UK Supreme Court reaffirms director fraud cannot be blamed on the company the company is the victim of

The recent Supreme Court decision in CPS vs. Aquila (2021)1 is a useful and welcome reminder of the law as to the extent to which the faults of directors, committed in violation of the duties of their directors, can be attributed to companies – in particular to companies which find themselves victims of fraudulent behavior by their directors. It also raises interesting points regarding corporate withholding of the proceeds of crime (albeit another’s crimes).

The directors of the company must comply with a series of obligations to the company, some of which are fiduciary in nature. If the director breaches such an obligation and in doing so acquires a so-called “secret benefit” at the expense of the company, the company will automatically benefit from a constructive trust on the profits in question. This means that the company has an enforceable property right over these secret profits. The property rights of the company will be opposable to third parties as well as to the directors themselves, and will have priority over any confiscation procedure involving the same assets, except by legal exemption.

The present case concerned two former directors of a company called Vantis Tax Limited (“Vantis”), who were found guilty of devising and implementing a fraudulent tax evasion scheme and, therefore, of committing the common law offense of cheating on government revenue and making unauthorized profit (or secret) over £ 4.5million. Crown (“CPS”), following his investigation of the case, obtained in Crown Court and aimed at enforcing confiscation orders, on the grounds that the money was the proceeds of crime. Significantly, in pursuing the case, the CPS did not attach the company to the indictment.

In subsequent civil proceedings, Vantis’ assignee, Aquila (to whom the company’s cause of action was assigned when the company went bankrupt), argued that in fact Vantis (and, under the assignment, Aquila) was the beneficial owner of the unauthorized profits made by the two directors, under a constructive trust, on the grounds that the directors had breached their fiduciary duties to the company.

The CPS, however, argued that the fraud of the two directors must be attributable to the company. On this basis, the right of ownership of the company on the product should be prohibited by the principle of illegality; in other words, Vantis could not invoke its own illegality (ie the illegality of directors attributed to the company) to claim the secret benefit. In addition, the CPS argued that the regime established under POCA should not allow a business to benefit from illegally generated profits.

Two important and relatively recent Supreme Court decisions were relevant; namely (i) FHR European Ventures LLP v Mankarious (2014)2, which is authoritative in asserting that any advantage acquired by an agent as a result of his mandate and in breach of his fiduciary duty is held for the principal by means of a constructive trust (which, in this case, would mean that the the company could sue for ownership over these products, which would take precedence over other claims, including forfeiture orders); and (ii) Bilta (UK) Limited against Nazir (2015)3, by what authority, when the company has been the victim of wrongdoing by its leaders, “the wrongdoing or the knowledge of the directors cannot be attributed to the company as a defense to an action brought against the directors [by the company] for the damage suffered by the company as a result of the wrongdoing“(emphasis added)4.

The Bilta The ruling was particularly relevant to the CPS ‘argument that the directors’ criminal conduct should be attributable to the company (which the CPS said should be prohibited from recovering the secret profit). Both at first instance and at the Court of Appeal, the authority of Bilta proved to be an insurmountable obstacle to the CPS thesis. Before the Supreme Court, however, the PSC held that the facts of this case were distinct from those of Bilta; here the company sought to profit from the criminal conduct of directors. The CPS also argued that the purpose of the POCA regime was to prevent some thirds to benefit from criminal behavior; it would be compromised if the company were allowed to recover the secret profit.

The Supreme Court disagreed with the CPS. The company had not acted illegally, because when a company sues its directors for breach of a fiduciary duty, the fraud of those directors could not be attributed to the company. The Supreme Court was also not persuaded by the CPS ‘attempt to distinguish the facts of this case (trying to withhold a profit made by the directors) from those of Bilta (recovery of losses caused by directors’ default) – the Supreme Court clarified that it did not matter whether the claim presented by the company concerned losses suffered by the company, or gains realized by the directors, or whether the fraudulent scheme meant that both the directors and the company would benefit. Finally, the question of illegality would arise only if the conduct in question was attributable to the company – which was not the case in the present case. As stated by the Supreme Court, “[a]the attribution being refused, the defense of illegality fails. “

The Supreme Court also disputed that allowing Aquila to succeed would be contrary to the POCA regime; if the CPS had wanted to ensure that the company did not profit from the criminal behavior of its managers, it could have taken various measures to achieve this, for example attaching the company to the indictment.

The Aquilas The ruling does not change the law in this area, but it does provide a welcome reaffirmation and clarification of the position of companies facing the obligation to prosecute their (former) directors or officers for fraudulent conduct, and the ability of the company to establish – provided that there has been a breach of fiduciary obligations – an exclusive remedy with regard to the secret profits made by the directors, which will have priority over the other claims of unsecured creditors. This position may well be different in the context of claims from customers who have also been victims of the fraud, but the CPS, or other prosecution agencies, will encounter significant difficulties in accessing the benefits unless they claim. specific statutory tools.

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