Can the dishonesty of directors be attributable to their company in profit-based claims?

The Supreme Court held in Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49 that a proprietary claim by a company against its directors arising from a breach of fiduciary duty took priority over a competing claim under confiscation orders obtained by the CPS. The dishonest conduct of the directors should not be attributed to the company, so as to provide an illegality defence for the directors, and this applied in profit-based as well as loss-based claims.

Background

Two directors of the company Vantis Tax Ltd (VTL) exploited their position as directors, in breach of their fiduciary duties, and made a “secret profit” of GBP 4.55 million through a fraudulent tax avoidance scheme. The two directors were convicted for tax fraud, following which confiscation orders were made against them.

VTL claimed that the directors had acquired the secret profit on behalf of VTL and that the secret profit was beneficially owned by VTL under a constructive trust. When VTL entered insolvency it assigned its rights, including its beneficial ownership of the secret profit, to Aquila Advisory Ltd (Aquila).

Issue

Points for the court to decide included: (i) whether Aquila had a proprietary right to the GBP 4.55 million based on a constructive trust in favour of VTL and in priority to the confiscation orders; and (ii) whether the illegality of the directors could be attributed to VTL in circumstances where VTL had suffered no loss and stood to benefit from the directors’ criminality.

Decision

The Supreme Court rejected the Crown Prosecution Service’s appeal and held that the proprietary claim by Aquila took priority over the CPS’s claims under confiscation orders.

The Supreme Court found that “the constructive trust (and the principal’s beneficial ownership of the property) arises automatically at the moment that, in breach of their fiduciary duty, the directors received the secret profits” and that “there was never a moment at which the former directors as fiduciaries owned the profits in equity”.

The only defence available to the CPS was that of illegality if it could establish that the constructive trust was unenforceable by attributing to VTL the fraud of its directors. However, the Supreme Court, relying on the principles established in Bilta (UK) Ltd v Nazir [2015] UKSC 23; [2016] AC 1, and applied in Singularis Holdings Ltd (in liquidation) v Daiwa Capital Markets Europe Ltd [2019] UKSC 50, found that “the rules of attribution prevent the directors’ dishonesty from being attributed to the company” in order that the director may not rely on an illegality defence in any claim by VTL against them, including in profit-based claims as well as loss-based claims.

Since the CPS was unable to establish illegality, Aquila could retain the secret profit because it took priority over the CPS’s confiscation orders.

Key takeaways

The court’s decision makes clear that a director who is in breach of their fiduciary duties cannot attribute their own dishonest conduct to the company to defeat any claim brought by that company against them.

The case also provided further clarity on the Bilta principle and confirmed that in civil proceedings brought by a company against its directors for breach of fiduciary duty, the dishonesty of those directors is not attributable to the company in both loss-based and profit-based claims.

The author would like to thank Matthew Roderick for his assistance in preparing this post.