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In this post, Amy Wilkinson, a senior associate in CMS’ financial crime team, comments on the decision of the UK Supreme Court in Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49. On 3 November 2021, the Supreme Court unanimously dismissed the appeal and ruled in favour of Aquila Advisory Ltd. The decision concerns attribution of directors’ criminal actions and who should have priority over assets derived from their criminal schemes.

Background

Robert Faichney and David Perrin were both directors of Vantis Tax Ltd (“Vantis”). During their time as directors of Vantis, they committed various criminal tax offences in breach of their fiduciary duties and made a secret profit of £4.55m. Vantis subsequently went into administration and when it did so, a company called Aquila Advisory Ltd (“Aquila”) was assigned Vantis’ proprietary rights.

Following contested trials, Mr Faichney and Mr Perrin were both convicted of tax offences. Vantis was never charged, indicted or tried for any offence.

Following conviction of Mr Faichney and Mr Perrin, the Crown Prosecution Service (“CPS”) sought confiscation orders under the Proceeds of Crime Act 2002 (“POCA”) for £809,692 and £648,000 respectively. Aquila asserted that as it had a proprietary claim to the secret profit of £4.55m it has priority over the confiscation orders, as those orders did not give the CPS any form of proprietary interest in the assets of either Mr Faichney or Mr Perrin. Accordingly, Aquila argued that it was entitled to all of their assets, leaving nothing to satisfy the confiscation orders, and sought a declaration to that effect.

Decisions of the lower courts

Mann J, at first instance, decided that Aquila was entitled to assert a proprietary claim to the funds in dispute in priority to the claim of the CPS. He made a declaration that moneys totalling £4.55m were held from the time of their receipt on constructive trust for Vantis, whose rights had been assigned to Aquila.

The CPS appealed to the Court of Appeal on the basis that the judge should have attributed the actions of Mr Faichney and Mr Perrin to Vantis and therefore treated Vantis’ claim to recover the proceeds of the crime as barred on the principles of illegality. The Court of Appeal dismissed the appeal on the basis that the CPS accepted that:

  • what Mr Faichney and Mr Perrin did amounted to a breach of fiduciary duty owed to Vantis and therefore, the consequence was that Vantis had a proprietary claim to the secret profit based on a constructive trust; and
  • confiscation orders under POCA did not give rise to any form of proprietary interest in the available assets of Mr Faichney or Mr Perrin.

Accordingly, unless the constructive trust could be rendered unenforceable because the fraud of its directors could be attributed to Vantis itself, the CPS could have no claim to the £4.55m. In support of its decision, the Court of Appeal referred to Bilta (UK) Ltd v Nazir [2015] UKSC 23 (at para 24), which confirmed that: “a director sued by a company for loss caused by a breach of fiduciary duty cannot rely on the principles of attribution to defeat the claim even if the scheme involved the company in the fraud or illegality”. The Court of Appeal could not attribute the actions of Mr Faichney or Mr Perrin to Vantis and therefore, the appeal was dismissed.

Summary of the Supreme Court’s findings

The CPS appealed to the Supreme Court on three grounds:

  • Ground 1: The Court of Appeal was wrong to conclude that the facts of the present case fell within the ratio of Bilta and contended that the fraud of its former directors should be attributed to Vantis in circumstances where, it was suggested, Vantis suffered no loss but rather stood to profit from the illegal acts of its directors by obtaining a proprietary interest in the proceeds of their crimes.
  • Ground 2: The Court of Appeal’s decision was inconsistent with the regime established by POCA, which aimed to permit innocent third-party purchasers, who paid market value for criminal property, to keep it, and innocent third-party victims, who have suffered a loss as a result of crime, to be compensated, in each case in priority to the State, but not to permit third parties otherwise to benefit from the acts of criminals any more than those criminals themselves.
  • Ground 3: Even if the directors’ unlawful conduct could not be attributed to Vantis, Mann J should not have exercised discretion to grant Aquila declaratory relief.

Lord Stephens, who gave the leading judgment (with which all members of the court agreed), considered the following:

  • Ground 1: This argument was dismissed and Bilta was correctly applied to this case. The unlawful acts or dishonest state of mind of a director cannot be attributed to the company to establish an illegality defence defeating the company’s claim under a constructive trust.
  • Ground 2: Overall, the scheme of POCA was not to interfere with property rights. While there were specific provisions of POCA which allowed the State to override property rights (in POCA, Pts 2 and 5), these provisions were not engaged by the CPS in this case. Accordingly, the Court of Appeal’s decision was not inconsistent with POCA.
  • Ground 3: Constructive trusts arise automatically when directors breach their fiduciary duties. At no stage did the directors own the secret profits in equity. Mann J’s declaration recognised this and was a proper exercise of his discretion.

Commentary

In this case, the Supreme Court reaffirmed the existing law on constructive trusts, illegality and attribution of directors’ wrongdoing to their companies. In doing so, it not only highlighted that companies will be given priority over unsecured creditors such as the CPS but may also obtain what might be perceived as a windfall by retaining illegal profits from directors’ criminal acts. Particularly where former directors may be insolvent, this case is helpful for companies seeking to recover and retain directors’ secret profits.

It also brought into sharp focus that confiscation orders will not always be an effective tool in law enforcement’s fight against financial crime. However, in this case, the Supreme Court suggested that the CPS may have avoided their problem by including Vantis in the original indictment (which could have been possible, given the directors were sufficiently senior to represent the “directing mind and will” of the company) and then seeking a confiscation order against it directly post-conviction. Going forward, we might see the CPS taking a more aggressive approach to indicting companies in similar circumstances, in order to recoup ill-gotten gains.