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
		21/05/2010

The Honourable Mr Justice Treacy:

1. On 8^th May 2009 a restraint order was made by Cranston J on an application made without notice by the Crown Prosecution Service ("CPS") over the assets of G, who was at the time under investigation for money laundering. G has since been charged with five counts of money laundering. The allegations arise from the theft of more than $15 million from a bank in Germany by two of its employees. They have since been convicted in Germany and are serving sentences. It is alleged that G assisted in the laundering in part of the $15 million.
2. As part of that process it is said that on D's instructions some £200,000.00 was transferred on 29^th April 2001 from an Australian bank account held by a man called Bryer to the British NatWest account held in the name of Prolink Holdings Limited ("Prolink"). Prolink had been incorporated on 27^th March 2001 specifically for the purpose of purchasing an existing timber business, AA Timber, which operated out of a yard at Romford Road, Romford, Essex. G, together with Derek Croft and John Kennedy, was a director of Prolink. They held shares in Prolink in the proportions 34%, 33%, and 33% respectively. Ownership of the yard was vested in Powervale Limited. That has the same directors as Prolink and is a wholly owned subsidiary with Prolink owning all its shares.
3. The £200,000.00, together with funds raised by way of bank loan, was used to purchase the existing business, AA Timber. The Crown asserts that since that money is directly traceable to the money stolen from the German bank, part of what is alleged to be G's alleged benefit from his involvement in the money laundering can be traced into AA Timber and the yard. The order made by Cranston J was served on G and also Derek Croft and John Kennedy, Prolink, and Powervale Limited.
4. Initially before me there were two applications. The CPS was seeking to vary the order to add certain specific assets to it and to seek disclosure. They indicated at the outset of the hearing that they did not intend to pursue their application and accordingly I dismiss it.
5. The second application was made by Derek Croft. He is the father-in-law of G. He seeks variation of the order so as to discharge himself and the companies from it. The parties have agreed that insofar as paragraph 5(a) of the original order restrained the assets of Prolink, it should be discharged and that that part of the order should be varied to refer to shares held by G in Prolink, together with rights held by him pursuant to the £200,000.00 loan made on 29^th April 2001. The real battleground in relation to this application is paragraph 5(b) of the order which restrained "all shares and assets held in the company Powervale Limited and in particular (i) the properties known as 383, 383(a), 397, and 397(a) Romford Road, Romford, and land at the rear of 383 to 397 Romford Road, Romford, Essex, registered under title number NGL112637". In addition variation is sought of that part of the order stating that the assets of Powervale Limited are to be treated as the personal assets of G. Paragraphs 6 and 8 of Cranston J's order had restrained Derek Croft and Powervale Limited from dealing with the assets of Powervale Limited as referred to paragraph 5(b).
6. It became clear during the hearing that the Crown's true interest related to the land and properties at Romford Road. They have recently been valued and show an equity worth in excess of half a million pounds. For the purposes of the application the essential facts are not in dispute. In the autumn of 2000 a business opportunity arose to buy an established timber business at Romford Road. The holding company Prolink was set up in March 2001 on financial advice as a vehicle for buying the business as a going concern. The purchase was then financed by a combination of a bank loan and a loan of £200,000.00 from G in May 2001. There is strong evidence to show that that money represented funds stolen from the German bank. There is no suggestion that the structure of Prolink acting as a holding company for Powervale and with different aspects of the business incorporated under other names is anything other than legitimate, and the result of bona fide professional advice. It is accepted that the timber business was a going concern when purchased and has been run since 2001 to date as a lawful and legitimate business. Until very recent times the business was run by Messrs Croft and Kennedy with significant increase in turnover. Kennedy has recently departed and in recent months Croft has been running the business in association with G, who has recently returned to this country from America. G's involvement in Prolink in terms of his directorship and share registration has been properly declared. The company's accounts show that the sum of £200,000.00 was a loan. There is internal company documentation created prior to any restraint proceedings making open reference to the fact of the loan by G and referring to interest payments due under the loan, as well as also showing what has been so far repaid.
