Crown Prosecution Service (Appellant) v Aquila Advisory Ltd (Respondent)
[2021] UKSC 49
Michaelmas Term
[2021] UKSC 49
On appeal from: [2019] EWCA Civ 588
Appellant
Andrew Sutcliffe QC Julian Christopher QC
Anne Jeavons
(Instructed by CPS National Proceeds of Crime Unit)
Respondent
Stuart Ritchie QC Martin Evans QC
Sam Neaman
(Instructed by Kingsley Napley LLP)
3. There were a number of parties to these civil proceedings but by the date of the
participating in the trial were Aquila and the CPS. The issue between them, as defined
by the judge (at para 1) was, in essence, whether the proprietary rights to which Aquila
would otherwise be entitled against Mr Faichney and Mr Perrin could be asserted “in
the face of” the confiscation orders obtained by the CPS against Mr Perrin and Mr
LORD STEPHENS: (with whom Lord Lloyd-Jones, Lord Sales, Lord Burrows and Lady
Rose agree)
Introduction and overview
1. Mr Robert Faichney and Mr David Perrin exploited their position as directors of
Vantis Tax Ltd (“VTL”), in breach of fiduciary duty, to make a secret profit of £4.55m. Aquila Advisory Ltd (“Aquila”), which has acquired the proprietary rights (including choses in action) of VTL, relies, in particular, on the judgment of this court in FHR European Ventures LLP v Mankarious [2014] UKSC 45; [2015] AC 250 (“FHR”), to assert that Mr Faichney and Mr Perrin are to be treated as having acquired the benefit of that secret profit on behalf of their principal, VTL. The result, Aquila argues, is that the secret profit was beneficially owned by VTL under a constructive trust, the beneficial interest in which has now passed to Aquila.
2. The amount of £4.55m was also the benefit obtained by Mr Faichney and Mr
Perrin from the crime of cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. Those crimes were committed by Mr Faichney and Mr Perrin in relation to four tax avoidance schemes. Following their criminal convictions, the Crown Prosecution Service (the “CPS”) sought confiscation orders under the Proceeds of Crime Act 2002 (“POCA”) against Mr Faichney and Mr Perrin. The judge in the criminal trial found that Mr Perrin’s benefit from the offence was £4.55m but that the available amount was £809,692. An order was made requiring Mr Perrin to pay that amount. Subsequently, an order was made requiring Mr Faichney to pay £648,000, which was the available amount in his case. However, Aquila asserts that as it has a proprietary claim to the secret profit of £4.55m (from which secret profit all the property assets of Mr Faichney and Mr Perrin were obtained) it has priority over the confiscation orders, as those orders do not give the CPS any form of proprietary interest in the assets of either Mr Faichney or Mr Perrin. If that is correct, then Aquila will be entitled to all of Mr Faichney’s and Mr Perrin’s assets leaving nothing to satisfy the confiscation orders.
trial before Mann J and by virtue of two settlement agreements, the only parties Faichney and Mr Perrin. Mann J decided that Aquila, which had acquired the proprietary rights of VTL, was entitled to assert a proprietary claim to the funds in dispute in priority to the claim of the CPS: see [2018] EWHC 565 (Ch); [2018] Lloyd’s Rep FC 345. The judge granted a declaration to the effect that the moneys totalling £4.55m were held by Mr Faichney and Mr Perrin (in fact, by the latter’s estate, as Mr Perrin had died in October 2017) and their wives, (who had been joined as defendants, see para 42 below), from the time of their receipt on constructive trust for VTL, whose rights had been assigned to Aquila. The declaration also provided, in accordance with an agreement between the parties (see para 44(c) below) that the CPS was obliged to instruct the receiver to transfer to Aquila the net proceeds realised from all the assets listed in the confiscation orders.
4. The CPS appealed to the Court of Appeal on the ground that the judge should
FHR. He also recorded (at para 14) that the CPS accepted that the confiscation orders under POCA did not give it any form of proprietary interest in the available assets of either Mr Faichney or Mr Perrin or any priority over other claims and interests in those assets, so that (as explained at para 20), unless the constructive trust is rendered unenforceable by attributing to VTL the fraud of its directors and thereby neutralising VTL’s assertion of its proprietary claim by the application of the defence of illegality, the CPS has no claim to the £4.55m, which belongs in equity to Aquila.
have attributed the actions of the directors to VTL and therefore treated VTL’s claim to amounted to a breach of the fiduciary duty which they owed to VTL and that the consequence of that breach of duty was that VTL had a proprietary claim to the £4.55m based on a constructive trust in accordance with the decision in
recover the proceeds of the crime as barred by the principles of illegality. Following a
hearing on 13 March 2019, the Court of Appeal (Patten, Hamblen and Holroyde LJJ)
handed down judgment on 9 April 2019; see [2019] EWCA Civ 588. Patten LJ delivered
the lead judgment, with which the other members of the court agreed. He recast the
issue (at para 1), at its simplest, as being whether the CPS had a claim under the
confiscation orders which it could enforce in priority to the proprietary claim of Aquila.
