Andrew Smith’s article on when a non-defendant company can have its assets confiscated published in The Barrister

When can a non-defendant company have its assets confiscated?

The majority of prosecutions in the UK for white-collar crimes are brought against individuals and not companies, even where the conduct constituting the crime was performed in the name of a company. If the individuals are convicted, however, confiscation proceedings will frequently address whether the company should have its turnover and assets confiscated, notwithstanding that the company itself was not prosecuted.

There are three principal scenarios in which a court is permitted to treat a company’s turnover and assets as the property of the convicted individuals. These scenarios were delineated by the Court of Appeal in R v Seager and Blatch [2009] EWCA Crim 1303; this approach was approved by a different constitution of the Court of Appeal in R v Sale [2014] 1 WLR 663. The scenarios are as follows:

1) Where the individual hides behind the company to conceal his crime and his benefit from it (“the first scenario”).

2) Where the individual performs acts in the name of a company which, with the necessary mens rea, constitute a criminal offence (“the second scenario”).

3) Where the transaction or business structure is a device or sham, i.e. an attempt to disguise the true nature of the transaction so as to deceive third parties or the courts (“the third scenario”).

The second scenario is often the most difficult to apply in practice. It has, for example, been interpreted to apply to situations whereby a company, whilst implicated in criminality through the actions of a convicted individual, has some legitimate business, i.e. the company is not a sham and is partly owned and/or controlled by innocent parties who have not been prosecuted.[1] The fact that a proportion of the company’s turnover or assets might be confiscated in these circumstances is a worrying prospect for companies seeking advice about their financial exposure to criminal proceedings.

In approving the “three scenario” approach in Seager, the court in Sale drew on the line of civil cases concerning the lifting of the corporate veil. These cases were summarised and interpreted by the Supreme Court in Prest v Petrodel [2013] 2 AC 415, in which Lord Sumption identified two principles whereby the company’s personality is abused for the purpose of wrongdoing, which are as follows:

1) The concealment principle, whereby a company is interposed so as to conceal the identities of the perpetrators, which entitles the court to look behind the corporate structure to discover the facts which the structure is concealing (“the concealment principle”).

2) The evasion principle, whereby a company is interposed so that the separate legal personality of the company defeats the rights of third parties against the individual in control of the company, or frustrates the enforcement of those rights (“the evasion principle”).

A literal reading of the second scenario in Seager might suggest that its scope is wider than both the concealment principle and the evasion principle. On its face, an individual can commit a crime in the name of a company, and thus potentially fall within the second scenario, without using the company either to conceal the crime, or to defeat or frustrate the rights of third parties.

What, then, is the precise scope of the second scenario in Seager? When can a non-defendant company have its assets confiscated, simply on the basis that an individual performed acts in the name of the company which constituted the criminal offence?

Last month the Court of Appeal considered this question in Boyle Transport (Northern Ireland) Ltd v R [2016] EWCA Crim 19, and in doing so promulgated guidance on all confiscation cases concerning an issue of lifting the corporate veil.

Background

The applicants in Boyle Transport were the directors and majority shareholders of a road haulage company (“the old company”). They sought leave to appeal against confiscation orders made following their guilty pleas to conspiring to make false instruments related to circumvention of an EU Regulation concerning drivers’ hours. An enforcement receiver was appointed over the applicants’ realisable assets, which were deemed to include the old company’s assets. The appointment was extended to cover the assets of a second company (“the new company”) performing a materially identical business to the old company. The old company’s assets had been transferred to the new company shortly after the applicants had been sentenced. The judge found this transfer of assets not to be genuine. For the purposes of confiscation, the trial judge thus treated the old company’s turnover and assets, and therefore the assets ostensibly transferred to the new company, as property obtained by, and belonging to, the applicants. He described the applicants as the “operating minds” of the old company and held that the case fell squarely within the second scenario identified in Seager.

For the purposes of the appeal, it was accepted by the applicants that the transfer of assets from the old company to the new company was fiction; the sole question was whether the judge was right to lift the corporate veil of the old company, and to treat its turnover and assets as belonging to the applicants.

