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Conveyancer and Property Lawyer

2010

Legislative Comment
The illegality defence: turning back the clock
Paul S. Davies
Subject: Trusts. Other related subjects: Civil procedure
Keywords: Beneficial interests; Concealment; Defences; Illegality; Trusts
Legislation: Trusts (Concealment of Interests) Bill (Draft)
Cases: Gray v Thames Trains Ltd [2009] UKHL 33; [2009] 1 A.C. 1339 (HL)
Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2009] UKHL 39; [2009] 1
A.C. 1391 (HL)
Tinsley v Milligan [1994] 1 A.C. 340 (HL)
Tribe v Tribe [1996] Ch. 107 (CA (Civ Div))
*CONVPL 282 In Tinsley v Milligan, the House of Lords called for a full inquiry by the
Law Commission into the illegality defence.1 That was in 1994. Some 16 years later, the
Law Commission has now finished its investigation and published a final report: The
Illegality Defence2 (Final Report ). Legislative reform is recommended, but it is of
much more limited scope than was originally hoped.3 Attached to the Final Report is the
Draft Trusts (Concealment of Interests) Bill (Draft Bill). As its title suggests, this only
concerns the concealment of interests under a trust, and therefore does not cover legal
property rights, contract, tort, or unjust enrichment. While such limited reform may be a
disappointing outcome, it hardly comes as a surprise: the approach of the Law
Commission was foreshadowed in its Consultative Report of Spring 2009 (Consultative
Report ).4 The general principles of the illegality defence and stance of the Law
Commission in the Consultative Report have been considered in a previous edition of
Conveyancer5 ; this article focuses upon the Draft Bill itself, as well as common law
developments which have occurred since the Consultative Report.

The Draft Bill

The principal aim of the Draft Bill is to implement a statutory discretion to apply the
illegality defence and therefore deny the beneficiary their normal right to enforce the
trust in cases where the beneficial interest in property has been concealed. Such a
discretion represents a departure from the strict reliance principle6 advocated by the
House of Lords in Tinsley. The arbitrary nature of the reliance principle has been
criticised, and virtues of a discretionary approach extolled, before.7 However, it is
interesting to observe that the members of the House of Lords in Tinsley were
unanimous in rejecting any test for the illegality defence which relied upon deciding
whether or not allowing a claim would be an affront to the public conscience, despite
this test receiving the support of the *CONVPL 283 Court of Appeal in the case.8
Although the discretion proposed in the Draft Bill offers more structured guidance and, if
implemented, would benefit from the authority which Parliament can bestow, it may

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nevertheless appear as if the Law Commission has taken a long time simply to tell the
House of Lords that its reasoning in Tinsley was undesirable,9 and that the Court of
Appeal was in fact on the right track.

Scope
The Draft Bill only applies in instances of concealment.10 If a trust was set up in order to
conceal a beneficiary's interest in the property, and this was done in connection with the
commission of an offence, then the statutory scheme bites.11 The proposed legislation
also covers situations where a trust was established for proper purposes, but has later
been deliberately continued in order to conceal a beneficial interest in connection with
the commission of an offence, and this has been exploited by one of the parties.12
It has long been difficult to state with confidence what illegality means for the
purposes of the illegality defence.13 The Draft Bill sidesteps such issues by providing
that the concealment of a beneficial interest should be in connection with the
commission of an offence.14 This seems appropriate: it provides some certainty about
the scope of the defence, yet is still sufficiently wide since all offences are included.
Extending the defence to conduct which is not unlawful but simply immoral15 would
lead to unnecessary uncertainty.
The major area in which the Draft Bill will apply is where a trust is established in order to
commit a fraud, contrary to the Fraud Act 2006.16 This is the point which was squarely
at issue in Tinsley v Milligan itself, where the property, although purchased jointly by
Miss Tinsley and Miss Milligan, was conveyed into the sole name of Miss Tinsley in order
to enable Miss Milligan to defraud the Department of Social Security by claiming benefits
to which she was not entitled. It is also important to note that the Draft Bill applies
regardless of whether or not an offence has in fact been committed, as long as the
purpose was to carry out an offence. This means that the facts of Tribe v Tribe would
now fall within the statutory scheme.17 In that case a father transferred shares to his
son on the understanding that the son would return the shares to the father on the
father's request. The father's purpose was to defraud his creditors by hiding his assets.
However, the creditors never made any demands from the father. When the father asked
for the shares back from his son, the son refused. The Court of Appeal allowed the
father's claim, *CONVPL 284 but was forced into contrived reasoning given the
strictures of the reliance principle in Tinsley : although the presumption of resulting trust
applied in Tinsley, the presumption of advancement applied in Tribe, which meant that
the father would have to rely upon the illegality in order to establish an interest under a
trust. Under the reliance principle, the illegality defence would therefore bar the father's
claim.18 Nevertheless, the Court of Appeal avoided this result by finding that the father
could rebut the presumption of advancement to his son by relying on the illegal purpose,
since the father had withdrawn from the illegality within the locus poenitentiae, or time
for repentance. This decision has always been difficult to explain: after all, the father's
purpose of hiding his assets from his creditors while there was a danger was fulfilled 19 ;
it is not obvious that the father withdrew from the illegality before any part of the illegal
purpose was carried into effect.20 In any event, the factual similarities between Tribe
and Tinsley mean that it is very sensible that the proposed statutory discretion should
extend to cases where the illegal purpose has not yet been carried into effect.
The intended legislation would therefore avoid some tricky issues that have arisen

