Available amount when company has net liabilities

Confiscation proceedings are increasingly being brought against companies especially by environmental agencies. The main issue is usually the available amount rather than the criminal benefit. Let's say the criminal benefit is £1 million. Assuming a company had fixed and current assets of £500K but trade laibilities of £550K and preferential creditors of £50K. Is the avilable amount Nil  or £450K?

Comments
davidwinch's picture

Available amount

davidwinch | | Permalink

Assuming none of the trade creditors are secured liabilities, the company's "free property" is £500K and "obligations having a priority" are £50K, so the company's "available amount" is £450K.  See section 9 PoCA 2002.

As the confiscation order is for the lesser of the 'benefit' and the 'available amount' the order would be for £450K.

A bit hard on the trade creditors, but it is recognised to be tough legislation.

Having said that, in many cases the essence of the business is legitimate although some activities may be in breach of the criminal law.  If the (VAT inclusive) turnover from these illegal activities can be identified, and the remaining turnover can be shown to be legitimate, then the benefit should be limited to the (VAT inclusive) turnover from the criminal conduct.  Obviously this exceeds (and may greatly exceed) the profit from those activities but it may be less than the gross assets.

Be sure to distinguish circumstances in which the activities of the company are illegal, from circumstances in which tax on profits from legitimate activities is evaded, and also from circumstances in which the company's activities are legal but the director(s)' activities are not (for example where a director acts as such whilst an undischarged bankrupt).

You have to consider issues of fact and law very carefully!

David

cymraeg_draig's picture

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cymraeg_draig | | Permalink

A bit hard on the trade creditors, but it is recognised to be tough legislation.

David

Posted by davidwinch on Fri, 21/01/2011 - 15:10

 

Theres a lack of "joined up thinking" in this.  OK the "state" grabs £450k, but, in so doing, it risks putting totally innocent suppliers out of business, therevy throwing people onto benefits at what cost to the state?

I think the moral of this is that if you are owed money, and you get the slightest whiff of them being prosecuted, get your claim into court first and grab whats owed to you - just in case.

 

davidwinch's picture

C_D

davidwinch | | Permalink

There was a deliberate decision not to make any allowance for ordinary (unsecured) creditors when the legislation was going through parliament.  The thinking was that it would be too easy for 'clever' villains to 'manufacture' some creditors (i.e. their 'mates' who would turn up claiming to be owed money) in order to effectively escape confiscation of their assets.

The unfortunate effect on genuine creditors was recognised but considered to be a price worth paying to make the regime effective against convicted criminals.  Of course the parliamentary discussions focussed on bringing down the 'Mr Bigs' of the criminal underworld - not single mums claiming benefits whilst having a live-in lover!

David

carnmores's picture

oh i see

carnmores | | Permalink

the innocent suffer - sorry but if you were an individual creditor (leaving aside corporates) would that not be a breach of your human right to enjoy your property - the only word for this sort of legislation is disgusting - repeal it;  should confiscation for enviroemntal offences be treated the same way as say a drug dealers confiscation? Do the costs of confiscation yet anywhere near equal the proceeds of confiscation or we all suffering thro taxation confiscation to uphold these somewhat ridiculous scenarios?

davidwinch's picture

Tough law

davidwinch | | Permalink

As the Court of Appeal said with relish in another confiscation case involving a business (operating without planning permission for the site of the business):

"The law, however, is plain. Those who choose to run operations in disregard of planning enforcement requirements are at risk of having the gross receipts of their illegal businesses confiscated. This may greatly exceed their personal profits. In this respect they are in the same position as thieves, fraudsters and drug dealers."

David

cymraeg_draig's picture

Disreputable law.

cymraeg_draig | | Permalink

 

 

This law, like many, brings the courts into disrepute, makes a total joke of the concept of justice, and turns our courts into money grubbing tax collectors there to line the "states" coffers.

The whole idea was "sold" as a way to tackle terrorism and serious organised crime, but, as seems to be normal nowdays (RIPA is another example) its purpose has been perverted.  Housewives fiddling benefits and self employed builders fiddling their VAT were never meant to be caught up by this Act.

Unfortunately the government of the day was utterly disreputable and amazingly stupid and lacked the intelligence or indeed decency to build in safeguards to ensure it was not misused.  All that was needed was a simple paragraph in the Act stating that where the proceeds of the crime do not exceed, say, £1 million, the above Act does not apply. - Simples. 

