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03 Jun 2013

Making applications for restraint orders

The recent decision of the Supreme Court in VTB Capital v Nutritek Corp and others [2013] UKSC5, a civil fraud case, provides helpful guidance relevant to applications for restraint orders in criminal cases in the Crown Court which include a request to freeze the assets of a company. Whilst this case was concerned with jurisdiction and the law of contract in relation to foreign parties it nonetheless is germane to this important area of the criminal law.

The basic norm of corporate liability under English law is that a company is an independent person and thus individuals who control it should not be made liable as a party to a contract entered into by the company. However in the VTB case, the claimant alleged fraud by the defendant company and contended that in the light of this those who controlled this company should be joined as defendants. What the claimant was thus seeking from the Court was for it to pierce the corporate veil. It contended that it was just and equitable to do this in order to impose contractual liability upon the alleged fraudulent controllers.

Sometimes when applying for a restraint order under the Proceeds of Crime Act 2002 prosecutors seek to extend its proposed ambit to companies alleged to be, to quote two of the many epithets often used in this circumstance, a “front” or “sham” for an alleged complex fraud carried out by the accused. Crown Court judges have sometimes reacted to such claims with a readiness to restrain. In other words, to regard corporate assets as those of the accused notwithstanding the separate personality and that no allegation of crime is levelled at the company.

This was the situation described for example by the Court of Appeal case, (R v Windsor and others [2011] EWCA 143. Here Hooper LJ urged circuit judges to take a more discerning approach. One can see from his judgment that the judge who had originally granted the order restraining the various companies had somewhat slackly just done what the CPS had asked for.

Whilst no criminal authority was cited in the VTB case it should be regarded alongside the Windsor case as a direction to judges not to be swayed by mere allegations that an accused has hidden behind a company to conduct a fraud. The Supreme Court held that an individual’s ownership and control of a company is not an adequate ground for piercing the corporate veil. So prosecutorial allegations that the company is a “creature” or “device” of the accused, should never be treated as a sufficient ground to restrain it. By implication neither should a judge be seduced by a prosecutorial sweeping or bold claim that restraint is necessary in the interests of justice. The writ of company law runs as much in the Crown as in any commercial court and appeals to pragmatism or fairness should not be persuasive.

VTB emphasises the duty on the litigant who asks a court to pierce the veil to identify impropriety by the defendant which “must be linked to use of the company structure to avoid or conceal liability”. In other words, it must be established how the defendant misused the company by attempting to mislead others into believing that the alleged wrong was committed by the company alone.

Prosecutors should also take note, insofar as corporate assets are concerned, VTB has imposed a higher threshold.

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