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Cite as: [2009] EWHC 1560 (Ch), [2010] Lloyd's Rep FC 25, [2002] 1 WLR 1316, [2010] 1 WLR 1316, [2010] Bus LR 689, [2010] WLR 1316, [2009] 4 Costs LR 615

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Neutral Citation Number: [2009] EWHC 1560 (Ch)
Case No: HC08C00118

IN THE HIGH COURT OF JUSTICE
CHANCERY DIVISION

Royal Courts of Justice
Strand, London, WC2A 2LL
01/07/2009

B e f o r e :

MR JUSTICE HENDERSON
____________________

Between:
THE SERIOUS ORGANISED CRIME AGENCY
Claimant
- and -

JOHN SZEPIETOWSKI and others
Defendants

____________________

Ms Sarah Harman and Ms Kate Selway (instructed by the SOCA Legal Department) for the Claimant
Mr Andrew Mitchell QC (instructed by Devonshires Solicitors) for the First, Third and Fourth Defendants
Hearing date: 13 May 2009

____________________

HTML VERSION OF JUDGMENT
____________________

Crown Copyright ©

    Mr Justice Henderson:

    Introduction

  1. By this application the Serious Organised Crime Agency ("SOCA") asks the court to set aside the four exclusion orders which have already been made under section 252 of the Proceeds of Crime Act 2002 as amended ("POCA 2002" or "the 2002 Act") in favour of the first defendant, Mr Szepietowski, in his trustee capacity, and the third and fourth defendants, who are the two Countess companies. It will be convenient to refer to these defendants collectively as "the Countess parties". SOCA's application was made by an application notice issued on 10 February 2009.
  2. No express power to set aside an exclusion order after it has been made is conferred either by POCA 2002 or by the relevant regulations made thereunder, the Proceeds of Crime Act 2002 (Legal Expenses in Civil Recovery Proceedings) Regulations 2005 ("the 2005 Regulations"). The express power upon which SOCA relies, and which it asks the court to exercise, is to be found only in the Practice Direction Civil Recovery Proceedings ("the Practice Direction") which was first published in February 2003 as part of CPR Update 30 by HMSO on behalf of HM Courts Service. The introductory note to the Practice Direction in volume 2 of the White Book (para 3K-1 on p.1569 of the 2009 Edition) states that the Practice Direction does not supplement any particular Part of the CPR, or Schedule rule, but is a consequence of the 2002 Act.
  3. The Practice Direction was amended in 2006 by CPR Update 41 in order to take account of the amendments to POCA 2002 (introduced by section 109 of the Serious Organised Crime and Police Act 2005) which for the first time empowered the court to make an exclusion from an interim receiving order for the purpose of enabling a person to meet legal expenses that he had incurred, or might incur, in respect of proceedings under Part 5 of the 2002 Act. The relevant amendments to POCA 2002, the 2005 Regulations, and the relevant amendments to the Practice Direction all took effect from 1 January 2006.
  4. The 2006 amendments included the insertion of new paragraphs 7A and 7B into the Practice Direction. Paragraph 7A.4 provides as follows:
  5. "7A.4 The court
    (1) will not make an exclusion for the purpose of enabling a person to meet his reasonable legal costs (including an initial exclusion under paragraph 5B.1); and
    (2) may set aside any exclusion which it has made for that purpose or reduce any amount specified in such an exclusion,
    if it is satisfied that the person has property to which the property freezing order or interim receiving order does not apply from which he may meet those costs."

    The power which SOCA asks the court to exercise is the power referred to in paragraph 7A.4(2). The application notice wrongly implies that this power is conferred by, and forms part of, the 2005 Regulations. It does not. I stress this point at the outset because, as I shall explain, the legal status of the Practice Direction became a major issue at the hearing of the application on 13 May 2009, and was only clarified in written submissions subsequently provided to the court by counsel on each side.

