JULY 2013
PART 4
CIVIL RECOVERY
In addition to the powers given in PoCA02 to restrain and confiscate property obtained in the course of criminal activity, powers are also provided to bring civil proceedings in the High Court jurisdiction to obtain certain orders for the protection and recovery of property, regardless of whether or not criminal proceedings are brought or are successful [note 1] [note 2]. The aim of civil recovery is to recover property obtained through unlawful conduct.
The following breakdown may assist in locating information within this part:
A civil recovery order enables an enforcement authority (see paragraph 9A.100) to recover property which is, or represents property obtained through unlawful conduct [note 1].
Freezing orders and interim receiving orders are applied for to protect property, where it is considered it has been unlawfully obtained, whilst proceedings for a civil recovery order are ongoing.
Unlawful conduct is conduct which is unlawful under UK criminal law or, where it occurs in another country, if it is contrary to the criminal law of that country and would be unlawful if it occurred there [note 3].
The burden of proof that the property was obtained unlawfully lies with the enforcement authority who must prove it to the court on the balance of probabilities [note 4].
Property obtained through unlawful conduct (see paragraph 9A.87), is known as recoverable property [note 5]. For a definition of property, see paragraph 9A.5. Property which represents the original property is also considered to be recoverable, so that recovery is not thwarted by the conversion of the property into something else or by giving a third person interest in it [note 6]. For example, if the person who obtained a stolen car then swapped it for a boat, the enforcement authority may choose to recover the stolen car or the boat. The property can be followed into anyone’s hands until it is acquired in good faith and for value (see paragraph 9A.92).
If a person's recoverable property is mixed with other property (whether his/her property or another's), only the portion of the mixed property which is attributable to the recoverable property represents the property obtained through unlawful conduct [note 7].
Recoverable property is mixed with other property if (for example) it is used;
Any profits made from recoverable property are also recoverable [note 9].
9A.92 Property which is excluded from being “recoverable”
The following property is excluded from being recoverable property:
9A.93 Property obtained in good faith
Where property was obtained in good faith and without knowledge of the unlawful conduct from which it originated, for value, and without notice that it was recoverable property it will not be recoverable property [note 10].
9A.94 Property subject to a civil recovery order or forfeiture order
Once property is the subject of a civil recovery order (see paragraphs 9A.115) or a forfeiture order (see paragraph 9A.129) it ceases to be recoverable property [note 11].
9A.95 Property subject to a restraint order
Where a restraint order is in force (see paragraph 9A.14) the property is not recoverable [note 12]. If following criminal proceedings the restraint order is discharged the property will again become recoverable.
9A.96 Property taken into consideration in confiscation proceedings
Where property has been taken into consideration in calculating the amount payable under a confiscation order (see paragraph 9A.54), it is not recoverable [note 13]. This prevents double recovery of the same proceeds of crime.
9A.97 Payments under criminal compensation
Where a compensation order has been made in criminal proceedings (see paragraph 9A.83), and is paid out of recoverable property, the property will cease to be recoverable [note 14]. In this way victims of crime are not deprived of compensation as a consequence even if it is paid for from the proceeds of crime.
9A.98 Payments following financial services offences
Where payments are required for restitution following offences under the Financial Services and Markets Act 2000 the amount paid ceases to be recoverable [note 15].
“Associated property” is innocently held property with some legal or physical connection with the recoverable property. Recovery proceedings can be commenced against the associated property if that is the only way to seize the recoverable property (provided there is a replacement for the value of the innocent party’s share in the property). An example of associated property is a bond held in the name of joint parties [note 16].
9A.100 Who can take civil recovery action?
Civil recovery proceedings can be taken by certain enforcement authorities, these are the Director of SOCA (see Part 1), the Director of Public Prosecutions, the Director of the Revenue and Customs Prosecutions and the Director of the Serious Fraud Office.
Law enforcement agencies or enforcement authorities can refer cases to SOCA for consideration for civil recovery or tax action (see Part 6). Cases must meet the following criteria:
(a) Recoverable property has been identified and has an estimated value of at least £10,000.
(b) Recoverable property has been acquired in the last 12 years (20 years for tax).
(c) Recoverable property includes property other than cash and cheques (although cash can be recovered in addition to other property, see paragraph 9A.102).
(d) There is evidence proven to civil standards of criminal conduct (see paragraph 9A.88).
