Factual and Procedural Background
This appeal was brought by the Crown Prosecution Service (CPS) with permission against orders made by a High Court judge in the Administrative Court on 26 March 2002. The orders refused to impose a restraint order and to appoint a receiver over the assets of a company ("the company") pursuant to the Drug Trafficking Act 1994 ("the Act").
The company was incorporated in 1993 by the first respondent ("Mr Compton"), who was its sole director, with his wife ("Mrs Compton") as company secretary. Both were also shareholders. Mr Compton pleaded guilty in January 2001 to drug trafficking offences and was sentenced to seven years' imprisonment. Both Mr and Mrs Compton were adjudicated bankrupt in 2000, with a trustee in bankruptcy appointed.
The company initially traded in domestic furniture and antiques but became insolvent by 1995. From late 1996, the company's financial position improved dramatically, including the purchase of properties and large cash deposits into its accounts. Several members of Mr and Mrs Compton's family were convicted of drug trafficking and money laundering offences.
The High Court judge refused the CPS's applications for restraint and receivership orders against the company for two reasons: insufficient evidence to treat the company's assets as belonging to Mr Compton, and a statutory bar under section 32(2) of the Act because of Mr Compton's bankruptcy. The judge did, however, make a restraint order against Mr Compton personally and imposed restrictions on the trustee in bankruptcy regarding disposition of assets.
Subsequently, a Crown Court judge made confiscation orders against Mr Compton and others, concluding after detailed evidence that the company's corporate veil should be pierced to treat the company's assets as belonging to Mr Compton. The CPS appealed the High Court's refusal, but the appeal became moot following the confiscation order.
Legal Issues Presented
- Whether the High Court judge erred in requiring a higher threshold than a prima facie case to exercise powers under section 26 of the Drug Trafficking Act 1994 to make restraint and receivership orders against the company.
- Whether the company's corporate veil could be pierced to treat its assets as the realisable property of Mr Compton for the purposes of confiscation.
- The effect of section 32(2) of the Drug Trafficking Act 1994 on the making of restraint and receivership orders where the defendant is bankrupt.
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 |
| Re Peters [1988] QB 871 |
Clarification of the court's power to make or vary restraint orders, analogous to Mareva injunctions, balancing preservation of assets and defendant's interests. |
Cited to explain the balancing exercise in exercising section 26 powers and the concept of a "Drugs Act Mareva". |
| Hughes v Customs & Excise Commissioners [2002] 4 All ER 633 |
Need for careful weighing of competing interests when making restraint and receivership orders, considering potential harm to innocent parties. |
Used to emphasize the court's duty to balance safeguarding assets against the risk of unjust harm to defendants. |
| In re H and Others (Restraint Order) [1996] 2 All ER 391 |
Authority for piercing the corporate veil where a company is used as a façade to conceal criminal activities, allowing assets to be treated as defendant's property. |
Applied as the leading authority supporting the piercing of the corporate veil in cases of money laundering through corporate structures. |
| Trustor AB v Smallbone & Others (No 2) 2001 1 WLR 1177 |
Engagement in money laundering by itself does not justify piercing the corporate veil without a link to the company's structure used to avoid or conceal liability. |
Considered by the High Court judge to limit piercing the veil, but ultimately the Court of Appeal preferred a broader approach. |
| In re Norris [2001] 1 WLR 1388 |
Procedure for contesting confiscation orders and related property issues in the High Court. |
Referenced to explain the procedural context for any future disputes about property ownership following confiscation orders. |
| The Tjaskemolen [1997] 2 Lloyd's Rep 465 |
Observation that the concept of piercing the corporate veil is not consistently defined and may vary in meaning. |
Used to highlight the complexity and variability of the doctrine in different legal contexts. |
Court's Reasoning and Analysis
The Court of Appeal analysed the High Court judge's approach to the exercise of section 26 powers under the Drug Trafficking Act 1994, concluding that the judge applied too high a threshold by requiring more than a good arguable (prima facie) case before making restraint and receivership orders. The court emphasised that the test for such interim orders should align with the principles applicable to Mareva injunctions, allowing orders to be made when a good arguable case exists that assets are realisable property of the defendant.
On piercing the corporate veil, the court acknowledged the difficulty and complexity of the doctrine but preferred the conclusion reached by the Crown Court judge after full evidence. The Crown Court found that the company had effectively become a vehicle for money laundering and that the veil should be pierced to treat the company's assets as belonging to Mr Compton. This approach was consistent with established authority that where a company is used as a façade or device to conceal criminality, the court may lift the veil to prevent evasion of liability.
The Court of Appeal also considered the statutory bar under section 32(2) of the Act, which prevents the exercise of certain powers over property comprising a bankrupt's estate. This statutory provision meant that even if the company was a sham, the High Court judge could not have made the orders sought because Mr Compton's bankruptcy took priority. The CPS no longer challenged this point.
Given the subsequent confiscation order made by the Crown Court after detailed evidence and the statutory bar, the appeal was deemed moot. However, the court took the opportunity to clarify the legal principles involved, especially regarding the appropriate threshold for exercising section 26 powers and the circumstances in which the corporate veil may be pierced in money laundering cases.
Holding and Implications
The Court of Appeal DISMISSED the CPS's appeal as moot, given the subsequent confiscation order and statutory bar to the relief sought.
The direct effect is that the orders refusing restraint and receivership over the company’s assets stand, but the confiscation order made by the Crown Court remains in force. The court clarified that the appropriate test for interim restraint and receivership orders under section 26 is the existence of a good arguable case, similar to Mareva injunction principles, rather than a requirement that the case be proven on a prima facie basis or higher.
Further, the court endorsed the principle that where a company is used as a façade for criminal activities such as money laundering, courts may pierce the corporate veil to treat the company’s assets as those of the individual behind the company, ensuring the effectiveness of confiscation proceedings.
No new precedent was established beyond reaffirming existing principles and clarifying their application in this statutory context.