamship Co., In re (1889) 42 Ch.D. 321, C.A. B Montefiore v. Menday Motor Components Co. Ltd. [1918] 2 K.B. 241 Norman v. Cole (1800) 3 Esp. 253 Parkinson v. College of Ambulance Ltd. [1925] 2 K.B. 1 Ralli Brothers v. Compania Naviera Sota Y Aznar [1920] 1 K.B. 614; [1920]

2 K.B. 287, C.A. Toprak Mahsulleri Ofisi v. Finagrain [1979] 2 Lloyd's Rep. 98.

The following additional cases were cited in argument: C

Abu Dhabi Investment Co. v. Mohammed I Al Heed (unreported), 5 June 1986, Bingham J.

Allan v. Leo Lines [1957] 1 Lloyd's Rep. 127 Burchell v. Gowrie [1910] A.C. 614, P.C. Burton v. Hughes (1885) 1 T.L.R. 207 Egerton v. Brownlow (1853) 4 H.L. Cas. 1, H.L.(E.) Hopkins v. Prescott (1847) 4 C.B. 578 D

Kemp v. Glasgow Corporation [1920] A.C. 836, H.L.(Sc.) Lampleigh v. Braithwait (1615) Hob. 105; 1 Brownl. 7; Moore, K.B. 866 Luxor (Eastbourne) Ltd. v. Cooper [1941] A.C. 108; [1941] 1 All E.R. 33,

H.L.(E.) Mansell v. Clements (1874) L.R. 9 C.P. 139 Regazzoni v. K. C. Sethia (1944) Ltd. [1958] A.C. 301; [1957] 3 W.L.R.

E 752; [1957] 3 All E.R. 286, H.L.(E.) Rex v. International Trustee for the Protection of Bondholders Aktiengesell-

schaft [1937] A.C. 500; [1937] 2 All E.R. 164, H.L.(E.) Sharif v. Azad [1967] 1 Q.B. 605; [1966] 3 W.L.R. 1285; [1966] 3 All E.R.

785, C.A. Steere v. Smith (1885) 2 T.L.R. 131 Steven v. Bromley & Son [1919] 2 K.B. 722, C.A.

F Trinidad Shipping Co. v. Alston [1920] A.C. 888, P.C. Way v. Latilla [1937] 3 All E.R. 759, H.L.(E.)

ACTION By a writ dated 23 January 1986 and amended points of claim, the

plaintiffs, Lemenda Trading Co. Ltd., a company registered in Nassau which carried on business as advisers in the petroleum industry, claimed from the defendants, the African Middle East Petroleum Co. Ltd., a company registered in London which carried on business as dealers in petroleum, commission for using their influence in assisting to procure the renewal of a contract between the defendants and the Qatar General Petroleum Co.

The facts are stated in the judgment.

Stephen Silber Q.C. and Stephen E. Phillips for the plaintiffs. David Bean for the defendants.

Cur. adv. vult.

3 November. PHILLIPS J. read the following judgment. In this action the plaintiffs seek to recover commission for using what are sometimes


2 W.L.R. Lemenda Ltd. v. African Middle East Co. (Q.B.D.) Phillips J.

A called "their good offices" in assisting to procure the renewal of a contract between the defendants and the Qatar General Petroleum Co. ("Q.G.P.C.").

The plaintiffs are a company registered in Nassau and the defendants are a company registered in London, but the real protagonists in this dispute are individuals. The principal shareholder in the plaintiff company is Mr. Hassan Yassin, a Saudi Arabian. The principal

B shareholder in the defendant company is Mr. Fakhry Abdelnour, an Egyptian. The evidence that I have heard suggests to me that the two companies are no more than convenient corporate vehicles for the business activities of their principal shareholders.

Mr. Yassin described the plaintiffs' business as "advisers in connection with the petroleum industry." The defendants carry on business as

C dealers in petroleum. Mr. Abdelnour explained that they do not deal on the spot market but purchase and resell oil under long-term supply contracts.