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regarding the locus poenitentiae. This is particularly welcome since subsequent decisions
have emphasised that the illegal purpose should be widely defined for the purposes of
the locus poenitentiae doctrine21 ; this clearly sits uncomfortably with the decision in
Tribe. Under the Draft Bill, the difficulties inherent in identifying the precise point in time
at which some part of the illegal purpose was carried into effect is not crucial, but just
one element to be taken into account.22 However, the Draft Bill only applies where a
beneficial interest is concealed in connection with the commission of an offence. In other
contexts, therefore, the complexities which riddle the law concerning the locus
poenitentiae will continue.23 This is not discussed in the Final Report.
A discretionary approach to withdrawal from an illegal transaction should be encouraged
in all instances; it is a pity that there is not to be legislation to which courts can turn to
justify such an approach. Rather, courts will continue to be left to struggle with the
decision in Tribe, and whether its scope extends beyond its own particular facts. For
example, Millett LJ stated:
I would hold that genuine repentance is not required. Justice is not a reward for merit;
restitution should not be confined to the penitent. I would also hold that voluntary
withdrawal from an illegal transaction when it has ceased to be needed is sufficient. It is
true that this is not necessary to encourage withdrawal, but a rule to the opposite effect
could lead to bizarre results.24
This statement appears to be very wide, and to depart from the earlier decision of Bigos
v Bousted, in which it was held that genuine repentance was required.25 That case
concerned a defendant who, in an attempt to avoid the Exchange Control Act 1947,
arranged for the claimant to provide the defendant's wife and daughter with *CONVPL
285 Italian currency, in return for the defendant's depositing a share certificate with the
claimant. The defendant did deposit the share certificate, but the claimant refused to
proceed with the agreement. Pritchard J. held that the defendant could not recover the
share certificate because he had not genuinely repented of the illegality.
Would Bigos be decided differently today?26Tribe appears to put an end to the notion
that a party should genuinely repent of his illegality in order to exploit the locus
poenitentiae, in which case the defendant in Bigos may be able to recover the share
certificate, despite a lack of genuine repentance; no part of the illegal agreement was
actually carried out.27 But if the Draft Bill were to be passed, it is possible that the
reasoning in Tribe would carry less weight, especially since it could be considered to be
heavily infected by the reliance principle. However, the Draft Bill does not overrule Tribe,
so such an approach may be inappropriate, especially because the dicta above seem to
have been intended to extend beyond the particular facts at issue. The Law Commission
appears content to leave such matters for the common law, but it may well be
awkward for courts to develop the law by relying on decisions such as Tribe and Tinsley
when the thrust of the reasoning in those cases has been sidestepped by statute. Further
guidance regarding the intended effect of the proposed reforms would be helpful.
The Draft Bill will also apply where the illegal purpose is formed only subsequent to the
trust's being established.28 This is sensible: whether an intention to defraud is formed
just before or just after the trust is created should not make a significant difference
regarding whether or not the court can exercise its discretion concerning the illegality
defence. However, if the purpose is formed after the trust has been created, the Draft
Bill requires both that steps be taken to ensure that the trust arrangements continue in

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being,29 and that the arrangement has in fact been exploited in connection with the
commission of an offence.30 The Law Commission considered such safeguards necessary
to avoid the statutory discretion applying to cases where the trust arrangement was
merely incidental to the crime committed. Only instances where the trust institution itself
has been used for criminal purposes are included within the ambit of the Draft Bill.31
The Final Report states that if the Draft Bill went beyond this it would cover a much
wider remit than our policy requires.32 This is consistent with the narrow scope of the
Draft Bill.
That the scope of the Draft Bill is so narrow will disappoint many. The arbitrary,
confusing and unsatisfactory reliance principle will continue to influence many areas
not covered by the statutory scheme. Cases which will not benefit from the proposed
legislation include instances where the trust is executed in return for consideration which
is illegal.33 Nor will the proposed scheme cover instances *CONVPL 286 where the
relevant illegality is the source of the trust property, rather than the purpose of the trust
arrangement. This is particularly troublesome, since the case law in this area appears to
conflict.34 Indeed, in Mortgage Express v McDonnell,35 where the payments which gave
rise to the trust were the fruits of a mortgage fraud, Robert Walker L.J. thought that
Tinsley could not be distinguished. Since the Draft Bill departs from the reliance principle
of Tinsley only in such a narrow range of circumstances, cases such as McDonnell, where
the illegality is not the purpose to commit a fraud, will still be governed by Tinsley and
the reliance principle. This may well be considered to be unsatisfactory.
The Final Report states that the effect of the reliance principle in such cases is that the
illegality is simply ignored,36 but that is clearly not always true.37 It also seems very
optimistic for the Law Commission to suggest that even where the reliance principle
applies, there is little reason to worry because the statutory provisions for forfeiture and
civil recovery contained in the Proceeds of Crime Act 2002 are likely to apply.38 As the
Law Commission itself previously pointed out:
[T]he Serious Organised Crime Agency [SOCA] does not have sufficient resources to
institute proceedings in every case in which property has been obtained through unlawful
conduct.39
It is insufficient to rely upon SOCA doing the work that the illegality defence could do.
Unsatisfactory outcomes may result; SOCA is unable to use POCA 2002 in order to
recover all benefits obtained illegally.
More positively, the proposed legislative scheme will apply not only to future trusts but
also to those already in existence.40 Such retrospective application of legislation may be
unusual, but it seems acceptable in this instance: there is no reason for the
unsatisfactory reliance principle to limp on for already existing trusts. Its passing will not
be lamented. After all, the reliance principle operates in an unclear, arbitrary manner and
can lead to disproportionate results.41 A discretionary approach is much more
appropriate, and helps to bring the elements of public interest which underpin the
illegality defence to the fore.42
In any event, beneficiaries will benefit from a year after the enactment of the Bill to
rearrange their affairs if they fear the effect of the changes brought about by
legislation.43 Perhaps the best justification for the year's grace may lie in the *CONVPL
287 fact that it might encourage parties to pull out of trusts which are being used in
connection with an offence. But few affected parties are likely to be aware of the need to

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review their arrangements, and beneficiaries who are exploiting trust arrangements for
illegal purposes deserve little sympathy anyway. The need for a delay of one year
between the enactment of the legislation and the date on which the discretion will come
into force is not clear.

Procedure
If the case in question does fall within the scope of the proposed statute, then the court
should first declare the beneficiary to be entitled to the equitable interest in issue.44 This
was considered necessary in order to avoid undermining provisions in POCA 2002: if a
party was not beneficially entitled to the property in the first place, then SOCA would not
be able to pursue that party for the property at issue.45 This seems entirely sensible:
POCA 2002 should be exploited to the full.46
The interrelationship between the rules on illegality and other common law doctrines is
not dealt with in depth in the Final Report ; rather it is asserted that where the
discretion applies, it should be the sole determinant of the effect of the illegality.47 One
significant effect of this may be to relegate the importance of the sham doctrine in trust
law.48 Sham trusts are often set up with an illegal purpose in mind; however, at present
there may be difficulties in pleading the illegality in order to show that the trust is a
sham, given the arbitrary nature of the reliance principle.49 Yet under the Draft Bill the
court must be satisfied that the beneficiary is entitled to the equitable interest under
general trust rules for the statutory scheme to apply, without having regard to the
reliance principle.50 It would appear as if this enables the court to apply the envisaged
statutory scheme to sham trusts which are established in order to conceal an interest.
This is welcome; much of the law relating to sham is unclear, and the consequence of
finding a sham appears to lead, inevitably, to the finding that the trust is void.51 This
may not always be appropriate when the proposed statutory scheme applies: the factual
context and nature of the illegality may markedly differ from case to case. A
discretionary approach is to be preferred.

