I should like in this post to describe pithily the substance of the reef on which the prosecutor’s case came to grief in the case of CPS v Aquila  EWCA Civ 588, and to try to explain what the reef was made of. But pithiness deserts me – or, at least, I think boiling the case down to a maxim too quickly is likely to produce something indigestible. And in my defence, the case is part of an exercise in litigation that has involved, if I have the count right, a Crown Court trial, three trips to the Court of Appeal (Criminal Division), a Chancery Division trial and, now, most recently, a trip to the Court of Appeal (Civil Division). These were not pithy proceedings.
This most recent case contains the point, providing an important lesson on the limits of the effective enforcement of confiscation orders – another difficulty to be aware of along with those that crystallised in R v Boyle Transport (Northern Ireland) Ltd & ors  4 WLR 63;  EWCA Crim 19. But to get there, I think I am going to have resort to saying something about the facts of the prosecution, which is a pity, because they are not entirely straightforward. Let me lend me what follows a veneer of breeziness by the use of bullet points:
- At the heart of the prosecution was an attempt to take advantage of the then-in-force s. 587B of the Income and Corporation Taxes Act 1988 (now repealed) which permitted individuals to claim tax relief where they had donated shares to a charity.
- The starting point for quantifying the extent of the relief to be claimed was – unsurprisingly – the value of the shares.
- It follows that it would be, for the taxpayer, a remarkable windfall if they were to buy shares for threepence that suddenly became valued at a pound. For an investment of threepence, they would then obtain tax relief of 33 times as much.
- Such shares are thin on the ground, but two directors of a company providing tax planning services, Vantis Tax Limited (‘Vantis’), Messrs Faichney and Perrin, both of them former officers of HM Revenue and Customs, thought that they could provide them. This was what they did:
— A company – and later further companies – was formed. The first was called Clerkenwell Medical Research plc (‘Clerkenwell’) and its subscription price was threepence. Certain customers of Vantis’s tax planning services subscribed to these shares.
— Vantis – and not its directors – had the intellectual property in a piece of software by the name of Taxcracker which was apparently able to identify individuals who would benefit from the tax planning services Vantis offered.
— This did not stop the directors pretending that the intellectual property was theirs and pretending to transfer it to a trust known as the Richardson Trust – which does not appear to have existed.
— The Richardson Trust on top of (probably) pretending to exist now pretended also to transfer the IP in Taxcracker to Clerkenwell in consideration of £500,000 which was paid to Mr Perrin’s wife and later shared between Mr and Mrs Faichney and Mr and Mrs Perrin.
— Vantis then told its customers that when they transferred their shares in Clerkenwell to charity, the value to be entered on the transfer forms was £1 a share – that value being justified by the supposed acquisition of IP rights in the Taxcracker software which, of course, Clerkenwell didn’t really own. They belonged, as they always had done, to Vantis.
- Not content with this, the directors then created the illusion that the IP rights passed through three other specially-created companies each of which was likewise invested in by Vantis customers and whose shares likewise soared.
- In due course, the directors were charged with cheating the Revenue and convicted. Confiscation proceedings ensued and it was found that they had profited to the tune of £4.55M.
- Meanwhile Vantis went into liquidation and its property rights, including choses in action, were sold by the liquidator to Aquila Advisory Limited (‘Aquila’).
That brings us to the problem. The confiscation order was, of course, predicated on the bases both (i) that the directors had obtained £4.55M in connection with their criminal conduct (the money paid to them by the newly-created companies for the supposed purchase of the Taxcracker software) and (ii) that the available amount was not less than this – it was predicated on their having the funds to pay the orders, funds derived from the supposed selling of the software. But on any view, these monies represented a secret profit. The directors had used the rights of Vantis in the Taxcracker software to pretend that they held the rights themselves, and to pretend that – via the Richardson Trust – they were entitled to sell them to Clerkenwell. And secret profits of agents are held on constructive trust for the principal. It follows that, on the face of it, Vantis – or rather, now Aquila, which had acquired the rights in the litigation – was entitled to the £4.55M in the directors’ hands.