Q.G.P.C. is the national oil corporation of Qatar and is owned and controlled by the Government of Qatar. The Minister of Finance and Petroleum of Qatar is also ex officio chairman of the board of directors of Q.G.P.C. At all material times this was Sheikh Abdul Aziz Bin

D Khalifa Al-Thani, the second son of the Emir of Qatar. Hereafter I shall refer to him simply as the minister. Throughout 1984 and in the first half of 1985 the managing director of Q.G.P.C. was Mr. Ali Jaidah. In July or August 1985 he fell from favour and was dismissed, to be replaced by Sheikh Rashed Awaida Al-Thani.

On 28 August 1984 the defendants and Q.G.P.C. executed an E agreement ("the supply contract") whereby for the six months beginning

on 1 October 1984, Q.G.P.C. was to supply to the defendants on f.o.b. terms 750,000 barrels of crude oil per month. The supply contract contained the following material terms:

"Article 2—Duration

F "This contract shall [come] into force as from 1 October 1984 and shall continue thereafter for a period of six months ending on 31 March 1985. Seller and buyer shall, before the expiry of six months, negotiate for extension of the contract to a further period of six months subject to agreement by both parties. "Article 16—Applicable law "Buyer shall comply with the laws and regulations of he State of

G Qatar and with directions of the Ministry of Finance and Petroleum. "Article 17—Arbitration "17.1 If at any time any difference or dispute shall arise between seller and buyer concerning the interpretation of this contract or anything therein contained, or any rights or liabilities thereunder, the same shall, failing agreement to settle in any other way, be

H finally settled between the parties concerned under English law and in accordance with the Rules and Arbitration of the International Chamber of Commerce by one or more arbitrators appointed in accordance with the rules."

At the same time as the supply contract was executed, Mr. Abdelnour signed on behalf of the defendants a side letter ("the side letter") in the following terms:

The Weekly Law Reports 15 April 1988 738 Phillips J. Lemenda Ltd. v. African Middle East Co. (Q.B.D.) [1988]

"With reference to crude oil sales contract concluded between [Q.G.P.C.] and your company on 28 August 1984, we should like you to note and confirm the following: 1. That this contract has been negotiated directly with your company and us without involvement of any agent/brokers. 2. That during the tenure of this contract or thereafter no commissions/discounts have been paid or will be paid to an agent/broker or any other person in receiving/obtaining benefits and consideration. 3. That any contraven-tion of above would not only lead to termination of the contract, but also shall entitle the seller to take all necessary measures to remedy any loss/damage caused as a consequence thereof. All the above-mentioned points are considered integral part to the crude oil sales contract, and your signature on copy of this letter is binding on your part."

On or about 7 July 1985 the supply contract was renewed for a period of one year with effect from 1 August 1985 for a quantity of 30,000 barrels per day of crude oil. The plaintiffs claim that they are entitled to commission at the rate of 30 U.S. cents per barrel for every barrel shipped under the renewed contract. The sum claimed amounts to well in excess of $2 million, though the parties are agreed that I shall not deal with quantum at this stage.

The agreement that the plaintiffs rely upon as entitling them to this commission was initially pleaded as follows:

"2. By an agreement made orally in or about March 1985 between Mr. Hassan Yassin on behalf of the plaintiffs and by the defendants and partially evidenced by (or alternatively made partly orally and partly contained) in a letter dated 20 March 1985 from Mr. Fakhry Abdelnour on behalf of the defendants to the plaintiffs, it was agreed that: (a) the plaintiffs would assist the defendants in negotiations with the [Q.G.P.C.] (`the corporation') for the renewal of a crude oil supply contract (`the supply contract') made between the corporation and the defendants on 28 August 1984; (b) in the event of the supply contract being renewed, the defendants would pay to the plaintiffs U.S.$0.30 per net U.S. barrel of crude oil on all quantities evidenced by bills of lading loaded from 1 April 1985 pursuant to the renewal of the supply contract."

