Speed Read: The recent decision of R v Neuberg serves to further entrench the distinction between the two classes of offences for determining benefit under the confiscation regime. Natasha Reurts provides an overview of the decision and assess the implications for corporate and financial crime cases that follow.

Case Summary

Background

The appeal concerns a confiscation order made against the appellant (Ms Karen Neuberg) in April 2006 in the sum of £100,000. An initial appeal was dismissed by Elias J in 2007 and a subsequent appeal referred by the Criminal Cases Review Commission (CCRC) pursuant to powers under the Criminal Appeal Act 1995 on the basis that there had been a change in the law.

The family of the appellant’s husband operated a light metals business which traded under the name ‘Neuberg Metal Spinners’. In 1998, Neuberg Metal Spinners went into liquidation but continued to operate through a new business called Watergate Services Limited (Watergate). The appellant’s husband was the sole director and company secretary of Watergate. In 2000, he was declared bankrupt but continued to run Watergate and manufacture light metal products under the name of Nueberg Metal Spinners. Watergate ceased trading in early 2001 and was eventually wound up in late 2001. In the intervening periods, the appellant began to trade as Neuberg Metal Spinners. Ms Nueberg continued to trade under this name until Watergate went into liquidation on 19 November 2001. It was unlawful for the appellant to use the ‘Neuberg Metal Spinners’ trading name after Watergate went into liquidation and she had been warned of this prohibition. The appellant continued to trade under the name until 14 June 2002.

The appellant was charged with trading under a prohibited style for the period between 19 November 2001 and 14 June 2002, without leave of a court, contrary to s.216 of the Insolvency Act 1986. She pleaded guilty in November 2004 and confiscation proceeding were commenced in 2005-2006.

It was common ground that the turnover in respect of the prohibited trading period amounted to £288,948. In April 2006, his Honour Judge Ross made a formal order for confiscation in the amount of £100,000, the sum representing the realisable assets. In calculating this final sum, Judge Ross determined that the offence was a continuing offence through the designated period and there was, therefore, a benefit. His Honour determined that although the business was lawful it was conducted through an “unlawful vehicle”. In determining the benefit, his Honour looked at the turnover, as opposed to the net profit, and found that although the effect of such a determination may be draconian, it was nonetheless “justified”.[i] In 2007, the appellant appealed. Three arguments were presented. First, that the judge was wrong to conclude that the appellant had obtained a benefit within the meaning of s.71(4) of the Criminal Justice Act 1998 (as amended by POCA).[ii] Second, that the net profit as opposed to the turnover should have been considered when calculating the benefit. And third, that the penalty was disproportionate as regards the European Convention on Human Rights.

Elias J (as he then was) dismissed the appeal on all three grounds. As regards the first ground of appeal, his Honour noted that the primary judge was entitled to conclude that the appellant had obtained a benefit within the meaning of s.71(4). The court confirmed the primary judge’s finding that the appellant’s use of a prohibited name enabled her to successfully trade as without its use she would not have been able to benefit from the goodwill attached to ‘Neuberg Metal Spinners’. Moreover, Elias J had regard to the numerous warnings the appellant received indicating that use of the trading name would be prohibited. In relation to the second ground of appeal, Elias J – relying on a number of authorities, held that the primary judge was entitled to adopt an approach that looked at the turnover instead of the net profits. As regards the third ground, the court considered that the principle of proportionality did not apply and even if it did apply, the facts of the case fell outside of the principle. The appellant was ordered to pay the confiscation order sum of £100,000.

Following the Supreme Court decision in R v Waya,[iii] the appellant reapplied to the CCRC on the grounds that the confiscation order was disproportionate, relying on the principles enunciated by Lord Walker and Sir Anthony Hughes.[iv] The CCRC referred the matter to the Court of Appeal, based on a new interpretation, contained in R v McDowell and Singh[v], that the use of a prohibited company name by a person contrary to s.216 of the Insolvency Act 1986 is a regulatory offence from which no benefit could be obtained by the appellant. Two other referral grounds were also referred to. Specifically, even if the appellant had obtained a benefit, it would be appropriate to assess the benefit by examining the pecuniary advantage the appellant obtained from using a prohibited business name, rather than turnover. Finally, the CCRC considered that the appellant could sustain an injustice should her confiscation remain in light of the fact that counsel for the appellant had raised the aforementioned referral grounds in previous appeal arguments.

Court of Appeal Decision

Was a benefit obtained?

