One question which arises from time to time concerns the interaction of insolvency and confiscation. If a convicted defendant individual is bankrupt can he nevertheless be subject to confiscation under Part 2 Proceeds of Crime Act 2002? (All references to a ‘defendant’ in this article are to a defendant who has been convicted of a criminal offence.)
Common sense suggests that if a person is bankrupt he has no assets and so confiscation proceedings would be pointless. But law and common sense do not always go hand in hand!
the confiscation legislation neatly side-steps bankruptcy
In reality the confiscation legislation neatly side-steps bankruptcy by providing, in s84(2)(d) PoCA 2002 that “references to property held by a person include references to property vested in his trustee in bankruptcy”. What this means is that any assets of a bankrupt will form part of his ‘available amount‘ for confiscation purposes and can be subject in a ‘criminal lifestyle‘ case to the statutory assumption of s10(3) regarding property held after the date of conviction. So these assets can be taken into account in determining the amounts reflected in the confiscation order. Section 7 prescribes that the amount which the defendant is ordered to pay will be the lower of his ‘benefit’ and his ‘available amount’.
But what about ‘preferential debts’? A ‘preferential debt’ is taken into account by way of a reduction in the defendant’s ‘available amount’ by virtue of s9(2)(b). But there is a common misconception that an individual’s tax liabilities are ‘preferential debts’. The law in this area was changed, by amendment to s386 and schedule 6 Insolvency Act 1986, in 2003 so that debts due to HM Revenue & Customs ceased to be ‘preferential debts’. So ‘preferential debts’ now arise only in respect of unpaid remuneration of employees, contributions to occupational pension schemes, and unpaid levies on coal and steel production.
It still remains the case however that an individual’s secured liabilities, such as a mortgage on his home, take precedence over confiscation.
the court should direct that the compensation order should be satisfied in priority
Where a court makes both a confiscation order under PoCA 2002 (which is an order that the defendant make payment to the Crown) and a compensation order under s130 Powers of Criminal Courts (Sentencing) Act 2000 (which is an order that the defendant make payment to the victim of his crime) then s13(5) and (6) provide that the court should direct that the compensation order should be satisfied in priority to the confiscation order where there are insufficient funds to satisfy both.
It should also be borne in mind that where a defendant is subject to an actual or contemplated civil claim from a victim of his crime then the court’s “duty” to make a confiscation order becomes simply a “power” to do so as a result of s6(6).
if the restraint order pre-dates the bankruptcy then the property subject to the restraint order does not fall into the bankruptcy and can be realised to pay the confiscation order
But a problem may arise for the defendant in realising the sum which he is required to pay under the confiscation order if he is bankrupt. What then?
Well it depends upon whether there has previously been a restraint order made under PoCA 2002, or following the making of a confiscation order an enforcement receiver has been appointed under s50. If there is a restraint order over assets, or an enforcement receiver has been appointed, and this pre-dates the bankruptcy order, then s417 provides that the property subject to the restraint order or receivership does not fall into the bankruptcy (so it can be realised to pay the confiscation order rather than the other creditors of the bankrupt defendant). A restraint order under s41 or receivership will normally have been drafted with the intention of covering all the defendant’s assets.
On the other hand, under s418, if the defendant’s bankruptcy order is made before any restraint order or management or enforcement receivership order is made then the trustee in bankruptcy can exercise his powers to realise the defendant’s assets under his control and pay creditors in the normal way. The defendant should ask the Crown Court to adjust his ‘available amount’ under s23 to reflect the payments to his creditors made by the trustee in bankruptcy.
So the issue is resolved on a first-come, first-served basis.
a prosecutor can return to court at any time and seek a reconsideration of the defendant’s current ‘available amount’
A bankrupt individual is likely to be discharged from bankruptcy in due course. What is his situation then in relation to the confiscation? Just like other defendants who are subject to confiscation he will be at risk for the remainder of his life to action under s22. Under this section a prosecutor can return to court at any time and seek a reconsideration of the defendant’s current ‘available amount’ to include assets acquired (whether legitimately or illegitimately) since the original confiscation order was made, if it is just to do so. In effect a confiscation order can operate as a ‘life sentence’ requiring the payment to the Crown of any amount which the defendant has, up to the figure of ‘benefit’ shown in the original confiscation order.
In summary then, a bankrupt individual can indeed be subject to confiscation proceedings.
If a restraint order under PoCA 2002 is in force, or an enforcement receiver is appointed, before any bankruptcy order, the order of priority for payment will be, in effect:
- Secured liabilities
- Preferential debts (unpaid remuneration of employees, contributions to occupational pension schemes, and unpaid levies on coal and steel production)
- Sums due under a compensation order
- Sums due under the confiscation order
- Unsecured and non-preferential debts (including taxes and ordinary creditors).
the defendant may apply to the court to have his ‘available amount’ reconsidered to reflect those payments
But if a bankruptcy order is made before any restraint order or enforcement receivership order under PoCA 2002 then the trustee in bankruptcy will retain control of the defendant’s assets vested in him. Once the trustee has ascertained the likely outcome of the bankruptcy in terms of payments to creditors, the defendant may apply to the court under s23 to have his ‘available amount’ reconsidered to reflect those payments (which will normally result in a reduction in the amount he is required to pay under the confiscation order).
An insolvency practitioner who is dealing with assets of a person who has been convicted, or is suspected, of an offence from which a benefit may have been obtained should consider carefully whether he may be handling ‘criminal property’ and if so he should obtain the necessary consent under Part 7 so as to avoid committing a money laundering offence himself.
(Note: This article refers to confiscation in England and Wales under the provisions of Part 2 of PoCA, the Proceeds of Crime Act 2002.)
David