Scottish Court of Session Decisions

FIRST DIVISION, INNER HOUSE, COURT OF SESSION

[2016] CSIH 21

P508/14 and P1019/14

Lord President

Lord Bracadale

Lord Drummond Young

OPINION OF THE COURT

delivered by LORD CARLOWAY, the LORD PRESIDENT

in the reclaiming motion

THE SCOTTISH MINISTERS

Petitioners and Reclaimers;

against

STEVEN MACDONALD

Respondent:

Act: Dean of Faculty (Wolffe QC), HM Carmichael; Civil Recovery Unit

Alt: Bain QC; Central Court Lawyers, Livingston

25 February 2016

Introduction
[1]        This is a reclaiming motion (appeal) from an interlocutor of an Outer House judge dated 22 April 2015, recalling two Prohibitory Property Orders, dated 28 May and 9 October 2014, which covered heritable and moveable property belonging to the respondent.  The petitioners maintain that the judge erred in that there was, and remains, a “good arguable case” that the property was obtained by unlawful conduct.  The issue in the appeal concerns the meaning of a “good arguable case”; that being the statutory test which requires to be satisfied before a PPO can be made.

Legislation
[2]        Part 5 of the Proceeds of Crime Act 2002 provides for the civil recovery of property which is obtained through unlawful conduct.  Unlawful conduct is conduct which is criminal (s 241).  The enforcement authority may make an application to the Court of Session against any person who holds recoverable property (s 244).  There is now a petition for the recovery of the property described in the PPOs, but this did not exist at the time they were made.

[3]        The court may make an order where it is satisfied “that there is a good arguable case” that the property is, or includes, relevant property or is associated property (s 255A(4) and (5)).  Associated property includes a part of recoverable property; for example where the property is purchased only partly with money obtained from unlawful conduct (s 245).  The court may at any time vary or recall a PPO (s 255B).  If the court determines that property is neither recoverable nor associated property, it must vary the PPO so as to exclude that property (s 255B(4)).  Otherwise, the general discretion applies.

The Petitions
[4]        In the first of the two petitions, the petitioners made reference to the respondent’s criminal record.  Although it includes convictions for assault, attracting either a prison sentence or a substantial fine, the offences are all over 15 years old.  The petitioners made a bald averment that the respondent’s record does not reflect his involvement in crime.  Rather, they stated that they have police intelligence that he has been involved for many years in organized crime, including drug supply, human trafficking, money laundering, violence, firearms and pornography.  

[5]        In his tax returns for the years 1997 to 2000 the respondent declared no income. From 2000 to 2003 he declared an annual income of between £10,000 and £16,000 from Planview Properties Ltd, latterly Speylink Ltd (the predecessor of Diamond Dolls Ltd), and Hooter's Showbar Ltd.  From 2003 to 2005 he stated that he earned between £50,000 to £60,000 per annum from Speylink, Hooter's and Big Daddio's Beerhouse Ltd.  From 2005 to 2012 the respondent declared income of varying amounts ranging from £4,000 to £130,000 per annum from property and either Diamond Dolls or its successor company, namely Kaagobot Ltd.  The figures for 2005/06, 2006/07 and 2007/08 were, respectively, £52,289; £4,035 and £19,620.

[6]        In 1998, the respondent bought land in Hen's Nest Road, East Whitburn, for £42,000.  He obtained a warrant to build a house on this land.  In 2008, the respondent obtained a loan, through the Bank of Scotland, of £552,000.  The loan was to be secured over the house, although the funds were required for commercial purposes (infra).  In his application, which was produced, the respondent said that he had been self-employed in “retail sales” as Firsaid Trading earning more than £193,000 in 2004/05, £251,000 in 2005/06 and £272,000 in 2006/07.  The application form described these amounts as net profit.

[7]        It can be seen immediately that the figures from his self-employment are in marked contrast to those in the tax returns.  Nevertheless, in a letter, which was produced, dated 13 November, Gilbert Little of RES Associates Ltd., chartered certified accountants, confirmed (as requested by the Bank) that, from the respondent's “books, records, information and explanations”, his income from all sources was as stated in the application.  It is averred by the petitioners that, having regard to the figures declared in his tax returns, the loan funds of £550,769.49, received on 3 December 2008, were obtained by fraud; that is to say overstatements of his legitimate income.

[8]        On 19 December 2008 the respondent bought 33 and 39 Mitchell Street, Glasgow for respectively £150,000 and £625,000.  Both purchases were financed by a bank transfer from the respondent's account into which the loan funds had been paid.  The petitioners aver accordingly that the Mitchell Street properties are recoverable (see Director of the Assets Recovery Agency v Olupitan [2008] Lloyd’s Rep FC 253).  The balance of the purchase prices was paid from an account held by the respondent at Barclays Bank.  That in turn had been funded by a payment of £303,000 in late October from the account of Diamond Dolls, which was itself provided from an unknown account in August, in turn funded by another Diamond Dolls’ account into which a deposit of £240,000 had been paid in July.

