Directors of Vantis Tax Ltd obtained a secret profit of £4.55 million by misusing the company’s intellectual property in fraudulent tax schemes, in breach of fiduciary duty, and were convicted of cheating the public revenue. The Supreme Court held that the profit was held on constructive trust for the company, whose rights had passed to Aquila Advisory Ltd, and that this proprietary claim took priority over confiscation orders against the directors.
Two directors of Vantis Tax Ltd used the company’s intellectual property in schemes designed to generate inflated tax relief on gifts of shares to charity. Vantis stood to earn fees. Its directors also arranged secret payments for their own benefit.
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The directors obtained £4.55 million through a fictitious trust. Their use of a corporate opportunity and company property for personal gain breached duties they owed Vantis. They were convicted of cheating the public revenue.
Mr Perrin and Mr Faichney were convicted in 2012. Confiscation orders under the Proceeds of Crime Act 2002 followed. Mr Perrin’s benefit was assessed at £4.55 million, but the available amounts were £809,692 for him and £648,000 for Mr Faichney. VTL was not prosecuted. It entered administration and later liquidation. Its administrator assigned its claims to Aquila Advisory Ltd for the benefit of VTL’s creditors. Clients of VTL also asserted losses.
The claim and the courts below
Aquila relied on FHR European Ventures LLP v Mankarious. A benefit obtained by an agent in breach of fiduciary duty is held on constructive trust for the principal. Aquila therefore claimed that the £4.55 million, and assets derived from it, belonged in equity to VTL from receipt and that those rights had passed to Aquila. A confiscation order does not give the Crown Prosecution Service a proprietary interest in the defendant’s assets or priority over third-party rights.
Settlements left Aquila and the CPS as the only active parties before Mann J. He held that Aquila could assert the constructive trust in priority to the confiscation orders and granted a declaration that the £4.55 million was held on constructive trust for VTL, whose rights had been assigned to Aquila. Consistently with the parties’ agreement, the declaration required the CPS to instruct the enforcement receiver to transfer to Aquila the net proceeds of the assets listed in the confiscation orders. The Court of Appeal dismissed the CPS’s appeal. Patten LJ held that, following Bilta (UK) Ltd v Nazir, directors’ fraud cannot be attributed to the company so as to defeat the company’s claim for breach of fiduciary duty.
Attribution
Lord Stephens, with whom the other Justices agreed, rejected the argument that Bilta was distinguishable because VTL had suffered no loss and stood to earn fees. The duties in question are those owed by directors to their company. Their purpose requires the company to be treated as separate from its officers. Otherwise a director could defeat the duty by attributing his own wrong to the company. That reasoning applies to a claim to strip a secret profit as well as to a claim for loss, and whether or not the scheme also contemplated a gain for the company. An exception where the company was intended to profit, or did profit, would undermine the deterrent effect of fiduciary duties and create uncertainty.
The constructive trust did not depend on proving the crime of cheating the public revenue. Mann J found breaches consisting of taking a corporate opportunity and a form of misappropriation of the intellectual property, and there was no finding that the £4.55 million was generated only by the criminal offence. As an unsecured creditor under the confiscation orders, the CPS had no better defence than the directors themselves. Patel v Mirza did not displace Bilta. Attribution is decided first. If the directors’ dishonesty is not attributed to the company, the illegality defence does not arise. Requiring directors to account for unauthorised gains is not approbation and reprobation.
The Proceeds of Crime Act 2002 and the declaration
POCA is not intended to interfere with existing third-party property rights except through its own procedures, including in respect of tainted gifts. The CPS did not prosecute VTL, did not obtain a restraint order over its interest, and, because the £4.55 million had been taken into account in Mr Perrin’s confiscation order, could not use Part 5 civil recovery against the same property. Those procedures, properly invoked, can override property rights. Public-policy arguments drawn from the money-laundering provisions cannot be used instead to alter ownership under a constructive trust. It was unnecessary to decide whether later dealings with the beneficial interest would themselves be money-laundering offences.
Even if the grant of a declaration is discretionary, Mann J exercised any discretion properly. The constructive trust is institutional: it arises automatically on receipt of the unauthorised profit, so the directors never owned the profits in equity. The declaration recognised that position and matched the settlement agreements.
Verdict: The Court unanimously dismissed the CPS appeal. Vantis acquired a beneficial interest when the directors received the secret profits. Aquila, as assignee, could assert that interest against the confiscation orders. The High Court’s declaration and agreed arrangements for transferring the net proceeds stood.
Source: Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49
