Attributing a director's knowledge to the company Moore Stephens (a firm) v Stone & Rolls Limited
Monday, January 3, 2011
The recent House of Lords case of Moore Stephens v Stone & Rolls provides guidance on the circumstances in which the acts of an individual can be attributed to a company. This decision could impact on the availability of cover for companies under the securities entity coverage section of its D&O policy, or under other insurance policies indemnifying the company itself in respect of losses and claims.
Stone & Rolls was used as a vehicle by its beneficial owner, Zvonko Stojevic, to defraud a number of banks using a letter of credit scam. One of those banks successfully sued Stone & Rolls which subsequently went into liquidation. Its liquidators brought an action in negligence against Stone & Rolls’ auditors, Moore Stephens, claiming that the failure of Moore Stephens to carry out their responsibilities as auditors had allowed Stojevic to perpetrate the fraud. The House of Lords considered whether Stojevic’s fraudulent conduct was attributable to Stone & Rolls in order to establish whether Stone & Rolls could recover its loss from Moore Stephens.
The court considered the extent to which two legal principles prevented Mr Stojevic’s fraudulent conduct being attributed to Stone & Rolls:
• The “Hampshire Land” principle, that the knowledge of an agent will not be attributed to his principal when the knowledge relates to the agent’s own breach of duty to his principal.
• The “adverse interest rule”, that the knowledge and conduct of an agent will not be attributed to the principal where the agent’s actions are adverse to the interests of his principal.
The case was complex and decided on a majority decision. In summary, the Law Lords found that Mr Stojevic was the directing mind and will of Stone & Rolls and was using the company for his own dishonest purposes. In those circumstances, neither the Hampshire Land principle nor the adverse interest rule prevented Mr Stojevic’s fraud from being attributed to Stone & Rolls. Stone & Rolls’ claim was therefore dismissed and the third parties funders who supported the claim have been left with a large bill of costs.
Such cases are necessarily fact sensitive and it is possible the case would have been decided differently if Stone & Rolls had “innocent” shareholders and executive directors, but the case serves as a useful reminder of the circumstances in which it may be possible for Insurers to attribute an individual’s fraud to the company.
