Restraint orders in criminal proceedings look much like civil freezing injunctions. But in the recent case of The Serious Fraud Office v. Lexi Holdings plc, the Court of Appeal decided that there is a significant difference between them. For, save in exceptional circumstances, the court will not vary a criminal restraint order to allow payment of bona fide debts owed by the defendant to unsecured creditors. They must consequently wait for payment until the end of the criminal proceedings.
Criminal restraint orders
Restraint orders are similar in terms to freezing injunctions in civil proceedings in that they prohibit alleged offenders and defendants to criminal proceedings from removing, disposing of, dealing with or diminishing the value of their assets. Since 24 March 2003, criminal restraint orders have been governed by the Proceeds of Crime Act 2002 (the Act). The Act replaced the previous statutory regime, which was contained in the Criminal Justice Act 1988 and the Drug Trafficking Act 1984.
Background to this case
Mr M was a chartered surveyor. In March 2006, the SFO started a criminal investigation into his part in a fraud on the Cheshire Building Society. It had made a series of loans based on inflated property valuations produced by Mr M's firm. Shortly after the criminal investigation began, the SFO obtained a restraint order against Mr M. The order prevented him from dealing with, amongst other things, several accounts held with the United National Bank Limited and Halifax Bank plc.
Lexi Holdings plc (Lexi) was a creditor of Mr M. It obtained judgment against him for £625,000, which was the amount of its money that Mr M allegedly received as bribes in connection with the fraud. In June 2007, Lexi applied to the Central Criminal Court to vary the restraint order against Mr M so as to permit payment of the judgment sum from the restrained assets. The judge made the variation. The SFO appealed to the Court of Appeal.
In so far as Lexi could show that it had a proprietary interest in the restrained assets (i.e., it owned them), the Court of Appeal allowed payment to be made. Since Lexi established that it had an equitable charge over Mr M's accounts at United National Bank Limited and Halifax Bank plc, which contained around £437,000, the Court of Appeal upheld the variation of the restraint order to permit payment of those moneys to Lexi.
As to the remaining £188,000 of Lexi's claim, however, it was an unsecured creditor of Mr M and the position was different. Sub-section 69(2)(b) of the Act provides that the court must exercise its powers in relation to restraint orders "with a view to securing that there is no diminution in the value of realisable property". This requirement reflects the primary purpose of restraint orders – to preserve property until a conviction is secured and the criminal court has made a confiscation order over the defendant's assets.
Unless payment to an unsecured creditor would not conflict with that object (for example, because the debt for which payment is sought is small and the available assets are substantial in comparison with the amount of any confiscation order), the court should not vary a restraint order to permit payment. As that exception did not apply in this case, the Court of Appeal refused to vary the restraint order to allow Lexi to receive the remainder of the judgment sum.
The criminal courts are making ever greater use of their powers under the Act to impose restraint orders, particularly in cases involving financial crimes such as conspiracy to defraud and money laundering. As a result, restraint orders are an increasingly common sight in the background of commercial disputes, especially those arising from corporate failures.
The Court of Appeal's decision in this case confirms the precarious position of unsecured creditors of people who are subject to restraint orders. Save in rare circumstances, the court will not permit unsecured debts to be paid from restrained assets until the criminal proceedings are over. Given that a restraint order can be made (as in this case) at the early stages of a criminal investigation, before charges are even brought, some unsecured creditors are going to have to wait a very long time for payment.