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Clash between asset recovery under POCA and third-party proprietary rights - Faichney v Vantis HR

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Summary: The judgment in Faichney v Vantis HR Ltd reiterates that common law and equity cannot frustrate the operation of the Proceeds of Crime Act 2002, but that equally POCA 2002 does not give rise to a general consideration of public policy to deprive third-parties of their proprietary rights. This article examines the interplay between the recovery of the proceeds of crime from convicted fraudsters and common law proprietary rights of third parties.

What was the background to this case?

The dispute between Aquila Advisory Ltd (Aquila), an assignee of choses in action and property rights from Vantis Tax Ltd (VTL), and the CPS as intervener, involved conflicting claims to the assets of the two former directors of VTL who had been convicted of fraud and were the subject of confiscation orders obtained under POCA 2002.

The underlying dispute arose from attempted tax avoidance scheme promoted by VTL, a company at which Mr Faichney and Mr Perrin were directors. The scheme involved the development and assignment of software and the transfer of that software to various companies, incorporated by the former directors, whose shares were then inflated and used to claim tax relief by gifting shares to charity at the inflated value. The two former directors acted as though they owned the software, despite VTL having paid for its development and the usual employment contract provisions, and obtained financial benefits, amounting to £4.55m, from exploiting it in that way.

The schemes were detected by HMRC and the two former directors were found guilty of fraud offences involving cheating the Revenue in a subsequent criminal trial. A confiscation order was made in relation to their assets based on the fact that the benefit to them of their crimes was the £4.55m.

In the High Court proceedings that were initially issued by the two former directors for wrongful dismissal, Aquila asserted proprietary rights and sought a declaration, by way of counterclaim, that the directors’ property was held on trust for it as property wrongfully obtained by a fiduciary. The CPS intervened to assert that such declaration should not be granted by the court in the face of the confiscation orders on the grounds of attribution of the directors’ actions to the company, public policy, and the discretionary nature of the remedy sought by Aquila.

What did the court decide?

Mr Justice Mann held that Aquila had established proprietary rights in the assets held by the former directors, and the CPS had not established that it has any current rights that are capable of impeaching those proprietary rights. The court dismissed each of the CPS’s arguments on attribution and public policy, which sought to attribute the former directors’ criminal acts to the company, and made it clear that ‘the rights of the CPS under the existing confiscation order [against the fraudsters] are personal rights which do not of themselves trump the proprietary rights of [the company].’

It therefore followed that Aquila was entitled to its declaration that the former directors’ property was held on trust for it as property wrongfully obtained by a fiduciary.

What does this judgment say about attribution of the acts of the convicted directors to the company?

While the CPS sought to make Aquila/VTL a co-criminal with two of its directors via the attribution of the directors’ wrongdoings to the company, Aquila argued that, pursuant to Bilta (UK) Ltd v Nazir [2015] UKSC 23, [2015] All ER (D) 149 (Apr), the ‘breach of duty exception’ applied, preventing the attribution of liability in circumstances where the company had a claim against the directors for breach of duty through the misappropriation of the software.

The judge highlighted that there were two wrongful acts in this case, which was accepted by the CPS—the misappropriation and the crime (fraud on the Revenue), and attribution must be considered separately. Accepting Aquila’s argument, Mr Justice Mann relied on Bilta and agreed that the claim by a company against its former directors for misappropriation of corporate opportunity or assets could not be defeated on grounds of ex turpi causa or illegality on the basis that the dishonest intentions of the directors were attributed to the company.

Mr Justice Mann noted that the CPS had made no real argument about attributing the directors’ crime to the company, and he dismissed what he termed the CPS’s ‘ad-hoc approach to attribution’. Further, Mr Justice Mann held that applying the ‘label’ of ‘proceeds of crime’ to the former directors’ assets is not sufficient to disapply the usual principles and law of attribution.

How did public policy and the policy underpinning the recovery of the proceeds of crime factor into the decision making?

The CPS argued that public policy and the need not to the frustrate the proper operation of the POCA 2002 confiscation regime stood in the way of allowing Aquila to succeed over the interests of the CPS—what Aquila was doing was seeking to gain a benefit from the fraud of its directors, and that should not be allowed.

Mr Justice Mann rejected the CPS’s arguments and noted that the rules of attribution and ‘breach of duty exception’ are also based on policy considerations. He added these should not be set aside or adjusted because a more generalised public policy does not like the outcome they produce in a particular case, stating ‘the rights of the CPS under the existing confiscation order [against the fraudsters] are personal rights which do not of themselves trump the proprietary rights of [the company]’.

The judge held that POCA 2002 does not operate through the medium of public policy—it operates through its provisions, and it must be under those specific provisions through which proceedings would need to be formulated as against the company.

Are there other routes or options for the CPS that might have been more successful?

In this case, the CPS had not pursued the company and sought to establish attribution in a criminal prosecution, but had only prosecuted the two individual directors, and therefore the confiscation orders were personal rights against the directors’ assets only. The CPS did, in support of its arguments before Mr Justice Mann, reference the powers under POCA 2002, s 240 (civil recovery of the proceeds of unlawful conduct) and asserted that it meant that the monies in the hands of the company could have been subject of confiscation. The court was clear, however, that if a claim is to be made under POCA 2002, it needs to be made properly under POCA 2002 proceedings in which the defences can be properly tested—not more broadly in public policy claims.

Under Part 5 of POCA 2002, civil recovery orders (CROs) and associated interim orders freezing property are available where it is established that the property in question was obtained by or in return for unlawful conduct. A CRO is an order in rem, and applies directly to the property rather than to an individual. In this way, it is different from the confiscation order obtained in this case, which was a personal right, operating in a similar way to a fine, and is dependent on a successful criminal prosecution.

It is not known whether or not the CPS tried, or now will try, an alternative route to secure the assets, and Mr Justice Mann noted that whether any other relief is appropriate in the circumstances is something which can be determined at consequential hearings.

If you would like to discuss this case, the Proceeds of Crime Act 2002 or this area more generally, please do not hesitate to contact Clare Reeve.

*A version of this expert insight was first published by Lexis PSL on 13 April 2018.

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