Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49 (03 November 2021)

(a) An internal investigation was carried out by the Vantis Group during which Mr Faichney and Mr Perrin resigned their employment and their directorships.

(b) On 26 January 2010 Mr Faichney and Mr Perrin commenced civil proceedings against VTL and its associated companies in the Vantis Group for unpaid salary and alleging wrongful dismissal, which are the original claims underlying these proceedings. This was met with a defence and counterclaim in which VTL alleged that the claimants had acted in breach of fiduciary duty both in equity and under the provisions of section 175 of the Companies Act 2006 when they used VTL’s IP as the basis of the tax avoidance schemes. The £4.55m derived from the four schemes was alleged to be held on constructive trust for VTL as representing the proceeds of the unlawful use of the company's property in a scheme which was a breach of the fiduciary duty owed by directors to VTL and other companies in the Vantis Group.

(d) On 21 December 2010 VTL, acting through its administrator, assigned its claims in these proceedings against the former directors to Aquila with a view to securing the best possible return for VTL’s creditors. Under the assignment, the VTL creditors will stand to benefit from any recoveries made by Aquila in these proceedings. The effect of the assignment is that if the secret profit obtained by the former directors was beneficially owned by VTL under a constructive trust, then VTL’s proprietary rights have now passed to Aquila.

(e) In 2011 VTL, along with the rest of the Vantis Group of companies, went into liquidation.

(f) VTL faces substantial claims by taxpayer subscribers (who were clients of VTL) and who were investors in the tax avoidance companies. These individuals assert that they have also suffered loss as a result of the fraud perpetrated by Mr Faichney and Mr Perrin.

(g) In the meantime, on 21 September 2009 criminal proceedings were commenced against Mr Faichney and Mr Perrin. In January and October 2012 respectively, Mr Perrin and Mr Faichney were convicted by juries at Blackfriars Crown Court of cheating the public revenue by:

“dishonestly facilitating and inducing others to submit claims for tax relief under section 587B Income and Corporation Taxes Act 1988, as amended, which falsely stated the values within the relevant accounting periods of charitable donations of shares in Clerkenwell Medical Research Plc, Modia Plc, Your Health International Plc and Signet Health International Plc.”

(h) VTL was never charged, indicted or tried for any offence. The decision not to prosecute VTL was made by the CPS and is to be seen in the context of its view, as summarised in its written submissions, that “On the basis of the (conceded) fact that Mr Faichney and Mr Perrin were the directing mind and will of the company for the purposes of the tax avoidance schemes, attribution for the purpose of criminal liability of VTL would follow.”

(i) Following Mr Perrin’s conviction and in confiscation proceedings under POCA, the trial judge made a confiscation order against him. Aquila was represented in those proceedings. Mr Perrin unsuccessfully appealed against the confiscation order on the grounds that the £4.55m did not represent a benefit obtained as a result of or in connection with the offence; see [2014] EWCA Crim 1556.

(j) On 1 August 2014 in confiscation proceedings following Mr Faichney’s conviction, the available amount and hence the recoverable amount was found to be £648,000.

(k) Each of the tax avoidance companies was dissolved.

(l) HMRC have taken steps to reverse and recover from the taxpayers involved the tax credits obtained under the various schemes (apart from the subscription price itself).

It is necessary to give some further details in relation to these civil proceedings.

Aquila obtained an order joining Mrs Faichney and Mrs Perrin as defendants to the counterclaim. It also obtained an interim freezing injunction to restrain Mr and Mrs Faichney and Mr and Mrs Perrin from dealing with the assets said to be subject to a constructive trust; see [2013] EWHC 3953 (QB). The freezing injunction prevented those assets, the proceeds of the £4.55m, being used to satisfy confiscation orders made against Mr Perrin.

On 12 March 2014 the CPS was granted permission to intervene in the High Court proceedings. In January 2017 the matter was listed for trial in January 2018.

In January 2018, immediately prior to trial, two settlement agreements were reached under which:

(a) All claims by VTL against Mr and Mrs Faichney and Mrs Perrin and the estate of Mr Perrin were withdrawn on the basis that they took no further part in the proceedings. They disclaimed any interest in the subject matter of Aquila’s claim which was to be litigated between Aquila and the CPS;

(b) The CPS agreed to apply to the Crown Court for the appointment of an enforcement receiver over all of the assets listed in the relevant confiscation orders (“the confiscation assets”); and

(c) The CPS agreed, if and insofar as the court found that the £4.55m received by the Mr and Mrs Perrin and Mr and Mrs Faichney from CMR was held on constructive trust for VTL, it would instruct the enforcement receiver to transfer to Aquila from the net proceeds realised from the confiscation assets “such sum as represents the amounts so found by the court to have been so held”, save that this would not apply if and to the extent that Aquila’s counterclaim succeeded as a personal (rather than a proprietary) claim.