So when the directors brought proceedings for unfair dismissal against Vantis, a counter claim was made seeking a declaration that they held the monies on trust for Aquila, and that declaration was subsequently made: see judgment of Mann J in Faichney v Vantis Ltd  EWHC 565 (Ch). The issue in that case and on appeal was whether the confiscation order might somehow prevail over Aquila proprietary right such that the £4.55M could be paid to the CPS rather than Aquila. But the answer, both at first instance and on appeal, was that the directors held the property on constructive trust for Aquila:
- First, a confiscation order does not actually involve confiscating anything: it simply creates an obligation to pay a sum of money, an obligation to be enforced like a fine. It therefore does not create and cannot trump a proprietary right.
- Secondit was argued for the CPS that Aquila was barred from asserting its right by the principle of ex turpi causa because the company itself was involved in the offending. But Supreme Court authority stood squarely in the face of the argument: see Bilta (UK) Ltd v Nazir  UKSC 23.
The potential absurdity in the last argument is that if the company was barred from recovering the £4.55M from the directors by reason of ex turpi causa, that would mean that – absent the confiscation proceedings – the directors would have been able to defeat the company’s proprietary claim and keep the money. That surely cannot be right. Or to put essentially the same point a different way: because the confiscation order was a fine, an obligation on the directors to pay monies, rather than anything more, as against Aquila the CPS could have no greater right to the monies than the directors themselves.
What then could the CPS have done? Well the Court gives a potential answer at paragraph 25 of the judgment, and this is when the case of Boyle (supra) comes quickly back to mind:
‘The only remedy available to the CPS in a case like this would be to add the company to the indictment and then, if convicted, to seek a confiscation order directly against the company.’
The echo is of para 121 of Boyle where Davis LJ said this:
‘We can accept that in many cases where a company is mixed up in the criminality it may be unnecessary or unduly complicated to include the company as a defendant. It should not be overlooked, in fact, that in some cases of, for example, criminal conspiracy or fraud the company in question may be not so much the instrument of the illegality as the victim of it. In other cases, there will be no practical purpose in joining the company: for example, where it is hopelessly insolvent. In other cases again, the company will so clearly be within the concealment and/or evasion principle on the facts alleged by the prosecution (for example, a carousel fraud) that to name it on the indictment may be wholly unnecessary. But there may be other cases – “regulatory” offences, so called, may be one example: there will be others – where the prosecution may be well advised, with an eye to any eventual confiscation proceedings, to consider whether the limited company involved should be included on the indictment or summons at the outset.
Just to recall Boyle for a moment, the problematic it exposed was this:
- that monies accruing to the company are not, on the face of it, monies accruing to the directors and therefore not the directors’ benefit;
- that the company’s property was not, on the face of it, the directors’ property and therefore did not add, so far as the director was concerned, to the available amount and
- that the test for piercing the corporate veil – so as, from the prosecution perspective, to improve this position – was not a matter of a vague inquiry into the broad interests of justice, but something more demanding: the same principles applied in the criminal courts that applied elsewhere: see Prest v Petrodel  UKSC 34;  2 AC 415.
The further problematic exposed by Aquila is that:
- Where a director criminally misuses a company’s property to make a secret profit, that secret profit is not in equity the director’s but the company’s and no appeal to the ex turpi causa principle will permit the prosecution to recover those funds at the expense of the company’s proprietary interest.
That, I think, is the maxim I avoided rushing to at the beginning of this piece.
But the potential solution to both the Boyle problematic and the Aquila problematic – fraught with further difficulty though it may be – is the same: to charge the company as well as its directors. This is the challenge a fraud prosecutor now faces at the charge phase – should I charge the company as well with an eye on possible (and at that point long distant) confiscation proceedings? It is a decision to be made complex cases at an early stage when in reality confiscation may be the least pressing of the prosecutor’s worries (first, let’s get the conviction… is a natural enough sentiment). But Boyle and Aquila illustrate its importance.