[9]        Rent in respect of 39 Mitchell Street, from which Diamond Dolls operated a lap dancing club, amounting to £111,000 was paid to the respondent in 2009/10.  From May 2010, rent of £1,500 per week was paid to him.  This rent is said by the petitioners to be profits accruing from recoverable property.  The respondent controls Giorico Properties Ltd, which bought 2 Laurieston Street, Edinburgh for £215,000 in July 2010.  This is another lap dancing club.  The money was paid from the respondent's accounts or those of Diamond Dolls or Kaagobot.  The title to the property was thereafter transferred into the respondent's name.

[10]      It is upon this basis that the petitioners maintain that they have a good arguable case that the properties at Mitchell Street and Laurieston Street, along with amounts in one of the respondent’s bank accounts, are recoverable.

[11]      In the second petition, the petitioners aver that, in November 2013, the respondent bought Club Earth, Livingston for £225,000.  The money for this was paid from the respondent's bank account, into which money had been paid by, amongst others, M & D Edinburgh Ltd, a company then controlled in part by the respondent.  The balance came from rental income from the Tingle Shooter Bar and Café, which operates from 33 Mitchell Street, and Kaagobot.  On this basis the petitioners aver that they have a good arguable case that Club Earth is recoverable property.

The Response
[12]      Rule of Court 76.36 provides the framework for civil recovery proceedings.  It provides (76.36(7)) that applications for variation and recall are to be made by motion.  At the hearing of the motion, the court can make an order for the application to proceed by way of a Note and Answers.  Although this matter was raised by parties, there was no order made for a Note when the case called initially on 16 April 2015 or at the hearing 6 days later.  The motion itself was in very general terms.  The reasons given for seeking recall were that the averments about involvement in organized crime were no longer to be insisted upon and there was no good arguable case justifying the PPOs.  Reference was made, inter alia, to a report from a forensic accountant, David Bell, and an affidavit from the respondent.  Further affidavits were to be produced.  However, there was no written pleading (ie a Note) setting out the respondent’s position on the detailed loan transaction averments in the petition.  This was unfortunate and may have resulted in the time (1½ days) which the judge took to hear the motion which was based on a number of different documents said to demonstrate the lack of an arguable case when compared with these averments.

[13]      At the core of the respondent’s case was the accountant’s report, which purported to contain opinion rather than fact.  The accountant states that he was asked to report on “the income streams” of the respondent at, and prior to, the loan application.  The conclusions of the report contain a statement that:

“7.3     Having carried out a review of [the respondent’s] tax returns the figures included in the [loan] application letter are not a reflection of his own personal income.

7.4       … the income available to [the respondent] appears to be in excess of the income declared … in the letter to the bank.”

The accountant noted various things said by Mr Little, who wrote the letter.  He produced a table recording, in partial form, the turnover of Speylink, a company called Trilink and Diamond Dolls over the relevant period.  He concludes that:

“The … table highlights what funds [the respondent] had at his disposal, both in terms of personal income and business income, across the years …”.

He then expresses an opinion that the respondent “does not appear to have attempted to defraud, trick or mislead anyone in his dealings with the Bank”.  He points to the respondent’s use of independent advisers in support of this contention.

[14]      An affidavit from Mr Little explains that he:

“… was involved in certifying to the Bank of Scotland that [the respondent] had sufficient income to repay the mortgage (sic) … what we did was we agreed a form of words with the bank which were designed to satisfy others that he had sufficient funds to repay the money.  Because it was a hybrid personal and business loan, the generic income declaration could not be used as it did not accurately reflect the position.

            … In terms of [the respondent’s] income, the tax returns were correct because he had not yet crystallised the income as a dividend or by way of a loan.  Instead, the income was still in the company.  However, I was aware that he had that income available to crystallise it if he wanted, which was the basis of the letter.  The letter was carefully worded to reflect the true position.”

The Judge’s Decision
[15]      The judge determined that his task was to deal with the issue of a good arguable case on the basis of “onus and substance” rather than averment (R (Director of the Assets Recovery Agency) v Jia Jin He (No. 2) [2004] EWHC 3021 (Admin), Collins J at para 79).  The judge held, following the approach in Scottish Ministers v Stirton 2008 SLT 505 (Lord Glennie at para [15]), that he could not categorize the case as a good arguable one with a good prospect of succeeding, with the strength and quality required to prove fraud.  He did not think that the documentation demonstrated a fraud. He considered that there was an “inevitable lacuna” in the petitioners' case.  On the court enquiring as to the meaning of this, it was explained that the petitioners had proceeded upon the basis that the respondent required to explain the discrepancies in the figures.  The judge did not consider that this was the correct approach.  Once that was recognised, there was no basis upon which to found a good arguable case.

