Proprietary Interest Takes Precedence
The overall scheme of the Proceeds of Crime Act 2002 (POCA) was not to interfere with property rights and, although there were specific provisions of POCA which allowed the State to override property rights, they were not engaged by the Crown Prosecution (CPS) in the present case: Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49: Lord Lloyd-Jones, Lord Sales, Lord Burrows, Lord Stephens, Lady Rose
Dismissing the appeal of the CPS and upholding the Court of Appeal and the judge of first instance, a unanimous Supreme Court found that the reasoning in Bilta (UK) Ltd v Nazir[1] applied in that the unlawful acts or dishonest states of mind of a director could not be attributed to the company to establish an illegality defence defeating the company’s claim under a constructive trust.
In this context, the constructive trust (and therefore Vantis Tax Limited’s (VTL) beneficial ownership of the secret profits) arose automatically when the directors breached their fiduciary duties.
At no stage did the directors own the secret profits in equity. The trial judge’s order recognised this reality and was a proper exercise of discretion.
The case arose following the CPS’s application for confiscation orders under POCA against directors F and P, directors of VTL who exploited their positions in breach of fiduciary duty to make secret profits of £4.55m.
The amount of £4.55m was also the benefit obtained by the directors from their crime of cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief.
VTL went into administration and Aquila Advisory Ltd was assigned VTL’s proprietary rights.
P was ordered to pay £809,692 and F was ordered to pay £648,000 to the CPS.
Aquila argued that because it had a proprietary claim to the secret profit of £4.55m, its claim took priority over the confiscation orders which did not give the CPS any form of proprietary interest.
The CPS was an unsecured creditor of the former directors under the confiscation orders obtained against them. The orders did not give it any proprietary interest in the former directors’ assets, or any form of priority over any other claims to those assets.
As against VTL, the CPS’s rights were dependent on the rights of the former directors.
The Court of Appeal was correct to hold that the CPS had no better rights against VTL than F or P.
The fact that the CPS was an intervener resisting VTL’s claim rather than a director doing so, could not alter the outcome as to whether the directors’ dishonesty was to be attributed to VTL.
In short, the ability of the CPS to recover under the confiscation orders depended upon defeating the proprietary claim which Aquila asserted against the former directors of VTL.
The CPS could have no better defence to that claim than the former directors would have had.
Wrongful acts of directors in breach of their director’s duties could not be attributed to the company.
It could make no difference to the reasoning in Bilta whether the claim brought by the company against its directors was for loss suffered by the company or for gains made by the directors or if a part of the director’s scheme was that not only the director would benefit but so also would the company.
The director’s duty to the company would still be negated if there was an exception to the reasoning in Bilta that attributed a director’s wrongdoing to the company in circumstances where the director’s scheme in breach of his fiduciary duty to the company also included an element of actual or intended profit for the company.
It simply could not lie in the mouth of a director to assert that the director should retain a secret profit on the basis that a part of the director’s scheme was that the company would also benefit from it.
[1] [2015] UKSC 23