As a consequence of the settlement agreements, the only parties participating in the trial before Mann J were the CPS and Aquila.

It was accepted at trial that the assets of Mr Faichney and Mr Perrin - on the basis of which the Crown Court had determined the available amount, and hence the recoverable amount, for the purposes of the confiscation order - in each case represented part of the £4.55m and were covered by Aquila’s proprietary claim.

The decisions in FHR and in Bilta

Prior to considering the issue as to whether the fraud of VTL’s former directors should be attributed to VTL, it is necessary to examine the decisions of this court in FHR and in Bilta in some detail.

In FHR the agent of the purchaser of an hotel had entered into an agreement with the sellers of the hotel under which the agent was to receive a fixed commission of €10m in the event of the successful completion of the sale. The agent failed to notify the purchaser of that agreement and received the commission when the purchaser bought the hotel. The purchaser sought to recover the €10m from its agent. The issue was whether a bribe or secret commission received by an agent is held by the agent on constructive trust for his principal, or whether the principal merely has a personal remedy for an account of the bribe or secret commission (ie, a personal remedy whereby the agent must account for, and pay over to the principal, the amount of the bribe or secret commission). This personal remedy was loosely and, with respect, somewhat confusingly (as Lord Reed pointed out in AIB Group (UK) Ltd plc v Mark Redler & Co [2014] UKSC 58; [2015] AC 1503, para 120) referred to by Lord Neuberger in this court in FHR as “equitable compensation” because, as Lord Neuberger made clear in his judgment at para 7, the remedy is restitutionary, reversing the value of a benefit received, and is not concerned to compensate for a loss. If the bribe or secret commission is held on constructive trust, the principal has a proprietary right to it, whereas the accounting remedy is purely personal. One of the most important practical differences between the constructive trust and the personal accounting remedy (or equitable compensation) is that the constructive trust would give the principal priority in the event of the agent’s insolvency, whereas the personal accounting remedy (or equitable compensation) would not. It has been long established that secret profits made by an agent in breach of fiduciary duty to its principal are held on constructive trust: Keech v Sandford (1726) Sel Cas Ch 61, [1726] EWHC Ch J76; Phipps v Boardman [1964] 1 WLR 993 (Wilberforce J) affirmed by the House of Lords [1967] 2 AC 46; FHR, paras 13-14 and 40. The central question in FHR was whether there should be a difference, so that the principal is entitled only to a personal accounting remedy and not a constructive trust, where one was concerned with a bribe or secret commission, rather than secret profits, being obtained in breach of fiduciary duty. In FHR it was submitted that a constructive trust should not apply to a bribe or secret commission paid to an agent, because it is not a benefit which can properly be said to be the property of the principal. Lord Neuberger, delivering the judgment of the court, stated (at para 30) that the rule that a bribe or secret commission is held on constructive trust:

“… is justified on the basis that equity does not permit an agent to rely on his own wrong to justify retaining the benefit: in effect, he must accept that, as he received the benefit as a result of his agency, he acquired it for his principal.”

Lord Neuberger, having concluded from a review of the authorities at paras 13-28 that there was no clearly right or wrong answer to the question whether a bribe or secret commission was held on constructive trust, turned to the arguments based on principle and practicality. He stated at para 33 that:

“The agent owes a duty of undivided loyalty to the principal, unless the latter has given his informed consent to some less demanding standard of duty. The principal is thus entitled to the entire benefit of the agent’s acts in the course of his agency. … The agent’s duty is accordingly to deliver up to his principal the benefit which he has obtained, and not simply to pay compensation for having obtained it in excess of his authority. The only way that legal effect can be given to an obligation to deliver up specific property to the principal is by treating the principal as specifically entitled to it.”

Lord Neuberger recognised at para 34 that:

“there is some force in the notion advanced by the [agent] that the rule should not apply to a bribe or secret commission paid to an agent, as such a benefit is different in quality from a secret profit he makes on a transaction on which he is acting for his principal, or a profit he makes from an otherwise proper transaction which he enters into as a result of some knowledge or opportunity he has as a result of his agency.”

However, (at para 35) the court held that in the absence of any clearly right answer, either as a matter of authority or principle, it should decide, in the interests of promoting simplicity and clarity in the law, that “any benefit acquired by an agent as a result of his agency and in breach of his fiduciary duty is held on trust for the principal” and a bribe or commission should not be excluded from that rule. Lord Neuberger considered (at para 42) that wider policy considerations also supported that approach and (at para 45) that there was further support from other common law jurisdictions.

