Supreme Court confirms POCA confiscation order cannot be enforced in priority to proprietary claim

• United Kingdom

• Financial services disputes and investigations
• Fraud and financial crime
• Litigation and dispute management - Other

19-07-2022

Crown Prosecution Service v Aquila Advisory Limited [2021] UKSC 49

Facts of the Case

• Two directors of a financial services company, Vantis Tax Ltd (“VTL”), operated a fraudulent tax scheme, making a secret profit of £4.5 million in breach of their fiduciary duties.

• VTL subsequently entered into administration and then liquidation, and its proprietary rights (including choses in action) were assigned to Aquila Advisory Ltd (“Aquila”).  Aquila asserted that the secret profit made by the directors was beneficially owned by VTL under a constructive trust, the beneficial interest in which had now passed to it.

• Separately, the Crown Prosecution Service (“CPS”) brought criminal proceedings against the directors for cheating the public revenue.  The directors were convicted and the £4.5 million secret profit was found to be the benefit of that crime, with the CPS obtaining confiscation orders in respect of it under the Proceeds of Crime Act 2002 ( “POCA”).

• Aquila asserted that as it had a proprietary claim to the £4.5 million, its claim had priority over the confiscation orders, as those orders did not give the CPS any form of proprietary interest.  If that was correct, that would mean Aquila would be entitled to all of the secret profit, leaving nothing to satisfy the confiscation orders.

The CPS, on the other hand, argued that:

• (i) the directors’ fraud should be attributed to VTL as it suffered no loss and stood to profit from the illegal acts of its former directors by obtaining a proprietary interest in the proceeds of the crime, which those directors had committed, and (ii) VTL’s claim was therefore barred on the basis it could not profit from its own illegal actions; and

• while POCA is intended to permit innocent third party purchasers who have paid market value for criminal property to keep it, and innocent third party victims who have suffered loss as a result of criminal behaviour to be compensated, in each case in priority to the State, it does not permit third parties, such as VTL / Aquila in this case, to benefit from the actions of criminals, here its directors.

Aquila’s claim succeeded at first instance ([2018] EWHC 565 (Ch)) and in the Court of Appeal ([2019] EWCA Civ 588). The CPS appealed to the Supreme Court.

The Decision

The Supreme Court dismissed the CPS’s appeal, finding inter alia that:

• following Bilta (UK) Ltd v Nazir [2015] UKSC 23, the fraudulent acts of VTL’s directors could not be attributed to VTL, where VTL was itself pursuing such directors for breach of fiduciary duty.  This was regardless of whether that claim was for loss suffered by the company or for gains made by the directors, or if part of the directors’ scheme was that both the directors and company would benefit. The CPS’s arguments based on illegality accordingly fell away; and

• allowing VTL/Aquila to recover secret profits generated by its directors was not adverse to the POCA regime, since the overarching principle of POCA is not to interfere with existing third party property rights “regardless of how those rights arise”.  Furthermore, while there are specific provisions in POCA which permit the State to override property rights, those provisions were not used here by the CPS.

Analysis & Practical Advice

• While this judgment is good news for companies (or their assigns) seeking to recover the benefits obtained by directors in breach of their fiduciary duties, in future cases the CPS may, where it is able to do so on the facts, seek to add the company to the indictment and then, if the company is convicted, apply for a confiscation order directly against the company, so as to avoid the issues with priority encountered in this case.