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Stone & Rolls revisited


The Chancellor of the High Court has held that the rule in Stone & Rolls v Moore Stephens does not apply to an action in conspiracy.

In Stone & Rolls a fraudster used a company of which he was the sole director and shareholder to commit a letter of credit fraud. Following the company's insolvency, its liquidators, acting in the company's name, sued its auditors in negligence for having failed to detect the fraud. The House of Lords held (by 3-2) that the claim was barred on the ground ex turpi causa, because the state of mind of the fraudster was to be attributed to the company, which was thus treated as the perpetrator of the fraud.

In the Bilta case the Claimant company was alleged to have been used by two fraudsters as the importing company in a carousel VAT fraud. There were no shareholders or directors of the company, other than the alleged fraudsters. Following the company's insolvency, HMRC appointed liquidators over the company, which pursued in its name claims in conspiracy seeking to recover over £38 million of unpaid VAT against other companies or individuals alleged to have conspired with its former directors, as well as against those former directors themselves.

On an application by certain of the Defendants to strike out the claim, the Chancellor held that a claim of this nature is not barred on the ground ex turpi causa. The Chancellor distinguished Stone & Rolls on two grounds. First that the company was pleaded in this case to be the victim of the fraud. Secondly that in an insolvency situation, the duties of the directors extend to protecting the interests of the creditors, for whose benefit the proceedings are brought (whereas in Stone & Rolls the auditors owed no duty to the creditors). The Chancellor thereby adopted the reasoning of Lord Mance, who was in the minority in Stone & Rolls. The decision raises the prospect that the reasoning of the majority in Stone & Rolls will come to be supplanted by that of the minority outside the sphere of actions in negligence. 

Permission to appeal was granted.

The judgment is here.

Alan Maclean QC and Colin West (instructed by Macfarlanes) appeared for the Applicants.