| 5. In relation to the submission that the fraud of the directors should be attributed | Bilta (UK) Ltd v Nazir [2015] 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.” Furthermore, Patten LJ held (at para 25) that it was not open to the Court of Appeal to fashion some exception to the decision in to VTL, Patten LJ, relying on the judgment of this court in Bilta to accommodate the facts of this case. His overall conclusion (at para 28) was that the Court of Appeal could not “attribute the actions of Mr Faichney and Mr Perrin to VTL so as to defeat the company’s equitable title to the £4.55m” so that the appeal was dismissed. | |||||
| 6. On 3 December 2019, a panel of the Supreme Court (Lord Kerr, Lord Hodge and Lady Arden) granted the CPS permission to appeal. | ||||||
| 7. In broad outline the CPS argues that (a) the fraud of its former directors should be attributed to VTL in circumstances where, it is suggested, VTL has suffered no loss | ||||||
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| The facts | ||||||
| 9. VTL, which was incorporated in Jersey on 22 December 2003, was intended to offer consultancy, and in particular tax planning, services to external clients. It was a | ||||||
| 10. Mr Faichney and Mr Perrin were recruited by the Vantis Group in 2003. They were both former Inland Revenue Officers. They became statutory directors of VTL | ||||||
| 11. Mr Faichney was appointed Managing Director of VTL in February 2004, and Mr Perrin Deputy Managing Director in May 2004. They both had minority shareholdings in VTL. Mr Perrin was the director with principal day to day responsibility for the initial tax avoidance scheme and for the three further schemes involved in this appeal. | ||||||
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| high net worth individuals who might benefit from tax planning services offered by the | ||||||
| product, called “Taxcracker”. Its purpose was to enable financial advisers to identify answer structure. | ||||||
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| NETbuilder Ltd to write and develop the code for the product. The underlying concept became known as “Qaria”. All original intellectual property rights in the software technology (“the IP”) vested in and continued, at all material times, to reside with VTL. | ||||||
| 14. The provisions of section 587B of the Income and Corporation Taxes Act 1988 allowed an individual taxpayer to claim relief in respect of the value of shares in a | ||||||
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| which utilised the provisions of section 587B. The scheme involved the formation of a company (“the tax avoidance company”) in which taxpayer subscribers (who were clients of VTL) could subscribe for shares at a small price per share. The company would then purportedly acquire assets which would increase its share price, at which point the shares would be given to charity at a higher valuation than their subscription price. The value of the donation would be allowed to the taxpayer as a relief, which would, on this basis, be much higher than the amount paid for the shares. | ||||||
| 16. Mr Faichney and Mr Perrin realised that the IP could ostensibly be acquired by the tax avoidance company to (purportedly) boost the value of its assets (and | ||||||
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| by way of a purported written assignment of the IP from a fictitious trust known as “The Richardson Trust” of which Mrs Perrin (using her maiden name of Barnes) was the purported trustee for the price of £500,000. | ||||||
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| Perrin, paid £500,000 to Mrs Perrin (in her maiden name of Barnes) purportedly for the IP. The Richardson Trust did not exist. The consideration of £500,000 in respect of the purported assignment of the IP rights was applied for the benefit of Mr and Mrs Perrin and Mr and Mrs Faichney. | ||||||
| 21. On 13 April 2005 VTL wrote to its clients who had subscribed for shares in CMR telling them that the value to be inserted in the transfer forms to the charities was £1 | ||||||
| 22. In ignorance of the true facts, the taxpayers donated the shares to charities at this value, and as the shares were then listed on the Channel Islands Stock Exchange, | ||||||
| 23. Under VTL’s terms and conditions the clients were obliged to pay fees to VTL equal to 12% of the amount sheltered as a result of their use of the scheme (ie, 12p | ||||||
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| justified by a number of dishonest means, central to which was the apparent purchase by CMR of rights to develop the IP. | ||||||
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| further cheques, signed by Mr Faichney and Mr Perrin, to Miss Barnes (ie, Mrs Perrin) of £1.8m and £2.25m (totalling £4.05m), on 22 August 2005 and 31 March 2006 respectively. Accordingly, the total amount paid by CMR to the Richardson Trust amounted to £4.55m, all of which passed into the hands of Mr and Mrs Perrin and Mr and Mrs Faichney. The source of that sum was the subscription fees paid by clients to participate in the tax avoidance scheme. | ||||||
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| those rights continued to be owned by VTL. No rights were ever transferred under the assignments, although the tax avoidance companies had use of the IP. The Richardson Trust was merely a vehicle for allowing money to flow through Mrs Perrin, using her | ||||||
| maiden name of Miss Barnes, to herself and to Mr Perrin and Mr and Mrs Faichney. | ||||||
| 28. The values attached to the rights in the various IP assignments did not represent the value of the rights purportedly being assigned, but rather represented the amounts | ||||||
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| clients wishing to take advantage of the scheme (from which the £4.55m can be directly traced) was money obtained as a result of or in connection with the offence of cheating the public revenue. The scheme also amounted to a breach of Mr Faichney’s and Mr Perrin’s fiduciary duty by exploiting the corporate opportunity afforded to them as directors and by pretending to sell VTL’s IP rights to benefit themselves. | ||||||
| 30. For the purposes of all four tax avoidance schemes Mr Faichney and Mr Perrin were the directing mind and will of VTL. | ||||||