  6. Most of the factual and legal background needed for an understanding of this application is set out in the judgment which I handed down on 27 February 2009, when I dismissed an application by the Countess parties for further exclusions to be made from the interim receiving order made by Collins J on 27 July 2005 in order to enable them to meet their legal expenses: see SOCA v Szepietowski and others, [2009] EWHC 344 (Ch). I will not repeat most of that material, which should be taken as read for the purposes of this judgment.
  7. In my judgment of 27 February I found that Mr Szepietowski had substantial assets available to him in his personal capacity, including a beneficial half share in his matrimonial home, Ashford House. I concluded from the rather unsatisfactory valuation evidence before me that the current equity in Ashford House was between about 1.1 and 1.6 million (see para 50), so the value of Mr Szepietowski's half share would fall within the bracket of about 550,000 to 800,000. I went on to say that, in the absence of evidence to the contrary, I was unwilling to assume that Mr Szepietowski would be unable to raise money to pay his legal costs on the security of a beneficial interest in prime real property of that order of magnitude.
  8. That conclusion was in itself sufficient to dispose of the application, because it was common ground at that stage that the position of all three of the Countess parties should be considered together (see para 69), and I held that the statutory regime required the assets owned by Mr Szepietowski in his personal capacity to be taken into account, even though he was sued in his trustee capacity and the case against him in his personal capacity had been settled in January 2008 (see para 8). Nevertheless, I went on to examine, although more briefly, the evidence relating to certain other assets, and concluded that Mr Szepietowski also had a beneficial half share in at least the following:
  9. (a) jewellery and works of art with a current value of at least 87,485 (para 52);
    (b) two unencumbered properties (62 High Street, Esher and 23 Muirfield, London, W3), held in the name of a company controlled by Mrs Szepietowski, a half share in which was worth approximately 140,000 (para 54); and
    (c) Mrs Szepietowski's half share in a portfolio of properties, of unknown but presumably substantial value, transferred by companies under her control (the Cobham companies) to a Mr Randerson (para 55).
  10. I was able to reach these conclusions despite severe deficiencies in the evidence presented to the court by Mr Szepietowski. I described his statement of assets dated 5 January 2009 as "a woefully inadequate document" (para 23); and his second witness statement, filed in response to a detailed critique by SOCA, left a number of obvious questions unanswered (para 42). In para 55, a propos of the Cobham companies, I said:
  11. "The identity, nature and value of the properties is wholly uncertain on the evidence before me. The court is therefore left in the dark. Nobody apart from Mr Szepietowski can be blamed for this absence of evidence, and if it were necessary for me to do so I would be prepared to infer that here, too, he has substantial undeclared assets available to him which in one way or another he could reasonably be expected to turn to account in order to meet his legal costs."
  12. The four existing exclusion orders, which SOCA now asks the court to set aside, were made between 28 March 2007 and 10 December 2008. Brief particulars of them are given in para 9 of my earlier judgment. Much the largest was the first, granted by Owen J on 28 March 2007 in the maximum sum of 66,000 plus VAT. The total of the four exclusions, after allowing for an agreed credit to SOCA of 2,000, is 98,700 plus VAT.
  13. Although Part 3 of the 2005 Regulations provides for the release of interim payments after an exclusion order has been made, and before the final resolution of the proceedings, no interim payments were ever made to the Countess parties' solicitors in the present case. The reason for this is that the land at Tredegar, which was the only property subject to the interim receiving order, remained unsold until January 2009, so until that date there was no liquid fund from which payments could be released.
  14. When the present application was issued, the court had not yet ruled on the Countess parties' application for further exclusions. SOCA intended that the two applications should be heard together, but at a preliminary hearing for directions on 11 February I ordered that the present application should not be heard until after I had determined the application for further exclusions. There has also been a further important development which I need to mention. On 25 March 2009 I heard SOCA's application for summary judgment against the Countess parties, and determined it in SOCA's favour. I accordingly ordered that a civil recovery order should be made in respect of the proceeds of sale of the Tredegar land, and ordered that it should vest in the trustee for civil recovery. I ordered the Countess parties, including Mr Szepietowski, to pay SOCA's costs of the action on a joint and several basis, such costs to be subject to a detailed assessment if not agreed. For the reasons given in an extempore judgment which I delivered on that occasion, I rejected various submissions advanced on Mr Szepietowski's behalf that I should not make an order for costs against him at that stage. I recognised, however, that he might wish to make an application pursuant to section 266(8A) of the 2002 Act that he should be allowed his costs, or some of his costs, out of what I had now held to be the recoverable property, and I made it clear that nothing which I said was intended to pre-judge in any way the outcome of such an application, were it to be made. I directed that, if any such application were made by Mr Szepietowski, it should be heard at the same time as the present application, in the week beginning 11 May 2009, and set a timetable for the filing of evidence. I also directed that the recoverable property should not be transferred to the trustee until after the conclusion of that hearing.
  15. In the event, no application for an order under section 266(8A) was made by any of the Countess parties. Thus the only application which I heard on 13 May was SOCA's application to set aside the existing exclusions.
  16. The evidence on the application