(e) For tax cases there must be reasonable suspicion that criminality has resulted in untaxed income (see Part 6).
9A.102 Commencement of civil recovery proceedings
In order for civil recovery proceedings to be commenced the person in possession of the property must have obtained it through unlawful conduct [note 3] [note 17], see paragraph 9A.87. The person subject to the order may not necessarily be the person who engaged in the unlawful conduct – simply that he/she has obtained property as a result of the unlawful conduct [note 18].
Civil recovery proceedings cannot be taken against cash alone but must include an element of other “property” [note 19]. Cash can be seized under a different part of the PoCA02 legislation, see Part 5.
A person who claims to be an innocent victim of theft may apply to the court for a declaration that certain property is not recoverable property, as the property claimed belongs to him/her and was not recoverable property immediately before he/she was deprived of it [note 20].
The relevant enforcement authority (see paragraph 9A.100) may make an application for a freezing order before or after starting proceedings for a civil recovery order. The aim of a freezing order is to prohibit any person to whose property the order applies, from dealing in any way with that property [note 21]. An allowance can be made from the property frozen, e.g. allowance of a certain amount from a bank account, for the person to meet reasonable living expenses, or to carry on any trade, business, profession or occupation [note 22]. The property subject to a freezing order does not become the property of the applicant, it is simply frozen for later determination by the court as to who is entitled to the property.
The court may make a freezing order where it is satisfied that there is a good arguable case that the property is recoverable or associated property (see paragraphs 9A.89 and 9A.99) [note 57].
9A.105 Freezing order – receiver appointment
The High Court may also appoint a receiver over any property to which the freezing order applies for the purpose of protecting that property [note 23] [note 24]. The receiver would have similar powers to those given to an interim receiver, see paragraph 9A.109.
9A.106 Freezing orders and interim receiving orders
A freezing order will generally be applied for prior to an interim receiving order (see paragraph 9A.107), which itself usually pre-dates a civil recovery order (see paragraph 9A.115).
A freezing order must be discharged prior to the making of an interim receiving order [note 25].
9A.107 Interim receiving orders
The enforcement authority may apply for an interim receiving order before or after starting proceedings for a civil recovery order [note 26] (see paragraph 9A.115), which will prevent the owner of the property from dealing with it and appoint an interim receiver to detain or preserve that property [note 26]. An allowance can be made for the person to meet reasonable living expenses, or to carry on any trade, business, profession or occupation [note 27]. The application for an interim receiving order can be made without notice (where, for example, notice may give opportunity for property to be put out of reach) [note 28].
The court may make an interim receiving order where it is satisfied that there is a good arguable case that the property is recoverable or associated property (see paragraphs 9A.89 and 9A.99) [note 58].
9A.108 Interim receiver appointed under PoCA02
An application for an interim receiving order must nominate a qualified receiver [note 29]. The receiver’s role is to establish whether or not the property listed in the order is recoverable or associated property (see paragraphs 9A.89 and 9A.99), and whether any other property is recoverable in relation to the same unlawful conduct [note 30].
9A.109 Interim receiver’s powers
The interim receiver is an officer of the court and powers held are derived from the order of appointment – which may be as broad or as narrow as the court considers appropriate [note 31] [note 32]. The order will usually include the power to seize property, to manage property, to search premises, and to require the provision of information or surrender of property.
Where an interim receiver accidentally deals with property not covered by the interim receiving order, then he/she is not liable to anyone for the loss or damage to that property, unless he/she has been negligent [note 33].
9A.110 Effect of freezing order or interim receiving order made prior to date of insolvency proceedings
A freezing order or interim receiving order obtained prior to an insolvency order will not grant any proprietary rights to the person obtaining the order, nor will it prevent assets vesting in the insolvency estate. However, both of these orders will prevent the official receiver as liquidator or trustee from dealing with those assets [note 34] [note 35].
Where a freezing order or interim receiving order has been made before the date of the winding-up or bankruptcy order the official receiver will need to liaise with the relevant enforcement authority (and interim receiver where applicable). Where evidence is available indicating that the assets subject to the freezing order or interim receiving order are the proceeds of unlawful conduct the official receiver should not make claim to the assets. It is unlikely that the official receiver would consider claiming the assets subject to the order as the court will have been satisfied prior to the making of a freezing or interim receiving order that there was a good arguable case that the assets are the proceeds of unlawful conduct (see paragraphs 9A.104 and 107).
