Too often prosecutors do not appear to understand the issues surrounding lifting or piercing the veil of incorporation in confiscation cases. Some will treat a limited company as entirely separate from the defendant and therefore untouchable and of no relevance to the confiscation proceedings. Whilst others will ignore the fact of incorporation and treat all income and assets of a limited company as automatically those of the defendant, whatever the circumstances. Neither approach is correct.
[UPDATE: There is a more up to date article on piercing the corporate veil in confiscation HERE.]
When can the veil of incorporation be pierced?
There is a relatively long history of piercing or lifting the corporate veil in confiscation case law, certainly back as far as R v Dimsey & Allen  EWCA Crim 2261. A useful summary was set out more recently in R v Seager & Blatch  EWCA Crim 1303 at paragraph  in which it was said:
“It is “hornbook” law that a duly formed and registered company is a separate legal entity from those who are its shareholders and it has rights and liabilities that are separate from its shareholders . . . A court can “pierce” the carapace of the corporate entity and look at what lies behind it only in certain circumstances. It cannot do so simply because it considers it might be just to do so. Each of these circumstances involves impropriety and dishonesty. The court will then be entitled to look for the legal substance, not the just the form. In the context of criminal cases the courts have identified at least three situations when the corporate veil can be pierced. First if an offender attempts to shelter behind a corporate façade, or veil to hide his crime and his benefits from it . . . 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 . . . Thirdly, where the transaction or business structures constitute a “device”, “cloak” or “sham”, i.e. an attempt to disguise the true nature of the transaction or structure so as to deceive third parties or the courts.”
It follows that where, for example, a defendant has been convicted of a crime carried out through a company with which he is connected (perhaps as a shareholder, or director) then the benefit of that crime, which in the first instance has been obtained by the company, may properly be regarded as having been obtained by the defendant for confiscation purposes.
But equally where a convicted defendant is connected with a company but there is no allegation of dishonesty or illegality in relation to that company, then the veil of incorporation cannot be pierced. Take the example of a defendant convicted of a drug trafficking offence who earns his living by a legitimate manufacturing business which he owns and which is incorporated as a limited company. In the absence of anything untoward relating to the company the income of the company is not income of the defendant and so, for example, the criminal lifestyle assumptions cannot be applied to the deposits into the company bank account.
Effect on defendant’s benefit
Where the corporate veil can properly be pierced or lifted the effect is that, for the purposes of calculating the defendant’s benefit, the receipts, expenditures and assets of the company are treated as if they were receipts, expenditures and assets of the defendant personally. A benefit of criminal conduct which has been obtained by a company can then be regarded as a benefit which has been obtained by the defendant personally.
An obvious example of this was the leading case of R v May  UKHL 28 in which companies with which the defendant was connected obtained the benefit of VAT fraud and this was treated as the benefit of the defendant himself in confiscation.
This can be particularly important in cases in which the ‘criminal lifestyle’ assumptions of s10 Proceeds of Crime Act 2002 (and corresponding provisions in earlier legislation) apply. In relation to benefit, once the corporate veil is pierced, the whole of the value of the company’s receipts, expenditures and assets can be ascribed to the defendant personally (irrespective of his actual shareholding in the company). So it is not the case that, for example, if Jim holds 60% of the shares of XYZ Ltd his deemed receipts will be limited to only 60% of the receipts obtained by that company – his receipts will be regarded as 100% of the receipts obtained by the company. It follows that Jim’s assumed benefit under the criminal lifestyle assumptions can also be 100% of those receipts.
In practice the prosecutor will often decide to apply the criminal lifestyle assumption to the receipts of the company, but not go so far as to apply the s10 assumptions to the company’s expenditure or assets.
Effect on the defendant’s available amount
The effect on the defendant’s available amount is less clear cut. It could be argued that, where the veil of incorporation can properly be pierced, the assets held in the company’s name should be treated as if they were held personally by the defendant. The effect of that could be to disregard the implications of any shares in the company being held by anyone other than the defendant and to disregard any unsecured and non-preferential liabilities of the company, following the logic of s9(1)(a) PoCA 2002.
