Insurance & Reinsurance Bulletin - September, 2009

Company Fraud: The Illegality Doctrine, Attribution & Third

Party Funding

Stone & Rolls Limited (in liquidation) v Moore

Stephens (a firm) [2009] UK HL 39

By Alison Zobel

The House of Lords has upheld the Court of Appeal's

decision to strike out a claim against auditors for failing to

detect a fraud committed by the claimant company. The case will

interest auditors, and third parties seeking recovery following a

fraud. The claim was brought with commercial third-party

funding.

The Facts

Mr Stojevic was the sole director of Stone & Rolls

("the company"), which he used to defraud banks. In

engaging Moore Stephens as the company's auditors, Mr Stojevic

gave a fictitious picture of the company's business and

accounts. The fraud was uncovered and the company found to be

insolvent. The company's liquidators subsequently brought a

claim against Moore Stephens for the benefit of the company's

creditors.

Moore Stephens admitted breaching its duty to the company in

failing to identify the fraud but was successful in arguing that

the claim should fail on the basis of the principle 'ex

turpi causa' which prevents a claimant from using the

court to obtain benefits from his own illegal conduct.

Attribution

The issue arose as towhether Mr Stojevic's criminal acts and

intentions should be attributed to the actual claimant, the

company. The majority of the Lords decided that the fraud could be

attributed to the company. Mr Stojevic was the sole controlling

mind of the company and no-one else was involved. Mr Stojevic's

fraud was therefore the act of the company.

It is possible that the approach taken by the Lords in this case

could apply in situations involving more than one director or

shareholder if all are complicit in the fraud. It is unlikely to

apply in circumstances where there were

"innocent" directors and shareholders.

Third Party Funding

This case has generated interest as it is one of the largest to

date in the UK to be backed by commercial third-party funders. Such

a high profile loss may impact upon the willingness of third

parties to back future claims.

Approved Persons

By Kapil Dhir and Andrew Carpenter

Section 59(1) Financial Services and Markets Act provides that

an authorised firm must take reasonable care to ensure that no

person performs a controlled function under an arrangement entered

into by it, in relation to any regulated activity carried on by it,

unless the FSA has first approved that person to perform that

controlled function – the "approved persons

regime".

In July 2009 the FSA confirmed, in policy statement 09/14, an

extension of the approved persons regime for those individuals who

perform a "significant influence" function at

firms as follows:

The scope and application of CF1 (director function) and CF2

(non- executive director) is extended to include those persons

employed by an unregulated parent undertaking or holding company,

whose decisions or actions are regularly taken into account by the

governing body of a regulated firm.

The definition of the significant management controlled

function (CF29) is extended to include all proprietary traders who

are not senior managers but who are likely to exert significant

influence on a firm.

The application of the approved persons regime to UK branches

of overseas firms based outside the EEA is amended.

The approved persons regime will be subject to further review in

light of the forthcoming Walker Review which is expected later this

year when the FSA will look at the role of non-executives more

closely, where it believes they should have intervened more

actively within a firm's management.

The changes set out in the policy statement came into effect on

6 August 2009 with a transitional period of six months. Firms

should review which individuals require approval and ensure that

applications are made to the FSA ahead of the transitional period

deadline.

Full details can be accessed at www.fsa.gov.uk/pubs/policy/ps09_14.pdf

Reinsurance Forum Shopping In Australia

By Richard Jowett and Andrew Dunn

The judgment in AIG UK Ltd & Ors v QBE Insurance

(Europe) Ltd [2008] QSC 308 illustrates that reinsurance

dispute forum shopping between different Australian states is not

dead. Parties who choose Australian law and Australian courts

potentially expose themselves to state forum shopping and

pre-emptive strikes by their opposition.

In respect to direct insurance, the Insurance Contracts Act 1984

(Cth) and the Marine Insurance Act 1909 (Cth) (both Commonwealth

Acts) respectively provide a nationally uniform framework for

general (i.e. non-marine) and marine direct insurance. However, the

Insurance Contracts Act specifically does not apply to reinsurance

contracts. Reinsurance contracts may, nonetheless, be within the

ambit of the various state...

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