The defendants requested particulars of the assistance that the plaintiffs agreed to provide, to which request the defendants replied:

"During the course of a meeting which took place during the first half of March 1985 at 60, Park Lane, London W1, Mr. Fakhry Abdelnour and Mr. Victor Chayto on behalf of the defendants told Mr. Hassan Yassin (`Mr. Yassin') that the defendants were convinced that Mr. Yassin was in a position to influence [Q.G.P.C.] into continuing to do business with the defendants and in particular into renewing a crude oil supply contract made between Q.G.P.C. and H the defendants on 28 August 1984 (`the supply contract'). During the course of the meeting Mr. Yassin received a telephone call from Mr. Jaida, the director of Q.G.P.C. on another matter. During the course of the conversation Mr. Yassin raised the question of the renewal of the supply contract whereupon Mr. Jaida indicated to Mr. Yassin that he would not have any objection to the renewal of the supply contract pending agreement from the appropriate minister

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A in Qatar. The defendants stated that they were not worried about the minister but that Mr. Yassin should continue to ensure that Mr. Jaida the director of Q.G.P.C. did not block the renewal of the supply contract between the defendants and Q.G.P.C. During the course of this meeting, Mr. Yassin on behalf of the plaintiffs agreed to provide. this assistance."

B The defendants admit that they entered into an agreement with the plaintiffs in relation to the renewal of the supply contract. They contend, however, that the terms of the agreement were that the plaintiffs would be entitled to their commission if, but only if, they procured the renewal of the supply contract prior to and with effect from 1 April 1985.

Illegality While the issue between the parties as to the terms of the agreement

is of critical importance in relation to liability under that agreement, there is no dispute as to the overall nature of the agreement. Mr. Yassin's task was to use personal influence within Q.G.P.C. in an endeavour to procure the renewal of the supply contract. Mr. Yassin's evidence was that his duties were restricted to "working on" or

D "lobbying" Mr. Jaida, the managing director. Mr. Abdelnour denied this and said that he expected Mr. Yassin to use his influence with the minister himself. Whichever be correct, the first question that it seems to me appropriate to consider is whether an agreement to pay commission for such services is one which the English courts will enforce.

The points of defence raised by amendment the following plea of

E illegality: "Further or alternatively any agreement for the payment of commission to an agent or broker in respect of the negotiation or renewal of a contract such as the crude oil supply contract between [Q.G.P.C.] and the defendants (which by its terms was subject to the law of Qatar) is and was at all material.times, as the plaintiffs well knew, unlawful by the law of Qatar, which is a foreign and

F friendly state. Accordingly, the alleged agreement relied on by the plaintiffs (and likewise the agreement admitted in paragraph 2 hereof) is and was illegal by the law of Qatar and is void and unenforceable in this court, in that it had for its purpose an object which was contrary to public policy and international comity."

This plea is narrowly based upon the law of Qatar. It occurred to me, G however, that there might be a more fundamental objection to the

enforcement of the contract sued on in this action, namely, that the agreement relates to a transaction that is contrary to public policy in England, and I requested counsel to deal with this question.

It is convenient at this point to set out the position under the law of Qatar and to make findings as to the knowledge of Mr. Yassin and Mr.

H Jaida. The law of Qatar is not in issue and I quote from the agreed report of Mr. Gebran Majdalany, a legal practitioner in Qatar:

"6. The Qatar Civil and Commercial Law, Law Number 16 of 1971, provides, inter alia, as follows: (i) By article 31, that, 'If the object of the obligation is contrary to public order or morals, the contract shall be void'; (ii) By article 35, that, 'If the cause of contracting is legally prohibited or is contrary to public order or morals, the contract shall be void'; (iii) By article 39, that, 'If the contract is

The Weekly Law Reports 15 April 1988 740 Phillips J. Lemenda Ltd. v. African Middle East Co. (Q.B.D.) (1988]

void any interested party may exercise its right to revoke it and the A court may order revocation at its own motion. Nullity shall not cease by confirmation.' The reference in these articles to 'public order' is the equivalent of the more familiar English term 'public policy.'

"7. The Qatar General Petroleum Corporation was set up under

corporation of Qatar and is owned and controlled by the Government Decree Law Number 10 of 1974. Q.G.P.C. is the national oil

B of Qatar. The Minister of Finance and Petroleum of Qatar is also ex officio chairman of the board of directors of Q.G.P.C.