Applying the discretion

If the Draft Bill applies, whether or not the illegality defence should bar a claim is a
matter for the court's discretion. The starting point for the discretion is that the
beneficiary should be able to enforce his equitable interest regardless of any *CONVPL
288 illegality.52 The Law Commission has previously explained its preference for a
presumption that an illegal transaction be enforceable on the basis that this would be the
result of the vast majority of cases: the illegality would simply be ignored.53 Yet it may
be preferable to state that a party who is tainted with illegality should not be presumed
to be able to enforce his otherwise-lawful rights.54 This approach has been adopted, in
the contractual context, in New Zealand55 and Israel.56 It is submitted that the Law
Commission should have followed this lead. The Law Commission previously explained its
reluctance to follow the lead of other jurisdictions on the basis that the envisaged
discretion was to cover a wide range of illegal transactions, including some instances
where the illegality would be unintentional, very minor, and not a criminal offence.57
However, the very narrow scope of the statutory scheme now proposed undermines this
justification: if a party has exploited the trust mechanism in order to conceal an interest

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in property, in connection with a criminal offence, then this appears to be particularly

culpable conduct where the illegality defence may well be expected to apply. The
presumption of the law should be that the beneficiary is unable to enforce his rights.
Since the courts are to weigh a number of factors in an overall discretionary approach, it
may make little difference from what point the courts begin their exercise. But this is not
necessarily true: the discretion only appears to kick in if in the court's opinion the
circumstances are exceptional.58 It is unclear both what the term exceptional means,
and why it is considered necessary.59
The Law Commission thought that what constitutes exceptional circumstances can be
safely left to the courts.60 This is problematic: the interpretation of exceptional is
likely to vary from case to case and therefore lead to inconsistency. The Final Report
considers this extra hurdle of exceptional circumstances to be necessary since in the
general run of the mill type of case we do not expect the illegality to have any effect on
the beneficiary's entitlement.61 However, if a beneficiary has taken steps to conceal an
equitable interest for the purpose of committing a criminal offence--the only sort of
situation to which the Draft Bill applies--this does not appear to be very run of the mill
in the first place. Nor is it obvious why the illegality defence should, generally, be of no
application in such a scenario.62 At the very least, it is puzzling why the courts should
not be able to go through the exercise of balancing competing policy considerations in
order to reach this result. The scope of the Draft Bill is so narrow anyway that it seems
unnecessarily restrictive to limit further the scope of the discretion by adding an
*CONVPL 289 additional requirement of exceptional circumstances, which seems to
represent an obscure hurdle of uncertain height. The Explanatory Notes to the Draft Bill
indicate that the circumstances might be exceptional where, for example, the claimant's
behaviour has been particularly reprehensible,63 but this does little to clarify matters.
What does particularly reprehensible mean? And what other circumstances are
exceptional?
Be that as it may, it is clear that the Draft Bill encourages a discretionary approach.64
The Law Commission seeks to avoid the suggestion that it is, in essence, advocating a
return to the shock of the conscience of the court test which was deprecated by all
members of the House of Lords in Tinsley by structuring the discretion. Thus the Draft
Bill suggests that the court may, in particular, take into account:
(a) the conduct of all the relevant persons;
(b) the effect which the declaration or determination would have on any relevant
unlawful act or purpose;
(c) the fact that an offence has, or has not, been committed;
(d) the value of the relevant equitable interest;
(e) any deterrent effect on others;
(f) the possibility that a person from whom the relevant equitable interest was to be
concealed might have an interest in the value of B's [the beneficiary's] assets (for
example, as a creditor of B or because of proceedings under the Matrimonial Causes Act
1973 or the Civil Partnership Act 2004).65
These factors are all sensible, but it should be noted that these considerations are
optional and non-exhaustive; the Draft Bill states that the court may take anything
which it thinks relevant into account.66 The difference between the statutory discretion

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and the public conscience test of the Court of Appeal in Tinsley67 may be very fine
indeed. However, it is undoubtedly desirable that the courts articulate the public policy
concerns which underpin the illegality defence, and the guidance of the statute should
promote coherent, transparent reasoning, rather than a vague discretion which may lead
to palm-tree justice.68
The factors identified by the Draft Bill which may influence a court are all sensible and
worthy of consideration. The list is unsurprising, given the views expressed in the
Consultative Report,69 but some points are worthy of note. First, it is a relevant
consideration whether or not an offence has actually been committed. This brings cases
which might currently be decided by reference to the locus poenitentiae within the scope
of the Draft Bill.70
*CONVPL 290 Secondly, two new factors are identified in the Final Report. The first of
these is that the conduct of all the parties involved is a relevant consideration.71 This
seems obviously relevant and its inclusion is welcome.72 The second new factor is that
the intended victim of the concealment may have an interest in the value of the assets
of the beneficiary, and the court should take this into account.73 The Law Commission
gives the example of a husband who may transfer property to his mistress in order to
hide it from his wife. If a dispute were to arise between the husband and mistress over
the ownership of the property, the court might take into account the possibility that the
wife might in the future bring a claim against her husband under the Matrimonial Causes
Act 1973, and that the value of the wife's possible claim might be reduced if the court
were to decide that the husband did not in fact have an interest under a trust in the
property transferred to the mistress because of the illegality defence. This factor is
welcome; it is submitted that innocent third parties should not be disadvantaged by the
court's application of the illegality defence in a dispute between two parties tainted by
illegality. This is particularly relevant for creditors of beneficiaries who have exploited the
trust mechanism in order to commit a fraud. Although the beneficiary may be barred
from asserting his rights, should the creditor's claim also be barred? The answer to this
important question remains unclear; in Collier v Collier, the Court of Appeal suggested
that the creditors would still be able to assert a right to the property under the trust,
even if the beneficiary himself could not do so for his own benefit.74 This seems correct,
particularly since it has often been said that the illegality defence is only a procedural
bar, rather than a substantive defence.75 However, in a different context, the House of
Lords appeared to cast doubt on such an approach.76 It is a shame that the Final Report
does not offer firmer guidance on the approach the courts should adopt in this matter,
although perhaps it is sufficient that it be a factor that the court can take into account.77
Thirdly, the Law Commission suggests that the value of the equitable interest at stake
should be taken into account.78 One justification given by the Law Commission for this
factor is that the beneficiary might regard the barring of his or her claim as being
punitive, so the value of the equitable interest at stake should be relevant to the court's
discretion. This must be right, but it is submitted that it would be better explicitly to
accept that the punishment of a party is a relevant consideration of which the courts
must be aware. However, the Law Commission has, unfortunately, distanced itself from
considering punishment to be a relevant rationale underpinning the illegality defence.79
It will be revealing to see whether the courts refer to punitive considerations in decisions
to come. In any event, the *CONVPL 291 Law Commission's goal of avoiding
disproportionate results, which also underpins the desire to consider the value of the

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equitable interest at stake,80 is undermined by the insistence upon the illegality defence
operating in an all-or-nothing manner.

