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Proprietary Claims and Confiscation Orders

Author: Syedur Rahman  2 December 2021
3 min read

Posted in: Commercial Litigation.

Syedur Rahman of Rahman Ravelli details a case where the courts had to consider whether a confiscation order could take priority over a company’s proprietary claim.

In Crown Prosecution Service v Aquila Advisory Limited [2021] UKSC 49, the Supreme Court had to consider issues relating to a proprietary claim brought by a company against its directors to recover proceeds of crime received in breach of fiduciary duty.

The main issues were:

  • Can that proprietary claim take priority over a confiscation order obtained by the Crown Prosecution Service?
  • Can the illegal behaviour of the directors be attributed to the company in circumstances where the company suffered no loss and stood to profit from the crime?

Case Background

Two directors of a company, Vantis Tax Limited, used the company to commit tax offences, from which they personally gained £4.55 million. They were prosecuted and convicted and made the subject of confiscation orders based on that benefit. 

Aquila Advisory Ltd (the respondent) then acquired the proprietary rights (including the choses of action) in Vantis and brought proceedings against the directors. The proceedings were brought because of the directors’ breach of fiduciary duty and because the directors had acquired the benefit of the secret profit on behalf of the respondent’s principal, Vantis. 

The respondent claimed that the profit was beneficially owned by Vantis under a constructive trust, and such beneficial interest had now passed to the respondent.  But the Crown Prosecution Service (CPS) argued that the confiscation orders should take priority over Aquila’s attempts to recover the money.

Judgments at lower courts

The High Court determined that the company – now meaning Aquila - could recover what remained of the £4.55 million from the directors because they had acted in breach of their fiduciary duty to the company and thus held the proceeds of the crime on constructive trust for the company. 

Mann J stated that the respondent had acquired the proprietary rights of Vantis and was entitled to assert a proprietary claim to the funds in dispute, in priority to the CPS’s claim. Mann J granted a declaration that the moneys totalling £4.55 million were held by the directors (and one director’s estate and their wives, who had been joined as defendants) from the time of their receipt on constructive trust for Vantis, which had been assigned to the respondent.

The CPS appealed to the Court of Appeal on the grounds that Mann J should have attributed the actions of the directors to Vantis and treated the claim to recover the proceeds of crime as being barred by the principles of illegality. 

But Patten JL recast the issue as being whether the CPS had a claim under the confiscation orders which it could enforce in priority to the proprietary claim of the respondent. The CPS had accepted that what the directors did amounted to a breach of the fiduciary duties owed to Vantis and, as such, Vantis had a proprietary claim to the £4.55 million based on a constructive trust. The CPS also accepted that the confiscation orders did not provide the CPS with a proprietary interest in the directors’ assets. The Court of Appeal held that the actions of the directors could not be attributed to Vantis; relying on Bilta (UK) Ltd (In Liquidation) v Nazir [2015] UKSC 23.

Supreme Court

The CPS continued its assertions at Supreme Court that the respondent’s claim should be barred due to the principal of illegality. The CPS argued that even if the court was right that the actions of the directors could not be attributed to Vantis, the grant of declaratory relief had been an improper exercise of the court’s discretion. The CPS went further, stating that the Proceeds of Crime Act (POCA) regime should not allow Vantis to benefit from profits generated by the criminal acts of its directors. 

The court dismissed the appeal. While the former directors had dishonestly committed a criminal offence while conducting the company’s business, this was not sufficient to attribute said unlawful conduct to the company, where the company was pursuing a claim against the directors for breach of duty. 

The constructive trust was necessary to ensure compliance with the directors’ fiduciary duty to the company. The directors would be stripped of their share of the unlawful profit, which was a guard against self-interest.  In relation to the POCA point raised by the CPS, there are provisions within Part 2 and Part 5, but these were not raised by the CPS. Those, however, are the methods that can be used to vindicate the public interest without distorting principles of equitable ownership of property under a constructive trust. 

Conclusion

The Supreme Court confirmed the decisions in both the High Court and Court of Appeal that the actions of the directors were not sufficient to be attributed to the company. 

The respondent had a proprietary claim to the directors’ assets, which the confiscation orders did not. The respondent’s claim could, therefore, take priority over the CPS’s confiscation orders, even if that meant the claim would frustrate those orders. The case illustrates that even the CPS does not get to “skip the queue” in situations where other creditors can be shown to have priority. 

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Syedur Rahman

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Syedur Rahman is known for his in-depth experience of serious fraud, white-collar crime and serious crime cases, as well as his expertise in worldwide asset tracing and recovery, civil recovery, cryptocurrency and high-stakes commercial disputes.

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