TCB Credit Recoveries v Arthur Andersen LLP

• Jurisdiction: Cayman Islands
• Judge: (McIntosh, Ag. J.)
• Judgment Date: 07 November 2008
• Court: Grand Court (Cayman Islands)
• Date: 07 November 2008

Grand Court

(McIntosh, Ag. J.)

TCB CREDITOR RECOVERIES LIMITED

and

ARTHUR ANDERSEN LLP

M. Black, Q.C. and D. McGrath for the plaintiff;

R. Miles, Q.C. and C. Russell for the defendant.

Cases cited:

(1) Att. Gen.”s Ref. (No. 2 of 1982), [1984] Q.B. 624; [1984] 2 W.L.R. 447; [1984] 2 All E.R. 216; [1985] Crim. L.R. 241; (1984), 78 Cr. App. R. 131, referred to.

(2) Belmont Fin. Corp. Ltd. v. Williams Furniture Ltd., [1979] Ch. 250; [1978] 3 W.L.R. 712; [1979] 1 All E.R. 118, referred to.

(3) CBS Songs Ltd. v. Amstrad Cons. Elec. Plc., [1988] Ch. 61; [1987] 3 W.L.R. 144; [1987] 3 All E.R. 151; [1987] 1 FTLR 488; [1987] R.P.C. 429, referred to.

(4) Clunis v. Camden & Islington Health Auth., [1998] Q.B. 978; [1998] 2 W.L.R. 902; [1998] 3 All E.R. 180; [1998] P.N.L.R. 262 referred to.

(5) Cross v. Kirby, [2000] EWCA Civ 426, referred to.

(6) El-Ajou v. Dollar Land Holdings Plc, [1994] 2 All E.R. 685; [1994] 1 BCLC 464; [1994] BCC 143; [1993] N.P.C. 165, referred to.

(7) Gray v. Thames Trains Ltd., [2007] EWHC 1558 (QB), referred to.

(8) Hampshire Land Co. (No. 2), In re, [1896] 2 Ch. 743, referred to.

(9) Hewison v. Meridian Shipping Servs. Pte. Ltd., [2003] I.C.R. 766; [2003] P.I.Q.R. P17; [2002] EWCA Civ 1821, referred to.

(10) Houghton (J.C.) & Co. v. Nothard Lowe & Wills Ltd., [1928] A.C. 1, referred to.

(11) Hubbuck & Sons Ltd. v. Wilkinson Heywood & Clark Ltd., [1899] 1 Q.B. 86, dictum of Lindley, M.R. followed.

(12) Lennard”s Carrying Co. Ltd. v. Asiatic Petroleum Co. Ltd., [1915] A.C. 705, referred to.

(13) McNicholas Constr. Co. Ltd. v. Customs & Excise Commrs., [2000] S.T.C. 553; [2000] BTC 5225; [2000] B.V.C. 255; [2000] S.T.I. 889, followed.

(14) Meridian Global Funds Management Asia Ltd. v. Securities Commn., [1995] 2 A.C. 500; [1995] 3 W.L.R. 413; [1995] 3 All E.R. 918; [1995] 2 BCLC 116; [1995] BCC 942, referred to.

(15) Morris v. Bank of India, [2005] 2 BCLC 328; [2005] BCC 739; [2005] BPIR 1067; [2005] EWCA Civ 693, referred to.

(16) Reeves v. Metropolitan Police Commr., [1999] Q.B. 169; [1998] 2 W.L.R. 401; [1998] 2 All E.R. 381, not followed.

(17) Stone & Rolls Ltd. v. Moore Stephens, [2008] 3 W.L.R. 1146; [2008] 2 Lloyd”s Rep. 319; [2008] 2 BCLC 461; [2008] P.N.L.R. 36; [2008] EWCA Civ 644, applied.

(18) Tesco Supermarkets Ltd. v. Nattrass, [1972] A.C. 153; [1971] 2 W.L.R. 1166; [1971] 2 All E.R. 127, referred to.

(19) Tinsley v. Milligan, [1994] 1 A.C. 340; [1993] 3 W.L.R. 126; [1993] 3 All E.R. 65; [1993] 2 F.L.R. 963; (1994), 68 P. & C.R. 412, referred to.

(20) Wenlock v. Maloney, [1965] 1 W.L.R. 1238; [1965] 2 All E.R. 871, dictum of Danckwerts, L.J. referred to,

(21) Williams & Humbert Ltd. v. W&H Trade Marks (Jersey) Ltd., [1986] A.C. 368; [1986] 2 W.L.R. 24; [1986] 1 All E.R. 129, dictum of Lord Templeman considered.

Legislation construed:

Grand Court Rules 1995, O.18, r.19(1): The relevant terms of this sub-rule are set out at para. 6.

Companies-auditors-professional negligence-auditor not liable to company for allegedly negligent audit if company guilty of fraud-ex turpi causa non oritur actio prevents court from assisting party relying on own illegality-principle not overridden because detection of illegality ‘the very thing’ auditor contracted to ensure

Companies-directors-breach of fiduciary duty-fraud-if company defrauded by directors, entitled to claim that innocent victim and not barred from bringing proceedings relying on fraud-if adopts and implements directors” fraud by actively participating in fraudulent procurement of investments, becomes complicit and barred from proceedings by ex turpi causa non oritur actio

The plaintiff brought an action against the defendant seeking damages for negligence.

