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England and Wales Court of Appeal (Criminal Division) Decisions
You are here: BAILII >> Databases >> England and Wales Court of Appeal (Criminal Division) Decisions >> The Serious Fraud Office v Lexi Holdings Plc [2008] EWCA Crim 1443 (10 July 2008)
URL: http://www.bailii.org/ew/cases/EWCA/Crim/2008/1443.html
Cite as: [2009] Bus LR 647, [2009] 1 All ER 586, [2009] QB 376, [2009] 1 Cr App R 23, [2008] BPIR 1598, [2008] EWCA Crim 1443, [2008] Lloyd's Rep FC 489, [2009] 2 WLR 905
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COURT OF APPEAL (CRIMINAL DIVISION)
ON APPEAL FROM THE CENTRAL CRIMINAL COURT
HIS HONOUR JUDGE HONE QC
RS TO 2006/002
Strand, London, WC2A 2LL |
||
B e f o r e :
MR JUSTICE DAVIS
and
HH JUDGE DIEHL QC, RECORDER OF SWANSEA
(sitting as a Judge of the Court of Appeal Criminal Division)
____________________
| The Serious Fraud Office |
Appellant |
|
| - and - |
||
| Lexi Holdings PLC (In Administration) |
First Respondent |
|
| and |
||
| M |
Second Respondent |
____________________
Phillip Marshall QC & Ruth Holtham (instructed by DLA Piper UK LLP, London EC2V 7EE) for the First Respondent
Hearing dates: 21 and 22 May 2008
____________________
Crown Copyright ©
- This appeal concerns the approach to be adopted by the courts to restraint orders made under the Proceeds of Crime Act 2002 ("the 2002 Act") when a third party raises claims which would reduce the amount of the restrained assets. So far as we are aware, it is the first case to reach the Court of Appeal Criminal Division raising such issues since the relevant provisions within the 2002 Act came into effect on 24 March 2003. All members of this court as presently constituted have contributed to this judgment.
- This is an appeal from a decision of His Honour Judge Hone QC sitting at the Central Criminal Court on 12 July 2007, whereby he varied a restraint order made under the 2002 Act on 20 April 2006 by His Honour Judge Stephens QC. The restraint order prohibited the Second Respondent, M, from removing, disposing of, dealing with or diminishing the value of any of his assets, including some specifically identified. Those included an account with the United National Bank Limited, 2 Brook Street, London, three accounts with Halifax Bank plc and a property located at Wheathampstead, Hertfordshire. There was provision in the order for up to £250 per week to be spent on M's ordinary living expenses. The order was made on an application by the Director of the Serious Fraud Office.
- The background to the restraint order is summarised in a statement of agreed facts, agreed between the Serious Fraud office ("SFO") and the First Respondent, Lexi Holdings plc ("Lexi"). Paragraphs 4 to 6 of the statement read as follows:
- Lexi is now in administration. It had been engaged in the business of providing bridging finance for the acquisition of properties. Its managing director and guiding force was a man called SL, who is currently serving two years imprisonment for contempt of court committed by him in proceedings brought by Lexi in the Chancery Division. Lexi eventually defaulted on a credit facility arranged by Barclays Bank and was placed into insolvent administration on 5 October 2006. Its Administrators claim that Lexi has been the victim of substantial frauds committed by SL and others, with about £53 million allegedly having been misappropriated from its accounts by him and others, including M.
- On 14 November 2006 Lexi began proceedings against a number of individuals and companies. The defendants included M. It was pleaded that SL dishonestly and in breach of the fiduciary duties owed by him to Lexi authorised or permitted the payment by Lexi to M of £625,000, that money going to his accounts at United National Bank Limited and at a bank in Lichtenstein. It was pleaded that M knew that the payments were made in breach of trust and that he held them or their products on constructive trust for Lexi and/or was liable to account for them. There was also a claim for money had and received. The Particulars of Claim sought various forms of relief against M, who was the 6th Defendant in the proceedings, as follows:
- Various court orders required disclosure by M of his assets and of the whereabouts of the funds received by him from Lexi's account. It is sufficient at this stage to refer to an "unless" order made by Blackburne J on 8 March 2007. When this order was not complied with, Lexi filed a Request for Judgment, and on 19 March 2007 judgment in default was duly entered. The material part of the court order was in the following terms:
- On 20 June 2007 Lexi made an application to the Central Criminal Court to vary the restraint order which had been made by Judge Stephens, so as to permit M to comply with the default judgment of 19 March 2007. It sought the variation both on the basis that it had a proprietary claim and as a bona fide judgment creditor. The application was heard by Judge Hone on 10 July 2007 and was opposed by the SFO. By his judgment on 12 July 2007, Judge Hone made the variation sought so as to allow payment to be made to Lexi from M's restrained assets. The SFO now appeals, permission to do so having been granted by the Full Court.
- With that summary of the facts, we turn to the statutory regime provided by the 2002 Act. The provisions dealing with restraint orders are to be found in Part 2 of the Act, the part which begins with the sections dealing with confiscation orders. That in itself supports what section 69 set out later in this judgment shows, namely that a restraint order is essentially a means to an end, the end being the satisfaction of a confiscation order which may be or has been made. The role of the restraint order is in that sense an ancillary one, since it seeks to preserve property and its value until the confiscation order has been made or satisfied or alternatively until the criminal proceedings have been concluded without a confiscation order being made, whether that be after conviction or acquittal of the restrainee.
- The power to make a restraint order is conferred by section 41(1) of the 2002 Act but only if one of the conditions set out in section 40 is satisfied. There are five such conditions set out in section 40, but it will suffice to quote the terms of the first two, to be found in section 40(2) and (3) respectively:
- Section 41, insofar as material for present purposes, provides:
- Provision for the discharge or variation of a restraint order is to be found in section 42, subsections (3) to (7) inclusive. They state:
- Section 69 is a vitally important section, which applies not only to the powers concerning restraint orders but also to those in respect of various forms of receivers. Section 69(2) and (3) are in the following terms:
- It should be noted that the "defendant" in section 69 includes, where proceedings have not begun, the alleged offender: see section 40(9)(a). The terms "property" and "interest" are expanded upon in section 84, the material parts of which provide:
- Finally, in setting out the relevant parts of the 2002 Act, we draw attention to the statutory restriction imposed on courts generally in respect of property to which an existing or proposed restraint order relates. Section 58(5) and (6) state:
- Judge Hone noted the submission by the SFO that the 2002 Act sought to tighten the statutory regime which had previously existed, but he concluded (paragraph 20 of his judgment) that the new regime was no more prescriptive than the old. He quoted a passage from the judgment of Simon Brown LJ in Hughes v. Customs Excise Commissioners [2003] 1 WLR 177, a case under the Criminal Justice Act 1988, where it was said that courts should
- Judge Hone found that the 2002 Act protected an equitable interest held by a third party under a constructive or resulting trust and then found that M was a constructive trustee when he received funds from Lexi in January/February 2006. He went on to say that at paragraph 21:
- But the judge then went further and dealt with the position of unsecured creditors generally. He concluded that the court had a "reasonably wide discretion" under the 2002 Act, so as to do justice. He repeated that he did not see any significant change in statutory policy or underlying principle from the pre-2002 Act regime, and agreed with the reasoning of Davis J in In re X [2005] QB 133, a decision on the provisions of the Criminal Justice Act 1988. He gave a number of reasons for that conclusion, including the fact that a confiscation order had not yet been made and
- It will be seen that there were in effect two bases for the judge's decision to vary the restraint order. The first was that Lexi had a proprietary interest in the funds held by M to the extent of the judgment sum of £625,250 plus interest. The second was that the court had a discretionary power in any event under the 2002 Act to vary a restraint order to enable an unsecured creditor of the restrainee to be paid. Those two bases give rise to the two issues in this case, since both are challenged by the SFO. We shall take them in turn.
- Given the provisions of section 69(3) of the 2002 Act and the wide meaning to be given to the word "interest" by section 84(2)(h), Mr Mitchell QC, for the appellant, rightly accepted that if Lexi did indeed have a valid claim to an equitable charge over all the assets of M then the variation order of Judge Hone was properly made.
- There can, in our view, having regard to the current evidence, be no real dispute but that at the time when the £625,000 was paid to M in instalments, at the behest of SL, M was constituted constructive trustee of those sums. SL, as a director of Lexi, owed fiduciary duties to Lexi. As is pleaded in the Particulars of Claim, verified by a Statement of Truth, the payments out to M were procured by SL dishonestly and in breach of fiduciary duty. Those payments were made variously in January and February 2006. The remittance forms are in evidence. £300,000 in total was paid to an account in the name of M, with the number 0123771 noted on the forms, at United National Bank in London. £325,750 in total was paid to an account of M at LGT Bank in Lichtenstein. (The resulting total sum is generally rounded off to £625,000 in the Particulars of Claim.) It is further pleaded that M, in receiving those sums, knew that the payments were not made in the interests of Lexi and had otherwise been paid away from Lexi in breach of trust. The underlying allegation is that those sums were paid to him as bribes in order to secure inflated valuations of properties.
