Moore Stephens (MS) were auditors of the claimant company (S&R) between 1996 and 1998. S&R alleged that in each year the audits were conducted negligently. S&R had committed letter of credit fraud against various banks. S&R alleged as against MS that they should have discovered and blown the whistle on the fraud, thus bringing it to an end. Both S&R, and its owner and controller, S, had already been found liable for the fraud to the major losing bank in proceedings brought in 2002. S was the person who had committed the fraud.
The principal issue in the proceedings against MS was whether, and if so, when, a claim by a company against its auditors will infringe the maxim ex turpi causa non oritur actio - the principle that an individual cannot claim losses suffered as a result of his own criminal conduct. The questions in this case were: (1) when, if at all, does that same principle apply to a claim by a corporation; and (2) does it make any difference where the defendant is an auditor, whose duty to the company audited, had it been properly performed, would have led to the disclosure of and end to the criminal conduct in question.
Langley J held1 that there was no doubt, that if this claim had been pursued by S himself, it would have been defeated by the ex turpi maxim. He could see no compelling reason why a corporation should not be subject to the same considerations in circumstances in which the relevant wrong-doing is to be attributed to the corporation, following the normal principles of law applicable to attribution. In this case, it was plain that the law of attribution would attribute to S&R the knowledge and wrongdoing of S. S&R was in a real sense the perpetrator of the fraud on the banks. In this case it would be artificial not to fix S&R with the knowledge and wrongdoing of S.
MS argued that creditors of S&R should not be able to obtain via a company which has committed fraud against them compensation from the auditors which they could not in law obtain direct. S&R argued that this was one of those unusual situations in which the defendant as auditor, even if it did not owe a duty to prevent fraud, did owe, and must have been in breach of, a duty of care which, if not breached, would have revealed the fraud and brought it to an end.
Langley J found this a difficult question to resolve, but decided that there was nothing so repugnant in S&R pursuing the claim which would justify ruling it impermissible by use of the ex turpi maxim. The objective of the maxim could be properly fulfilled by precluding any recovery which would enure to the benefit of the perpetrator of the criminal conduct, in this case S. There was no principled basis upon which defrauded creditors of the company should be in a worse position than those whose debts arose in the ordinary course of business. MS’s application to strike-out this head of the claim therefore failed.