England and Wales Court of Appeal (Criminal Division) Decisions

IN THE SUPREME COURT OF JUDICATURE
COURT OF APPEAL (CRIMINAL DIVISION)
ON APPEAL FROM THE CROWN COURT AT SOUTHWARK
HIS HONOUR JUDGE FINGRET

		Royal Courts of Justice Strand, London, WC2A 2LL
		1 November 2005

Lord Justice Pill:

1. On the 25 January 2001 at the Crown Court at Southwark before His Honour Judge Fingret and a jury Michael Richard Stannard was convicted, and on 9 February 2001 was sentenced, to two offences of cheating the public revenue (Counts 3 and 4). He was sentenced to four and a half years imprisonment concurrent on each count and was disqualified under Section 2 of the Company Directors Disqualification Act 1986 for nine years. On 17 October 2003, before the same judge, a confiscation order was made under Section 71 of the Criminal Justice Act 1988 ("the 1988 Act") in the sum of £1,678,954. A sentence of four years imprisonment consecutive was imposed in default of payment.
2. An appeal against conviction was dismissed and an application for leave to appeal against the sentences of imprisonment and disqualification was refused. A co-defendant Robert Charles Nelson was acquitted on Counts 3 and 4 and on other counts in the original indictment. Stannard was also found not guilty of other counts and still other counts were left on the file. Stannard appeals against the confiscation order by leave of the single judge.
3. The fraud operated by way of a 'company purchase scheme'. A company would be targeted for acquisition when it had an unpaid corporation tax liability and funds available to meet that liability. Steps would then be taken to reduce the corporation tax liability by false debenture documents which purported to show that debentures in substantial sums had been subscribed for and interest paid in advance. By extinguishing or reducing the corporation tax liability, the purchaser of the company would obtain a financial advantage. A company controlled by the appellant acquired the target company for its balance sheet value plus a proportion of the corporation tax liability.
4. The offence was charged as "Cheating the Public Revenue" and the particulars of offence in Counts 3 and 4 were as follows:

"Count 3.

MICHAEL RICHARD STANNARD between the 1^st January 1993 and the 31^st October 1997 with intent to defraud cheated Her Majesty the Queen and the Commissioners of Inland Revenue of public revenue, namely corporation tax, by claiming or causing to be claimed a deduction against profits for interest paid including debenture interest paid in advance by Bonnington Shipping Limited to Anglo Austrian Finance Limited when in truth and in fact no such transaction had taken place.

Count 4.

MICHAEL RICHARD STANNARD between the 1^st October 1992 and the 31^st October 1997 with intent to defraud cheated Her Majesty the Queen and the Commissioners of Inland Revenue of public revenue, namely corporation tax, by claiming or causing to be claimed a deduction against profits for interest paid including debenture interest paid in advance by Fairflight Leasing Limited to Anglo Austrian Finance Limited when in truth and in fact no such transaction had taken place."

5. In his judgment, Judge Fingret stated the facts succinctly:

"The offences involved the purchase of subsidiaries of UK companies which had unpaid corporation tax liabilities and the funds to meet such liabilities. The defendant's company acquired the two target companies named in the indictment for their balance sheet value plus an amount equal to approximately half of the corporation tax liability. Having acquired these two companies the defendant arranged for the creation of false documents designed to give the impression that Anglo Austrian Finance Ltd had subscribed for bearer debenture bonds on which interest would be payable in advance.

This interest created a deduction against profits thus extinguishing any charge to Corporation Tax. Thus it was possible for the cash held in the purchased companies to be extracted. It is this cash or the tax evaded which forms the basis of this Confiscation Hearing.

The Crown say that the benefit is the cash withdrawn from the two companies namely:

Bonnington Shipping £3,516,299 to which should be added interest based on RPI to July 2001 of £805,232 totalling £4,321,521.

Fairflight Leasing Ltd £2,325,000 and interest of £518.475 totalling £2,843,475.

This figure of £7,165,006 would, say the Crown, be the total value of the benefit if CJA 1988 s.71(4) applies, ie. if the defendant obtained property as a result of or in connection with the commission of the offences.

