England and Wales High Court (Administrative Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
ADMINISTRATIVE COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		5th February 2003

Mr Justice Lightman:

INTRODUCTION

1. Ms Sara Dayman of BDO Stoy Hayward ("the Receiver") applies for the guidance of the court on two issues. The first is a direction whether she is assessable to capital gains tax or income tax in the sum of £500,000 in respect of realisations made during the course of the receivership of Mr Peter Piacentini ("the Defendant") to which she was appointed under section 77 of the Criminal Justice Act 1988 ("CJA"). The second is a direction whether such tax is payable as an expense of the receivership within the meaning of section 81(5) and indeed section 88(2) of the CJA. These issues have arisen in many receiverships undertaken by the Receiver and there are very substantial sums at stake.

FACTS

2. In 1994 the Defendant was charged with a tax fraud. By a restraint order made under section 77 of the CJA dated the 20^th September 1995 the Receiver was appointed management receiver with duties to take possession of and receive and manage the property and affairs of the companies controlled by the Defendant. This order was subsequently replaced by a further order to like effect on the 27^th October 1995 ("the Restraint Order"). Both orders were made on the application of the Commissioners of Inland Revenue ("the Revenue") in anticipation of the making of a confiscation order in the event of the Defendant's conviction. The Restraint Order (in paragraph 6) conferred upon the Receiver (in the event that a confiscation order was imposed on the Defendant) powers: (a) to sell the realisable property of the Defendant; (b) to discharge from the proceeds of realisation the costs of and incidental to the realisation; and (c) to apply the net proceeds of the realisation towards satisfaction of the confiscation order. Paragraph 8 of the Restraint Order provided that the Receiver's remuneration, disbursements and expenses were to be paid.
3. On the 10^th September 1998, following the trial and conviction of the Defendant, a confiscation order was made in the sum of £2.1 million. The Receiver thereupon assumed the role of enforcement receiver as contemplated by paragraph 6 of the Restraint Order and in exercise of the power conferred upon her sold assets the subject of the receivership. On the 26^th April 2000 the confiscation order was satisfied by the full payment of £2.1 million to the Justices Chief Executive of Uxbridge Magistrates Court ("the Chief Executive") of which just over £2 million was paid by the Receiver out of the proceeds of sale. By letter dated the 8^th August 2000, the Chief Executive stated that the confiscation order had been satisfied. On the 22^nd July 2002 the Defendant applied for the discharge of the Restraint Order. On the 13^th August 2002 the Receiver issued the application notice now before me seeking directions whether she is assessable to capital gains tax and/or income tax in respect of realisations of or dealings with receivership assets made by her during the course of the receivership. By order dated the 19^th August 2002, the Restraint Order was discharged, but the Chief Executive was ordered to hold the funds paid into court pending the outcome of the Receiver's application.

CJA

4. Part VI of the CJA is headed "Confiscation of the proceeds of an offence". Section 71 provides that, where an offender is convicted of a specified offence, the court is required: (a) to determine whether the offender obtained property or a pecuniary advantage as a result of or in connection with its commission and the value of the property or pecuniary advantage so obtained; and (b) to make an order ("a confiscation order") that the offender pays a sum equal to the lesser of the benefit obtained and the amount which appears to the court might be realised at the time the order is made. Section 72(7) provides that, where an offender has been ordered to pay compensation to the victim of his offence and the means of the offender are insufficient to meet an order for compensation under section 130 of the Powers of Criminal Courts (Sentencing) Act 2000, so much of the compensation as is not recoverable shall be paid out of any sums recovered under the confiscation order.
5. Section 77 confers upon the High Court power to grant a restraint order prohibiting any person from dealing with any "realisable property" and to appoint a receiver to manage or otherwise deal with such "realisable property" as directed by the court. Section 74 contains a definition of "realisable property" and provisions for its valuation:

"74(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 this Act….

(3) For the purposes of this Part of this Act the amount that might be realised at the time a confiscation order is made is...

(a) the total of the values at that time of all the realisable property held by the defendant, less

(b) where there are obligations having priority at that time, the total amounts payable in pursuance of such obligations.

together with the total of the values at that time of all gifts caught by this Part of this Act.

(4) Subject to the following provisions of this section, for the purposes of this Part of this Act the value of property (other than cash) in relation to any person holding the property...