Consequences of the discretion

While the range of factors the court may take into account in deciding whether or not the
illegality defence should apply is potentially limitless, the ramifications of the exercise of
that discretion are very restricted indeed. The court only has four options when deciding
who is entitled to the equitable interest: (i) the beneficiary81 ; (ii) the trustee82 ; (iii)
the settlor83 ; or (iv) another beneficiary under the same trust.84 This is obviously very
limited, and is compounded by the fact that the court cannot split the relevant interest
between (i), (ii), (iii) and (iv).85 The illegality defence will continue to operate in an allor-nothing manner; either the beneficiary is entitled to retain the entire beneficial
interest or none of it.
This all-or-nothing approach is unsatisfactory. The discretion that the courts have in
deciding whether or not the illegality defence should apply should also extend to deciding
what the consequences of the defence should be.86 It may be argued that this could
lead to uncertainty, but there will already be uncertainty regarding how the courts will
exercise their discretion, and to whom it will award the relevant equitable interest.
Moreover, allowing apportionment could help to avoid unjust results. For example,
imagine that a father transfers 10,000 to his son in order to hide his money from his
creditors. The son did not wish to hold the money on trust, but was blackmailed into
doing so by his father. The creditors later seek to recover 5,000 from the father. The
father, realising that he could actually afford to pay off his creditors after all, then asks
for the money back from his son. The son refuses. It is possible that in such a situation
the court would wish to apply the illegality defence.87 But to prevent the father from
recovering anything at all would leave the creditors empty-handed and the son with a
scarcely-deserved windfall. It is submitted that a better result would be to allow the
father to recover from his son 5,000 only, in order to pay his creditors.88 But under the
Draft Bill the court is left with the alternative of allowing the father to recover
everything, in which case he will gain 5,000 he would not otherwise have obtained, or
of recovering nothing, in which case the creditors would be unfairly disadvantaged.89
The lack of flexibility inherent in the Draft Bill may also pose a problem in cases such as
Tinsley. On the facts of the case, it seems as if Miss Milligan may have made peace with
the Department for Social Security by paying back the *CONVPL 292 benefits she
fraudulently claimed.90 But what if she had not done so? If her claim was still not barred
by the illegality defence,91 then she would be able to retain the benefits she had
fraudulently claimed. This would represent an undue windfall benefit.92 However, rather
than allowing Miss Milligan to assert her share in the property and retain the fraudulently
claimed benefits, it may be better to allow Miss Milligan to assert her share in the
property if she returns the benefits she fraudulently claimed. This was the solution
favoured by the High Court of Australia in Nelson v Nelson, and seems entirely
appropriate.93 The Law Commission admits to finding this issue difficult,94 but
ultimately rejected such a solution because it felt it appropriate to leave to defrauded
third parties the choice of whether or not to pursue a claim to recover the benefit which
was illegally obtained.95 Such reasoning is unconvincing; in many cases the victim of the
fraud will not have the resources to bring such a claim, or will decide that the value of

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the claim is not worth the resources required to pursue it.96 This might leave a party
with an underserved windfall. It seems unsatisfactory for the court to be unable to
deprive a party of gains which the court knows have been illegally made.97 The Final
Report suggests that, in practice, parties will be encouraged to repay ill-gotten gains as
this might influence the exercise of the court's discretion.98 But where there has been
no such repayment, the courts will be left with an uncomfortably narrow range of
remedial options.
Similarly, if Miss Milligan's only asset were her interest in the house, but the court were
to decide that her illegality were so serious that her claim should not be allowed to
succeed, this may deprive the Department of Social Security of any chance of seeking
substantial relief from Miss Milligan.99 It is suggested that the position of the third party
victim of the fraud should be addressed, and that the court should have the power to
award a sum to such a party; the Department of Social Security deserves to recover the
amount by which it was defrauded, whereas neither Miss Milligan nor Miss Tinsley has
any convincing claim to that money. Yet this is clearly impossible under the Draft Bill; the
classes of person who may benefit from the court's discretion are restrictively
defined.100
It may be argued that giving such a power to the court would be a novel step. But the
Law Commission is content to allow the novel remedial option of allowing the trustee, as
legal owner, to become beneficially entitled to the property in question.101 Indeed,
where the settlor is the sole beneficiary under a trust, and the court decides that the
illegality defence should prevent him from asserting his equitable interest, the only
option open to the courts is to find that the equitable *CONVPL 293 interest in
question vests beneficially in the trustee. This seems rather unsatisfactory. It results in a
windfall gain to the legal owner, which is not readily explicable. Why does the trustee
have any claim to beneficial ownership of the property at all? After all, a trustee should
only be seen as the instrument of the trust. The Law Commission appears to believe that
this is the only feasible option,102 and that the trustee will only benefit from such a
windfall in suitable cases, since the court will have taken into account the conduct of
the trustee when exercising its discretion, which, in any event, can only be exercised in
exceptional cases.103 Yet even here it would be preferable for the trustee not to be able
to benefit from his position by taking beneficially the property previously held on trust.
The Law Commission previously expressed the view that any windfall the trustee
obtained could be reduced by ordering the trustee to pay sums (whether as
compensation or as restitution) to the settlor (or transferor/contributor).104 That is
clearly impossible under the Draft Bill.
The Draft Bill affords the court the power to declare the trustee beneficially entitled,
even where the trustee has not sought any declaratory relief in his favour. Yet if the
court is prepared to give the property to someone who is not a party to the dispute in
question, surely the state105 has a claim which is at least as strong and worthy of
consideration. Any illegal act is necessarily also a wrong against the state, and it
therefore seems sensible to recognise this by allowing the courts to award the property
to the state.106 This may be considered to be akin to treating the property as bona
vacantia. Nevertheless, the Law Commission appears uncomfortable with such a
conclusion because it resembles a criminal sanction.107 But bona vacantia has nothing
to do with the criminal law. Moreover, allowing the court the power to award property to
the state would seem to be consistent with the rationale of POCA 2002; it should not

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matter whether the illegal transaction is brought to the court's attention by the parties to
a private dispute, or by SOCA. In both instances the court should have the power to
confiscate gains made.108

Conclusion
The Draft Bill deserves to be supported. The reliance principle operates in an arbitrary
and complicated manner, so any legislation which reduces its scope of operation should
be welcomed. Moreover, the proposed legislative regime will reduce the importance of
the difficult distinctions which riddle the presumption of advancement, rightly
condemned by the Law Commission as archaic and discriminatory.109 The
discretionary approach advocated is appropriate; given the wide range of illegalities and
factual scenarios in which the illegality defence may apply, a less nuanced approach
would be undesirable. However, the ambit of the *CONVPL 294 discretion is very
narrow indeed, and this may be a cause for lament: the reliance principle seems set to
limp on in areas of trust law which do not fall within the ambit of the proposed statutory
scheme. Moreover, courts may well feel dissatisfied with the fact that while they enjoy a
wide discretion when deciding whether or not the illegality defence should apply, they do
not enjoy such freedom when deciding what the consequences of the discretion should
be. The Final Report 's hope that SOCA will exercise its powers under POCA 2002
appears to be very optimistic: SOCA simply does not have the resources to strip all
wrongdoers of their ill-gotten gains. Courts may well, after hearing extensive argument
about serious illegality on the part of all parties, be forced to allow one of them to retain
the entire benefit derived from an offence.110

