Factual and Procedural Background
This judgment concerns an application by the first, third, and fourth defendants ("the Applicants") under section 252 of the Proceeds of Crime Act 2002 ("POCA 2002") for further exclusions from an interim receiving order made on 27 July 2005. The exclusions sought would enable the Applicants to meet legal expenses in defending civil recovery proceedings brought by the Serious Organised Crime Agency ("SOCA").
SOCA seeks a civil recovery order over approximately US $2.4 million ("the Turkish money") remitted to the UK from Turkey in 1999, alleging it was obtained by unlawful conduct, principally drug trafficking. The money was held in a client account of a small solicitors' firm, and with assistance from the first defendant (a partner in that firm), an offshore trust structure (the Heritage Investment Trust) was established to hold the funds. The trust held shares in a British Virgin Islands company (Countess BVI), which lent money to another offshore company to purchase land in Wales (the Tredegar land). The land was later transferred to an English company (Countess UK), which is also a defendant.
The Applicants, including the first defendant as trustee, have been defending SOCA's claim that the trust assets, including proceeds from the Tredegar land, are recoverable property. The proceedings also included a separate mortgage fraud claim against the first defendant in his personal capacity and others, which was settled by consent in January 2008, resulting in some properties being vested in the trustee and others released from the interim receiving order, including the matrimonial home ("Ashford House").
Several exclusion orders have previously been made to allow the Applicants to meet legal costs, totaling £98,700 plus VAT after credits. The action is set for hearing in May 2009. SOCA has made applications for summary judgment and to set aside existing exclusion orders, the latter to be heard after this application.
Legal Issues Presented
- Whether the Applicants have available assets not subject to the interim receiving order from which they can meet their legal costs.
- Whether the Applicants, particularly the first defendant as trustee, are entitled to further exclusion orders to cover legal expenses under section 252 of POCA 2002 and related regulations.
- The application of trust law principles to the position of the first defendant as trustee in the context of exclusion orders for legal costs.
- The proper exercise of the court’s discretion balancing the desirability of legal representation against the need to protect recoverable property.
Arguments of the Parties
The opinion does not contain a detailed account of the parties' legal arguments.
Table of Precedents Cited
| Precedent |
Rule or Principle Cited For |
Application by the Court |
| Director of the Assets Recovery Agency v Creaven [2005] EWHC 2726 (Admin), [2006] 1 WLR 622 |
Use of freezing orders under ordinary jurisdiction to circumvent inability to fund legal costs under POCA 2002 pre-amendment |
Referenced in context of legislative amendment permitting exclusions for legal expenses under POCA 2002 |
| Re Grimthorpe, deceased [1958] Ch 615 |
Trustees' entitlement to indemnity from trust property for properly incurred costs including litigation |
Applied to explain general principles of trustees’ rights to costs and limits thereof |
| Tudball v Medlicott (1888) 59 LT 370 |
Trustees are not bound to bring or defend actions at their own expense where no trust funds are available |
Applied to confirm trustees’ rights regarding funding litigation |
| In re Dallaway, deceased [1982] 1 WLR 756 |
Court’s discretion to authorize trustees to defend actions and recover costs out of trust fund, win or lose |
Considered in relation to discretionary costs orders for trustees |
| In re Evans, deceased [1986] 1 WLR 101 |
Discretionary nature of costs orders in trust litigation |
Used to emphasize court’s discretion in costs orders for trustees |
| McDonald v Horn [1995] 1 All ER 961 |
Pre-emptive orders for payment of costs out of trust fund should only be made if trial judge would order such costs |
Applied to caution against premature costs orders fettering trial judge’s discretion |
Court's Reasoning and Analysis
The court first outlined the statutory exclusion order regime under section 252 of POCA 2002 and the accompanying 2005 Regulations and Practice Direction, emphasizing the balancing exercise between enabling legal representation and protecting the recoverable property.
The court examined the Applicants’ statements of assets and found them inadequate and insufficiently particularized. The first defendant’s statement lacked supporting documentation and understated the value of significant assets, notably the matrimonial home, Ashford House.
SOCA’s evidence, including valuations from qualified surveyors and estate agents, demonstrated that Ashford House’s market value was significantly higher than the Applicants’ estimate. The court preferred SOCA’s valuations, concluding the property was worth approximately £3 million (±£250,000), with equity available to the first defendant given the mortgage secured against it.
The court found that the first defendant could reasonably be expected to raise funds against his beneficial interest in Ashford House to meet legal costs. Additional assets, including chattels, properties purchased by the first defendant’s wife, and shares in property companies, were also considered likely to be beneficially owned or partially owned by the first defendant, further indicating available resources.
On trust law principles, the court acknowledged that trustees are generally entitled to be indemnified out of trust property for reasonable legal costs but are not required to litigate at their own expense if trust funds are unavailable. However, the exclusion order regime under POCA 2002 is exhaustive and does not provide special exceptions for trustees. Thus, the court must consider the trustee’s personal assets when deciding on exclusions.
The court noted that the trust in question was shadowy, with no proper administration or trust accounts, and the sole named beneficiary had disappeared. There was a strong prima facie case that the trust arrangement was a sham, and the first defendant held the property effectively as a nominee. This undermined any argument for excluding personal assets from consideration.
In balancing the statutory requirements, case law, and the facts, the court concluded that the Applicants have substantial available assets and that making further exclusion orders would not be appropriate.
Holding and Implications
The court DISMISSED the application for further exclusion orders.
The direct effect is that the Applicants, including the first defendant as trustee, are not entitled to further exclusions from the interim receiving order to cover legal expenses. The first defendant is expected to meet legal costs from available assets, notably his beneficial interest in Ashford House and other property interests. No new legal precedent was established; the decision applies existing statutory and trust law principles to the facts of this case.