| The Proceeds of Crime Act 2002 | ||||||
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| 32. Part 2 makes provision for confiscation orders. Section 6, under Part 2, requires the Crown Court to make a confiscation order in certain circumstances, with the | ||||||
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| Part 2, nor a civil recovery order under Part 5, nor the money laundering provisions in Part 7 interfere with existing third-party property rights. For example, section 69(3)(a) (under Part 2) which provides that the powers of a receiver in respect of realisable | ||||||
| with a view to allowing a person other than the defendant or a recipient of a tainted | ||||||
| property to which a confiscation order (or a restraint order) applies “must be exercised said, in setting out the scheme of that Act in In re Norris [2001] 1 WLR 1388 at paras 12-17, that confiscation orders should not interfere with the property rights of innocent third-parties. | ||||||
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| confiscation order being reduced. If it is determined in these proceedings that all the assets of Mr Faichney and Mr Perrin are subject to a constructive trust in favour of VTL then section 23 enables the confiscation order to be reduced based on the inadequacy of the available amount. | ||||||
| 35. It is suggested on behalf of the CPS that the determination that the assets of Mr Faichney and Mr Perrin are subject to a constructive trust in favour of VTL is inconsistent with the aim and purpose of POCA. That suggestion contradicts the view that has been set out in para 33 above that POCA does not interfere with third party property rights. In any event, certain provisions in POCA could have been, but were not used by the CPS to deprive VTL of its proprietary rights under the constructive trust or to prevent VTL from dealing with its proprietary rights. | ||||||
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| offence in proceedings before the Crown Court, the court must (if the prosecutor asks it to proceed under section 6 or the court believes it is appropriate to do so) consider whether to make a confiscation order under section 6(5)(b) requiring the defendant to | ||||||
| pay the recoverable amount. The CPS did not bring any criminal charges against VTL. confiscation order under section 6 in respect of its proprietary rights under the constructive trust. | ||||||
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| confiscation order can be determined section 40 provides that where, for instance, a criminal investigation has been started in England and Wales with regard to an offence, and there are reasonable grounds to suspect that the alleged offender has benefited from his criminal conduct then under section 41 the Crown Court may make an order (a restraint order) prohibiting any specified person from dealing with any realisable property held by the alleged offender. The CPS did not apply for, or obtain, a restraint order in relation to VTL in respect of its proprietary rights under the constructive trust. | ||||||
| 38. Third, Part 5 of POCA (under the rubric of “Civil recovery of the proceeds etc. of unlawful conduct”) has effect for the purpose, for instance, of enabling the | ||||||
| 39. The money laundering provisions are contained in Part 7 of POCA. I will consider those in relation to CPS’s second ground of appeal commencing at para 81 below. | ||||||
| The criminal and civil proceedings | ||||||
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| Perrin in 2005 and 2006 and the final cheque made out by them to Miss Barnes was dated 31 March 2006. However, by that date HMRC had already commenced a criminal investigation. The fraudulent nature of the schemes subsequently also became apparent to the Vantis Group and to the clients of VTL. This had a number of consequences which I will summarise: |
(a) An internal investigation was carried out by the Vantis Group during which Mr Faichney and Mr Perrin resigned their employment and their
directorships.
(b) On 26 January 2010 Mr Faichney and Mr Perrin commenced civil proceedings against VTL and its associated companies in the Vantis Group for in a scheme which was a breach of the fiduciary duty owed by directors to VTL and other companies in the Vantis Group.
unpaid salary and alleging wrongful dismissal, which are the original claims
underlying these proceedings. This was met with a defence and counterclaim in
which VTL alleged that the claimants had acted in breach of fiduciary duty both
in equity and under the provisions of section 175 of the Companies Act 2006
when they used VTL’s IP as the basis of the tax avoidance schemes. The £4.55m
derived from the four schemes was alleged to be held on constructive trust for
(c) On 29 June 2010 VTL was placed in administration. (d) On 21 December 2010 VTL, acting through its administrator, assigned its claims in these proceedings against the former directors to Aquila with a view to proceedings. The effect of the assignment is that if the secret profit obtained by the former directors was beneficially owned by VTL under a constructive trust, then VTL’s proprietary rights have now passed to Aquila.
securing the best possible return for VTL’s creditors. Under the assignment, the
(e) In 2011 VTL, along with the rest of the Vantis Group of companies, went into liquidation.
(f) VTL faces substantial claims by taxpayer subscribers (who were clients of
VTL) and who were investors in the tax avoidance companies. These individuals
assert that they have also suffered loss as a result of the fraud perpetrated by
Mr Faichney and Mr Perrin.
(g) In the meantime, on 21 September 2009 criminal proceedings were commenced against Mr Faichney and Mr Perrin. In January and October 2012
respectively, Mr Perrin and Mr Faichney were convicted by juries at BlackfriarsCrown Court of cheating the public revenue by:
“dishonestly facilitating and inducing others to submit claims
for tax relief under section 587B Income and Corporation
Taxes Act 1988, as amended, which falsely stated the values
within the relevant accounting periods of charitable
donations of shares in Clerkenwell Medical Research Plc,
Modia Plc, Your Health International Plc and Signet Health
International Plc.”