(a) where any other person holds an interest in the property, is...

(i) the market value of the first-mentioned person's beneficial interest in the property, less

(ii) the amount required to discharge any incumbrance (other than a charging order) on that interest; and

(c) in any other case, is its market value….

(9) For the purposes of subsection (3) above, an obligation has priority at any time if it is an obligation of the defendant to...

(a) pay an amount due in respect of a fine, or other order of a court, imposed or made on conviction of an offence, where the fine was imposed or order made before the confiscation order; or

(b) pay any sum which would be included among the preferential debts (within the meaning given by section 386 of the Insolvency Act 1986) in the defendant's bankruptcy commencing on the date of the confiscation order or winding up under an order of the court made on that date. "

6. Section 80 provides that, where a confiscation order is made, the High Court may appoint a receiver to take possession of and realise the realisable property. Section 81 governs the application of the realisations on sale:

"(1) Subject to subsection (2) below … the proceeds of the realisation … of any property under section 77 or 80 above … shall first be applied in payment of such expenses incurred by a person acting as an insolvency practitioner as are payable under section 87(2) below and then shall, after such payments (if any) as the High Court may direct have been made out of those sums, be applied on the defendant's behalf towards the satisfaction of the confiscation order.

(2) If, after the amount payable under the confiscation order has been fully paid, any such sums remain in the hands of such a receiver, the receiver shall distribute them...

(a) among such of those who held property which has been realised under this Part of this Act, and

(b) in such proportions

as the High Court may direct after giving a reasonable opportunity for such persons to make representations to the court.

(3) The receipt of any sum by a [justices' chief executive] on account of an amount payable under a confiscation order shall reduce the amount so payable, but the [justices' chief executive] shall apply the money received for the purposes specified in this section and in the order so specified.

(4) The [justices' chief executive] shall first pay any expenses incurred by a person acting as an insolvency practitioner and payable under section 87(2) below but not already paid under subsection (1) above.

(5) If the money was paid to the [justices' chief executive] by a receiver appointed under this Part of this Act or in pursuance of a charging order, the justices' clerk shall next pay the receiver's remuneration and expenses.

(6) After making...

(a) any payment required by subsection (4) above; and

(b) in a case to which subsection (5) above applies, any payment required by that subsection,

the [justices' chief executive] shall reimburse any amount paid under section 88(2) below.

(7) The [justices' chief executive] shall finally pay any compensation directed to be paid out of any sums recovered under the confiscation order under section 72(7) above.

(8) Any balance in the hands of the [justices' chief executive] after he has made all payments required by the foregoing provisions of this section shall be treated for the purposes of [section 60 of the Justices of the Peace Act 1997] (application of fines, etc) as if it were a fine imposed by a magistrates' court…."

7. The expenses incurred by an insolvency practitioner for which provision is made under section 87(2) of the CJA are expenses incurred arising from the honest and reasonable but wrongful seizure or disposal of property which is the subject of the restraint order: see section 81(1)(a).
8. Section 88(2) provides as follows:

"(2) Any amount due in respect of the remuneration and expenses of a receiver so appointed shall, if no sum is available to be supplied in payment of it under section 81(5) above, be paid by the prosecutor or, in a case where proceedings for an offence to which this Part of this Act applies are not instituted, by the person on whose application the receiver was appointed."

9. Section 82 provides:

"Exercise of powers by High Court or receiver

(1) This section applies to the powers conferred on the High Court by sections 77 to 81 above or on the Court of Session by sections 90 to 92 below, or on a receiver appointed under this Part of this Act or in pursuance of a charging order.

(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 exercising those powers, no account shall be taken of any obligations of the defendant … which conflict with the obligation to satisfy the confiscation order."