The decision of the Court of Appeal some years ago in R v Omar  EWCA Crim 2320 appears to suggest such an approach might be open to the courts. However in that case the Crown Court judge had, in the event, calculated the defendant’s available amount in accordance with the legal ownership of the properties in the company’s Balance Sheet (which were registered either in the sole name of the defendant or in the joint names of the defendant and his wife). The Crown Court judge did not accept a defence argument that, notwithstanding the apparent legal ownership, the properties should be treated as company assets. The Court of Appeal upheld that decision of the Crown Court. So, in the author’s view, Omar does not demonstrate that assets which are held by a company can be treated as if they were held by the defendant personally for the purpose of calculating the defendant’s available amount.
There have been cases in which restraint orders have been applied to assets held by a company with which the defendant is connected. A leading case in this area is HM Customs & Excise v Hare & Others  EWCA Civ 1351,  2 All ER 391. However, in the author’s view, there is an important difference between concluding that such assets ought properly to be subject to a restraint order, and might even be sold, and concluding that such assets ought properly to be treated as wholly belonging to the defendant for the purpose of valuing his available amount without reference to the company’s liabilities and the interests of other shareholders.
Where the corporate veil is not lifted the defendant’s available amount will include the value of the shares which he holds in the company. That value will reflect the company’s assets and its liabilities (both secured and unsecured and both preferential and non-preferential) and will also reflect the proportion of the total issued share capital of the company which is held by the defendant. That approach to the valuation of the defendant’s assets is consistent with s79(3) PoCA 2002. In the author’s view this is the better approach when calculating a defendant’s available amount even where the corporate veil has been pierced for the purpose of calculating the defendant’s benefit.
However each case needs to be examined closely based on its own particular facts.
The importance of the facts
In relation to benefit it is conceivable that a situation might arise in which money (or other assets) might be obtained by the defendant and then introduced by him into his (legitimate) company. In that case the money (or asset) would, in truth, initially have belonged to the defendant and the introduction into the company would, in reality, be a loan or gift to the company by the defendant. (The money or asset would not truly be ‘income’ of the company.) In that situation the initial obtaining by the defendant himself would be the crucial factor and would result in the money (or asset) being capable of being treated as, or being assumed to be, a benefit of his for confiscation purposes.
Similarly, in relation to the defendant’s available amount, money (or an asset) initially held and owned by the defendant which is then transferred by him to his (legitimate) company would not reduce his available amount. Either the transfer to the company would create a loan balance due to the defendant (which would form part of his available amount) or the transfer would be a gift which again could form part of his available amount, under s9(1)(b) PoCA 2002.
A grey area remains where a defendant asserts that a company which he controls is a legitimate business but the prosecutor asserts that, on the contrary, the company is, or has been, engaged in some criminality (separate from the criminality of which the defendant has been convicted) – but that criminality has not been the subject of any prosecution. In such a case it is the author’s view that the prosecutor who seeks to rely on unprosecuted criminal conduct as a basis for piercing or lifting the veil of incorporation would be under an obligation to prove that unprosecuted criminal conduct to the court dealing with the confiscation – and prove it to the criminal standard. This is because, in the author’s view, the position would be akin to that considered by the House of Lords in R v Briggs-Price  UKHL 19. The prosecutor would not simply be relying on the application of the statutory assumptions – he would be seeking to extend the ambit of the statutory assumptions in reliance upon the unprosecuted criminal conduct. No such case appears yet to have come before the appeal courts.
(Note: This article applies to confiscation orders under the provisions of Part 2 of the Proceeds of Crime Act 2002 in England and Wales and corresponding earlier legislation. There are a number of additional issues which could be relevant to a defendant’s confiscation order in particular cases which it is not possible to deal with in a relatively short article such as this. Appropriate professional advice should be sought in each individual case.)