(h) VTL was never charged, indicted or tried for any offence. The decision not
to prosecute VTL was made by the CPS and is to be seen in the context of its
view, as summarised in its written submissions, that “On the basis of the
(conceded) fact that Mr Faichney and Mr Perrin were the directing mind and
will of the company for the purposes of the tax avoidance schemes, attribution
for the purpose of criminal liability of VTL would follow.”
(i) Following Mr Perrin’s conviction and in confiscation proceedings under POCA, the trial judge made a confiscation order against him. Aquila was represented in those proceedings. Mr Perrin unsuccessfully appealed against the confiscation order on the grounds that the £4.55m did not represent a benefit obtained as a result of or in connection with the offence; see [2014] EWCA Crim 1556.
(j) On 1 August 2014 in confiscation proceedings following Mr Faichney’s
conviction, the available amount and hence the recoverable amount was found
to be £648,000.
(k) Each of the tax avoidance companies was dissolved. (l) HMRC have taken steps to reverse and recover from the taxpayers involved the tax credits obtained under the various schemes (apart from the
subscription price itself).41. It is necessary to give some further details in relation to these civil proceedings.
42. Aquila obtained an order joining Mrs Faichney and Mrs Perrin as defendants to
the counterclaim. It also obtained an interim freezing injunction to restrain Mr and Mrs constructive trust; see [2013] EWHC 3953 (QB). The freezing injunction prevented those assets, the proceeds of the £4.55m, being used to satisfy confiscation orders made against Mr Perrin.
43. On 12 March 2014 the CPS was granted permission to intervene in the High
Court proceedings. In January 2017 the matter was listed for trial in January 2018.
44. In January 2018, immediately prior to trial, two settlement agreements were reached under which:
(a) All claims by VTL against Mr and Mrs Faichney and Mrs Perrin and the
estate of Mr Perrin were withdrawn on the basis that they took no further part
in the proceedings. They disclaimed any interest in the subject matter of
Aquila’s claim which was to be litigated between Aquila and the CPS;
(b) The CPS agreed to apply to the Crown Court for the appointment of an
enforcement receiver over all of the assets listed in the relevant confiscation
orders (“the confiscation assets”); and
(c) The CPS agreed, if and insofar as the court found that the £4.55m received by the Mr and Mrs Perrin and Mr and Mrs Faichney from CMR was
held on constructive trust for VTL, it would instruct the enforcement receiver to
transfer to Aquila from the net proceeds realised from the confiscation assets
“such sum as represents the amounts so found by the court to have been so
held”, save that this would not apply if and to the extent that Aquila’s
counterclaim succeeded as a personal (rather than a proprietary) claim.
48. In FHR the agent of the purchaser of an hotel had entered into an agreement
of €10m in the event of the successful completion of the sale. The agent failed to
notify the purchaser of that agreement and received the commission when the
purchaser bought the hotel. The purchaser sought to recover the €10m from its agent.
The issue was whether a bribe or secret commission received by an agent is held by
the agent on constructive trust for his principal, or whether the principal merely has a
personal remedy for an account of the bribe or secret commission (ie, a personal
remedy whereby the agent must account for, and pay over to the principal, the
amount of the bribe or secret commission). This personal remedy was loosely and,
with respect, somewhat confusingly (as Lord Reed pointed out in AIB Group (UK) Ltd
plc v Mark Redler & Co [2014] UKSC 58; [2015] AC 1503, para 120) referred to by Lord
Neuberger in this court in FHR as “equitable compensation” because, as Lord
Neuberger made clear in his judgment at para 7, the remedy is restitutionary,
reversing the value of a benefit received, and is not concerned to compensate for a
loss. If the bribe or secret commission is held on constructive trust, the principal has a
proprietary right to it, whereas the accounting remedy is purely personal. One of the
most important practical differences between the constructive trust and the personal
accounting remedy (or equitable compensation) is that the constructive trust would
give the principal priority in the event of the agent’s insolvency, whereas the personal
accounting remedy (or equitable compensation) would not. It has been long
established that secret profits made by an agent in breach of fiduciary duty to its
principal are held on constructive trust: Keech v Sandford (1726) Sel Cas Ch 61; Phipps
v Boardman [1964] 1 WLR 993 (Wilberforce J) affirmed by the House of Lords [1967] 2
45. As a consequence of the settlement agreements, the only parties participating in the trial before Mann J were the CPS and Aquila.
46. It was accepted at trial that the assets of Mr Faichney and Mr Perrin - on the
basis of which the Crown Court had determined the available amount, and hence the
recoverable amount, for the purposes of the confiscation order - in each case
represented part of the £4.55m and were covered by Aquila’s proprietary claim.
The decisions in FHR and in Bilta
47. Prior to considering the issue as to whether the fraud of VTL’s former directors
should be attributed to VTL, it is necessary to examine the decisions of this court in
FHR and in Bilta in some detail.
with the sellers of the hotel under which the agent was to receive a fixed commission be a difference, so that the principal is entitled only to a personal accounting remedy and not a constructive trust, where one was concerned with a bribe or secret commission, rather than secret profits, being obtained in breach of fiduciary duty. In FHR it was submitted that a constructive trust should not apply to a bribe or secret commission paid to an agent, because it is not a benefit which can properly be said to be the property of the principal. Lord Neuberger, delivering the judgment of the court, stated (at para 30) that the rule that a bribe or secret commission is held on constructive trust:
“… is justified on the basis that equity does not permit an
agent to rely on his own wrong to justify retaining the
benefit: in effect, he must accept that, as he received the
benefit as a result of his agency, he acquired it for his
principal.”