 

  

carnmores's picture

thanks David

carnmores | | Permalink

as C-D says - like G Brown invoking laws that were supposed to be used in terrorist situations against the whole os Iceland apres the banking fiasco 

Publicus's picture

Available Amount

Publicus | | Permalink

The 'available amount' according to Balckstone's Guide to the Proceeds of Crime Act 2002 3.160 states 'its manifest importance to the defendant is that the court cannot confiscate more than he is worth.' So what is a company with net liabilities really worth?  

A confiscation order for £450K is in essence creating a fraudulent preference to the Crown over the legitimate creditors. An enforcement reciever would have to give notice to all interested parties of his intention to dispose of the assets to meet the confiscation order and I wonder if at that point the Courts could intervene. Surely the intention of the legislature in passing the Proceeds of Crime Act  in 2002 was to consolidate the existing law and take ill-gotten gains from the Mr Bigs, not deprive legitimate creditors of their interest.  

davidwinch's picture

Ability to pay

davidwinch | | Permalink

I would put it slightly differently.  I would say that the legislation, and the courts who exercise it, seek to avoid making a confiscation order which the defendant has no means of paying.

That is the logic of limiting the order to the defendant's 'available amount'.  Since a defendant (and here we are always referring to a convicted defendant - since confiscation (unlike civil recovery) requires conviction as a pre-condition) is at risk of being required to serve a default sentence of imprisonment for failure to satisfy a confiscation order it would be wrong in principle to make confiscation orders routinely which will necessarily result in the defendant's failure to pay.

Sorry that is a bit convoluted.  The point is if a confiscation order were normally made for the 'benefit' figure then that would (almost automatically) result in default and further imprisonment.  That would be an abuse of the legal system.  Confiscation is supposed to be about the courts extracting money from defendants - not about making them serve a longer prison sentence than the crime warrants.

In the example you quote, the company IS able to pay £450K.  So that is (legally) acceptable.  It just means that the company will then be unable to pay its unsecured creditors.  But that happens in business anyway.  So everybody's happy - right?

You might like to look at para 3.179 of Blackstones for an example which underlines the point.

David

cymraeg_draig's picture

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cymraeg_draig | | Permalink

In the example you quote, the company IS able to pay £450K.  So that is (legally) acceptable.  It just means that the company will then be unable to pay its unsecured creditors.  But that happens in business anyway.  So everybody's happy - right?

Posted by davidwinch on Sat, 22/01/2011 - 11:44

 

I think the point is David that creditors who would have been paid, suddenly find that they wont be paid - because the courts took the debtors funds.  So, a confiscation order which results in existing creditors not being paid, is grossly unjust as it is the credotors who are paying the confiscation order, not the convicted person.

 

The REAL amount the convicted person is "able" to pay is actually whatever is left AFTER all existing genuine creditors have been paid.

davidwinch's picture

C_D

davidwinch | | Permalink

C_D

My "everyone's happy - right?" was tongue in cheek!

Basically the question is 'Who should be paid - the State in confiscation or genuine and innocent creditors of the business?'.

The State of course determines the result as the State makes the legislation.

Imagine the scene . . .

"And the winner is . . . " (drum roll while celebrity opens a gold coloured envelope and there is a pause for dramatic emphasis) . . . "the State" (band strikes up 'Rule Britannia' - audience clap enthusiastically -  or maybe not)!

It is, of course, a 'preference' but it is not a 'fraudulent preference' since complying with the law is not dishonest.  Whether it is an unfair or immoral preference is a different question.  But I generally comment about what the law says - not what it ought to say.

David

cymraeg_draig's picture

Campaign

cymraeg_draig | | Permalink

Whether it is an unfair or immoral preference is a different question.  But I generally comment about what the law says - not what it ought to say.

David

 

Posted by davidwinch on Sat, 22/01/2011 - 15:49

 

Agreed David - but my view is that just because "the law" says something, that doesnt make it right.  And I believe that where a law is unjust or unfair then we have a duty to campaign to change that law.

If legislators remain unchallenged they become dictators.  

davidwinch's picture

Advocacy

davidwinch | | Permalink

C_D

In the legal arena a barrister is an advocate for his client.  An expert witness (such as myself) is called upon to assist the court to understand the facts and the significance which may attach to them - but is forbidden to be an advocate for those who have instructed him.

