JULY 2013
PART 2
ACTION AGAINST ASSETS IN CRIMINAL CASES – RESTRAINT ORDERS
This part deals with restraint orders obtained under PoCA02. To assist in locating information in the part, a breakdown of the part is provided as follows:
An application for a restraint order is made by a prosecuting authority to a Crown Court [note 1].
The aim of a restraint order is to prevent the person specified in the order from dealing with realisable property (see paragraph 9A.4 - 9A.5) during a criminal investigation or criminal proceedings. The order prohibits the specified person from dealing with the property held whether or not he/she is the suspected offender (or defendant where criminal proceedings have been commenced). For ease the term defendant is used in the chapter.
A restraint order has the effect of freezing property anywhere in the world that may be liable to confiscation following a trial and subsequent conviction of a defendant (see Part 3).
9A.15 Restraint orders and interaction with confiscation orders
The restraint order protects property which may be required to be sold to satisfy any confiscation order that may be made by the court should the suspected offender (defendant) be found guilty. A confiscation order is an order that a convicted defendant pay to the Crown a certain sum of money representing the defendant’s benefits from crime. Guidance on confiscation orders is provided in Part 3.
Generally speaking, where the prosecution is taking action against a defendant’s property, the first order to be obtained will be a restraint order. Following the trial, if the defendant is convicted, the court may make a confiscation order (see paragraph 9A.54).
9A.16 Enforcement of restraint orders
Failure to comply with a restraint order or the breach of any of its terms is contempt of court [note 2]. It can be punished by a maximum of two years imprisonment and/or an unlimited fine [note 3].
9A.17 When can a restraint order be made?
A restraint order may be made:
9A.18 Scope of restraint order – any specified person
The legislation does not require the person restrained to be the alleged defendant and a restraint order can be made against any specified person [note 8]. A person who has possession of property in which the defendant has an interest; or who has an interest in property in which the defendant has an interest; may be specified in a restraint order, e.g. the defendant’s spouse with an interest in the family home (see paragraph 9A.35).
9A.19 Defendant’s interest in property held with third party
Under PoCA02 the defendant is said to hold any property in which he/she has an interest [note 9]. This applies even where a third party may have a legitimate and even greater interest in that property, such as where the third party is the sole legal owner of a property but it is believed that the property may have been purchased, or part purchased, with the proceeds of crime.
The third party interest is only taken into account following the conviction of the defendant as part of the hearing for a confiscation order. The value of the defendant’s interest in the third party property must then be decided by the court as part of the confiscation proceedings (see Part 3, paragraph 9A.65-66).
9A.20 When does a restraint order end?
Restraint orders do not come to an end when a confiscation order (see Part 3) is made, but remain in force until the confiscation order is satisfied and/or the restraint order is discharged by the court, see paragraph 9A.42 and 9A.47 [note 10].
9A.21 Restraint order – after trial
A restraint order may be made for the first time after a confiscation order is made, following the conviction of the defendant (see Part 3). The court can grant the order if there is a risk that assets may be dissipated whilst an appeal or enforcement action is pending [note 6] [note 7] [note 11].
9A.22 When should a restraint order be made?
An application for a restraint order should only be made where there is a reasonable risk that realisable property (see paragraph 9A.4) may be dissipated [note 12]. Without a real risk of dissipation of assets being established, there is no justification for interference with a suspect's human rights [note 13].
The court needs to consider the affect personally or commercially on the defendant or any third parties prior to making a restraint order, and must ensure that the order is proportionate in relation to protecting the public interest.
9A.23 Property exempt from restraint order
In making a restraint order, the court will aim to strike a balance between keeping the defendant’s assets available to satisfy a potential future confiscation order should the defendant be convicted (Part 3), and making provision to meet the defendant’s reasonable general living expenses, legal expenses or funds to enable the continuation of a trade, business, profession or occupation requirements pending any trial [note 14] [note 15].
Where the prosecuting authority believes that a defendant has a criminal lifestyle (see Part 3, paragraph 9A.64), a request may be made for a restraint order which restrains the defendant from dealing with all of his/her assets. It may extend to all realisable property transferred to the defendant after the order is made [note 8]. This is known as a general restraint order.
9A.25 Specific restraint order
Where the prosecuting authority is not alleging that the defendant has a criminal lifestyle the court will be asked to decide whether the defendant has benefited from his/her particular conduct. In such circumstances the defendant may be restrained from dealing with specific assets which together total in value the amount that he/she may have benefited from the particular criminal conduct. This is known as a specific restraint order.
Where a specific restraint order is made, the official receiver should realise or deal with any property not covered by the restraint order as he/she would in any other case.
