Can a bankrupt individual be subject to confiscation?

One question which arises from time to time concerns the interaction of insolvency and confiscation. If a convicted defendant individual is bankrupt can he nevertheless be subject to confiscation under Part 2 Proceeds of Crime Act 2002?  (All references to a 'defendant' in this article are to a defendant who has been convicted of a criminal offence.)

Common sense suggests that if a person is bankrupt he has no assets and so confiscation proceedings would be pointless. But law and common sense do not always go hand in hand!

In reality the confiscation legislation neatly side-steps bankruptcy by providing, in s84(2)(d) PoCA 2002 that "references to property held by a person include references to property vested in his trustee in bankruptcy". What this means is that any assets of a bankrupt will form part of his 'available amount' for confiscation purposes and can be subject in a 'criminal lifestyle' case to the statutory assumption of s10(3) regarding property held after the date of conviction.  So these assets can be taken into account in determining the amounts reflected in the confiscation order.  Section 7 prescribes that the amount which the defendant is ordered to pay will be the lower of his 'benefit' and his 'available amount'.

But what about 'preferential debts'? A 'preferential debt' is taken into account by way of a reduction in the defendant's 'available amount' by virtue of s9(2)(b). But there is a common misconception that an individual's tax liabilities are 'preferential debts'. The law in this area was changed, by amendment to s386 and schedule 6 Insolvency Act 1986, in 2003 so that debts due to HM Revenue & Customs ceased to be 'preferential debts'. So 'preferential debts' now arise only in respect of unpaid remuneration of employees, contributions to occupational pension schemes, and unpaid levies on coal and steel production.

It still remains the case however that an individual's secured liabilities, such as a mortgage on his home, take precedence over confiscation.

Where a court makes both a confiscation order under PoCA 2002 (which is an order that the defendant make payment to the Crown) and a compensation order under s130 Powers of Criminal Courts (Sentencing) Act 2000 (which is an order that the defendant make payment to the victim of his crime) then s13(5) and (6) provide that the court should direct that the compensation order should be satisfied in priority to the confiscation order where there are insufficient funds to satisfy both.

It should also be borne in mind that where a defendant is subject to an actual or contemplated civil claim from a victim of his crime then the court's "duty" to make a confiscation order becomes simply a "power" to do so as a result of s6(6).

But a problem may arise for the defendant in realising the sum which he is required to pay under the confiscation order if he is bankrupt.  What then?

Well it depends upon whether there has previously been a restraint order made under PoCA 2002, or following the making of a confiscation order an enforcement receiver has been appointed under s50.  If there is a restraint order over assets, or an enforcement receiver has been appointed, and this pre-dates the bankruptcy order, then s417 provides that the property subject to the restraint order or receivership does not fall into the bankruptcy (so it can be realised to pay the confiscation order rather than the other creditors of the bankrupt defendant).  A restraint order under s41 or receivership will normally have been drafted with the intention of covering all the defendant's assets.

On the other hand, under s418, if the defendant's bankruptcy order is made before any restraint order or management or enforcement receivership order is made then the trustee in bankruptcy can exercise his powers to realise the defendant's assets under his control and pay creditors in the normal way.  The defendant should ask the Crown Court to adjust his 'available amount' under s23 to reflect the payments to his creditors made by the trustee in bankruptcy.

So the issue is resolved on a first-come, first-served basis.

A bankrupt individual is likely to be discharged from bankruptcy in due course. What is his situation then in relation to the confiscation? Just like other defendants who are subject to confiscation he will be at risk for the remainder of his life to action under s22. Under this section a prosecutor can return to court at any time and seek a reconsideration of the defendant's current 'available amount' to include assets acquired (whether legitimately or illegitimately) since the original confiscation order was made, if it is just to do so. In effect a confiscation order can operate as a 'life sentence' requiring the payment to the Crown of any amount which the defendant has, up to the figure of 'benefit' shown in the original confiscation order.

In summary then, a bankrupt individual can indeed be subject to confiscation proceedings.

If a restraint order under PoCA 2002 is in force, or an enforcement receiver is appointed, before any bankruptcy order, the order of priority for payment will be, in effect:

  1. Secured liabilities
  2. Preferential debts (unpaid remuneration of employees, contributions to occupational pension schemes, and unpaid levies on coal and steel production)
  3. Sums due under a compensation order
  4. Sums due under the confiscation order
  5. Unsecured and non-preferential debts (including taxes and ordinary creditors).

But if a bankruptcy order is made before any restraint order or enforcement receivership order under PoCA 2002 then the trustee in bankruptcy will retain control of the defendant's assets vested in him.  Once the trustee has ascertained the likely outcome of the bankruptcy in terms of payments to creditors, the defendant may apply to the court under s23 to have his 'available amount' reconsidered to reflect those payments (which will normally result in a reduction in the amount he is required to pay under the confiscation order).

An insolvency practitioner who is dealing with assets of a person who has been convicted, or is suspected, of an offence from which a benefit may have been obtained should consider carefully whether he may be handling 'criminal property' and if so he should obtain the necessary consent under Part 7 so as to avoid committing a money laundering offence himself.

(Note: This article refers to confiscation in England and Wales under the provisions of Part 2 of PoCA, the Proceeds of Crime Act 2002.)

David

Comments
Top_Cat's picture

Legal stupidity

Top_Cat | | Permalink

The moral of this is, if subjected to a confiscation order, go bankrupt and live off benefits for the rest of your life.