That same approach very much flavours the way in which I write on legal topics.

David

cymraeg_draig's picture

David

cymraeg_draig | | Permalink

 

I fully appreciate that you approach the subject from a forensic angle, simply accepting the rules as they stand and basing your advice upon them.  However, the reality is that, contrary to what people think, the law is constantly evolving and whatever parliament might pass in the way of laws, it is the courts who interpret these laws (often in ways which parliament did not forsee). 

Also of course, every law is subject to modification and interpretation to ensure that it complies with superior legislation such as the Human Rights Act, and lastly whatever law is passed it must be compatible with the concept of natural justice. 

This is why a skilled advocate, even when faced with what appears to be a hopeless case, can and sometimes does sucessfully argue that the existing law is wrong and that in certain circumstances (those of his client) there are reasons why the particular law in question cannot or should not apply. 

As I said before, if the courts ever stop examining, altering, and testing the validity of laws passed by parliament, and start blindly accepting them at face value, then that is the day when we cease to have a democracy and become a dictatorship.

The laws passed by parliament give the courts  the "tools" to administer justice, but it must never be forgotton that law and justice are two very different things.

 

   

davidwinch's picture

C_D

davidwinch | | Permalink

C_D

I think I agree with about 98% of your post.  Certainly application of the law in areas such as confiscation is light years away from a mere mechanical adding up of the numbers - it requires some fresh thinking to understand how the law applies to the facts in any particular case.  And law is constantly evolving and changing, both as a result of changes in statute and the outcomes of court decisions.

Proceeds of crime law is particularly interesting from that point of view.  The Court of Appeal and Supreme Court (what we used to call the House of Lords) are frequently re-examining and re-interpreting the law in this area.

Going back to the OP's original scenario, one would ask oneself whether the crime was that of the company or of its director(s).  If the crime was that of the director(s) and they were also the shareholders one would be asking oneself if their 'available amount' should be based on the value of their shares in the company (which would, in effect,  involve a deduction for unsecured creditors) or whether the 'veil of incorporation' should be 'pierced' so as to look at the underlying assets of the company (almost as if it were an unincorporated business).

There are a number of arguments which could be advanced - and very likely that would lead to some sort of negotiation with the other side (I am usually, but not always, instructed by the defence in criminal cases). 

Sometimes the outcome is surprising!

David

cymraeg_draig's picture

Who pays ?

cymraeg_draig | | Permalink

 

I think the main point in the case put forward by the OP is that innocent creditors (people like you and I) could find that they are effectively paying the comfiscation order. I would certainly argue that "available funds" should be calculated after genuine innocent creditors have been paid. 

I would hate to think that we incurred a bad debt as a result of the courts grabbing the contents of our clients bank account before he paid our bill.

Perhaps there is a lesson to be learnt here - if you're going to file a MLR report make damn certain the client has paid your bill first.

   

davidwinch's picture

It could happen

davidwinch | | Permalink

C_D

The legislature recognised that confiscation could result in innocent creditors losing money.  That was considered to be a 'lesser evil' than leaving a 'loophole' which criminals might use to circumvent confiscation.

Of course a suspected person may have his assets made subject to a restraint order ('frozen' in common parlance) before even he or you realises that he is under investigation.  However in practice prosecutors are not keen to exercise restraint orders over the assets of a legitimate business because of the risk that the business might be 'killed off' by the 'freezing' and the prosecutor will then be subject to a substantial claim for damages if the prosecution founders.

But if you know a client is facing criminal prosecution then be very careful to get paid for work you do immediately (or in advance)!

David

cymraeg_draig's picture

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cymraeg_draig | | Permalink

But if you know a client is facing criminal prosecution then be very careful to get paid for work you do immediately (or in advance)!

David

 

Posted by davidwinch on Sun, 23/01/2011 - 12:10

Thats the point - until you do the work you probably dont know, and if its you that files the initial report then why would you do so (and risk not getting paid) ?  Surely the temptation is to hold back on filing a report until after you have been paid.

And of course, do you then "tip off" others to get paid fast - or would that be an "offence". 

in other words, the legislation was clearly written by people who dont live in the real world.

davidwinch's picture

A hypothetical example

davidwinch | | Permalink

To make this clearer let's take a hypothetical example.

One of your clients is a veterinary surgeon.  You prepare business accounts and tax returns.  The business appears to be a legitimate vet's practice.

