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[View ICLR summary:  WLR(D) 439]
||Neutral Citation Number:  EWCA Crim 1043
||Case No: 201503570 C1; 201505034 C1
IN THE COURT OF APPEAL (CRIMINAL DIVISION)
ON APPEAL FROM CROWN COURT AT NEWPORT
HHJ BIDDER QC
||Royal Courts of Justice
Strand, London, WC2A 2LL
B e f o r e :
LORD JUSTICE TREACY
MR JUSTICE HICKINBOTTOM
MR JUSTICE HOLGATE
||- v -
Mr Kennedy Talbot QC and Mr . T. Evans (instructed by National Resources Wales) for the applicant
Mr A. Bird (instructed by Blackfords LLP) for the respondent Powell
Mr P. Rouch QC (instructed by Grech Gooden Partnership ) for the respondent Westwood
Hearing date: 12th July 2016
HTML VERSION OF JUDGMENT APPROVED
Crown Copyright ©
Lord Justice Treacy:
- This is an application by the prosecutor under section 31 of the Proceeds of Crime Act 2002. It concerns confiscation orders made by the Crown Court. The purpose of the Crown's application is to seek to vary upwards confiscation orders made against each of the respondents.
- Jacqueline Powell was convicted at the Newport Crown Court of two counts of consenting or conniving as a director in the failure of a company, Wormtech Limited, to comply with the condition of an environmental permit (counts 2 and 6), and one count of consenting or conniving as a director of a company in the commission of an offence by the company, namely treating, keeping or disposing of controlled waste in a manner likely to cause pollution (count 14). In her case the period of offending was between 1st August 2011 and 31st October 2012. She was sentenced to 12 months' imprisonment, suspended for 12 months with a requirement to perform 250 hours unpaid work. She was also disqualified for a period of 5 years from acting as a director.
- On 19th October 2015 the judge found that Mrs Powell had benefited in the sum of £60,000. Since she had available assets of over £200,000 a confiscation order was made in that sum. In addition, a compensation order in the sum of £200,000 was made, and the judge made a direction under section 13(6) of the Proceeds of Crime Act 2002 (POCA) that the sums recovered under the confiscation order should be paid in part settlement of the compensation order.
- Jonathan Westwood had pleaded guilty to counts mirroring those against Powell: counts 3 and 7 mirroring counts 2 and 6 involving consent or connivance and count 15 which mirrored count 14. In Westwood's case, however, he pleaded guilty to those counts, not on the basis of consent or connivance, but on the basis that the company's offence was attributable to his neglect. His offending was alleged to have occurred between 1st August 2011 and 14th August 2012 as on that date he ceased to be a director. He was sentenced to 32 weeks' imprisonment suspended for 18 months with a requirement to perform 150 hours unpaid work. He was disqualified from acting as a director for a period of 5 years.
- In confiscation proceedings on 3rd July 2015, Westwood was found to have benefited in the sum of £30,000 with a confiscation order being made in that sum. Any sum paid under the Order was ordered to be used to pay compensation. A compensation order was further made in the sum of £70,000.
- Prior to the final confiscation proceedings against each of these respondents, the judge had made a ruling on 24th February 2015 which forms the basis of the prosecutor's application for leave to appeal. The facts show that Wormtech Limited (Wormtech) of which both respondents were directors and shareholders, was granted a permit for an in-vessel composting facility at a site on land owned by the Ministry of Defence at Caerwent in South Wales. The facility was permitted to recycle 25,000 tonnes of co-mingled food and green waste into compost. The operating permit required the operation to compost in closed vessels and in open windrows. The permit contained conditions to protect the environment. In its regulation of the site the Environment Agency officers noted repeated breaches of the permit conditions.
- As a result an enforcement notice was served on Wormtech in about August 2012, suspending the part of the permit allowing waste to be accepted onto the site. A site visit on 21st September 2012 revealed no site workers or machinery. Hundreds of tonnes of food waste had been left rotting down and producing leachate. In addition, leachate lagoons were overflowing. The site appears to have been abandoned by October 2012, and on 26th November 2012 a winding up order was made against Wormtech. It fell to the Ministry of Defence and the public purse to clear up the site, dealing with the leachate and resultant pollution. The cost of that was approximately £1.125 million.