Alternatively, if s71(5) applies, in that the defendant derived a pecuniary advantage as a result of or in connection with the commission of the offences, the total value of the benefit would be £3,099,030 being the tax evaded by the scheme made up as follows:

Bonnington Shipping Ltd £1,199,670 together with interest to 30^th July 2001 of £542,047 which totals £1,741,717.

Fairflight Leasing £929,979 and interest of £427,334 totalling £1,357,313."

6. The judge went on to hold that "any benefit derived from the fraud could not relate to the acquisition of Bonnington and Fairflight as these were both arms length transactions with the vendors, although they were both purchased in connection with the commission of the offences". The judge held that those transactions in themselves did not form part of the cheat so that there was no relevant benefit to which Section 71(4) of the 1988 Act could attach. The judge stated that the issue was whether the appellant derived a pecuniary advantage within the meaning of Section 71(5) as a result of or in connection with the commission of the offence. Section 71(5) provides:

"Where a person derives a pecuniary advantage as a result of or in connection with the commission of an offence, he is to be treated for the purpose of this Part of this Act as if he had obtained as a result of or in connection with the commission of the offence a sum of money equal to the value of the pecuniary advantage."

7. It is conceded that the court had jurisdiction to make a confiscation order and that an "offence" within the meaning of Section 71(5) had been committed.
8. Section 71(6) provides:

"The sum which an order made by a court under this section requires an offender to pay must be at least the minimum amount, but must not exceed –

(a) the benefit in respect of which it is made; or

(b) the amount appearing to the court to be the amount that might be realised at the time the order is made."

By virtue of Section 71(7) the minimum amount was £10,000.

9. Section 74 (1) provides:

"(1) In this Part of this Act, "realisable property" means, subject to subsection (2) below –

(a) any property held by the defendant; and

(b) any property held by a person to whom the defendant has directly or indirectly made a gift caught by this Part of the Act."

Section 74(2) has no application in this case.

10. Section 74(10) provides:

"A gift (including a gift made before the commencement of this Part of this Act) is caught by this Part of this Act if –

(a) it was made by the defendant at any time after the commission of the offence or, if more than one, the earliest of the offences to which the proceedings for the time being relate; and

(b) the court considers it appropriate in all the circumstances to take the gift into account."

11. It is common ground that it is the 1988 Act, as amended by the Criminal Justice Act 1993, which applies because of the dates when the offences are alleged to have been committed. The amendments provided by the Proceeds of Crime Act 1995 do not apply in this case.
12. The judge held that the benefit obtained by the appellant as a result of the commission of the two offences of which he was found guilty was the sum of £3,099,030 identified earlier. The judge went on to hold that the realisable property within the meaning of Section 71(6)(b) and Section 74(1) was the sum of £1,678,954.
13. On behalf of the appellant, it is submitted by Mr Fisher QC, first, that the confiscation order should be quashed because the appellant has not benefited as a result of or in connection with the offences and, secondly, that in the light of the appellant's actual realisable assets the order should be reduced substantially. Mr Fisher acknowledges that in his evidence at the confiscation hearing, the appellant substantially accepted that the scheme was designed to extinguish the tax liability in the target company and leave the cash resources of the target company for uses other than tax liability. The appellant had expressed broad agreement with the proposition that the whole structure was planned by him with a view to obtaining the cash sums held by the companies. As to realisation, Mr Fisher acknowledged that the burden was on the appellant to show that the amount to be realised was less than the benefit figure.
14. It is submitted that no pecuniary advantage has been obtained by the appellant because he was merely the beneficiary of a discretionary trust. He was not a shareholder of any of the companies involved in the case and it was inappropriate to lift the corporate veil.
15. The judge cited and applied the judgment of the Laws LJ in Dimsey & Allen [2000] 1 CAR(S) 497 at 502:

"However, it is plain from authorities cited by the Crown that the corporate veil may fall to be lifted where companies are used as a vehicle for fraud. Here the companies in question were the appellant's alter ego".

16. The judge stated:

"It is equally clear in this case, from the evidence given at the trial that MS [the appellant] had a controlling interest in each of the companies involved in the acquisition of Bonnington and Fairflight, and the companies and Trusts used to ease the distribution of cash assets of those companies. More particularly he controlled the companies which enabled him to evade payment of the Corporation Tax liabilities of Bonnington and Fairflight. So, it is appropriate to lift the corporate veil."