"8. It is the official policy of the Government of the State of Qatar and that of Q.G.P.C. to prohibit agreements for the payment of commission to an agent or broker in respect of the negotiation or renewal of any oil supply contract and to require the buyer under C any such contract to sign a letter, countersigned by the Minister of Finance and Petroleum of Qatar, in his capacity as chairman of the board of directors of Q.G.P.C., confirming that no such payment has been or will be made. The existence of this official policy has been confirmed to me by Mr. Abdul Rab Mohammed Al-Malki, deputy manager and head of contracts section, Q.G.P.C.

D Headquarters. "In the present case, a letter in those terms was signed by the

defendant company at the same time as the original crude oil sales and purchase agreement on 28 August 1984.. .

"9. It is my opinion that, as a matter of official practice, payment of commission to a foreign intermediary in connection with an oil supply agreement entered into with Q.G.P.C. is prohibited E and that it is accordingly contrary to public policy in the State of Qatar. In my view, therefore, assuming the plaintiffs' pleaded case to be correct, the commission contract in question would be void under the laws of Qatar on the basis that its object is contrary to public policy in the State of Qatar."

On the basis of the agreed evidence as to the law of Qatar I make F the following findings. (i) The agreement between the parties involved a transaction which was contrary to public policy in Qatar. In consequence the agreement was void under the law of Qatar and unenforceable in Qatar. (ii) Performance of the agreement would constitute a breach of the terms of the side-letter which would automatically be incorporated in any renewal of the supply contract. (iii) If the minister became aware of

G the agreement before renewing the supply contract this would destroy any chance of renewal. (iv) If Mr. Jaidah became aware of the agreement it would be his duty not to countenance it but to draw it to the attention of the minister.

Mr. Yassin told me that he did not know that the defendants' supply contract was subject to the terms of the side letter. Mr. Yassin had himself recently been involved in concluding another supply contract between Q.G.P.C. and a company called Carey Energy, with which Mr. Yassin had a joint venture agreement. To Mr. Yassin's knowledge this contract was subject to an identical side letter. I have no doubt that Mr. Yassin must have appreciated that the defendants' supply contract was likely to be subject to the same provisions. Indeed I am satisfied that Mr. Yassin's experience in the oil business was such that he must have been well aware of all the facts that I have just found.



A Mr. Silber for the plaintiffs submitted that the nature of the agreement between the parties must have been quite apparent to Mr. Jaida. The evidence does not support that submission. Mr. Yassin did not tell Mr. Jaida that he was to be paid for his services, let alone that he was to be paid on a commission basis. He told Mr. Jaidah that Mr. Abdelnour was a friend of his and urged him to support a fellow Arab. Mr. Yassin agreed, when cross-examined, that Mr. Jaida must have

B known of the policy of the Qatar Government and would not have wished to be involved in an activity of which the government or the minister would disapprove. If Mr. Jaida was loyal to Q.G.P.C., and there was no suggestion that he was not, it was plainly important that he should not be aware of the nature of the agreement between Mr. Yassin and Mr. Abdelnour. I find that he had no knowledge of this.

C The plaintiffs contend and the defendants concede that the agreement between them is governed by English law. It is not entirely clear to me why the defendants accept that the proper law of the agreement is not that of Qatar—such a proposition would not seem beyond argument—but I see no reason why the court need challenge their concession.

There are two allied principles of English law that the defendants

D invoke in this case: 1. A contract (whether lawful by its proper law or not) is, in general, invalid in so far as the performance of it is unlawful by the law of the country where the contract is to be performed: Ralli Brothers v. Compania Naviera Sota Y Aznar [1920] 1 K.B. 614; [1920] 2 K.B. 287. 2. An English contract should and will be held invalid on account of illegality if the real object and the intention of the parties necessitates them joining in an endeavour to perform in a foreign and

E friendly country some act which is illegal by the law of that country notwithstanding the fact that there may be, in a certain event, alternative modes or places of performing which permit the contract to be performed legally: Foster v. Driscoll [1929] 1 K.B. 470.

