THE litigation in Crown Prosecution Service v Aquila Advisory Ltd. [2021] UKSC 49 centred on the conduct of Robert Faichney and David Perrin. Working together while directors of Vantis Tax Ltd. (“Vantis”), they had “misappropriated for themselves a corporate opportunity” and “indulged in a form of misappropriation of [company] assets” (at [68]). This had resulted in them making profits of £4.55m. In the High Court, Mann J. found that the men's behaviour amounted to breach of fiduciary duty: [2018] EWHC 565 (Ch). In addition, although they were tried separately, juries at Blackfriars Crown Court decided that it constituted cheating the public revenue. This meant that the money in their hands – or at least what remained of it – was both a profit made in unauthorised conflict of interest and the proceeds of crime.
After the two directors’ respective convictions, the Crown Prosecution Service acquired confiscation orders issued under section 6 of the Proceeds of Crime Act 2002 (“POCA”) in relation to their gains. However, it is tolerably clear that such orders vest only personal rights in the authority to which they are granted. As noted in Aquila, they claim as a criminal's “unsecured creditor” (at [65]). What is more, as against third parties, those rights are dependent on the rights of the criminal as against the same (at [65]). Consequently, notwithstanding the fact of their grant, there was a real risk that, on the facts of the case, the CPS's orders would be effectively worthless. Relying on FHR European Ventures LLP v Cedar Capital Partners LLC [2014] UKSC 45 (“FHR”), Aquila Advisory Ltd. (“AAL”) – which had acquired both Vantis’ choses in action and property rights – sought a declaration that the money in Faichney and Perrin's hands was held on constructive trust in its favour. FHR established that, in any case involving an acquisitive breach of fiduciary duty a principal may make a proprietary claim to his fiduciary's identifiable gains. Moreover, it was – as it remains – true that, as against the same defendant, assertions of interests under trusts have priority over the personal claims of third parties (see e.g. Re Kayford Ltd. [1975] 1 W.L.R. 279). Thus, if it was going to make a claim with respect to any of the £4.55m made by the sanctioned directors, the CPS had to find a way of improving the relative priority of its rights.
Its argument to that end was ingenious. Calling on the rules of corporate attribution, it contended that, as directors, Faichney and Perrin's criminal acts and/or states of mind could be attributed to their company. This would allow their criminality to be invoked to prevent Vantis (or any party claiming through it) from enforcing, as against either those directors or those claiming through them (as their assignee), any rights which had been acquired because of their behaviour, whether personal or proprietary. In other words, the CPS said that, irrespective of the decision in FHR, the ability of a company whose director has made an unauthorised gain to make a claim to that gain was contingent on the legality of his conduct.
At first instance, Mann J. held that the directors’ illegality could not be attributed to their company ([2018] EWHC 565 (Ch), at [43]–[57]). As a result, no question of illegality could arise. He therefore granted AAL the relief sought (ibid., at [79]). The Court of Appeal upheld this decision ([2019] EWCA Civ 588). Patten L.J. (with whom Hamblen and Holroyd L.JJ. agreed) identified that the Supreme Court's decision in Bilta (UK) Ltd. v Nazir [2015] UKSC 23 supported the proposition that, in order to preserve the integrity of the relationship of trust and confidence which exists between a director and his company, neither that director nor any party claiming through him “should be able to argue that the company either committed or knew about [a] breach of duty, simply because [the director] committed or knew about it” (Bilta, at [42]). Yet whilst he also accepted that that case concerned a company's claim for equitable compensation “for loss caused by a [director's] breach of fiduciary duty” ([2019] EWCA Civ 588, at [24], emphasis added), he did not think it was open to him “to fashion some exception” to the wider principle it reflected “[in order] to accommodate the facts of [the] case” before him (ibid., at [25]).