- Those pleaded allegations were further verified at length in various affidavits and witness statements put in on behalf of Lexi in the Chancery proceedings. Attempts by SL and M to rebut those allegations – for example, by saying that the paying company was not Lexi but a Gibraltar company called Lexi Holdings Limited or that substantial repayments had been made – had been roundly rejected by the courts in the course of the Chancery proceedings.
- We have set out the specific relief sought against M in the Particulars of Claim in paragraph 5 of this judgment. It is plain that in some respects at least the remedies sought are true alternatives – for example, the common law claim for monies had and received as compared to the claim that M held the £625,000 on trust for Lexi. It may also be noted that the subsequent general prayer for relief against all the defendants in the action (including M) included claims for, among other things, compound interest and further or other relief.
- The problem, for present purposes, arises from the form of the judgment entered by Lexi against M on 19 March 2007.
- That judgment was entered pursuant to a request for judgment dated 18 March 2007. The request for judgment was itself based on the failure of M to comply with the disclosure orders made in the Chancery proceedings by Mr Justice David Richards on 30 November 2006 and by Mr Justice Briggs on 14 December 2006 and, ultimately, by Mr Justice Blackburne on 8 March 2007. That last order provided as follows:-
- The request for judgment was made, as Mr Marshall QC, on behalf of Lexi, accepted, under the provisions of CPR 3.5. That permits a party to file a request for judgment in these circumstances:
- The request for judgment in this case did not seek judgment in terms of, for example, claiming a declaration of trust as sought in paragraph (10) of the relief claimed against M in the Particulars of Claim. Indeed it could not do so under the terms of Rule 3.5 – had such relief been sought an application notice issued in accordance with Part 23 would have been required. Instead the judgment requested was (1) that M's defence be struck out; (2) that M do pay the claimant the sum of £625,250 (sic) plus compound interest at the rate of 4% over six monthly LIBOR in the sum of £62,432.83; (3) that M do pay the claimant's costs of the action, such costs to be subject to summary assessment if not agreed. It was judgment in precisely that form which was entered on the following day.
- Judgment in such form is consistent with the (common law) claim for monies had and received as set out in paragraph (11) of the relief sought against M in the Particulars of Claim. But it is also consistent with the claim for (equitable) compensation set out in paragraph (13). Since the judgment which was obtained on 19 March 2007 also included an order for payment of compound interest we think that the judgment can be taken to be based on the claim for (equitable) compensation. But it remains the case that this was an in personam judgment: and no proprietary remedy was sought or obtained.
- It is clear that in the immediate aftermath Lexi proceeded on the footing that it was an (unsecured) judgment creditor of M. Thus on 14 May 2007, as a judgment creditor, it obtained an interim charging order, sealed on 23 May 2007, over the matrimonial home in Hertfordshire where M resided and in which he had a beneficial interest. On the same date Lexi also obtained interim third party debt orders over M's accounts at the Halifax and United National Bank. In its written application dated 20 June 2007 to the Central Criminal Court seeking a variation of the Restraint Order made by Judge Stephens, Lexi's solicitors described Lexi as a "bona fide third party judgment creditor". The first time after judgment was obtained that Lexi appears to have been specifically described as a person having a proprietary interest in the form of an equitable charge in respect of some or all of M's assets was (following a witness statement of Lexi's solicitor dated 20 June 2007) when Mr Marshall presented arguments to Judge Hone: the potential implications of section 69 of the 2002 Act no doubt by then having become appreciated.
- In the meantime, M had sought to have the default judgment set aside. His application was dismissed by Pumfrey J by Order entered on 18 May 2007. Permission to appeal was thereafter refused by the Court of Appeal on 31 August 2007.
- In such circumstances, it was Mr Mitchell's submission that, in applying in the Chancery proceedings for judgment in a money sum, Lexi had elected to become a judgment creditor and had abandoned in those proceedings its proprietary claims raised in its pleaded case. His submission was also consistent with saying (although he did not put it precisely this way) that the available causes of action had merged in the judgment.
- We consider that submission to be correct to the extent that it connoted that Lexi had at the time of judgment abandoned its proprietary claims in the Chancery proceedings. Under Rule 3.5(2)(5) a judgment of the kind requested in this case is available where "the claim" is for a specified amount of money: otherwise the party must make an application in accordance with Part 23. Further in Part 12 (which applies to default judgments) it is provided by Rule 12.4 that a party may apply for default judgment where, among other things, the claim is for a specified amount of money. Rule 12.4(3) provides as follows:
- Mr Marshall sought to rely on the fact that the Particulars of Claim had claimed "further or other relief". That may be so but it takes him nowhere at this stage of the argument. For the judgment entered was, in the absence of a successful appeal, a final judgment and the judgment itself did not by its terms confer, for example, a liberty to apply for further or other relief.
- Thus there has not been judgment, or even a finding, in the Chancery proceedings that Lexi had an entitlement to an equitable proprietary remedy. Mr Mitchell accordingly went on to submit (he further emphasising – although it was not essential to his argument – that the creation of an equitable charge had not even been pleaded in the Particulars of Claim) that it also was not open to Lexi to assert before Judge Hone in the Crown Court that Lexi had a proprietary interest, whether in the form of an equitable charge or otherwise, over any of M's assets. Judge Hone thus had been wrong, to the extent that this jurisdiction point was argued before him (if it was at all, which is doubtful), to entertain an argument that Lexi had a proprietary interest, in the form of an equitable charge, over M's assets. Thus it was Mr Mitchell's submission that Lexi had not simply abandoned, by election, its claim to a proprietary interest in the Chancery proceedings; it had abandoned such a claim for all purposes.
- This was a powerful point and powerfully made. But, having considered the arguments, we do not think that it should be accepted.
- Before entering its judgment Lexi had maintained, as one of its claims, that M held the £625,000 on (constructive) trust for Lexi. That was a claim properly open to it. It had not pleaded or claimed that it had security in the form of an equitable charge existing over assets held by M: albeit in our view it would not have been precluded from doing so, prior to judgment, as an alternative form of relief (and here, perhaps, the claim for "further or other relief" may have been of some value).
- It is the case that where misappropriated trust assets are thereafter applied in the acquisition of other property the beneficiary is entitled at his option either (a) to assert, via a constructive trust, beneficial ownership of the proceeds (or a commensurate part of them) or (b) to make a personal claim against the defaulting trustee, if need be enforcing an equitable charge or lien over the proceeds in question to secure restoration by the defaulting trustee of the misappropriated assets. These are true alternatives. In the first kind of claim, the beneficiary is in effect saying: "Those proceeds (or part of them) belong to me". In the second, alternative, kind of claim the beneficiary is in effect saying "The trustee is obliged to account personally to me for his misappropriation and those proceeds stand charged as security for his personal obligation to me". The position is very fully and helpfully explained by Lord Millett in his speech in Foskett v McKeown [2001] 1 AC 102, especially at pages 130-132. At p.130A, Lord Millett said this:-
- As we have said, the original Particulars of Claim asserted a (constructive) trust in respect of the £625,000 when it passed into the hands of M. At that stage, what was known was that the money had passed into the two accounts in his name, the one at United National Bank in London and the other at LGT Bank in Liechtenstein. Had those accounts been set up solely for the purpose of receiving the misappropriated sums, without mixture with any other money, then there would on the pleaded facts have been no complication at all with regard to a claim that those sums were held by M on (constructive) trust for Lexi.
- In this regard, however, as the very history of the Chancery proceedings makes clear, there has been only limited disclosure by M. In a letter from his former solicitors dated 4 December 2006 some assets in his name were disclosed. These included, among other things, an account in London with United National Bank, identified as "10123371", holding at that date £225,545.77; and an account with the Halifax numbered 0208046 holding £211,712.64. The letter states that "the balance of" the monies formerly held at LGT Bank in Liechtenstein had been "repatriated" to that Halifax account. Lexi takes the view that both the account with the United National Bank and the account with the Halifax represent mixed accounts: that is to say, monies from other sources have been paid into, as well as out of, the accounts in addition to the monies representing part of the misappropriated £625,000. In such circumstances, a claim to an equitable charge over such accounts would be entirely orthodox, on the facts thus far known. What has happened to the balance of the £625,000 has not, so it appears, been explained by M notwithstanding the Order for disclosure, which included an order for disclosure as to what had become of the £625,000, made by David Richards J. In fact, privilege against self incrimination was at one stage claimed by M to seek to justify the failure to make such disclosure.
