The Winner Takes It All: Priorities Between Directors, Companies And Third Parties When Directors Breach Their Duties

• Published date: 18 November 2021
• Subject Matter: Corporate/Commercial Law, Criminal Law, Corporate and Company Law, Directors and Officers, White Collar Crime, Anti-Corruption & Fraud
• Law Firm: Carey Olsen
• Author: Mr Marcus Pallot, Richard Holden and Michael Kushner

If the directors of a company defraud its customers, the proceeds can belong to the company. This is what the Supreme Court decided in Crown Prosecution Service v Aquila Advisory Ltd [2021] UKSC 49, an English case involving a Jersey company.

WHAT HAPPENED?

Two directors of VTL, a Jersey company, devised a fraudulent scheme. They purported to provide investors with a mechanism to decrease income tax exposure. As it turned out, the scheme was a fraud on the customers. It was also a fraud on VTL: instead of turning over around '4.55 million in proceeds from the scheme to VTL, the directors kept these funds for themselves.

Meanwhile, the directors' actions began to catch up with them and three storms were brewing. First, the directors were convicted for tax fraud offences. The Crown Prosecution Service ('CPS') sought to confiscate the '4.55 million from the directors. Secondly, Aquila (an assignee of VTL's rights) asserted a proprietary claim to the very same funds - that in effect, they belonged to VTL (and so Aquila by assignment). Third, HMRC was also looking to VTL's customers to make good on tax credits fraudulently obtained under the scheme.

The Supreme Court held that Aquila's proprietary claim should prevail. Essentially, this meant returning to the company the proceeds of the fraudulent scheme perpetrated by its former directors. Although the CPS had successfully prosecuted those directors for crimes in respect of that fraud, it had not prosecuted the company and could not confiscate anything from it. On the other hand, even in the directors' hands, the '4.55 million belonged to the company. So the CPS could not confiscate it from the directors either.

How can this be? The reason is because of the nature of a directors' duties, which gives rise to the company's proprietary claim against them.

DIRECTORS' DUTIES - AND CLAIMS FOR BREACH OF THEM

Company directors owe fiduciary duties - duties of undivided loyalty to the company to put the interests of that company first. These duties mean that the directors cannot make a secret profit at the company's expense or receive proceeds which otherwise ought to have flowed to the company. Any such proceeds are therefore considered to be the company's, even in the directors' hands.

So, if a director does receive such proceeds, the director is deemed to hold them on trust for the company, as a constructive trustee, and the company has a proprietary right to those proceeds. In other words, the proceeds are...