The decision

In reaching its decision, the Court of Appeal outlined seven non-exhaustive principles of general application in any confiscation case concerning an issue of lifting the corporate veil. These principles bear reading in full. In summary, however, the court held that:

1) The test is not simply one of “justice”; so vague an approach would be unprincipled and would give rise to uncertainty and inconsistency in decision-making.

2) Whilst the court is required in each case to assess the “reality of the matter”, that does not permit a court to depart from established principles relating to the separate legal status of a company.

3) Confiscation proceedings are not of themselves aimed at punishment; rather at the recovery of benefit.

4) The principles relating to the doctrine of lifting the corporate veil in the context of confiscation proceedings are the same as in the civil courts.

5) Regard should be had to the nature and extent of the criminality of the convicted individual, in particular whether the individual’s benefit from his criminality should be equated with the turnover or profits of the company.

6) Even where a company implicated in criminality is solely owned and solely controlled by the convicted defendant, this does not in itself necessitate a conclusion that its turnover and assets are to be equated with the property of the defendant.

7) All such decisions must be geared towards the facts and circumstances of the particular case.

Applying those principles to the instant case, the court found that it could not be determinative that the applicants were the old company’s “operating minds”. Whilst they were the sole, legally appointed directors, there were a number of minority shareholders who had not been convicted. The company was not therefore simply the alter ego of the applicants. The old company had been properly set up as a limited company and had operated over a long period in the business of road haulage. There was ultimately no evidence that the business would not have been viable without the breaches of the EU Regulation.

For these reasons, the Court concluded that no case for lifting the corporate veil was made out, and that the trial judge had been wrong in saying that the “realities of the situation” justified the conclusion that the old company’s assets should be treated as belonging to the applicants. The court held that the second scenario in Seager was not to be taken out of context and did not encompass some further free-standing legal principle whereby the court would always lift the corporate veil. Accordingly, the confiscation orders and the order appointing the enforcement receiver were quashed and the case remitted to the Crown Court for the benefit figures to be recalculated.

Commentary

When individuals are convicted of white-collar crimes, and a company in whose name the crime was committed benefits as a result of the crime, it is tempting to think that the commission of the crime provides a gateway through which the company’s tainted benefit can be confiscated. The Court of Appeal’s decision in Boyle Transport makes it clear that this approach, whilst conceptually attractive, is legally impermissible. The fact that the company has been implicated in criminality is insufficient in itself to lift the corporate veil in confiscation proceedings. The veil can only be lifted on the basis of the established civil law principles identified in Prest, which the Court of Appeal regarded as consistent with the “three scenario” approach identified in Seager.

What, then, is the scope of the second scenario identified in Seager? According to the Court of Appeal, it should only apply in a case which falls within the evasion principle or the concealment principle. The Court was keen to ensure that the wording of the second scenario is not read too literally, and that the indivisibility or otherwise of the company and the convicted individuals must be tested against the facts of the particular case. Where the two are divisible, the benefit of the convicted individuals can and should be assessed by reference to the sums received by them as directors of the company, and not to the company’s assets and turnover. Indeed, even when a company is solely owned and solely controlled by the convicted defendants, the Court was at pains to point out that its turnover and assets should not necessarily be equated with the property of the individual defendants.

Whilst this decision may appear to be welcome news to companies and their advisers, it disguises a worrying truth. A company can escape unscathed from confiscation if it is divisible from the convicted individuals, but that may simply prompt more companies to be charged. If the company is charged alongside the individuals, which the prosecution would be entitled to do if any one of the individuals constituted its directing mind, the legal argument about the corporate veil could be circumvented altogether in confiscation proceedings. Indeed, in Boyle Transport, the Court of Appeal did not doubt that the applicants were the company’s operating minds. Had the old company been charged, the prosecution would have been entitled to a confiscation order over a relevant proportion of its assets and turnover, in addition to confiscation orders over the available assets of the applicants.

Ultimately, then, this decision, which ostensibly protects companies from the unwelcome impact of confiscation proceedings, may result in more canny prosecutorial decision-making, and more companies being charged if they retain the fruits of a crime, notwithstanding that a proportion of their business is legitimate.

[1] See for example R v Xu [2008] EWCA Crim 2372.

This article is also published in The Barrister.