In re Smith: Making a Proprietary Claim to Trump a Confiscation Order

The ongoing Dr Gerald Smith saga continues as the Serious Fraud Office (“SFO”), through enforcement receivers, continues to attempt to enforce a confiscation order made 16 years ago. This has led to a series of proprietary claims by various parties as against assets which the enforcement receivers say are part of the realisable property.

As recently as last week, enforcement receivers successfully sought from Mr Justice Foxton a declaration that a house in Ascot, legally owned by Dr Smith was also beneficially owned by him. The executor of Dr Smith’s late mother’s estate, his brother Anthony, supported by evidence from Dr Smith and his ex-wife Dr Gail Cochrane, argued that the estate was beneficially held not by Dr Smith but by his late mother. Thus, argued the Smith parties, the asset was beyond the reach of the enforcement receivers. The Smith parties’ evidence was rejected (Milson & Standish (Enforcement Receivers) v. Smith [2023] EWHC 255 (Comm)). This stems from a series of hearings in which proprietary interest in assets has had to be assessed by the court.

On 30 November 2022, Foxton J handed down a judgment relating to numerous competing interests in Dr Smith’s assets (EWHC 3053 (Comm)) (“the November 2022 judgment”). The judgment largely relates to the construction of a trust and questions as to its administration.The judgment follows that in SFO & Anr v Litigation Capital Ltd & 46 Ors (In re Gerald Martin Smith [2021] EWHC 1272 (Comm) handed down on 18 May 2021 (“the May 2021 judgment”). The May 2021 judgment was upheld by the Court of Appeal in January of this year on the point appealed but was otherwise not appealed ([2023] EWCA Civ 36).

Dr Smith was the CEO of a property portfolio which included numerous Thistle hotels. Dr Smith had already served a two-year sentence of imprisonment for theft from a company pension fund. In 2006 he was sentenced to an 8-year term of imprisonment for theft of a further £35 million from Izodia plc. On 13 November 2007, the SFO obtained the confiscation order against Dr Smith in the sum of £40,856,911, to be paid within 12 months. Enforcement receivers were appointed in 2008 to enforce the confiscation order against Dr Smith’s realisable property.

To this date, the confiscation order has not been satisfied and ongoing High Court litigation has resulted from various assets being tied up, and as the SFO/enforcement receivers would invariably argue, hidden, in complex onshore and offshore trust structures and through proxy persons, or “nominees” who have claimed to have had a competing proprietary interest.

The May 2021 judgment

By way of background, a seven-week trial was heard before Foxton J in early 2021 giving rise to the May 2021 judgment. The judgment is complex and detailed. Essentially, Foxton J was required to ascertain whether various parties had a proprietary interest in the following assets (referred to in the judgment as “the Relevant Property”):

  1. Shares in 18 BVI and Manx companies transferred into the ownership of a Marshall Islands Company called SMA Investment Holdings Ltd (“SMA”);
  2. Shares in 27 Marshall Islands, Manx, Canadian, Dutch, Jersey and English companies created by entities alleged to be associated with Dr Smith;
  3. Four properties in Jersey;
  4. A collection of “Identified Underlying Assets” comprising various properties, the proceeds of properties, the benefit of a loan and jewellery; and
  5. The sum of £2 million paid into the account of Stewarts Law.

The confiscation order

The outstanding amount to satisfy the confiscation order, was, at the date of the May 2021 judgment, £72 million. The issue whether the various claimants did indeed hold a proprietary interest in the Relevant Property was an important one to the enforcement receivers who would, if the claims were valid, therefore not be able to realise such property to satisfy the confiscation order. In CPS v Aquila Advisory Ltd  [2021] UKSC 49, the Supreme Court confirmed that existing confiscation orders would not be prioritised in favour of constructive trusts. In that case, the directors of a company later acquired by Aquila breached their fiduciary duty and secured a £4 million profit. Aquila brought a claim to secure its proprietary interest arguing it held a constructive trust over the profit. The actions of the directors were not attributed to the company and a constructive trust arose automatically the moment the directors received the profit.