- As made clear by Lord Millett in Foskett v McKeown, an in personam claim against a defaulting trustee may be supplemented in addition by a claim to enforce an equitable charge or lien over the proceeds in which the misappropriated assets have been mixed. That is an available remedy to secure compliance by the trustee with his personal obligation to account. In this context Mr Marshall appositely cited the decision of the Privy Council in Tang Man Sit v Capacious Investments Limited [1996] 1 AC 514 where at p.521 Lord Nicholls said this:
- In the present case, Lexi by the form of the judgment it obtained on 19 March 2007 had elected to pursue its equitable claim against M in personam. But that is not of itself inconsistent with a claim to an equitable charge, as Foskett v McKeown makes clear: it is a cumulative remedy in aid of an equitable in personam claim, not an alternative remedy. On the whole we do not think that, by electing to enter judgment in the form that it did, Lexi is to be taken as having conclusively and for all purposes abandoned any further claim it might have for an equitable charge, sought by way of further legal proceedings or steps. The Civil Procedure Rules do not stipulate such an outcome: that is to say, by expressly prohibiting a further proceeding to pursue a security remedy not claimed in a request for a default judgment under Rule 3.5. No question of double recovery arises: on the contrary the equitable charge is invoked to achieve restoration of what the defaulting trustee (M) has failed to pay. It is true, as Lord Nicholls points out in Tang Man Sit at p.522, that ordinarily in the interests of fairness and finality "a plaintiff is required to bring forward his whole case against a defendant in one action": see also section 49(2) of the Supreme Court Act 1981. But in this context what is fair is dependent on the merits and circumstances of the case: see Johnson v Gore-Wood & Co [2002] 2 AC 1. Further, as Lord Nichols pointed out in Tang Man Sit at page 522, principles concerning election are not fixed or unyielding and reflect the overriding principle that proceedings be conducted in a manner striking a fair balance between the parties, having proper regard also to the wider public interest in the conduct of court proceedings.
- On the facts of this case we can see no unfairness, let alone a misuse or abuse of process, in Lexi by this further application to vary the Restraint Order seeking to achieve recovery by means of an equitable charge in order to secure discharge of the equitable in personam obligation of M. On the contrary the merits are the other way. (1) First, all this arises in the context of M having failed to comply with disclosure orders. (2) Second, there is no inconsistency between the enforcement steps thus far taken under the judgment and the present claim to an equitable charge. Ordinarily a creditor can seek to use any available method of enforcement: see CPR 70.2. It is true that proceeding to enforce an alleged equitable charge of this kind is not itself in terms an enforcement process provided for by the Civil Procedure Rules (although the appointment of a receiver, for example, is). But in substance and reality the claimed remedy is one designed to secure enforcement of the personal obligation to account or compensate – and that obligation has been established by the judgment obtained on 16 March 2007. Further it is in our view no bar to enforcement by this method that Lexi has previously taken steps to enforce by other methods: for example, by obtaining an interim charging order. (3) Third, if no assertion of a prior proprietary interest in the form of an equitable charge were even capable of now being raised on the variation application by Lexi then the amount of assets which are the subject of the Restraint Order and which are potentially available to (unsecured) victims of the alleged criminal conduct would appear to have been increased by assets which in part originated from Lexi itself and in circumstances where it originally had a proprietary claim to that money in the hands of M. That does not seem at all just.
- Accordingly, in our judgment Lexi was not precluded from applying for a variation of the Restraint Order on that basis; and Judge Hone was not precluded from entertaining the application on that basis.
- It is worth repeating the Judge's finding in paragraph 21 of his ruling:
- The next question arising is therefore this. Over what assets does the equitable charge extend?
- That, on the pleaded facts and on the evidence filed, an equitable charge could arise over assets mixed with or deriving from the money misappropriated, in breach of trust, from Lexi cannot be in doubt, by reference to ordinary equitable principles. Thus the accounts at the Halifax and the United National Bank, into which significant parts of the misappropriated monies were ultimately paid, could properly be made subject to the equitable charge.
- Mr Marshall, however, went much further. He submitted to us, as he had successfully to the Judge below, that all of M's assets – which, we were told, were valued at around £1.7 million for the purposes of the Restraint Order – were subject to the equitable charge.
- We find this impossible to sustain.
- Mr Marshall's first way of putting his argument was to rely on certain wide obiter dicta of Lord Templeman in the Privy Council case of Space Investments Limited v Canadian Imperial Bank of Commerce (Bahamas) Limited [1986] 1 WLR 1072. At page 1074 Lord Templeman said this (this being in the context of a banking case):
- Based on this passage, Mr Marshall submitted that where a trustee mixes trust funds with his own assets in such a way as to make it impossible for the beneficiary to identify which of the trustee's assets are affected by an equitable charge the court will impose the charge over all the assets of the wrongdoing trustee.
- This cannot be right, in our view. For the equitable charge to attach it must attach to assets in existence which derive from the misappropriated trust funds. There must be a nexus. Were it otherwise the principles of following and tracing could become otiose. On the contrary, tracing in this area is a vital process: just because it is by that process that the necessary nexus is established and the proprietary remedy, be it by way of constructive trust or equitable charge, made effectual. It is for that reason that if all the misappropriated trust funds in any given case are paid into an account which was and remains overdrawn then the proprietary remedy is lost: for there are no identifiable assets left in existence, deriving from the misappropriated trust funds, to which a constructive trust or an equitable charge could attach: see, for example, re Diplock [1940] Ch.465 at p.521; Bishopsgate Investment Management Limited v Homan [1995] Ch.211. In such a situation it is not open to a beneficiary to seek to shift the claim for an equitable charge to other assets which do not derive from the misappropriated trust funds.
- The present case provides a clear example. Included in the assets the subject of the Restraint Order is M's interest in the matrimonial home in Hertfordshire. But that was acquired in 1998. His initial purchase could not possibly have derived in any way from, or been mixed with, the misappropriations from Lexi in 2006. Mr Marshall speculated – and speculation is what it was – that perhaps some of the later mortgage payments in respect of that property derived from the misappropriated monies. It is debateable, even if that were so as a matter of fact, that that could as a matter of tracing give rise to an equitable charge over the beneficial interest in the home as security for the misappropriated money. But in any case it is not borne out by evidence; and we also add that M, in a short address to the court, in fact told us that all the mortgage payments had always been made out of entirely separate funds representing his earnings as a surveyor.
- Mr Marshall then, as a variation on his original theme, sought to invoke the maxim (still conventionally used in Latin) "omnia praesumuntur contra spoliatorem". He said that the necessary nexus thus was established by application of this evidential presumption. The burden of rebutting the presumption lies on the trustee, he said, and here M had failed to rebut it. M indeed had failed to comply with the disclosure orders made by the judges in the Chancery Division; had failed to explain precisely what had become of the full £625,000; and accordingly, it was said, it should be presumed against him that the misappropriated proceeds had been mixed with all his own assets.
- This will not do either. It is completely unrealistic: as the example of the matrimonial home illustrates. It goes against the whole rationale of tracing. It also further goes against settled practice, which ordinarily requires a claimant beneficiary seeking a proprietary remedy to adduce evidence to prove the necessary nexus and to prove the existence of assets with which the misappropriated trust funds have been admixed. It is precisely for that reason, among others, that disclosure orders of the kind made in this case – enforceable if need be by committal application – are commonly sought in this type of litigation.
- Mr Marshall cited in argument various cases. In the famous case of Armory v Delamirie 1 Strange 505; 93 ER 664 there was no doubt that the diamond existed. The approach to valuation directed by the Court was premised on the evidential presumption just because the jeweller refused to produce the diamond for independent valuation. In Lupton v White (1808) 15 Ves.432 the case proceeded on the footing that the principal's property had been mixed with all the defaulting agent's property. In Indian Oil Corporation Limited v Greenstone Shipping SA [1987] 3 All ER 893, Staughton J said this, after reviewing certain authorities, at p. 906:
- The present case is no different from many others of its type. If misappropriated trust monies have gone missing then the claimant beneficiary must adduce sufficient evidence to justify, by the process of tracing, any claim to an equitable charge over assets into which the misappropriated monies are said to have been, directly or indirectly, applied. It may well be in some cases (and particularly perhaps where information has been withheld by the defaulting trustee) that certain inferences can be drawn. But in the present case there cannot, realistically, be either presumption or reasonable inference that all of M's assets derive in some way from the £625,000 wrongfully misappropriated in early 2006.
- For his part, Mr Mitchell, latching on to Mr Marshall's argument that the equitable charge is to be taken to extend over all the assets of M by reason of his failure to comply with the orders for disclosure made by David Richards J and Briggs J, emphasised that the Restraint Order was made by Judge Stephens on 20 April 2006: that is to say, the Restraint Order antedated the non-disclosure, let alone the date - June 2007 - when the claim for an equitable charge was first expressly formulated by Lexi on the variation application. He went on to submit that the equitable charge thus arose after the making of the Restraint Order. Accordingly, he said, no relevant interest, justifying a variation under section 42 and section 69(3) of the 2002 Act, had been established at the relevant time.