In the Supreme Court, the CPS invited five Justices to do just that. It argued that “the purpose of [the rule in Bilta was] to protect [a] company from losses as a result of the dishonesty of [its] directors … not to protect [it] when [that] company stands to profit from [such behaviour]” (at [70]). However, each of them rejected that contention. Lord Stephens (with whom Lord Lloyd-Jones, Lord Sales, Lord Burrows, and Lady Rose agreed) held that “the reasoning … in Bilta, albeit concerned with loss-based claims rather than claims to strip profits, [applied] with equal force to the breach of fiduciary duty [before him]” (at [81]). He therefore stated that “in civil proceedings brought by a company against its directors for breach of fiduciary duty, claiming that the sums [those directors] acquired as a result of the breach are subject to a constructive trust in the company's favour, the principles established in Bilta prevent the attribution of the dishonesty of those directors to that company” (at [60]). Attribution being denied, he added, the possibility of anyone successfully raising the issue of illegality failed in limine (at [60]). It is thus now settled that, as against his principal, it makes no difference to a fiduciary – or those whose rights against that fiduciary are derived from his position vis-à-vis his principal – whether the disloyalty he engaged in ended in him making a profit or causing a loss to his principal.
This decision should be warmly welcomed. Fiduciary duties exist when one party, be they a company director or otherwise, has at least one power over another and that power is not to be exercised in a self-interested way (see e.g. Al Nehayan v Kent [2018] EWHC 333 (Comm), at [159]). They are “prophylactic” in the sense that they are designed to prevent by deterrence the misuse of the power or powers to which they relate (at [75]). In addition, as Lord Stephens observed, “the protective function of the fiduciary duty would be put at risk if a director were permitted to seek to avoid liability by arguing that the impugned transaction was nonetheless in the interests of the company” (at [75]). Indeed, it would be absurd for a company whose director has committed a non-criminal breach of fiduciary duty to be in a stronger position as against him or his unsecured creditors vis-à-vis his unauthorised profits, than a company whose unfaithful director was simultaneously guilty of a criminal offence. Instead, the more serious the wrongdoing on the part of a fiduciary, the stronger the reflexive protection of their principal should be.
Furthermore, Lord Stephens was right to state that, at least for the purposes of settling the rules of attribution, there is no principled justification for distinguishing between unauthorised conflicts of interest which result in directors making gains and those which cause their companies to suffer losses (at [71]). Taking seriously the need to protect the integrity of the relationship which exists between directors and their companies, the nature of the unauthorised conflict which a director engages in should not make a difference when it comes to what relief, if any, that company (or those claiming through it) are entitled to. As His Lordship noted, “the director's duty to the company [will] still be negated … in circumstances where the director's scheme in breach of his fiduciary duty … included an element of … profit for [his] company” (at [71], emphasis added).
There are also two wider policy points to consider. The first is that it ill behoves a law against corruption to be riddled with fine distinctions. As equity lawyers have understood for centuries, the more rules are laid down in relation to fraud, the easier it is for them to be evaded (see e.g. Lawley v Hooper (1745) 26 E.R. 962, 963 (LC)). Consequently, Lord Stephens was wise to caution against introducing any sort of “exception” to “the reasoning in Bilta” on the basis that the “uncertainty” it would import would undermine the “highly desirable … clarity and simplicity” of the current law (at [72]).
The second policy point concerns enforcement. Thinking about bribes, Davies has expressed support for the idea that, as between a principal and a third-party claiming pursuant to a confiscation order, “whilst a principal should not be deprived of his own property, in other circumstances it is arguable that nobody should be able to benefit from [the proceeds of crime] and that confiscation should be [prioritised]” (see P.S. Davies, “Bribery” in Equity, Trusts and Commerce (P.S. Davies and J. Penner (eds.), 2017, 231). Yet one may doubt whether that would lead to consistent or distributionally just results. The CPS is a public authority with limited resources and a discretion as to whether to apply for a POCA order. In every single case, it may therefore be less likely to try and capture disloyal fiduciaries’ illegal gains than each of their respective principals are, albeit working in isolation. Not only do those principals have a direct incentive to strip away their fiduciaries’ profits, something the CPS lacks, but whether a principal who has been the victim of a breach of fiduciary duty can recover his fiduciary's ill-gotten gains should not depend on whether the CPS has obtained a confiscation order in respect of the same. Like principals should be treated alike.
