Clarifying proceedings for recovery orders in bankruptcy
Restructuring & Insolvency analysis: James Fletcher, barrister at 5 St Andrew’s Hill, discusses Chief Constable of Greater Manchester Police v Wright, a case which helps clarify when permission of the insolvency court is required for proceedings where alleged recoverable property under the Proceeds of Crime Act 2002 (POCA 2002) is included in a bankrupt’s estate.
Chief Constable of Greater Manchester Police v Wright  EWHC 3824 (Ch),  All ER (D) 270 (Nov) The Manchester County Court dismissed the claimant chief constable’s application, purportedly under POCA 2002, s 311 for leave to continue forfeiture proceedings against a bankrupt as, on a true reading of that section, no permission was required. On that basis, a condition of permission, providing for payment of cash seized to the defendant trustee in bankruptcy, could not be imposed and, in any event, would fall foul of POCA 2002, s 298(4).
What was the background to the application?
Three amounts of cash were seized by police from Mohammed Tahir pursuant to POCA 2002, s 294 in August 2010 and May 2013. On 7 July 2014, Mr Tahir was adjudged bankrupt and a trustee in bankruptcy (Miss Wright, the respondent to the application) was appointed with effect from 14 August 2014. At some point after he had been made bankrupt, the Police applied to the magistrates’ court for the cash to be forfeited. Due to the bankruptcy, the police considered that they needed to make an application to the County Court pursuant to POCA 2002, s 311 to seek permission for the cash forfeiture proceedings to continue.
The interpretation of POCA 2002, s 311 was crucial to the application. POCA 2002, s 311 says, so far as was relevant to this case:
‘(1) Proceedings for a recovery order may not be taken or continued in respect of property to which subsection (3) applies unless the appropriate court gives leave and the proceedings are taken or (as the case may be) continued in accordance with any terms imposed by that court.
(2) An application for an order for the further detention of any cash to which subsection (3) applies may not be made under s 295 unless the appropriate court gives leave.
(3) This subsection applies to recoverable property, or property associated with it, if—
[…](d) it is an asset comprised in the estate of an individual who has been adjudged bankrupt or, in relation to Scotland, of a person whose estate has been sequestrated’
What were the legal issues the judge had to decide in this application and what were the main legal arguments put forward?
The court had to decide on the appropriateness of the police application. The police submitted that they should be granted permission to continue the cash forfeiture proceedings against the cash seized from Mr Tahir who was now bankrupt pursuant to POCA 2002, s 311. In her evidence in reply to the police application, the trustee in bankruptcy suggested that the cash should be paid over to her.
What did the judge decide, and why?
The judge found the application was unnecessary. He could not grant the permission sought. This was because permission was not required from the court for the police to continue the cash forfeiture proceedings against the cash.
The case cannot be understood without an understanding of POCA 2002, Pt 5 which deals with the recovery of the proceeds of crime through civil means.
There are two separate routes:
- first, ‘civil recovery’ in the High Court whereby the enforcement authority issues proceedings seeking a ‘recovery order’ pursuant to POCA 2002, s 266 which vests recoverable property in a trustee
- the second route is ‘recovery of cash’ in the magistrates’ court whereby cash that is recoverable property or is intended for use in unlawful conduct may be forfeited under POCA 2002, s 298
‘Recoverable property’ is defined in POCA 2002, s 304 and means property that has been ‘obtained through unlawful conduct’. POCA 2002, s 241 defines unlawful conduct as conduct which is unlawful under the criminal law of the UK and includes overseas unlawful conduct which is also unlawful in the UK. Under POCA 2002, s 242, a person obtains property through unlawful conduct if it is obtained by or in return for the conduct.
The proceedings are in rem against the alleged recoverable property. Therefore the court has to decide on the origin and intended use of the property. Manchester police’s application was made in the context of ongoing cash recovery proceedings.
Cash recovery proceedings
Under POCA 2002, s 294 police can seize sums of cash (£1,000 minimum) where they have reasonable grounds to suspect that the cash is ‘recoverable property’ or is intended by any person for use in unlawful conduct.