- In our view that particular argument confuses the existence of the equitable charge with the extent of the assets to which the equitable charge relates. It is true that in this context the equitable charge is a (proprietary) remedy. But it is a remedy founded on an equitable right. At the very time the £625,000 entered M's two bank accounts in January and February 2006 Lexi, had it then known the true position, could at its option have either asserted a claim to beneficial ownership of those monies in the account (or, more formally, the chose in action representing the same) or asserted a claim to an equitable charge over the accounts for the amounts misappropriated. That it did not then do so does not matter. What does matter is its entitlement to do so: see, for example, El Ajou (op.cit). Accordingly Lexi had an interest, within the meaning ascribed to that word by the 2002 Act, which antedated the making of the Restraint Order.
- It follows from all this that, in the judgment of the court, Lexi had and has an equitable charge, and thus an "interest" for the purposes of the 2002 Act, over the two bank accounts at United National Bank and Halifax (which in December 2006 totalled £437,258.41) securing the payment to it of the misappropriated monies and interest. But no equitable charge over any other assets held by M has been established. To the extent that the Judge below decided otherwise he was persuaded into error. Thus as to the shortfall between the amounts in the two bank accounts and the total amount of the judgment debt Lexi is to be regarded as an unsecured creditor.
- This therefore leads to the next issue.
- It is this topic which raises the most important issue of principle in this case. The treatment of unsecured creditors under the legislation before the 2002 Act produced a number of judicial decisions, not all of which were reconcilable with each other. There have, however, been a number of changes to the statutory provisions concerning restraint orders as a result of the 2002 Act, and this requires one to look carefully at the reasoning in those cases dealing with restraint orders made under the Criminal Justice Act 1988 and the Drug Trafficking Act 1994.
- The 2002 Act brought those statutes of 1988 and 1994 into a single piece of legislation, but Parliament chose to vary the resulting provisions. A number of those changes are of relevance to the position of third party creditors. It is sufficient for present purposes to compare the terms of the Criminal Justice Act 1988 with those of the 2002 Act, since the relevant provisions of the former are sufficiently similar to those in the Drug Trafficking Act 1994.
- The provision in the 1988 Act broadly equivalent to section 69 in the 2002 Act was section 82. It reads as follows, having in subsection (1) said that it applied to the power (amongst others) to make restraint orders:
- If one compares those provisions with the terms of section 69 in the 2002 Act (set out earlier in paragraph 12), one can observe a number of differences. First, section 69(2)(b) is a new provision, requiring that the powers to make, vary or discharge a restraint order be exercised, when a confiscation order has not yet been made,
- There are others which may perhaps have some bearing on the present dispute. Thus the provision which seeks to give some protection to third parties in the 2002 Act, section 69(3)(a), is couched in somewhat different terms from those which were to be found in the equivalent provision in the 1988 Act, namely section 82(4). The "legislative steer", as it has been called, deriving from the use of the phrase "with a view to", now allows for the third party to retain or recover the value of any interest held by him, rather than the value of any "property" held by him as under the 1988 Act. "An interest" is then defined by section 84(2)(f) and (h) in the way we have earlier set out.
- With that brief summary of the legislative changes, we can turn to the authorities on this topic, beginning with those which dealt with the law as it was before the coming into effect of the 2002 Act. Some of those earlier authorities were not directly concerned with the position of unsecured creditors but gave some general guidance about the application of the legislation as it then stood. Thus in In re Peters [1988] Q.B. 871 the Court of Appeal was dealing with a variation made by a High Court judge to a restraint order under the Drug Trafficking Offences Act 1986, so as to allow £25,000 to be paid out of the defendant's assets for the purpose of, in effect, meeting his son's future school fees. The Court of Appeal held that this was contrary to the purpose of the 1986 Act, Lord Donaldson MR emphasising that the purpose of a restraint order was the preservation of the assets of the defendant at a time when the court could not know whether he would be convicted or not: page 879E. That is a point to which we shall return.
- Lord Donaldson MR accepted that the wording of section 13(6) of that Act, which required that, when a court exercised its powers under the Act,
- In a later case, In re P (Restraint Order: Sale of Assets) [2000] 1 WLR 473, the Court of Appeal was dealing with how a receiver, appointed under the 1994 Act, should act in respect of assets covered by the restraint order. It held that his task was to safeguard the assets from dissipation and secretion, rather than to maximise their value by (in that instance) selling some of those assets. In that context Simon Brown LJ referred to the purpose of the Act as being
- The case of In re X was decided by Davis J in 2004 but was nonetheless concerned with the pre-2002 Act legislation, in the shape of the 1988 Act. The judge emphasised at paragraph 7 of his judgment that he was not dealing with the provisions of the 2002 Act, which had not been examined in argument before him. The case concerned an application by Z, a third party company which claimed to be owed money by a company controlled by the defendant X, against whom a restraint order had been made. Z sought a variation of that order. The variation was refused but only as a matter of discretion. Davis J considered but declined to follow Buckley J's decision in Re W, holding instead that the court had a discretionary power to vary a restraint order in favour of a third party creditor, even if that reduced the restrained assets below what was likely to be required to meet a future confiscation order.
- His reasoning was clearly spelt out in paragraph 20. He referred first to the wide terms in which the power in section 77(1) and (6) of the 1988 Act to make or vary a restraint order was phrased. He recognised that those powers were subject to section 82, but he noted, secondly, that the words in section 82(2), "with a view to making available" for satisfying any confiscation order introduced a degree of elasticity. He continued as follows:
- Since the 2002 Act came into effect, there have been some first-instance decisions on its provisions relating to restraint orders and the position of third parties. Two in particular are relevant. The first in time is a decision of His Honour Judge Maddison (as he then was), sitting in the Crown Court at Middlesex Guildhall, in the case of In re Nalborough. (unreported, case number PCA/2005/00016). A judgment creditor sought a variation of a restraint order made under the 2002 Act. The judge set out at length the reasoning of Davis J in In re X, while acknowledging that that was a decision on the 1988 Act. But he said, in very brief terms, that he did not regard section 69 of the 2002 Act as involving any significant changes in the meaning of the earlier provisions: see paragraph 29. The judge granted the variation sought. It should be noted that the Crown was not represented in those proceedings.
- The other decision is one made in the Family Division of the High Court by the President, Sir Mark Potter, in Webber v Webber [2006] EWHC 2893 (Fam); [2007] 1 WLR 1052. The Crown Prosecution Service was represented as an intervener in ancillary relief proceedings between a wife and her husband, who had been convicted of a drug trafficking offence. A restraint order had been made under the 2002 Act, the sole asset (as it turned out) being the matrimonial home. The Crown had accepted that the wife had a 50 per cent interest in the home, but in the confiscation proceedings which were in progress she made it clear that she would be seeking a larger share. The case came before the President on a procedural issue which is not material for present purposes, but he took the opportunity to express his view as to the powers of a Family Division judge in ancillary relief proceedings in the light of the 2002 Act and the Matrimonial Causes Act 1973.
- In so doing, he took into account two decisions of the Court of Appeal made under the pre-2002 legislation, Customs and Excise Commissioners v. A [2002] EWCA Civ 1039; [2002] Fam 55, and Richards v. Richards [2006] EWCA Civ 849, which had identified the need to resolve the conflict between the two public policy objectives of depriving offenders of the fruits of their crime and making proper provision for dependants after a divorce. The President was of the opinion that that need to strike an appropriate balance between the two policy considerations embodied in the 2002 Act and the Matrimonial Causes Act 1973 still remained after the coming into force of the 2002 Act and was still permissible under the latter: paragraph 42. He referred there to the "elasticity" in the phrase "with a view to" which appears in section 69(2)(a) and section 69(3)(a). There is no reference at all in the judgment to section 69(2)(c), the provision which requires the powers concerning restraint orders to be exercised
- This omission must have been deliberate and must have reflected the President's view that that paragraph was not relevant to the issue he was considering. We can understand why he took that view. It seems to us that the word "obligation" in the paragraph was not intended to relate to the consequence of the exercise of the statutory powers under the Matrimonial Causes Act 1973. Patently it could not apply where the family court makes a property adjustment order, such as a property transfer order under section 24(1)(a) of that 1973 Act, and the order takes effect, since that process vests the relevant interest in the party identified in the order. It was a property adjustment order which was in issue in Webber v. Webber. On the same basis it may well be that the family court retains jurisdiction to make other financial orders under its statutory powers in the 1973 Act, though it will have in the exercise of its discretion to weigh in the balance the considerations arising under the 2002 Act. Having said all that, it seems to this court that cases such as Webber v. Webber are dealing with a special situation and cast no light on the appropriate approach to cases where a restrained person is said to owe an "obligation" to an unsecured creditor.