  17. SOCA's application is supported by a witness statement of Ross Evans dated 9 April 2009. Much of his evidence consists of legal argument, and submissions of a more or less technical nature about the circumstances in which the exclusion orders were made. For example, the point is made that no statements of assets were filed by the Countess parties before the making of at least the second, third and fourth orders, despite the apparently mandatory requirement in paragraph 7A.2 of the Practice Direction; and in relation to the third order, which I made on 2 April 2008, the further point is made that the Countess companies have the benefit of costs orders in their favour against Plevna and Mr Tummond. I will return to these, and other, points made by Mr Evans in due course. However, the main thrust of SOCA's case, as one would expect, is that in the light of the findings of fact in my February judgment Mr Szepietowski now has ample resources with which to pay the costs of the Countess parties. Those resources were not available to him at the time when the first two exclusions were made, because all of his property was then frozen pursuant to the separate interim receiving order made by Stanley Burnton J on 26 October 2005 in support of the intended mortgage fraud claim against the Szepietowskis and three of their companies. Following the settlement of that claim in January 2008, however, assets of very substantial value were returned to the Szepietowskis, including Ashford House. In those changed circumstances, the pre-condition for the setting aside of an exclusion in paragraph 7A.4(2) of the Practice Direction is clearly satisfied, and SOCA contends that the court should exercise its discretion by setting aside all four exclusions in their entirety.
  18. Mr Evans stresses that it is no part of SOCA's case that the solicitors who acted for the Countess parties at the material times, Messrs Sonn Macmillan Walker, should not be paid for the work they have done. SOCA's position is, rather, that Sonn Macmillan Walker should now look to their clients (in effect Mr Szepietowski personally) for payment of their fees, pursuant to the engagement letters which they must presumably hold. The mere fact that it would be more convenient for the firm to obtain payment out of the recoverable property is decisively outweighed by the clear policy of the 2002 Act and the 2005 Regulations, which is that legal costs should be paid out of property which is held to be recoverable property only as a last resort.
  19. The principal evidence in response of the Countess parties consists of a witness statement by Mr David Sonn dated 30 April 2009. Mr Sonn is a partner of Sonn Macmillan Walker, and he says he was duly authorised to make the statement on behalf of the Countess parties, his instructions coming from Mr Szepietowski both in his capacity as trustee of the Heritage Investment Trust and in his capacity as sole director of Countess UK.
  20. Mr Sonn explains that his involvement in the present case began in September 2006, when he first met Mr Szepietowski. He sets out the circumstances in which he was instructed by the two Countess companies, and exhibits a letter dated 26 January 2007 which he sent to Mr Szepietowski in lieu of a formal engagement letter to Countess UK. In that letter he confirmed that he was instructed by both Countess companies to contest the proceedings commenced by the Assets Recovery Agency ("the ARA"), and said that the hourly rate which he would be charging for conduct of the matter was the rate permitted by the 2005 Regulations. He added that he had already instructed Mr Sam Grodzinski of counsel, whose fees were similarly governed by the 2005 Regulations. Mr Sonn also provided Mr Szepietowski with a copy of his firm's client care letter, which he describes as a generic document.
  21. Mr Sonn goes on to say that, both at the time when he began acting for the Countess companies, and when he formally confirmed the terms of his retainer on 26 January 2007, it was mutually understood between Mr Szepietowski, as sole trustee of the Heritage Investment Trust, and himself, on behalf of the firm, "that the only means by which I might be paid would be if an exclusion order were to be made under [the 2005 Regulations], as all the assets of the Trust and those of [Mr Szepietowski] were frozen".
  22. Mr Sonn continues:
  23. "10. I envisaged securing the agreement of the [ARA] to an exclusion order being made under the Regulations, failing which an application would be made for such an order. If such an order were either agreed or granted by the Court, I together with Counsel would continue to act on behalf of the Countess Defendants. If such an order were not to have been granted, I would no longer have acted as there were no means by which my firm might be paid. There was certainly no unrestrained third party offering to meet the legal expenses of the Countess Defendants.
    11. At that time, I confess that I did not apply my mind to the possibility that an exclusion order might [be] made and subsequently set aside. I would not have agreed to represent the Countess Defendants had I thought that there was any prospect that I might undertake work and incur disbursements (including the fees of Counsel) pursuant to an exclusion order that might subsequently be set aside, where the effect of that setting aside would be that I would not receive payment in full for work already properly undertaken in accordance with the exclusion order. In short, the basis of my retainer was that I would be paid in accordance with the payment regime under the Regulations, subject to such an order being made and the land being sold. I was unable to secure payment on account to protect myself from the possibility that an exclusion order would be set aside and that I might encounter difficulty in seeking payment from any one or more of my clients direct."
  24. Mr Sonn then sets out the detailed history of his involvement in the case from 2007 onwards. Among other matters, he refers to the long saga of the marketing of the land at Tredegar, and makes the point that he played a central role in assisting the land agents (CBRE) and solicitors (Finers Stephens Innocent) who were instructed for that purpose. A supporting witness statement by Mr Stephen Lewis, who is a partner of Finers Stephens Innocent, confirms that he was only able to deal with the conveyancing aspects of the sale "as a result of the assistance provided to me by Mr Sonn who was able to explain and interpret the many orders of the court that dealt with the sale of the land".
  25. On 7 May 2009 Mr Evans made a statement in reply on behalf of SOCA. Most of this statement is again argumentative in content, and I need not refer to it in any detail.
  26. At about the same time, it became apparent to the Countess parties that there was a potential conflict of interest between themselves and Sonn Macmillan Walker, as a result of which Sonn Macmillan Walker ceased to act for them and were replaced by Messrs Devonshires, who came on the Court record on Thursday, 7 May. The relevant circumstances which led to the change of representation are briefly explained in a witness statement made on 8 May by Mr Philip Barden, the partner of Devonshires who now has care and conduct of the matter on behalf of the Countess parties. In his statement he expressed the view that it would be desirable to adjourn the forthcoming hearing. In the event, however, no such application was made.
  27. Finally, on 11 May, two days before the hearing, Mr Szepietowski himself made a short statement at Devonshires' request dealing with four matters:
  28. (a) whether or not he had retained the services of Sonn Macmillan Walker on his own behalf, and the terms of the Countess companies' retainer with that firm;
    (b) the position with CBRE;
    (c) his understanding of the position in relation to the January 2008 settlement agreement; and
    (d) the continuation of the litigation after the settlement agreement.
  29. In relation to the first of those matters, Mr Szepietowski maintained that he gave instructions to Sonn Macmillan Walker in his capacity as a director of the two Countess companies, and he personally was never a client of the firm. He says that there was never any mention of the possibility of his being personally liable for the firm's costs if the exclusion orders were revoked.
  30. With regard to the 2008 settlement agreement, Mr Szepietowski says this:
  31. "13. I was present during the negotiations with representatives from ARA particularly at the key meeting when most of the provisions were agreed. At no time was it ever suggested that the exclusion orders, which I believed had been agreed, could be revoked. Had that been suggested then I would have not entered into the deed of settlement in its final form. I would have sought an assurance that Sonn Macmillan Walker would be paid for the work that they had done to that date under the terms of the exclusion because, even though the liability for David Sonn's costs is as set out above and therefore I am not responsible for them, I had no desire whilst that agreement was being negotiated to leave David Sonn entirely without cover for his costs."
  32. With regard to the position after the settlement agreement, Mr Szepietowski says he was advised by Mr Sonn that it was necessary for him to continue to seek an order for the sale of the Tredegar land, and to defend the third party claim by Plevna. He was never advised that the existing exclusion orders could be revoked, or that he might be personally liable for the costs of his continued involvement in the proceedings. He sums the matter up thus:
  33. "18. I had no interest in pursuing any litigation. I would not have taken these steps that I was advised to take if there had been any risk that the property, which was released to my wife and myself as part of the settlement, could retrospectively [be] put at risk for the purposes of paying legal fees which it had been agreed would be met from an exclusion. If I had been given the choice at the time to act as I was advised but with the risk that the roof over the head of my wife and children might have been put at risk it is plain that I would not have permitted David Sonn to take any of the post-settlement steps that he took."