Submissions
Petitioners
[16]      It was accepted that if, at the stage of a recall hearing, there was no good arguable case, then the judge required to exercise his discretion to recall the order.  The onus, in the sense of a requirement to satisfy the court that such a case existed, remained on the petitioners.  However, the petitioners argued, first, that the judge had erred by placing a gloss on the statutory test of good arguability, as had the Lord Ordinary (Glennie) in Scottish Ministers v Stirton 2008 SLT 505.  The test was similar to that for diligence on the dependence, ie a prima facie, meaning “a good arguable”, case (Barry D Trentham v Lawfield Investments 2002 SC 401, Lord Drummond Young at para [19]).  The petitioners did not need to demonstrate that they would be able to prove the averments.  The test was a flexible one.  It was sufficient for the applicant to show that there was “a good prospect of succeeding at a proof” (Szepietowski v Director of the Asset Recovery Agency [2008] Lloyd’s Rep FC 10, Moore-Bick LJ at para 111).  That did not mean that an applicant required to show such a good prospect in order to meet the statutory test. 

[17]      A good arguable case was one which was “more than barely capable of serious argument, and yet not necessarily one which [had] ... better than 50 per cent chance of success” (The Niedersachsen [1983] 2 Lloyd’s Rep 600, Mustill J at 605 followed in Lakatamia Shipping Co v Nobu Su [2012] EWCA Civ 1195, Longmore LJ at para 25).  The context in Bols Distilleries v Superior Yacht Services [2007] 1 WLR 12 was different, involving a final decision jurisdiction.  The test of having a “much better argument” (Lord Rodger at para 28) should not be followed.  The observations of Collins J in R (Director of the Assets Recovery Agency) v Jia Jin He (No. 2) (supra) (at 79) about the stage of the process were helpful.  The focus should remain on arguability and not ultimate prospects.  The test was “not exacting” (Scottish Ministers v Stirton 2006 SLT 306, Lord Macfadyen at para [28]). 

[18]      The gloss placed on the test by the Lord Ordinary in Scottish Ministers v Stirton 2008 SLT 505 (at para [15]) that a petitioner required to show “a good prospect of succeeding” was not helpful and was based on a misinterpretation of what had been said by Moore-Bick LJ in Szepietowski v Director of the Asset Recovery Agency (supra).  The authorities which the Lord Ordinary had used in relation to proof on the balance of probabilities (R (N) v Mental Health Review Tribunal (Northern Region) [2006] QB 468 and Chief Constable of Merseyside Police v Harrison [2007] QB 79) had been the subject of re-articulation (In Re D [2008] 1 WLR 1499).  The Lord Ordinary had fallen into the trap of thinking (erroneously) that, because the standard at proof would be an enhanced balance of probabilities, the test required the petitioners to put forward material of sufficient weight and cogency to meet it.  The judge at first instance had compounded that error.

[19]      Secondly, the judge had erred in considering that there was an onus on the petitioners. It was accepted that the petitioners had to satisfy the court that the PPOs ought to remain in force, but it did not follow that the court should examine the material produced critically. He had erred in identifying a lacuna and in not recognizing the support which the material gave to the averments.  The material called for an explanation and the judge should have looked to the respondent for that.  The petitioners had pled a prima facie case.  The respondent had accepted that the figures in the loan application did not match his declared income.

[20]      Thirdly, the judge had failed to regard the material produced as supporting the averments.  He did not address the respondent's explanation or scrutinize his material.  This was that the respondent had income available to “crystallize” if he wanted, eg by way of dividends, even if the tax return reflected the actual figures.  There was no explanation of the basis upon which the respondent could treat the income of the various companies as his own.  There was a lack of vouching in that regard.

Respondent
[21]      The respondent accepted that the test was that set out in Szepietowski v Director of the Asset Recovery Agency (supra).  The judge had not expressed the test correctly, but had adopted that of the Lord Ordinary (Glennie) in Stirton v Scottish Ministers (supra) which had not been quite accurate.  Nevertheless, the judge had applied the correct test in substance.  The question was whether the case had a good prospect of succeeding at trial or whether it was merely speculation. 

[22]      The judge had correctly exercised his discretion.  The focus of the petitioners on the alleged fraud demonstrated that they had a weak case, as did the lack of reliance on the averments of serious criminality.  The material lodged by the respondent had answered the allegation of fraud. There was no prima facie case.  The respondent had relied on his professional advisers to put the correct figures into the application and the supporting letter.  Mr Bell’s report had confirmed that the figures were correct, in so far as they demonstrated the income which the respondent might have derived from all sources, even if he had not taken that income.  The figures were verifiable.  Those declared in the tax returns did not reflect the full access to funds which the respondent had.  It was not good enough simply to point to a discrepancy of figures and assert fraud.  The judge took into account all of the petitioners’ submissions and the documentation produced by the respondent and exercised his discretion in a manner which he had been entitled to do.