- Such then is the state of the authorities on this part of the case. On behalf of the SFO, Mr Mitchell submits that a judge when faced with an application by an unsecured creditor to vary a restraint order is required by section 69(2)(c) of the 2002 Act first to determine whether a variation to enable such a creditor to be paid from the restrained assets would conflict with the object of satisfying any existing or future confiscation order. If it would not, perhaps because of the small size of the debt owed and the substantial size of the assets compared to the known or anticipated amount covered by the confiscation order, then there is no difficulty. But if there is such a conflict, then Mr Mitchell contends, after some initial hesitation, that the judge has no discretion. The wording of paragraph (c) of section 69(2) is clear and mandatory, with the result that the obligation to the creditor must be left out of account by the court. It is said that In re X would not have been decided as it was, had it been dealing with the 2002 Act provisions.
- Mr Mitchell points out that restraint orders are often simply preserving the position while criminal proceedings are decided upon or taken and that they seek to perform a holding operation pending any confiscation order. They are not, thereafter, necessarily a permanent deprivation of the unsecured creditor of his money. Moreover, ultimately the Crown Court will be able to make a compensation order in favour of any victim of the restrained person's criminal conduct, assuming that he is convicted, and such a compensation order takes priority over a confiscation order: see section 13(5) and (6). This helps to avoid injustice or harsh consequences to creditors who have suffered from the offence or offences in question. But before that stage of a confiscation order and a compensation order is reached, it is important, it is said, that no unsecured creditor should be able to jump the gun and gain an advantage over others, including the victim or victims of the crime, by reducing the amount of assets ultimately available.
- In effect, submits Mr Mitchell, the 2002 Act has re-introduced the position as it had been found to be in the case of W. That is plain, but if there is ambiguity in the statute, then it is argued that the court should be prepared to look, under the principle of Pepper v. Hart [1993] AC 593, at certain passages from Hansard which make clear, through the speeches of government ministers, what the Parliamentary intention behind these statutory provisions was in respect of unsecured creditors.
- Mr Marshall resists such a course of action. His submission is that the legislation is sufficiently clear (albeit in this case in favour of the construction which he advances) and confers a discretion on the Crown Court to vary a restraint order in favour of an unsecured creditor if it thinks fit. When asked on what principle such a discretion should be exercised, Mr Marshall replied that ordinarily such a creditor, if bona fide, should be paid and the restraint order varied accordingly.
- He argues that the object of the 2002 Act remains as it was under the previous legislation, namely to deprive the criminal of the proceeds of crime and not to enrich the Crown. He points to section 41(3), which provides for exceptions to be made to restraint orders, in particular so as to make provision for reasonable living and legal expenses and to enable a trade, business, profession or occupation to be carried on (see paragraph 10 hereof) and submits that it would be bizarre if future debts incurred by the restrained person for those purposes under the terms of a restraint order were to be met but not past debts, incurred before the making of the restraint order, perhaps for the very same purpose of enabling a trade or business to be carried on. As for section 69(2)(c), it is contended that that does not apply to unsecured creditors if bona fide. Meeting such debts would not conflict with "the object of satisfying any confiscation order", because that object is simply that of depriving a defendant of the proceeds of his crime, and meeting third party debts likewise deprives him of such proceeds.
- Finally Mr Marshall submits that unsecured creditors get only limited protection from the possibility of a compensation order ultimately being made, because the power to make such an order, to be found in section 130 of the Powers of Criminal Courts (Sentencing) Act 2000 ("the Sentencing Act"), is limited in scope. Only those creditors who suffered losses because of the offence or offences for which the defendant is convicted or because of other offences taken into consideration can benefit from that provision. Other creditors are not covered and would not be protected.
- We begin our consideration of these arguments with section 69 itself. It is true that some of the provisions in that section contain the phrase "with a view to", which as has been said in several of the authorities indicates a degree of flexibility in the court's approach and simply gives a "legislative steer." Section 69(2)(c), however, is different. It does not contain that phrase and does appear to be in mandatory terms: the powers "must be exercised without taking account of any obligation … ." Moreover, the feature of its equivalent provision in the earlier legislation which so influenced Davis J in In re X has changed: it is now clear that this provision does apply in the situation where there is a restraint order but no confiscation order in existence, because the words "or may be made" have been added: see the discussion at paragraphs 63 and 69 (ante). This must be taken to represent a deliberate tightening-up of the legislation by Parliament. Though In re X came after the passage of the 2002 Act, the point being made in In re X about the wording of the equivalent provision in the earlier legislation had already been made by Lord Donaldson MR in In re Peters: see paragraph 66 hereof.
- On the face of it, section 69(2)(c) does require the courts to ignore any debt owed by the restrained person to an unsecured third party creditor, so that the existence of such a debt would not empower the court to vary a restraint order unless there was no conflict "with the object of satisfying any confiscation order." On that last aspect, we are wholly unpersuaded by Mr Marshall's argument about the meaning to be attached to those words. His contention that the "object" is that of depriving the offender of the proceeds of crime is unsustainable. That is the object of the confiscation order itself, whereas this provision is referring to the object of "satisfying" any confiscation order, i.e. providing a sufficient quantum of assets to meet the sum identified, already or in due course, in a confiscation order. Mr Marshall's interpretation would render the presence of that word "satisfying" unnecessary and would, in our judgment, distort the natural meaning of section 69(2)(c). If he were right, the provision would enable any third party creditor to obtain a variation of the restraint order and so to be paid, and indeed Mr Marshall submits that this is what should happen. The provision would in fact have virtually no effect in practice. In our view, the latter part of paragraph (c) is, as Mr Mitchell argues, indicating merely that if the court can see that a confiscation order, existing or prospective, relates to an amount which the defendant has ample assets to meet, then it may be that a debt to a third party creditor can properly be allowed to be paid from the restrained assets.
- But what if there is a conflict with the object of satisfying a confiscation order, a situation which will regularly arise? As we have said, the wording of section 69(2)(c) appears to mean that the court cannot vary the restraint order to enable a debt to a third party to be paid. But we accept that it is necessary to see section 69(2)(c) in the wider context of the 2002 Act as a whole. If one does that, then a number of considerations emerge.
- First, Mr Mitchell is right to emphasise that a restraint order, like the other orders possible under the powers to which section 69 relates, is essentially a temporary measure. It is preserving the position pending other matters being dealt with, very often pending criminal proceedings being instituted and/or concluded. As Lord Donaldson MR commented in In Re Peters, the court in such a case
- Secondly, the potential harshness of section 69(2)(c) to innocent creditors is to some extent softened by the powers which the Crown Court has if the offender is eventually convicted; if he is acquitted, then the restraint order is in any event discharged. Thus the court has the power under section 130 of the Sentencing Act to make a compensation order in favour of a person who has suffered loss resulting from the offence or any other offence which is taken into consideration. As Mr Mitchell points out, such a compensation order takes priority over a confiscation order: see section 13(5) and (6) of the 2002 Act. Not every creditor will be helped by this provision, since he may not qualify under the terms of section 130, but some will be assisted. Indeed, if a victim of the defendant's criminal conduct has started or intends to start civil proceedings against him "in respect of loss, injury or damage sustained in connection with the conduct", then the court, by virtue of section 6(6), need not make a confiscation order at all. The duty to make one where it is determined that the defendant has benefited from his criminal conduct becomes simply a power in those circumstances described in section 6(6). When one bears in mind that the criminal conduct leading to "loss, injury or damage" may be general criminal conduct if the defendant has a criminal lifestyle and not merely the particular criminal conduct covered by the offences in question (plus those taken into consideration), it can be appreciated that a considerable number of persons may qualify as "victims" for this purpose. This too must tend to reduce the number of third parties ultimately affected adversely by the 2002 Act.
- Thirdly, those who have suffered losses from that criminal conduct and who do qualify for a compensation order are only going to benefit from section 130 if the defendant's assets are preserved in the meantime to a sufficient degree. There seems to us to be a powerful argument for not allowing the total of those assets to be reduced in the meantime by third party creditor applications for variations of the restraint order, which could work to the detriment of such victims. That factor could be reflected in the court exercising a discretion to refuse a variation in such a case, rather than by requiring it to do so, but it is another reason why the words of section 69(2)(c) could properly be taken at their face value.