The common law

The narrow scope of the Draft Bill means that, in the vast majority of circumstances, the
illegality defence will still depend upon common law principles. As has been pointed out
many times before, the common law is complicated, difficult to explain, and riddled with
contradictions. Nevertheless, the Law Commission hopes that the common law will
develop so that the courts increasingly articulate the policy reasons behind their
decisions regarding the application of the illegality defence. This would be welcome and
make the illegality defence more transparent and easier to predict. However, it may be
unduly optimistic to expect that case law will provide a sustained, transparent, coherent
approach in this area; certainly, the law has done little thus far to give cause for
confidence. That is why the House of Lords in Tinsley called on the Law Commission to
recommend reform. But without the support of legislative authority, the hopes and
recommendations of the Law Commission have little force. It is therefore a pity that the
scope of the proposed statutory discretion is so narrow.
In particular, the effect of such a narrow legislative scheme may be that the reliance
principle continues to blight much of English private law. For example, the decision in
Bowmakers Ltd v Barnet Instruments Ltd111 means that, as far as legal property rights
are concerned, the reliance principle will continue to operate in a confusing manner.112
A significant dichotomy therefore arises between how courts are empowered to consider
the illegality defence as it relates to equitable property rights (discretion) and legal
property rights (reliance). This is highly unsatisfactory. Indeed, one of the principal aims

Page11

of Tinsley was to ensure that there was no difference in the operation of the illegality
defence between law and equity113 ; substantive fusion of the law in this area should
be supported. The Final Report admits to concern about this dichotomy, but believes
that different treatment between law and equity can be justified because the trust
institution is being used to conceal the equitable interest in a way that is simply not
possible with the legal interest.114 Whilst obviously correct, it does not really explain
why *CONVPL 295 equitable rights benefit from a discretionary regime, whereas legal
rights do not. The Final Report suggests that it is the intention to conceal the beneficial
ownership by splitting the two estates that sets this type of case apart,115 but why is
the intention to conceal beneficial ownership in connection with an offence the only sort
of illegal conduct that is worthy of a legislative, discretionary regime?
It is submitted that there is no satisfactory answer to this question.116 The Law
Commission appears to conclude that it is principally in situations such as Tinsley where
the reliance principle has proved problematic, and this justified a very specific Draft Bill.
But other areas have clearly proved troublesome; the scope of the reliance principle
extends beyond the facts of Tinsley itself.117 Thus in the area of unjust enrichment the
reliance principle may continue to distort results, particularly given the failure of the law
to recognise that partial failure of consideration may be a ground of restitution. The
reliance principle may also continue to pose problems in the areas of contract and
tort.118
Since the Consultative Report there have been two important decisions of the House of
Lords relating to the illegality defence: Gray v Thames Trains Ltd119 and Stone & Rolls
Ltd (In Liquidation) v Moore Stephens (A Firm)120 The Final Report suggests that these
decisions121 support the notion that the common law will develop, of its own accord, to
make the application of the illegality defence more transparent and depend upon the
policy principles which underpin the defence. Whilst some support for this contention can
be found in their Lordships' speeches, a shift towards a discretionary, transparent,
balancing approach is far from unequivocal and may be insufficient to allay fears that the
illegality defence is a difficult area of law which can produce problematic results.

Gray v Thames Trains Ltd

Gray is the decision which affords most support to the Law Commission's belief that
statutory reform is not necessary to produce a transparent, principled approach. Mr Gray
was a victim of the Ladbroke Grove train crash of 1999. He suffered post-traumatic
stress disorder as a result. Consequently, in 2001, he committed homicide, and pleaded
guilty to manslaughter on the grounds of diminished responsibility. He brought a claim
against the defendants, who were responsible for the original crash, for loss of earnings.
The House of Lords refused to allow Mr Gray to recover any loss of earnings suffered
after he had committed homicide, ruling that any such claim was barred because of the
illegality defence.
*CONVPL 296 The decision of the House of Lords was contrary to that of the Court of
Appeal. However, it seems both sensible and coherent: allowing Mr Gray to recover
would have been inconsistent with the criminal law, which seeks to punish Mr Gray for
his crime. The House of Lords rejected any test for the illegality defence which depended
upon whether the claimant's claim is so closely or inextricably bound up with his own
criminal or illegal conduct that the court could not permit him to recover without

Page12

appearing to condone the conduct.122 This was rightly considered to be so malleable as

to be unhelpful.123 Their Lordships also dismissed any notion that Tinsley should apply
to the facts of the case; Lord Hoffmann insisted that Tinsley was not relevant to this
kind of case.124 Whilst the rejection of the reliance principle of Tinsley is very welcome,
it is very clear that the House of Lords did not criticise Tinsley, let alone overrule it. But
it remains unclear what should be understood by this kind of case; if its scope is very
narrow, then the influence of Tinsley may remain very large.
Nevertheless, the House of Lords did consider what policy factors should underpin the
decision whether or not the illegality defence should bar Mr Gray's claim. Consistency
with the criminal law was considered to be of paramount importance.125 This is clearly
one important rationale of the illegality defence, but their Lordships, rightly, did not
suggest that it should be the only relevant factor.126 Indeed, it seems apparent that
their Lordships also believed the seriousness of the illegality to be an important
consideration.127 However, the judges did not spell out what other factors should be
taken into account. This may develop on a case-by-case basis, in which case the Law
Commission's desire that a transparent, well-reasoned, policy-based illegality defence be
advanced through the judiciary might be fulfilled. Yet this path should be treated with
some caution; judges may well find it difficult to articulate what policy factors should be
relevant, and a coherent approach may not be reached through disparate, individual
decisions.128 It is not beyond the realm of possibility that Tinsley be continued to be
used by the courts, and the Law Commission may regret not giving authoritative
guidance to judges in the lower courts.

Stone & Rolls Ltd (In Liquidation) v Moore Stephens (A Firm)

Stone & Rolls Ltd (S&R) was a one-man company, controlled by Mr Stojevic. Through
S&R, Mr Stojevic perpetrated a letter of credit fraud. His victims sued and S&R was put
into liquidation. In order to try to recover some money, the liquidators sued the auditors
of S&R, Moore Stephens, for both breach of contract *CONVPL 297 and negligence, on
the grounds that the auditors had carried out their duties without taking reasonable
care. Moore Stephens argued that even if this were true, the claim could not succeed
because of the illegality defence.
In the Court of Appeal, Rimer L.J. had applied the reliance principle of Tinsley with some
gusto, asserting that Tinsley was of general application, and that if a claimant needed to
rely upon and plead an illegality in order to make out his claim then the axe falls
indiscriminately and the claim is barred, however good it might otherwise be. There is no
discretion to permit it to succeed.129 Such a rigid approach would clearly undermine
the Law Commission's contention that the reliance principle is not so important outside
the trust law context.
Although the House of Lords, by a 3:2 majority, agreed that the illegality defence barred
the claim, the issue was not considered in detail by all their Lordships.130 But of the
majority, both Lord Walker and Lord Brown held that Tinsley governed the claim, and
that the reliance principle left no scope for discretion.131 Lord Walker even
acknowledged that this was contrary to the approach advocated by the Law Commission
in its Consultative Report, but stated that the proposals of the Law Commission would
only become effective if enacted by Parliament.132 Since the Draft Bill does not
propose legislative reform, it is difficult to understand how the law is certain to develop