9A.26 Restraint order made before winding up order
Where the restraint order has been made prior to the date of the winding-up order or the date of a resolution for the company to be voluntarily wound up, then the liquidator (or provisional liquidator) is prevented from taking any action against the property of the company subject to that restraint order [note 16]. This is the case even where the restraint order is made after the winding up petition has been presented to court or a provisional liquidator has been appointed [note 17].
Annex A shows the interaction of insolvency orders and restraint orders.
9A.27 Restraint order made before bankruptcy order
If a restraint order is in force as at the date of the making of the bankruptcy order then any property subject to the restraint order [note 8] does not form part of the bankruptcy estate [note 18]. This is the case even where an interim receiver has been appointed and the powers of the receiver will not apply to assets subject to the restraint order [note 19] [note 20].
Annex A shows the interaction of insolvency orders and restraint orders.
9A.28 Action to be taken when restraint order made before insolvency order
Where a restraint order is made by the court prior to the date of the winding-up order or bankruptcy order then the official receiver should contact the relevant prosecuting authority and inform them of the making of the order. The official receiver should attempt to establish the current position regarding the restraint order and the appointment, or otherwise, of a management receiver (see paragraph 9A.48). The official receiver should also request a copy of the restraint order in order to ascertain what assets are covered by the order.
Although the property subject to the restraint order will be excluded from the insolvent estate (see paragraphs 9A.26 - 27) the prosecuting authority should be asked to note the official receiver’s interest in any property subject to the restraint order and request that he/she be notified if the order is discharged. Where the order is discharged, the property will return to the company to be dealt with by the official receiver as liquidator, or vest in the official receiver as trustee as part of the bankrupt’s estate [note 23]. If there is a surplus after satisfaction of any confiscation order (see paragraph 9A.30) the official receiver should request that the surplus funds be remitted to the liquidator/trustee.
9A.29 Need to defer company dissolution
Where there is a possibility that assets subject to a restraint order will later come back under the control of the liquidator (see paragraph 9A.30), the official receiver should defer the dissolution of the company for 6 years, see Chapter 38, paragraph 38.52.
9A.30 Need to review cases where assets covered by a restraint order
A restraint order operates to prevent dealings with restrained assets until the criminal hearing. If the defendant is found not guilty the restraint order will be discharged. If the defendant is found guilty it is likely that a confiscation order will be made. The restraint order will be discharged once the confiscation order has been satisfied. Where the restraint order is discharged, it is possible that the assets will come back under the control of the liquidator/trustee (see paragraph 9A.47). Where restrained property is used to satisfy a confiscation order, the official receiver will be entitled to any surplus funds from the sale of that property as liquidator/trustee (see Part 3, paragraph 9A.82).
The official receiver as liquidator or trustee should ensure that the case is regularly reviewed until the conclusion of the criminal proceedings.
9A.31 Restraint order contains onerous obligations – company
It is possible that the terms of the restraint order over a company’s assets may be onerous to the insolvent estate. For example a restraint order over specified property may require the official receiver, as liquidator, to preserve the asset and to ensure its value does not diminish. The official receiver may therefore have an obligation to insure the property at a cost to the estate. Such an obligation to insure is onerous as it is possible that the property may be sold to satisfy any confiscation order should the offender subsequently be found guilty by the court and that there will be no financial benefit to the estate.
In such circumstances the official receiver should consider making an application to the court for the terms of the restraint order to be varied (see paragraphs 9A.43 to 44).
9A.32 Restraint order against company property where individual is under investigation
A restraint order can be made over an individual’s personal property, shares of a company and the assets of that company where an individual is being investigated under PoCA02. Before a company’s assets can be considered to be part of a defendant’s assets the court must first lift the corporate veil. Once the veil has been lifted the company assets can subsequently be used to pay a personal confiscation order, which will only be lifted in cases of impropriety or dishonesty. The court will consider whether the veil of incorporation should be lifted if the defendant is found guilty at the hearing for a confiscation order. This is covered in more detail in Part 3, paragraph 9A.81.
9A.33 Restraint order where fixed charge
Where company property is subject to a fixed charge, then the charge-holder’s rights take priority over any restraint order made later. A restraint order will usually contain a clause allowing a charge-holder to enforce his/her security under the terms of the charge.
9A.34 Restraint order and floating charge
Where company property is subject to a floating charge (see Chapter 40, paragraph 40.130), the floating charge does not attach to any specific property until it has crystallised (e.g. where the loan is in default). This has led to some uncertainty over whether the floating charge or restraint order would take priority in such cases. It may be possible for a floating charge-holder to apply to court for the appointment of an administrator after a restraint order is made, as this is not specifically prohibited [note 21] [note 22].