Foxton J set out the relevant law relating to the confiscation order and competing priority interests.

The confiscation order was made against Dr Smith under Part VI of the Criminal Justice Act 1988 (“CJA”). The amount of a confiscation order can be recovered from the defendant’s “realisable property”. Realisable property, under the CJA, is:

  1. any property held by the defendant (s.74(1)(a), 102(1) and 102(7)); and
  2. any property held by a person to whom the defendant has “directly or indirectly made a gift” (s.71(1)(b)).

“Property” includes “money and all other property, real or personal, heritable or moveable, including things in action and other intangible or incorporeal property” (s.102(1)). Property is “held” by a person “if he holds any interest in it”, which includes a “right” (s.102(1) and (7)). Property “is transferred by one person to another if the first person transfers or grants the other any interest in the property” (s.102(10)).

For the purposes of s.71(1)(b), the gift must have been made after the commission of the relevant offence (s.74(10)(a)) and the court must consider it “appropriate in all the circumstances to take the gift into account” (s.74(10)(b)). A gift includes a transfer “to another person directly or indirectly for a consideration the value of which is significantly less than the value of the consideration provided by the defendants” (s.74(12)).

As Foxton J correctly identified, as far as priority is concerned, the rights of the enforcement receivers rank after those with proprietary interests acquired otherwise than by gift. Section 82(4) of the CJA provides that the powers of the court shall be exercised “with a view to allowing any person other than the defendant or the recipient of a gift to retain or recover the value of any property held by him.”

Foxton J also noted that in an earlier hearing in this case[1] Popplewell J observed that “the legislative steer in section 82 of the … Act requires the Court to give priority to the property rights of innocent third parties, in priority to those of the prosecutor, in seeking to enforce the confiscation order”. Subject to that provision, the powers are to be exercised “with a view to making available for satisfying the confiscation order … the value for the time being of realisable property” (s.82(2)).

The SFO relied on the case SFO v Lexi Holdings Plc [2009] QB 376 in which the Court of Appeal rejected the argument that a restraint order should be varied to allow the property to be used to meet the claims of unsecured creditors. At [86], the Court noted:

“It will be seen that, when the court decides on the amount to be specified in the confiscation order, it has to use the total of the values of the property the defendant holds, less only ‘priority’ obligations, such as fines and preferential debts. The existence of obligations owed to ordinary third party creditors is to be disregarded when a confiscation order is made. It seems to this court that it would have been wholly illogical for the legislature to have decided to allow third party debts to be paid during the period when assets are supposedly being preserved by a restraint order when such debts are to be left out of account at the stage when the confiscation order is made. We can see no reason why Parliament should have decided to allow unsecured creditors to reduce the assets during the restraint phase when such creditors could not reduce the assets at the confiscation stage. If that were the position, it would put a premium on well-advised creditors getting in quickly during the restraint phase before their opportunity is lost, and we do not accept that that situation is one which was ever intended”.

Foxton J also referred to Popplewell LJ in R v Luckhurst [2020] EWCA Crim 1579 in which he said at paragraph 25 (referring to sections of the Proceeds of Crime Act 2002) (emphasis added):

A confiscation order is not proprietary in nature. It does not confer a proprietary interest in any property. It is for a specified sum and may be enforced against any realisable property whether or not the latter constitutes the proceeds of crime. Nor, however, is it the same as a personal debt or money judgment. It ranks ahead of other unsecured creditors in a number of ways. Section 69(2)(c) provides that all the relevant powers, which include those of enforcement, must be exercised without regard to obligations to unsecured creditors. Sections 417 and 418 of the Act exclude property which is the subject matter of a restraint order or otherwise recoverable in confiscation proceedings from the estate of a bankrupt, and so such assets are unavailable for distribution to unsecured creditors of a bankrupt; and there are equivalent provisions in relation to the assets of a corporate defendant in liquidation in s.426 of the Act. In calculating the ‘available amount’ under s.9, there is no reduction in the calculation of the value of the defendant’s assets to take account of debts to unsecured creditors. Moreover s.58 provides that once a restraint order in support of a future confiscation order is in place, no distress may be levied against realisable property, nor may any tenancy of premises be forfeited without the court’s consent, and courts may stay any other proceedings in respect of any property which is the subject of the restraint order. In these ways the debt constituted by a confiscation order is afforded priority over those owed to unsecured creditors generally”.

