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Accountants PI: the illegality defence

A recent High Court decision has highlighted the difficulty in relying upon the illegality defence to defeat a claim in the context of a professional negligence claim, where a claimant is claiming losses flowing from his conviction for a strict liability criminal offence.

Background

The Claimant, Mr Griffin, operated a drinks company selling “Saxon 1050” apple juice, which went into creditors’ voluntary liquidation. At that time, he set up a new company that took over the selling of the brand of apple juice. This contravened rules in the Insolvency Act that were designed to strike down the “phoenix phenomenon” and Mr Griffin was convicted of the strict liability offence and fined £1,000. He had instructed the accountancy firm, Hacker Young, to advise him on the winding up and he alleged that they failed to advise him that his conduct was illegal. He claimed various losses flowing from his conviction including the loss of a significant shareholding in a US listed company.

Hacker Young applied to strike out Mr Griffin’s claim on the basis that the illegality principle provided a complete defence.

Decision

The court dismissed Hacker Young’s application to strike out the claim. The offence was one of strict liability and it was agreed by the parties that in order for the illegality defence to succeed, some level of “moral culpability” had to be shown. The judge was not prepared to decide what level was appropriate nor whether Mr Griffin had no reasonable prospect of defeating the illegality defence without a full trial of the factual evidence. This was particularly so given the fact that the illegality defence remains a developing area of law.

Comment

Despite the well publicised example of a successful strike out in Stone & Rolls Ltd v Moore Stephens, illegality remains a difficult defence to rely upon. This case was different to Stone & Rolls, as it involved a strict liability offence. The judge was firm that a full trial on the facts was necessary as it was Mr Griffin’s position that he had not been advised about the consequences of contravening the Insolvency Act. In those circumstances a summary application was inappropriate to establish whether or not that offence was committed with the required level of moral turpitude to allow the accountants to rely upon illegality to defeat the subsequent claim against them.

This article first appeared in Law-Now, CMS Cameron McKenna's free online information service, and has been reproduced with their permission. For more information about Law-Now, please go to www.law-now.com.

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