Supreme Court decision handed down in landmark director duty case
By Jane Fowler
Jane Fowler reviews the Supreme Court POCA precedent in CPS v Aquila Advisory Ltd  UKSC 49
In a recent landmark case, Crown Prosecution Service v Aquila Advisory Ltd  UKSC 49, the Supreme Court rejected the CPS’s argument that the company was debarred from claiming the assets on the grounds that this involved seeking to profit from the proceeds of crime. This article considers the case and explains the facts behind, as well as the reason for the outcome.
Having not been successful in the High Court and Court of Appeal, the CPS raised two key arguments in the grounds of appeal before the Supreme Court:
1. VTL had not suffered a loss and was instead seeking to recover (and benefit from) the proceeds of its directors’ crime. As the directors were the controlling minds of VTL the conduct and knowledge of the directors should be attributed to the company preventing them from recovering the proceeds. The CPS argued that this would be consistent with policy considerations within Patel v Mirza  UKSC 42 and was not precluded by Bilta  UKSC 23.
2. Whether recognition of a constructive trust in favour of VTL/Aquila would be inconsistent with the regime under POCA which was intended to permit innocent third-party purchasers who have paid market value for criminal property to keep it, and for 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 criminal activity (which the CPS contended would be the case if the trust was recognised).
Aquila argued that the case fell within the principles established in Bilta, that these principles were unaffected by Patel v Mirza, that POCA was an independent code which (except as expressly provided for) did not affect third party property rights and that the result contended for by the CPS could not stand with the decision in FHR European Ventures LLP v Makarious  AC 250, to the effect that directors’ unauthorised profits, including bribes or secret commissions were held by the director on constructive trust for the benefit of the company.
The appeal arose after two directors of Vantis Tax Ltd (VTL) were found guilty of having exploited their position in breach of their fiduciary duties to VTL to make a secret profit of £4.55m, following the quasi-misappropriation of intellectual property rights.
VTL was incorporated on 22 December 2003. In February 2004 Mr Robert Faichney became managing director and in May 2004 Mr David Perrin was appointed deputy managing director. Both men had previously worked for HMRC. VTL was formed to offer tax planning services to clients. In June 2004, Faichney (later assisted by Perrin) introduced a business plan as part of which VTL would develop and produce a piece of software called Taxcracker. Its primary purpose was to allow financial advisers to identify high net worth individuals who might benefit from the tax planning services offered by VTL, but, in time, Faichney and Perrin realised that it had potentially wider applications – and a potential value which could be used to facilitate a suspected tax avoidance scheme.
The scheme in question sought to take advantage of the provisions of s587B of the Income and Corporation Taxes Act 1988 which allow an individual taxpayer to claim relief in respect of the value of shares in a quoted trading company which are given to charity. The scheme set up by VTL to exploit this relief involved the formation of a company in which VTL’s taxpayer clients would subscribe for shares at a relatively nominal price. The company would then acquire assets which would increase its share price and the shares would be given to charity at a much higher valuation than their subscription price. The taxpayer could then claim relief against tax based on the higher valuation.
The first such scheme involved the formation of a company called Clerkenwell Medical Research PLC (“CMR”). The subscription price was 3p per share, but at the time of the transfer to charity the shares were valued at £1. The increase in value was attributed to the acquisition of the Taxcracker software developed under the name of the Qaria concept. Under the terms of their contracts of employment any intellectual property (“IP”) rights attaching to the development of the Qaria concept by Faichney and Perrin belonged to VTL, which had funded the project. But, notwithstanding this, Faichney and Perrin arranged for a purported assignment of the IP rights to CMR, using an entity described as the Richardson Trust as the purported assignor in the relevant documentation. The judge found that the Richardson Trust probably does not exist, and was used as a means of transferring the profits from the tax schemes to Mr and Mrs Faichney and Mr and Mrs Perrin. More to the point, the Richardson Trust never had title to the IP rights.
CMR was incorporated in Jersey in September 2004. A private placing memorandum invited subscriptions for its 0.1p ordinary shares at 3p each. The shares were to be listed on the Channel Islands Stock Exchange. The purpose of the company was said to be the acquisition and exploitation of the Qaria concept software. By March 2005 some £1.24m had been raised from subscriptions for shares. In consideration of the purported assignment of the IP rights to CMR, the company paid £500,000 to Mrs Perrin – which was shared between her, her husband and Mr and Mrs Faichney. The assignment, as the judge found, was misleading on at least three levels. The Richardson Trust did not own the IP rights; Mr Faichney and Mr Perrin knew that they had no right to assign the rights which belonged to VTL or to receive the £500,000; and Mr Perrin and Mr Faichney were acting in breach of fiduciary duty to VTL in seeking to profit from the use of its property.