49. Lord Neuberger, having concluded from a review of the authorities at paras 13- 28 that there was no clearly right or wrong answer to the question whether a bribe or secret commission was held on constructive trust, turned to the arguments based on principle and practicality. He stated at para 33 that:
“The agent owes a duty of undivided loyalty to the principal, unless the latter has given his informed consent to some less demanding standard of duty. The principal is thus entitled to the entire benefit of the agent’s acts in the course of his
agency. … The agent’s duty is accordingly to deliver up to his
principal the benefit which he has obtained, and not simply
to pay compensation for having obtained it in excess of his
authority. The only way that legal effect can be given to an
obligation to deliver up specific property to the principal is bytreating the principal as specifically entitled to it.”
Lord Neuberger recognised at para 34 that:
“there is some force in the notion advanced by the [agent]
that the rule should not apply to a bribe or secret
commission paid to an agent, as such a benefit is different in
quality from a secret profit he makes on a transaction on
which he is acting for his principal, or a profit he makes from
an otherwise proper transaction which he enters into as a
result of some knowledge or opportunity he has as a result of
his agency.”
However, (at para 35) the court held that in the absence of any clearly right answer, either as a matter of authority or principle, it should decide, in the interests of promoting simplicity and clarity in the law, that “any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal” and a bribe or commission should not be excluded from that rule. Lord Neuberger considered (at para 42) that wider policy considerations also supported that approach and (at para 45) that there was further support from other common law jurisdictions.
50. It is accordingly clear, since the decision in FHR, that as between the principal
on trust for his principal, regardless of the circumstances in which it was obtained.
and his agent, any benefit obtained by the agent in breach of his fiduciary duty is held clear law prior to FHR, I therefore agree with the Court of Appeal (at para 19) that:
“The decision in FHR therefore prevents a director in the
position of Mr Faichney and Mr Perrin from asserting a right
to retain the secret profit against VTL based on the fact that
it has been obtained by fraud.”
51. However, in none of the secret profits or bribe cases (including FHR) have the
courts had to consider whether the fraud of the agent should be attributed to the principal so as to prevent the principal, by reason of the defence of illegality, from relying on a constructive trust in priority to the claims of unsecured creditors, such as,
in this case, the CPS.
52. The issue of the attribution of the fraud of an agent to its principal, and the
consequent effect on the defence of illegality, did, however, arise in Bilta albeit in the slightly different context of the company seeking damages or equitable compensation for loss (not restitution of profits obtained) for, for example, the tort of conspiracy,
breach of fiduciary duty and dishonest assistance of a breach of fiduciary duty. In that dishonestly assisted the directors’ breaches of fiduciary duty.
case the defendant directors had used a company, Bilta (UK) Ltd, as part of a VAT
carousel fraud. This involved transactions under which Bilta (UK) Ltd bought carbon
credits from a Swiss company net of VAT, which it then sold on to UK companies
inclusive of VAT, such that Bilta (UK) Ltd became obliged to account to HMRC for the
VAT. The proceeds of the sales (including the VAT) were paid away to the Swiss, and
another offshore company, thereby leaving Bilta (UK) Ltd insolvent and unable to meet
its liabilities to HMRC. Bilta (UK) Ltd (through its liquidators) alleged that its former
directors had acted in breach of their fiduciary duty by removing from the company
the means of paying the output tax due and thereby exposing it to liability to HMRC.
53. In response, the appellants applied to strike out the liquidator's claim against
them on the ground that Bilta (UK) Ltd could not maintain the proceedings in view of the principle ex turpi causa non oritur actio, or, to put it another way, the appellants were bound to defeat the claims against them on the basis of an illegality defence as Bilta (UK) Ltd was, through its directors, a party to the VAT fraud and was therefore
precluded from seeking relief from its co-conspirators.
54. This court, sitting as a panel of seven justices, held that the wrongful activity of
the directors could not be attributed to Bilta (UK) Ltd in those proceedings. Lord proposition in relation to attribution (at para 7):
“Where a company has been the victim of wrongdoing by its
directors, or of which its directors had notice, then the
wrongdoing, or knowledge, of the directors cannot be
attributed to the company as a defence to a claim brought
against the directors by the company’s liquidator, in the
name of the company and/or on behalf of its creditors, for
the loss suffered by the company as a result of the
wrongdoing, even where the directors were the only
directors and shareholders of the company, and even though
the wrongdoing or knowledge of the directors may be
attributed to the company in many other types of
proceedings.”
55. Lord Neuberger also agreed (at para 9) with Lord Mance “whether or not it is
appropriate to attribute an action by, or a state of mind of, a company director or
agent to the company or the agent's principal in relation to a particular claim against
the company or the principal must depend on the nature and factual context of the
claim in question.”