Page13

in the manner desired by the Law Commission. Lord Walker will not be alone in seeking
guidance from the authority of the House of Lords in Tinsley, rather than the less
persuasive wishes of a law reform body.
However, the Final Report does not consider Moore Stephens to undermine its belief that
the common law will develop a coherent, discretionary approach, although it does accept
that [i]t is difficult to anticipate what precedent, if any, [Moore Stephens ] will set
regarding the illegality defence.133 The Final Report focuses on the speech of Lord
Phillips, who favoured a broader approach to the illegality defence in the contractual
sphere and thought that policy considerations underlying the illegality defence needed to
be clearly identified. Yet it is, perhaps, unconvincing to focus on only one judge of the
majority, rather than two.134 It is unfortunate that the Law Commission did not
recommend legislation to clarify this area of the law, but in the absence of such reform it
is to be hoped that the Law Commission's desires will be fulfilled, and that future
decisions will focus upon the policy reasons which underpin the illegality defence.
Indeed, subsequent first instance decisions do seem to follow a more transparent, policybased approach, rather than a mechanical application of the reliance principle.135 But it
is unclear whether this really represents a sustainable shift of approach. Experience of
the illegality defence suggests that coherence in this area does not come readily through
case law.
*CONVPL 298 It has been argued above that the failure of the Law Commission to
recognise the benefits of apportionment, and insist upon an all-or-nothing application of
the illegality defence, may be viewed as unfortunate. This may also be relevant in other
areas of private law, not only trusts.136 For example, the application of the illegality
defence in Moore Stephens allowed the auditors to escape scot-free, despite carrying out
the audit negligently. It may be preferable to allow the creditors to recover something
from the auditors, even if the scope of recoverable damages may be limited by the
illegality defence. Indeed, Lord Mance expressed an attraction towards a more balanced
discretionary possibility.137

Conclusion
The Law Commission faced an unenviable task when it took on this law reform project:
the case law is difficult, and views regarding the appropriate path of reform vary wildly.
Indeed, within the Commission there have clearly been differences of approach.138 The
final proposals were therefore never likely to please everyone. It is, nevertheless,
somewhat ironic that after such a long period of time the proposed legislation would
simply reverse the reasoning of the House of Lords in the very case which called for
extensive reform of this area.
The Draft Bill deserves support: decisions such as Tinsley and Tribe do not reflect well on
the law. The application of the illegality defence should not be a question of applying, in
a mechanical manner, the reliance principle. Rather, reference should be made to the
principles of public policy which underpin the reasons for applying the illegality defence
itself. The proposed statutory discretion is therefore welcome. In the view of this writer,
however, it is a shame that the discretion is so narrow. As the Law Commission itself
notes, [t]o date, the common law rules have found it difficult to cope with such a
variety of circumstances,139 and it may be optimistic to hope that coherence and a
discretionary approach will be developed by the judges. Such reform would be welcome,

Page14

but the Final Report itself is simply a weak nudge in that direction. A firm shove in the
shape of a wider Draft Bill would have been preferable. After all, judges have little
opportunity to assess the structure of the illegality rules as a whole.140
The Final Report expresses the belief that the interpretation of the reliance principle in
Tinsley can be limited to the strict remit of that case,141 and that judges should feel
free to develop a more balanced approach in all other areas. Such a development would
be commendable, but it must be feared that the authority of Tinsley, and its subsequent
progeny, will not be taken to be so limited.142 Nor can decisions such as Bowmakers
lightly be pushed aside.143 The reliance principle looks set to cause problems for some
time to come.
*CONVPL 299 The reaction of the Ministry of Justice to the Law Commission's
recommendations will be revealing. In such a technical area of law, it is unlikely that the
Government will adopt a radically different approach from that of the Final Report,
although it may be that the Draft Bill will be seen to be too narrow or too controversial
for legislation to be passed. That would be a shame; any encouragement that can be
given to the judges to adopt a discretionary approach is desirable. Under a new Protocol
between the Law Commission and Ministry of Justice, the latter has six months to
respond with its preliminary views, and one year to give its formal response to the Final
Report.144 Trust lawyers await the decision with interest.
I am grateful to Graham Virgo for his comments and advice. Any errors are, of course,
my own.
Conv. 2010, 4, 282-299
1.

Tinsley v Milligan [1994] 1 A.C. 340; [1993] 3 W.L.R. 126 HL.

2.

The Illegality Defence Law Com No.320.

3.

cf. Law Commission Consultation Paper No.154, Illegal Transactions (1999) (CP 154) and Law
Commission Consultation Paper No.160, The Illegality Defence in Tort (2001) (CP 160).

4.

Law Commission Consultation Paper No.189, The Illegality Defence: A Consultative Report (2009).

5.

P.S. Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182.

6.

This principle states that the illegality defence will apply if a party needs to plead or lead evidence of
illegality in order to establish his claim.

7.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182.

8.

Tinsley v Milligan [1992] Ch. 310; [1992] 2 W.L.R. 508 CA (Civ Div). The public conscience test had
been used in previous decisions also: see e.g. Thackwell v Barclays Bank Plc [1986] 1 All E.R. 676 QBD;
Euro-Diam Ltd v Bathurst [1990] 1 Q.B. 1; [1988] 2 W.L.R. 517 CA (Civ Div).

9.

Even if the outcome of the case may remain the same.

10.

Draft Bill cl.2.

11.

Draft Bill cl.2(2).

12.

Draft Bill cl.2(4).

13.

The Law Commission has previously acknowledged that attempting to define illegality was
surprisingly difficult: CP 154 para.1.4.

14.

Either an offence under the law of England and Wales, or an offence in the jurisdiction where the

Page15

conduct element of the offence was to occur or would have occurred: Draft Bill cl.2(7).
15.

e.g. Pearce v Brookes (1866) L.R. 1 Ex. 213.

16.

This gives a broad definition of fraud: Fraud Act 2006 ss.1-3.

17.

Tribe v Tribe [1996] Ch. 107 CA (Civ Div).

18.

See Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 190-191.

19.

See e.g. F. Rose, Gratuitous transfers and illegal purposes (1996) 112 L.Q.R. 386, 389-390.

20.

Indeed, the withdrawal appears to lie simply in the fact that the father brought a claim for restitution.

21.

See especially Q v Q [2008] EWHC 1874 (Fam); [2009] 1 P. & C.R. DG5.

22.

Clause 5(1)(c); see text to n63ff.

23.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 204-206.

24.

Tribe v Tribe [1996] Ch. 107, 135.

25.

Bigos v Bousted [1951] 1 All E.R. 92.

26.