In 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 per share. This valuation was, the judge found, false and dishonest, because CMR did not have the IP rights – and there was nothing to justify that share price. But, in ignorance of the true facts, the taxpayers transferred the shares at this value, made successful claims for tax relief on that basis – and thereby caused HMRC to give them tax credit which could not be justified.
Faichney and Perrin then replicated the CMR scheme on three further occasions, using companies called Modia plc, Your Health International plc, and Signet Health International plc. In August 2005, CMR purported to assign the software rights to Modia in return for a payment of £2m. The rights were then purportedly assigned on successively to the other two companies, to provide the documentation used to justify the enhanced valuation of the shares in each case. A total of £4.55m was transferred to the Perrins and Faichneys via the Richardson Trust. The judge in the first instance held that each of the schemes involved valuations of the shares which were unjustified and dishonest.
In 2009, Faichney and Perrin were charged with offences of cheating the Revenue by dishonestly facilitating and inducing others to submit claims for tax relief. They were convicted and orders were made under s.6 of the Proceeds of Crime Act 2002 (“POCA”) for the confiscation of assets representing the £4.55m which the Crown Court judge determined represented the proceeds of their crime. 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) and the individuals concerned have been left with claims against VTL.
In January 2010 Faichney and Perrin brought a claim against VTL and its associated companies in the Vantis group for unpaid salary and wrongful dismissal. Following an investigation by the author, assisted by Capcon and Stroz Freidberg, 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 s175 of the Companies Act 2006, when they used VTL's Qaria IP rights as the basis of the tax schemes described earlier. The £4.55m in profits derived from the four schemes was alleged to be held on constructive trust for VTL (and now for Aquila as assignee) as representing the proceeds of the unlawful use of the company’s property in a scheme which was also of itself a breach of the fiduciary duties owed by directors to VTL and other companies in the Vantis group.
A perhaps unusual factor of the case, as the judge in the first instance pointed out, is that, although Faichney and Perrin undoubtedly sought to exploit VTL’s Qaria software rights as part of the four dishonest tax schemes which they devised, the IP rights were in fact never transferred out of the company. The assignments, like everything else, were a fiction. However, the judge held that this made no difference for the purposes of the company’s claim that the directors had made an unauthorised secret profit by exploiting the opportunity which their position in the company and VTL’s ownership of the Qaria concept gave to them:
The decision of the Supreme Court
The Supreme Court dismissed the appeal on all grounds. Lord Stephens (with whom Lords Lloyd-Jones, Sales, Burrows and Lady Rose agreed) held that:
1. Although the law on illegality had been restated since Bilta in Patel v Mirza the reasoning in Bilta (built on the policy of avoiding illegality undermining the purpose of the legal rule in question), was entirely consistent with Patel v Mirza and had not been undermined by it . The principles of illegality in Patel v Mirza did not arise .
2. The approach to attribution established in Bilta applied equally to claims by a company against its director to establish and enforce a constructive trust in respect of unauthorised profits made in breach of fiduciary duty. The knowledge or acts of a director were not to be attributed to the company in the context of claims by companies against their directors for breach of duty. There was no relevant distinction between claims by the company for loss and claims to strip profit. Any such distinction would be unprincipled and would introduce uncertainty into the law [63-80].
3. Such a result was not inconsistent with operation of the regime under POCA. The Supreme Court approved the approach of Sales LJ in the Court of Appeal in R (Best) v Chief Land Registrar  EWCA Civ 17 to the effect that “POCA is a separate regime operating according to its own distinct procedures and safeguards and is not material to the issues before us”. -.
The decision is extremely welcome news to victims of fraud who wish to pursue civil claims in the English courts, in particular companies who have been defrauded by their directors. It confirms that the Proceeds of Crime Act 2002 (POCA) and the confiscation regime do not generally interfere with the enforcement of third party property rights under the civil law.
Jane Fowler is Director of Aquila Advisory, boutique forensic accounting firm specialising in criminal investigations, civil and commercial disputes: aquilaadvisory.co.uk