Confiscation Update – Piercing the Corporate Veil


In POCA proceedings the decision whether the income or assets of a company are to be attributed personally to a human defendant is fact-specific, and it is important not to take too literally statements that suggest any criminality associated with the corporation will allow the “corporate veil” to be pierced.  The extent and nature of the criminality involved, and the rights of innocent shareholders, are significant considerations.

 

The confiscation regime under the Proceeds of Crime Act 2002 (“POCA”) had a simple aim – to deprive criminals of what they had got through their crimes. The court was to ask three deceptively simple questions – had the offender benefitted from his criminal conduct (“the benefit”), if so by how much and what did he have available to pay it back. Interpreting those provisions has led criminal practitioners deep into the legal principles relating to money and property. The higher courts have had to address themselves to, among many other topics, apportionment, gross proceeds versus net profit, equitable and legal interests, the value of ‘things in action’, and more recently proportionality.

2016 saw the Courts tackle another difficult topic, this time connected to company law, and the legal personality of corporations. If an individual is convicted of a crime, under what circumstances can anything gained by a company with which he is associated be regarded as part of his benefit, and in what circumstances can the assets of that company be regarded as available to the individual to pay off any benefit assigned to him?

“Piercing the corporate veil” and treating the gains and assets of the company as those of the offender is a frequent occurrence in POCA proceedings but whether and when it is right to do so is increasingly being questioned. The latest attempt to bring practice into line with principle was made by the Court of Appeal in R v Jacqueline Powell & Anor [2016] EWCA Crim 1043, decided in July.

Ms Powell had been convicted of three counts of consenting or conniving in the regulatory offences of a company, Wormtech Limited, which had breached environmental rules relating to the disposal of waste. Her co-defendant had pleaded guilty to similar offences. When the company was wound up, it emerged that it had left the public with a £1.1m bill for clearing up the site where it had been operating. They were not sole shareholders, but she was a director, a significant shareholder and the “controlling mind” of the corporation.

The case against the company had been discontinued as, after the liquidation, the High Court declined to give the required permission. In the Crown Court, the judge ruled early on in the POCA proceedings (on the basis that the defendants were not sole shareholders of the company) that the pecuniary advantage to Wormtech in not having to pay the clean-up bill was not a benefit that could be attributed to the defendants. The court did identify benefit to the defendants in the form of salary and other benefits and relatively modest confiscation orders were made to reflect those.

The prosecution applied for leave to appeal. At the permission hearing, it was common ground that the judge was wrong to have made his decision on the basis of the absence of sole shareholding. But the respondents argued that the judge was, nevertheless, right to rule in their favour. The court agreed.

The court first examined the second limb of the test in R v Seager, R v Blatch [2009] EWCA Crim 1303. In Seager it was held that there were three situations in which the corporate veil could be pierced:

(i) if the offender is sheltering behind a corporate façade

(ii) if the offender does acts in the name of the company which (with the necessary mens rea) constitute a criminal offence or

(iii) where the business structure is essentially a sham

When setting out situation (ii) in Seager & Blatch, Aikens LJ quoted Lord Bingham of Cornhill from Jennings v CPS [2008] AC 1046 who said that in such a case “the veil of incorporation has been not so much pierced as rudely torn away”.

Treacy LJ, giving the judgment in Powell, said those formulations had to be treated with care.  He cited the January 2016 case of R v Boyle Transport (Northern Ireland) Ltd [2016] 4 WLR 63 as authority that sole ownership by a defendant or defendants was not sufficient of itself to allow the corporate veil to be pierced. Further if there were other shareholders their rights could not just be ignored.

In Boyle the defendants were shareholders and the “operating minds” of the company. They were executive directors with general powers and duties. However that did not mean that other shareholders could be overridden, even if they played a minimal role in the company.

Treacy LJ accepted that the test in Seager & Blatch had to be read in the context of the Supreme Court case of Prest v Petrodel Resources Ltd [2013] UKSC 34, 3 WLR 1. The Court of Appeal has held it to be a necessary precondition of applying the Seager & Blatch test that one of the two principles in Prest can be found to apply.

First is the concealment principle whereby if the legal personality of a company was being used to conceal the identity of the real actors then the court can look behind the corporate veil, which does not amount to piercing it at all.

The second is the evasion principle which allows the court to disregard the corporate veil “if there is a legal right against a person in charge of the company,  which exists independently of the company’s involvement, and a company is interposed so that the separate legal personality of the company will defeat the right or frustrate its enforcement” [Prest at 28].

Treacy LJ rejected the prosecution’s submission that Ms Powell’s situation could be brought within the evasion principle. He cautioned [at para 24]

“… the words of the second Seager & Blatch test should not be read literally and without regard to context. As was observed in Boyle Transport, regard should be had to the nature and extent of the criminality involved … [there is] a clear distinction to be drawn between cases in which goods and services are provided by way of a lawful contract but the transaction is tainted by associated illegality, and cases in which the entire undertaking is unlawful” [as it had been in Jennings].

 

In the case of Wormtech, it was relevant that the company had been formed in 2002 and had obtained permits, undertaken significant investment and provided a valuable service for a number of years. It was a lawful operation that had become unlawful through the breaches of the permits.

Where does that leave practitioners trying to decide if their clients are at risk of having to account for company receipts or assets? It seems they should have regard to the following:

  1. First go to Prest, and see if the company can be brought within the principles there.
  1. If it can look at the three limbs of the test in Seagar & Blatch.
  1. Whether a company can be brought within limb 2 of Seagar & Blatch will be fact sensitive and in particular:

(i) the fact that a defendant is the sole shareholder will not of itself mean the veil can be pierced.

(ii) the fact that there are other (innocent) shareholders is relevant to whether the corporate veil should be pierced (although not decisive) [Boyle Transport].

(iii) it is very important to identify to what extent the company operated lawfully but with some/all transactions tainted by the associated illegality, or was the entire undertaking unlawful.

(iv) is the company a façade for concealing what is going on behind the corporate structure, or, as in Powell a legitimate business which has broken the law in some way.

(v) it may be significant if the individual’s offences are parasitic on the company committing an offence.

Powell is unlikely to the last word on piercing the corporate veil in POCA proceedings. However it does seem to have provided some guidance which may reduce the enthusiasm of the courts to treat the company and the individual as effectively one and the same.

 

Ben Rich