Dispute resolution

Corporate proprietary rights take precedence over criminal confiscation orders

Published on 17th Nov 2021

Will the Crown Prosecution Service be more likely to prosecute companies alongside their directors in future?

The Supreme Court clarified recently that the actions of directors cannot be attributed to a company so as to defeat the company's proprietary claim against them, thus confirming that confiscation orders sought against the directors rank below constructive trusts in favour of the company.

What happened

In CPS v Aquila Advisory Ltd (2021), two directors breached their fiduciary duty to Vantis Tax Ltd (VTL), which was later acquired by Aquila, by exploiting their position as directors to make a secret profit of £4.55m. Aquila sought to establish a constructive trust under which VTL was the beneficial owner of the secret profit, with that beneficial ownership transferring to Aquila on the purchase of VTL. The Crown Prosecution Service (CPS) sought confiscation orders against the directors under the Proceeds of Crime Act 2002 (POCA) as the £4.55m was obtained through crimes committed by the directors in relation to four tax avoidance schemes. 

In the criminal trial, the directors were ordered to pay the available amount to the CPS, but Aquila brought civil proceedings against the CPS in order to determine its proprietary right to the secret profit. The judge ruled in favour of Aquila, ordering the CPS to transfer the net proceeds of the confiscation order to it. The Court of Appeal dismissed the CPS's appeal against the order on the basis that the actions of the directors could not be attributed to VTL so as to defeat the equitable right to the secret profit. 

The CPS then appealed to the Supreme Court, arguing that the directors' actions should be attributed to VTL as the company stood to profit from them and that POCA should not permit a company to benefit from the criminal actions of its former directors. 

The outcome

The Supreme Court dismissed the CPS's appeal. The judges unanimously agreed that the actions of a director cannot be attributed to a company in order to defend them against a proprietary claim from the company. 

The judges also rejected the CPS submission that the Court of Appeal's decision was inconsistent with POCA, as POCA provides for the overriding of property rights through confiscation orders upon conviction and for restraint orders against exercising property rights until a confiscation order is determined. That the CPS did not pursue VTL under these provisions did not make the decision inconsistent with POCA, as POCA is not intended to interfere with existing third-party property rights.

Osborne Clarke comment 

Part of the difficulty faced by the CPS in this case arose because it had failed to prosecute VTL in addition to the directors. Given the seniority of those directors, it is likely that VTL would have been convicted and a confiscation order then imposed directly upon the company. 

It remains to be seen whether, to avoid the risk of this difficulty arising again, the CPS will look to prosecute more companies in the future: but we feel that this may be likely. 

 

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