Conspiring to define conspiracy to defraud

A recent Crown Court case featuring the SFO has clarified the laws surrounding conspiracy to defraud

Company directors who design and pursue a lawful transaction designed to remove from the company hefty future obligations do not conspire to defraud those who might be financially affected by their doing so.

That was the conclusion of Mr Justice Hickinbottom at the Crown Court at Cardiff.  In Evans and Others [2014] the court dismissed charges brought by the Serious Fraud Office (SFO) against two company directors, three of their solicitors and Queen’s Counsel. The particular transaction involved a company (Celtic) selling freehold open cast mining sites to a British Virgin Islands company (Oak). The aim of the transaction was to transfer away from Celtic responsibility for the cost of restoring the opencast sites, for which provision in excess of £70m had been made in Celtic’s accounts.

The SFO failed in an attempt to argue that the sale of the freeholds did not actually transfer the restoration liabilities away from Celtic.  It further failed to establish that the defendants had sought to defraud the enforcing authorities into believing that the transfer had removed the restoration liabilities. 

The SFO then “very substantially” changed its case.  The core argument advanced by the SFO was that those who dishonestly agree to act to the prejudice of others enter into a conspiracy to defraud, even if both the object of the agreement and the means by which they act pursuant to it are entirely lawful.

It is unsurprising that Mr Justice Hickinbottom rejected that proposition. That the pursuit of financial advantage through lawful means might amount to a criminal conspiracy is naturally counter-intuitive. Beyond that, commerce depends on such behavior and the fiduciary obligations of directors require it. What is more, it is difficult to comprehend how one can act dishonestly whilst conducting oneself lawfully. As the judge noted, one cannot act dishonestly by doing that which one is entitled to do.

That was not, however, the only flaw in the SFO’s case. The SFO alleged that the right of the authorities to recover the costs of any restoration had been prejudiced.  The difficulty with that as a basis for the prosecution case, the Judge found, was that a dishonest agreement is only criminalised where there is at least the potential to interfere with a victim’s proprietary rights. On the facts of this case, the rights of the enforcing authorities were contingent and unsecured. No proprietary interest therefore existed.  None could be affected by the defendants’ agreement.

What should not be overlooked is that the directors were able to make commercial decisions, and to benefit their company, in the way that they did by virtue of decisions made by the enforcing authorities when Celtic was granted its licence to undertake the work.

As the court set out, it would have been open to the authorities to have imposed conditions on Celtic’s licences.  Conditions could have caused Celtic to retain the restoration liabilities after any sale of the freeholds.  They could also have prevented Celtic from selling the sites without the authorities’ approval. The SFO’s attempt to prosecute was, in essence, an attempt to evade the consequences of the ‘important commercial decision’ made by the authorities.

Ben Douglas-Jones and Andrew Johnson, barristers, 5 Paper Buildings