9A.35 Jointly owned property subject to a restraint order
Any specified person who holds assets jointly with the defendant may be specifically restrained from dealing with those jointly owned assets. This may include a third party not subject to the criminal investigation e.g. money held in a joint bank account. Separate restraint orders may be made against both the defendant and the joint owner.
Where the restraint order(s) were made prior to the bankruptcy order, the official receiver will not be able to deal with the restrained property unless the restraint order is lifted/varied (see paragraph 9A.27). The official receiver should seek to establish the legal and beneficial ownership of the property (see paragraph 9A.36).
Where restraint order(s) were made against jointly owned property after the date of the bankruptcy order, the official receiver should consider applying to the court to vary/discharge the restraint order in relation to assets that vest in the official receiver as trustee of the bankrupt’s estate (see paragraphs 9A.43 to 44).
9A.36 Restraint order against jointly owned property – where one party is bankrupt
Where the bankrupt and another individual jointly own property subject to restraint proceedings and the bankrupt’s beneficial interest in the property vests in the trustee (i.e. the bankruptcy order pre-dates the restraint order, see paragraph 9A.38), then the restraint order should be consulted to see if the order clarifies the beneficial interest division.
It is likely that the restraint order will remain in force until the criminal hearing. If the defendant is found guilty any subsequent confiscation hearing will consider the jointly owned property and draw conclusions as to the beneficial interest split (see paragraph 9A.78).
9A.37 Restraint order against jointly owned property– where both parties bankrupt
Where both joint owners are bankrupt, and a restraint order was made against jointly owned property prior to the bankruptcy orders then the official receiver as trustee of both estates will only have an interest in the property if the restraint order is subsequently discharged, or in any surplus should one arise after any confiscation orders are satisfied (see paragraph 9A.27).
It is possible that a subsequent confiscation order will be made against one party only, and in this situation, the bankrupt not subject to the confiscation order will have their restraint order lifted dependant on any decision the court may make in the confiscation proceedings as to the beneficial interest split (see paragraph 9A.78). That bankrupt’s interest in the property will then vest in the official receiver as trustee [note 23], see paragraph 9A.47.
9A.38 Restraint order made after the date of the insolvency order – no action to be taken in respect of assets restrained
Where a winding-up order or bankruptcy order is made before a restraint order, the restraint powers of PoCA02 are not exercisable in respect of property held by the company [note 24], or the bankrupt [note 25], see paragraph 9A.39 below. Any property comprised in the insolvent estate will not be available to satisfy any confiscation order [note 26] (see paragraph 9A.59). In such circumstances the official receiver should take no action to realise assets subject to the restraint order, as to do so may be acting in contravention of the court order. For action to take in such circumstances, see paragraph 9A.40.
9A.39 Property which cannot be dealt with following the making of an insolvency order
The powers of POCA02 cannot be exercised, and a management receiver (see paragraphs 9A.48 to 52) cannot be appointed over:
(a) Property held by a company [note 27].
(b) Property of which the functions of liquidator are exercisable [note 28].
(c) Property comprised in a bankrupt’s estate [note 29].
(d) Property which may be claimed as after-acquired property in bankruptcy (see paragraph 31.8.1) [note 30].
(e) Property or income due to a bankruptcy estate as a condition of discharge from bankruptcy [note 31].
(f) Where a confiscation order has been made and the amount to be paid has been fully paid, any remaining sums [note 32].
9A.40 Restraint order made after the date of the insolvency order - application to lift or vary restraint order
Where a restraint order is made after the date of the insolvency order, in respect of assets comprised in the insolvent estate, the official receiver is prevented from dealing with those assets as a consequence of the terms of the restraint order. If the official receiver were to deal with the assets it is likely he/she would be acting in breach of the court order. The official receiver should therefore take no steps to realise the assets but should obtain a copy of the restraint order in order to verify the assets subject to restraint. The official receiver should inform the prosecuting authority that it is his/her opinion that the application has been incorrectly obtained and request that an application is made to court to have the order lifted or varied [note 25] [note 24]. This is especially important if the assets are onerous, as a disclaimer cannot be issued whilst the restraint order remains in force.
Where the prosecuting authority is not prepared to go back to court to have the restraint order lifted or varied, then the official receiver should consider whether he/she should make such an application court [note 33] (see paragraph 9A.42 - 43).
