Chen, R v

This case raises a short point arising out of the making of a Confiscation Order. It is whether certain pension policies which could not be surrendered should have been treated as a realisable asset when fixing the amount in the Confiscation Order.

The background is as follows. The appellant pleaded guilty, late in the day, to conspiracy to obtain property by deception. He was sentenced to four years' imprisonment. He was later made the subject of a Confiscation Order under the Proceeds of Crime Act 2002 in the sum of almost £42,000 or in default to serve one month's imprisonment consecutive to the term for the substantive offence.

Very little need be said about the circumstances of the substantive offence. The appellant was part of a conspiracy designed to defraud elderly and vulnerable people. They were told that they needed damp-proofing services. They were provided with these services when they were not required and charged exorbitant sums. The services with which they were provided were valueless. The appellant was a salesman for the company who directly swindled some of the clients.

The purpose of the Confiscation Order is to deprive a defendant of the benefits of his crime. The court must make a Confiscation Order either if the prosecution asks for one (which they did in this case) or if the court believes that it is appropriate to make such an order.

The sum stipulated in the order is the "recoverable amount". This is defined by section 7 of the Act. Usually it will be the amount by which the defendant has benefited. There are complex rules for identifying the amount of the benefit. However, a lower figure is specified in certain circumstances, the most relevant of which is where the defendant can show that the "available amount", as defined in section 9 of the Act, is less than the benefit gained as a result of the criminal conduct. In essence, the available amount is the money available to the defendant. If he can show (the onus being on him) that he simply does not have the resources to repay in full the benefits he has acquired as a result of his criminal activities, he must pay what he has. This will then be the recoverable amount specified in the order.

Section 9 provides as follows:

For the purposes of deciding the recoverable amount, the available amount is the aggregate of --

Subsection (2) defines obligations which have priority. They are not applicable here.

There are therefore three stages in the assessment of the available amount. First, the court must determine the value of all "free property" held by the defendant at the time the order is made. Second, they should deduct from that sum the total amount of obligations which have priority under subsection (2). Third they add the value of "tainted gifts", as defined by section 77 of the Act.

The concept of "free property" and the assessment of its value is therefore a crucial calculation under the Act. This is dealt with by sections 79-84.

Section 84 defines "property" as "all property wherever situate". It includes any property in which the defendant has an interest. Section 79 provides that the value of any property is the market value at the time the value is being determined. As we have said, in the case of a Confiscation Order section 9 provides that this is when the order is made.

Section 82 provides that property is "free" unless an order is in force in respect of it under any one of a number of statutory provisions. They do not apply here.

A problem sometimes arises where the anticipated available amount is not in fact realised. In these cases the defendant can seek a "certificate of inadequacy" from the Crown Court under section 23 of the Act. The available amount is then recalculated in the light of the new circumstances.

There are also two circumstances where the prosecution or other interested party (such as a receiver) may return to court to seek a variation of an order. The first is that the prosecution has up to six years from the date of conviction to ask the court to consider evidence of benefit from criminal conduct which was not available at the time of the earlier proceedings. The court may then fix the recoverable amount at such sum as it thinks fit: see sections 19 to 21. The second, which is potentially material here, is that the prosecution can return to the court under section 22 to ask for a reconsideration of the available amount. This may be because the defendant has acquired property even after the original order was made. It does not have to have resulted from the crime. Furthermore, pending such an application, a restraint order can be sought under section 40(6) to prevent the defendant from dealing with an asset. That is so in circumstances where it is anticipated that an application may be made under section 22, as well as in circumstances where such an application has actually been made.

The court identified the benefit as being in excess of £68,000. That figure was not disputed. The prosecution therefore sought a Confiscation Order in that sum unless the appellant was able to show that the resources available to him were less than that benefit.

The appellant had virtually no assets. There was a car worth £100 and, apart from that, two pension policies. (The existence of one of them only became apparent to the judge during the course of the confiscation hearing). The pension policies are due to mature in 2018. The appellant's interest is therefore all in the future. He had no right to access the fund until that date. In particular, there was no surrender value and the policy could not be assigned or sold. The policy had an underlying value which represented the value of the units in the policy fund. It also had an anticipated transfer value, namely the anticipated capital value which would be available to the appellant on maturity. But neither value reflected any immediate benefit to the appellant.

