Supreme Court upholds proprietary claim, trumping confiscation orders

The Supreme Court has handed down its judgment in CPS v Aquila Advisory Limited [FN1].  The appeal focused on secret profits obtained by company directors who had been convicted of facilitating tax fraud.  The key question for the court was whether the directors’ illegal acts could be attributed to the company concerned.  If so, this would upend a constructive trust in favour of the company, giving priority to confiscation orders which had been obtained by the CPS.

Background

Civil proceedings

Robert Faichney and David Perrin were two directors of Vantis Tax Limited (VTL).  Civil proceedings began as a claim by the directors against VTL for unpaid salary and for wrongful dismissal.  This was met with a defence and counterclaim for breach of fiduciary duty, both in equity and under the Companies Act [FN2].  VTL alleged that £4.55m which the directors had obtained from their dishonest conduct was held on constructive trust for VTL.  The basis for this was that it represented the proceeds of the unlawful use of VTL’s intellectual property in schemes operated in breach of the directors’ fiduciary duties.

VTL was placed into administration, and the claims against the directors were assigned to Aquila Advisory Limited (Aquila).  The effect of that assignment was that if the £4.55m secret profit was beneficially owned by VTL under a constructive trust, then VTL’s proprietary rights to that money had passed to Aquila.

Criminal proceedings

In parallel, a criminal prosecution was successfully brought against the directors for cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. 

Confiscation proceedings followed the convictions under POCA [FN3], and the Crown Court made a final order stating that Mr Perrin had benefitted in the sum of £4.55m from his offending.  The Court found that the directors had combined available assets totalling £1,457,692 and made confiscation orders accordingly.

Proceedings before the High Court and Court of Appeal

As part of its civil claim, Aquila obtained an interim freezing injunction restraining the defendants and their spouses from dealing with the assets said to be subject to a constructive trust [FN4].  That freezing injunction prevented those assets – the proceeds of the £4.55m – being used to satisfy the confiscation orders made against Mr Perrin and Mr Faichney.

The CPS was granted permission to intervene in the High Court proceedings.  Immediately prior to trial, settlement agreements were reached to the effect that the only participating parties were Aquila and the CPS.  In dispute between them was whether Aquila’s proprietary rights could be asserted “in the face of” the confiscation orders which had been obtained by the CPS.

In the High Court, Mr Justice Mann decided that Aquila was entitled to assert a proprietary claim to the disputed funds in priority to the claim of the CPS [FN5].  The CPS appealed to the Court of Appeal on the ground that the Judge should have attributed the actions of the directors to VTL.  This would have seen VTL barred from recovering the proceeds of the crime by the principles of illegality (ex turpi causa non oritur actio).  The CPS were unsuccessful [FN6], the Court of Appeal instead following the Supreme Court’s judgment in Bilta [FN7].

Appeal to the Supreme Court

The CPS advanced three grounds of appeal.

Attribution of the illegal acts of the directors to VTL

The CPS argued that Bilta did not operate to permit a principal to simultaneously profit from its agent’s illegality (approving/sanctioning the director’s illegal acts) whilst denying attribution of that illegality.  Bilta, said the CPS, did not prevent the illegality defence from applying in the present case.

However, the Supreme Court held that:

  • Following Bilta, the mere fact that the directors were conducting the business of the company did not (in itself) lead to the attribution of their illegality to VTL.  The company and its directors have separate legal personality.  The acts, knowledge and state of mind of the company must be separated from those of its directors.
  • It was not a necessary part of VTL’s claims against the directors for breach of fiduciary duty that their conduct also amounted to the criminal offence of cheating the public revenue.  VTL’s claim for breach of fiduciary duties was found to have occurred at the point that the directors – with a view to making a secret profit – exploited their positions as directors by misappropriating for themselves a “corporate opportunity” and pretending to sell VTL’s intellectual property rights.
  • The fundamental basis of the constructive trust was to ensure compliance with the directors’ fiduciary duties to the company.  A constructive trust arises as a consequence of those duties.  The Court considered that it would fundamentally undermine a director’s fiduciary duty if the director could establish that a constructive trust did not arise purely because (i) the director also intended the company to profit, or (ii) that because the company had in fact made a profit, the director should be able to retain his own unlawfully obtained property.
  • Bilta stands as authority for the proposition that the unlawful acts (or dishonest state of mind) of a director cannot be attributed to the company so as to afford the director an illegality defence to the company’s claim against him for breach of fiduciary duty.  The reasoning in Bilta, which applied to loss-based claims rather than claims to strip profits, applied with equal force to the breach of duty in this case.