- Fourthly, and of the greatest significance, the payment of third party creditors at the restraint order stage seems to us to be inconsistent with the position which obtains at the confiscation order stage. Section 9 of the 2002 Act provides that the available amount of the defendant's assets when one comes to quantify the amount to be specified in the confiscation order is to be ascertained in the following way:
- True it is that section 41(3) empowers a court to make provision in the approved terms of a restraint order for living and legal expenses and for the purpose of enabling a trade or business to be carried on, and one can mount an attractive argument, as Mr Marshall did, about the contrast between past debts and such future debts. But we do not regard that contrast as sufficient to overcome the matters to which we have referred. The Crown Court will, if making such provision under section 41(3) in the terms of the restraint order, seek to control carefully the amounts involved. Indeed, we note that the "reasonable legal expenses" cannot be ones incurred in relation to the offence, the investigation or prosecution of which has given rise to the application for the restraint order: see section 41(4) and (5). In any event, this power under section 41(3) seems to be aimed, at least in part, at allowing a defendant, in person or through a corporate vehicle, to carry on his trade or business and thereby avoid a depreciation of his business assets.
- We conclude, therefore, that the natural meaning of section 69(2)(c) gains support from the statutory framework in which it is to be found. The intention of the legislature that restraint orders should be made and subsequently be maintained without regard to debts owed to third party unsecured creditors is evident and is sufficiently clear without the need to have recourse to Hansard. In those circumstances the court is not entitled to have regard to what was said during the passage of the Bill which led to the 2002 Act and we therefore decline to do so. Nonetheless it follows from our conclusion that Judge Hone was wrong to reach the decision that he did about unsecured creditors. The statutory provisions have changed significantly since the pre-2002 Act legislation and In re X would be decided differently today. Unless there is no conflict with the object of satisfying any confiscation order that has been or may be made, a restraint order should not be varied so as to allow for the payment of a debt to an unsecured creditor.
- There was a submission made on behalf of Lexi that the restraint order in this case should be varied because of delay on the part of the SFO. Mr Marshall draws attention to the fact that, by virtue of section 42(7) of the 2002 Act, a restraint order must be discharged if proceedings for the anticipated offence have not started within a reasonable time. He submits that, if that is so, then a restraint order can be varied for such a reason. We are not convinced that in such a case variation would be the appropriate outcome: in such circumstances the proper order would be one of discharge of the order. But obviously Lexi would be content with the complete discharge of the restraint order.
- The argument on this is that the restraint order was made on 20 April 2006 on the basis that a criminal investigation had been started and the terms of section 40(2) satisfied but that we are now two years later and no prosecution has been begun. Mr Marshall submits that a reasonable time has elapsed. We are not persuaded of that. From the material we have seen, it appears that the investigation being conducted by the SFO is one of some complexity – indeed, it is described in a witness statement by Tanvir Tehal, dated 4 July 2007, as "very complex". A witness statement made by Paul Joseph Fleming dated 20 June 2007 and filed on behalf of Lexi refers to a major fraud involving losses of £10 million (paragraph 5). Beyond that it is difficult to go in describing the detailed facts relevant to delay, because the evidence is not before us, no doubt because delay was not a ground on which the application to Judge Hone to vary the restraint order was made. We are in no position to conclude that a reasonable time within which criminal proceedings should have begun has elapsed.
- It follows from the reasons we have set out that we propose to allow this appeal to the extent of varying Judge Hone's order so as to limit the variation which he made. The restraint order will be varied so as to allow payment of the judgment dated 19 March 2007 to the extent of £437,258.41. It will not be varied so as to allow for the payment of the unsecured balance. We invite submissions in writing from the parties as to any issue concerning interest on the £437,258.41 and as to the precise form of our order.
- We cannot leave this appeal without commenting on some procedural matters which have come to light during the hearing. First, there can be little doubt that the issues which arose in this case concerning beneficial interests, equitable charges and tracing were far from straightforward. They are not part of the daily work of most Crown Court judges, and indeed this constitution of the Court of Appeal Criminal Division was deliberately arranged so as to ensure that appropriate expertise in matters normally falling within the jurisdiction of the Chancery Division was available. Sometimes issues may arise in restraint order proceedings about equitable interests which are not unduly complicated and can readily be dealt with in the Crown Court. In other cases the sums involved may not warrant any unusual steps. But there may be other times when the complexities are such that it may not be wise for the Crown Court judge to embark on seeking to decide those issues. In such a case where a relaxation of a restraint order is sought, consideration should be given to adjourning those variation proceedings to enable the issues to be determined in proceedings before a specialist Chancery Circuit judge or High Court judge of the Chancery Division. Alternatively, those arranging the listing of such cases in the Crown Court should seek to ensure that they are heard by a judge with the relevant experience and expertise.
- The other procedural matter which has caused us concern derives from section 58(5) and (6), the terms of which we have set out earlier at paragraph 14. Those provisions require any court in which proceedings are pending in respect of any property, in respect of which a restraint order has been made or applied for, to give an opportunity to be heard to the applicant for the restraint order (i.e. the Crown in some manifestation) and to any receiver appointed under the 2002 Act, and to do so before it decides whether or not to stay the proceedings or to allow them to continue. Those provisions clearly applied to the proceedings brought by Lexi against M in the Chancery Division. We have been told that, although some of the judges dealing with those proceedings were made aware that a restraint order was in existence, their attention was never drawn to section 58 of the 2002 Act. It should have been. One consequence was that the SFO did not seek to intervene in the Chancery proceedings.
- We entirely accept that the reason why section 58 was not drawn to the attention of those judges was because counsel appearing then for Lexi was himself unaware of it. It was an innocent oversight. Nonetheless, steps do need to be taken to ensure that the terms of section 58 are observed. Some thought might usefully be given to the possibility of creating a register of restraint orders and applications for such orders, though that would not have cured the problem in the present case, since all involved were aware of the existence of the restraint order. The SFO and other prosecuting authorities could usefully publicise more widely the general tenor of section 58, to increase the awareness of it in the legal profession, and no doubt the relevant Bar Associations could also play a role. In addition, judges themselves should be alerted to its significance, perhaps through the training provided by the Judicial Studies Board. This is not just a matter for the criminal courts and criminal lawyers: the duty under section 58 applies to all courts in which proceedings about such property take place, and very often those will be the civil courts. We shall direct that a copy of this judgment, together with a note drawing attention to this postscript, be sent to the Chairman of the Judicial Studies Board and to the Family and Civil Procedure Rules Committees.
Lord Justice Keene:
"4. On 15th March 2006 a criminal investigation was started in England and Wales into an offence of conspiracy to defraud the Cheshire Building Society and money laundering offences against [M].
5. [M] was a chartered surveyor and director of the property services firm Dunlop Haywards. At about the same time as the investigation was commenced, [M] was suspended from his employment with the firm.
6. The SFO's investigation concerns loans made by the Cheshire Building Society in respect of properties valued by Dunlop Haywards. The SFO's investigation into this fraud is continuing, but as of yet, no criminal charges have been brought."
"10) A declaration that the 6th defendant holds the sum set out at paragraph 7.5 of the particulars of claim or its product on trust for the Company and an Order that he repay the same.
11) Further or alternatively, a declaration that the 6th Defendant holds the sum of set out at paragraph 7.5 of the particulars of claim as monies had and received to the claimant's use and an Order that he repay the same.
12) An Order directing enquiries and the taking of accounts into the benefits that the 6th defendant has received directly or indirectly from the sum paid.
13) An Order that the 5th defendant (sic) do compensate the Claimant for the loss it has suffered by reason of the payment."
"[M] do pay the Claimant [Lexi] the sum of £625,250 plus compound interest at the rate of 4% over six monthly LIBOR in the sum of £62,432.83."
An interim charging order was subsequently obtained by Lexi against the property at Wheathampstead and third party debt orders against the bank accounts at United National Bank and Halifax.
"(2) The first condition is that –
(a) a criminal investigation has been started in England and Wales with regard to an offence, and
(b) there is reasonable cause to believe that the alleged offender has benefited from his criminal conduct.
(3) The second condition is that –
(a) proceedings for an offence have been started in England and Wales and not concluded, and
(b) there is reasonable cause to believe that the defendant has benefited from his criminal conduct."
The references to reasonable cause to believe that the alleged offender or defendant has benefited from his criminal conduct echo the wording of section 6 dealing with confiscation orders, where the court decides whether a defendant has benefited from such conduct: see section 6(4) and (5).
"41 Restraint orders
(1) If any condition set out in section 40 is satisfied the Crown Court may make an order (a restraint order) prohibiting any specified person from dealing with any realisable property held by him.
(2) A restraint order may provide that it applies –
(a) to all realisable property held by the specified person whether or not the property is described in the order;
(b) to realisable property transferred to the specified person after the order is made.
(3) A restraint order may be made subject to exceptions, and an exception may in particular –
(a) make provision for reasonable living expenses and reasonable legal expenses;
(b) make provision for the purpose of enabling any person to carry on any trade, business, profession or occupation;
(c) be made subject to conditions.
(4) But an exception to a restraint order must not make provision for any legal expenses which –
(a) relate to an offence which falls within subsection (5), and
(b) are incurred by the defendant or by a recipient of a tainted gift.