7. It is also agreed that there is no evidence that Croft or Kennedy knew of or suspected the unlawful source of the loan provided by G. None of the forgoing matters is disputed on behalf of the CPS. It enabled Mr Talbot, on behalf of Mr Croft, to submit that the timber business associated with the Prolink group was a legitimate group of companies which had not been set up to launder money. Moreover, there was no evidence that it had been purchased for any reason other than to run a legitimate business. The question before the court is whether this court had jurisdiction to restrain dealings in the assets of Powervale Limited. It was common ground that the court could only do this if it was correct to treat Powervale Limited's assets as those of G by lifting the corporate veil. It was agreed that ordinary principles of company and property law applied to a consideration of the order made pursuant to s77 of the Criminal Justice Act 1988 which enables the High Court to prohibit any person from dealing with any "realisable property". Section 74(1)(a) defines "realisable property" as "any property held by the Defendant". Section 102(7) provides that "property is held by any person if he holds any interest in it". Section 102(1) provides that "interest in relation to property includes right".
8. The parties agree that assets or property owned by a company are not the property of its shareholders. See for example Salomon v Salomon and Co [1897] AC 22, and more recently, R v Seager and Blatch [2009] EWCA Crim 1303 at paragraph 54. The relevant case law starts with the decision of the Court of Appeal in Re H and others (Restraint Order) [1996] 2 A.E.R 391 where the court held that where a Defendant has used the corporate structure as a device or façade to conceal his criminal activities, the court could lift the corporate veil and treat the assets as the realisable property of a Defendant under the Criminal Justice Act 1988. In that case there was a prima-facie case that the Defendants controlled the companies concerned; that the companies had been used for fraud on a massive scale in relation to the evasion of excise duty; that the Defendants regarded the companies as carrying on a family business; and that company cash had been used to benefit the Defendants in substantial amounts. It was held appropriate to lift the corporate veil in those circumstances. A submission that whilst the veil could be lifted if a company was set up solely for the purpose of criminal activity, but could not be lifted or pierced if the business had been set up or used for purposes which, to a significant or substantial extent, were illegitimate, was not successful.
9. CPS v Compton [2002] EWCA Civ 1720 is a case where the company was initially a legitimately run business, albeit apparently struggling, but which had been transformed by a series of injections of laundered drug money. The Court of Appeal held it appropriate to lift the corporate veil. At paragraph 48 Simon Brown LJ said "Where, as here, it is established upon a full investigation of the facts that, save for the most limited and sporadic continuation of its original business activities, a small family company from a given date has wholly changed character and become essentially a vehicle for money laundering and, through investment, profiting from the proceeds of crime, it appears to me appropriate to pierce the corporate veil and to impute to the directors involved the ownership of the relevant assets…The courts should not permit those profiting from crime to escape the confiscation of their gains simply by pursuing under corporate guise what are no more than nominal trading activities as a cover for money laundering operations".
10. In R v Grainger [2008] EWCA Crim 2506 the court quashed a confiscation order since the judge had misdirected himself as to the proper approach to the obtaining of benefit. At paragraph 15 Toulson J said "This confiscation order…cannot, in our judgment, stand. It should not be thought that it follows from this that offenders can shelter behind companies with impunity. If an offender chooses to use a company as a shield to hide his benefits from the crime, it is open to the court to look behind the corporate veil in order to ascertain the true position".
11. Mr Talbot drew attention to those authorities and those passages, submitting that they accurately represented the state of the law. However, he went on to submit that on appropriate analysis of the facts of this case, there would be no justification for lifting or piercing the corporate veil. This was not a case of forming a company solely for the purpose of criminal activity. The loan had been made to the company on a basis which was openly recorded and associated with G's name in its books and records. The loan had been made on a basis which required repayments to be made. This was not a case of a business wholly changing its character and becoming a vehicle for money laundering; a previously existing business had been taken over and was continued successfully by those actually managing the company. This was not nominal trading activity using corporate guise as a cover for money laundering. He submitted that it did not follow from the mere fact that money derived from crime went into the company that the company's assets should be treated as belonging to the Defendant.