Not the brightest piece of legislation is it.

stepurhan's picture

Wrong order

stepurhan | | Permalink

Unless I've misunderstood something, going bankrupt after the confiscation order doesn't do you any good. You need to go bankrupt before the confiscation order, and before any restraint order put in place in anticipation of a conviction. Basically, if you think they've got you bang to rights then go into bankruptcy before they set in motion the legal wheels to bring you down.

davidwinch's picture

Slightly different points, I think

davidwinch | | Permalink

I think Top_Cat is saying that if you are subject to a confiscation order then there is no point working hard legitimately for the rest of your life, because what you garner may be taken off you to pay up the old confiscation order.

What Stephen is saying, I think, is that if there is a restraint order or a confiscation order in place BEFORE you go bankrupt then the restraint / confiscation will take priority over the bankruptcy.

Both these points are valid I think.

I should add that a restraint order under s41 may be obtained ex parte (i.e. without the defendant knowing it is being sought) as soon as a 'defendant' comes under investigation for an offence from which he may have benefited - see s40(2).

So at that time the individual may not even know the police (or other authorities) are investigating him - the restraint order may arrive in his lap entirely out of the blue.  By then it is too late to take 'evasive action' by engineering a bankruptcy!

David

LATER ADDITION:

I have revised the wording of the original article with regard to the criteria for deciding who gets the value of the defendant's assets in confiscation v bankruptcy.

The (rather technical) point is that a confiscation order is not itself an order which attaches itself to any specific assets.  It is simply an order that the defendant must pay a specified sum of money to the Crown by a specified date.

So in terms of whether specific assets are to be realised to pay ordinary bankruptcy creditors or the Crown under the confiscation the making of the confiscation order itself is something of a non-event.

What does attach to assets in confiscation proceedings is the making of a restraint order under s41 or the appointment of an enforcement receiver under s50.  So it is the dates of these events (rather than the date of the making of the confiscation order) which are of key importance.  One must check the date on which the defendant was adjudged bankrupt (the date of the bankruptcy order - not the petition) and compare that with the date of the restraint order or the date of appointment of an enforcement receiver (whichever of these came first).

I hope that makes sense.

mikedawe's picture

More different points

mikedawe | | Permalink

Could the same legislation be used against the spouce of a bankrupt with a criminal conviction where the spouce received the assets by way of gift from their partner?

carnmores's picture

David you say

carnmores | | Permalink

A bankrupt individual is likely to be discharged from bankruptcy in due course. What is his situation then in relation to the confiscation? Just like other defendants who are subject to confiscation he will be at risk for the remainder of his life to action under s22

this is bollocks

this is a clear breach of ones human rights

davidwinch's picture

Gifts to spouse

davidwinch | | Permalink

The position with regard to spouses can get a bit complicated, particularly where for example they are joint owners of the matrimonial home.

Confiscation can only apply to a person who has been convicted of an offence.  (For that reason the Crown will sometimes prosecute the 'innocent' spouse for money laundering in connection with the proceeds of the crime(s) committed by the 'guilty' spouse.  If both spouses are convicted then confiscation can proceed against them both and most arguments about who owns what fall away.)

Let us assume that only the husband is convicted of an offence.  Then confiscation can only apply to him.  But his 'available amount' is deemed to include whatever he has given away since the 'relevant day' (in a 'criminal lifestyle' case the 'relevant day' is exactly 6 years prior to the day on which he was charged with the offence(s) of which he ultimately is convicted).  So although the confiscation does not directly attack the wife it does require the husband to pay to the Crown the monies (or the value of assets) which he has given away.  If the wife obligingly returns the gifts then he will be able to do that.  If he is not able to do it then he will spend extra time in prison.

On occasion however the couple may have divorced and the wife may be making financial claims against the husband in the matrimonial courts.

So then there may be three parties (the husband, the wife and the Crown) squabbling over who gets what in proceedings before the civil and criminal courts.  Great fun!

David

davidwinch's picture

Human rights

davidwinch | | Permalink

The confiscation legislation is Draconian.  That is deliberate - Parliament made it that way.

The First Protocol to the European Convention on Human Rights provides:

"Every natural or legal person is entitled to the peaceful enjoyment of his possessions. No one shall be deprived of his possessions except in the public interest and subject to the conditions provided for by law and by the general principles of international law.

The preceding provisions shall not, however, in any way impair the right of a State to enforce such laws as it deems necessary to control the use of property in accordance with the general interest or to secure the payment of taxes or other contributions or penalties."

But Courts have generally taken the view that confiscation legislation serves to reverse the convicted criminal's acquisition of benefit which he should never have had.  That, it is argued, is in accordance with the public interest and the law.

So it is not considered to amount to a breach of human rights.  The legislation in s22 allows the judge a discretion to do what is "just".  What could be fairer than that, one might say!

There is also under Article 6(1) a provision that:

"In the determination  . . . of any criminal charge against him, everyone is entitled to a fair and public hearing within a reasonable time  . . . "

It has been argued that the "reasonable time" element is not respected by this legislation.  However it appears that the Convention right is interpreted as meaning that if "the state sits on its hands after significant and clear evidence about the defendant's means or realisable property comes to its attention" that could be regarded as a breach of Article 6(1).  However that 'clock' only starts to run when the new information has come to the attention of the authorities.  There is no limit to the time which may elapse between the original confiscation order and the new information coming to the attention of the authorities.  See the judgment in the case of Saggar [2005] EWCA Civ 174.

David

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