Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49

Directors of VTL made £4.55m secret profit through fraudulent tax avoidance schemes, breaching their fiduciary duties. VTL's successor, Aquila, claimed proprietary rights to these funds under a constructive trust. The Supreme Court held that the directors' fraud could not be attributed to VTL, preserving Aquila's proprietary claim in priority to CPS confiscation orders.

Facts

Mr Faichney and Mr Perrin were directors of Vantis Tax Ltd (VTL), a tax consultancy company. They devised fraudulent tax avoidance schemes exploiting section 587B of the Income and Corporation Taxes Act 1988, which allowed tax relief for shares donated to charity. The directors created fictitious arrangements purporting to transfer VTL’s intellectual property to inflate share values, enabling subscribers to claim illegitimate tax relief. Through these schemes, they extracted £4.55m for their personal benefit, paid through a non-existent ‘Richardson Trust’. Both directors were subsequently convicted of cheating the public revenue.

The Competing Claims

VTL (through its assignee, Aquila Advisory Ltd) claimed the £4.55m was held on constructive trust due to the directors’ breach of fiduciary duty. The Crown Prosecution Service (CPS), holding confiscation orders against the directors under the Proceeds of Crime Act 2002 (POCA), argued that the directors’ fraud should be attributed to VTL, thereby defeating Aquila’s proprietary claim through the illegality defence.

Issues

The central issue was whether the dishonest conduct of VTL’s directors should be attributed to VTL itself, thereby barring VTL (and its assignee Aquila) from asserting a proprietary claim to the £4.55m on grounds of illegality.

Judgment

The Supreme Court unanimously dismissed the CPS’s appeal. Lord Stephens delivered the judgment, with which all other Justices agreed.

Attribution Principles

The Court applied the principles established in Bilta (UK) Ltd v Nazir [2015] UKSC 23. Lord Stephens quoted Lord Mance’s reasoning from Bilta:

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.

The Court held that directors sued by their company for breach of fiduciary duty cannot rely on attribution principles to defeat the claim, even where the scheme involved the company in fraud.

Constructive Trust

Following FHR European Ventures LLP v Mankarious [2014] UKSC 45, the Court confirmed that any benefit acquired by an agent in breach of fiduciary duty is held on trust for the principal. Lord Stephens stated:

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.

POCA and Third-Party Rights

The Court emphasised that POCA does not interfere with existing third-party property rights. Lord Stephens agreed with the lower courts that:

POCA does not operate through the medium of public policy. It operates through the medium of its provisions… 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.

The CPS had not utilised the available mechanisms under POCA to override VTL’s proprietary rights.

Implications

This case confirms that the Bilta principles apply equally to claims for restitution of profits as to claims for loss. It reinforces that a company’s proprietary claim against its directors for breach of fiduciary duty cannot be defeated by attributing the directors’ wrongdoing to the company. The judgment also clarifies the relationship between equitable proprietary rights and POCA confiscation orders, confirming that POCA operates through its specific provisions rather than general public policy considerations. The CPS, as an unsecured creditor under confiscation orders, has no better rights than the defaulting directors themselves against the company’s equitable claims.

Verdict: Appeal dismissed. The Court held that the directors’ fraud could not be attributed to VTL, and Aquila’s proprietary claim under a constructive trust to the £4.55m took priority over the CPS’s confiscation orders.

Source: Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49