It is accordingly clear, since the decision in FHR, that as between the principal and his agent, any benefit obtained by the agent in breach of his fiduciary duty is held on trust for his principal, regardless of the circumstances in which it was obtained. Although, as far as secret profits are concerned, this may be said already to have been clear law prior to FHR, I therefore agree with the Court of Appeal (at para 19) that:

“The decision in FHR therefore prevents a director in the position of Mr Faichney and Mr Perrin from asserting a right to retain the secret profit against VTL based on the fact that it has been obtained by fraud.”

However, in none of the secret profits or bribe cases (including FHR) have the courts had to consider whether the fraud of the agent should be attributed to the principal so as to prevent the principal, by reason of the defence of illegality, from relying on a constructive trust in priority to the claims of unsecured creditors, such as, in this case, the CPS.

The issue of the attribution of the fraud of an agent to its principal, and the consequent effect on the defence of illegality, did, however, arise in Bilta albeit in the slightly different context of the company seeking damages or equitable compensation for loss (not restitution of profits obtained) for, for example, the tort of conspiracy, breach of fiduciary duty and dishonest assistance of a breach of fiduciary duty. In that case the defendant directors had used a company, Bilta (UK) Ltd, as part of a VAT carousel fraud. This involved transactions under which Bilta (UK) Ltd bought carbon credits from a Swiss company net of VAT, which it then sold on to UK companies inclusive of VAT, such that Bilta (UK) Ltd became obliged to account to HMRC for the VAT. The proceeds of the sales (including the VAT) were paid away to the Swiss, and another offshore company, thereby leaving Bilta (UK) Ltd insolvent and unable to meet its liabilities to HMRC. Bilta (UK) Ltd (through its liquidators) alleged that its former directors had acted in breach of their fiduciary duty by removing from the company the means of paying the output tax due and thereby exposing it to liability to HMRC. The Swiss company and its chief executive (the “appellants”) were alleged to have dishonestly assisted the directors’ breaches of fiduciary duty.

In response, the appellants applied to strike out the liquidator's claim against them on the ground that Bilta (UK) Ltd could not maintain the proceedings in view of the principle ex turpi causa non oritur actio, or, to put it another way, the appellants were bound to defeat the claims against them on the basis of an illegality defence as Bilta (UK) Ltd was, through its directors, a party to the VAT fraud and was therefore precluded from seeking relief from its co-conspirators.

This court, sitting as a panel of seven justices, held that the wrongful activity of the directors could not be attributed to Bilta (UK) Ltd in those proceedings. Lord Neuberger, (with whom Lord Clarke and Lord Carnwath agreed) set out the following proposition in relation to attribution (at para 7):

“Where a company has been the victim of wrongdoing by its directors, or of which its directors had notice, then the wrongdoing, or knowledge, of the directors cannot be attributed to the company as a defence to a claim brought against the directors by the company’s liquidator, in the name of the company and/or on behalf of its creditors, for the loss suffered by the company as a result of the wrongdoing, even where the directors were the only directors and shareholders of the company, and even though the wrongdoing or knowledge of the directors may be attributed to the company in many other types of proceedings.”

Lord Neuberger also agreed (at para 9) with Lord Mance “whether or not it is appropriate to attribute an action by, or a state of mind of, a company director or agent to the company or the agent's principal in relation to a particular claim against the company or the principal must depend on the nature and factual context of the claim in question.”

In that respect Lord Mance stated (at para 41) that:

“As Lord Hoffmann made clear in [Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500], the key to any question of attribution is ultimately always to be found in considerations of context and purpose. The question is: whose act or knowledge or state of mind is for the purpose of the relevant rule to count as the act, knowledge or state of mind of the company?” (Emphasis in the original)

The relevant rules in Bilta, as in this case, are the duties owed by an officer to the company which the officer serves. Lord Mance analysed the purpose of those duties in the context of attribution, as follows (at para 42):

“Where the relevant rule consists in the duties owed by an officer to the company which he or she serves, then, whether such duties are statutory or common law, the acts, knowledge and states of mind of the company must necessarily be separated from those of its officer. The purpose of the rule itself means that the company cannot be identified with its officers. It is self-evidently impossible that the officer should be able to argue that the company either committed or knew about the breach of duty, simply because the officer committed or knew about it. This is so even though the officer is the directing mind and will of the company. The same clearly also applies even if the officer is also the sole shareholder of a company in or facing insolvency. Any other conclusion would ignore the separate legal identity of the company, empty the concept of duty of content and enable the company’s affairs to be conducted in fraud of creditors.” (Emphasis added)

As emphasised, the purpose of the rule itself means that the company cannot be identified with its officers. The wrongful acts of the directors in breach of their directors’ duties cannot, therefore, be attributed to the company.