[23]      The petitioners’ approach was flawed in that it failed to take into account the fact that, although the loan was secured against the respondent’s house, it was for the commercial purpose of buying the premises in Mitchell Street.  All who were involved in the transaction were aware of this.  The Bank’s employee had, it was said, wanted “pre-tax post deduction of normal business overheads and expenses” income.  This involved not just the respondent’s personal income but that derived from Diamond Dolls.  Thus, what had been provided was a statement of the income not only of the respondent but also of Diamond Dolls. 

Decision
[24]      Subsections 255A(4) and (5) of the Proceeds of Crime Act 2002 provide that the court may make a Prohibitory Property Order if it is satisfied that “there is a good arguable case” that the property is recoverable or associated in terms of the legislation.  It is important that the court focuses on these precise words and does not attempt to place a gloss upon them or to redefine them using different terms.  That is the error which the judge has made in this case, following the same error in Scottish Ministers v Stirton 2008 SLT 505 (Lord Glennie at para [15]).  The test is not whether the case has a “good prospect of succeeding, with the strength and quality required to prove fraud”.  It is whether it is a “good arguable” one; the focus being on arguability, not proof.

[25]      The dictum of Moore-Bick LJ in Szepietowski v Director of the Asset Recovery Agency [2008] Lloyd’s LR FC 10 (at para 111) is helpful in so far as it states that the test will be met if the applicant demonstrates that he has a “good prospect of succeeding at a proof”.  That is not to say that it is necessary to show such a prospect in order to satisfy the statutory test.  Ultimately, as Mustill J put it at first instance in The Niedersachsen [1983] 2 Lloyd’s Rep 600 (at 605) a good arguable case is one which “is more than barely capable of serious argument and yet not necessarily one which the Judge believes to have a better than 50 per cent chance of success”.  As he went on to say:

“... it is particularly important ... that the Court should not be drawn into a premature trial of the action, rather than a preliminary appraisal of the [applicant’s] case ...”.

The context of an application for a PPO is normally the investigative stage of a case, often prior to the presentation of a petition for a recovery order.  In that sense, a PPO is an interim order, preserving the status quo pending enquiries.  For that reason, the threshold is not an “exacting” one (Scottish Ministers v Stirton 2006 SLT 306, Lord Macfadyen at para [28] in the context of probabilis causa litigandi) and may often be met purely on the basis of averment.

[26]      As the judge has applied the wrong test, the matter falls to be re-assessed.  That assessment is on a motion for recall under section 255B, which gives the court a discretion on whether to recall, other than where it decides positively that the property is not recoverable or associated (in which case recall is mandatory).  It is conceded, no doubt correctly, that the petitioners must continue to satisfy the test of good arguable case.  That was the focus of the submissions, albeit that there will be other factors (such as delay in the institution and progress of recovery proceedings) which may have an impact upon a court’s decision in a given case.

[27]      It is unfortunate that the petitioners made general averments about the respondent’s involvement in crime when, it became apparent, they were not in a position to support them.  If averments are not based upon evidence, they ought not to be made.  That, however, leaves the averments of fraud.  The position here is straightforward.  Indeed, the facts are not in dispute.  In his tax returns for the relevant three years, the respondent declared his income to be £52,289, £4,035 and £19,620.  This then is a formal representation to the tax authorities that this was the extent of his legitimate income in these fiscal years.  The tax return refers to the source of his income being Diamond Dolls or its successor company.  It may be assumed that the respondent’s accountant, who was involved in making the returns, would have seen the relevant vouchers.   In the application for the loan, the respondent states his income to be at least 3, and in some years 5, times higher than that declared to the tax authorities.  The veracity of the new figures is supported by a letter from his accountants.  One obvious inference which can be drawn from that is that the new figures contained in the application did not represent the extent of the respondent’s legitimate income.  Rather, they are false and thus the application was fraudulent and the funds made available become recoverable property, as do any assets purchased by them.  This is a good arguable case even if the inference may not ultimately be drawn.

[28]      The respondent’s argument is that the higher figures in the loan application were accurate because they represented money which he might have withdrawn from Diamond Dolls and its successor company.  The fundamental problem with this is that it simply confirms the nature of the fraud, in so far as it proceeds upon an acceptance that the figures given to the bank did not represent the respondent’s actual income during the three year period, but some other notional amounts which the respondent might have withdrawn.  Just how such withdrawals could have taken place legitimately, given that the respondent was not, for the most part, either a shareholder or director of the relevant companies, remains a mystery.

[29]      In all these circumstances, the reclaiming motion will be allowed, the interlocutors of 22 April 2015 will be recalled and the motions for recall of the PPOs will be refused.