A need for genuine repentance has been criticised: e.g. K. Grodecki, In pari delicto potior est conditio
defendentis (1955) 71 L.Q.R. 254; R. Merkin, Restitution by Withdrawal From Executory Illegal
Contracts (1981) 97 L.Q.R. 420. Although compare P. Birks, Unjust Enrichment, 2nd edn (OUP, 2005)
pp.250-251.

27.

Although Millett L.J. in Tribe did state that withdrawal simply because of the discovery of the illegality is
insufficient: Tribe [1996] 1 Ch. 107, 135.

28.

Draft Bill cl.2(4).

29.

Draft Bill cl.2(4)(a).

30.

Draft Bill cl.2(4)(b).

31.

e.g. Slater v Simm [2007] EWHC 951 (Ch); [2007] W.T.L.R. 1043, where one party exploited an existing
trust arrangement in order to conceal a beneficial interest in divorce proceedings.

32.

Final Report para.2.40.

33.

Ayerst v Jenkins (1873) L.R. 16 Eq. 275 Ct of the Lord Chancellor. This is particularly significant since
property rights can pass under an illegal contract: Singh v Ali [1960] A.C. 167; [1960] 2 W.L.R. 180 PC
(FMS).

34.

Compare Macdonald v Myerson [2001] EWCA Civ 66; [2001] 6 E.G. 162 (C.S.) with Halley v Law
Society [2003] EWCA Civ 97, [2003] W.T.L.R. 845. See Davies, The Illegality Defence--two steps
forward, one step back? [2009] 73 Conv. 182, 185.

35.

Mortgage Express v McDonnell [2001] EWCA Civ 887; [2001] 2 All E.R. (Comm) 886.

36.

Final Report para.2.44.

37.

e.g. Halley [2003] EWCA Civ 97, which is not discussed at all in the Final Report.

38.

Final Report para.2.44.

39.

Consultative Report para.A.16. See fn.110, below.

40.

Draft Bill cl.7(2).

41.

This is particularly the case if the presumption of advancement applies, although this presumption will,
from October, no longer apply to future transactions: Equality Act 2010 s.199. It may even be suggested
that there is such confusion about the application of the current law, that not applying the Draft Bill to
existing trust arrangements may in fact be more likely to be incompatible with Article 1 of the First

Page16

Protocol to the European Convention on Human Rights than the approach taken by the Law Commission.
42.

Although there may still be an issue about whether the statutory scheme can lead to proportionate
results as between the parties themselves: The default position: see text to fn.81ff. The Law
Commission appears to be more focussed on striking a fair balance between the parties' interest and the
public interest: e.g. Final Report para.2.130.

43.

Draft Bill cl.7(3).

44.

Draft Bill cll.1(1), 3

45.

There may also be a risk of jeopardising a criminal prosecution: Final Report para.2.56.

46.

Draft Bill cl.6 provides for some minor amendments to POCA 2002 in order to ensure that even where
the court decides that the beneficiary should not be able to enforce his rights, there should be no
adverse impact on the ability to recover the proceeds of crime under POCA 2002.

47.

Final Report para.2.109

48.

Another would be that the equitable maxim of clean hands would not be used in disputes falling within
the ambit of the statutory discretion.

49.

On sham trusts generally see M. Conaglen, Sham Trusts (2008) 67 C.L.J. 176.

50.

Draft Bill Explanatory Notes, B.8.

51.

Midland Bank Plc v Wyatt [1997] 1 B.C.L.C. 242; [1995] 1 F.L.R. 697, 707; Rahman v Chase Bank (CI)
Trust Co Ltd [2002] B.P.I.R. 129; [1991] J.L.R. 103, 168.

52.

Draft Bill cl.4(1)

53.

Law Commission Consultation Paper No.154, Illegal Transactions (1999) (LCCP 154) paras 7.44-7.56.
See also Law Commission Consultation Paper No.160, The Illegality Defence in Tort (2001), paras 6.486.49 and Final Report para.2.59.

54.

N. Enonchong, Illegal transactions: the future? (LCCP 154) [2000] R.L.R. 82, 90-93.

55.

New Zealand Illegal Contracts Act 1970 s.6(1).

56.

Israeli Contract (General Part) Law 1973 s.30.

57.

LCCP 154 paras 7.49-7.50.

58.

Draft Bill cl.4(1).

59.

Nor is it clear what circumstances means.

60.

Final Report para.2.60.

61.

Final Report para.2.60.

62.

Admittedly, in the leading case of Tinsley the claimant was able to enforce her rights, despite the
illegality. But that result will not necessarily follow as a general rule; in Tinsley, Miss Milligan had made
her peace with the Department of Social Security, and the illegality does not seem to have been
considered to be particularly serious. See Final Report para.2.71.

63.

Draft Bill Explanatory Notes s.B.31.

64.

Draft Bill cl.5.

65.

Draft Bill cl.5(1).

66.

Draft Bill cl.5(1).

67.

Tinsley [1992] Ch. 310.

68.

e.g. G. Virgo, The Effect of Illegality on Claims for Restitution in English Law in W. Swadling (ed), The

Page17

Limits of Restitutionary Claims: A Comparative Analysis (London: BIICL, 1997), p.142; G. Virgo and J.
O'Sullivan, Resulting Trusts and Illegality in P. Birks and F. Rose (eds), Restitution and Equity Volume
One: Resulting Trusts and Equitable Compensation (London: Mansfield Press LLP, 2000)
69.

Consultative Report Pt 2.

70.

See above, text to fnn.17-26.

71.

Draft Bill cl.5(1)(a); Final Report paras 2.66-2.69

72.

See Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 185-186.

73.

Draft Bill cl.5(1)(f); Final Report para.2.77.

74.

Collier v Collier [2002] EWCA Civ 1095; [2002] B.P.I.R. 1057; see especially Mance L.J. at [112].

75.

e.g. Tinsley [1993] 3 W.L.R. 126; [1994] 1 A.C. 340, 374 HL; Tribe [1996] Ch 107, 133.

76.

Stone & Rolls Ltd v Moore Stephens Ltd [2009] UKHL 39; [2009] 3 W.L.R. 455; see further Stone &
Rolls Ltd (In Liquidation) v Moore Stephens (A Firm) [2008] EWCA Civ 644; [2008] 3 W.L.R. 1146 at
[16].

77.

Although there remains the problem that the illegality defence operates as an all-or-nothing defence,
which may be inappropriate where the creditor only has a claim to a (small) proportion of the equitable
interest at issue: see Davies, The Illegality Defence--two steps forward, one step back? [2009] 73
Conv. 182, 188-190.

78.

Draft Bill cl.5(1)(d); Final Report paras 2.70-2.72.

79.

This has been criticised: Davies, The Illegality Defence--two steps forward, one step back? [2009] 73
Conv. 182, 186-188.

80.

Interestingly, the Law Commission suggests that the illegality in Tinsley itself may not have been
sufficiently serious to warrant Miss Milligan's claim being barred: Final Report para.2.71.