(5) These offences fall within this subsection –
(a) the offence mentioned in section 40(2) or (3), if the first or second condition (as the case may be) is satisfied;
(b) the offence (or any of the offences) concerned, if the third, fourth or fifth condition is satisfied."
"(3) An application to discharge or vary a restraint order or an order under section 41(7) may be made to the Crown Court by
(a) the person who applied for the order;
(b) any person affected by the order.
(4) Subsections (5) to (7) apply to an application under subsection (3).
(5) The court –
(a) may discharge the order;
(b) may vary the order.
(6) If the condition in section 40 which was satisfied was that proceedings were started or an application was made, the court must discharge the order on the conclusion of the proceedings or of the application (as the case may be).
(7) If the condition in section 40 which was satisfied was that an investigation was started or an application was to be made, the court must discharge the order if within a reasonable time proceedings for the offence are not started or the application is not made (as the case may be)."
It will be observed that under the 2002 Act, unlike earlier legislation, the powers to make, vary and discharge a restraint order are conferred on the Crown Court and no longer on the High Court.
"(2) The powers –
(a) must be exercised with a view to the value for the time being of realisable property being made available (by the property's realisation) for satisfying any confiscation order that has been or may be made against the defendant;
(b) must be exercised, in a case where a confiscation order has not been made, with a view to securing that there is no diminution in the value of realisable property;
(c) must be exercised without taking account of any obligation of the defendant or a recipient of a tainted gift if the obligation conflicts with the object of satisfying any confiscation order that has been or may be made against the defendant;
(d) may be exercised in respect of a debt owed by the Crown.
(3) Subsection (2) has effect subject to the following rules –
(a) the powers must be exercised with a view to allowing a person other than the defendant or a recipient of a tainted gift to retain or recover the value of any interest held by him;
(b) in the case of realisable property held by a recipient of a tainted gift, the powers must be exercised with a view to realising no more than the value for the time being of the gift;
(c) in a case where a confiscation order has not been made against the defendant, property must not be sold if the court so orders under subsection (4)."
"84 Property: general provisions
(1) Property is all property wherever situated and includes -
(a) money;
(b) all forms of real or personal property;
(c) things in action and other intangible or incorporeal property.
(2) The following rules apply in relation to property –
(a) property is held by a person if he holds an interest in it;
…
(f) references to an interest, in relation to land in England and Wales or Northern Ireland, are to any legal estate or equitable interest or power;
…
(h) references to an interest, in relation to property other than land, include references to a right (including a right to possession)."
"(5) If a court in which proceedings are pending in respect of any property is satisfied that a restraint order has been applied for or made in respect of the property, the court may either stay the proceedings or allow them to continue on any terms it thinks fit.
(6) Before exercising any power conferred by subsection (5), the court must give an opportunity to be heard to –
(a) the applicant for the restraint order, and
(b) any receiver appointed in respect of the property under section 48, 50 or 52."
We shall have to revert to these last-mentioned provisions in due course when commenting later in this judgment on what happened in the Chancery Division proceedings brought by Lexi.
"be astute, wherever possible, to protect the rights and interests of third parties."
"If the wrongdoer has failed to comply properly with court orders, as is abundantly the case here, the beneficiary of the constructive trust (Lexi Holdings) will have a first charge for the money had and received upon all trust property which becomes mixed with the constructive trustee's own property. So I find that the Applicant in this case succeeds on the first ground of the argument."
"there is a clear distinction to be made in the court's approach between the position before and after a confiscation order is made." (paragraph 25(e))
Consequently he held that the court had the power to sanction the payment of third party unsecured creditors.
A Proprietary Interest?
"(1) Unless [M] complies in full with his obligations set out under paragraphs 11 and 12 and 14 to 20 of the Order of Mr Justice Richards dated 13 November 2006, and paragraphs 11.4 of the Order of Mr Justice Briggs dated 14 December no later than 4 p.m. on 15 March 2007 being within 7 days of the date of this order, his defence be struck out and the Claimant be at liberty to enter judgment against him."
"Judgment without trial after striking out
3.5 (1) This rule applies where:
(a) the court makes an order which includes a term that the statement of case of a party shall be struck out if the party does not comply with the order; and
(b) the party against whom the order was made does not comply with it.
(2) A party may obtain judgment with costs by filing a request for judgment if:
(a) the order referred to in paragraph (1)(a) relates to the whole of a statement of case; and
(b) where the party wishing to obtain judgment is the claimant, the claim is for:
(i) a specified amount of money;
(ii) an amount of money to be decided by the court;
(iii) delivery of goods where the claim form gives the defendant the alternative of paying their value or
(iv) any combination of these remedies.
…
(4) The request must state that the right to enter judgment has arisen because the court's order has not been complied with.
(5) A party must make an application in accordance with Part 23 if he wishes to obtain judgment under this rule in a case to which paragraph (2) does not apply."
"12.4(3) Where a claimant:
(a) claims any other remedy in his claim form in addition to those specified in paragraph (1); but
(b) abandons that claim in his request for judgment,
he may still obtain a default judgment by filing a request under paragraph (1)."
It is true that Rule 12.4(3) has no expressed counterpart in Rule 3.5. But it is difficult to think that any different outcome could have been intended; and in any case, both by reference to the wording of Rule 3.5 itself (in particular the words "the claim") and by reference to what Lexi actually sought in its requested judgment, we do consider that a claim for a proprietary interest had been abandoned in the Chancery proceedings at the time judgment was requested and obtained.
"The simplest case is where a trustee wrongfully misappropriates trust property and uses it exclusively to acquire other property for his own benefit. In such a case the beneficiary is entitled at his option either to assert his beneficial ownership of the proceeds or to bring a personal claim against the trustee for breach of trust and enforce an equitable lien or charge on the proceeds to secure restoration of the trust fund. He will normally exercise the option in the way most advantageous to himself … "
Lord Millett went on to summarise at p.131G, the basic rule where mixing has occurred as this:-
"Where a trustee wrongfully uses trust money to provide part of the cost of acquiring an asset the beneficiary is entitled at his option either to claim a proportionate share of the asset or to enforce a lien upon it to secure his personal claim against the trustee for the amount of the misapplied money".
Moreover, as Lord Millett explains (see p.130 C-D) both remedies are proprietary and depend on successfully tracing the misappropriated trust property into the proceeds: cf. also El Ajou v Dollar Land Holdings plc [1993] 3 All ER 717 (a decision of the same judge, at first instance). That process of its nature involves identifying a continuing equitable interest at all stages leading up to the identification of the asset or assets over which the proprietary remedy is ultimately asserted.
"Faced with alternative and inconsistent remedies a plaintiff must choose between them. Faced with cumulative remedies a plaintiff is not required to choose. He may have both remedies. He may pursue one remedy or the other remedy or both remedies, just as he wishes. It is a matter for him. He may obtain judgment for both remedies and enforce both judgments. When the remedies are against two different people, he may sue both persons. He may do so concurrently, and obtain judgment against both. Damages to the full value of goods which have been converted may be awarded against two persons for successive conversions of the same goods. Or the plaintiff may sue the two persons successively. He may obtain judgment against one, and take steps to enforce the judgment. This does not preclude him from then suing the other."
"21. I am satisfied that the transfer of Lexi Holdings' funds to [M] in the circumstances of this case did make [M] a constructive trustee at the time the funds were received by him in January/February 2006, prior to the making of the restraint order. The general principle illustrates the maxim Omnia praesumuntur contra spoliatorem. If the wrongdoer has failed to comply properly with court orders, as is abundantly the case here, the beneficiary of the constructive trust (Lexi Holdings) will have a first charge for the money had and received upon all trust property which becomes mixed with the constructive trustee's own property. So I find that the Applicant in this case succeeds on the first ground of the argument."
The phrase "a first charge for the money had and received upon all trust property which becomes mixed with the constructive trustee's own property", with all respect to the Judge, involves something of a conflation of various different concepts. But the Judge's overall intent – as Mr Mitchell did not seek to dispute – appears to have been to hold that the assets of M were subject to an equitable charge in favour of Lexi to secure restoration of the misappropriated £625,000 together with interest in accordance with the judgment of 19 March 2007.
