POCA s303Z18 Compensation: “Exceptional Circumstances” as a High Threshold Protecting Properly-Made Account Freezing Orders

1. Introduction

The Advocate General for Scotland v Alexander Watt McCartney and others ([2026] CSIH 5) is an Inner House decision addressing the scope of compensation for account freezing orders (“AFOs”) under section 303Z18 of the Proceeds of Crime Act 2002 (“POCA”).

The appellant (Mr McCartney) sought compensation after an AFO—granted on HMRC’s application—was ultimately recalled and no forfeiture was pursued. The principal issue was the correct construction and application of the statutory requirement that compensation may be ordered only where the applicant suffered loss and “the circumstances are exceptional” (s 303Z18(3)). A secondary issue (arising from an obiter remark by the sheriff) concerned the relevance of actings of the Scottish Ministers’ Civil Recovery Unit (CRU) to a compensation claim where HMRC applied for the AFO.

Parties

Pursuer/Respondent: The Advocate General for Scotland (acting on behalf of HMRC, as the AFO applicant).
Defender/Appellant: Alexander Watt McCartney (account holder subject to the AFO).
Interveners: The Scottish Ministers (to address the CRU/attribution relevance point).

Key Questions

What counts as “exceptional” circumstances for s 303Z18 compensation?
How does the public-interest role of enforcement officers shape the compensation jurisdiction?
Can CRU investigative conduct be a relevant “circumstance”, and is HMRC “accountable” for it?

2. Summary of the Judgment

The court refused the appeal and refused the cross-appeal.

The Inner House held the sheriff erred in dismissing the minute solely on the basis that no relevant loss was averred: in particular, solatium-type averments (distress/inconvenience) were “suitable for inquiry” (para [35]).
However, the claim still failed because the appellant could not meet the separate statutory gateway: the circumstances were not “exceptional” in the ordinary sense (paras [36]–[44]).
The court confirmed a strong public-interest rationale: where an enforcement officer acts honestly, reasonably, properly and on grounds that reasonably appeared to be sound, compensation should generally not be awarded; otherwise, there is a deterrent (“chilling”) effect on law enforcement (paras [38]–[39]).
On the CRU issue, the court clarified that it was unhelpful to frame HMRC as “accountable” for CRU actings, because the Scottish Ministers are responsible for the CRU; nonetheless, CRU conduct may be a circumstance relevant to whether the overall circumstances are exceptional (paras [45]–[46]).

3. Analysis

A. Precedents Cited

1) Dismissal/irrelevancy threshold

The appellant relied on Finlayson v Alban Wine Ltd [2024] CSIH 32 for the proposition that dismissal for irrelevancy is only appropriate where the case is bound to fail even if all averments are proved (para [21]). The Inner House did not dispute that general approach, but emphasised the procedural setting: the compensation minute was “in the nature of a summary application” that can be disposed of summarily, with the court entitled to consider material beyond pleadings, including the chronology (para [34]).

2) Interest as compensation / being “kept out of money”

The appellant invoked Carmichael v Caledonian Railway Co (No 2) (1870) 8 M (HL) 119 and Farstad Supply AS v Envirico Ltd [2011] CSOH 153, 2012 SLT 348 (upheld [2013] CSIH 9, 2013 SC 302) to support the idea that being deprived of funds can be compensated by interest (para [22]).

The court distinguished the statutory context. It doubted judicial interest at 8% was an appropriate proxy for investment loss and noted that if the AFO was properly granted, the appellant was not “wrongfully” kept out of funds in the sense that would normally underwrite judicial interest as a remedial policy (para [35]). The court also flagged that prevailing base rates made 8% an unlikely “reasonable” measure of return (para [35]).

3) The public authority enforcement context: no “periculo petentis”

The respondent and interveners relied upon the principle articulated in F Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 (para [27], [31], [38]): public bodies acting in the public interest are not in the same position as private litigants seeking interim orders and should not routinely face compensatory liability for proper enforcement action.

The court adopted that frame, holding enforcement officers are not akin to private litigants acting periculo petentis and that compensation should generally not follow where action was honest, reasonable and proper on apparently sound grounds (paras [38]–[39]).