As a result of the decisions in R v McDowell and Singh and R v Sumal & Sons (Properties) Ltd [vi] the appellant contended that the initial appeal was wrongly decided. The appellant, and indeed the CRCC, stated that the conclusion that the offences in Sumal & Sons (letting properties without a license) and McDowell and Singh (selling scrap metal without proper license/registration) did not constitute conduct which ultimately results in the offender obtaining an advantage capable of being the subject of a confiscation order should also hold true in the present case. Essential to the appellant’s contention was the important “critical question” raised by the Court in McDowell and Singh as follows:

“…We respectfully agree with the conclusion of the court in Sumal that the question whether benefit has been obtained from criminal conduct must first depend on an analysis of the terms of the statute that creates the offence and, by that means, upon an identification of the criminal conduct admitted or proved. In may be that, as in Sumal, the wider statutory context of the offence will assist to answer the critical question: what is the conduct made criminal by statute – is it the activity itself or is it the failure to register, or obtain a licence for, the activity? In our judgment, there is a narrow but critical distinction to be made between an offence that prohibits and makes criminal the very activity admitted by the offender or proved against him (as in del Basso) and an offence comprised in the failure to obtain a licence to carry out an activity otherwise lawful (as in Sumal)” [vii] (Emphasis added)

To resolve this critical question, the Court of Appeal also turned to examine subsequent cases, namely Palmer. [viii]

Writing the judgment of the Court, Lord Thomas CJ held that the court was correct to hold that the criminal activity was the carrying on of business utilising a prohibited trading name and it was such criminal activity that gave the appellant a “significant benefit.”[ix] Lord Thomas CJ, on this issue, concluded by stating – “it is clear that the appellant carried on the business under a prohibited name and it was the carrying on of that business under that name that gave her a significant benefit.”[x] Upon this single determination, the appeal failed in its entirety.

However, as regards the two remaining appeal points, Lord Thomas CJ also found against the appellant. In relation to the question of ‘what was the benefit received?’ (i.e turnover or net profits), Lord Thomas CJ held that upon an ordinary interpretation of s.71(4), the benefit received by the appellant trading under a prohibited name was the turnover accrued during the defined period.

The third appeal point called for a determination as to whether the confiscation order was proportionate. In effect, the appellant contended that the determination of benefit should be limited by proportionality. As the Supreme Court determined in Waya, there may be circumstances where a court has – following the making of a confiscation order – determined whether the confiscation order is indeed proportionate. Lord Thomas CJ engaged in an analysis of the trading accounts of the appellant’s company and determined that the confiscation order amount of £100,000 was not disproportionate.[xi]

In the context of conviction-based confiscation, recent case law demonstrates the importance of accurately identifying the precise nature of the criminal conduct which has been committed before any attempt is made to determine what the benefit or advantage may have flowed from it. It is important to bear in mind when considering such cases is s.340(3) of POCA 2002 which defines criminal property as property which constitutes a person’s benefit from criminal conduct or represents such a benefit (in whole or in part, and whether directly or indirectly.) The distinctive and interesting question posed by these cases asks; what is the criminal property where a lawful activity is performed unlawfully? What is the criminal conduct?

Palmer concerned a defendant who operated a security business, ‘Lock Up Security Ltd’, without the appropriate licence. Mr Palmer was convicted of undertaking activities which required a license and was given a suspended sentence. Following McDowell and Singh, the judge initially refused to make a confiscation order. The basis for the refusal was that the conduct was not criminal conduct, but only became criminal conduct by virtue of the failure to obtain a license. The prosecution lodged an appeal arguing that the failure to obtain a license was analogous to the facts in McDowell (unlicensed arms trader) as opposed to Singh (an unregistered/licensed metal dealer). Lord Justice Simon in the Court of Appeal in allowing the appeal on the basis of an apparent distinction between Singh and the facts in Palmer stated:

“we see no reason in principle why it should a difference whether an activity is unlawful by reason of a statutory prohibition except in a case of persons who have been granted a licence (on the one hand), or whether an activity which is otherwise lawful is prohibited by statute unless one has a licence (on the other). The result is the same: the activity is prohibited and the conduct is therefore ‘criminal conduct’.”[xii]

Some commentators may miss the more normative implications of the Neuberg decision. The entrenching of the distinction between the two classes of offence for determining ‘benefit’ in the confiscation regime has a worrying ramification for corporates and financial crime cases as the way in which the ability to perform otherwise lawful commercial activities is coming under increasing regulatory control, backed up by criminal sanction. The appellant in this case, on one interpretation, is not a conventional criminal but rather an individual who has failed (in a regulatory sense) to trade in a non-prohibited manner and for which she has been adequate punished – the appellant having been sentenced on 28 January 2005 to a Community Prevention Order of 80 hours work and from holding a company directorship for five years.[xiii] The entrenching of Palmer by the Court of Appeal in Neuberg serves to enable zealous prosecuting authorities to exploit legislative prohibitions in order to pursue confiscation orders in an arguably disproportionate way. At its simplest, we can question whether Simon LJ’s view in Palmer is correct and thus, whether the Lord Chief Justice has missed an opportunity, in Neuberg, to right a jurisprudential ‘wrong’.