81.

The default position: Draft Bill cl.4(1). See text to fn.52ff.

82.

Draft Bill cl.4(4)(a).

83.

Draft Bill cl.4(4)(b).

84.

Draft Bill cl.4(4)(c).

85.

Draft Bill cl.4(3)(a), although if a particular class contains more than one party, than the interest can be
split between those parties: Draft Bill cl.4(3)(b).

86.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 188-190.

87.

For example, to deter the father from pursuing such a course of action in the future.

88.

This would also be consistent with the rationale behind Draft Bill cl.5(1)(f): see text to fn.64ff.

89.

Particularly since the illegality defence should operate as a procedural bar: see text to fn.75.

90.

Tinsley [1992] Ch. 310, 317 cited by Lord Goff in the House of Lords: [1994] 1 AC 340, 353; Final
Report para.2.71.

91.

For example, because the illegality was insufficiently serious.

92.

Which would not necessarily be shared with Miss Tinsley.

93.

Nelson v Nelson (1995) 184 C.L.R. 538. It is suggested that this would also be an appropriate outcome
from the hypothetical example given by the Law Commission: Final Report Explanatory Notes, B.10

94.

Final Report para.2.85.

95.

Final Report paras 2.81-2.86.

Page18

96.

cf. the problems regarding POCA 2002: see Consultative Report para.A.16.

97.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 186-188.

98.

Final Report para.2.85.

99.

Pursuing Miss Tinsley for the fruits of Miss Milligan's fraud would obviously be more problematic.

100.

See Draft Bill cl.4(4). If a particular class contains more than one party, than the interest can be split
between those parties: Draft Bill cl.4(3)(b).

101.

Draft Bill cl.4(4)(a).

102.

The Final Report notes some suggestion that this might be correct in the case law: Q v Q [2008] EWHC
1874 (Fam), [2009] 1 F.L.R. 935 at [139]. Such authority is less than overwhelming, particularly in the
light of comments of higher authority that the illegality defence operates only as a procedural bar: see
Tinsley [1994] 1 A.C. 340, 374; Tribe [1996] Ch. 107, 133.

103.

Final Report para.2.92.

104.

CP 154 para.8.78.

105.

Or any victim of the offence in question.

106.

B. Dickson, Restitution and Illegal Transactions in Burrows (ed), Essays on the Law of Restitution
(Oxford: Clarendon Press, 1991), p.175.

107.

Although the Law Commission admits to finding this a difficult matter to decide: Final Report
para.2.92.

108.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 187-188.

109.

e.g. Final Report para.1.26.

110.

For example, SOCA will not seek the civil recovery of the proceeds of unlawful conduct if the recoverable
property is worth less than 10,000 or does not include property other than cash or negotiable
instruments: http://www.soca.gov.uk/about-soca/how-we-work/asset-recovery [Accessed on July 23,
2010].

111.

Bowmakers Ltd v Barnet Instruments Ltd [1945] K.B. 65 CA.

112.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 196-198.

113.

See e.g. Tinsley [1994] 1 A.C. 340, 371.

114.

Final Report para.2.54

115.

Final Report para.2.54.

116.

Particularly since the illegality at issue can be very serious indeed; legal property rights may have been
acquired under a lease which was only obtained in order to plan and commit acts of terrorism. It is very
difficult to distinguish between degrees of iniquity (Lord Goff in Tinsley considered it to be impossible:
Tinsley [1994] 1 A.C. 340, 367) and the Law Commission recognised that it was impossible to ring fence
particularly serious instances of illegality: Final Report para.2.28.

117.

Bowmakers [1945] K.B. 65 being but one example.

118.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 198-207.

119.

Gray v Thames Trains Ltd [2009] UKHL 33; [2009] 3 W.L.R. 167 (noted in (2009) 68 C.L.J. 503; (2009)
125 L.Q.R. 556).

120.

Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 (noted (2009) 68 C.L.J. 505; (2010) 126 L.Q.R.
14).

121.

The approaches of the Court of Appeal decisions in these two cases differed markedly, which was a

Page19

cause of some concern to the Law Commission:Consultative Report, paras 7.66-7.68.

122.

Cross v Kirkby The Times, April 5, 2000 per Beldam L.J.

123.

See e.g. Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 at [74]; [2009] 1 A.C. 1391.

124.

Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 at [30].

125.

Gray [2009] UKHL 33 Lord Hoffmann (at [38]) and Lord Rodger (at [66]) both cited CP No.160, The
Illegality Defence in Tort (2001) para.4.100, explaining Clunis v Camden and Islington HA [1998] Q.B.
978; [1998] 2 W.L.R. 902, as well as State Rail Authority of New South Wales v Wiegold (1991) 25
N.S.W.L.R. 500; Hall v Hebert [1993] 2 S.C.R. 159; British Columbia v Zastowny [2008] 1 S.C.R. 27.

126.

cf. the Canadian approach in Hall [1993] 2 S.C.R. 159 and Zastowny [2008] 1 S.C.R. 27; Consultative
Report, paras 7.10-7.11.

127.

e.g. Gray [2009] UKHL 33 at [83].

128.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 200-202.

129.

Moore Stephens [2008] EWCA Civ 644 at [16].

130.

Much discussion concerned a difficult question of attribution: see P.S. Davies, Auditors' Liability: No
Need To Detect Fraud? (2009) 68 C.L.J. 503; P. Watts, Audit contracts and turpitude (2010) 126
L.Q.R. 14.

131.

Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 at [128]-[131]; [2009] 1 A.C. 1391.

132.

Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 at [30].

133.

Final Report para.3.32.

134.

Although, admittedly, even two judges of the majority do not constitute a majority of the court. Lord
Scott's speech is ambivalent: he seems to apply Tinsley at [97]-[102], but to depart from this at [120][122].

135.

Nayyar v Denton Wilde Sapte [2009] EWHC 3218 (QB); [2010] P.N.L.R. 15; K/S Lincoln v CB Richard
Ellis Hotels Ltd [2009] EWHC 2344 (TCC); [2010] P.N.L.R. 5; Safeway Stores Ltd v Twigger [2010]
EWHC 11 (Comm); [2010] Bus. L.R. 974.

136.

Davies, The Illegality Defence--two steps forward, one step back? [2009] 73 Conv. 182, 188-190.

137.

Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 at [273].

138.

Consultative Report para.1.3.

139.

Final Report para.1.3.

140.

LCCP 154 para.5.10. See Davies, The Illegality Defence--two steps forward, one step back? [2009] 73
Conv. 182, 200-202.

141.

Final Report para.3.39.

142.

e.g. Lord Walker in Moore Stephens [2009] UKHL 39; [2009] 1 A.C. 1391 at [30].

143.

Bowmakers [1945] K.B. 65.

144.

Law Com No.321, Protocol between the Lord Chancellor (on behalf of the Government) and the Law
Commission (2010), paras 18-22.
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