The Supreme Court's recent decision in CPS v Aquila (2021)1 provides a useful and welcome reminder of the law regarding the extent to which the wrongful acts of directors, committed in breach of their directors' duties, can be attributed to companies – particularly for those companies who find themselves the victim of fraudulent conduct by their directors. It also raises interesting points around companies' retention of proceeds of crime (albeit the crimes of another).
Company directors must comply with a range of duties owed to the company, some of which are fiduciary in nature. If the director breaches such a duty, and in so doing acquires a so-called "secret profit" at the company's expense, the company will benefit from an automatic constructive trust over the profits in question. This means that the company has an enforceable proprietary interest in those secret profits. The company's proprietary claim will be enforceable against third parties as well as the directors themselves, and will take priority over any confiscation proceedings involving the same assets, unless overridden by statute.
The present case involved two former directors of a company called Vantis Tax Limited ("Vantis"), who were convicted of designing and operating a fraudulent tax avoidance scheme and, thereby, committing the indictable common law offence of Cheating the Public Revenue, and making an unauthorised (or secret) profit of in excess of £4.5 million. The Crown Prosecution Service ("CPS"), following its investigation into the matter, obtained in the Crown Court and sought to enforce confiscation orders, on the basis that the money constituted proceeds of crime. Significantly, in pursuing the case, the CPS did not join the company to the indictment.
In subsequent civil proceedings, Vantis' assignee, Aquila (to which the company's cause of action was assigned when the company entered insolvency), argued that in fact Vantis (and, by virtue of the assignment, therefore Aquila) was the beneficial owner of the unauthorised profits made by the two directors, under a constructive trust, on the basis that the directors had breached their fiduciary duties to the company.
The CPS argued, however, that the fraud of the two directors should be attributable to the company. On that basis, the company's proprietary claim in respect of the proceeds should be barred by the principle of illegality; in other words, Vantis could not rely on its own illegality (that is, the illegality of the directors as attributed to the company) in claiming the secret profit. Further, the CPS argued that the regime established under POCA should not allow a company to benefit from illegally-generated profits.
Two significant, and relatively recent, Supreme Court decisions were relevant; namely (i) FHR European Ventures LLP v Mankarious (2014)2, which is authority for the proposition that any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held for the principal by way of a constructive trust (which, in the present case, would mean that the company could pursue a proprietary claim for those proceeds, which would have priority over other claims, including confiscation orders); and (ii) Bilta (UK) Limited v Nazir (2015)3, according to which authority, where the company has been the victim of wrongdoing by its directors, "the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors [by the company] for the loss suffered by the company as a result of the wrongdoing" (emphasis added)4.
The Bilta decision was particularly relevant to the CPS's argument that directors' criminal conduct should be attributable to the company (which should, said the CPS, thereby be prohibited from recovering the secret profit). Both at first instance, and in the Court of Appeal, the authority in Bilta was found to constitute an insurmountable obstacle to the CPS's case. Before the Supreme Court, however, the CPS argued that the facts of the present case were distinct from those of Bilta; here, the company was seeking to profit from the directors' criminal conduct. The CPS also argued that the aim of the regime in POCA was to prevent third parties from benefiting from criminal conduct; this would be undermined if the company was allowed to recover the secret profit.
The Supreme Court disagreed with the CPS. The company had not acted illegally, because when a company pursues its directors for breach of fiduciary duty, the fraud of those directors could not be attributed to the company. Nor was the Supreme Court persuaded by the CPS's attempt to distinguish the facts of the present case (trying to retain a profit made by the directors) from those of Bilta (recovering losses caused by directors' breaches) – the Supreme Court clarified that it made no difference whether the claim brought by the company is for loss suffered by the company, or for gains made by the directors, or if the fraudulent scheme meant that both the directors and the company would benefit. Finally, the question of illegality only arose if the conduct in question was attributable to the company – which it was not here. As the Supreme Court stated, "[a]ttribution being denied, the illegality defence fails."
The Supreme Court also disagreed that allowing Aquila to succeed would be inimical to the POCA regime; if the CPS had wanted to ensure that the company did not profit from the criminal conduct of its directors, it could have taken various steps to do so, for example joining the company to the indictment.
The Aquila decision does not alter the law in this area, but it does provide a welcome reaffirmation, and clarification, of the position of companies faced with having to pursue their (former) directors or officers for fraudulent conduct, and the ability of the company to establish – provided there has been a breach of fiduciary duties – a proprietary remedy in respect of secret profits made by the directors, which will have priority over other claims by unsecured creditors. This position may well be different in the context of claims by the customers who were also victims of the fraud, but the CPS, or other prosecutorial agencies, will face significant difficulties in accessing the profits unless they invoke specific statutory tools.