    Two questions of principle

  34. I shall begin by considering two issues of principle which Mr Andrew Mitchell QC placed at the forefront of his submissions for the Countess parties.
  35. First, he submitted that paragraph 7A.4 of the Practice Direction is inconsistent with the statutory scheme of POCA 2002 and the 2005 Regulations, and must therefore be disregarded. The Practice Direction has no statutory authority, and cannot be treated as though it had legislative force. Accordingly, although the court has an inherent power to reconsider exclusion orders before the final determination of the proceedings, because they are orders of an interim nature, the court should do so only in accordance with established general principles. The examples given by Mr Mitchell were where the order was obtained by fraud or deceit, or where the person in whose favour it was made has obtained a windfall benefit unconnected with the proceedings, such as a lottery win or an inheritance.
  36. Secondly, Mr Mitchell submitted that it would in any event be wrong for the court to regard Mr Szepietowski's share in the property which was released under the terms of the 2008 compromise as property from which he could reasonably be expected to pay the costs covered by the exclusions. This submission relies in particular on SOCA's status as a public body acting in the public interest, and the fact that no notice or warning was ever given by SOCA that it might seek to set aside the exclusions on the basis that Mr Szepietowski would now have available to him the assets returned under the compromise, including his beneficial half share in Ashford House.
  37. (1) Paragraph 7A.4 of the Practice Direction

  38. As I have already said, the Practice Direction does not supplement any particular part of the CPR, nor was it made in exercise of any vires conferred by the 2002 Act. The question therefore arises: what is its precise status, and is the court obliged to follow its provisions, including in particular paragraph 7A.4?
  39. It soon became clear at the hearing that neither side had been able to get to the bottom of this question, or to consider the recent review of the legal nature and force of practice directions by the Court of Appeal in Secretary of State for Communities and Local Government v Bovale Ltd and another [2009] EWCA Civ 171 ("Bovale"), the existence of which I drew to their attention. In the circumstances I invited the parties to deal with the point by sequential written submissions, and in due course I received a helpful note from counsel for SOCA (Ms Sarah Harman and Ms Kate Selway) dated 15 May, to which Mr Mitchell responded briefly on 20 May.
  40. In the light of the valuable review by the Court of Appeal in Bovale at paragraphs 9 to 28 of the joint judgment of Waller and Dyson LJJ (with which Stanley Burnton LJ agreed, although differing from them on another point that does not arise in the present case), it is now reasonably clear, and is common ground between the parties, that the Practice Direction, although introduced by the 30th Update of the CPR and published by the Civil Procedure Rules Committee, was in fact made by the Heads of Division in exercise of the inherent power of judges to control their own proceedings. That power survived the enactment of section 5 of the Civil Procedure Act 1997; and there is nothing in that Act, or anywhere else, to suggest that the Civil Procedure Rules Committee itself had power to make practice directions.
  41. Section 5 of the Civil Procedure Act 1997, as originally enacted, was relatively limited in scope, as Hale LJ explained in Re C (Legal Aid: Preparation of Bill of Costs) [2001] 1 FLR 602: see paragraphs (16) to (20) of her judgment, cited in Bovale at paragraph 17. A new, and wider, section 5 was substituted by the Constitutional Reform Act 2005, establishing the present system whereby (in brief) CPR practice directions are made by the Lord Chief Justice (or a judicial office holder nominated by him, since 3 April 2006 the Master of the Rolls), and practice directions given otherwise than under the process set out in Part I of Schedule 2 to the 2005 Act generally require the approval of the Lord Chancellor and the Lord Chief Justice. For present purposes, however, these provisions may be ignored, because both the Practice Direction in its original form, and the changes to it introduced by CPR Update 41 (including the addition of paragraphs 7A and 7B), preceded the coming into force of the 2005 Act.
  42. In paragraph 28 of Bovale the Court of Appeal dealt with the question of how far a practice direction is binding:
  43. "28. How far is a practice direction binding? In our view a judge is bound to recognise and has no power to vary or alter any practice directions, whether brought in under the section 5(1) procedure or under the section 5(2) procedure or indeed any existing practice directions issued pre-2005 Act. There are powers under the rules, as we have already indicated, to apply case management powers in particular cases but otherwise practice directions must, as it seems to us, be binding on the court to which they are directed. The issue of a practice direction is the exercise of an inherent power, even when carried out pursuant to section 5(1) or 5(2). If a Head of Division exercised that inherent power to give directions as to a procedure to be adopted in a particular court as happened before the 2005 Act, and a fortiori if the direction is given with the approval or agreement of the Lord Chief Justice and Lord Chancellor, it cannot be open to another judge of the court to which the practice direction is intended to apply to ignore that practice direction or to suggest in a judgment that a practice direction should no longer be followed in that court."
  44. Thus there is clear recent authority, binding on me, that I must recognise and apply the Practice Direction. The only exception expressly noted by the Court of Appeal is that the obligation may yield, in a particular case, to the exercise of case management powers under the CPR. A further exception, perhaps too obvious to need stating, is that a non-statutory practice direction cannot override primary or secondary legislation, and in case of conflict the legislation must prevail. If authority is needed for that proposition, it may be found in Re C (Legal Aid: Preparation of Bill of Costs), loc. cit., at para (24).
  45. Accordingly, the critical question I have to consider is whether there is any conflict between paragraph 7A.4 of the Practice Direction and POCA 2002 or the 2005 Regulations. If there is such a conflict, the legislation must prevail. If there is not a conflict, however, I am bound to apply the Practice Direction.
  46. Mr Mitchell's submissions that paragraph 7A.4 is inconsistent with the statutory scheme for the making of exclusion orders may be summarised as follows:
  47. (1) The legislation contains no express power to set aside an exclusion once it has been made. Had Parliament intended the court to have such a power, it would have said so, and would have laid down the criteria by reference to which it was to be exercised.
    (2) The policy of the 2002 Act, since the amendments made to it by the Serious Organised Crime and Police Act 2005, has been to enable a defendant to civil recovery proceedings under Part 5 of the Act to be legally represented, and to make the necessary exclusions for that purpose: see in particular section 252(4), (4A) and (6). Parliament intended that policy to be carried out in a commercially sensible manner, and not to leave solicitors in a position where they could not safely accept instructions because of the risk that an exclusion might be set aside.
    (3) The necessary balance between the interests of SOCA and the public purse on the one hand, and the interests of the defendant and his lawyers on the other hand, is struck by the 2005 Regulations: see, for example, the strict procedures set out in Parts 2 and 3 of the 2005 Regulations, and the strict rules regarding the assessment of costs in Part 5.
    (4) Although it does not say so expressly, the legislation envisages that when an exclusion order has been made, and the court subsequently makes a recovery order, the recovery order will normally provide for payment out of the recoverable property of the defendant's reasonable legal expenses, including those covered by the exclusion order: see POCA 2002 sections 266(8A) and 280(2)(aa), and regulation 6(b) and Parts 4 and 5 of the 2005 Regulations.
    (5) Payment of a defendant's reasonable legal costs out of the recoverable property does not provide the defendant with a benefit in any objectionable sense, but rather reflects his right to a fair trial. The sums in question can only be paid to his lawyers (see regulations 10(2) and 14(2)), and will not benefit the defendant personally. The basic legislative aim of depriving the defendant of the recoverable property will have been achieved, even if (to the extent of the costs) it does not accrue to the public purse.
  48. These are cogent submissions, and they were forcefully advanced by Mr Mitchell. In the end, however, I find them unconvincing, and I am unable to discern any conflict between the Practice Direction and the legislative scheme.
  49. My starting point is that the primary legislation in the 2002 Act expressly provides that the court may at any time vary or set aside an interim receiving order: see section 251(3). By virtue of section 252(2), exclusion orders may be made when the interim receiving order is made or on an application to vary the order. Furthermore, by virtue of section 252(3), an exclusion may be made "subject to conditions", quite apart from the "required conditions" set out in the 2005 Regulations. In the light of these provisions, it seems clear to me that the court has jurisdiction under the 2002 Act itself to vary or set aside an exclusion, and there can therefore be no presumption that an exclusion, once made, will be immune from future challenge. The power to vary or set aside an interim receiving order must, in my view, include power to vary or set aside an exclusion from the property subject to the order. In addition, when making an exclusion, the court could in my view properly impose an express condition in terms equivalent to paragraph 7A.4(2) of the Practice Direction.
  50. I am therefore unable to accept Mr Mitchell's submission that the legislation confers no power to set aside an exclusion order once it has been made.
  51. My next point is that a claim for a recovery order under Part 5 of the 2002 Act is sui generis, and differs from both a conventional personal and a conventional proprietary claim: see Director of the Assets Recovery Agency v Creaven [2005] EWHC 2726 (Admin), [2006] 1 WLR 622, at paragraphs 19 21 (Stanley Burnton J). Nevertheless, the claim is clearly akin to a proprietary claim, and Stanley Burnton J went on to hold in paragraph 22 that, in relation to an interim (non-statutory) freezing order sought against the defendant to a Part 5 claim,
  52. "the principles applicable should be similar to those applicable to proprietary claims, but with allowance made for the fact that any depletion of the property frozen by the order will not be recoverable from any property of the defendant that is free from any claim under the Act. I say this because the clear policy of the Act is to deprive defendants of property obtained through unlawful conduct (unless they can establish one of the defences provided in the Act, which involve acting without notice that the property is recoverable property), and for that property to be transferred for the benefit of the community."
  53. The judge made those comments at a time before the 2005 amendments to the 2002 Act had come into force, and when there was still an absolute bar, under section 252(4) as originally enacted, against exercising the power to make an exclusion "for the purpose of enabling any person to meet any legal expenses in respect of proceedings under this Part". Nevertheless, his basic point in my judgment still holds good, and even in the absence of the Practice Direction it would be appropriate for the court to approach applications for an exclusion for legal expenses, or an application to vary or set aside such an exclusion, having regard to the familiar principles applicable to proprietary claims. Those principles are conveniently summarised in paragraphs 24 and 25 of the Creaven case, referring to the unreported judgment of the Court of Appeal in Ostrich Farming Corpn Ltd v Ketchell, 10 December 1997, Court of Appeal (Civil Division) transcript number 2259 of 1997 per Millett LJ, and Fitzgerald v Williams [1996] QB 657 at 669-670 per Sir Thomas Bingham MR. For present purposes, the most important point is that the court will not permit a defendant to make payments towards his legal costs out of a fund that is subject to a proprietary claim unless he can show that he has no other funds available for that purpose.
  54. I am also unable to accept Mr Mitchell's submission that the legislative scheme proceeds on the footing that an exclusion, once it has been made, will as a matter of course be reflected in an order under section 266(8A) of the 2002 Act, if a recovery order is made. Section 266(8A) provides as follows:
  55. "A recovery order made by a court in England and Wales may provide for payment under section 280 of reasonable legal expenses that a person has reasonably incurred, or may reasonably incur, in respect of
    (a) the proceedings under this Part in which the order is made, or
    (b) any related proceedings under this Part."