The police may detain the cash for up to 48 hours (not including the weekends and bank holidays) but if they want to keep it for longer then they must obtain an order from the magistrates’ court pursuant to POCA 2002, s 295. The court will grant an order for continued detention orders for up to six months, if it is satisfied that there are reasonable grounds for suspecting the cash is recoverable or intended for use in unlawful conduct and that is continued detention is justified. Thereafter the court can order further periods of detention which in total cannot exceed two years. At or before the last date for detention the police have to decide whether they can prove on the balance of probabilities that the cash is ‘recoverable property’ or intended by any person for use in unlawful conduct. If they consider that their evidence is sufficient then they will apply for ‘Forfeiture’ pursuant to POCA 2002, s 298. As soon as the police apply for forfeiture the cash will be detained pending the determination of the hearing and any appeal pursuant to POCA 2002, s 298(4).
On an application for forfeiture the court may forfeit all or any part of the cash if it is satisfied that it is recoverable or intended for use in unlawful conduct.
For the purposes of understanding this case it is important to note that cash can therefore be detained pursuant to POCA 2002, s 295 by order of the court while the police continue investigating its origin or intended use, or detained under POCA 2002, s 298(4) pending determination of a cash forfeiture application.
The judge pointed out that POCA 2002, s 311(1) applied to proceedings for a recovery order, ie civil recovery proceedings. It did not therefore apply to cash forfeiture proceedings.
Second, the judge pointed out that POCA 2002, s 311(2) only required an application to the court for permission to seek an order for continued detention pursuant to POCA 2002, s 295.
Therefore the police, who had applied for forfeiture of the cash which was detained pursuant to POCA 2002, s 298(4), did not require permission from the court dealing with the insolvency and their application could not be granted.
Furthermore, the judge was precluded from making the order sought by the trustee in bankruptcy for payment-over of the cash because it was detained pending forfeiture pursuant to POCA 2002, s 298(4), but he pointed out that if the police application was unsuccessful the cash would be returned to the trustee.
To what extent is the judgment helpful in clarifying the law in this area?
The judgment clarifies where permission of the insolvency court is required for proceedings where alleged recoverable property is included in a bankrupt’s estate:
- civil recovery proceedings seeking an order under POCA 2002, s 266—yes
- continued detention applications for seized cash under POCA 2002, s 295—yes
- applications for cash forfeiture where cash is detained pending determination under POCA 2002, s 298—no
As the judge stated in his concluding comment:
‘If this judgment serves any useful purpose at all, it may be to underline the distinction between proceedings for the further detention of cash under POCA 2002, s 295 and for its forfeiture under POCA 2002, s 298 and to make it clear that while permission of the insolvency court is required for the former, it is not for the latter.’
What practical lessons can those advising take away from this case?
The case highlights that those advising in cash recovery cases must have a thorough understanding of POCA 2002, which is badly drafted in places, difficult to understand and has definitions that can only be understood by reading across numerous sections. If a proper understanding of the different stages of cash recovery proceedings had been understood, it would have been appreciated that the application was unnecessary.
From the perspective of those advising bankrupts or trustees, while permission under POCA 2002, s 311 is not required for forfeiture applications, the bankrupt them self or the trustee can still challenge the application for forfeiture in the magistrates’ court and, if the court is not satisfied that the property is recoverable or intended for use in unlawful conduct, it will be returned to the trustee for the benefit of the bankruptcy creditors.
In obiter comment, the judge considered that in a case where cash would be returned to a trustee and distributed to creditors, (as opposed to being returned to the respondent), a magistrate may exercise his discretion and not order forfeiture despite being satisfied that the cash was recoverable.
It is not clear whether the judge was aware of the case of HM Revenue and Customs v Chott  EWHC 2641 (Admin),  All ER (D) 263 (Oct) which gives some guidance as to when it might be appropriate for a court to exercise the discretion not to order forfeiture. That case was an appeal to the Divisional Court by HMRC from a judgment of the magistrates’ court in relation to a Drug Trafficking Act 1994 (DTA 1994) cash recovery application. The magistrates exercised their discretion not to forfeit cash seized which they found was from drug trafficking. Although the Divisional Court accepted that DTA 1994, s 43 granted the magistrates a discretion to forfeit, they held that no reasonable tribunal, having found the cash to have been the proceeds of crime, could have decided to return some of it.
It is submitted that it if a court finds the cash is the proceeds of crime, it will be a highly unusual case where a court would decide not to forfeit. The aim of POCA 2002 is to divest criminals of assets with the recovery of those assets being applied for the benefit of the public in general. Therefore it is suggested that it could not be right for private creditors of a respondent to be handed back proceeds of crime to satisfy their commercial debts to the detriment of the public at large.
This article was first published on Lexis®PSL 16 February 2016