12. Mr Evans, on behalf of the Crown, contended that whilst the facts and the law were largely agreed between the parties, their interpretation of the facts was different. The facts showed that G had invested the proceeds of crime in a new corporate venture so that at least part of the company's directing mind knew that the money was the proceeds of crime. He accepted that whilst the legislative steer of s 82(2) of the 1988 Act was to make available realisable property held by any person for the purpose of satisfying a confiscation order, there would be no jurisdiction to make the order if the property was not in fact realisable property of the Defendant in question. He submitted that the Defendant had in terminology approved in Re H attempted by the device of a corporate structure to evade limitations imposed on his conduct by law. He pointed to the fact that, although what had been purchased was an existing corporate structure and real estate, and although the business had been operated legitimately, the whole purchase had been made possible by using the proceeds of crime as part of the purchase price. He invited the court to say that the corporate veil might be pierced so as to restrain a particular asset of the company which had been obtained using criminal property, and in particular he identified the land and premises at Romford Road.
13. Mr Evans acknowledged that the other assets of the company had been built up through the successful efforts of Mr Croft and Mr Kennedy. The issue, however, was whether there was a good arguable case on the facts that the companies were in practice a façade or device for the concealing of monies that had been criminally obtained. He drew attention to R v K [2005] EWCA Crim 619 where the court had approved that approach. He also drew attention to Re D [2006] EWHC 254 (Admin). At paragraph 17 Ouseley J commented that there was a risk of using the phrase "piercing the corporate veil" as if it had a specific meaning to be applied in the same way in all contexts. In his judgment the real question was whether the order sought was appropriate or necessary in the light of the legislative objectives. Two questions needed to be asked. Firstly, whether there are corporate assets which should be treated as the Defendant's assets, and secondly, whether if that is the case, a restraint and receivership order of the extent sought, is necessary. The judge observed that if it was established that some or all of the assets of the company are to be treated as those of the Defendant, then the question of how their intermingling with the assets of an innocent person was to be resolved was a matter to be dealt with by deciding whether an order should be made and on what terms, rather than merely asking whether the corporate veil should be pierced. Ouseley J stated that the authorities he had seen did not deal with the problem of the intermingling of a criminal's realisable assets with those of an innocent person in a company which has legitimate business activities but in part carries them out using the criminal's realisable assets. "There would obviously be a very considerable lacuna in the ability of the Act to achieve its objective if in principle, because such a company was not a one man band or wholly criminal in its origin, funding or activities, assets held in it could not be subject to receivership or restraint order provisions." In his judgment, the real question therefore was whether an order was necessary in the light of the evidence which had emerged. That would enable the interests of an innocent third party to be balanced. It should be observed that the circumstances in R v D strongly demonstrated an attempt to put monies beyond the reach of the Revenue and Customs after a confiscation order had been made (see paragraph 21). Each case is, of course, fact-specific.
14. Mr Evans contended that this approach did not create some new basis for piercing the corporate veil, but was consistent with the existing authority. The matter could be encapsulated by reference to paragraph 76 of Seager and Blatch where the court had said "a court can "pierce" the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance not just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade or veil to hide his crime and his benefits from it…"
15. In essence, said Mr Evans, his submissions were that the evidence showed that G had put his money into the property at Romford Road as part of laundering the proceeds of crime. He had used his criminal monies to help to capitalise a new business and he should not be allowed to say at this stage that in effect it belonged to the company and was beyond the reach of the legislation.
