Barnes (as former Court Appointed Receiver) v The Eastenders Group & Anor [2014] UKSC 26

A court-appointed receiver managed companies under a POCA order later quashed on appeal. The Supreme Court held taking the companies' assets to pay his £772,547 costs would breach A1P1, but the CPS was liable in unjust enrichment for failure of consideration.

Facts

The appellant, a former partner in a well-known firm of accountants, was appointed as management receiver of a group of companies referred to as ‘Eastenders’ pursuant to orders made under sections 41 and 48 of the Proceeds of Crime Act 2002 (‘POCA’). The orders were made ex parte by HH Judge Hawkins QC on 6 December 2010 during a 40-minute hearing while he was in the middle of conducting a murder trial. The application by the CPS was based on evidence from an HMRC financial investigator alleging that Messrs Windsor and Hare, the beneficial owners of the companies, were involved in large-scale evasion of excise duty and VAT, and inviting the court to ‘lift the corporate veil’ to treat the companies’ assets as the defendants’ personal assets.

The receiver’s powers were activated on 14 December 2010. On 8 February 2011 the Court of Appeal Criminal Division quashed the restraint and receivership orders in relation to the companies, finding no good arguable case that their assets were assets of the defendants. Evidence indicated approximately 95% of the companies’ business was demonstrably legitimate. The receivership had operated for around six weeks and the receiver’s costs and expenses were put at £772,547, including significant sums for chargeable time, professional security staff, and legal advice.

The receiver applied to draw his remuneration from the companies’ assets. Underhill J refused, holding this would breach the companies’ rights under Article 1 of the First Protocol to the ECHR (A1P1), and ordered the CPS to pay. The majority of the Court of Appeal upheld the A1P1 finding but held POCA could not be interpreted to make the CPS liable, leaving the receiver without a remedy. Laws LJ dissented on the A1P1 point.

Issues

The Supreme Court identified three issues:

1. Whether the companies’ A1P1 rights would be infringed by taking their assets to pay the receiver’s remuneration and expenses.
2. If so, whether the receiver was entitled to look to the CPS for reimbursement.
3. Whether any powers exist to prevent such a situation arising in future.

Arguments

Receiver (Mr Perry QC)

Laws LJ had been correct: the costs should be borne by the companies as the order was valid until set aside and the common law lien remained enforceable. In the alternative, Underhill J was correct to order the CPS to pay. It could not be just that a court-appointed officer be left unpaid.

Companies (Mr Jones QC)

The majority of the Court of Appeal was correct in finding that taking the companies’ assets would breach A1P1. Any contractual dispute lay between the receiver and CPS.

CPS (Mr Parroy QC)

Laws LJ was correct on the A1P1 point. If A1P1 precluded recovery from the companies, POCA provided no basis for holding the CPS liable and there was no contractual remedy against the CPS.

Judgment

The A1P1 issue

Lord Toulson (with whom Lady Hale, Lord Kerr, Lord Wilson and Lord Hughes agreed) held that taking the companies’ assets to meet the receiver’s remuneration would violate A1P1. Applying the Sporrong analysis, this engaged the second rule (deprivation of possessions). The taking satisfied the conditions of being ‘provided for by law’ (Laws LJ was right on that point) and had a legitimate public interest aim in combatting crime.

However, the taking failed the proportionality test. The critical facts distinguished this case from Raimondo, Andrews, Hughes, Capewell and Sinclair v Glatt, in all of which the original order had been rightly made. Here, the companies were neither defendants nor was there reasonable cause on 14 December 2010 to regard their assets as the defendants’ assets. As Underhill J had aptly put it, this was ‘simply a confiscation of a third party’s assets to fund the execution of an order that should not have been made in the first place’. That did not strike a fair balance between the community’s general interest and the companies’ rights.

The receiver’s remedy against the CPS

The Court of Appeal was correct that no power to order the CPS to pay could be located within POCA, and section 3 of the Human Rights Act could not be used to read one in. However, Lord Toulson held that the receiver had a claim in unjust enrichment against the CPS based on failure of consideration (or ‘failure of basis’).

The CPS had received a benefit from the receiver’s services in managing the companies. The basis on which the receiver agreed to act, as set out in the CPS’s letter of 29 November 2010, was that he would have an enforceable lien over the assets under his management. Because the effect of the A1P1 conclusion was that the lien was unenforceable, that fundamental basis for the agreement had failed. Drawing on Fibrosa Spolka Akcyjna v Fairbairn Lawson Combe Barbour, Roxborough v Rothmans and D O Ferguson v Sohl, Lord Toulson held that failure of consideration extends beyond promissory failure to include the failure of a state of affairs on which the agreement was premised. The consideration could be treated as severable, so total failure in respect of the companies’ assets sufficed. The receiver was therefore entitled to recover his proper remuneration and expenses from the CPS.

Disposal

The Court upheld the refusal to permit the receiver to take his costs from the companies’ assets, but allowed the receiver’s appeal against the CPS and reinstated Underhill J’s order (on different reasoning).

Lessons for the future

Lord Toulson issued important procedural guidance. Applications for restraint and receivership orders should not be forced into busy lists with limited judicial time except in genuine emergencies. He endorsed Hughes LJ’s remarks in In re Stanford International Bank Ltd on the duty of candour on ex parte applications:

it is essential that the duty of candour laid upon any applicant for an order without notice is fully understood and complied with. It is not limited to an obligation not to misrepresent. It consists in a duty to consider what any other interested party would, if present, wish to adduce by way of fact, or to say in answer to the application, and to place that material before the judge.

He also endorsed the use of a ‘Piggott condition’ (attached as an appendix), providing that where property later turns out not to be that of the defendant, the applicant prosecutor should pay the receiver’s remuneration and expenses.

Implications

The decision establishes several important principles. First, although a receivership order remains valid at common law until set aside, exercising the usual receivership lien over the assets of an innocent third party in circumstances where there never was a good arguable case for treating those assets as the defendant’s may be a disproportionate interference with A1P1 rights. Lord Hughes emphasised that this is fact-sensitive: where the original order was properly made on a good arguable case that later turned out to be wrong, the position may well be different.

Second, the case is a significant development in the law of unjust enrichment. It confirms that failure of consideration is not limited to failure of promised counter-performance but can include the failure of a state of affairs fundamental to the basis of an agreement. It illustrates the courts’ willingness to treat consideration as severable where commercial reality warrants. The Supreme Court expressly left open the wider academic debate as to whether the failure must be total.

Third, the decision has practical significance for prosecutors, receivers and third parties. Prosecutors must think carefully about the statutory conditions and adverse impact on third parties before applying for restraint and receivership orders. Judges must scrutinise such applications critically. Receivers accepting appointment on the standard basis may find that where the underlying order should not have been made against third party assets, they must look to the applying prosecutor for payment. The ‘Piggott condition’ offers a prospective mechanism to make this explicit.

The judgment does not create a broader compensation remedy for third parties affected by wrongly made orders, and the drafting difficulty in section 72(6) POCA relating to compensation for non-defendants was noted but left unresolved.

Verdict: The Supreme Court dismissed the CPS’s appeal against the refusal to allow the receiver to recover his remuneration and expenses from the companies’ assets, holding that this would infringe the companies’ rights under A1P1. The Court allowed the receiver’s appeal against the CPS, holding (on unjust enrichment grounds rather than under POCA) that the CPS was liable to pay the receiver’s proper remuneration and expenses. Underhill J’s order was reinstated.

Source: Barnes (as former Court Appointed Receiver) v The Eastenders Group & Anor [2014] UKSC 26