4) “Exceptional circumstances”: ordinary meaning, not a term of art

The court relied on R v Kelly (Edward) [2000] QB 198 to define “exceptional” in its ordinary sense—unusual, out of the ordinary course, not routinely encountered (paras [36]–[37]). It also cited authorities illustrating “exceptional” as signalling a departure from a norm:

R v Offen [2001] 1 WLR 253
R(O) v Crown Court at Harrow [2003] EWHC 868 (Admin), [2003] 1 WLR 2756
MF (Nigeria) v Secretary of State for the Home Department [2013] EWCA Civ 1192, [2014] 1 WLR 544

5) Rejecting the “broad view” from the confiscation postponement jurisprudence

The appellant argued that the broad approach to “exceptional circumstances” in confiscation timing provisions should apply by analogy, relying on R v Haden [2024] EWCA Crim 344 and R v Soneji [2006] 1 AC 340 (para [23]). The Inner House rejected that analogy: the “exceptional circumstances” in s 14(4) POCA serves a very different statutory purpose (ensuring confiscation is not frustrated by time limits), and that context drove the broad approach in R v Soneji [2006] 1 AC 340 and later cases, including R v Guraj [2016] UKSC 65, [2017] 1 Cr App R(S) 32 (paras [37]–[38]).

By contrast, s 303Z18 is designed so that non-forfeiture does not, without more, yield compensation; compensation is the exception, not the rule (para [37]).

6) Enforcement restraint / chilling effect: costs analogy

The sheriff and the Inner House drew guidance from R (Perinpanathan) v City of Westminster Magistrates Court [2010] EWCA Civ 40, [2010] 1 WLR 1508 (paras [19], [27], [38])—a costs case arising from seizure/detention where forfeiture failed. The core policy point translated: enforcement should not be deterred by routine exposure to compensatory consequences where the authority acted properly on reasonable grounds.

7) Remoteness/third-party acts (not determinative but contextual)

The interveners cited Abbey Forwarding Ltd (in liquidation) v Hone (No 3) [2014] EWCA Civ 711, [2015] Ch 309 as an analogy for remoteness and causation in the freezing-order context (para [33]). The Inner House ultimately did not need to decide the causation/subsection (5) attribution debate, because it disposed of the claim on the “exceptional circumstances” limb (para [45]).

B. Legal Reasoning

1) Procedure: summary disposal and use of the chronology

A significant practical point is the court’s confirmation that a s 303Z18 claim, though brought by minute in the same process, is “in the nature of a summary application” and may be disposed of summarily. The sheriff (and appellate court) may consider not only pleadings but the wider material (notably, the agreed chronology) to determine whether the statutory threshold can be met (para [34]).

2) Two cumulative gates: “loss” and “exceptional circumstances”

The decision underscores that s 303Z18(3) contains two separate cumulative conditions:

loss suffered “as a result of the making of” the AFO; and
the circumstances are exceptional.

Even where loss is arguable (including non-patrimonial loss), the claim fails if exceptionality is not established (paras [35]–[44]).

3) Loss: judicial interest not automatically the measure

The court was sceptical of treating judicial interest at 8% as an appropriate or reasonable proxy for patrimonial loss in this statutory setting (para [35]). Two strands matter:

Specification: the appellant did not specify what investment advice would likely have been, or what return would likely have been achieved. The court indicated it might have allowed amendment to cure specification deficiencies if that had been the only obstacle (para [35]).
Wrongful withholding: the appellant’s “kept out of his money” framing depended on “wrongfulness”. If there were proper grounds for the AFO, “wrongful” withholding is inapt (para [35]).

Importantly, the court diverged from the sheriff by holding that the distress/inconvenience (“solatium”) averments were, in principle, suitable for inquiry under the “loss” limb (para [35]).

4) “Exceptional” means exceptional: a norm of no compensation

The ratio of the case lies in its construction of “exceptional” in s 303Z18(3):

“Exceptional” is an ordinary word: unusual, special, not routinely encountered (R v Kelly (Edward) [2000] QB 198) (para [36]).
The confiscation “permitted period” jurisprudence (R v Haden; R v Soneji; R v Guraj) is context-specific and does not relax the threshold in the compensation setting (para [37]).
Section 303Z18 is structured on the premise that the usual position—where an AFO is made and later no forfeiture occurs—is no compensation absent exceptionality (para [37]).

5) Public interest and the enforcement function: no periculo petentis

The court entrenched a public-law restraint principle: enforcement officers acting in the public interest should generally not face compensation exposure where they acted honestly, reasonably, properly, and on grounds reasonably appearing sound (paras [38]–[39]). This is both:

a functional protection (avoiding deterrence); and
a guide to identifying what would be “exceptional” (something materially outwith proper, reasonable enforcement conduct).

6) Application to the facts: why nothing exceptional was shown

The Inner House emphasised:

Reasonable suspicion at the outset: large credits were unexplained against modest declared income; reasonable grounds existed (para [40]).
No duty to pre-investigate remote history: it was not incumbent on HMRC to trawl much further back to locate potential historic funding links before applying for an AFO; explanation/vouching would be pursued during the investigation, with the account-holder expected to explain sources (para [40]).
Extensions justified: each extension corresponded to ongoing investigation and continuing reasonable suspicion (para [40]).
Delay critique rejected: the chronology showed delays were largely attributable to the appellant/agents’ late and incomplete responses (para [40]).
Mitigation/reasonable steps: if living expenses were an issue, the appellant could have sought exclusions/variation under ss 303Z4–303Z5; his failure to do so reduced the weight of hardship claims in the exceptionality assessment (para [41]).

