The Serious Fraud Office v Lexi Holdings Plc

A restraint order under Proceeds of Crime Act 2002 must preserve realisable property for satisfaction of an existing or prospective confiscation order. Under section 69(2)(c), the court must disregard an unsecured debt where payment would conflict with that object. It may permit payment only where no such conflict arises.

A person claiming an equitable interest may obtain protection under section 69(3)(a). A money judgment founded on equitable compensation does not necessarily prevent a cumulative claim to an equitable charge. However, the charge attaches only to assets traced from, or mixed with, the misappropriated funds. The claimant must establish that nexus. A trustee’s inadequate disclosure does not justify a presumption that all of the trustee’s assets derive from the trust funds.

The Serious Fraud Office appealed against a Crown Court order varying a restraint order made against M during a fraud and money-laundering investigation. Lexi Holdings plc had obtained a default money judgment against M after alleging that he had received £625,000 paid in breach of trust.

Lexi sought payment from restrained assets. It relied both on an asserted equitable proprietary interest and on its position as a bona fide unsecured judgment creditor. Judge Hone QC accepted both grounds and allowed payment of the whole judgment debt.

The appeal raised whether Lexi retained an equitable charge despite the form of its default judgment, the assets to which any charge could attach, and whether the court could vary a restraint order to pay an unsecured creditor under the Proceeds of Crime Act 2002.

1. Appeal allowed in part. Lexi had an equitable charge over the United National Bank and Halifax accounts, but not over M’s other restrained assets. The restraint order was to be varied only to permit payment of £437,258.41, subject to submissions on interest and the precise order.

2. Lexi’s default judgment was an in personam judgment for equitable compensation and did not itself grant proprietary relief. Nevertheless, it did not conclusively abandon a later claim to an equitable charge. A claim to beneficial ownership of traced proceeds and a personal equitable claim secured by a charge are alternatives; but a charge may be a cumulative remedy securing the personal obligation. The court applied the analysis in Foskett v McKeown [2001] 1 AC 102 and held that there was no unfairness or abuse of process in Lexi pursuing that security remedy.

3. The charge could attach only to assets derived from, or containing, the misappropriated funds. Tracing supplies the necessary nexus. It could therefore cover the two identified bank accounts into which the funds had been paid or repatriated. It could not extend to all M’s assets, including a matrimonial home acquired years before the misappropriation. Non-compliance with disclosure orders did not reverse the claimant’s obligation to establish the nexus.

4. Lexi’s equitable interest arose when the misappropriated funds entered M’s accounts, before the restraint order. It was therefore an interest protected by section 69(3)(a), read with section 84, of the Proceeds of Crime Act 2002.

5. As to the unsecured balance, section 69(2)(c) is mandatory. It requires the court to disregard an obligation to an unsecured creditor where payment conflicts with satisfying a confiscation order that has been made or may be made. The statutory changes since the earlier confiscation regime meant that In re X (Restraint Order: Variation) [2005] QB 133 could not govern the result. The court rejected the wider discretion adopted below.

6. The court also held that the delay since the investigation began did not establish that a reasonable time for bringing proceedings had elapsed. In a postscript, it stressed the need to comply with section 58 where civil proceedings concern property subject to a restraint order.

• Court of Appeal (Criminal Division): Allowed the Serious Fraud Office’s appeal in part and limited the variation of the restraint order.

• Central Criminal Court: On 12 July 2007, Judge Hone QC varied the restraint order to permit payment to Lexi of the full default-judgment debt.

• Central Criminal Court: On 20 April 2006, Judge Stephens QC made the original restraint order against M.