Inconsistency with POCA

The CPS alternatively submitted that the Court of Appeal’s decision was inconsistent with the regime established by POCA.  It contended that POCA was intended to permit innocent third-party purchasers of criminal property to keep it (i.e. bona fide purchasers for value without notice), and to permit innocent third-party victims to be compensated.  However, the CPS submitted that POCA did not go further, and it was not the intention that third-parties (in this case, VTL/Aquila) to otherwise benefit from the actions of criminals, any more than the criminals themselves.

The CPS further argued that – even if the funds were held by Aquila under a constructive trust – any transfer, use or possession of that beneficial interest would amount to money laundering offences [FN8].

The Supreme Court found that:

  • It would be a surprising result if VTL or Aquila, in dealing with a beneficial interest arising under a constructive trust, could be said to have committed a money laundering offence, given that POCA is not intended to interfere with existing third-party property rights, following Bowman v Fels [FN9].
  • Approving of comments made by Mann J, “POCA does not operate through the medium of public policy.  It operates through the medium of its provisions … it is therefore POCA which determines whether VTL/Aquila lose the rights which the directors’ acts give them, not some more generalised considerations of public policy (or illegality)…
  • The Court noted that the CPS had failed to avail itself of remedies available pursuant to POCA.  VTL was never charged, indicted or tried for any offence.  That would have provided the CPS with a route to seek a confiscation order against VTL itself.

Discretion in granting declaratory relief

As a third ground, the CPS contended that – even if the unlawful conduct of the former directors could not be attributed to VTL – the High Court ought to have exercised its discretion and not granted declaratory relief.  Aquila contended that the grant of a declaration was not subject to the exercise of discretion.

The Supreme Court found that – even if there was a discretion – it was plainly exercised appropriately.  The court noted that constructive trusts are not remedial but are institutional.  In this context, the constructive trust arose automatically at the moment that – in breach of their fiduciary duties – the directors received the secret profits.  There was never a point in time at which the directors owned the profits in equity.

Conclusion

The Supreme Court accordingly dismissed the CPS’s appeal.

Comment

The Supreme Court has emphasised the force of proprietary claims, here in the form of a constructive trust.  This is of broad application, with such trusts frequently arising where fiduciaries breach duties owed to their principals.  Proprietary claims are of particular importance in claims arising in the context of insolvencies, where competing claimants might otherwise be left in the pool of unsecured creditors.

Further, the Supreme Court has reaffirmed Bilta and that the doctrine of illegality does not allow a director to escape a breach of their fiduciary duties by asserting that the company is tainted by their unlawful acts.

As a result of the court’s comments, the CPS will likely be more tempted at the charging stage to seek to add relevant companies to the indictment so as to keep the option of confiscating funds available.  In circumstances where it is suspected that a company’s directors or officers have engaged in criminal activity it is accordingly all the more important that appropriate legal advice is obtained for the benefit of the company itself.

Nigel Brook and Marie Bourke
Tyr


Nigel Brook is a Legal Director in the Commercial Litigation department at Tyr.  He has expertise in civil disputes involving tax, professional negligence, administrative law, and civil fraud.

Marie Bourke is a Senior Associate in the Regulatory department at Tyr.  Marie advises individuals and corporates who are being investigated and prosecuted in relation to fraud and financial crime.

If you would like to discuss the issues raised in this article, please contact Nigel (nigel.brook@tyrlaw.co.uk / +44 (0) 113 5121098) or Marie (marie.bourke@tyrlaw.co.uk / +44 (0) 113 5186060).


Footnotes

FN1Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49.

FN2 – Section 175 Companies Act 2006.

FN3 – Proceeds of Crime Act 2002.

FN4 – [2013] EWHC 3953 (QB).

FN5 – [2018] EWHC 565 (Ch).

FN6 – [2019] EWCA Civ 588.

FN7Bilta (UK) Ltd v Nazir [2015] UKSC 23.

FN8 – Contrary to sections 327 and 329 POCA.

FN9 – Para 62 of Bowman v Fels [2005] EWCA Civ 226.