The Outcome in a Nutshell

Foxton J was required thereafter to make an assessment of the various claims to proprietary interest over the Relevant Property. As Foxton J rehearsed, an enforcement authority’s rights in seeking to enforce a confiscation order rank after those with proprietary interests acquired otherwise than by gift. Priority is given to the proprietary rights of innocent third parties. He had to consider whether the apparent owner of the Relevant Property in fact held it as a nominee.

Foxton J said at paragraph 604: “In the context under consideration, a nominee is someone who owns property, but holds it on a bare trust for the principal absolutely, effectively dealing with the property as the principal directs, including conveying it to the principal so as to terminate the trust: see Lewin, 1-028. Whether property is held by someone in the capacity of a nominee is essentially a question of fact.” Quoting Lord Sumption in Prest v Petrodel Resources Ltd [2013] UKSC 34 at paragraph 52:

“… But I venture to suggest, however tentatively, that in the case of the matrimonial home, the facts are quite likely to justify the inference that the property was held on trust for a spouse who owned and controlled the company. In many, perhaps most cases, the occupation of the company’s property as the matrimonial home of its controller will not be easily justified in the company’s interest, especially if it is gratuitous. The intention will normally be that the spouse in control of the company intends to retain a degree of control over the matrimonial home which is not consistent with the company’s beneficial ownership. Of course, structures can be devised which give a different impression, and some of them will be entirely genuine. But where, say, the terms of acquisition and occupation of the matrimonial home are arranged between the husband in his personal capacity and the husband in his capacity as the sole effective agent of the company (or someone else acting at his direction), judges exercising family jurisdiction are entitled to be sceptical about whether the terms of occupation are really what they are said to be, or are simply a sham to conceal the reality of the husband’s beneficial ownership.”

Thus Foxton J considered which matters would support the conclusion that the apparent owner of the Relevant Property was in fact simply a nominee and therefore held on a bare trust (that is, that Dr Smith retained beneficial ownership and thus there is no proprietary interest arising which takes priority over the confiscation order):

  • whether someone other than the alleged nominee exercises control over the asset (Phoenix v Cochrane [2017] EWHC (Comm), [17(5)]);
  • whether the apparent owner uses or allows the asset to be used in a manner which advances someone else’s interests rather than its own (Prest, [52]) ;
  • who paid for the asset, which may support a conclusion that it is held on constructive trust (Lewin on Trusts (20th) 10-019); and
  • whether the person alleged to be the “real” owner had a motive to disguise his or her ownership (JSC BTA Bank v Solodchenko & Ors [2015] EWHC 3680, [8]).

Of Dr Smith’s incentive, Foxton J said at paragraph 606(v):

The confiscation order made against Dr Smith gave him every incentive to hide his ownership of assets behind a nominee owner who he could trust to follow his directions. It is clear that Dr Smith has acted at all times since the confiscation order was made with a view to making it appear as if he has no assets – for example his Deed of Separation with Dr Cochrane of 11 March 2014 sought to give Dr Smith all the benefits of certain properties, while transferring no property for the SFO to attach.”

The November 2022 judgment

In the November 2022 judgment Foxton J was required to deal with a number of claims which came before him arising from the May 2021 judgment.

