I wanted to draw to your attention a very interesting (and, some would say, surprising) decision from the Supreme Court on Wednesday (3rd November).
In the case of Crown Prosecution Service -v- Aquila Advisory Ltd, the Supreme Court decided that a company’s claim against its former directors for breach of their fiduciary duty took precedence over a Confiscation Order obtained by the Crown. Whilst the name of the Appellant tells you that this is and English case, the decision is of relevance throughout the UK. What adds an additional level of surprise to the decision reached is the fact that the conduct which gave rise to the breach of fiduciary duties by the former directors did not cause any loss to the company (it was, in effect, a receipt of “secret profits” – sums that should otherwise be paid to the company) but it did, of course (self-evidently, otherwise no Confiscation Order would have been made) cause loss to the Crown, in this case involving tax fraud.
The directors were prosecuted for and convicted of, amongst other things, assisting third parties to make false claims for tax relief, which they carried out as directors of and for the benefit of (by way of fees paid) Vantis. They created schemes whereby share values of companies were fraudulently increased by these companies purportedly acquiring assets. These assets were allegedly sold by the former directors (or their spouses) to the companies concerned and they received payments in respect of the alleged sale of the assets totalling £4.55 million. In fact, there was only one asset (purportedly sold four times) and it was owned (but never sold) by Vantis Tax Ltd (“Vantis”), the company of which they were the directors.
The Crown, after the successful prosecution, obtained Confiscation Orders against each of the directors, one in the amount of £809,692 and one in the amount of £648,000 (roughly £1.5 million – the only sums available to each of the former directors).
The Respondents in this case, Aquila Advisory Ltd (“Aquila”) purchased the claims of Vantis against its former directors for their breach of their fiduciary duty. As that claim was for breach of constructive trust under English law, Aquila argued that it took priority over any claim against the former directors by the Crown in respect of the Confiscation Orders since the assets subject to the Confiscation Order had already been subjected to the constructive trust. The argument was that as soon as the former directors received the secret profits, they held them on trust with a duty to account for them to Vantis and so they were never personal assets against which a Confiscation Order could attach.
The Crown’s response was that as the former directors were pursuing a criminal enterprise through Vantis (selling fraudulent tax relief claims to third parties), the claim of Vantis (and, thus, the claim acquired by Acquila) was tainted by illegality and so must fail. In addition, if that was wrong, the Confiscation Orders should take priority over claim made by Acquila as, otherwise, this would allow a company to benefit from the profits generated by the criminal activities of its former directors.
On the face of it, therefore, the former directors had acted on behalf of Vantis in selling shares in companies to third parties to implement tax benefit schemes; had then sold assets which they never owned to the companies concerned and received payment for the assets; and Vantis had never lost the ownership of the asset and so had suffered no loss but had received fees from the third parties. You can see why the Crown took this appeal to the Supreme Court.
You may recall the recent (actually, 2015) decision of the Supreme Court in the Bilta (UK) Ltd case which decided that “a director sued by a company for loss caused by a breach of fiduciary duty cannot rely on the principles of attribution to defeat the claim even if the scheme involved the company in the fraud or illegality”. The Crown argued that this analysis did not apply to the present case because Vantis could not “have their cake and eat it” – benefit from the illegal acts and yet avoid the responsibility of the illegal acts. In addition, the Crown pointed out that the fraudulent scheme was also to the benefit of Vantis in the fees that the third parties paid to it.
The decision of the Supreme Court was clearly based on the fact that a director and their conduct cannot be identified with the company of which they are the director – they are two separate legal entities. There was no concession to the fact that the claim in this case was not one of the company against its former directors but competing claims by the company and the Crown against the former directors. What the Supreme Court did indicate, however, was that, in cases such as this, the Crown should also seek to prosecute the company concerned and, upon conviction, seek a Confiscation Order.