- Wormtech had been formed in 2002 by Mrs Powell and a former partner. Mrs Powell was a director and significant shareholder. She resigned as director on 30th September 2012. The Crown said she was the directing mind of the company with control of finances and having day-to-day responsibility. Mr Westwood was active in the management of the operations at the site and was between November 2006 and 13th August 2012 a director and shareholder. There were also other shareholders in Wormtech. Mrs Powell held 91 shares, Westwood held 5, Westwood's father owned 28, a Sheila Robbins held 3 shares and a Martin Gardener owned 4 shares. In his ruling the judge found as a fact that the majority of control of the company in the sense of responsibility for major decisions affecting it was exercised by Mrs Powell. That control was exercised to a limited extent jointly with Westwood.
- Initially, Wormtech as well as Mrs Powell and Mr Westwood was charged with offences. The case against Wormtech did not continue because the High Court did not give the relevant permission after the company went into liquidation.
- Before the judge the Crown argued that the costs of disposal of the waste left on site in October 2012 would have been met by the company had it continued to trade. Since the company had kept the controlled waste in a manner likely to cause pollution, it was responsible for clearing up the site, and by abandoning the site it had avoided those costs. So doing amounted to a pecuniary advantage to the company. The Crown argued that that was a benefit accruing to the company which should be attributed to the respondents. The Crown relied on R v Seager & Blatch  1 Cr App R (S) 60, and in particular  where the court said:
"In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced … Secondly, where an offender does acts in the name of a company which (with the necessary mens rea) constitute a criminal offence which leads to the offender's conviction, then "the veil of incorporation is not so much pierced as rudely torn away": per Lord Bingham in Jennings v CPS paragraph 16."
Jennings v CPS is reported at  Cr App R 29.
- The respondents resisted the application primarily on the grounds that the second limb of Seager & Blatch did not apply in the light of the Supreme Court's view of the applicable law in relation to piercing the corporate veil in Prest v Petrodel Resources Ltd  3 WLR 1 which this court in R v Sale  1 Cr App R (S) 60 had held to be a necessary pre-condition to the application of the three tests set out at  of Seager & Blatch.
- The judge ruled against the Crown's application on the basis that the situations which the Supreme Court accepted to be those in which the corporate veil could be pierced were analysed by Lord Sumption as cases which follow two principles, the concealment principle and the evasion principle. He said that those principles only applied where the person misusing the protection of the corporate veil was the sole controller or sole owner of the company. Since neither of the respondents was the sole controller of the company nor the sole shareholder, the judge held that neither the concealment nor the evasion principle could apply. Accordingly the Crown could not rely on any pecuniary advantage gained by the company to form the basis for confiscation orders against these respondents.
- The judge also held at subsequent confiscation hearings that the Crown could establish direct benefits accruing to the respondents arising out of the offences which they had admitted. It was on this basis that he made the confiscation orders recited above, those orders reflecting salary and other such benefits accruing to the respondents in their individual capacities. The respondents do not challenge the confiscation orders made in that respect. This application relates to the Crown's dissatisfaction with the judge's ruling holding that these respondents could not be held liable for the company's pecuniary advantage in avoiding the costs involved in cleaning up the site. The application specifically challenges the judge's ruling that it was necessary for the prosecution to establish that a respondent was the sole controller and/or the sole shareholder of a company before he or she could be held liable for what was initially the company's avoided liability.
- Mr Kennedy Talbot for the applicant contended that no such principle had been laid down in Prest. A consideration of earlier cases referred to in Prest had not identified sole shareholding as a necessary criterion. Indeed, in Gilford Motor Co Ltd v Horne (1933) Ch 935 cited at  of Prest, Mr Horne, who was the subject of a restrictive employment covenant, had not been a shareholder in a competing business which he had set up and sought to hide behind in avoidance of the restrictive covenant. The decisions in Seager & Blatch and in Jennings have not identified any necessity for the individual targeted by a confiscation order to be a sole shareholder.