The judge had heard the evidence at the trial and at the confiscation hearing and was in a good position to make findings of fact. He was in our judgment entitled to make that finding on the evidence in this case.

17. Reliance is placed by the appellant on the judge's finding that the purchase of Bonnington and Fairflight were arms length transactions with the vendors. The judge has not found that the corporate veil should be removed with respect to those companies. In the absence of such a finding, it is submitted, the statutory requirements are not met on the facts of this case. In the absence of a finding in relation to those companies, no order should have been made.
18. We see no merit in that submission. The entire series of transactions was under the control of the appellant and the fact that the first of them, the purchase of Bonnington and Fairflight, were genuine transactions at arms length does not preclude a finding that this was a fraudulent scheme devised by the appellant and entirely under his control. The corporate veil having been lifted, and subject to submissions about his alleged status as a beneficiary of a discretionary trust, the appellant was better off, as the judge found, in the sum of £3,099,030. The judge correctly applied to the facts the proposition stated by Laws LJ in Dimsey:

"Had these grave frauds succeeded then, in crude terms, Mr Allen would have been better off to the tune of £4m. That represents in our judgment the measure of his pecuniary advantage".

19. On the question of realisable assets (Section 71(6) of the 1988 Act), the judge correctly directed himself that it was for the appellant to show, on balance of probability, that the amount that might be realised in respect of property was less than the value of the proceeds of crime. (Dyson J in Walbrook & Glasgow [1994] Cr App R (S) 783 at 786). Considering an asset in the form of a debt, Dyson J added that, if a defendant is to satisfy the burden: "this he must do by producing clear and cogent evidence; vague and generalised assertion unsupported by evidence will rarely if ever be sufficient to discharge the burden on the defendant". That statement was appropriately cited by the judge.
20. The judge had before him carefully prepared statements of information under Section 73 of the 1988 Act. They were prepared by Mr R A Neville, investigator employed by the Special Compliance Office of the Inland Revenue and were dated 20 February 2001 and 12 April 2002. Mr Neville also gave evidence. The appellant responded to the written statements and also gave evidence.
21. In his judgment, the judge set out, item by item, the assets held to constitute the realisable property of the appellant. Detailed questions of valuation do not arise and it is acknowledged that the appellant has a right to seek a certificate of inadequacy at a later stage.
22. Several of the alleged assets, Moulin de Beaufils (£113,000), a Cessna aircraft (£25,000), Gila Holdings (£96,620) and Aragon Finance Limited (£230,000) are claimed by the appellant to have been owned, not by him, but by the Rupert Trust, a discretionary trust under which he claimed to be only a potential beneficiary. He relies on the principle in Gartside v Inland Revenue Commissioners [1968] AC 553, and the statement of Lord Reid at page 606, that "no object of a discretionary trust has, as such, any legal right to or in the capital". This argument also relates back to the question whether the appellant received benefit.
23. In relation to the Trust the judge stated , at page 11:

"No Trust Deed has been produced and is clear that, although MS said that he can request money from the Trust but is not entitled to it, clearly he controls its activities. "Supposing you did want to write to the Rupert Trust, who would you write to?" asked Mr Lucraft. He replied "I would write to Anglo European Trustees. Q. "You would write to yourself in Gibraltar" A. "Yes". These and similar replies are clear evidence that Rupert Trust is or was controlled by MS and that he was correct when he said that Moulin de Beaufils was his property."

24. At page 14, the judge stated:

"The role of the Rupert Trust in MS's financial affairs became clear in his evidence on p116 of the transcript of evidence of 30^th May when asked by Mr Lucraft "So what would happen, so I have this right, is that the property is sold and you, wearing your hat with the Rupert Trust, when it was sold, that would effectively say to the Trustee, which would again be yourself; just put the money back into the Rupert Trust for my daughter's school fees. A. More or less yes.

He went on to say that the purpose of this and other trusts was to "put a barrier between any assets and myself". He went on "if everything went wrong, and somebody tried to bankrupt me, I could say that these are discretionary trust assets, they are not mine for a bankruptcy

MS cannot hide behind the Rupert Trust in these proceedings and the assets of Gila will be included in the sum of £96,620."

