The Crown Prosecution Service v Aquila Advisory Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Justice Patten,Lord Justice Hamblen,Lord Justice Holroyde |
| Judgment Date | 09 April 2019 |
| Neutral Citation | [2019] EWCA Civ 588 |
| Docket Number | Case No: A3/2018/0827 |
| Court | Court of Appeal (Civil Division) |
| Date | 09 April 2019 |
[2019] EWCA Civ 588
IN THE COURT OF APPEAL (CIVIL DIVISION)
ON APPEAL FROM THE HIGH COURT OF JUSTICE
CHANCERY DIVISION
MANN J
HC-2016-001812
Royal Courts of Justice
Strand, London, WC2A 2LL
Lord Justice Patten
Lord Justice Hamblen
and
Lord Justice Holroyde
Case No: A3/2018/0827
Julian Christopher QC and Ben Douglas-Jones QC (instructed by The National Proceeds of Crime Unit) for the CPS
Jonathan Brettler and Sam Neaman (instructed by Beers LLP) for the Respondent
Hearing date: 13 March 2019
Approved Judgment
Put at its simplest, the issue on this appeal is whether the Crown Prosecution Service (“CPS”) has a claim under a confiscation order which it can enforce against the identified proceeds of a fraud in priority to the proprietary claim of a company whose directors were the chief engineers of the fraud. The company in question, Vantis Tax Limited (“VTL”), is now in liquidation and faces substantial claims by investors who have also suffered loss as a result of the fraud. But the CPS contends that the rights of VTL to recover the proceeds of the fraud from its directors on the basis of a claim for breach of fiduciary duty should not be allowed to defeat the effect of the confiscation order. This can be achieved, they say, by attributing the fraud of the directors to VTL so as to debar recovery by the company under the ex turpi causa rule. For this argument to succeed the CPS accepts that the facts of this case must be treated as distinguishable from those considered by the Supreme Court in Bilta (UK) Ltd v Nazir [2015] UKSC 23 (“ Bilta”).
After a trial in the Chancery Division, Mann J decided that the respondent to this appeal, Aquila Advisory Limited (“Aquila”), which has acquired the choses in action and property rights of VTL from its liquidators, was entitled to assert a proprietary claim to the funds in dispute in priority to the claim of the CPS: see [2018] EWHC 565 (Ch). The CPS now appeals against the judge's order with the permission of Henderson LJ on the ground that he should have attributed the actions of the directors to VTL and therefore treated its claim to recover the proceeds of the crime as barred by the principles of illegality.
The judge made detailed findings of fact about the fraud, none of which is challenged on this appeal, and I can therefore summarise the facts and the procedural history relatively shortly.
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 Mr Faichney (later assisted by Mr 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 Mr Faichney and Mr Perrin realised that it had potentially wider applications and a potential value which could be used to facilitate a particular tax avoidance scheme promoted by VTL.
The scheme in question sought to take advantage of the provisions of s.587B 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 Mr Faichney and Mr Perrin belonged to VTL which had funded the project. But, notwithstanding this, Mr Faichney and Mr 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.
But of course the fraud extended beyond VTL. 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 credits which could not be justified.
Mr Faichney and Mr 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 held that each of the schemes involved valuations of the shares which were unjustified and dishonest.
In June 2006 HMRC raided the premises of VTL and in 2009 Mr Faichney and Mr 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 Mr Faichney and Mr Perrin brought a claim against VTL and its associated companies in the Vantis group for unpaid salary and wrongful dismissal. 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 s.175 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 pointed out, is that although Mr Faichney and Mr 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 But 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:
“40. However, the facts of this case are a little unusual. In what one might call the more normal case, a director commits the wrong by entering into a transaction which, in itself, is a genuine transaction. In the present case the directors did not enter into something which could be seen to be a genuine transaction when they procured the first purported assignment by the trust. The trust had nothing to assign, and assigned nothing. CMR, and the succeeding companies, actually acquired no legal rights at all, albeit that they de facto had...
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