    The subsection does not say that a recovery order shall so provide, and the use of the word "may" shows in my judgment that the power is a discretionary one. In the usual case, no doubt, such an order will be made, because it is confined to reasonable legal expenses reasonably incurred. However, there may be circumstances, such as the existence of free assets which were not available or not known about when the exclusion was made, which would make it inappropriate to make an order under subsection (8A). In my judgment the making of such an order is not a mere formality, and the need for an order is reflected in the provisions of the 2005 Regulations which confine the right to payment, once a recovery order has been made, to cases where the order provides for the payment of the defendant's reasonable legal expenses: see regulations 6(b), 11, 13(1) and 15.

  56. It is important to remember at this point that the making of an exclusion does not, of itself, authorise the payment of any sums in respect of legal expenses. The exclusion merely earmarks, or ring-fences, a sum out of which payments may in due course be made in accordance with the procedure set out in the 2005 Regulations. If, at the end of the case, a recovery order is not made, the need for the exclusion disappears. Any property freezing or interim receiving orders which have been made will be discharged, and the successful defendant will be able to pay his legal expenses free from any constraint. He may well also have the benefit of an order for costs in his favour. If, on the other hand, a recovery order is made, the defendant's reasonable legal expenses will be paid out of the recoverable property only if the court decides to make an order to that effect under section 266(8A). In that event, the expenses will be agreed or assessed, and when the sum payable has been ascertained the trustee for civil recovery will pay it to the defendant's solicitor if and to the extent that it exceeds any interim payments already made: see regulation 14(1)(a). If, however, the sum payable is less than interim payments already made, the defendant is obliged to refund the balance to the trustee: regulation 14(1)(b). It would seem to follow that, if interim payments are made, but no order under section 266(8A) is then made at the conclusion of the proceedings, the full amount of the interim payments will have to be refunded.
  57. It can thus be seen that the statutory scheme confers no guarantee that any part of a defendant's legal expenses will ultimately be paid out of recoverable property, unless and until an order under section 266 (8A) is made at the end of the case.
  58. In my judgment this statutory framework is reflected, and in no way contradicted, by paragraphs 7A.4 and 7B.1 of the Practice Direction. Paragraph 7B.1 provides that where the court makes a recovery order in respect of property which was the subject of a property freezing order or interim receiving order, and an exclusion was made for the purpose of enabling a person to meet his reasonable legal costs, the recovery order "will make provision under section 266(8A) of the Act for the payment of those costs". However, this direction has to be read in the light of paragraph 7A.4, which enables the court to set aside or reduce in amount any exclusion if it is satisfied that the person has free assets from which he may meet his reasonable legal costs.
  59. The purpose of these paragraphs is to state the principles by reference to which the court will normally exercise the powers given to it by the legislation:
  60. (a) to make, vary or set aside exclusions, in cases where a defendant has free assets; and
    (b) to make provision in a recovery order for the payment of reasonable legal expenses.

    To regularise the basis upon which statutory powers or discretions are to be exercised by the court is an entirely proper function of a practice direction. Nor, I think, does it involve any unlawful restriction or fetter on the exercise of the court's powers, because the court retains the ability to exercise its specific case management powers in a way that departs from the practice if there is good reason to do so in a particular case.

    (2) The relevance of the 2008 compromise

  61. I can deal with this point more shortly, because in my judgment there is no substance in Mr Mitchell's submissions. Property released to the Szepietowskis in accordance with the terms of the compromise is their free property just as much as assets acquired from some external source, or as a result of an unexpected windfall, and the fact that the property was previously subject to an interim receiving order is in my judgment irrelevant. What matters is the availability of free assets from which the relevant legal costs may reasonably be paid, not the source of those assets or the means by which they have become available.
  62. I am also unimpressed by the complaint that the ARA never warned the Szepietowskis, in the negotiations which led up to the January 2008 compromise, that it might subsequently seek to vary or set aside the first two exclusions (which were the only ones which had been made by that date) in reliance on the availability of the assets released under the compromise. The Szepietowskis were engaged in hostile and hard-fought litigation with the ARA, and they were legally represented throughout the negotiations. They had the benefit of the services of Mr Mitchell at the unsuccessful mediation which took place in October 2007, and of Devonshires in the subsequent discussions which bore fruit in the January 2008 consent order. Prima facie, and subject to the terms of their retainer or instructions, it was the duty of the Szepietowskis' lawyers to consider the possible costs consequences of the compromise for their clients, and to advise them accordingly. The 2005 Regulations and paragraph 7A.4 of the Practice Direction had been in force for two years, and can hardly have been overlooked. The suggestion that the ARA was under some kind of legal, or moral, obligation to draw these provisions and their possible implications to the attention of the Szepietowskis and their advisers is in my judgment fanciful. It is not as though the Szepietowskis were vulnerable litigants in person. They both had extensive business experience, and had carried on a joint property business for many years before the interim receiving orders were made. They had the benefit of legal representation by experienced solicitors and (for much of the time) leading counsel. The agreed value of the properties released to them and their companies under the compromise, net of encumbrances, was in excess of 9.7 million, only 840,000 of which was attributable to Ashford House. In those circumstances, the ARA was in my judgment fully entitled to take the view that the Szepietowskis were well able to look after themselves and to make their own financial calculations.
  63. Furthermore, neither side has waived legal professional or mediation privilege, so I am anyway in no position to make firm findings of fact about what was, or was not, said in the course of the negotiations.
  64. The individual exclusions

  65. Having rejected Mr Mitchell's two arguments of principle, I now turn to the particular circumstances of the four exclusions and the question whether they should be set aside, in whole, or in part, or not at all. I will consider them in reverse chronological order.
  66. I begin with a general observation, which applies with equal force to all four of the exclusions. Despite the criticisms which I made in my February judgment, Mr Szepietowski has taken no steps to provide fuller or clearer information about his financial resources. Nor has he sought to rebut the inferences which I drew about his beneficial interest in certain assets now held in the name of his wife or companies under her control, or about the feasibility of his raising money to pay his legal expenses on the security of such assets. He could have done so, but has conspicuously chosen not to. I therefore proceed on the footing that he has available to him, at the very least, the interests in property identified in my earlier judgment, and that there would be no significant practical obstacles to his raising therefrom a sum equivalent to the exclusions.
  67. (a) The fourth exclusion

  68. The fourth exclusion was granted by myself on 10 December 2008, in the sum of 2,700 plus VAT. It was made with the specific purpose of covering the costs to be incurred by the Countess parties in complying with other directions which I made on that occasion, relating to disclosure and the preparation of detailed statements of assets by the Countess parties. It was made in the light of evidence that the existing exclusions had already been exhausted, and as a necessary precursor to determination of the application for substantial further exclusions which I eventually heard in February 2009. Strictly speaking, provision of statements of assets should have preceded even the very limited exclusion which I granted in December, but I took the pragmatic view that nothing was likely to happen unless I granted the exclusion, and that it could always be revisited once statements of assets had been filed.
  69. In the light of the findings in my February judgment, it is now clear that Mr Szepietowski had very substantial free assets available to him in December 2008, and that the fourth exclusion should never have been made. I have no hesitation in saying that it should now be set aside, and that no order for payment of these costs out of the recoverable property should be made under section 266(8A). In reaching this conclusion, I bear in mind Mr Sonn's evidence about the basis of his retainer, and Mr Szepietowski's contention that Mr Sonn never acted for him in his personal capacity. These are matters which may need to be resolved as between the Countess parties and Sonn Macmillan Walker, but they carry little, if any, weight in the balancing exercise that the court now has to perform. Application, by analogy, of the principles relating to proprietary freezing orders, and the terms of paragraph 7A.4 of the Practice Direction itself, make it plain that the burden of these costs should not be cast upon the recoverable property.
  70. (b) The third exclusion