10. It is established by the decision in Hughes v. Commissioners of Customs & Excise [2002] 4 All ER 633 that the Receiver as management receiver until the 10^th September 1998 (when the confiscation order was made) was entitled to recover her expenses and remuneration from the assets under her control; but from the crystallisation of the Defendant's obligation in the sum of £2.1 million on that date, subject to any contrary direction of the High Court under section 81(1), her obligation was to pay all or any realisations up to the figure of the confiscation order (i.e. £2.1 million) to the Chief Executive. The High Court has however conferred upon it by section 81(1) power to give a direction that payments be made out of realisations ahead of and in addition to the amount payable under the confiscation order. Payments may accordingly be directed to be made e.g. to the Receiver or Central Confiscation Branch of the CPS ahead of, but not postponed to, payment in satisfaction of the confiscation order. No such order was sought or made in this case. By section 81(3) the sum received by the Chief Executive is to be treated as a payment on account and in reduction of the amount payable under the confiscation order. In turn the Chief Executive is under a duty to apply the sum received in the following order:

(1) in satisfaction of the expenses of an insolvency practitioner payable under section 87(2) so far as they are unpaid under section 81(1): see section 81(4);

(2) in payment of the receiver's remuneration and expenses: see section 81(5);

(3) in reimbursement of the sum paid to the receiver under the indemnity provided for under section 88(2): see section 81(6).

11. It is open to question whether the CJA makes provision for reassessing the confiscation payment in the light of an increase in value of, or the greater than anticipated realisations from, the "realisable property". If there is a lacuna in that regard, it affords wide scope for the restoration of excess property to the Defendant or donees of gifts caught by the CJA pursuant to the order of the court under section 81(2). But if there is such a lacuna, section 22 of the Proceeds of Crime Act 2002 when it comes into force expressly confers on the court the power to make such an uplift, and accordingly will fill any lacuna when it comes into force.

THE ISSUES

12. Two issues are raised on this application. The first is whether the Receiver incurs any personal liability to pay the capital gains tax or income tax. The second is whether the tax liability is an expense for the purposes of section 81(5) which is to be paid and discharged out of the proceeds of realisation.

PERSONAL LIABILITY

13. The starting point (as it seems to me) is to view the position which arises where a confiscation order is made and in compliance with that order the offender makes payment without the need for any recourse to a receivership. If the offender, to raise the necessary funds to satisfy the confiscation order, of his own volition realises his own assets, the offender (and he alone) will be assessable for any tax liability arising from that realisation. In cases where the offender is unwilling to realise his assets to raise the funds necessary to satisfy the confiscation order, the CJA provides an alternative mechanism to achieve this result, namely the appointment of a receiver vested with power to realise the offender's property and pay the liability. The issue raised on the application is whether the satisfaction of the confiscation order by the realisation of assets of the Defendant by the Receiver instead of by the Defendant himself materially affects the incidence of the tax liabilities arising from such sale. If the Receiver is assessable to capital gains tax or income tax, plainly that personal liability is an expense of the Receiver and falls within section 81(5) of the CJA: see e.g. In Re Beni Felkai Mining Company Ltd [1934] Ch 406 cited with approval in In re Mesco Properties Ltd [1980] 1 WLR 96 ("Mesco"). It is not apparent why the legislature should wish to make the Receiver assessable or in any way wish the incidence of tax to be any different (let alone more beneficial to the offender) if he fails or refuses to realise his assets to satisfy the confiscation order and thus necessitates the appointment of a receiver and realisation of his assets by the receiver.
14. The question whether personal liability is imposed on the Receiver turns on the provisions of sections 75 and 77 of the Taxes Management Act 1970 ("the TMA") which read (so far as material) as follows:

"75 (1) A receiver appointed by any court in the United Kingdom which has the direction and control of any property in respect of which income tax is charged in accordance with the provisions of the Income Tax Acts shall be assessable and chargeable with the tax in like manner and to the like amount as would be assessed and charged if the property were not under the direction and control of the court.

(2) Every such receiver shall be answerable for doing all matters and things required to be done under the Income Tax Acts for the purpose of assessment and payment of income tax.

77. (1) This part of this Act….shall apply in relation to capital gains tax as it applies in relation to income tax…."

15. I find these sections exceptionally difficult to construe. The difficulty is to understand the import of the final words of section 75(1): "if the property were not under the direction and control of the court". It may mean "as if no receiver had been appointed at all" or "as if the receivership was an out of court appointment". If the liability to assessment of the court appointed receiver is to be approached on the assumed premise that there is no receivership, then necessarily there can be no liability on the part of the receiver. On the other hand, if the court appointed receiver is to be treated as an out of court receiver, it is plain that, since in the ordinary case the receiver is the agent of the company or debenture holder, he is subject to no liability, (a proposition for which counsel cited Lightman & Moss, The Law of Receivers and Administrators of Companies (2000) paragraphs 13-013 and 13-017).
16. There is only one authority which touches on this issue, namely IRC v. Thompson [1937] 1 KB 290. In that case Lawrence J held that for the purposes of the Income Tax Act 1918 Schedule D Miscellaneous Rules r.1, which charged tax on the person receiving or entitled to income, the word "receiving" meant "receiving in fact" the income, and that a receiver appointed under a debenture as agent for the company was subject to the charge as he was receiving in fact the income. Lawrence J went on to consider the statutory predecessor to section 75 and at p.302 said as follows:

"The receiver in fact receives the proceeds of all the assets of the company, whether they are capital or income, and in receiving the proceeds of assets which are income assets he receives the income within the meaning of that rule. My attention was drawn by Mr Stamp to r. 15 of the General Rules applicable to All Schedules, which provides expressly that: 'A receiver appointed by' the Court 'shall be assessable and chargeable with tax in like manner and to the like amount as would be assessed and charged if the property were not under the direction and control of the Court'. That rule appears to me to contemplate that a receiver other than a receiver appointed by the Court would be assessed and charged in the ordinary course, being the person who received the income under Miscellaneous rules, r.1, and r. 15 is introduced for the purpose of providing that a receiver appointed by the Court shall be assessed and charged in the same way, although being under the direction and control of the Court he might be said not to be in receipt of the income. My attention was also drawn to the fact that the receiver is the occupier for the purpose of rating, and that on his appointment there is a change of occupation, and the case of Richards v. Overseers of Kidderminster (1) was referred to…."

17. In my respectful judgment, in his holding that the receiver "received" the income" the learned judge failed to have full and proper regard to the agency of the receiver. The reference to Richards v. Overseer of Kidderminster [1896] 2 Ch 212, when properly regarded, lends no support to the view that a receiver when acting as agent can incur such a liability: see Radford and Hayward v. Northavon RDC [1987] QB 357 in particular at 379F. The learned judge then went on to hold that rule 15 imposed a like charge on a receiver appointed by the court. If however his initial proposition that the out of court receiver is subject to a charge is wrong (as I think it is), the second relating to the receiver appointed by the court likewise cannot stand.
18. It appears to me that section 75 is founded on the same erroneous premise (i.e. that out of court receivers are subject to a charge) that founded the views expressed by Lawrence J on the predecessor section. Accordingly in view of the fact that the out of court receiver is subject to no charge, section 75 misfires and can have no effect or application. Common sense requires that where there is a realisation by the receiver the tax liability (whether for capital gains or income tax) should remain that of the Defendant alone, and that the Receiver should not be assessable. Nothing in section 75 compels me to reach any other conclusion. This conclusion is reinforced by the absence of any provision in the scheme of the CJA for any such liability for tax, for the ring-fencing of assets to meet that liability or for any indemnity. I accordingly hold that the Receiver is not assessable to capital gains tax or income tax.
19. I should add that section 448 and Schedule 10 of the Proceeds of Crime Act 2002, when that Act comes into force, disapplies section 75 and 77 of the TMA to receivers such as the Receiver in this case, but those provisions will not have the necessary retrospective effect to relieve the Receiver from any pre-existing personal liability. They accordingly have no direct relevance in this case. But it may be noted that the explicit statutory policy of the Proceeds of Crime Act 2002 that there should be no personal liability accords with what I have held to be the implicit statutory policy of the CJA to like effect.

EXPENSES OF RECEIVERSHIP

20. I turn to the question whether the provisions of the CJA require the capital gains tax or income tax liability to be paid and discharged as an expense of the enforcement receiver. Looking at the statutory scheme as a whole, it is clear that section 81 sets out an exhaustive statement of the purposes for which the receivership property may be applied. Section 81(3) requires the Chief Executive to apply the monies paid to him in the order and for the purposes there stated; and the Receiver must distribute the property and monies in his hands as provided in section 81(2). There is no provision in the legislation contemplating any payment of tax and no provision enabling any such payment to be made save in so far as it is implicit in the provision in section 81(5) for payment of the receiver's remuneration and expenses. The question accordingly arises whether the term "expense" in this context includes discharge of the capital gains tax liability of the Defendant.
21. The starting point in answering this question must be an examination of the decisions of Brightman J and the Court of Appeal in Mesco.
22. In Mesco, after the commencement of the compulsory winding-up of two companies, properties of those companies were sold at profit variously by mortgagees, receivers appointed by mortgagees and the liquidators. As a result the companies became liable to corporation tax in respect of the chargeable gains so realised under sections 238 and 243 of the Income and Corporation Taxes Act 1970, and by section 108(1) and (3)(a) of the TMA the liquidator were the proper officers to pay the tax, on all such sales. The question which arose was where did the corporation tax liability come in the order of priorities set out in Rule 195(1) of the Companies (Winding-up) Rules 1949 ("Rule 195(1)") which provided as follows:

"(1) The assets of a company in a winding up by the court remaining after payment of the fees and expenses properly incurred in preserving, realising and getting in the assets … shall, subject to any order of the court, … be liable to the following payments which shall be made in the following order of priority, namely: … Next ['the fifth paragraph'] the necessary disbursements of any liquidator appointed in the winding up by the court, other than expenses properly incurred in preserving realising or getting in the assets heretofore provided for …"

23. The question also arose as to the applicability of section 267 of the Companies Act 1948 which provided as follows:

"The court may in the event of the assets being insufficient to satisfy the liabilities, make an order as to the payment out of the assets of the costs, charges and expenses incurred in the winding up in such order of priority as the court thinks just."

24. The Court of Appeal (affirming Brightman J) held that the corporation tax liability was not a fee or expense incurred in preserving and realising and getting the assets which would have made the corporation tax payable in priority to all other claims, including necessary disbursements under the fifth paragraph. Those expenses were held to be limited to the direct costs of preserving, realising and getting in assets. Such costs included (for example) the fees of solicitors and estate agents and the costs of advertising. Corporation tax did not assist in the realisation of the companies' assets: it was not a necessary result of the sale. It was merely a possible consequence of a sale at a profit, and this was so even though the corporation tax was incurred because the liquidator carried on the companies' business in the performance of his duties. Since the liability arose as a consequence of a sale in the course of the winding up, the tax was a necessary disbursement within the fifth paragraph of Rule 195(1) which the liquidator was under a duty to pay in priority to unsecured creditors. The liability to tax constituted "charges and expenses" within the meaning of section 267 of the Companies Act 1948. As Buckley LJ said (at p.100):

"If in consequence of the realisation the company incurs a liability, the discharge of such liability must in my judgment constitute a charge or expense incurred in the winding up within section 267 of the Companies Act 1948 and must also, in my view, fall within rule 195."

25. The issue before me is whether the liability of the Defendant for capital gains tax and income tax likewise constitutes an expense within the meaning of section 81(5). In my view the answer is clearly in the negative. First it is to be noted that the liquidator in Mesco was by reason of section 108(1) and (3) of the TMA the proper officer to pay the liabilities of the companies of which he was liquidator. Unless the liquidator paid the tax liability, it would and could not be discharged. In the case of a receivership such as the present there is no equivalent to section 108 (1) or (3) making the Receiver the proper person to pay, and the liability of the Defendant continues unaffected by the receivership. Secondly section 82(6) of the CJA provides that in exercising her powers "no account shall be taken of any obligation of the defendant … which conflicts with the obligation to satisfy the confiscation order". This provision makes plain that the proceeds of realisation available for satisfaction of the confiscation order are not to be depleted by any application in discharge of the Defendant's liability for capital gains and income tax. Thirdly having particularly in mind that the term "expenses" is not a term of art (see Maughan J in In re Beni Falkai above at p.418-9) in the absence of any liability on the part of the Receiver to pay the capital gains tax, the term "expense" of the Receiver is not apposite to a continuing liability of the Defendant. Fourthly and finally the whole scheme of the CJA is to place a strict limit on the items to be paid and discharged out of the proceeds of realisation, and it is not consistent with that scheme to make a payment in effect for the benefit and in discharge of a continuing liability of the Defendant.
26. I accordingly hold that the Defendant's capital gains tax and income tax liabilities are not an expense of the Receiver within the meaning of the CJA and in particular section 81(5) and section 88(2) of the CJA.
27. I should add for completeness that no question can arise of the court having any jurisdiction to direct the Receiver to make any payment in respect of the capital gains tax and income tax liabilities. Any such order would be inconsistent with the scheme and in particular section 82(6) of the CJA to which I have already referred.
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