If you are not familiar with the Proceeds of Crime Act, 2002 (POCA), it is high time you were. Accountants will increasingly see their employers or clients embroiled in it. Partners in several accountancy firms take appointments as Management Receivers under POCA. Insolvency Practitioners must steer carefully around its provisions. POCA's purpose is the confiscation of the proceeds of crime, but the breadth and potency of its powers to freeze and control assets have caused increasing numbers of lawful businesses significant, if unmeasured, economic damage.

POCA does more than it says on the tin

POCA is intended to deny suspects use of their assets; in particular, to fund their defence. It does so through orders to restrain (freeze) assets and to control them via "Management Receivers", pending eventual confiscation.

The orders are obtained, usually in secret, on the prosecution showing a reasonable apprehension that assets will be dissipated. Orders are often made against suspects, without any charge being brought (POCA, misleadingly, terms suspects "defendants"). Though interim in nature, orders can run for months, or even years, without a charge being brought. Orders may also be obtained against those who deal with the "defendant's" assets. Significantly, POCA is not restricted to the proceeds of a crime; orders attach to "realisable property"; all unencumbered property in which the "defendant" has an interest or that he gifted away.

These factors enable POCA orders to attach themselves to otherwise untainted assets and even to companies engaged in lawful business. The collateral economic damage of POCA orders is uncompensated and significant.

Restraining Business

On the face of it, company assets are not realisable assets and cannot be restrained (a "defendant's" shares in a company are not assets of the company).

Nevertheless, certain circumstances will cause a company and/or its assets to be restrained:

• Property held jointly with the "defendant" can be restrained in the hands of the company. For example, where contribution to the purchase of the asset creates a resulting trust in favour of the "defendant".




• Property gifted to the company by the "defendant" may be restrained; where the value of the gift exceeds that of the company, the entire business may be restrained.




• Sham companies, used by the "defendant" in furtherance of the offence or to disguise his ownership of assets, will be restrained. As a result of giving the Crown the benefit of the doubt, substantial and lawful businesses are often restrained. The Crown tends to assume that companies are merely the tools of criminal activities and often has not achieved an understanding of a company's activities by the time a restraint order is sought and obtained.




• A Management Receiver is able to exercise all the rights of a shareholder, so will control a company in which the "defendant" has a controlling interest.

Accountants on the Front Line

Company accountants will soon find themselves engaged in managing POCA issues:

• Where an order permits a restrained business to continue trading, the Crown will wish to ensure that there is no dissipation and that the company acts lawfully. The company accountant must provide regular accounts and help to provide sufficient transparency of company transactions.




• Where the Crown lacks a grasp of the company's activities at the time the order is obtained, the company accountant will be essential in establishing that the company's business is lawful and commercially rational.




• Where the Crown fears that business capital and assets will diminish, company accountants must work hard to demonstrate the financial viability of their company and show that the company is solvent, or, that the directors have a reasonable basis for believing that it will trade into profit. The Crown will want to secure the 'pot', in case, at some future point, it should decide to charge the suspect and attempt to gain a conviction and confiscation; the Crown is not concerned with the survival of a going concern.

In a case last year, in which POCA orders where discharged because the Crown failed to inform he Court of vital matters, the Court, nevertheless, re-imposed a Management Receivership because the attempt to demonstrate future growth of the business had been undermined by the revelation that the "defendant" had removed capital of £5 million before quitting the jurisdiction, leaving the business insolvent.

Management Receivership

Insolvency Practitioners and accountancy professionals often take appointments as Management Receivers. As such they are officers of the Court, not agents of the company, nor of the prosecution. Nevertheless, often the prosecution appear to expect an appointment to advance its investigation by immobilising the target or providing information via the Management Receiver's report. Management Receivers, who are naturally aware of the prospect of further work from the Crown, must be careful not to appear to stray too far inside the prosecution camp.

Management Receivership appointments come about as the only means available under POCA for policing restraint orders, especially where businesses are involved.
A restrained company must trade within the "normal course of business" exception. The Crown may fear that their target "defendants" will abuse the freedom to trade by placing business assets beyond reach. The Crown may not understand transactions or trust explanations offered by the company. It may fear that trading will result in diminution. The Crown Court has in practice been very receptive to such fears and has imposed Management Receivership. Unfortunately, POCA provides a bludgeon, where a rapier would be more effective (and make less of a mess).

Management Receivers feel constrained by the duties POCA imposes upon them to preserve assets and to ensure that there is no diminution in value of the estate. As a result of this need to avoid losses, Management Receiverships can come to resemble liquidations as practitioners err on the side of caution. The Management Receiver's duties to the company appear less certain.

Another difficulty for companies is the cost. Management Receivership fees, sometimes £50-100,000 per month, must be borne by the company, rendering survival as a going concern doubtful. Thus, fears of diminution become self-fulfilling prophecies. The current downturn merely exacerbates the tension between preserving businesses and securing assets for possible eventual confiscation.

As a result, the "defendant", who, let us not forget, may never be charged, let alone face conviction or confiscation, may be economically destroyed during the currency of a restraint and receivership regime. He may question whether the Management Receiver's actions in closing down his business satisfied the purpose of POCA to preserve value. The Crown Court can substitute its own discretion for that of the office holder on this issue, though no compensation can be sought from the Crown. In these circumstances, a "defendant" may well regard a Management Receiver with professional indemnity insurance as a legitimate target, indeed, the only target.

Management Receivers are potentially liable in the civil courts for wilful default or negligence. Their indemnities from the Crown are modest. To avoid liability for negligence, there must have been the degree of care expected from a reasonably prudent man of business. However, where a Management Receiver exercises powers over non-realisable property, POCA shelters him from liability, provided he was not negligent and acted in the reasonable belief that the property concerned was realisable. In practice, the Management Receiver may feel fairly safe in arguing that continuing to trade posed a risk that the value of the business would decline and that, instead, assets should be realised and preserved. The financial exhaustion of a "defendant" in these circumstances also insulates the Management Receiver.

Supervising Accountants

An interesting development in 2008 saw the Court accept an alternative to Management Receivership. Four companies, against which ex parte POCA orders had been obtained, argued that Management Receivership was unnecessary and destructive and that an alternative method of policing the restraint orders should be permitted.

The Crown had accused the companies of being shams, but they produced evidence that they were substantial and legitimate concerns, which would be destroyed if Management Receivership was imposed. The Judge accepted that the companies would be harmed by the expense and damage to reputation of Management Receivership and that it could trigger contractual default provisions and terminate employment.

A novel solution proposed the adoption by the companies of their own supervisory regime:

• Independent "supervising accountants" would exercise financial control under powers of attorney. They would require accounts and investigate any matters thought necessary;




• The supervising accountants would submit monthly reports to the Crown;




• Their powers would be tailored to the prosecution's particular concerns.

Any risk of dissipation would be avoided, but the damage that Management Receivership threatened would also be avoided. Supervising Accounts were a lesser cost and, because invisible to the outside, the companies' reputations would be preserved avoided. The companies' contracts would not be affected.

This self regulating model will doubtless require refinement and accountants taking on the role need their responsibilities clearly defined. Nevertheless, this represents opportunities for the accountancy profession to contribute to a more sophisticated alternative to Management Receivership in appropriate cases.

James Hilsdon is a partner and specialist in commercial litigation at Davies Arnold Cooper LLP (www.dac.co.uk [1]).