Lord Sumption also considered that the case turned on rules of attribution, which he viewed as applying “regardless of the nature of the claim or the parties involved” (para 86). He considered that the acts and state of mind of the directing mind and will of a company will normally be attributed to the company. But he qualified the effect of his analysis by reference to a policy-based “breach of duty exception” in order “to avoid, injustice and absurdity”. For present purposes it is sufficient to observe that Lord Sumption considered (at para 89) that a claim by a company against its directors for breach of their duties, which exist for the protection of the company against the directors, was a paradigmatic case where the directors’ dishonesty should not be attributed to the company, albeit as an exception to a general rule.

Lord Toulson and Lord Hodge approached the case on the basis that the primary question was “whether [Bilta (UK) Ltd’s] claim against the directors for breach of fiduciary duty [was] barred by the doctrine of illegality” (para 120). They held (at paras 130, 131 and 209) that the defence of illegality was sensitive to context and to competing aspects of public policy. If the defence of illegality were permitted to succeed on the facts in Bilta, such as to enable the directors to escape responsibility for breach of their fiduciary duty, then “the courts would defeat the very object of the rule of law …, and would be acting contrary to the purpose and terms of sections 172(3) and 180(5) of the Companies Act 2006.” Accordingly, on that ground they dismissed the appeal, but they also went on to hold (at para 209) that the rules of attribution would achieve the same result. In that respect, where a company is pursuing a claim against a director or an employee for breach of duty or breach of contract, they considered that:

“it would defeat the company’s claim and negate the director’s or employee’s duty to the company if the act or the state of mind of the latter were to be attributed to the company and the company were thereby to be estopped from founding on the wrong.”

They concluded that (at para 206):

“… as the courts have recognised since at least Gluckstein v Barnes [1900] AC 240, it is absurd to attribute knowledge to the company and so defeat its claim.”

I therefore agree with the Court of Appeal (at para 24) that:

“Bilta confirms that a director sued by a company for loss caused by a breach of fiduciary duty cannot rely on the principles of attribution to defeat the claim even if the scheme involved the company in the fraud or illegality.”

I also agree with the Court of Appeal (at para 28) that:

“it is clear from what was said in Bilta that the company’s participation through its directors in criminal conduct is not enough to justify the application of a different rule in relation to the ownership (as between the company and its directors) of the proceeds of the fraud.”

Accordingly, subject to the issues on this appeal, which are considered below, in civil proceedings brought by a company against its directors for breach of fiduciary duty, claiming that the sums they acquired as a result of the breach are subject to a constructive trust in the company’s favour, the principles established in Bilta prevent the attribution of the dishonesty of those directors to that company. In this way the rules of attribution prevent the directors’ dishonesty from being attributed to the company, with the result that the company is not acting illegally and its claim is not barred by the defence of illegality. Attribution being denied, the illegality defence fails.

Although the law on illegality has been restated since Bilta by this court in Patel v Mirza [20I6] UKSC 42; [2017] AC 467 (“Patel”), the reasoning in Bilta, built as it is on the policy of avoiding illegality undermining the purpose of the rule in question, is entirely consistent with Patel and has not been undermined by it. Subsequent to the decision in Patel, this court in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50; [2020] AC 1189 did not alter, but rather applied, the reasoning in Bilta as to attribution. Lady Hale delivering the judgment of the court, referred (at para 30), and subsequently applied, the reasoning in Bilta that “the key to any question of attribution was always to be found in considerations of the context and the purpose for which the attribution was relevant.” Bilta remains good law after Patel.

The grounds of appeal to this court

Having set out the background to this appeal, I can now set out the grounds of appeal and the principal arguments, together with my answers to them.

(a) Ground one

The CPS argues that the Court of Appeal was wrong to conclude that the facts of the present case fell within the ratio of Bilta, and contends (per the formulation in the statement of facts and issues) that the Court of Appeal “was wrong to hold that, for the purposes of a proprietary claim by a company against its directors to recover proceeds of crime received in breach of fiduciary duty, the illegality of the directors is not attributed to the company notwithstanding that the company itself has suffered no loss and stood to profit from the illegal acts.”

There were several arguments in support of this ground of appeal but before addressing those arguments I should clarify the standing of the CPS as an intervener.