The question which arose was: how should these assets be valued? Were they to be assessed by reference to the current asset value, or the transfer value, or were they to be treated as having no value at all since there was no money which could in practice be realised from these policies until 2018?

The judge was satisfied that the pension policies qualified as "free property" and he treated the asset value as the current value of the funds. He considered this to be consistent with the decision of the court in R v Ford [2008] EWCA Crim 966, which we shall consider shortly. The judge rejected an argument for the defence, which has been repeated before us, that the valuation should be nil but that the Crown could make a subsequent application under section 22 when the funds become available. The judge commented that the Crown could have chosen to proceed in that way but they were entitled in the alternative to seek to deal with all of the assets on this occasion.

The prosecution had accepted that in reality it would be impossible for the appellant to obtain the relevant money within the six month period. They accepted that in the circumstances it was appropriate for the judge to impose only a nominal sentence in default of payment, rather than the usual tariff that would be imposed for default of payment of such a sum, and they made that clear to the judge. That is why the judge fixed a short period of one month's imprisonment in default. However, if the sentence is triggered it does not absolve the appellant from the obligation to comply with the order.

In our judgment, these policies constitute free property. The appellant does not dispute that. It is property because the defendant has an interest in it; it is free because there is no order in force with respect to it within the meaning of section 82.

But what is its value? There are two authorities which bear upon the question of how policies of this nature should be valued. In R v Cornfield [2007] 1 Cr App R(S) 124 this court had to determine how to treat a pension policy which, as in this case, could only be realised at a future date, in that case when the defendant reached the age of 50. He was in fact only six months short of that when the order was made. The pension was not transferable and no early surrender value could be taken. At the age of 50 the appellant could draw 25% of the value of the pension fund if he chose to do so. The judge calculated the value by reference to the underlying value of the lump sum at the time he made the order. It appears that he took the amount predicted to be available at 50 and discounted it on the assumption that it was being valued six months early. The resulting figure was a little in excess of £30,000.

The appellant contended that this was wrong. The fund had no market value because it could not be assigned or sold. Further, it was submitted that the purpose of the Act was to confiscate that which a defendant was able to realise at the time the order was made, and it was wrong to subject a defendant to further imprisonment for being in default of his obligations when it was not possible for him to comply with them.

The appellant contended that even if some wider concept of market value could be adopted, so as for example to include sums which might be raised by way of a bank loan on the security of the policy, still in this case the value was nil because the appellant was bankrupt and no bank would lend any money to him.

The Crown submitted that the proper value was in fact the transfer value of the policy, that is the valuation of the projected benefits at the age of 50, which in that case was £128,000. However, the court had a discretion to accept the lower figure, and that was the basis on which the judge’s decision below was capable of being supported.

This court (the Vice-President, May LJ, David Clarke and Teare JJ) rejected both the approach adopted by the court and the submissions of the Crown. They considered that there was no market value in the property. They explained their conclusion as follows:

In our judgment, market value in section 74(4) of the 1988 Act has to be viewed in the context that it is seeking to define 'realisable property'; and in the context of legislation, draconian certainly, but whose purpose is to confiscate that which a defendant is able to realise. It must be realisable in some real way. Although it could extend to a contingent beneficial interest under a will (see the decision of Walbrook v Glasgow (1994) 15 Cr App R(S) 873), it does not, in our judgment, extend to the putative possible future receipt of a lump sum pension payment which could not be used as security for a loan; which, if it were paid, would go to the trustee in bankruptcy; and when the real possibility of the appellant borrowing money with reference to it was zero. On that analysis, the pension payment, its value or any value with reference to the possibility of a lump sum payment, was not part of the amount that might be realised at the time the order was made against the appellant."

