McKendrick v Financial Conduct Authority

The Court of Appeal dismissed the appellant's challenge to a committal to prison for contempt arising from deliberate breaches of two worldwide freezing orders made in proceedings brought by the Financial Conduct Authority. The court reaffirmed the governing approach to sentencing for civil contempt: first assess culpability and the harm (including intended or likely harm), consider whether a fine would suffice, and if not select a custodial term proportionate to the misconduct, having regard to aggravating and mitigating factors.

Material grounds for the decision were that the breaches were planned, repeated and deliberate (diverting rental receipts to an account and appointing an agent who received very large commissions), that the effect was to frustrate the purpose of the freezing orders by preventing accurate monitoring and recovery of funds for investors, and that the judge had taken into account mitigation including admissions and belated disclosure. The judge began with a 12 month starting point, reduced it to six months to reflect the appellant's admissions and partial compliance, and the Court of Appeal held that a six month immediate custodial sentence was within the range reasonably open to the judge.

Background and parties: The Financial Conduct Authority brought proceedings in relation to investment schemes in which investors had suffered losses. At trial the appellant was found to have contravened provisions of the Financial Services and Markets Act 2000. Two worldwide freezing orders (the Roth WFO and the McCahill WFO) containing disclosure requirements and a requirement that rental income be paid into a named Barclays account were in force against the appellant.

Facts: The appellant owned buy-to-let properties. Rental income had previously been paid into the Barclays account, which was subject to special monitoring arrangements. The appellant caused rental payments to be directed to accounts controlled or operated by Mrs Priya McKendrick, who received a commission arrangement dated April 2017, and on whom the appellant relied to receive and disburse rental income. The FCA alleged a failure to disclose assets and diversion of rental income in breach of both WFOs, and an inability to account for sums approaching £40,000.

Nature of the application: The FCA applied for committal for contempt of court on five pleaded allegations of breach of the WFOs (failure to disclose assets and directing rental payments and payments of mortgages to sources other than the Barclays account, and dissipation by spending money paid to Mrs McKendrick). The appellant admitted the contempts and offered mitigation.

Procedural posture: The committal application was heard by Marcus Smith J who found the contempts proved and sentenced the appellant to six months' imprisonment (having started at 12 months and halved the term for admissions and belated compliance). The appellant appealed to the Court of Appeal on three grounds: that the 12 month starting point was excessive (such that the ultimate six month sentence was excessive), that execution of the sentence should have been stayed pending appeal, and that the order for costs payable within 14 days was unreasonable.

Issues framed by the court: (i) whether the judge erred in principle or reached a sentence outside the range reasonably open to him; (ii) whether factors such as the possible blocking of the Barclays account materially mitigated culpability; (iii) whether suspension or stay was appropriate; and (iv) whether procedural unfairness or other irregularity vitiated the sentence.

Court's reasoning and decision: The Court of Appeal reviewed the legal framework for committal (including section 14 Contempt of Court Act 1981, CPR provisions and the appellate standards) and considered authorities cited on sentencing for breaches of freezing orders. The court accepted that the judge had not made specific adverse findings on every factual point relied on by the appellant (and therefore proceeded on the basis that the Barclays account had been blocked until August 2018), but concluded that even on that basis the breaches were serious: repeated, deliberate diversions and failures to disclose which frustrated the purpose of the WFOs and dissipated the only funds available for investors. The judge had correctly weighed aggravating and mitigating factors, gave appropriate but limited credit for belated admissions, and did not take into account immaterial matters. The six month immediate custodial sentence therefore fell within the range reasonably open to the judge and the appeal was dismissed. The court ordered the appellant to pay the FCA's costs of the appeal.

Appeal dismissed. The Court of Appeal held that the judge had applied the correct legal approach to sentencing for contempt (assessing culpability and harm, considering whether a fine would suffice, and imposing a commensurate custodial term only if justified). The judge reasonably concluded that the contempts were deliberate and planned, that the freezing orders' purpose had been frustrated, and that a custodial sentence was required. The judge's starting point (12 months) and reduction to six months for admissions and partial compliance were within the range of reasonable responses and did not involve an error of principle.

Appeal from the High Court (Business and Property Courts, Chancery Division) Mr Justice Marcus Smith [2019] EWHC 607 (Ch) to the Court of Appeal (Civil Division), resulting in dismissal in [2019] EWCA Civ 524.