56. In that respect Lord Mance stated (at para 41) that:
Meridian Global Funds 500], the key to any question of attribution is ultimately always to be found in considerations of context and purpose. The question is: whose act or knowledge or state of mind is for the purpose of the relevant rule to count as the act, knowledge or state of mind of the company?” (Emphasis in the original)
“As Lord Hoffmann made clear in [
The relevant rules in Bilta, as in this case, are the duties owed by an officer to the company which the officer serves. Lord Mance analysed the purpose of those duties in the context of attribution, as follows (at para 42):
“Where the relevant rule consists in the duties owed by an
officer to the company which he or she serves, then, whether
such duties are statutory or common law, the acts,
knowledge and states of mind of the company must
necessarily be separated from those of its officer. The
purpose of the rule itself means that the company cannot be
identified with its officers. It is self-evidently impossible that
the officer should be able to argue that the company either
committed or knew about the breach of duty, simply because
the officer committed or knew about it. This is so even
though the officer is the directing mind and will of the
company. The same clearly also applies even if the officer is
also the sole shareholder of a company in or facing
insolvency. Any other conclusion would ignore the separate
legal identity of the company, empty the concept of duty of
content and enable the company’s affairs to be conducted in
fraud of creditors.” (Emphasis added)
As emphasised, the purpose of the rule itself means that the company cannot be identified with its officers. The wrongful acts of the directors in breach of their directors’ duties cannot, therefore, be attributed to the company.
57. Lord Sumption also considered that the case turned on rules of attribution,
which he viewed as applying “regardless of the nature of the claim or the parties
involved” (para 86). He considered that the acts and state of mind of the directing
mind and will of a company will normally be attributed to the company. But he
qualified the effect of his analysis by reference to a policy-based “breach of duty
exception” in order “to avoid, injustice and absurdity”. For present purposes it is
sufficient to observe that Lord Sumption considered (at para 89) that a claim by a
company against its directors for breach of their duties, which exist for the protection
of the company against the directors, was a paradigmatic case where the directors’
dishonesty should not be attributed to the company, albeit as an exception to a
general rule.
58. Lord Toulson and Lord Hodge approached the case on the basis that the primary
question was “whether [Bilta (UK) Ltd’s] claim against the directors for breach of
fiduciary duty [was] barred by the doctrine of illegality” (para 120). They held (at paras
130, 131 and 209) that the defence of illegality was sensitive to context and to
competing aspects of public policy. If the defence of illegality were permitted to
succeed on the facts in Bilta, such as to enable the directors to escape responsibility
for breach of their fiduciary duty, then “the courts would defeat the very object of the
rule of law …, and would be acting contrary to the purpose and terms of sections
172(3) and 180(5) of the Companies Act 2006.” Accordingly, on that ground they
dismissed the appeal, but they also went on to hold (at para 209) that the rules of
attribution would achieve the same result. In that respect, where a company is
pursuing a claim against a director or an employee for breach of duty or breach of
contract, they considered that:
“it would defeat the company’s claim and negate the
director’s or employee’s duty to the company if the act or the
state of mind of the latter were to be attributed to the
company and the company were thereby to be estoppedfrom founding on the wrong.”
They concluded that (at para 206):
“… as the courts have recognised since at least Gluckstein v Barnes [1900] AC 240, it is absurd to attribute knowledge to the company and so defeat its claim.”
59. I therefore agree with the Court of Appeal (at para 24) that:
“Bilta confirms 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 thescheme involved the company in the fraud or illegality.”
I also agree with the Court of Appeal (at para 28) that:
“it is clear from what was said in Bilta that the company’s
participation through its directors in criminal conduct is not
enough to justify the application of a different rule in relation
to the ownership (as between the company and its directors)
of the proceeds of the fraud.”
60. Accordingly, subject to the issues on this appeal, which are considered below, in
civil proceedings brought by a company against its directors for breach of fiduciary duty, claiming that the sums they acquired as a result of the breach are subject to a constructive trust in the company’s favour, the principles established in Bilta prevent
the attribution of the dishonesty of those directors to that company. In this way the
rules of attribution prevent the directors’ dishonesty from being attributed to the
company, with the result that the company is not acting illegally and its claim is not
barred by the defence of illegality. Attribution being denied, the illegality defence fails.
