UK: Linked Organisations - How Vulnerable Are They When It Comes To Sentencing For Health And Safety Offences?

The Sentencing Council's Definitive Guideline (the Guideline) was published in November 2015 and since 1 February 2016 must be applied to cases sentenced for health and safety, corporate manslaughter, and food safety and hygiene offences.

The Guideline breaks down the sentencing process into nine clearly defined steps. On a finding of 'guilt' or on a 'guilty' plea, the Guideline will first require the sentencing court to determine the offence category, by looking at culpability and harm. The court will then determine a starting point and category range for any fine to be imposed - looking at the organisation's (and potentially any linked organisation's) financial status, based on its turnover during the past three years.

While making it clear that, "Normally, only information relating to the organisation before the court will be relevant" when considering a company's turnover, the Guideline provides that there may be exceptional occasions where, "it is demonstrated to the Court that the resources of a linked organisation are available and can properly be taken into account". No examples are offered of what would be regarded as "exceptional circumstances" nor is any definition of "linked organisation" given.

Culpability and harm

For health and safety offences culpability will first be assessed as low, medium, high or very high. Most cases are likely to fall within either the medium or high categories - the latter being appropriate where the court finds that, for example, the offending organisation ignored concerns previously raised, or where the risks existed over a long period of time.

Within each culpability band there are four levels of harm. Category 1 is where there was a high likelihood of death or of an injury which would shorten life or result in long term dependency on care. Category 4 is where there is a low likelihood of harm or a medium likelihood of a low level of harm.

For corporate manslaughter cases there are two bands into which a case will fall: Category A where there was a high risk of death and high culpability, or Category B where there was a lower level of culpability.

The impact of turnover on any fine

The culpability and harm levels are important. They will be applied to tables that are defined by an offending organisation's turnover, to determine the starting point and suggested range for a fine. There are significant differences between the tables.

For an organisation with an annual turnover over £50 million the starting point for health and safety fines is between £10,000 and £4 million, depending on harm and culpability (and £5 million to £7.5 million for corporate manslaughter). By contrast an organisation with a turnover below £10million will have a starting point of between £700 and £450,000 (and £540,000 to £840,000 for manslaughter).

At this stage there is no real guidance as to the likely fine that would be imposed on an organisation with a turnover substantially above £50 million. There are no tables which can be used to predict outcomes, just a comment in the Guideline that "Where an offending organisation's turnover or equivalent very greatly exceeds...[£50 million], it may be necessary to move outside the suggested range to achieve the necessary sentence."

The court has not confirmed that the ranges for large companies will be pro-rated upward but the fines are intended to be, "sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to comply with health and safety legislation". The fines handed to three 'very large' entities sentenced under the Guideline since 1 February 2016 support this statement.

ConocoPhillips (UK) Limited is one of the world's largest oil and gas exploration and production companies, whose turnover is measured in the 'billions'. It admitted two uncontrolled and one controlled but unexpected gas release, caused as a result of maintenance work and which put a number of its workers at risk of death or serious injury - although no one was actually injured.

On 8 February 2016 ConocoPhillips was fined £3 million. The fine no doubt reflected not only the high likelihood of death or of an injury and the fact that ConocoPhilips had previously been convicted of health and safety breaches, but also the company's substantial turnover.

Travis Perkins Trading Company Limited (Travis Perkins) was fined £2million in April 2016, following a guilty plea in respect of two health and safety offences. A customer was loading wood on to the roof rack of his Landrover when he slipped and fell backwards. He was run over by a company vehicle and subsequently died. It was found that the company had 'failed to ensure loading and unloading activities were undertaken in a safe manner in a safe area'. Like ConocoPhillips, Travis Perkins' turnover is measured in billions.

Earlier this month Balfour Beatty Utility Solutions Limited (BBUS) pleaded guilty to two health and safety offences following an incident in which an employee was killed when the trench he was working in collapsed on him - due to a lack of shoring. A fine of £2.6million was imposed by the court.

It is interesting to note that BBUS is actually a dormant company. Its company filings confirm that it acts as an agent for Balfour Beatty Group (the Group) and the transactions relating to BBUS' activities are dealt with in the financial statements of the Group. The Group had consolidated accounts which reported a turnover of £3.1 billion for 2014.

The fact the level of any fine imposed is linked to turnover - and that depending on the level of turnover there can be such a difference in the applicable fine - may well mean a convicted organisation could be motivated to try and argue its turnover as conservatively as possible.

Prosecution of parent companies?

Guilty smaller limited companies, owned by larger holding companies, will have an advantage over very substantial convicted businesses which operate through smaller divisions and do not have their own separate corporate identities. In those circumstances, prosecutors may consider whether they can prosecute the wealthier parent company of a subsidiary business in which serious risks have been identified, as well as or instead of, its subsidiary.

Whether or not a parent company can be prosecuted will of course depend on the facts, whether it exercised sufficient control over the subsidiary and whether the parent company itself is guilty of a criminal offence too.

In Chandler v Cape Plc (2012) the Claimant had been employed by a wholly owned subsidiary of the Defendant and was exposed to asbestos through his work. Many years later he found that he had asbestosis. His employer no longer existed and there was no insurance that might settle his claim.

The claimant sued the parent company, on the basis that both the parent and its subsidiary were jointly liable. The court found that the parent company (which had neither employed him nor been directly responsible for his exposure to the asbestos) did indeed owe the Claimant a duty of care, taking into account the fact that in this case:

  • the parent had knowledge of the working conditions and presence of asbestos dust;
  • the parent employed a medical and a scientific officer responsible for health and safety at the Plc and its subsidiary; and
  • the parent dictated the health and safety policy applicable to its own and its subsidiary organisation.