The judge added that he was satisfied that "this trust and its assets are under the total control of MS".

25. Mr Fisher submits that, by those findings, the judge accepted that there was a trust and also appeared to have accepted that the trust was created many years before the offence. If there was a trust, a detailed analysis of the legal and beneficial interests involved, including that of the appellant, was required, it is submitted. That analysis could be avoided only by a finding that the trust was a sham and the analysis required to make such a finding, in accordance with principles stated in Snook v London and West Riding Investments Limited [1967] 1 QB 786 at page 802 per Diplock LJ and in Stone v Hitch & Ors [2001] EWCA Civ 63 per Arden LJ at paragraphs 62 to 69, was not undertaken. Moreover, there was evidence that the trust had been set up for a reason other than money laundering.
26. We do not accept that analysis. The judge did not spell out the stages of his reasoning but in substance he held, having referred to evidence, that there was no trust. He did refer to the "role of the Rupert Trust" but in substance he was holding that there was no trust. The property was controlled by, and only by, the appellant, a conclusion amply supported by the appellant's evidence at the hearing. The concept of control, as expressed by the judge, is inconsistent with the concept of trust. Nor does the evidence that the appellant may have had another purpose in mind when first using the expression Rupert Trust affect that conclusion.
27. In relation to Aragon Finance, the further point is made that the proceeds were used to pay school fees. On the evidence, that would require a finding that the sum of £230,000 was expended for that purpose, and the judge was entitled not to make such a finding.
28. The judge was also justified in making the finding he did about Chalet Verseau Verbier (£270,000) on the evidence. The judge relied on the fact that, in his evidence at the trial, the appellant referred "my flat at Verbier". In a letter to his bank on 27 July 1995, providing a "rough statement of affairs" for the bank, he stated that he owned a "flat in Switzerland worth about £300,000, with a remaining mortgage of £40,000." The appellant claims that the letter was an informal one but that claimed informality did not prevent the judge making the finding he did.
29. The Crown's case on Cotswold Stone Quarries (£524,334) ("Cotswold") was put in the supplementary statement of information and the somewhat complicated arithmetic by which the sum of £524,334 is reached is not challenged, as arithmetic. Substantial sums were paid to Cotswold in the early 1990's from funds, it is submitted which, to the extent of the sum calculated, were controlled by the appellant. Further sums were paid over from funds under Mrs Stannard's control. There was evidence, including a letter written by the appellant to the Royal Bank of Scotland on 31 December 1991 from which it could be concluded that funds under the control of the appellant were paid to Cotswold. The judge held that a vehicle used in the transaction, Severn Industrial Limited ("Severn"), was a company then under the control of the appellant.
30. The appellant's case is that money was loaned to Cotswold by a company owned by the Victoria Trust. It is common ground that the appellant has no interest in that Trust, described as Mrs Stannard's trust fund. Repayments at the time of the confiscation hearing were being made to that trust. The loans were in any event part of an arms length commercial transaction, it is submitted.
31. The judge held that the loan was to be treated as a gift within the meaning of Section 74(10) of the 1988 Act and was, to the extent of the sum claimed, a realisable asset of the appellant. In support of that finding, the Crown rely on an acknowledgement made by the appellant in an order made in matrimonial proceedings on 5 November 1999 that the appellant "has no interest in any shares in [Severn] or the business of Cotswold and that no monies are owing to him or the Rupert Trust from that company or business". Repayments under the loan, increased to £4,100 per month, were paid into an account of Severn until March 2001 and after that date to the Victoria Trust. The loan by the appellant was converted into a gift.