The official receiver should ask for his/her interest in assets subject to the order be noted in the event that any application for a civil recovery order is unsuccessful.
9A.111 Effect of freezing order or interim receiving order made after the date of insolvency proceedings
It is possible for a freezing order or an interim receiving order to be obtained after an insolvency order has been made. This will effectively prevent the official receiver as liquidator or trustee from dealing with the assets as a consequence of the terms of the 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 freezing order or interim receiving order to verify the assets subject to the order.
The official receiver should liaise with the relevant enforcement authority (and interim receiver where applicable) carefully to determine whether there is compelling evidence that the property represents the proceeds of unlawful conduct. Where the enforcement authority intend to make a subsequent application for a civil recovery order (for which they will need leave of the court, see paragraph 9A.120), then the official receiver should not object where convincing evidence is held. In the absence of such evidence, the official receiver may consider making representations to the court at the application for hearing where it is considered that the assets should more appropriately be dealt with within the insolvency proceedings.
9A.112 Insolvency – release of property subject to freezing order or interim receiving order
Where the property subject to a freezing order or interim receiving order is found to belong to a third party (e.g. the property of a victim of theft, see paragraph 9A.113 below) or the proceeds of unlawful conduct, then the official receiver, as liquidator or trustee, should confirm in writing to the enforcement authority (and interim receiver) that he/she will not be claiming the property for the benefit of the insolvent estate. It is likely that the official receiver will have been liaising with the relevant enforcement authority prior to reaching this decision.
The enforcement authority that obtained the freezing order or interim receiving order will need leave of the court to continue with the civil recovery proceedings in order to realise those assets (see paragraph 9A.120), and the official receiver should confirm to the court that he/she has no objection to the continuance of the proceedings.
9A.113 Insolvency – freezing orders over bank accounts
The official receiver may encounter an insolvent’s bank account which is subject to a freezing order. It is possible that the bank account may hold monies that are mixed from various sources. Where the proceeds of unlawful conduct held in a bank account have become mixed with funds from another source, for example, company income or the bankrupt’s wages, the official receiver should investigate the source of those funds before deciding whether to attempt to have the freezing order lifted and to claim the funds. Only the portion of the mixed money which is obtained through unlawful conduct would be recoverable property [note 7], see paragraphs 9A.87 to 9A.89. The official receiver should obtain copies of bank statements, cheque book stubs, etc. to identify the source of funds (see paragraph 9A.90 and paragraph 31.5.67).
On receipt of the statements which show monies from a legitimate source and money from unlawful conduct the official receiver should treat the balance of the account, as if first debits from the account extinguish first credits from the account unless there is evidence to contradict this [note 60]. The official receiver will therefore need to analyse the credits and debits to the account and assume that monies withdrawn are debits from the money first deposited.
9A.114 Application to vary or discharge a freezing order or interim receiving order
Where a freezing order or interim receiving order is in force against property held by a company in liquidation or vesting in the official receiver as trustee of a bankruptcy estate, and the official receiver is of the view that the assets subject to the order should more appropriately be dealt with as part of the insolvent estate, then the official receiver should liaise with the relevant enforcement authority (interim receiver) with a view to having the order set aside or varied. As the court will have formed the view that the property subject to the order has been obtained by unlawful conduct (see paragraph 9A.87), the official receiver would need to have compelling evidence to indicate why the property should more appropriately form part if the insolvent’s estate. Technical Section’s advice should be sought in such circumstances. It is possible that consideration may need to be given to making an application to the High Court to vary or discharge the order [note 36] [note 37] [note 38]. It is expected that such applications will be rare.
Where an application to court to vary or set aside the order is considered appropriate a copy of the application must be served on every party to the proceedings, and any person affected by the court’s decision. When dealing with an interim receiving order, the court must give the interim receiver an opportunity to be heard on the matter [note 59].
There is no standard wording for an application, but for a suggested format, see Annex B for a company case or Annex C for a bankruptcy case.
The application should contain a clear and concise chronology of events, with information such as the date of the petition and order, the date of the relevant freezing or interim receiving order and application, details of the assets concerned, cooperation (or lack of), any other known assets, and any known liabilities or relevant court action against the company or bankrupt.