The CPS is an unsecured creditor of the former directors under the confiscation orders obtained against them. The orders do not give it any proprietary interest in the former directors’ assets, or any form of priority over any other claims to those assets. As against VTL, the CPS’s rights are dependent on the rights of the former directors. I agree in that respect with the Court of Appeal (at para 25) that “The CPS … has no better rights against VTL than Mr Faichney and Mr Perrin …”. The fact that the CPS is an intervener resisting VTL’s claim rather than a director doing so cannot alter the outcome as to whether the directors’ dishonesty is to be attributed to VTL. In short, the CPS’s ability to recover under the confiscation orders depends upon defeating the proprietary claim which Aquila asserts against the former directors of VTL. The CPS can have no better defence to that claim than the former directors would have had.

In essence, the CPS’s overarching submission in support of the first ground is that, properly understood, nothing in Bilta permits a principal to profit from its agent’s illegality (and thus approbate its illegal acts) while denying attribution of the illegality (and thus reprobate the illegal acts). Bilta therefore does not prevent the illegality defence from applying in the present case. There are a number of aspects to this submission which I will consider in turn.

First, the CPS emphasises that the former directors have dishonestly committed a criminal offence (cheating the revenue) whilst conducting the business of the company as its directing mind and will. I note at the outset, however, that the decision of this court in Bilta means that this, on its own, cannot lead to the attribution of that unlawful conduct to the company in a situation where, as here, the context is one in which the company is pursuing a claim against its directors for breach of duty.

It is worth stressing, albeit perhaps obvious, that it forms no necessary part of VTL’s claim against its former directors for breach of their fiduciary duties that their conduct also amounted to the criminal offence of cheating the public revenue. That is, the alleged constructive trust rests in civil law on a claim for breach of fiduciary duty and does not rest on any aspect of criminal law. In its pleadings and in both lower courts Aquila advanced the proprietary claim on two bases: (a) the exploitation of the value of the IP rights and (b) the exploitation of the corporate opportunity by virtue of the former directors’ knowledge of VTL’s business and its affairs. Mann J found (at para 54) that: “The directors misappropriated for themselves a corporate opportunity” and referring to the IP rights “indulged in a form of misappropriation of assets” which was “a separate wrong vis-à-vis the company”. Accordingly, Mann J found that the breach of fiduciary duties occurred when the directors, with a view to making a secret profit, which they in fact made, exploited their positions as directors by taking advantage of the “corporate opportunity” and by pretending to sell VTL’s IP rights. The Court of Appeal upheld those findings (at para 19) stating that “The imposition of the constructive trust in favour of the company as principal simply recognises that the agent cannot use his position or the assets of the company to benefit himself” (emphasis added). Indeed, the CPS accepts at para 23 of its written submissions that “… it may be correct to identify as distinct breaches of fiduciary duty the directors’ exploitation of the value of the IP rights on the one hand and taking advantage of the ‘corporate opportunity’ of the tax mitigation arrangements on the other.” Accordingly, there is no issue that it is not a necessary component of VTL’s claim against its former directors that their conduct also amounted to the criminal offence of cheating the public revenue, though that is not to ignore that their conduct also amounted to the commission of that offence.

Second, the CPS suggests that the former directors obtained the £4.55m as a result of their criminal offending, by cheating the public revenue, rather than by exploiting the IP in breach of their fiduciary duties. On that basis, the CPS submits that any claim for profit generated by the “quasi-misappropriation” of IP rights does not get Aquila to the £4.55m because that breach of duty did not generate the £4.55m of profits. This argument fails on the basis that there has been no factual finding that any part of the £4.55m was only generated by the criminal offence of cheating the public revenue. Indeed, Mann J proceeded on the factual basis that the former directors had also obtained the £4.55m by abusing their position and the assets of the company to benefit themselves in breach of their fiduciary duties.

Third, the CPS argues that the purpose of not attributing the former directors’ unlawful conduct to the company is to protect the company from losses as a result of the dishonesty of the directors. In support of this argument the CPS assert that the purpose of the rule as to attribution is not to protect a company when a feature of a fraudulent scheme is that the company stands to profit from it. In this case it is suggested that VTL was always intended to benefit from the fraudulent scheme, rather than being the target or intended victim of this fraud, as it would receive fees of around 12% of the total amount claimed as tax deductible. In this way, the CPS argues, attribution should only be denied where the dishonest conduct was targeted against the company so that it was intended to or did in fact sustain a financial loss, but not where the dishonest conduct was intended to or did in fact secure a financial benefit for the company.