By way of background to the issues which arose in this case and referring again to the facts set out in the May 2021 judgment, Dr Smith and a man named Andrew Ruhan, described by Foxton J alongside Dr Smith as being “two entrepreneurs who  amply merit the traditional epithet of colourful” were engaged in significant litigation. Dr Smith had business dealings with Mr Ruhan who was accused of breaching his fiduciary duty in relation to a company called Hotel Portfolio II UK. This gave rise to litigation in 2012 referred to as the Orb claim or the Orb litigation (the claim was brought by two individuals and a Jersey company, Orb a.r.l, a company which held Dr Smith’s property). Harbour Fund II LLP (“Harbour”) provided over £5 million of funding to the claimants in the proceedings against Mr Ruhan. What was said of the Orb litigation by Foxton J was: “It is right to note that acting for the Orb Claimants in the 2012 Proceedings would have presented a challenge for any legal team, not least because of the dominant role which Dr Smith played in formulating strategy and in opening parallel fronts of attack…”

The November 2022 judgment arises from a dispute from a trust (the Harbour Trust) created in connection with providing litigation funding by Harbour under a contract called Harbour IA, for proceedings which ultimately settled on terms involving the transfer of various rights and assets (“the settlement”). The November 2022 judgment was required to deal with the following applications:

  • A claim by Messrs Thomas and Taylor and Mr Rupert Ticehurst (they were two claimants in the 2012 Orb proceedings. They advanced a proprietary interest through the Harbour Trust as set out in the May 2021 judgment) to confirm their status, rights and powers as alleged trustees of the Harbour Trust;
  •  An application by some parties to the settlement to appoint receivers over certain assets beneficially owned by the Harbour Trust and by companies under the management of joint liquidators;
  • A claim by some settlement parties seeking relief in the form of the transfer of shares in some companies to new trustees to be appointed to the Harbour Trust; and
  • An application by Messrs Thomas and Taylor seeking to appoint certain receivers over assets alleged to fall within the Harbour Trust.

Essentially, it was all to do with the nature of the Harbour Trust and how it was being administered. Foxton J was required to assess the nature of the Harbour Trust and whether the appointment of Mr Ticehurst was undertaken by Mr Thomas and Mr Taylor for an improper purpose. Of note, he said the circumstances (as set out by him) “raise a strong prima facie case that Mr Thomas with Mr Taylor’s support has been co-operating with parties whose interests would at least appear to be directly opposed to those of the beneficiaries under the Harbour Trust, with Mr Thomas’ actions being funded by those parties. The funding entities are closely connected to individuals against whom prior findings of dishonesty have been made (and in the case of Dr Smith, someone who has twice been convicted and imprisoned for fraud).” He also said: “there is also a strong prima facie case that the various actions undertaken by Mr Thomas with the benefit of that funding, including the appointment of Mr Ticehurst, were undertaken at the direction of or at least to serve the interests of those funders. The failure to follow good practice and consult Harbour and Orb before exercising the power of appointment also supports that inference.”

This was important for the enforcement receivers because on 21 June 2021 they asked LCL (a company found to be ultimately beneficially owned by Dr Smith, his brother Anthony, who featured in the February 2023 litigation, holding shares as nominee on his behalf – see the May 2021 judgment at paragraphs 498  and 610) to transfer the shares in SMA (as stated one of the assets subject forming part of the Relevant Property) to them. LCL refused to do so, relying on certain proceedings. On 9 August 2021, LCL purported to appoint a company called BKV Limited (“BKV”) as director of SMA. An individual called Mr Atik Miah was held out as the principal of BKV. Mr Miah is a known associate of Messrs Cooper and McNally (who had brought these proceedings against LCL). Foxton J said this strongly suggested that Dr Smith (through LCL) and Messrs Cooper and McNally (through BKV) were cooperating in attempts to prevent the enforcement receivers from gaining control of SMA on behalf of the Harbour Trust.

The cases demonstrate the ongoing difficulties in assessing interests in property for the purposes of satisfying a confiscation order. Where there is a proprietary claim, numerous factors are taken into account to identify if a valid proprietary interest exists or whether the arrangement is, in effect, a sham designed to hide the true ownership of the asset in question. Some arrangement are, often deliberately, opaque and complex. Thus anyone seeking to enforce a confiscation order may have a more difficult job than realised. However, the ongoing case of Dr Smith also lays warning to those seeking to hide behind complex trust structures to avoid assets being realised. The courts will look at what is said to be a proprietary interest where there is an incentive to hide assets behind a nominee.

Drafted by Mai Holdom

[1] [2017] EWHC 3332 (Comm) at paragraph 31