"A bank in fact uses all deposit moneys for the general purposes of the bank. Whether a bank trustee lawfully receives deposits or wrongly treats trust money as on deposit from trusts, all the moneys are in fact dealt with and expended by the bank for the general purpose of the bank. In these circumstances it is impossible for the beneficiaries interested in trust money misappropriated from their trust to trace their money to any particular asset belonging to the trustee bank. But equity allows the beneficiaries, or a new trustee appointed in place of an insolvent bank trustee to protect the interests of the beneficiaries, to trace the trust money to all the assets of the bank and to recover the trust money by the exercise of an equitable charge over all the assets of the bank. Where an insolvent bank goes into liquidation that equitable charge secures for the beneficiaries and the trust priority over the claims of the customers in respect of their deposits and over the claims of all other unsecured creditors. This priority is conferred because the customers and other unsecured creditors voluntarily accept the risk that the trustee bank might become insolvent and unable to discharge its obligations in full. On the other hand, the settlor of the trust and the beneficiaries interested under the trust, never accept any risks involved in the possible insolvency of the trustee bank. On the contrary, the settlor could be certain that if the trusts were lawfully administered, the trustee bank could never make use of trust money for its own purposes and would always be obliged to segregate trust money and trust property in the manner authorised by law and by the trust investment free from any risks involved in the possible insolvency of the trustee bank. It is therefore equitable that where the trustee bank has unlawfully misappropriated trust money by treating the trust money as though it belonged to the bank beneficially, merely acknowledging and recording the amount in a trust deposit account with the bank, then the claims of the beneficiaries should be paid in full out of the assets of the trustee bank in priority to the claims of the customers and other unsecured creditors of the bank. 'If a man mixes trust funds with his own, the whole will be treated as the trust property, … that is, that the trust property comes first; …' per Sir George Jessel M.R. in In re Hallett's Estate [1880] 13 ChD 696, 719, adopting and explaining earlier pronouncements to the same effect. Where a bank trustee is insolvent trust money wrongfully treated as being on deposit with the bank must be repaid in full so far as may be out of the assets of the bank in priority to any payment of customers' deposits and other unsecured debts.
Equity thus protects beneficiaries against breaches of trust."
"Second, if the wrongdoer has destroyed or impaired the evidence by which the innocent party could show how much he has lost the wrongdoer must suffer from the resulting uncertainty."
But that was said in the context of a case where the admixed proceeds – namely crude oil – were identified. Further, in the present case it is known how much the innocent party (Lexi) has lost: the £625,000 and interest.
The Position of Unsecured Third Party Creditors:
"(2) Subject to the following provisions of this section, the powers shall be exercised with a view to making available for satisfying the confiscation order or, as the case may be, any confiscation order that may be made in the defendant's case the value for the time being of realisable property held by any person by the realisation of such property.
(3) In the case of realisable property held by a person to whom the defendant has directly or indirectly made a gift caught by this Part of this Act the powers shall be exercised with a view to realising no more than the value for the time being of the gift.
(4) The powers shall be exercised with a view to allowing any person other than the defendant or the recipient of any such gift to retain or recover the value of any property held by him.
(5) An order may be made or other action taken in respect of a debt owed by the Crown.
(6) In exercising those powers, no account shall be taken of any obligation of the defendant or of the recipient of any such gift which conflict with the obligation to satisfy the confiscation order."
"Property" was then defined by section 102(1) as including:
"money and all other property, real or personal, heritable or moveable, including things in action and other intangible or incorporeal property."
"with a view to securing that there is no diminution in the value of realisable property."
Secondly, section 69(2)(c) differs from its predecessor (section 82(6)), in that the requirement to take no account of any obligation of the defendant which conflicts with the object of satisfying "any confiscation order" now applies not merely to an existing confiscation order but also to one which may be made in the future against the defendant. This requirement, which is in mandatory terms, removes in its new form one of the bases for the decision in In Re X (Restraint Order: Variation), as we shall see. Those are probably the two most material changes for present purposes.
"no account shall be taken of any obligations of the defendant … which conflict with the obligation to satisfy the confiscation order",
showed that that provision did not apply to the situation before the making of a confiscation order: page 879B. The court referred to a balancing exercise akin to that involved in decisions under what was then known as the Mareva jurisdiction.
"essentially to impoverish defendants, not to enrich the Crown." (page 481F)."
More directly upon the point about the position of unsecured third party creditors under the pre-2002 legislation are two first-instance decisions, Re W (The Times 15 November 1990) and In re X (Restraint Order: Variation) (ante). In the former, Buckley J refused to vary a restraint order so as to permit payment of a bona fide debt on which judgment had been obtained. He referred to the terms of section 82(6) of the 1988 Act, which we have set out earlier in this judgment:
"Subsection (6) seems plain. Assuming that "obligation" includes debts, the satisfaction of the confiscation order takes priority. As "obligations" [sic] is given no special meaning in the definition sections of the Act, the assumption is justified. Support for this view of the legislative purpose is also to be found in the provisions concerning receivers, realization of property and priorities on bankruptcy in, for example, sections 78, 79, 80, 81, and 84.
Mr Stephens, for "Mrs W", drew my attention to In re Peters [1988] 1 QB 871, [1988] 3 All ER 46 and the analogy there drawn with Mareva injunctions. He submitted that under that jurisdiction the court would permit bona fide debts to third parties to be paid as they fell due. There is one fundamental difference between the two jurisdictions which did not concern the court in In re Peters but which is vital here. The object of Mareva injunctions is not to give any priority or advantage to the plaintiff over other creditors of the defendant. The provisions to which I have referred in the 1988 Act do give priority to the satisfaction of the confiscation order at least over general creditors. If that is the ultimate purpose of the Act, it must be wrong to make any order at an intermediate stage which might thwart such purposes, quite apart from section 82(6)."
Buckley J went on to indicate his tentative view that, if it was clear that the assets were on such a scale that payment of the third party creditor would not conflict with the object of satisfying an eventual confiscation order, then a variation could be made.
"Third, section 82(6) provides that no account shall be taken of any obligations of the defendant which conflict with the obligation to satisfy the confiscation order. But it is to be noted that subsection (6) does not, unlike subsection (2), include the words "or, as the case may be, any confiscation order that may be made". Thus subsection (6) only applies, and is only designed to apply, where a confiscation order has actually been made; not at an earlier stage. Indeed, that has been authoritatively decided by the Court of Appeal in In re Peters [1988] QB 871: see in particular the judgment of Lord Donaldson of Lymington MR, at p879B-C. "
He returned to that point in paragraph 21, saying
"In my view, however, what is important to bear in mind is that there is a clear distinction between the position after a confiscation order has been made and the position before one has been made. A confiscation order is made after conviction. Before conviction there is a presumption of innocence. The person who is the subject of the restraint order may be acquitted. It is difficult to think that Parliament could have intended to restrict the court's powers as a matter of jurisdiction in the way now contended for when the consequence might be the bankruptcy or ruin of the individual concerned before he has even been tried. That, indeed, to my mind, is one explanation for the distinction between the wording of section 82(2) and section 82(6) "
As we have already observed, the equivalent provision in the 2002 Act to section 82(6) in the 1988 Act does differ on this aspect. Section 69(2)(c) requires the relevant powers to be exercised without taking account of any obligation of the defendant if that obligation conflicts with the object of satisfying any confiscation that has been or may be made against the defendant.
"without taking account of any obligation of the defendant … if the obligation conflicts with the object of satisfying any confiscation order that has been or may be made against the defendant."
"is concerned solely with the preservation of assets at a time when it cannot know whether the accused will or will not be convicted." (page 879E).
A restraint order is therefore performing a holding operation. Of course, it has to be acknowledged that that operation may, and has been known to, last a considerable time. Nonetheless, the limited duration of restraint orders is a relevant factor when considering its adverse effects on third party creditors and when seeking to ascertain the intention of Parliament. The restraint order will eventually be discharged and either replaced by some other order such as a confiscation order or not replaced at all.
"(1) For the purpose of deciding the recoverable amount, the available amount is the aggregate of –
(a) the total of the values (at the time the confiscation order is made) of all the free property then held by the defendant minus the total amount payable in pursuance of obligations which then have priority, and
(b) the total of the values (at that time) of all tainted gifts.
(2) An obligation has priority if it is an obligation of the defendant –
(a) to pay an amount due in respect of a fine or other order of a court which was imposed or made on conviction of an offence and at any time before the time the confiscation order is made, or
(b) to pay a sum which would be included among the preferential debts if the defendant's bankruptcy had commenced on the date of the confiscation order or his winding up had been ordered on that date.
(3) "Preferential debts" has the meaning given by section 386 of the Insolvency Act 1986 (c.45)."
It will be seen that, when the court decides on the amount to be specified in the confiscation order, it has to use the total of the values of the property the defendant holds, less only "priority" obligations, such as fines and preferential debts. The existence of obligations owed to ordinary third party creditors is to be disregarded when a confiscation order is made. It seems to this court that it would have been wholly illogical for the legislature to have decided to allow third party debts to be paid during the period when assets are supposedly being preserved by a restraint order when such debts are to be left out of account at the stage when the confiscation order is made. We can see no reason why Parliament should have decided to allow unsecured creditors to reduce the assets during the restraint phase when such creditors could not reduce the assets at the confiscation stage. If that were the position, it would put a premium on well-advised creditors getting in quickly during the restraint phase before their opportunity is lost, and we do not accept that that situation is one which was ever intended.
Other Matters:
Conclusions:
Postscript: