Ex turpi causa non oritur actio

Stone and Rolls (in liquidation) v Moore Stephens (a firm) [2009] UKHL39; TLR 11 August

A company, exclusively controlled by a single director who was primarily liable for frauds committed against third parties, brought a claim for damages against its auditors on the basis that they had failed to detect his fraudulent activities. The judge dismissed the defendant auditors’ application to strike out the claim but the Court of Appeal allowed the auditors’ appeal. The House of Lords, by a majority of 3-2, has also struck out the claim on the grounds that any claim would be based on the company’s own illegal conduct and was accordingly debarred by the defence of ex turpi causa non oritur actio. The test was whether the claimant had to plead or rely on his own illegality. If the director had carried out his frauds on his own, not through a corporate vehicle, neither he nor his trustee in bankruptcy would have had a claim against the auditors since the illegality defence would have been unanswerable. The main dispute centered on whether the director’s criminal acts and intentions were to be imputed to the company. The Court of Appeal was right to hold that the company was primarily, not vicariously, liable for the frauds. There was no doubt that the director was its embodiment for all purposes.