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17 July 2017

Partnership and the proceeds of crime

Question

I am a partner in a firm of surveyors. One of the partners accepted bribes from a director of one of our corporate clients and fraudulently prepared valuations of properties enabling the company to obtain inflated mortgages.

The partner has been convicted of fraud, but he has not been convicted of defrauding our client. A restraint order has been made under the Proceeds of Crime Act 2002 (POCA) in relation to his home (which he purchased with money obtained from the bribes) and our client is going to try to recover against the property. If that is not successful, it will attempt to recover against my firm. Can the firm be held liable to the client and/or to the mortgage providers?

Answer

Since your partner knowingly received money paid out in breach of fiduciary duty, your client will have a proprietary interest in any property purchased with that money. If the client can prove that the partner’s home was purchased with that money, it will have an interest in the property which will take priority over any confiscation order.

Your firm is unlikely to have any liability to the client since your partner knowingly receiving the client’s money in breach of fiduciary duty is unlikely to be in the course of his role in the firm. However, the firm may be vicariously liable to the mortgage providers, though such liability would be reduced by anything the mortgage providers recover under the confiscation order against your partner.

Explanation

Money received by someone knowing that it was paid in breach of a director’s fiduciary duty is held on constructive trust for the company. The company can therefore trace the funds and obtain a proprietary interest in any property purchased with that money.

This in turn should allow your client to assert an interest in the partner’s home for the purposes of the Proceeds of Crime Act 2002 (POCA) (see Serious Fraud Office v Lexi Holdings plc (in administration) [2008] EWCA Crim 1443). If your client can establish this interest, then it would take priority over the restraint or confiscation order (section 69(3) of POCA).

When determining the extent of the defendant’s interest in any property, the criminal courts necessarily have to determine the extent of third party rights. Therefore, the relatively new provision of section 10A of POCA, which came into force on 1 June 2015, entitles a third party with an interest in the property to make representations at the hearing of the confiscation order.

Any compensation order made to compensate victims of the partner’s criminal conduct will also take priority over any compensation order (section 13 of POCA).

In any event, the company’s losses are the misappropriated funds paid to your partner by way of a bribe. The claim against the partner would be that he knowingly received the client’s money paid out in breach of fiduciary duty. This is a proprietary claim against him personally, rather than a tortious claim, and so the client could not claim that you were vicariously liable. Moreover, the client cannot have believed that accepting a bribe was within the partner’s ostensible authority. It is therefore unlikely that the firm can be held liable for the client’s losses.

However, under section 10 of the Partnership Act 1890 the firm would be liable for any wrongful act of a partner acting in the ordinary course of business of the firm. Therefore, the mortgage providers are more likely to be able to recover against the firm. In Nationwide Building Society v Dunlop Haywards Ltd [2009] EWHC 254 (Comm); [2009] PLSCS 64, Nationwide made advances of £11.5m to a client of DHL’s on the security of a commercial property, based on a valuation by one of its directors. However, he had fraudulently overstated the value of the security, claiming that it was worth £16m when the true value was closer to £1.5m.

Nationwide obtained judgment for deceit against DHL on the basis of vicarious liability, due to the fact that the director knew his statements to be false, and the statements were made in the course of his employment. Such liability will, however, be limited if your partner has sufficient assets, and the mortgage provider is compensated through a confiscation order under POCA.
In the case of DHL, the director in question had insufficient assets to limit its liability and DHL failed to comply with the court order to make an interim payment to Nationwide of £10m on account of damages and £250,000 on account of costs. A winding-up order was made against DHL, which was put in to liquidation.

Finally, section 6(4) of POCA includes a consideration of whether the defendant had a “criminal lifestyle” and whether he has benefitted from his “general criminal conduct”. In Lexi Holdings the judge suggested that victims entitled to be compensated under a confiscation order under section 6(6) included victims of the defendant’s general criminal conduct, rather than just those of the particular conduct of which the defendant has been convicted. You may, therefore, also want to consider whether the firm is a victim of the partner’s general criminal conduct as well.


This article was written by Rachel Morrish, associate and Claire Thompson, barrister at Enterprise Chambers. For more information please contact Rachel on +44 (0)20 7427 6644 or rachel.morrish@crsblaw.com


This article first appeared in Estates Gazette on May 17th 2017

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