| 61. Although the law on illegality has been restated since Bilta by this court in Patel Bilta as to attribution. Lady Hale delivering the judgment of the court, referred (at para 30), and subsequently applied, the reasoning in Bilta that “the key to any question of attribution was always to be found in considerations of the context and the purpose for which the attribution was relevant.” Bilta remains good law after Patel. v Mirza | [20I6] UKSC 42; [2017] AC 467 (“Patel”), the reasoning in Bilta, built as it is on the reasoning in | |||
| The grounds of appeal to this court | ||||
| 62. Having set out the background to this appeal, I can now set out the grounds of appeal and the principal arguments, together with my answers to them. | ||||
| ||||
| 63. The CPS argues that the Court of Appeal was wrong to conclude that the facts of the present case fell within the ratio of Bilta, and contends (per the formulation in the | ||||
| 64. There were several arguments in support of this ground of appeal but before addressing those arguments I should clarify the standing of the CPS as an intervener. | ||||
| 65. The CPS is an unsecured creditor of the former directors under the confiscation orders obtained against them. The orders do 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 are dependent on the rights of the former directors. I agree in that respect with the Court of Appeal (at para 25) that “The CPS … has no | ||||
| better rights against VTL than Mr Faichney and Mr Perrin …”. The fact that the CPS is an intervener resisting VTL’s claim rather than a director doing so cannot alter the outcome as to whether the directors’ dishonesty is to be attributed to VTL. In short, the CPS’s ability to recover under the confiscation orders depends upon defeating the proprietary claim which Aquila asserts against the former directors of VTL. The CPS can have no better defence to that claim than the former directors would have had. | ||||
| 66. In essence, the CPS’s overarching submission in support of the first ground is that, properly understood, nothing in Bilta permits a principal to profit from its agent’s | ||||
| 67. First, the CPS emphasises that the former directors have dishonestly committed a criminal offence (cheating the revenue) whilst conducting the business of the | ||||
| 68. It is worth stressing, albeit perhaps obvious, that it forms no necessary part of conduct also amounted to the criminal offence of cheating the public revenue. That is, | ||||
| VTL’s claim against its former directors for breach of their fiduciary duties that their constructive trust in favour of the company as principal simply recognises that the agent cannot use his position or the assets of the company to benefit himself” (emphasis added). Indeed, the CPS accepts at para 23 of its written submissions that “… it may be correct to identify as distinct breaches of fiduciary duty the directors’ exploitation of the value of the IP rights on the one hand and taking advantage of the ‘corporate opportunity’ of the tax mitigation arrangements on the other.” Accordingly, there is no issue that it is not a necessary component of VTL’s claim against its former directors that their conduct also amounted to the criminal offence of cheating the public revenue, though that is not to ignore that their conduct also amounted to the commission of that offence. | ||||
| ||||
| exploiting the IP in breach of their fiduciary duties. On that basis, the CPS submits that | ||||
| result of their criminal offending, by cheating the public revenue, rather than by profits. This argument fails on the basis that there has been no factual finding that any part of the £4.55m was only generated by the criminal offence of cheating the public revenue. Indeed, Mann J proceeded on the factual basis that the former directors had also obtained the £4.55m by abusing their position and the assets of the company to benefit themselves in breach of their fiduciary duties. | ||||
| 70. Third, the CPS argues that the purpose of not attributing the former directors’ unlawful conduct to the company is to protect the company from losses as a result of | ||||
| ||||
| 72. This argument seeks, in effect, to establish an exception to the reasoning in Bilta as to attribution where the director’s conduct in breach of fiduciary duty was also | ||||
| 73. In addition, I consider that this argument has an element of circularity because it seeks to attribute to the company the directors’ intention that substantial fees would | ||||
| 74. I also reject this argument on the fundamental basis that the constructive trust exists to ensure compliance with, and is imposed in consequence of, the directors’ | ||||
| ||||
| prophylactic way in which the director’s fiduciary duties operate. The fact that a director who breaches a fiduciary duty will be stripped of profit is a powerful means of guarding against the director’s temptation of self-interest. The deterrent effect of the fiduciary duty would be undermined if a constructive trust did not arise where the company was intended to, or did in fact, make a profit. Put shortly, the protective function of the fiduciary duty would be put at risk if a director were permitted to seek to avoid liability by arguing that the impugned transaction was nonetheless in the interests of the company. | ||||
| ||||
| where the company’s culpability for the illegality is the “very matter” of which complaint is made. It submits that in this case the very matter of which complaint is made is the breach by VTL’s former directors of the no-profit rule, rather than the criminal conduct of cheating the public revenue. On this basis it argues that the directors’ criminal conduct can be attributed to VTL because it is not the “very matter” of which complaint is made by VTL in seeking to establish that the former directors hold the profit of £4.55m on constructive trust. In support of this argument the CPS relies on Lord Sumption’s judgment at para 89 of Bilta which stated that “The company’s culpability [for the illegality] is wholly derived from [the directors], which is the very matter of which complaint is made.” | ||||
| 77. However, I do not consider that Lord Sumption was stating that if the culpability of the company can be attributed to some aspect which is not the “very matter” of | ||||
| 78. Another reason for rejecting this fourth argument is because it envisages that a director could seek to attribute to the company some undisclosed dishonesty, which is | ||||
| ||||
| in Patel has now fundamentally reshaped the illegality defence. On this basis the CPS argues that had the illegality defence been as now articulated in Patel at the time of Bilta, the illegality defence advanced by the appellants in Bilta would have failed | ||||
