Crown Prosecution Service vs. Aquila Advisory Ltd. - (03 Nov 2021)

Constructive trust rests in civil law on a claim for breach of fiduciary duty and does not rest on any aspect of criminal law

Company

Mr. Robert Faichney and Mr. David Perrin were directors of Vantis Tax Ltd ("VTL"). During this time, Mr. Faichney and Mr. Perrin ("the directors") exploited their position in breach of their fiduciary duty to make a secret profit of £4.55m. The amount of £4.55m was also the benefit obtained by the directors from their crime of cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. VTL went into administration. Aquila Advisory Ltd ("Aquila") was assigned VTL’s proprietary rights.

Following the directors’ criminal convictions, the Crown Prosecution Service ("CPS") sought confiscation orders under the Proceeds of Crime Act 2002 ("POCA") against them. Mr. Perrin was ordered to pay £809,692 and Mr. Faichney was ordered to pay £648,000 to the CPS. The trial judge granted a declaration that an amount of £4.55m was held on constructive trust in favour of VTL, whose rights had since been assigned to Aquila. Further, and in accordance with an agreement between the parties, the trial judge declared that the CPS was obliged to give instructions for the transfer of the net proceeds realised from all the assets listed in the confiscation orders to Aquila.

The CPS appealed to the Court of Appeal. The CPS argued that, the directors’ actions should have been attributed to VTL, and thus, VTL should have been barred from recovering any proceeds of crime because of the principle of illegality. The principle of illegality is that, a person should not be permitted to benefit from his or her illegal act. The Court of Appeal dismissed the appeal.

The CPS argued that the Court of Appeal was wrong to conclude that in the case of a proprietary claim by a company against its directors to recover proceeds of crime received in breach of fiduciary duty, the illegality of the directors is not attributed to the company, notwithstanding that the company itself suffered no loss and stood to profit from the illegal acts.

The Court dismissed this argument and found that the reasoning in Bilta (UK) Ltd vs. Nazir [2015] applies to this case, in that, the unlawful acts or dishonest state of mind of a director cannot be attributed to the company to establish an illegality defence defeating the company’s claim under a constructive trust.

It forms no necessary part of VTL’s claim against its former directors for breach of their fiduciary duties that their conduct also amounted to the criminal offence of cheating the public revenue. That is, the alleged constructive trust rests in civil law on a claim for breach of fiduciary duty and does not rest on any aspect of criminal law. The overall scheme of POCA is not to interfere with property rights. Furthermore, although there are specific provisions of POCA which allow the State to override property rights, these provisions were not engaged by the CPS in present case. As a result, the Court found the decision of the Court of Appeal was not inconsistent with POCA.

The constructive trust (and thus VTL’s beneficial ownership of the secret profits) arose automatically, when the directors breached their fiduciary duties. At no stage, did the directors own the secret profits in equity. The Court found that the trial judge’s order recognised this reality, and exercised proper discretion. Appeal dismissed.

Tags : CHEATING PUBLIC REVENUE SECRET PROFITS