  71. The third exclusion was also made by myself, on 2 April 2008. Like the fourth exclusion, it post-dated the January 2008 compromise, and was therefore made at a time when Mr Szepietowski had available to him the assets referred to in my February judgment. Furthermore, like the fourth exclusion it was made without the benefit of a statement of assets from any of the Countess parties.
  72. The third exclusion was made in the context of the intervention by Plevna to halt the sale of the Tredegar land, and was expressly confined to the two Countess companies. By paragraph 7 of my order of 2 April 2008, I directed that there should be a further increase of 20,000 plus VAT in the exclusion originally granted by Owen J
  73. "so as to cover the future costs of and occasioned by the Countess Companies considering with their solicitors and Counsel the Particulars of Claim served by Plevna and settling and serving a Defence thereto, together with a Counterclaim if so advised and generally representing the interests of the Countess Companies in these proceedings."
  74. On the assumption (to which I will return at the end of this judgment) that the free assets available to Mr Szepietowski should be treated as also available to the Countess companies, it is now clear, for the same reasons as in relation to the fourth exclusion, that the third exclusion likewise should never have been granted, and must now be set aside. However, there is an additional point upon which SOCA relies in relation to this exclusion. Following the withdrawal by Plevna of its claim, the Countess companies have the benefit of orders for costs in their favour, not only against Plevna (which is a company incorporated in the British Virgin Islands with no known assets) but also against Mr Tummond, whom the court joined as a party to the proceedings, at his own request, specifically for the purpose of rendering him liable for costs orders against Plevna.
  75. SOCA likewise has the benefit of a costs order against Plevna and Mr Tummond, and Mr Evans' evidence is that SOCA has taken steps to obtain a default costs certificate against Mr Tummond and an interim charging order over property owned by him. There appear to be reasonable prospects of recovering these costs in full, as the piece of land over which the charging order has been granted has planning permission for conversion into eight flats. SOCA's simple point is that the Countess companies should seek to obtain payment of their costs from Mr Tummond before any question can arise of payment of those costs out of the recoverable property.
  76. Mr Sonn's evidence is that the Countess companies are indeed belatedly taking steps to follow in SOCA's footsteps by seeking a default costs certificate followed by an interim charging order: see paragraphs 57 to 60 of his witness statement.
  77. It seems to me that SOCA's submission is correct in principle, and that while a reasonable prospect remains of the Countess companies recovering their costs from Mr Tummond it would be quite wrong for the court to authorise payment of those costs from the recoverable property. Accordingly, if it were not otherwise appropriate to set aside this exclusion, I would order that the costs covered by it should be paid out of the recoverable property only if and to the extent that recovery of those costs from Mr Tummond proves fruitless.
  78. (c) The second exclusion

  79. The second exclusion was made, again by myself, on 18 December 2007 in the maximum sum of 12,000 plus VAT. It was granted for
  80. "all costs incurred and to be incurred of and occasioned by the conduct of this matter on behalf of [the Countess parties] up to and including the hearing of the Case Management Conference [which I had directed to take place on 29 January 2008]."
  81. Unlike the third and fourth exclusions, this exclusion was made at a time when all of the assets of the Countess parties were still frozen by the two interim receiving orders. There would accordingly have been little point in insisting upon the production of statements of assets before the exclusion was granted, and the evidence before the court was instead directed to establishing that the initial exclusion granted by Owen J had been exhausted. SOCA did not consent to the making of the exclusion, but does not now seek to say that it was wrongly granted. SOCA submits, instead, that the condition in paragraph 7A.4 of the Practice Direction has been satisfied since the January 2008 compromise took effect, and the court should now exercise its discretion so as to set the exclusion aside.
  82. Having rejected the submissions of the Countess parties on the two questions of principle, I agree with SOCA that this exclusion should be set aside in full. For the reasons which I have already given, the exclusion was in my view always liable to be set aside if the financial circumstances of the Countess parties changed, and there is no reason why the release of assets under the January 2008 compromise should not be taken into account for this purpose. The recoverable property should not be burdened with the payment of legal costs if another source for their payment is reasonably available. Furthermore, the terms of Sonn Macmillan Walker's retainer, assuming them to be accurately recorded by Mr Sonn in his evidence, should not lead the court to reach a different conclusion. Otherwise the way would be open for a defendant to proceedings under Part 5 of POCA 2002 to frustrate the clear purpose of the legislation by agreeing with his solicitor in advance that he was to be under no personal liability to pay any legal costs not covered by an exclusion order, even if free assets should become available to him. If a solicitor is incautious enough to enter into a retainer on those terms, that may be a misfortune for him if he carries out work in reliance on exclusions which have been made, and if the exclusions are subsequently set aside; but sympathy for the solicitor cannot, in itself, be a good reason for refusing to set the exclusions aside, thereby casting onto the recoverable property the burden of legal costs which the defendant is in fact well able to pay for himself.
  83. (d) The first exclusion

  84. The first exclusion was granted by Owen J on 29 March 2007, in the maximum sum of 66,000 plus VAT. By paragraph 7 of his order, that sum was said to relate to:
  85. (a) costs incurred to date, as set out in a schedule served by Sonn Macmillan Walker on 27 March 2007; and
    (b) the future costs of and occasioned by the Countess parties in considering with their solicitors and counsel the Particulars of Claim to be served by the ARA and documentation served therewith, "so as to enable instructions to be given for the preparation of a Defence".
    The order went on to say that, since the Particulars of Claim had not yet been served, and the volume of the documentary and other evidence to be served in support of the Particulars of Claim was as yet unknown, the Countess parties "shall have liberty to apply for an increase in the maximum sum specified above".
  86. The judgment which Owen J delivered on that occasion shows that there had been something of a volte face in the attitude of the ARA to the granting of an exclusion. Although the Director had twice stated in correspondence that he was willing to agree an exclusion when the Tredegar land was sold, the application was opposed on the basis that there should be no release of funds unless and until two preconditions were met: first, that Countess UK should reveal the identity of those in control of it, and set out what defence it had to the claim that the Tredegar land represented property obtained by unlawful conduct; and second, that Countess UK should explain why it required separate representation from Mr Szepietowski. The judge was not persuaded that it was necessary or appropriate to attach either precondition, and evidently considered that the ARA was acting unreasonably. With regard to the second precondition, he said in paragraph 32 of his judgment:
  87. "As to the second point, I do not consider that the material before me demonstrates an overlap between the positions of [Mr Szepietowski] in his private capacity on the one hand (his position as trustee of Heritage Investments Ltd), and the position of [Countess UK] on the other. Their interests may in due course prove to be closely entwined, but for present purposes I am satisfied that it is appropriate for there to be an exclusion such as to enable the legal costs of [Countess UK and Mr Szepietowski] as trustee to be met from the proceeds of sale of the Tredegar property."

