Crown Prosecution Service v Aquila Advisory Ltd

A director’s unlawful acts and dishonest state of mind cannot be attributed to the company so as to provide the director with an illegality defence against the company’s claim for breach of fiduciary duty. This rule applies equally to claims for losses and claims to strip secret profits, even where the director intended the company also to benefit.

A benefit acquired through breach of fiduciary duty is held on constructive trust for the company. Confiscation legislation respects existing third-party property rights unless its specific statutory mechanisms are properly invoked to override them. General public policy derived from the legislation cannot alter equitable ownership.

Two directors exploited their positions and their company’s intellectual property in fraudulent tax-avoidance schemes. They received secret profits of £4.55m and were convicted of cheating the public revenue. The company’s proprietary claims were assigned to Aquila Advisory Ltd.

The Crown Prosecution Service obtained confiscation orders against the directors but accepted that those orders created no proprietary interest or priority. Mann J held that the profits and traceable assets were held on constructive trust for the company and granted declaratory relief: [2018] EWHC 565 (Ch); [2018] Lloyd’s Rep FC 345. The Court of Appeal dismissed the Crown Prosecution Service’s appeal: [2019] EWCA Civ 588.

The central questions were whether the directors’ dishonesty should be attributed to the company so that illegality defeated its proprietary claim, whether that claim was inconsistent with the Proceeds of Crime Act 2002, and whether declaratory relief should have been refused.

1. Appeal dismissed unanimously. Lord Stephens gave the judgment, with which Lord Lloyd-Jones, Lord Sales, Lord Burrows and Lady Rose agreed.

2. Any benefit obtained by an agent in breach of fiduciary duty is held on constructive trust for the principal. The trust therefore arose automatically when the directors received the secret profits. Their related criminal offending did not form a necessary element of the civil claim, which rested independently on misuse of the company’s intellectual property and exploitation of a corporate opportunity: FHR European Ventures LLP v Mankarious [2014] UKSC 45; [2015] AC 250 applied.

3. Bilta (UK) Ltd v Nazir [2015] UKSC 23; [2016] AC 1 applied. In proceedings by a company against its directors for breach of fiduciary duty, the purpose of the duty requires the directors’ acts, knowledge and states of mind to be separated from those of the company. Attribution would negate the duty and permit directors, or persons claiming through them, to rely on their own wrongdoing.

   The rule applies to claims for gains as well as losses. It also applies where the scheme was intended to benefit, or did benefit, the company and where the dishonesty relied upon was collateral to the particular breach complained of. Exceptions of those kinds would undermine the fiduciary duty’s prophylactic and deterrent functions.

4. Attribution must be addressed before illegality. Patel v Mirza [2016] UKSC 42; [2017] AC 467 had not undermined Bilta. Since the directors’ dishonesty was not attributable to the company, the principles of illegality in Patel did not arise. Seeking an account of a director’s gains neither adopted the criminal conduct nor avoided any liabilities owed to third parties.

5. The Crown Prosecution Service had no better rights or defences against the company than the directors had. Its confiscation orders made it an unsecured creditor and conferred neither a proprietary interest nor priority.

6. The Proceeds of Crime Act 2002 generally preserves existing third-party property rights. Parts 2 and 5 contain particular mechanisms capable of overriding such rights, but the Crown Prosecution Service had not invoked the available mechanisms against the company. Public policy said to derive from Part 7 could not be used to alter ordinary equitable ownership. Possible money-laundering consequences under sections 327 and 329 did not need to be decided.

7. The constructive trust was institutional rather than remedial. It arose when the profits were received, leaving no moment at which the directors owned them beneficially. Even assuming that declaratory relief was discretionary, Mann J had exercised that discretion properly.

1. United Kingdom Supreme Court: Dismissed the Crown Prosecution Service’s appeal unanimously and affirmed the company’s assignee’s priority under the constructive trust: [2021] UKSC 49.
2. Court of Appeal: Dismissed the appeal, holding that the directors’ conduct could not be attributed to the company so as to defeat its equitable title: [2019] EWCA Civ 588.
3. High Court, Chancery Division: Mann J declared that the £4.55m was held on constructive trust for the company, whose rights had been assigned to Aquila: [2018] EWHC 565 (Ch); [2018] Lloyd’s Rep FC 345.