The Crown Prosecution Service v Aquila Advisory Ltd
| Jurisdiction | England & Wales |
| Judge | Lord Sales,Lord Stephens,Lord Burrows,Lady Rose,Lord Lloyd-Jones |
| Judgment Date | 03 November 2021 |
| Neutral Citation | [2021] UKSC 49 |
| Court | Supreme Court |
[2021] UKSC 49
Lord Lloyd-Jones
Lord Sales
Lord Burrows
Lord Stephens
Lady Rose
Appellant
Andrew Sutcliffe QC
Julian Christopher QC
Anne Jeavons
(Instructed by CPS National Proceeds of Crime Unit)
Respondent
Stuart Ritchie QC
Martin Evans QC
Sam Neaman
(Instructed by Kingsley Napley LLP)
Heard on 27 April 2021
( with whom Lord Lloyd-Jones, Lord Sales, Lord Burrows and Lady Rose agree)
Mr Robert Faichney and Mr David Perrin exploited their position as directors of Vantis Tax Ltd (“VTL”), in breach of fiduciary duty, to make a secret profit of £4.55m. Aquila Advisory Ltd (“Aquila”), which has acquired the proprietary rights (including choses in action) of VTL, relies, in particular, on the judgment of this court in FHR European Ventures LLP v Mankarious [2014] UKSC 45; [2015] AC 250 (“ FHR”), to assert that Mr Faichney and Mr Perrin are to be treated as having acquired the benefit of that secret profit on behalf of their principal, VTL. The result, Aquila argues, is that the secret profit was beneficially owned by VTL under a constructive trust, the beneficial interest in which has now passed to Aquila.
The amount of £4.55m was also the benefit obtained by Mr Faichney and Mr Perrin from the crime of cheating the public revenue by dishonestly facilitating and inducing others to submit false claims for tax relief. Those crimes were committed by Mr Faichney and Mr Perrin in relation to four tax avoidance schemes. Following their criminal convictions, the Crown Prosecution Service (the “CPS”) sought confiscation orders under the Proceeds of Crime Act 2002 (“ POCA”) against Mr Faichney and Mr Perrin. The judge in the criminal trial found that Mr Perrin's benefit from the offence was £4.55m but that the available amount was £809,692. An order was made requiring Mr Perrin to pay that amount. Subsequently, an order was made requiring Mr Faichney to pay £648,000, which was the available amount in his case. However, Aquila asserts that as it has a proprietary claim to the secret profit of £4.55m (from which secret profit all the property assets of Mr Faichney and Mr Perrin were obtained) it has priority over the confiscation orders, as those orders do not give the CPS any form of proprietary interest in the assets of either Mr Faichney or Mr Perrin. If that is correct, then Aquila will be entitled to all of Mr Faichney's and Mr Perrin's assets leaving nothing to satisfy the confiscation orders.
There were a number of parties to these civil proceedings but by the date of the trial before Mann J and by virtue of two settlement agreements, the only parties participating in the trial were Aquila and the CPS. The issue between them, as defined by the judge (at para 1) was, in essence, whether the proprietary rights to which Aquila would otherwise be entitled against Mr Faichney and Mr Perrin could be asserted “in the face of” the confiscation orders obtained by the CPS against Mr Perrin and Mr Faichney under POCA, which were obtained by the CPS after the convictions of Mr Faichney and Mr Perrin. Mann J decided that Aquila, which had acquired the proprietary rights of VTL, 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); [2018] Lloyd's Rep FC 345. The judge granted a declaration to the effect that the moneys totalling £4.55m were held by Mr Faichney and Mr Perrin (in fact, by the latter's estate, as Mr Perrin had died in October 2017) and their wives, (who had been joined as defendants, see para 42 below), from the time of their receipt on constructive trust for VTL, whose rights had been assigned to Aquila. The declaration also provided, in accordance with an agreement between the parties (see para 44(c) below) that the CPS was obliged to instruct the receiver to transfer to Aquila the net proceeds realised from all the assets listed in the confiscation orders.