You now read in the newspaper that your client has been arrested on suspicion of supplying veterinary drugs to illegal drug traffickers for human use (some veterinary drugs are taken by 'users' - ketamine being an obvious example).

From then on you would be wise not to allow this client any credit.  If your client is convicted he may well be subject to confiscation proceedings.

However so long as he is continuing with his legitimate business (which may not be very long as his professional body may suspend him from practice) his business bank account is unlikely to be 'frozen'.

But it would be rare indeed for a 'freezing' order to be made swiftly after an MLR report from an accountant (unless there was strong evidence of serious criminal conduct).

David

Information

alistair_king | | Permalink

Of course being able to know if the vet has been arrested depends on its being reported. Even if it is reported, what if it is reported only in local press and you live outside the area.

In order to avoid loss you then have to perform permanent checks on your customers to see who might have been arrested or charged. which iprobably sounds good in theory. But I know from my own experience just how painful it was setting up credit checking function in a situation where credit information was lagging behind real world events. Either you continually refresh the credit data (which means paying for frequentreports to update information or paying a premium for always live access to a database plus employing someone to administer this and read the reports) or else you accept the data is out of date. Even if you pay for the up-to-date data, it might not be up-to-date. I would imagine legal checking could be just as painful. You would continually need to check, by obtaining frequent reports on all your customers, and taking time to read them.

So in the case, I am afraid, the law is truly a pain for legitimate businesses.

 

Gerard Murray's picture

Criminal Benefit, Available Amount and Expert Witnesses

Gerard Murray | | Permalink

I have followed with interest the views on available amount and the wider debate on the responsibilities of an expert witness. I have been involved in a case that recently concluded in which there were many of these issues. Firstly, I was instructed by defence solicitors. The case involved confiscation proceedings against a company and one of its directors. At Crown Court the company had pleaded guilty to four charges of trading without a waste management licence in 2006 and a director had pleaded guilty to one charge. Crown Counsel invoked Part 6 of the Proceeds of Crime Act 2002 and the defence’s legal team instructed me to examine the figures of criminal benefit and potential available amount that had emerged in the course of the case.

While the company had pleaded guilty it was clear that it was engaged in lawful activities, was supported by the local economic development agency and had correspondence from HMRC that it was fully tax compliant.  

The criminal benefit of the company as computed by the Crown was in mega pounds, the company’s turnover and the Crown invited the court to determine that the criminal benefit of the director was one third of that of the company ( the company had three directors.)

The company had a net deficiency of assets and the Crown’s case was that the gross assets less only the preferential debts was the available amount. This would have amounted to several hundreds of thousands of pounds. I have much sympathy with the views of Publicus that the Crown cannot take from a company more than the company is worth. In detailed negotiations and discussions I pointed out that the net outcome of the Crown succeeding would be the inevitable winding up of the company which had fifteen employees and that was not the intention of Parliament. In the case of Perkes before the court of Appeal, http://www.bailii.org/ew/cases/EWCA/Crim/2010/101.htm the transcript noted that in the Crown Court the presiding judge had said that if the Crown had succeeded in its amount of the confiscation order that the fishing business would have been wound up and he requested the Crown and the defence to attempt to negotiate a mutually acceptable figure.

The negotiations in my case centred on attempting to find an amount of a confiscation order that the company could meet over a specified period. In the end an amount of £60K was agreed.

The position of the director was more interesting in that the available amount was clearly in excess of £250K. The main arguments were to whether the corporate veil had been pierced or even torn asunder, which was the Crown’s approach or whether the criminal benefit was the gross remuneration of the director for the period for which they had pleaded guilty. In the end, the Crown accepted the defence case and the order was made in the sum of £28K. In the discussions and negotiations there was plenty of airing of the Del Basso and Godwin case, http://www.bailii.org/ew/cases/EWCA/Crim/2010/1119.html.

In the wider issues I am fully supportive of David’s comments that the primary duty of the Expert Witness is to the Court and not the party that appointed him. The Expert Witness is not a hired gun, although many still regard themselves to be such. The Expert Witness is not an advocate for either side but is there to assist the Court in his field of expertise. However, should he not be an advocate for the opinions that he puts before the Court and argue strongly for the position he has adopted and given the necessary reasons? In this case, there were two issues on which I differed from the Crown’s case-the available amount of the company and the criminal benefit of the director. In both instances my instructions from defence lawyers was to compute the amounts that I professionally believed were appropriate and to give my reasons. This is different from being the hired gun of the defence but involvers me as an accountant in giving reasons in law for the conclusions that I have reached.