32. The judge held property at 5 Markenhorn, Godalming to be the appellant's realisable property (£395,000). The property was acquired by Ms Joan Ashton, the mother of the appellant's youngest child, in 1995. It was acquired with money transferred on 11 October 1993 from the bank account of IBEUS (Investment Bank of Europe and the United States) held at Anglo Irish Bankcorp under the control of the appellant. Funds in the IBEUS account had come from the transactions relating to Bonnington and Fairflight. Reference was made to the appellant's responsibility for his child. The appellant's case, rejected by the judge, was that consideration was given for the payment to Ms Ashton, the transfer of funds being in settlement of all future liabilities in relation to the daughter, except for the payment of school fees. The judge noted that the payment was voluntary and not pursuant to a court order and that the appellant had not discharged the evidential burden on him. The judge was, in our view, entitled to reach that conclusion and hold the payment to have been a gift.
33. The point is taken in relation to both transactions the judge held to be gifts that the judge did not expressly exercise the discretion conferred on him in Section 74(10)(b) of the 1988 Act, as to whether the gift should be taken into account. It is clear that submissions were made to the judge in relation to his discretion and we do not doubt that he had regard to this discretion. In both cases, the appellant divested himself of very substantial sums of money, and in the Godalming case, only shortly after receipt of that money from Bonnington and Fairflight transactions. In the context of this statute, the circumstances were far from favourable to an exercise of discretion in the appellant's favour. The absence of an express reference to discretion in the judgment does not invalidate the judge's finding.
34. In relation to both transactions, the circumstances in HM Customs v MCA & Anr [2002] EWHC 611 (Munby J) and [2002] EWCA Civ 1039 (Court of Appeal), where family considerations prevailed, were very different from those in the present case. In the Court of Appeal, Wall J stated, at paragraph 101, that "there can be no question of the Matrimonial Causes Act 1973 being used as a means to circumvent the provisions of the Drug Trafficking Act 1994".
35. The further point is taken in relation to Cotswold and 5 Markenhorn, a point not taken before the judge, that the transactions held to constitute gifts were not made at "any time after the commission of the offence" within the meaning of Section 74(10)(a) of the 1988 Act. It is submitted that the offences were not committed until tax returns were submitted by the companies whose funds were taken, in the case of Bonnington on 25 May 1995, and in the case of Fairflight on 4 March 1996. The particulars of offence in each case stated that the cheat was "by claiming or causing to be claimed a deduction against profits for interest paid…"
36. The point does not on the evidence apply to Cotswold because, in the absence of evidence to the contrary, what is for this purpose assumed to be a loan was converted into a gift at the time repayments were first made to Victoria Trust, in which the appellant had no interest. That was in April 2001, well after the dates in the indictment. In relation to 5 Markenhorn, payment was made on 11 October 1993, that is shortly after the receipt of funds from Bonnington and Fairflight. In the case of Fairflight, the false debenture was signed on 9 October 1993. The date was earlier in the case of Bonnington. It is accepted by the Crown that the earliest date stated in the indictment (1 October 1992) is not, as the judge, in the absence of argument to the contrary assumed, the relevant date for this purpose.
37. For the Crown, Mr Perry submits that the offence of cheating the public revenue had been committed by the time the false documents were prepared and the money extracted from Bonnington and Fairflight. Because accounts were submitted to the revenue subsequently, the particulars of indictment referred to the claim made in them. Although the particulars of offence would have been put differently had accounts not been submitted, offences of cheating the public revenue were committed before the gift was made, it is submitted. For this purpose, the court is not confined to the particulars, drafted in the light of subsequent events, in the indictment.
38. The offence of cheating the revenue was considered in this court in The Queen v Mavji [1987] 84 Cr. App R 34. The issue was whether the common law offence of cheating the revenue necessarily required a false representation, either by words or conduct. The appellant had failed to make VAT returns or to pay the VAT due. The court held that cheating could include any form of fraudulent conduct which resulted in diverting money from the revenue and depriving the revenue of money to which it was entitled. Giving the judgment of the court, Michael Davies J stated, at page 38:

"In our judgment, "cheating the revenue" can take place without any positive act of deceit or, to adopt and respectfully endorse the words of Drake J when ruling on this matter in the appellant's first trial: "The common law offence of cheating does not necessarily require a false representation, either by words or conduct. Cheating can include any form of fraudulent conduct which results in diverting money away from the Revenue and in depriving the Revenue of money to which it is entitled." This appellant was in circumstances in which he had a statutory duty to make the VAT returns and to pay over to the Crown the VAT due. He dishonestly failed to do either. Accordingly he was guilty of cheating Her Majesty the Queen and the Public Revenue. No further act or omission required to be alleged or proved."

39. In R v Redford [1989] 89 Cr App R 1, this court, Lord Lane CJ presiding, approved that approach. Lord Lane cited, at page 7, that part of the judgment of Michael Davies J which immediately preceded that cited above:

"Mr Ashe-Lincoln candidly conceded that if no distinction can be drawn in this context between an act and an omission, to use convenient shorthand, then this appeal fails. His submission was that this, as he would say, crucial, distinction did not fall to be considered in Hudson [1956] 40 Cr App R 55 or indeed in the case of Tonner[1985] 80 Cr.App.R.170 [1985] 1 W.L.R. 344 to which we were referred by counsel for the Crown. No doubt that is right except that in the opinion of this Court the distinction is not crucial and, where it exists, as in the instant case, does not justify a departure from the conclusions reached by the Court of Criminal Appeal in Hudson (supra). In coming to this decision we are influenced by the fact that in none of the cases or authorities such as Hawkins is the distinction between "deceit" involving an act and "non-deceit" involving no more than an omission canvassed or regarded as vital or indeed relevant. The distinction has always been and in our view remains between "frauds affecting the Crown and public at large," to repeat the words of Hawkins, and those which affect only individuals."

40. In R v Hunt [1994] Crim LR 747, a conviction of conspiracy to cheat the Inland Revenue was challenged on grounds which included the fact that the prosecution was unable to show that the appellant had benefited from the proceeds of the fraud. The court, Stuart-Smith LJ presiding, held that notwithstanding some expressions of opinion in the old cases, there was ample authority to show the offence of cheating the Revenue is "a conduct offence". "A distinction is drawn between cheating the public or the King, in which the resultant loss does not have to be proved, and cheating a private individual where it must be".
41. The court cited the case of Less and Depalo (unreported, transcript 2 March 1993) where the court had approved a summing-up in this form:

"The next direction I have to give you is what in law is cheating the Public Revenue. To cheat, members of the jury, is defined by the Concise Oxford Dictionary as: 'To deceive or trick a person into or out of a thing'. The common law offence of cheating the Public Revenue does not necessarily require a false representation either by words or conduct. Cheating can include any form of fraudulent conduct which results in diverting money from the Revenue and in depriving the Revenue of the money to which it is entitled. It has, of course, to be fraudulent conduct. That is to say, deliberate conduct by the defendant to prejudice, or take the risk of prejudicing, the Revenue's right to the tax in question knowing that it has no right to do so."

42. Thus it is established:

(a) The offence can be proved on the basis of an omission.

(b) It can be constituted by deliberate conduct prejudicing the Revenue's right to the tax in question.

(c) The offence can be established without loss resulting from the cheat having been proved.

43. The substance of the cheat in the present cases was the creation of the false debenture documents and the extraction of money from Bonnington and Fairflight on the strength of those false documents. On the basis of that conduct, offences of cheating the public revenue could have been laid and the jury asked to infer that the purpose of the transactions was to defraud the Revenue. Either no tax returns would be submitted or false ones would be submitted. It is difficult to find any other purpose with which these transactions were performed.
44. In the event, returns were submitted to the Revenue and, not surprisingly, the particulars of offence in the indictment took into account those subsequent events. While those events were further evidence of the cheat, they were not an essential ingredient. The substance of the offence was in the earlier transactions, which preceded the relevant gifts. That was deliberate conduct prejudicing the Revenue's right to the tax in question. The subsequent submission of the tax return was both a further fraudulent act and evidence of the earlier fraud.
45. One of the purposes of the 1988 Act was to prevent dissipation of the proceeds of crime of the kind which occurred in this case. It should be construed in a manner consistent with that purpose (Soneji[2005] UKHL 49 [2005] 3 WLR 303 per Lord Steyn at paragraph 24, Lord Carswell at paragraph 64). Provided the conduct constituting the substance of the offence occurred before the gift was made, the requirement in Section 74(10) that a gift is caught, if made by the defendant at any time after the commission of the offence, is satisfied. Further, for present purposes, the court is not confined to a consideration of the wording of the particulars of offence in the indictment which, for evidential reasons, referred to the claim subsequently made in the tax return. The charge comprehended the earlier conduct which constituted the cheat.
46. The other sums included in the confiscation order: cars (£15,000), bank accounts (£8,000) and shares (£2,000) have not been challenged in this appeal.
47. The appeal is dismissed