The CPS appealed to the Court of Appeal on the ground that the judge should have attributed the actions of the directors to VTL and therefore treated VTL's claim to recover the proceeds of the crime as barred by the principles of illegality. Following a hearing on 13 March 2019, the Court of Appeal (Patten, Hamblen and Holroyde LJJ) handed down judgment on 9 April 2019; see [2019] EWCA Civ 588. Patten LJ delivered the lead judgment, with which the other members of the court agreed. He recast the issue (at para 1), at its simplest, as being whether the CPS had a claim under the confiscation orders which it could enforce in priority to the proprietary claim of Aquila. Patten LJ recorded (at para 13) that the CPS accepted that what the directors did amounted to a breach of the fiduciary duty which they owed to VTL and that the consequence of that breach of duty was that VTL had a proprietary claim to the £4.55m based on a constructive trust in accordance with the decision in FHR. He also recorded (at para 14) that the CPS accepted that the confiscation orders under POCA did not give it any form of proprietary interest in the available assets of either Mr Faichney or Mr Perrin or any priority over other claims and interests in those assets, so that (as explained at para 20), unless the constructive trust is rendered unenforceable by attributing to VTL the fraud of its directors and thereby neutralising VTL's assertion of its proprietary claim by the application of the defence of illegality, the CPS has no claim to the £4.55m, which belongs in equity to Aquila.
In relation to the submission that the fraud of the directors should be attributed to VTL, Patten LJ, relying on the judgment of this court in Bilta (UK) Ltd v Nazir [2015] UKSC 23; [2016] AC 1 (“ Bilta”), held (at para 24) 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.” Furthermore, Patten LJ held (at para 25) that it was not open to the Court of Appeal to fashion some exception to the decision in Bilta to accommodate the facts of this case. His overall conclusion (at para 28) was that the Court of Appeal could not “attribute the actions of Mr Faichney and Mr Perrin to VTL so as to defeat the company's equitable title to the £4.55m” so that the appeal was dismissed.
On 3 December 2019, a panel of the Supreme Court (Lord Kerr, Lord Hodge and Lady Arden) granted the CPS permission to appeal.
In broad outline the CPS argues that (a) the fraud of its former directors should be attributed to VTL in circumstances where, it is suggested, VTL has suffered no loss but rather stood to profit from the illegal acts of its former directors by obtaining a proprietary interest in the proceeds of the crime which those directors committed; and (b) the regime established by POCA should not permit VTL to benefit from the profits generated by the criminal activities of its former directors.
The parties to the appeal are the CPS as appellant and Aquila as respondent.
VTL, which was incorporated in Jersey on 22 December 2003, was intended to offer consultancy, and in particular tax planning, services to external clients. It was a part of the Vantis Group of companies which offered accountancy services.
Mr Faichney and Mr Perrin were recruited by the Vantis Group in 2003. They were both former Inland Revenue Officers. They became statutory directors of VTL upon its incorporation.
Mr Faichney was appointed Managing Director of VTL in February 2004, and Mr Perrin Deputy Managing Director in May 2004. They both had minority shareholdings in VTL. Mr Perrin was the director with principal day to day responsibility for the initial tax avoidance scheme and for the three further schemes involved in this appeal.
In June 2004 Mr Faichney submitted a business plan to VTL for a software product, called “Taxcracker”. Its purpose was to enable financial advisers to identify high net worth individuals who might benefit from tax planning services offered by the Vantis Group. It operated on the basis of an (at that time) sophisticated question and answer structure.
In August 2004 VTL commissioned a software writing company called NETbuilder Ltd to write and develop the code for the product. The underlying concept became known as “Qaria”. All original intellectual property rights in the software technology (“the IP”) vested in and continued, at all material times, to reside with VTL.
The provisions of section 587B of the Income and Corporation Taxes Act 1988 allowed an individual taxpayer to claim relief in respect of the value of shares in a trading company on a recognised stock exchange which were given to charity. If an individual taxpayer purchased shares for a small consideration and those shares, having substantially increased in value, were subsequently given to charity, the taxpayer could obtain tax relief in excess of the amount which the taxpayer had expended on the purchase of the shares. The obtaining of tax relief in such circumstances was legitimate provided, of course, that the increase in the value of the shares was genuine.
Mr Faichney and Mr Perrin devised and promoted (through VTL) a scheme which utilised the provisions of section 587B. The scheme involved the formation of a company (“the tax avoidance company”) in which taxpayer subscribers (who were clients of VTL) could subscribe for shares at a small price per share. The company would then purportedly acquire assets which would increase its share price, at which point the shares would be given to charity at a higher valuation than their subscription price. The value of the donation would be...
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