With regard to the company’s available amount I thought that the legal position was somewhat ambiguous and set out the full range of options. Similarly with the criminal benefit of the director this involved a detailed examination of the relevant case law and setting out the reasons for the position that I invited the court to accept. David is quite right to say that the law is evolving especially through the Court of Appeal and Supreme Court.

 

Interesting Reply!

alistair_king | | Permalink

Thanks Gerard. That was a fascinating insight.

Thanks to both David and Gerald

pauljohnston | | Permalink

For me this has been a lifting of the veil.  I am very grateful.

davidwinch's picture

Excellent post

davidwinch | | Permalink

That's an excellent post Gerard, thank you.

The legislature has endeavoured in PoCA 2002 to restrict the options of courts and require them to adopt an inflexible approach.  One might almost think that parliament did not trust judges!

See the wording of, for example, section 6 "The Crown Court must proceed under this section . . .", and section 10 "The Court . . must make the following four assumptions . . . ", section 11 the period allowed for payment "must not exceed 12 months".

However the results of doing this will inevitably lead to 'benefit' figures which are unrealistic.  What has happened is that judges have sought to create just solutions by carefully not fully implementing the draconian spirit of this law, whilst keeping within the letter of it.

So in the case of Perkes the judgment records:

"On the morning when the Judge was due to rule on the amount of the benefit, a discussion took place between the Judge and Counsel. The Judge was concerned that if he was driven to order the full amount claimed by the Prosecution, it would effectively destroy their business. He therefore encouraged a negotiation to agree a lesser figure. As a result a total figure of just over one third of the claim was agreed."

In effect the judge was saying 'my hands are tied - if I have to rule on this it will be a disaster for you - but if the two sides negotiate a sensible compromise I can rubber stamp that without having to make my own computation'.  That way the legislation was somewhat side-stepped in the interests of justice.

In fact, many prosecutors are willing to 'do a deal' before the matter goes before the judge - and the majority of confiscation cases in my experience are settled by negotiation.

But this does underline the draconian nature of the legislation and the fact that it is frequently employed, not against master criminals, but against relatively small fry or people who have committed rather less serious offences.

David

Old Greying Accountant's picture

Talk about abuse of power

Old Greying Acc... | | Permalink

Surely trading without a licence should be a simple matter of a fine, and for repeat offending a ban, not thousnads of pounds and hours of court time being wasted!

cymraeg_draig's picture

Lottery

cymraeg_draig | | Permalink

The legislature has endeavoured in PoCA 2002 to restrict the options of courts and require them to adopt an inflexible approach.  One might almost think that parliament did not trust judges!

David

 

Posted by davidwinch on Tue, 25/01/2011 - 09:53

 

This is true right across the board.  Meddling politicians (particularly Labour politicians) have repeatedly tried to remove discression from the judiciary. 

A simple example is the madatory life sentence for murder.

There are so many "kinds" of murder, from the premeditated assassination of someone, to the moment of madness when someone pushed beyond the limits lashes out and kills on the spur of the moment.  Each case, whether its murder, burglary, or a simple motoring offence, has it's own circumstances and only the court, after hearing all the evidence and mitigation, can judge what an appropriate sentence would be, but parliament has sought to remove this discression from the courts.

Exactly the same applied to money laundering and it is totally wrong.

Take two examples -

  1. A man with a good job and plenty of money burgles houses - he then hides this money under the floorboards. He has a good income, no debts, and is simply acting out of greed.
  2. A man burgles house - he is out of work, and he uses the proceeds pay the arrears on his mortgage as the building society is about to repossess his home and put his sick wife and elderly mother on the street.

Now both have committed the same "offence", but there is no way that they should both be financially destroyed. The motives behind there crimes are totally different, man (1) acted out of pure greed,  man (2) acted out of desparation.  The courts therefore shoul;d have discression to deal with each appropriately - at present they dont. 

It is utterly wrong that prosecutors should be allowed to negotiate a deal as this makes justice a lottery which depends on whether the accused faces a decent reasonable prosecutor (there are some), or a nasty obnoxious prosecutor on a power trip (there are some of these too). 

 

 

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