- The respondents did not contest this analysis before us insofar as it was based upon sole control or ownership being a prerequisite. They accepted that the judge's reasoning was incorrect. They did however contend that an individual's degree of control of a company was an important factor to be taken into account in deciding whether a case was one in which the fact of incorporation could be disregarded.
- In so submitting, they made reference to R v Boyle Transport (Northern Ireland) Ltd  4 WLR 63 at  Davis LJ stated:
"…even where a company mixed up in relevant wrong doing is solely owned and solely controlled by the (criminal) defendant that does not of itself always necessitate a conclusion in a confiscation case that it is an alter ego company, whose turnover and assets are to be equated with being the property of the defendant himself."
- At  he continued:
"… In doing so, [the judge] clearly considered that the fact that Patrick and Mark Boyle [the appellants] were the "operating minds" was of paramount importance. He also plainly was influenced by the fact that other shareholders, in particular Mary and John Boyle, played no active part in the business.
102. We think, with all respect, that he was wrong in his approach. It cannot be determinative that Patrick and Mark Boyle ran the company and were the "operating minds". On the contrary, they were the sole, legally appointed, directors. They were, in substance, executive directors, with very wide general powers and duties. As such directors, it was their delegated responsibility to operate the day to day affairs and business of the Old Company (although of course they had no authority to do so unlawfully). Under the companies' legislation and conventional Memoranda and Articles of Association shareholders, generally speaking, have no right, as shareholders, to involve themselves in such matters: their ultimate control rests on their voting powers at company meetings. So to say, in the context of this case, that Patrick and Mark Boyle were the "operating minds" simply does not carry the almost conclusive force which the judge seems to have ascribed to it.
103. Moreover, while Mary and John Boyle played no active part in the business their status as shareholders could not be ignored on that account. There was, as we have said, no evidence or finding that they were mere nominees for Patrick and/or Mark Boyle. Further, Neil Boyle, also a shareholder, was actively involved in the business; and his position as shareholder could not be ignored … simply because he too had been prosecuted: in circumstances where the case against him had been dropped and a verdict of not guilty been directed."
- The respondents' case before this court was that, notwithstanding that they could not sustain the particular basis upon which the judge had found in their favour, his decision was correct. When the matter was correctly approached, proper analysis of Seager & Blatch, Prest, Boyle Transport and the facts of this case showed that the prosecutor could not properly render these respondents liable for the company's liabilities in relation to the clean up costs. In this context significant reliance was placed on the recent decision of this Court in Boyle Transport which post-dated the judge's decision below.
- Section 6(4)(c) of POCA provides that the court must, if it decides that a defendant does not have a criminal lifestyle, decide whether he has benefited from his particular criminal conduct. Section 76 provides as follows:
(3) Particular criminal conduct of the defendant is all his criminal conduct which falls within the following paragraphs—
(a) conduct which constitutes the offence or offences concerned; …
(5) If a person obtains a pecuniary advantage as a result of or in connection with conduct, he is to be taken to obtain as a result of or in connection with the conduct a sum of money equal to the value of the pecuniary advantage."
The Crown relied on those provisions as the foundation for its submission that the pecuniary advantage to the company of not paying for the clean up costs it would otherwise have incurred could properly be attributed to the respondents and sound in a confiscation order equivalent to the sum avoided.
- In making its case the Crown accepted that it must bring itself within the second Seager & Blatch test read with the decision in Prest. In Prest Lord Sumption said at :
"The difficulty is to identify what is a relevant wrongdoing. References to "a facade" or "sham" beg too many questions to provide a satisfactory answer. It seems to me that two distinct principles lie behind these protean terms, and that much confusion has been caused by failing to distinguish between them. They can conveniently be called the concealment principle and the evasion principle. The concealment principle is legally banal and does not involve piercing the corporate veil at all. It is that the interposition of a company or perhaps several companies so as to conceal the identity of the real actors will not deter the courts from identifying them, assuming that their identity is legally relevant. In those circumstances the court is not disregarding the "facade", but only looking behind it to discover the facts which the corporate structure is concealing. The evasion principle is different. It is that the court may disregard the corporate veil if there is a legal right against the person in control of it 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 [our italics]. Many cases will fall into both categories, but in some circumstances the difference between them may be critical. This may be illustrated by reference to those cases in which the court has been thought, rightly or wrongly, to have pierced the corporate veil."
