John McNamara discusses the recent Supreme Court judgment in Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49
On 3 November 2021 the Supreme Court handed down judgment in the case of CPS v Aquila Advisory Ltd. While many have chalked this up as a loss by the CPS, that rather ignores the changing legal landscape in asset recovery. This case could be a transforming moment for the CPS. It may accelerate a move to more non-criminal based recovery of the proceeds of crime and in turn the recovery of substantially more funds in the future.
Facts
Two directors of Vantis Tax Ltd (“VTL”) were convicted of fraud and cheating the public revenue. The tax avoidance scheme they employed on behalf of their ultra-high net worth clients was fraudulent. It led to the two directors making a secret profit of £4.55m, in breach of their fiduciary duty.
In the course of confiscation proceedings the judge found the benefit figure to be £4.55m but the available amount to be just over £800,000 for one director, the second was ordered to pay just shy of £650,000.
Aquila Advisory Ltd (“Aquila”) acquired the propriety rights of VTL. Aquila argued that the two directors of VTL were to be treated as having acquired the benefit of that secret profit on behalf of VTL, and therefore the secret profit was beneficially owned by VTL under a constructive trust, the beneficial interest in which had passed to Aquila. And, as all the assets obtained by the directors derived from the secret profit, Aquila has proprietary interest in their assets.
In the civil proceedings Mann J decided that Aquila was entitled to assert a proprietary claim to the funds in dispute in priority to the claim of the CPS. Mann J found the CPS were obliged to instruct the receiver to transfer the net proceeds released from all the assets listed in the confiscation orders to Aquila.
The Appeal to the Supreme Court
The CPS appealed. In reductionist terms the CPS asserted that Aquila, as the assignee of VTL, would end up with £4.55m of criminally obtained monies. That would be essentially unfair. There were three grounds advanced under this broad proposition:
Grounds
First, the fraud of the former directors of VTL should be attributed to VTL, where VTL suffered no loss but in fact profited from the illegal acts by obtain a proprietary interest in the proceeds of crime.
Second, the POCA regime should not permit VTL to benefit from the profits generated by the criminal activities of its former directors (the policy argument).
A third ground related to the trial judge granting Aquila declaratory relief.
Grounds Rejected
These arguments were rejected. The Supreme Court held, following Bilta (UK) Ltd v. Nazir [2015] UKSC 23 that in proceedings brought by a company against directors who had acted in breach of their fiduciary duty, the fraud of the directors could not be attributed to the company. It mattered not whether the company was a loser or stood to make a profit. Illegality did not offer a bar to the constructive trust and did not arise in this case.
In relation to the second ground of appeal, the Supreme Court confirmed that the POCA confiscation regime does not seek to interfere with any third-party property rights (save for tainted gifts). While other provisions of POCA may allow for interference with third-party property rights they were not engaged by the CPS in this case.
A third ground appealing against the use of Mann J’s discretion to grant Aquila declaratory relief was dismissed. The Court found that the constructive trust arose automatically. At no stage did the directors own the secret profits. Put succinctly constructive trusts are not remedial, but institutional (citing FHR European Ventures LLP v Mankarious [2014] UKSC).
Conclusion
This case reaffirms the existing legal principles as established in Bilta. It may be of some assistance to criminal courts when considering similar issues in confiscation orders in relatively complex cases. In my view the main effect of this case will be that prosecuting agencies are more careful, and tactical in which route they use to recover criminal funds, particularly in business crime cases.
It was open to the CPS to indict VTL, and thus bring the secret profit within scope of a confiscation order if VTL were convicted. Many have cited this as the “solution” for the CPS. However, setting aside for a moment the requirement for a conviction before that option presents itself, in deciding whether to prosecute the CPS must consider their guidance on prosecuting and consider whether there was a reasonable prospect of conviction, and whether it was in the public interest. Indicting VTL solely, or arguably at all, for the purposes of confiscation would likely be found to be an abuse of process.
More realistically, it seems, it was open to the CPS to commence in rem civil recovery proceedings under POCA in relation to the criminally obtained funds. CRO proceedings in the High Court do not require a conviction. A CRO cannot be sought over funds which have been used to calculate someone’s benefit for a confiscation order. This route would require advanced and careful consideration. There may well have been a significant contest put forward by Aquila to this route but, with hindsight, the CPS would have been in a stronger position to argue that the funds should be recovered.
In terms of legislation, and policy, the last 5 years has seen a concerted move towards the use of non-criminal recovery of criminal funds. There has already been a huge increase in the number of cases which could have been prosecuted (such as MTIC frauds and complex money laundering cases) where law enforcement has sought to only pursue the fruits of the crime. The increasing numbers of account freezing orders used by agencies including the Serious Fraud Office demonstrate this trend.
Perhaps, had the underlying criminal case against the two directors been prosecuted more recently than 2012 the decisions on recovery may have been different. If there is the appetite, the CPS may consider the recent changes of policy by other prosecuting agencies in this area and follow suit. If they do then this loss may, in the long term, turn out to be a win.
John undertakes cases in crime, business crime, proceeds of crime matters and related civil proceedings. John is ranked in the Legal 500 2022 for Proceeds of Crime and Asset Forfeiture. He is experienced in defending and prosecuting a range of proceedings arising from the Proceeds of Crime Act 2002 including restraint and confiscation, cash forfeiture, and account freezing and forfeiture hearings.