    The judge ordered the ARA to pay Countess UK's costs of the application, which were summarily assessed at 5,570 plus VAT.

  88. As with the third exclusion, SOCA does not now seek to argue that the first exclusion was wrongly granted in the first place. However, and for substantially the same reasons, SOCA submits that the exclusion should now be set aside.
  89. The first exclusion is substantially larger than the second, but apart from that difference I cannot see any good reason for distinguishing between them. Although the sum involved is considerable, it represents only a small fraction of the value of the assets which I have found to be available to Mr Szepietowski. As before, I can see no good reason why the exclusion should not be set aside in full.
  90. Should the position of the Countess companies be considered separately from that of Mr Szepietowski?

  91. I come finally to the question whether any distinction should be drawn between the position of Mr Szepietowski and that of the Countess companies. As I have already said, it was common ground at the hearing of the application for further exclusions in February that no such distinction should be drawn. However, that concession has not been extended to the present application by Mr Mitchell QC (who was not instructed for the Countess parties in February), although he did not deal with the point at all in his written submissions, and touched on it only briefly in his oral submissions. Without going so far as to apply for an adjournment, he suggested that if I were minded to pierce the corporate veil and set aside the exclusions earmarked for the costs of the Countess companies (including in particular the whole of the third exclusion), on the footing that Mr Szepietowski's free assets should be treated as available to them for payment of their legal costs, I should allow further time for the precise relationship between Mr Szepietowski and the Countess companies to be investigated. He submitted that Mr Szepietowski was only involved in the proceedings in his capacities as trustee and director, and he had no personal interest in either the Heritage Investment Trust or the Countess companies, nor did he have a personal interest in the outcome of the proceedings.
  92. I reject the submission that further time should be allowed for this question to be investigated. Counsel for SOCA set out their submission that the separate corporate personality of the Countess companies should be disregarded in a skeleton argument dated 8 December 2008, which was prepared for the case management conference on 9 and 10 December, and the factual evidence relied upon in support of the submission was contained in the 12th witness statement of Ross Evans, also dated 8 December 2008. Accordingly the Countess parties had notice of the point for at least five months before the hearing of the present application on 13 May 2009. In my judgment they have had every opportunity to meet the argument by filing evidence and/or written submissions, but they have failed to do so. I am satisfied that it would be wrong to allow further time for this purpose, and the court should in my view do the best it can on the material now before it.
  93. On the facts, it is reasonably clear that both of the Countess companies were established by Mr Szepietowski, and that he is the only person who in reality controls their activities, whether or not he is a de jure director. The contrary has never been seriously contended, so far as I am aware, at any rate since the hearing before Owen J in March 2007. Indeed, in his most recent witness statement dated 11 May 2009 Mr Szepietowski says that he gave instructions to Sonn Macmillan Walker in his capacity "as a director" of the two companies.
  94. It is also Mr Szepietowski's case that the shares of both companies are assets of the Heritage Investment Trust: see paragraphs 3 and 5 of my February judgment. In paragraphs 66 to 68 of that judgment, I explained why there are strong prima facie grounds for suspecting that the whole trust arrangement was a sham, and said that if Mr Szepietowski wishes to be treated as a bona fide trustee today, it was incumbent on him to dispel the suspicion and produce solid evidence "that he has in the past behaved as a real trustee of real trust property". That invitation has not been taken up by Mr Szepietowski, and I therefore proceed on the footing that the original ownership structure of the trust and Countess BVI, and the subsequent establishment of Countess UK and the transfer to it of the Tredegar land, all formed part of the framework set up by Mr Szepietowski, at least ostensibly on behalf of Jamie Mitchell, for the receipt and utilisation of the Turkish money. I have, of course, now held, on the summary judgment application, that the Turkish money was the proceeds of crime and recoverable property within the meaning of the 2002 Act.
  95. Against this background, I do not think it is necessary to have recourse to the principles relating to piercing of the corporate veil in order to reach the conclusion that assets available to Mr Szepietowski in his personal capacity should be treated as also available to the Countess companies for the payment of their legal costs. The involvement of the Countess companies in the litigation has been at his sole direction and instigation throughout. Given the background, it is hard to see how he could possibly have held a bona fide belief that the companies had an arguable defence to SOCA's claim, and in the event the summary judgment application was unopposed. Indeed, no defence was ever filed on behalf of the Countess companies. In those circumstances, Mr Szepietowski would almost certainly be held personally liable for any unsatisfied costs orders made against the Countess companies, on the basis that he had caused them to defend the proceedings improperly. If he were not already a party to the action, he could have been added pursuant to CPR Part 48.2 for the purposes of costs only. The corollary of this, as it seems to me, is that no distinction should be drawn between the positions of Mr Szepietowski and the Countess companies when it comes to meeting the costs of their own representation. Fairness and justice require that recourse should be had to Mr Szepietowski's free assets, before any part of the burden of those costs is placed upon the recoverable property.
  96. Conclusion

  97. For the reasons which I have given, this application succeeds and all four existing exclusion orders will be set aside in full.


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URL: http://www.bailii.org/ew/cases/EWHC/Ch/2009/1560.html