Serious Organised Crime Agency v Szepietowski & Ors

A court may vary or set aside an exclusion from an interim receiving order under the Proceeds of Crime Act 2002, including where free assets later become available to meet legal costs. A practice direction may regularise the exercise of that statutory power, provided it does not conflict with legislation.

Legal expenses should be paid from recoverable property only as a last resort. The relevant question is whether free assets are reasonably available, not how those assets were acquired or released. Where companies’ participation in civil recovery proceedings is directed and controlled by an individual, the individual’s free assets may be treated as available for the companies’ legal costs.

The Serious Organised Crime Agency applied to set aside four exclusion orders made under section 252 of the Proceeds of Crime Act 2002 in favour of John Szepietowski, as trustee, and two Countess companies. The exclusions had enabled legal expenses to be met from property subject to an interim receiving order.

The application followed an earlier judgment, SOCA v Szepietowski and others, [2009] EWHC 344 (Ch), in which the court found that Mr Szepietowski had substantial free assets. The central issues were whether paragraph 7A.4 of the Practice Direction was binding and compatible with the statutory scheme, whether assets released under a compromise counted as free assets, and whether the companies’ position should be considered separately.

1. The application succeeded. All four exclusion orders were set aside in full.

2. Paragraph 7A.4 of the Practice Direction was binding. Following Secretary of State for Communities and Local Government v Bovale Ltd and another [2009] EWCA Civ 171, a judge must recognise and apply a practice direction unless the exercise of case-management powers justifies a departure in the particular case. A practice direction cannot override primary or secondary legislation.

3. There was no conflict between paragraph 7A.4 and the statutory scheme. Section 251(3) of the Proceeds of Crime Act 2002 authorised variation or setting aside of an interim receiving order. Sections 252(2) and 252(3) permitted exclusions to be made on an application to vary the order and subject to conditions. The power to vary or set aside the receiving order included power to vary or set aside an exclusion.

4. An exclusion merely earmarked property from which payment might later be made. It did not guarantee payment of legal expenses. On a recovery order, payment remained dependent on a discretionary order under section 266(8A). The Practice Direction properly stated the principles governing those statutory powers.

5. The court applied principles analogous to those governing proprietary freezing orders. Recoverable property should not bear legal costs where the defendant has other funds reasonably available. Property released under the 2008 compromise was free property for this purpose. Its source, and the absence of advance warning that the exclusions might later be challenged, did not alter that conclusion.

6. The evidence showed that Mr Szepietowski controlled the Countess companies and directed their involvement in the proceedings. It was unnecessary to pierce the corporate veil. In the circumstances, fairness and justice required his free assets to be treated as available for the companies’ legal costs before recoverable property was used.

The judgment records earlier proceedings in the same litigation, including an earlier judgment refusing further exclusions: SOCA v Szepietowski and others, [2009] EWHC 344 (Ch). The present judgment determined SOCA’s subsequent application to set aside the existing exclusions.