- At  he continued:
"I conclude that there is a limited principle of English law which applies when a person is under an existing legal obligation or liability or subject to an existing legal restriction which he deliberately evades or whose enforcement he deliberately frustrates by interposing a company under his control. The court may then pierce the corporate veil for the purpose, and only for the purpose, of depriving the company or its controller of the advantage that they would otherwise have obtained by the company's separate legal personality. The principle is properly described as a limited one, because in almost every case where the test is satisfied, the facts will in practice disclose a legal relationship between the company and its controller which will make it unnecessary to pierce the corporate veil. … But the recognition of a small residual category of cases where the abuse of the corporate veil to evade or frustrate the law can be addressed only by disregarding the legal personality of the company is, I believe, consistent with authority and with long-standing principles of legal policy."
- Both sides further analysed Prest and in particular, other speeches. It is not necessary for us to develop the arguments. It is clear that a majority of the Supreme Court agreed with Lord Sumption's analysis, although some of their Lordships posed the possibility that there might be other rare situations not falling within the concealment or evasion principles in which piercing the veil may be relevant.
- Mr Talbot accepted that the present case could not be brought within the concealment principle. He also accepted that the present case did not fall clearly within the evasion principle as enunciated by Lord Sumption. He described it as a "sort of evasion" but did not otherwise identify any further principle beyond submitting that where, as he submitted was the case here, an egregious crime had been committed by a company in a situation where others in management positions were also criminally responsible, the second test in Seager & Blatch could be satisfied in a way which was consistent with the decision in Prest. At one point he submitted that holding individuals in senior managerial positions liable to confiscation orders in these circumstances might apply in every criminal case. There was a breadth and degree of imprecision to this formulation which casts considerable doubt on its validity.
- It seems to us important to go back to the second test propounded at  of Seager & Blatch. As the decision in Boyle Transport makes clear, it is necessary to understand the context in which the Seager & Blatch test was put forward. The reference to the case of Jennings at that point is to a case in which Jennings, who was neither a shareholder nor a director, was heavily involved in a company used as vehicle for fraud and whose corporate structure was effectively a sham. It is clear to us that the words of the second Seager & Blatch test should not be read literally and without regard to their context. As was observed in Boyle Transport, regard should be had to the nature and extent of the criminality involved. Attention was drawn to R v King (Scott)  EWCA Crim 621 where Fulford LJ at  referred to a clear distinction to be drawn between cases in which goods or 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. In those circumstances the court would need to consider amongst other things the difference between those two types of case. Davis LJ commented in Boyle Transport that this sort of consideration, whilst not of itself determinative, is likely to be relevant where an issue of lifting or piercing the corporate veil is raised in confiscation proceedings.
- In this case, although the failings of the company in complying with the relevant environmental regulatory regime were very serious, the following matters are worthy of note. The company had been founded in 2002. Its purpose was the legitimate disposal of food waste. It had obtained the necessary permits in order to do so. At the time, its site and buildings were not foreseen as unsuitable for the quantities of waste that were eventually brought onto the site. The judge accepted that the company had taken a number of steps involving very significant expenditure to comply with the regulations and the permit. He noted that the company had instructed and paid considerable amounts of money to consultants to advise it. Drainage channels had been installed. Boreholes had been sunk. Construction works had taken place to improve guttering and drainage. A main access of surface water to a local stream had been blocked off. Two lagoons had been constructed to receive leachate and considerable amounts of money were spent tankering off leachate. The company's profit margins were not large. The judge said that it was true to say that the company had provided a valuable service for some years to the communities it served. It was a lawful operation which had become unlawful through breaches of conditions.
- The judge also referred to the difficulties in making structural changes on the site because of the reluctance of the Ministry of Defence, the site's owner, to allow changes to be made. This was particularly true in the construction of lagoons. As far as Mrs Powell was concerned, the judge noted that she had made very substantial personal investments into the company. She could not be described as a fly-by-night director. She had guaranteed the company's overdraft and finance agreements and had suffered a large financial loss as a result of the failure of the company. As to Mr Westwood, he had given guarantees for debts of the company and was said to have performed a limited function within it.