This argument is misconceived. The relevant rule is the duty owed by an officer to the company which the officer serves. The purpose of the rule itself means that the company cannot be identified with its officers. As I have stated at para 56 above, this means that the wrongful acts of the directors in breach of their director’s duties cannot be attributed to the company. I consider that it can make no difference to the reasoning in Bilta whether the claim brought by the company against its directors is for loss suffered by the company or for gains made by the directors or if a part of the director’s scheme was that not only the director would benefit but so also would the company. To my mind the director’s duty to the company would still be negated if there was an exception to the reasoning in Bilta that attributed a director’s wrongdoing to the company in circumstances where the director’s scheme in breach of his fiduciary duty to the company also included an element of actual or intended profit for the company. It simply cannot lie in the mouth of a director to assert that the director should retain a secret profit on the basis that a part of director’s scheme was that the company would also benefit from it. As I have indicated at para 65 above the CPS can have no better defence to the proprietary claim which Aquila asserts against the former directors of VTL than the former directors would have had.

This argument seeks, in effect, to establish an exception to the reasoning in Bilta as to attribution where the director’s conduct in breach of fiduciary duty was also intended to or did in fact secure a financial benefit for the company. I consider that any such exception would create uncertainty. As Lord Neuberger stated in FHR (at para 35) “Clarity and simplicity are highly desirable qualities in the law.” Indeed, in this case it is uncertain as to whether this proposed exception to the rules of attribution in Bilta applies to intended financial profits or only to actual financial profits. However, in either event it is an unwarranted distinction which undermines the clarity and simplicity of the law in relation to attribution. Therefore, for the reasons in the preceding paragraph and in this paragraph, I would dismiss this argument.

In addition, I consider that this argument has an element of circularity because it seeks to attribute to the company the directors’ intention that substantial fees would be earned by VTL from the scheme in order to establish that other dishonest conduct of the directors should also be attributed to the company, so as to permit the claim of the company against its former directors to be defeated on the basis of illegality. Put shortly, there can be no intent on the part of VTL to benefit from a fraudulent scheme unless the directors’ intent to that effect can be attributed to VTL. On that basis also this argument is misconceived.

I also reject this argument on the fundamental basis that the constructive trust exists to ensure compliance with, and is imposed in consequence of, the directors’ fiduciary duty to the company. It would fundamentally undermine that fiduciary duty if the director could establish that a constructive trust did not arise purely on the basis that the director also intended that the company should make a financial profit, or on the basis that in fact the company had made a financial profit, so that the director should be able to retain the director’s own unlawful profit. Such a consequence cannot be correct, and the CPS is in no better position in this case than are the former directors, for which see para 65 above.

Another reason for rejecting this argument is that it undermines the prophylactic way in which the director’s fiduciary duties operate. The fact that a director who breaches a fiduciary duty will be stripped of profit is a powerful means of guarding against the director’s temptation of self-interest. The deterrent effect of the fiduciary duty would be undermined if a constructive trust did not arise where the company was intended to, or did in fact, make a profit. Put shortly, the protective function of the fiduciary duty would be put at risk if a director were permitted to seek to avoid liability by arguing that the impugned transaction was nonetheless in the interests of the company.

Fourth, the CPS suggests that the bar to attribution under Bilta only applies where the company’s culpability for the illegality is the “very matter” of which complaint is made. It submits that in this case the very matter of which complaint is made is the breach by VTL’s former directors of the no-profit rule, rather than the criminal conduct of cheating the public revenue. On this basis it argues that the directors’ criminal conduct can be attributed to VTL because it is not the “very matter” of which complaint is made by VTL in seeking to establish that the former directors hold the profit of £4.55m on constructive trust. In support of this argument the CPS relies on Lord Sumption’s judgment at para 89 of Bilta which stated that “The company’s culpability [for the illegality] is wholly derived from [the directors], which is the very matter of which complaint is made.”

However, I do not consider that Lord Sumption was stating that if the culpability of the company can be attributed to some aspect which is not the “very matter” of which complaint is made then that culpability can be attributed to the company. That would elevate the form of the company’s claim over its substance. A claim by a company against its directors is the paradigm case for not attributing the directors’ dishonesty, whatever it may be, to the company. The key point is that reliance would still be placed on the knowledge and acts of the same directors by those same directors, or those claiming through them, to defeat the claim by the company by attributing that knowledge to the company to set up an illegality defence. Accordingly, I consider that it is immaterial whether the dishonesty relied upon relates to the same acts as form the “very matter” of the claim or relates to collateral acts of dishonesty. In either case, reliance is still being placed on the wrongdoing of the same directors who are defendants to the company’s claim to defeat that claim by attributing their own dishonesty to the company. I consider that attribution will not be permitted in those circumstances regardless as to how the dishonesty of the directors is formulated and regardless as to whether the dishonesty is the “very matter” complained of, or whether it is another aspect of that matter.