7) The CRU point: relevance without “accountability”

The court accepted that CRU investigative conduct may be part of the “circumstances” relevant to exceptionality; if the CRU acted improperly, that could potentially contribute to an exceptional-circumstances finding (paras [42]–[43]). However:

the sheriff’s language of HMRC being “accountable” for CRU actings was “not helpful” because the Scottish Ministers are responsible for the CRU (para [45]);
this did not prevent CRU conduct being considered when deciding exceptionality (para [45]); and
on the facts, the CRU criticisms were unjustified (para [43]).

C. Impact

1) A clarified, high bar for s 303Z18 compensation in Scotland

The decision cements that s 303Z18 compensation is not a routine consequence of an AFO followed by non-forfeiture. Claimants must show something truly “out of the ordinary course” in the circumstances, assessed against the norm that proper public enforcement should not be chilled (paras [37]–[39]).

2) Practical pleading implications: loss must be particularised, but exceptionality is decisive

The court signalled willingness (in principle) to allow amendment for specification of patrimonial loss, but the case demonstrates that even a well-specified loss case will fail unless the claimant can plead and prove facts capable of meeting the exceptional-circumstances threshold (paras [35]–[44]).

3) Investigative conduct can matter—without collapsing into vicarious “liability” debates

Future applicants may seek to frame exceptionality by reference to investigative impropriety (including CRU conduct). The court’s approach allows relevance (as “circumstances”) while cautioning against simplistic “accountability” language when different authorities perform different statutory roles (para [45]).

4) Reinforced policy alignment with UK-wide enforcement jurisprudence

By drawing on F Hoffmann-La Roche & Co AG v Secretary of State for Trade and Industry [1975] AC 295 and the cost-restraint logic in R (Perinpanathan) v City of Westminster Magistrates Court [2010] EWCA Civ 40, [2010] 1 WLR 1508, the Inner House positions Scottish practice on POCA compensation as firmly enforcement-protective where reasonable suspicion and proper process are demonstrated (paras [38]–[39]).

4. Complex Concepts Simplified

Account Freezing Order (AFO): a civil order preventing withdrawals/payments from a bank or similar account where there are reasonable grounds to suspect the funds are recoverable property or intended for unlawful conduct (ss 303Z1–303Z3).
Recoverable property / unlawful conduct: property obtained through conduct unlawful under criminal law; recoverable property can be pursued in civil recovery/forfeiture mechanisms even without a criminal conviction (ss 241–242, 304).
Forfeiture (s 303Z14): if satisfied the money is recoverable property or intended for unlawful conduct, the sheriff may order forfeiture while an AFO is in effect.
Compensation (s 303Z18): only available if (i) an AFO was made, (ii) none of the money is forfeited, (iii) the applicant suffered loss as a result of the AFO, and (iv) the circumstances are exceptional; even then, compensation is discretionary.
“Exceptional circumstances”: not “anything that feels unfair”; it means circumstances out of the ordinary course—not routinely encountered—viewed against the statutory norm that properly-made enforcement steps should not usually trigger compensation.
Periculo petentis: “at the pursuer’s risk”; in private interim remedies, the applicant often bears risk of compensating harm if the interim order proves unjustified. The court held public enforcement officers are not in that same position.
Judicial interest: a court-set interest rate often used to compensate for being kept out of money in civil claims; the court doubted its suitability as an automatic measure of “loss” in the AFO compensation context.
Solatium: compensation for non-patrimonial harm (distress, inconvenience); the court accepted such loss could, in principle, be “suitable for inquiry” under the “loss” limb (para [35]).

5. Conclusion

[2026] CSIH 5 establishes a clear Scottish Inner House approach to s 303Z18 POCA:

“Exceptional” carries its ordinary, strict meaning: compensation is the exception, not the norm, even where no forfeiture follows.
The court will protect proper public enforcement from deterrent compensation exposure: where enforcement action was honest, reasonable and proper on apparently sound grounds, compensation will generally not be awarded.
CRU investigative conduct may be relevant to exceptionality, but HMRC is not neatly “accountable” for CRU actings; the correct analysis is relevance to the overall circumstances, not simplistic attribution.

The practical message for future litigants is that s 303Z18 is not a vehicle for routine recompense following the lifting of an AFO; successful claims will require compelling, well-supported facts demonstrating truly unusual circumstances—typically involving identifiable impropriety or dysfunction beyond the ordinary burdens of being investigated.