| CRIME — Restraint order — Unsecured third party creditor applying to have restraint order varied to pay judgment debt — Whether power to vary restraint order to allow for payment of such debt — Proceeds of Crime Act 2002, s 69
Serious Fraud Office v Lexi Holdings plc (in Administration) and M [2008] EWCA Crim 1443; [2008] WLR (D) 235
CA: Keene LJ, Davis J and Judge Diehl QC: 10 July 2008
A restraint order should not be varied so as to allow for the payment of a debt to an unsecured creditor unless there was no conflict with the object of satisfying any confiscation order that had been or might be made.
The Court of Appeal, Criminal Division, so held when allowing to a limited extent an appeal by the Director of the Serious Fraud Office against a decision of Judge Hone QC sitting at the Central Criminal Court on 12 July 2007 whereby he varied a restraint order made on 20 April 2006 by Judge Stephens QC under the Proceeds of Crime Act 2002 which prohibited the second respondent, M, from removing, disposing of, dealing with or diminishing the value of any of his assets, including an account with the United National Bank Ltd, three accounts with Halifax Bank plc and a property located at Wheathampstead, Hertfordshire.
The administrator of Lexi Holdings plc claimed that Lexi had been the victim of substantial fraud committed by, among others, M, and commenced proceedings against him. It was pleaded that SL, the managing director of Lexi, dishonestly, and in breach of the fiduciary duties owed by him to Lexi, authorised or permitted the payment by Lexi to M of £625,000. On 19 March 2007 judgment in default was entered in the sum of £625,250. On 20 June 2007 Lexi made an application to the Central Criminal Court to vary the restraint order made by Judge Stephens so as to permit M to comply with the judgment. It sought the variation both on the basis that it had a proprietary claim and as a bona fide judgment creditor. Judge Hone made the variation sought so as to allow payment to be made to Lexi from M’s restrained assets.
KEENE LJ, in the judgment of the court, said that Judge Hone had found that the Proceeds of Crime Act 2002 protected an equitable interest held by a third party under a constructive or resulting trust and then found that M was a constructive trustee when he received funds from Lexi in 2006 and, in addition, he held that the court had the power to sanction the payment of third party unsecured creditors. Thus there were two bases for his decision to vary the restraint order: (i) Lexi had a proprietary interest in the funds held by M to the extent of the judgment sum of £625,250, and (ii) the court had a discretionary power in any event under the 2002 Act to vary a restraint order to enable an unsecured creditor of the restrainee to be paid. On appeal, the Serious Fraud Office (SFO) challenged both bases of his decision. In their Lordships’ view there could be no real dispute but that at the time when the £625,250 was paid to M, at the behest of SL, M was constituted constructive trustee of those sums. The problem, for present purposes, arose from the form of the judgment entered by Lexi against M on 19 March 2007. Mr Mitchell, for the SFO, contended that in applying in the Chancery proceedings for judgment in a money sum, Lexi had elected to become a judgment creditor and had abandoned in those proceedings its proprietary claims for all purposes. Their Lordships did not agree. No question of double recovery arose: on the contrary the equitable charge was invoked to achieve restoration of what the defaulting trustee (M) had to pay. On the facts of the case there was no unfairness in Lexi, by the further application to vary the restraint order, seeking to achieve recovery by means of an equitable charge in order to secure the discharge of the equitable in personam obligation of M. Such an equitable charge attached to assets in existence which derived from the misappropriated funds (ie the funds in the accounts at the Halifax and United National Bank) but not to the matrimonial home in Wheathampstead which was acquired in 1998 and could not possibly have derived in any way from, or been mixed with, the misappropriations from Lexi in 2006. To the extent that there was a shortfall between the amounts in the two bank accounts and the total amount of the judgment debt, Lexi was to be regarded as an unsecured creditor. As to the position of an unsecured third party creditor, the power to make restraint orders was now contained in s 69 of the 2002 Act. Subs (2)(b) and (c) of s 69 were new provisions requiring that the powers to make, vary or discharge a restraint order be exercised not only where there was an existing confiscation order but also where one might be made in the future. If the court could see that a confiscation order, existing or prospective, related to an amount which the defendant had ample assets to meet, then it might be that a debt to a third party creditor could properly be allowed to be paid from the restrained assets. But unless that was the case the court could not vary a restraint order to enable a debt to a third party to be paid. It would have been wholly illogical for the legislature to have decided to allow third party debts to be paid during the period when assets were supposedly being preserved by a restraint order when such debts were to be left out of account at the stage when the confiscation was made. If that were the position, it would put a premium on well-advised creditors getting in quickly during the restraint phase before their opportunity was lost. The natural meaning of s 69(2)(c) gained support from the statutory framework in which it was to be found. The statutory position had changed significantly since pre-2002 Act legislation and cases such as In re X [2004] EWHC 861 (Admin); [2005] QB 133 would be decided differently today. |