Another reason for rejecting this fourth argument is because it envisages that a director could seek to attribute to the company some undisclosed dishonesty, which is collateral to the “very matter” upon which the company relies, in order to deny the company a remedy based on the defence of illegality. However, a facet of the director’s duty to act in good faith in the best interests of the company (see section 172 Companies Act 2006) is an obligation on the director to disclose personal wrongdoing see: Item Software (UK) Ltd v Fassihi [2004] EWCA Civ 1244; [2005] 2 BCLC 91, pp 109 - 110 per Arden LJ. It would denude this aspect of that duty of its content if the director did not disclose his dishonesty in order to set up an illegality defence to the company’s claim in respect of a collateral breach of duty which was not the “very matter” upon which the company relies.

Fifth, the CPS suggests that since the decision in Bilta, the decision of this court in Patel has now fundamentally reshaped the illegality defence. On this basis the CPS argues that had the illegality defence been as now articulated in Patel at the time of Bilta, the illegality defence advanced by the appellants in Bilta would have failed without requiring recourse to arguments of attribution. Mr Sutcliffe, on behalf of the CPS, contends that since the decision in Patel, the rules of attribution cannot be used to control the application of the illegality defence, because the rules of attribution are not the rules of illegality policy. On this basis Mr Sutcliffe suggests that legal coherence as between the decision in Patel and Bilta requires this court to reconsider the rules of attribution. I reject this argument on the ground that the reasoning in Bilta as to attribution remains good law after Patel for the reasons which I have set out at para 61 above. However, I also reject this argument on the basis that the question of attribution is to be addressed first so that a decision is made as to whether the unlawful or dishonest conduct of the directors is to be attributed to the company. Thereafter, if that conduct is to be attributed to the company then consideration is given as to whether it falls within the principles enunciated in Patel such as to found an illegality defence.

Sixth, the CPS argues that by seeking to establish a constructive trust in respect of the profit of £4.55m Aquila is both reprobating the directors’ illegality and approbating it by adopting that illegality so as to profit from it. I consider that there has been no inconsistent approbation and reprobation in this case. That occurs when the principal takes advantage of the agent’s acts in relation to its affairs while denying liability to third parties for such acts. The principle applies to claims by third parties against a principal for the acts of its agent. It does not apply in the context of this claim, which is a claim by the principal against its agent. Any company which pursues its director for breach of duty for acting in an unauthorised way will have found out about the conduct before bringing the claim. By bringing the claim, and requiring its dishonest or criminal director to account for his gains, the company neither approbates the dishonesty nor the crime, nor does it avoid the consequent liabilities to third parties, if any, for the agent’s dishonesty or criminal activity. The decision in Lloyd v Grace, Smith & Co [1912] AC 716 illustrates the principle. A law firm (the principal) which entrusts its affairs to a clerk (the agent), cannot, if the clerk acts dishonestly in the conduct of a client’s retainer, seek to benefit from that agent’s work (approbation) and then to turn to the client and say that the law firm is not liable for the clerk’s unauthorised acts (reprobation).

In conclusion in relation to this ground I consider that the reasoning of this court in Bilta, albeit concerned with loss-based claims rather than claims to strip profits, applies with equal force to the breach of fiduciary duty which is the subject of this decision. Bilta is authority for the proposition that the unlawful acts or dishonest state of mind of a director cannot be attributed to the company so as to afford the director an illegality defence to the company’s claim against him for breach of fiduciary duty. The principles of illegality in Patel simply do not arise.

(b) Ground two

By its second ground of appeal, the CPS submits that the Court of Appeal’s decision is inconsistent with the regime established by POCA. It argues that POCA is intended to permit innocent third-party purchasers, who have paid market value for criminal property, to keep it, and innocent third-party victims, who have suffered loss as a result of criminal behaviour, to be compensated, in each case in priority to the state, but not to permit third parties otherwise to benefit from the actions of criminals any more than those criminals themselves.

As explained at para 33 above the scheme of POCA is not to interfere with any property rights (except tainted gifts). POCA protects the property rights of others regardless as to how those rights arise. Furthermore, there are specific provisions in POCA which permit the State to override property rights, but those provisions have not been used by the CPS. I agree with Mann J (at para 67) that:

“it is therefore POCA which determines whether VTL/Aquila lose the rights which the directors’ acts give them, … If that Act contains provisions which, when properly implemented, have the effect vis-à-vis VTL of depriving it of its proprietary rights, then VTL/Aquila loses those rights. But those rights have to [be] invoked against VTL/Aquila in a proper way.”