Mr. Bean, for the defendants, submitted that the agreement in the present case was for the performance of a transaction that was illegal

F under the law of Qatar, a friendly state, and that in consequence the agreement should not be enforced by the English courts. In reply to this Mr. Silber made two points: (i) the agreement did not require, and the parties did not intend, that it should necessarily be performed in Qatar. (ii) The transaction which formed the subject matter of the agreement between the parties was not illegal under the law of Qatar; it was merely contrary to the public policy of that country. I shall deal with each point

• in turn.

Place of performance

In a number of decided cases defendants have sought to resist a claim for payment of money due under an English law contract by

H contending that such payment would be illegal under a foreign law. In those cases the courts have rejected the plea of illegality where it has been demonstated that payment was possible under the contract outside the country whose law made payment illegal: see for instance Kleinwort Sons & Co. v. Ungarische Baumwolle Industrie Aktiengesellschaft [1939] 2 K.B. 678 and Toprak Mahsulleri Ofisi v. Finagrain [1979] 2 Lloyd's Rep. 98; Libyan Arab Foreign Bank v. Bankers Trust Co., The Times, 19 September 1987.


Phillips J. Lemenda Ltd. v. African Middle East Co. (Q.B.D.) [1988]

Mr. Silber sought to apply the reasoning in those cases to the present case. Both the minister and Mr. Jaida travelled from time to time outside Qatar. Mr. Yassin could, so Mr. Silber argued, have performed his contractual obligations by bringing his influence to bear during the course of such foreign travel. I do not consider that this is a realistic approach to the agreement. Under the agreement Mr. Yassin was to apply influence to Q.G.P.C., a Qatar state company based in Qatar. While there is a dispute as to whom he was to influence, both Mr. Jaida, Q.G.P.C.'s managing director, and the minister were normally to be found in Qatar. While the parties made no express agreement as to how or where Mr. Yassin should exert his influence, I find that both the agreement and the parties contemplated that, whether by telephone, telex, letter or by personal encounter, Mr. Yassin would bring his influence to bear within Qatar, as indeed he did.

The law of Qatar The agreed report of Mr. Majdalany does not state that agreements

for the payment of commission to intermediaries in connection with an oil supply agreement entered into with Q.G.P.C. violate any provision of the law of Qatar. What Mr. Majdalany does state is that it is the D official policy of the Government of Qatar to prohibit such agreements. Thus, he says, "as a matter of official practice" payment of commission is prohibited and accordingly contrary to public policy in the State of Qatar. There is a clear distinction between acts which infringe public policy and acts which violate provisions of law. I have been referred to no decided case that supports the proposition that the English courts should, as a matter of comity, refuse to enforce an English law contract E on the sole ground that performance would be contrary to the public policy of the country of performance. The public policy of Qatar cannot, of itself, constitute any bar to the enforcement of the agreement in this case. It may, however, be a relevant factor when considering whether the court ought to refuse to enforce the agreement in this case under principles of English public policy. F

English public policy In a number of cases the English courts have, on grounds of public

policy, refused to enforce an agreement whereby one party was to be paid by the other for using personal influence to procure a benefit from a third party. It is necessary to consider these cases in order to discover the principles underlying this head of public policy and see whether they apply to the present case. In Norman v. Cole (1800) 3 Esp. 253 the plaintiff sought to recover moneys paid to a person who was to use his influence to procure a pardon of a man under sentence of death. The facts were set out in the report as follows: Tunstall was a man of good character before his conviction. One Morland, being a person of good connections, and having access to persons of interest, the money was to be given to him for so using his interest, by representing in favourable terms, the case and character of Tunstall. Lord Eldon dealt with the case in peremptory fashion. He said, at p. 253:

"I cannot suffer this cause to proceed. I am of opinion, this action is not maintainable; where a person interposes his interest and good offices to procure a pardon, it ought to be done gratuitously, and not for money; the doing an act of that description should proceed

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A from pure motives, not from pecuniary ones. The money is not recoverable."

