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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