| without requiring recourse to arguments of attribution. Mr Sutcliffe, on behalf of the CPS, contends that since the decision in Patel, the rules of attribution cannot be used to control the application of the illegality defence, because the rules of attribution are not the rules of illegality policy. On this basis Mr Sutcliffe suggests that legal coherence as between the decision in Patel and Bilta requires this court to reconsider the rules of attribution. I reject this argument on the ground that the reasoning in Bilta as to | ||||
| above. However, I also reject this argument on the basis that the question of | ||||
| attribution remains good law after Patel for the reasons which I have set out at para 61 given as to whether it falls within the principles enunciated in Patel such as to found an illegality defence. | ||||
| 80. Sixth, the CPS argues that by seeking to establish a constructive trust in respect of the profit of £4.55m Aquila is both reprobating the directors’ illegality and | ||||
| ||||
| in Bilta, albeit concerned with loss-based claims rather than claims to strip profits, applies with equal force to the breach of fiduciary duty which is the subject of this decision. Bilta is 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 principles of illegality in Patel simply do not arise. | ||||
| ||||
| decision is inconsistent with the regime established by POCA. It argues that 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, but not to permit third parties otherwise to benefit from the actions of criminals any more than those criminals themselves. | ||||
| ||||
| regardless as to how those rights arise. Furthermore, there are specific provisions in | ||||
| property rights (except tainted gifts). POCA protects the property rights of others been used by the CPS. I agree with Mann J (at para 67) that: |
“it is therefore POCA which determines whether VTL/Aquila lose the rights which the directors’ acts give them, … If that Act contains provisions which, when properly implemented, have the effect vis-à-vis VTL of depriving it of its proprietary rights, then VTL/Aquila loses those rights. But those rights
| 85. The central issue in this appeal concerns the attribution of the former directors’ relate to potential subsequent illegality committed, not by the former directors of VTL, | fraud to VTL. The issues raised under sections 327 and 329 POCA are different as they be said to have committed a money laundering offence given that POCA is not intended to interfere with existing third-party property rights; see para 62 of Bowman v Fels [2005] EWCA Civ 226; [2005] 1 WLR 3083. |
| 86. For my part it is not necessary to decide whether such an offence has been or will be committed, as I agree with the observation of Sales LJ giving the judgment of the Court of Appeal in R (Best) v Chief Land Registrar [2015] EWCA Civ 17; [2016] QB 23, para 95 that “POCA is a separate regime operating according to its own, distinct concepts and with its own, distinct procedures and safeguards, and is not material to | |
| of Drug Trafficking Offences Act 1986, is not to interfere with existing third-party | |
| the issue before us.” The scheme of POCA contained in Parts 2 and 5, like the scheme criminal law without needing to distort the operation of ordinary principles as to equitable ownership of property under a constructive trust. Accordingly, I agree with Mann J at paras 66 and 67 that: |
have to [be] invoked against VTL/Aquila in a proper way.”
I also agree with the Court of Appeal (at para 25) that a “… remedy available to the CPS in a case like this would be to add the company to the indictment and then, if convicted, to seek a confiscation order directly against the company.” The operation of POCA has not been frustrated by the proprietary claim as the CPS had the right to seek to recover the proceeds of crime from VTL in a number of ways (see paras 36-38 above) but did not seek to invoke those rights.
84. On behalf of the CPS, it was contended that even if there is a constructive trust
in favour of VTL so that the beneficial interest is owned by the company any transfer,
use or possession of that beneficial interest would amount to money laundering
offences contrary to sections 327 and 329 POCA. The CPS contends that (a) the
assignment from VTL to Aquila and (b) the application for a declaration of constructive
trust in relation to the amount of £4.55m would result in the commission of those
offences.
“POCA does not operate through the medium of public
policy. It operates through the medium of its provisions. Its
provisions determine whether persons are liable to
confiscation orders and whether property is liable to be
taken by the state. … 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). If that Act contains provisions
which, when properly implemented, have the effect vis-à-vis
VTL of depriving it of its proprietary rights, then VTL/Aquila
loses those rights. But those rights have to invoked against
VTL/Aquila in a proper way.”
The CPS has not availed itself of remedies under Parts 2 and 5 POCA. It is not permissible to use public policy considerations said to derive from Part 7 to alter the existing property rights under a constructive trust.
87. I therefore reject the contention that the Court of Appeal’s decision is
inconsistent with the regime established by POCA.
| (c) | Ground three: declaratory relief |
88. The CPS contends that, even if the unlawful conduct of the former directors
cannot be attributed to VTL, then Mann J in the proper exercise of his discretion ought the terms of the settlement agreements entered into by the CPS.
not to have granted Aquila any declaratory relief. Aquila contends that the grant of a
declaration is not subject to the exercise of discretion relying on Lewin on Trusts, 20th
ed (2020), at 45-040 and the judgment of Sir Terence Etherton C in FHR in the Court of
Appeal [2013] EWCA Civ 17; [2013] 3 WLR 466, paras 75-76 together with Foskett v
McKeown [2001] 1 AC 102 at 109B-C. In my view, however, even if there is a discretion,
then plainly it was exercised appropriately. As it has often been said, constructive
trusts are not remedial but institutional: see FHR at para 47. In other words, in this
context, the constructive trust (and the principal’s beneficial ownership of the
property) arises automatically at the moment that, in breach of their fiduciary duty,
the directors received the secret profits. There was never a moment at which the
former directors as fiduciaries owned the profits in equity. The declaration granted by
Conclusion
89. For all the reasons given above I would dismiss this appeal.
JUDGMENT
Crown Prosecution Service (Appellant) v Aquila
Advisory Ltd (Respondent)
before
Lord Lloyd-Jones
Lord Sales
Lord Burrows Lord Stephens
Lady Rose
JUDGMENT GIVEN ON
3 November 2021
Heard on 27 April 2021
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