In Parkinson v. College of Ambulance Ltd. [1925] 2 K.B. 1 the secretary of a charity fraudulently represented to the plaintiff that he or the charity was in a position to undertake that the plaintiff would receive a knighthood if the plaintiff made a large donation to the funds of the

B charity. The plaintiff did not receive his title and sought to recover his money. Lush J. said, at p. 13:

Gt

. . . I cannot feel any doubt that a contract to guarantee or undertake that an honour will be conferred by the Sovereign if a certain contribution is made to a public charity, or if some other service is rendered, is against public policy, and, therefore, an

C unlawful contract to make. Apart from being derogatory to the dignity of the Sovereign who bestows the honour, it would produce, or might produce, most mischievous consequences. It would tend to induce the person who was to procure the title to use improper means to obtain it, because he had his own interests to consider. It would tend to make him conceal facts as to the fitness of the proposed recipient. . . . The contract, in my opinion, is one that

D could not be sanctioned or recognised in a court of justice."

In Montefiore v. Menday Motor Components Co. Ltd. [1918] 2 K.B. 241 the plaintiff claimed under a contract which he alleged entitled him to commission for procuring from the government a loan to the defendants to be used in the manufacture of aircraft components. The issue was whether the commission was earned or not, but Shearman J. took the

E point that the agreement was contrary to public policy and not enforceable. He found the following facts, at p. 244:

"what was bargained for between the plaintiff and the defendants was the recommendation by the plaintiff of the merits of the defendants and the exercise of the influence of the plaintiff with servants of the Crown in order to induce an advance of public

F money to the defendants for the securing or the obtaining of government contracts. The true consideration for the giving of the note was that the plaintiff should use his alleged position, and the value of his good word, in favour of the defendants in getting government assistance in the form of money or contracts."

The judge then held, at p. 245:

"A contract may be against pqblic policy either from the nature of the acts to be performed or from the nature of the consideration. In my judgment it is contrary to public policy that a person should be hired for money or valuable consideration when he has access to persons of influence to use his position and interest to procure a benefit from the government."

After citation of authority the judge went on, at p. 245:

"It is well settled that in judging this question one has to look at the tendency of the acts contemplated by the contract to see whether they tend to be injurious to the public interest. In my judgment a contract of the kind has a most pernicious tendency. At a time when public money is being advanced to private firms for objects of national safety it would tend to corrupt the public service and to /

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bring into existence a class of persons somewhat like those who in A ancient times of corrupt politics were described as `carryers,' men who undertook for money to get titles and honours for those who agreed to pay them for their influence . . ."

The facts of the last case are closest to those with which I am concerned. Mr. Silber sought to persuade me that the evil in the Montefiore case was that the plaintiff was in an official position and that, B by agreeing to be paid for his influence, he placed himself in a position of conflict of interest. I do not consider that this is a valid analysis of the facts. While the evidence showed that the plaintiff was on an influential committee, he had no official position. The reasoning underlying the decision in that case appears satisfactorily from the judgment itself.

From this somewhat sparse authority it is possible to deduce the C following principles underlying this head of public policy: (i) it is generally undesirable that a person in a position to use personal influence to obtain a benefit for another should make a financial charge for using such influence, particularly if his pecuniary interest will not be apparent. (ii) It is undesirable for intermediaries to charge for using influence to obtain contracts or other benefits from persons in a public

D position. The textbooks seek to place into categories the various heads of

public policy that can invalidate contracts. Halsbury's Laws of England, 4th ed., vol. 9 (1974), para. 394, p. 268 places the cases I have cited under the heading "Agreements Injurious to Public Life"; Chitty on Contracts, 25th ed. (1983), para. 1048, p. 557 under "Objects Injurious to Good Government: Domestic Affairs"; and Cheshire Fifoot and E Furmston, The Law of Contract, 11th ed. (1986), p. 355 under "A Contract Liable to Corrupt Public Life." It has certainly been a feature of the decided cases that the contract has involved influencing a decision to be taken by someone in a public position, though whether this feature is an essential element in the application of the doctrine has yet to be decided. F

In some cases it will be difficult to decide whether this head of public policy applies so as to render a contract unenforceable. In certain circumstances the employment of intermediaries to lobby for contracts or other benefits is a recognised and respectable practice. In the present case the significant facts are as follows: (i) the influence to be exerted by Mr. Yassin was upon the controlling minister of a state-owned corporation; either directly or by influencing the managing director of G the corporation. (ii) The influence was to be exerted in circumstances where it was essential that the person influenced should be unaware of Mr. Yassin's pecuniary interest. (iii) The amounts at stake, both in terms of the value of the contract that it was hoped to obtain and the size of the commission to be earned by Mr. Yassin, were enormous.