In the case of Ford the question arose as to how to value three pension policies. The fund value in these policies was nearly £80,000, although only 25% could be taken by way of a lump sum on realisation. There was in that case, however, a surrender value of around £17,500 which could be immediately realised. The polices could not be assigned, whether by way of sale or otherwise. The judge fixed the value as the full fund value of the polices. The defendant appealed and submitted that it should be the surrender value. He relied upon the analysis of the court in Cornfield. This court (Hallett LJ, Openshaw and Blair JJ) rejected that submission. It is plain that they did so for policy reasons. They were concerned that if the sum was limited to £17,500, the defendant would be able to borrow that money from a member of his family or friends in order to meet the terms of the order. In those circumstances he would retain his interest in the asset which in due course would be worth £80,000. The judgment, given by Openshaw J, continued as follows:

It seems to us that on the facts of this case the appellant simply has not proved that he could not raise the money in question and so he has not proved in relation to these particular pension figures that his realisable assets are less than his benefit. There is no injustice in this since, if he is right and if he has to surrender the policies in an attempt to raise the money to discharge his liability under the confiscation order, and if he can only raise the cash in surrender value, he can then come back to the court and seek a Certificate of Inadequacy under section 83 of the Criminal Justice Act 1988 on the basis that his assets were overvalued. He will then have been stripped of his assets and will not come out of prison with an £80,000 nest egg waiting for him. The social policy of the Act will therefore have been achieved."

Both these cases were concerned with orders made under the Criminal Justice Act 1988, but the essential structure of that Act and the Proceeds of Crime Act is the same. the material difference between the two Acts, as the appellant emphasises, is that under the current legislation, as we have indicated, it is always open to the prosecution to go back to court under section 22 if and when assets become available which can be utilised to meet the Confiscation Order. That was not possible under the 1988 Act.

We think that is a highly material distinction. Whatever the justification for the broad approach to market value adopted in Ford, there is no need to adopt that same construction under the 2002 Act. In any event, as a matter of construction, we prefer the approach in Cornfield to that adopted in Ford. In our judgment, it is wrong to say that the market value of this policy was the current value of the underlying fund. There is simply no way in which it would have been possible to realise that or, in reality, any other money of property of any value under this policy. There was simply no market. The prosecution say that the appellant did not give evidence to the court to that effect. That is true, but all parties plainly and realistically accepted that he could obtain no money at all on the back of this policy. Indeed, that was why the prosecution suggested that only a nominal sentence in default should be imposed.

We would add that we do not think that Cornfield can be distinguished, as the court in Ford sought to, on the basis that the critical feature of the case was that the defendant in Cornfield was bankrupt. That was the reason why the court concluded that it would be quite unreal to believe that the defendant could obtain even a loan on the security of the pension. But the crucial finding was that the policy had no market value because nothing could be realised from it whether by way of borrowing on the security or any other way.

We would add that if the prosecution's approach to valuation in this case, accepted by the judge, is correct, then even if a loan could be raised on the security of the policy (which will always be difficult for anyone who is sent to prison), this would not enable a defendant to avoid prison by obtaining a certificate of inadequacy, as was envisaged in Ford. The reason is that in any recalculation of available assets under section 23, the defendant would still have the policy which would retain its original value, less the sum which had been obtained by way of a loan. The important feature in Ford was that the policy could be surrendered. Thereafter the asset ceased to belong the defendant and therefore he could obtain a certificate of inadequacy.

In our judgment, therefore, it is not legitimate to treat the underlying value of the fund as the value of the asset. Ford was a different case. It was under a different statutory regime. The policy in that case had a surrender value, which this one does not.

It follows that in our view that this Confiscation Order ought not to have been made for this sum, but only for the sum of £100. We consider that any other conclusion would be quite unacceptable. The appellant would be sent to prison for not paying a sum of money which at the time of making the order the court knew he would be unable to pay. The prosecution say that it would have been possible to stipulate an even shorter sentence -- perhaps even of a day or two. However, the objection here is a principled one, not simply directed at the time specified to be served in default. Moreover, as the appellant points out, even a sentence of one day would not take effect until the end of the full half of the existing sentence. Accordingly, the appellant would not be eligible for early release as a consequence. It may well be a breach of Article 5 of the European Convention on Human Rights as an arbitrary detention to sentence a person for breach of an order in circumstances where the court knows when it is making the order that the defendant will not be able to comply with it. We heard no argument about that and we reach no conclusion on it. We are satisfied that, quite independently of Convention considerations, the legislation (draconian as it may be in certain respects) does not compel such an unjust result. For these reasons, this appeal is allowed.

We add that the appellant also contended that if the Crown's submissions were correct, then we should stay the confiscation proceedings as an abuse of process in accordance with the principles established by the court in R v Shabir [2008] EWCA Crim 1809. Since he has succeeded, that issue does not arise.