The plaintiff (‘TCB’) was an investment fund which had been used by its director to defraud investors. For several years, he had represented that TCB was a bona fide and solvent financial institution in order to procure investment, much of which he then fraudulently transferred to his family and associates. During that period, the defendant (‘Andersen’) was TCB”s auditor.

When the fraud was detected, TCB brought the present proceedings against Andersen for negligence, seeking damages in the amount of its liability to its creditors. It alleged that Andersen, as its auditor, was either negligent in not detecting the fraud, or it had turned a blind eye to it, timely detection of which would have enabled recovery of part, if not all,

of the fraudulently transferred moneys. Andersen applied for an order pursuant to the Grand Court Rules, O.18, r.19(1)(a), striking out TCB”s action.

It submitted that (a) TCB”s action should be struck out because it had no prospect of success as (i) TCB itself was the vehicle of the fraud, actively participating in the defrauding of its depositors by publishing false financial statements, and was not the victim; it was irrelevant that TCB was established for legitimate purposes and then became a vehicle of fraud; and (ii) a fraudster could not blame another party, who was only said to be negligent, for its own unlawful conduct; (b) in any case, TCB”s action was barred as it was contrary to the ex turpi causa non oritur actio principle, which prevented a claimant from relying on its own illegality or immorality, which TCB had done in accepting the falsity of the publication of the financial misstatements; (c) if TCB were permitted to amend its pleadings, it would remove its pleading in respect of the misstatements, in an attempt to defeat the ex turpi causa non oritur actio principle, and so permission should be refused; (d) the ex turpi causa non oritur actio principle was not avoided by the fact that the commission of fraud was the ‘very thing’ that it had contracted it (Andersen) to prevent, as there was no principle to that effect in either Cayman law or in any other jurisdiction and there was in fact well-established authority against such a proposition; and (e) it was correct to apply for striking out pursuant to O.18, r.19(1)(a) of the Grand Court Rules, rather than making an application for summary judgment, as there was no need for an examination of any evidence, and the court should not usurp the role of the trial judge and turn such applications into mini-trials.

TCB submitted in reply that its action should not be struck out as (a) it did have a realistic prospect of successfully showing that Andersen was liable to it for negligently failing to detect the fraud, and as it was itself a victim of that fraud, there was therefore nothing preventing it from making such a claim against Andersen; (b) the authority which suggested that, according to the ex turpi causa non oritur actio principle, a claimant could not rely on its own illegality or immorality and such claims should be automatically barred, had been wrongly decided and the principle was therefore inapplicable; (c) in any case, even if such a principle could be applied, it was overridden by the fact that the commission of fraud was the ‘very thing’ that it had contracted Andersen to prevent; (d) it should be permitted to amend its pleadings, so as to clarify them; and (e) Andersen had been wrong to apply to strike out its action under O.18, r.19(1)(a) as in doing so it denied it the chance to have its evidence examined by the court; it should have applied for summary judgment instead.

Held, granting the application:

(1) TCB”s claim would be struck out as it had no realistic prospect of succeeding. TCB was the very vehicle of the fraud, and a fraudster could not blame another party, who is only said to be negligent, for its own unlawful conduct. Although it was a well-established principle (the ‘Hampshire

Land’ principle) that a company could not have attributed to it its own knowledge of fraud when such fraud was being practised against the company itself, here it was clear that TCB was not a victim, but was the villain. Although the directors (the members of the Peirano family) were the controlling minds and will of TCB, their actions were attributable to TCB and their dishonesty was inextricably linked to it. In fact, the Peiranos had no intention of harming TCB at all; it was necessary for TCB to remain in existence for them to accomplish their own fraudulent objectives. In any case, TCB had actively participated in the procurement of its depositors” funds by publishing fraudulent financial statements for the purposes of misleading depositors into believing that its financial position was better than it actually was. The purpose for which TCB was first established was unimportant-it did not matter whether it was set up for legitimate purposes and later became the vehicle of fraud, or whether it was established for that very reason in the first place (paras. 63–66; para. 73).

(2) In any case, TCB”s claim had to fail as it had implicated itself in its pleadings by accepting the illegality of the publication of the false financial statements, upon which it then relied. According to the ex turpi causa non oritur actio principle, a claim that relied on the maker of the claim”s own illegality or immorality should be automatically barred. A company that committed fraud, for which it was responsible in law, could not therefore, as a matter of public policy, claim compensation from another for those same frauds, as to allow it to do so would be to allow it to rely on its own illegal conduct. TCB would not be granted permission to amend its pleadings. While amendments would be permitted if pleadings needed clarifying, there was no question of clarification being needed here; the purpose of any amendment by TCB would have been to remove their pleading as to the illegality of the misstatements that it published, which served to operate against it in respect of the ex turpi causa non oritur actio principle (para. 2, para. 61; paras. 68–70; para. 73).

(3) TCB”s argument that the ex turpi causa non oritur actio...