Had the agreement related to the procurement of a contract from a H British Government department or a state-owned industry, I am in no doubt that it would have been unenforceable by reason of English public policy. Is this a policy a bar to enforcement having regard to the fact that performance of the relevant obligation was to take place not in England but in Qatar? This is no easy question.

Chitty on Contracts, 25th ed., para. 1056, p. 561 has the following commentary:


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A "Where the contract is . . . valid by its foreign proper law, will it be unenforceable in England because it would be regarded as illegal or contrary to public policy under the rules governing domestic contracts? . . . Where . . . the contract, though not involving criminality, is alleged to offend against one of the recognised heads of English public policy, great care should be exercised by the courts in determining whether the domestic policy demands the

B non-enforcement of a contract with substantial or even exclusive foreign elements which is valid under the system of law with which it has the closest connection. It cannot, however, be said that the courts have carefully considered this problem; instead they have usually applied the English heads of public policy and held such contracts unenforceable in England."

While this passage is dealing with contracts governed by foreign law, the commentary would seem apposite in the case of an English law contract to be performed abroad. Some heads of public policy are based on universal principles of morality.

"Where a contract is void on the ground of immorality, or is contrary to such positive law as would prohibit the making of such .a

D contract at all, then the contract would be void all over the world, and no civilised country would be called on to enforce it"; per Lord Halsbury L.C. in In re Missouri Steamship Co. (1889) 42 Ch.D. 321, 336."

Where a contract infringes such a rule of public policy the English court will not enforce it, whatever the proper law of the contract and wherever

E the place of performance. Other principles of public policy may be based on considerations which are purely domestic. In such a case there would seem no good reason why they should be a bar to the enforcement of a contract to be performed abroad.

Into which category does one place the principles of public policy that apply in the present case? This is a question that is considered by

F Cheshire Fifoot and Furmston, The Law of Contract, 11th ed., pp. 370 and 371, under the heading "A foreign contract, if contrary to English public policy, is unenforceable."

"An action is frequently brought in England upon a foreign contract. By a foreign contract is meant one which is more closely connected with a foreign country than with England, as, for instance, when it

G is made is). France by an Englishman and a Frenchman and is performable only in France. In such a case the rule is that the substance of the obligation—the essential validity of the contract—must be governed by what is called the 'proper law,' i.e. in effect the law of the country with which the transaction is most closely connected. The English doctrine of consideration, for instance, could not be invoked in an action for breach of the contract given

H above. Nevertheless, the rights of the parties as fixed by the proper law, if put in suit iii England, are subject in general to the English doctrine of public policy. If the contract, though valid by the foreign law, is repugnant to what has been called the 'stringent domestic policy' of England, it cannot be enforced in England. This, however, does not mean that each individual rule comprised in the comprehensive doctrine of public policy applies to a foreign contract. That doctrine strikes at acts which vary greatly in their

VoL. 2 34


degree of turpitude. Certain of its prohibitory rules exemplify A principles which in the English view it is of paramount importance to maintain in English courts; others, such as that directed against a fraud on the revenue, are presumably designed to protect purely English interests. It is the former rules only, those upon which there can be no compromise, that apply to an action on a foreign contract.