16. Whilst it is plain to me that there is a good arguable case that the £200,000.00 advanced to Prolink by G represented criminal monies, the real question is whether there is a good arguable case that the company's assets should be treated as G's realisable property. It plainly cannot be the case that every injection of criminal funds into a business would result in the corporate veil being lifted, and a restraint order made against the company in terms that its assets were to be treated as those of the criminal. A much closer examination of the facts than that is required. In my judgment, the circumstances of this case are not such that it is appropriate to maintain the restraint order insofar as it relates to the land and property owned by Powervale Limited at Romford Road. Whilst the purchase of the business was in part facilitated by G's monies, the transaction has been openly recorded and is shown in the accounts. There has been no attempt to hide it and although there was a degree of informality about the recording of the loan and a degree of relaxation as to the making of interest payments, those in my judgment are more consistent with the type of informality which may exist between individuals known to one another rather than operating as an indication of impropriety or dishonesty. The available evidence does not appear to me to show a substantial arguable case of use of a corporate structure as a device or façade to conceal criminal activity in circumstances where substantial trading activity took place to continue an already existing genuine business, and where the loan was openly recorded. Whilst what occurred no doubt enabled G to invest what appear to be part of his ill-gotten gains, I am not persuaded that on the evidence an arguable case is demonstrated to show that G was attempting to hide behind the corporate veil so as to conceal his crime and his benefits from it. Inasmuch as G represented part of the directing mind of Prolink at the time of the £200,000.00 loan, this is outweighed by the agreed fact that Messrs Croft and Kennedy, as equal shareholders with him, were in ignorance of the tainted source of the loan. Moreover, this is not a case where G used Prolink "without the least let or hindrance to facilitate and execute [his] fraudulent designs". See R v K [2005] EWCA Crim 619 at paragraph 25.
17. I have given careful consideration to the observations of Ouseley J in R v D which are relied on by the Crown. However, it should be recognised that nothing he said should be read outside the context of R v H as discussed in later authorities, and the factual situation in that case was very different from the present one. None of the factors relating to D's case which justified a decision to pierce the corporate veil are present in this case save for the bare fact that criminally generated monies went into Prolink. Even then the process was openly recorded, unlike in D's case.
18. I remind myself of the observations in R v Seager and Blatch (paragraph 76) that I should not pierce the corporate veil merely because I consider that it might be just to do so. To do that would in effect be to start at the end of the process, and then to work backwards.
19. I do not consider that the mere fact that allegedly criminally-derived monies have been put into Prolink is sufficient to cause me to lift the corporate veil in the light of the authorities from R v H onwards, and in the absence of any clear statement in the case law or statute that mere intermingling of monies enables a restraint order to be made against a corporate entity.
20. My conclusion therefore is that there is no good arguable case for treating the corporate assets of Prolink or Powervale Limited as the realisable property of G. Accordingly the relevant parts of Cranston J's order must be discharged.
21. It remains the case, of course, that G should be restrained from disposing of or dealing with his shareholding in Prolink, and his rights pursuant to the loan made in May 2001. Both of these are recognised as realisable property in the hands of G, and, I think, correctly so.
22. A secondary point was raised by Mr Talbot to the effect that the initial application to the court represented a failure of the Crown's duty of full and frank disclosure such as to lead to a discharge of the order. Criticisms were made of failures to set out aspects of the matter favourable to the Respondents. Briefly put, they include the fact that the business was a going concern with a large turnover, trading legitimately, and that there was a lack of clarity about the corporate structure, and a lack of detail about the companies' finances.
23. Mr Evans acknowledged that there was some force in the criticisms raised but submitted (a) that the essential matters related to events in 2001 and that they had been sufficiently dealt with and (b) that G was not party to this application for a discharge, so that the whole order could not be discharged in any event.
24. I have considered Jennings v CPS [2006] 1 WLR 182, and in particular the observations of Laws LJ at paragraph 56 drawing attention to the potential for tension between the public interest and those of a Respondent to an application for a restrain order in this type of situation. I have weighed those competing interests against what I conceive to be some justification in Mr Talbot's criticisms about disclosure in the application made without notice. I note that nearly eleven months elapsed before any application was made on the basis that the Crown's failures were so egregious as to warrant discharge of the order. This confirms my view that the shortcomings were not on such a scale as to warrant discharge of the order. Whether it is necessary for a failure to be "so appalling that the ultimate sanction of discharge would be justified" as suggested by Longmore LJ at paragraph 64 of Jennings is not a matter I need to deal with in this case. What I do hold is that the failures are not in this case of sufficient moment or gravity to justify discharge of the order or to override the public interest in maintaining the effective use of the confiscation legislation. Accordingly, I decline to discharge or vary Cranston J's order on the basis of an alleged failure of full and frank disclosure.
25. In the light of my ruling on the primary issue (lifting of the corporate veil), I invite counsel to agree and submit a form of order giving effect to my ruling.