I also agree with the Court of Appeal (at para 25) that a “… remedy available to the CPS in a case like this would be to add the company to the indictment and then, if convicted, to seek a confiscation order directly against the company.” The operation of POCA has not been frustrated by the proprietary claim as the CPS had the right to seek to recover the proceeds of crime from VTL in a number of ways (see paras 36-38 above) but did not seek to invoke those rights.

On behalf of the CPS, it was contended that even if there is a constructive trust in favour of VTL so that the beneficial interest is owned by the company any transfer, use or possession of that beneficial interest would amount to money laundering offences contrary to sections 327 and 329 POCA. The CPS contends that (a) the assignment from VTL to Aquila and (b) the application for a declaration of constructive trust in relation to the amount of £4.55m would result in the commission of those offences.

The central issue in this appeal concerns the attribution of the former directors’ fraud to VTL. The issues raised under sections 327 and 329 POCA are different as they relate to potential subsequent illegality committed, not by the former directors of VTL, but by the administrator of VTL and by Aquila. It would be a surprising result if VTL or Aquila, in dealing with a beneficial interest that arises under a constructive trust could be said to have committed a money laundering offence given that POCA is not intended to interfere with existing third-party property rights; see para 62 of Bowman v Fels [2005] EWCA Civ 226; [2005] 1 WLR 3083.

For my part it is not necessary to decide whether such an offence has been or will be committed, as I agree with the observation of Sales LJ giving the judgment of the Court of Appeal in R (Best) v Chief Land Registrar [2015] EWCA Civ 17; [2016] QB 23, para 95 that “POCA is a separate regime operating according to its own, distinct concepts and with its own, distinct procedures and safeguards, and is not material to the issue before us.” The scheme of POCA contained in Parts 2 and 5, like the scheme of Drug Trafficking Offences Act 1986, is not to interfere with existing third-party property rights. Rather Parts 2 and 5 contain provisions which can be used to override the property rights of VTL by a confiscation order on conviction in the Crown Court or by civil recovery of the proceeds of unlawful conduct. Furthermore, there is provision for a restraint order to prevent VTL from dealing with its proprietary rights before an application for a confiscation order can be determined. These orders under Part 2 or Part 5 are the vehicles for the vindication of the public interest in upholding the criminal law without needing to distort the operation of ordinary principles as to equitable ownership of property under a constructive trust. Accordingly, I agree with Mann J at paras 66 and 67 that:

“POCA does not operate through the medium of public policy. It operates through the medium of its provisions. Its provisions determine whether persons are liable to confiscation orders and whether property is liable to be taken by the state. … it is therefore POCA which determines whether VTL/Aquila lose the rights which the directors’ acts give them, not some more generalised considerations of public policy (or illegality). If that Act contains provisions which, when properly implemented, have the effect vis-à-vis VTL of depriving it of its proprietary rights, then VTL/Aquila loses those rights. But those rights have to invoked against VTL/Aquila in a proper way.”

The CPS has not availed itself of remedies under Parts 2 and 5 POCA. It is not permissible to use public policy considerations said to derive from Part 7 to alter the existing property rights under a constructive trust.

I therefore reject the contention that the Court of Appeal’s decision is inconsistent with the regime established by POCA.

The CPS contends that, even if the unlawful conduct of the former directors cannot be attributed to VTL, then Mann J in the proper exercise of his discretion ought not to have granted Aquila any declaratory relief. Aquila contends that the grant of a declaration is not subject to the exercise of discretion relying on Lewin on Trusts, 20th ed (2020), at 45-040 and the judgment of Sir Terence Etherton C in FHR in the Court of Appeal [2013] EWCA Civ 17; [2013] 3 WLR 466, paras 75-76 together with Foskett v McKeown [2001] 1 AC 102 at 109B-C. In my view, however, even if there is a discretion, then plainly it was exercised appropriately. As it has often been said, constructive trusts are not remedial but institutional: see FHR at para 47. In other words, in this context, the constructive trust (and the principal’s beneficial ownership of the property) arises automatically at the moment that, in breach of their fiduciary duty, the directors received the secret profits. There was never a moment at which the former directors as fiduciaries owned the profits in equity. The declaration granted by Mann J not only has the effect of recognising this state of affairs but also accords with the terms of the settlement agreements entered into by the CPS.

Conclusion

For all the reasons given above I would dismiss this appeal.

United Kingdom Supreme Court