"Which of the rules are sufficiently important to be applied B without exception is a somewhat controversial question that cannot be adequately discussed in a book on the elements of contract. The decisions, however, at least warrant the statement that most of the contracts already described in this chapter as being repugnant to public policy and illegal, would not be enforced in an English action, whatever view might be taken of their validity by their C proper law. This is clearly so, for instance, in the case of a French contract to commit a crime or a tort, or to promote sexual immorality, or to prejudice the public safety of England. It might be thought that an agreement to stifle a foreign prosecution would scarcely arouse the moral indignation of an English court, but no such indifference to what is normal in certain countries was shown by the Court of Appeal in Kaufman v. Gerson [1904] 1 K.B. 591. In D that case: 'A Frenchman coerced a Frenchwoman into signing a contract in France by the threat that if she refused to sign he would prosecute her husband for a crime of which he was accused.' The contract was valid by French law, but an action brought for its breach in England was dismissed on the ground that to enforce it

essential moral interest.' Presumably, therefore, an English court `would contravene what by the law of this country is deemed an E

would apply the rule that has been laid down in the United States of America and would refuse to enforce any contract which tended to promote corruption in the public affairs of a foreign country, however irreproachable such conduct might be in the view of the foreign law."

F The opinion expressed in the last few lines of this passage loses some

of its force when it is appreciated that Kaufman v. Gerson [1904] 1 K.B. 591 does not support the proposition for which it is cited. In that case the Court of Appeal had before it a claim in relation to a French law contract to be performed in France, the object of which was to stifle a prosecution in France. Had the prosecution been in England, this object

G would have been against public policy. It was not against the public policy of France. At first instance Wright J. held that English public policy was no bar to enforcement. In the Court of Appeal the court refused to enforce the contract because it had been obtained by duress, which fact also was apparently no bar to enforcement under French law. Sir Richard Collins M.R. left open the question of whether a contract of the type sued on was in any event enforceable in England. He said, at p. 596:

"I do not propose to deal with the first point raised, namely, that the agreement, being one which interfered with the course of justice, could not be enforced in an English court. The law of France with regard to such agreements is said to differ from that of England. I am not prepared to say that, so far as this point is concerned, the agreement in this case, if valid according to the law



A of France, may not be enforced by an English court; but I express no final opinion on the matter one way or the other."

Thus the Court of Appeal left open the question of whether an agreement to stifle a foreign prosecution was one which the English court would not enforce on grounds of public policy.

The principles underlying the public policy in the present case are B essentially principles of morality of general application. The practice of

exacting payment for the use of personal influence, particularly when the person to be influenced is likely to be unaware of the pecuniary motive involved, is unattractive whatever the context. Yet it is questionable whether the moral principles involved are so weighty as to lead an English court to refuse to enforce an agreement regardless of the

C country of performance and regardless of the attitude of that country to such a practice. The later English decisions were influenced, at least in part, by the effect of the practice in question upon good government in England. It is at this stage that, in my judgment, it becomes relevant to consider the law of Qatar. The significant fact in Kaufman v. Gerson was that the contractual adventure was not contrary to French law and the contract was valid and enforceable in France. In the present case

D Qatar, the country in which the agreement was to be performed and with which, in my view, the agreement had the closest connection, has the same public policy as that which prevails in England. Because of that policy, the courts of Qatar would not enforce the agreement.

In my judgment, the English courts should not enforce an English law contract which falls to be performed abroad where: (i) it relates to an adventure which is contrary to a head of English public policy which

E is founded on general principles of morality, and (ii) the same public policy applies to the country of performance so that the agreement would not be enforceable under the law of that country.

In such a situation international comity combines with English domestic public policy to militate against enforcement.

For these reasons the court will not entertain this action and the

F claim must be dismissed. As my decision covers a point which is not clearly covered by authority I propose, nonetheless, to indicate what the result of this action would have been had it been justiciable in the English court.

[His Lordship continued and dealt with his findings on the evidence. He rejected the defendants' evidence that the plaintiffs would only get their commission if the contract was renewed by 1 April 1985; however,

G for the plaintiffs to earn their commission they had to procure the renewal of the contract. He held that the plaintiffs would have failed on the merits as they had not proved it was their influence which was all important in securing the renewal of the contract.]

Action dismissed.

H Solicitors: Field Fisher & Martineau; Lovell White & King.

[Reported by Miss GERALDINE FAINER, Barrister-at-Law.]

Tab 5 - US Case Law

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Transcript of Tab 5 - US Case Law