9A.41 Restraint order made after the date of the insolvency order – insurance
Where a restraint order is made after the insolvency order, any assets covered by the restraint order will still form part of the insolvency estate (see paragraph 9A.38), and so the official receiver should ensure that the assets are adequately insured and protected pending an application to vary or discharge the restraint order (see paragraph 9A.42).
9A.42 Variation and discharge of a restraint order
A restraint order may be varied or discharged on application of the person who applied for the order, or any person affected by the order [note 34]. A restraint order may be varied to widen or reduce the property covered. The official receiver is considered to be a person affected by the order (see also paragraphs 9A.43 and 44).
9A.43 Application to court to dismiss or vary restraint order
Where it is considered appropriate for the official receiver, as liquidator or trustee, to make an application to dismiss or vary the restraint the application should be sent, in writing, to the court in which the restraint order was made, and must be supported by a witness statement [note 35]. A copy of the application should be sent to the person who applied for the restraint order (the prosecuting agency), and any person restricted from dealing with the property by the restraint order. This should be sent at least 2 days prior to the hearing. There is no fee for making the application [note 36].
9A.44 Draft application to court to amend or discharge restraint order
There is no specific form available for an application to the court to discharge or vary a restraint order but a suggested template for a company case is available at Annex B and for a bankruptcy case is available at Annex C. Any other relevant facts of the case should also be included in the application.
9A.45 Avoiding costs relating to assets subject to restraint
The official receiver should avoid taking possession of assets subject to a restraint order as he/she will not be able to realise those assets until the restraint order is varied or discharged.
Where the official receiver has taken assets into storage prior to discovering a restraint order against those assets, the storage costs will continue to accrue as a cost to the estate despite the asset not being available to discharge them. The official receiver should therefore ensure that a timely resolution is found for such assets, by application to discharge or vary the restraint order so that he/she may deal with those assets appropriately (see paragraph 9A.43 to 44).
9A.46 Consequences of dealing in property subject to restraint order
Where a liquidator, receiver and manager or trustee of an insolvent estate deals with property subject to a restraint order, he/she has a defence against being found liable for any consequent losses or damages, so long as it can be shown that he/she had reasonable grounds to believe that at the time of seizure/disposal of the assets he/she was entitled to seize or dispose of the property, and did not act negligently [note 37] [note 38].
9A.47 Effect on property of discharge of restraint order
Where a restraint order is discharged following an application to the court or following satisfaction of a confiscation order (see Part 3), any company property would return to the company (after meeting the remuneration and expenses of any management receiver appointed by the court), and would fall to the official receiver as liquidator to deal with.
Any property excluded from the bankrupt’s estate as a result of the restraint order will vest in the trustee as part of the bankrupt’s estate (after meeting the remuneration and expenses of any management receiver appointed by the court) [note 23].
9A.48 Appointment of a management receiver
The court may appoint a management receiver to manage property to which a restraint order applies pending the making of a confiscation order [note 39]. The management receiver is given power in the order of appointment to carry out certain acts to manage or otherwise deal with the property (including selling the property in some circumstances) [note 40].
A management receiver will usually be appointed where the defendant’s assets are of a nature that require active management and the individual is either unable to manage the assets or the court is of the view that he/she cannot be trusted to manage the assets properly.
9A.49 Powers of management receiver
A management receiver is an officer of the court, and so acts on the order of the court rather than the applicant [note 41]. The powers of the management receiver are set out by the court in the order of appointment and are usually limited to preserving the value of the assets for any subsequently made confiscation order [note 40]. The court may confer the power:
(a) To take possession of the property;
(b) To manage or otherwise deal with the property (including to sell that property, to carry on a business or to incur capital expenditure);
(c) To start, carry on or defend any legal proceedings in respect of the property;
(d) To realise so much of the property as is necessary to meet the management receiver’s remunerations and expenses.
Where a management receiver is unsure as to the power held in relation to certain actions, he/she should go back to court for directions [note 42].
9A.50 Difference between management receiver and enforcement receiver
A management receiver (who is appointed to protect property when a restraint order is in place), is not to be confused with an enforcement receiver. An enforcement receiver may be appointed when a confiscation order is in force and has the power to realise property for the purpose of satisfying a confiscation order [note 43], see paragraph 9A.73.
9A.51 Management receiver’s costs
The costs and expenses of the management receiver are paid from the assets that he/she is managing subject to the restraint order even if the defendant is subsequently acquitted [note 44].
9A.52 Management receiver – application to vary or discharge
Any person affected by the appointment of a management receiver (which could include the official receiver) may apply to court for the order to be varied or discharged [note 45].
[Back to Part 1 – Introduction] [On to Part 3 – Confiscation orders]