- True it is that the judge found that these respondents were both well aware of the failure to comply with regulations at the material time and that the reason for non-compliance was out of a desire to increase the company's profitability. But it seems to us important, in looking at the nature of the criminality as Boyle Transport indicates we should, to note that there was no facade or concealment for hiding behind the company's structure in a way which abused the corporate shield. Unlike the situation, for example in Jennings, this was not a company being run for an unlawful purpose but rather was a legitimate business which had broken the criminal law through its failure to observe the necessary regulations. In this context we note that the criminal liability of the respondents was parasitic upon proof that the company had committed an offence. The respondents' liability depended on consent, connivance or neglect in relation to the company's failures.
- It also seems to us that it is a material fact that these respondents were not the sole shareholders – a factor which Mr Talbot acknowledged was relevant to be taken into account in deciding whether the respondents should in law be treated as having obtained the pecuniary advantage accrued by the company's failure to clear up the site. We refer again to  and  to  of Boyle Transport.
- We turn next to consider Prest. It seems to us that when  and  of that decision are examined, in relation to the evasion principle, there are very serious difficulties in the way of the prosecutor. The words italicised in our citation from  above refer, firstly, to the need for there to be a legal right against the person controlling the company which exists independently of the company's involvement. An example of that might be the restrictive covenant which bound Mr Horne in Gilford. We find it hard to identify in the case of either respondent some legal right, liability, obligation or restriction on either respondent which existed independently of the company. It was the company which had incurred obligations to comply with the relevant environmental laws by obtaining the permit.
- There was no separate obligation imposed on either of the respondents. Their criminal liability arose in a secondary way through the operation of the well-known framework by which criminal responsibility can attach to senior managers and officers of a company if consent, connivance or neglect are present and the relevant legislation so provides. The Crown sought to meet this difficulty by saying that the respondents had an obligation to obey the criminal law irrespective of the company's position. In addition to being circular, this seems to us to be in conflict with the approach of the Supreme Court in Prest which expressly limits the application of the evasion principle to rare cases. The prosecution's approach would risk making every company director liable to the confiscation regime whenever a company broke the criminal law.
- Returning to Prest and , we also find it hard to see how in the circumstances Wormtech had been interposed so that its separate legal personality would defeat or frustrate the enforcement of some right against the respondents. As  of Prest makes plain, the court was concerned with abuse of the corporate veil to evade or frustrate the law. Only in such circumstances can the legal personality of the company be disregarded, and persons in the position of the respondents fixed with a personal liability, for example under our confiscation procedures.
- As stressed in Boyle Transport decisions of this sort in the context of confiscation proceedings must be geared to the facts and circumstances of the particular case. It seems to us that when the basis upon which the prosecutor has put forward this application is examined, the facts point away from showing that this is the sort of case in which a benefit obtained by a company should be treated in law by POCA as a benefit obtained by the individual criminal. Moreover, an examination of the proper context to be attributed to the second test at  of Seager & Blatch together with the analysis of the evasion principle enunciated by Lord Sumption in Prest, demonstrates that the applicant falls well short of establishing the necessary conditions for fixing these respondents with liability.
- In conclusion we remind ourselves of Lord Bingham's endnote in R v May  2 Cr App R 28 at . At [48(5)] he said:
"In determining, under the 2002 Act whether D has obtained property or a pecuniary advantage and, if so, the value of any property or advantage so obtained, the court should (subject to any relevant statutory definition) apply ordinary common law principles to the facts as found. The exercise of this jurisdiction involves no departure from familiar rules governing entitlement and ownership …"
- He continued at [48(6)]:
"… He ordinarily obtains a pecuniary advantage if (among other things) he evades a liability to which he is personally subject …"
Applying those observations to the facts of this case, neither of these respondents had a personal liability under POCA confiscation procedures for the costs of cleaning up the company's polluted site.
- Accordingly, we hold that the judge's decision was correct, albeit that his reasoning was erroneous. The necessary conditions for rendering these respondents liable to a confiscation order were not established. For these reasons we refuse leave in relation to this application. The practical effect therefore is that the confiscation orders made by the judge below remain in place.
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