A civil recovery order is the end result of civil recovery proceedings which may have previously included a freezing order and/or interim receiving order. The High Court will only make a civil recovery order when it is satisfied that property is recoverable [note 39], see paragraph 9A.89. The civil recovery order provides for the appointment of a trustee to realise the recoverable property, see paragraph 9A.116.
9A.116 Enforcement of a civil recovery order – trustee for civil recovery
A civil recovery order is enforced by the appointment of a trustee for civil recovery [note 40], whose duties and powers are similar to that of a trustee in bankruptcy [note 41] [note 42]. Property listed in the civil recovery order will vest in the trustee for civil recovery to realise and pay over to the enforcement authority [note 43]. The trustee for civil recovery acts on behalf of the enforcement authority who applied for the appointment and must comply with its directions [note 44].
9A.117 Payment of pension rights
Where a person has accrued monies in a pension scheme and the money has been obtained unlawfully (whether an occupational or personal pension scheme, or annuity [note 45] [note 46]), then those pension rights can be considered as recoverable property. Where the pension rights are considered to be recoverable, then the court may order that the pension trustees or managers pay the value over to the trustee for civil recovery following the making of a pension recovery order [note 45]. The pension rights are valued by the trustees or managers of the pension scheme [note 47].
9A.118 Civil recovery order made prior to date of insolvency order
Where a civil recovery order is made by the court, the recovery order must vest the recoverable property in the trustee for civil recovery [note 43]. Consequently any assets subject to a civil recovery order will not form part of the liquidation estate or vest in the official receiver as trustee in bankruptcy.
9A.119 Action where civil recovery order is in force
Where the official receiver is aware, or suspects, that a civil recovery order is in force in relation to the insolvent’s property, (typically, this will be where the official receiver has knowledge of previous enforcement proceedings in respect of the insolvent), notification should be sent to the enforcement authority (see paragraph 9A.100) of the making of the winding-up order or bankruptcy order. The official receiver should attempt to establish the current position regarding the recovery order and the appointment, or otherwise, of a trustee or receiver.
The relevant enforcement authority should be asked to note the official receiver’s interest in any property subject to the recovery order.
9A.120 Effect of insolvency on action for civil recovery order
Proceedings for a civil recovery order may not be taken or continued in respect of property which is an asset of a company in a voluntary liquidation or a voluntary arrangement [note 48], or an asset in a bankruptcy [note 49], unless the relevant court gives leave to do so [note 50].
PoCA02 is silent with respect to a company which has been wound up by the court or where a provisional liquidator has been appointed, but protection to company assets forming part of the insolvency estate is provided from civil action under the insolvency legislation. When a winding-up order has been made, or a provisional liquidator has been appointed, no action or proceeding shall be proceeded with against the company or its property except by leave of the court and subject to such terms as the court may impose [note 51]. Additional protection is provided by insolvency legislation between the presentation of the petition and the winding-up order [note 52].
An application for leave may be made without notice to prevent a potential respondent from having an opportunity to put property out of reach [note 53], though notice must still be given, where required, to the official receiver and insolvency practitioner [note 54].
Where there is adequate evidence to support the fact that the asset subject to the recovery order was obtained via unlawful conduct, the official receiver should consider not opposing the application for leave to take action against the asset. In cases of doubt the advice of Technical Section should be sought.
9A.121 Effect on property of discharge of civil recovery order
If a civil recovery order is subsequently discharged the official receiver should take action to claim/realise the assets for the benefit of the insolvent estate.
In the case of a company, any company property will continue to belong to the company, and the official receiver as liquidator should take the necessary steps to protect and realise the assets upon discharge of the order.
In a bankruptcy case, any assets subject to a civil recovery order would not have vested in the official receiver, as trustee, from the date of the bankruptcy order. The official receiver should therefore claim the assets as after-acquired property within the usual 42 day period [note 55] [note 56]. For further information on after acquired property see Chapter 31.8.
9A.122 Civil recovery order – not provable
There is no provision under PoCA02 for the claimant in a civil recovery to prove a civil recovery judgment as a debt in bankruptcy proceedings. A civil recovery order vests property in the trustee for civil recovery. It does not create a personal debt [note 43].
[Back to Part 3 – Confiscation orders] [On to Part 5 – Cash seizure and forfeiture]