[2007] EWHC 1826 (Comm)

The ex turpi causa non oritur actio rule comes into play where the claim is founded on, or arises from, an illegal act of the claimant, or where the illegal act has to be pleaded or relied upon in order to sustain the claim. The question which arose in this case is when, if at all, will a claim by a company against its auditors infringe this rule?

Moore Stephens (MS) were the auditors of the claimant company. The company, by its owner and controller Zvonko Stojevic, had committed letter of credit fraud against several banks and was liable to repay them. It brought these proceedings against MS alleging that, because of their negligent audits, they failed to spot the fraud. The claimants argued that, had MS performed their duty properly, they could and should have blown the whistle on the fraud thereby bringing it to an end.

Had Mr Stojevic brought the claim himself, it would definitely have been defeated by the ex turpi rule. The judge concluded that there was no reason why this should not also be the case if the acts of the wrongdoer could be attributed to the company. Mr Stojevic was clearly the “directing mind and will” of the company and it would be artificial in these circumstances not to fix the claimant with his knowledge and wrongdoing.

However, this alone was not sufficient to justify striking out the claim. The judge concluded that claimant companies should not be prevented from pursuing actions against negligent auditors by an unforgiving application of the ex turpi rule. The objective of the rule can be met by preventing the wrongdoer from benefiting from any recovery and there is no principled reason why defrauded creditors of a company should be in a worse position than those whose debts arise in the ordinary course of business.

Comment: this claim for £90 million is one of the largest to be brought with the help of independent litigation funding. The claim is being led by Stone & Roll's liquidator on behalf of the company's creditors and funding for the claim is being provided by IM Litigation Funding. They will no doubt have well in mind the Court of Appeal’s decision in Arkin v Borchard where another professional funding company, MPC, was ordered to contribute to the successful defendants’ costs to the extent of the funding they had provided, which totalled £1.3 million. The court concluded that it is only fair that a funder who supports a claim for profit should be required to contribute to the defendant’s costs if the claim fails and the claimant is unable to do so.