The parent company's failure to intervene was found to be a breach of its duty to its subsidiary's employee and it was liable to compensate the claimant as a result.

This is not an example of the corporate veil being pierced but of a parent company's control over its subsidiary rendering it independently liable. Cape is a civil not a criminal case but there is always the possibility that prosecutors could look to the control exercised over a small subsidiary by a larger parent - for example in terms of health and safety policies, safe systems of work and so on.

If there is sufficient control and the parent company is in breach of its own duties the prosecutor could then consider prosecuting the parent company - in the alternative or in addition to the subsidiary. Section 3 Health and Safety at Work etc Act 1974 specifically creates an offence of failing to conduct an undertaking in such a way as to ensure, so far as is reasonably practicable, that persons not in its employment who may be affected thereby are not therebyexposed to risks to health and safety.

Each case will turn on its own facts, but parent companies should take heed from the Cape case and remember that inaction by a parent may be as culpable as action. Global health and safety policies and documentation may well benefit a parent company by making use of a pooled expert resource but they can also put the parent at risk of prosecution by providing evidence of 'control' and their own breach of duty.

Relevance of a linked organisation's turnover

If a parent company is not prosecuted separately, when could its financial position be taken into account in determining the subsidiary's fine, as a "linked organisation"?

The starting point and band for a fine under the Guideline should be determined solely by reference to harm, culpability and turnover of the offending organisation.

Having reached a figure within the band the Court will use the Guideline to review and, if necessary, adjust the fine to "ensure that it fulfils the objectives of sentencing". Mitigating and aggravating factors relevant to the particular facts of each case can be used to take the fine up or down within a band or even to adjust the fine to levels outside the suggested range. Central to the court's objectives is its need to ensure that:

  • The fine is proportionate to the overall means of the offender (the convicted subsidiary not the parent), and
  • "The fine must be sufficiently substantial to have a real economic impact which will bring home to both management and shareholders the need to comply with health and safety legislation."

It is also at this stage that the Guideline suggests there may be cases where, "the resources of a linked organisation are available and can properly be taken into account." The Guideline specifically states that this will happen "exceptionally" - that qualification is very important.

No definition is offered for what is meant by "linked organisation", but if this is interpreted as a parent company or a sister company and the assets of another limited company are to be taken into account in determining the appropriate fine this would effectively mean that the corporate veil is pierced. If linked organisation assets are taken into account a subsidiary could be fined beyond its means on the assumption that its parent will bail it out and will meet or at least contribute to the fine imposed.

Piercing the corporate veil is something that has never been done lightly by the courts. However, it remains to be seen the extent to which prosecutors will regard the reference to 'linked organisation turnover' as a mandate to at least argue that an offending business is part of a multinational super giant and that any fine should take account of the linked organisation's turnover.

Cases where the court has gone behind limited liability are not only rare but have generally involved an element of deliberate asset concealment or fraud.

The case of Salomon v A Salomon & Co Ltd (1897) remains the leading authority on this issue in spite of its age. The Supreme Court - in Prest v Petrodel (2013) - confirmed that Salomon

"is House of Lords authority affirming the distinction between the separate legal personalities of a company and its corporators. It is a feature of the principle that a company's assets belong beneficially to the company and that its corporators have no interest in, or entitlement to, them...the separate corporate identify of a company is a fact of legal life that all courts are required to recognise and respect, whatever jurisdiction they are exercising. It is not open to a court simply because it regards it as just and convenient, to disregard such separate identity and to appropriate the assets of a company in satisfaction.. of the monetary claims of its corporator's creditors...".

The recent case of Boyle Transport (Northern Ireland) Limited v Boyle (2016) is a further example of the court's reluctance to lift or pierce the corporate veil. Here, the Court of Appeal held that the corporate veil in confiscation proceedings could not be pierced just because the majority shareholders in the 'old' company had each been convicted of criminal offences.

The test was not 'justice'; the confiscation process was not aimed at punishment but at recovery of benefit. The old company had been properly set up as a limited company, there was no evidence that it would not have been viable, even after the illegal activities (tampering with tachographs and keeping false records) had been identified and had ceased. Furthermore, the old company was not regarded as an 'alter ego' of the 'new company'. The lower court had therefore been wrong in treating assets of the 'new company' as realisable property of the two majority shareholders.

In the Balfour Beatty case, however, the consolidated accounts and therefore the revenue of the Group were used to determine the level of fine to be imposed - using the Group turnover allowed BBUS to be categorised as a 'very large' company under the Guideline. This may well be an example of the court 'peeping' behind the corporate veil, rather than piercing it. BBUS did not have its own accounts from which the court could establish its turnover - the consolidated accounts had to be used instead. Furthermore, the filing for BBUS confirmed that it acted as agent for the Group.

What about linked companies that are not subject to consolidated accounting procedures and/or there is no express agency relationship between the two? It is unlikely that a prosecutor will be able to satisfy the court that it should have regard to a wealthy parent company's assets in determining a subsidiary's fine, unless a special reason exists to justify piercing of the corporate veil - for example impropriety in a parent company's use of a subsidiary in order to derive an advantage.

Impact on shareholders

If there is no evidence of impropriety on the part of the parent the court's ability to take account of any linked organisation should be restricted to organisations which are the limited company's shareholders, although any impact a fine may have on shareholders will not necessarily mean that the subsidiary's fine will be increased.

Many large businesses operate not with a raft of wholly owned but privately incorporated subsidiaries, but with distinct operating divisions and sometimes distinct trading names, although all operating under the same corporate umbrella. Unless the divisions have their own legal identity it will be the overarching corporate that will be prosecuted and convicted. In determining sentence, these businesses, with turnover very greatly exceeding the £50million turnover threshold for what are defined in the Guideline as the "very large organisations", may well face sentencing for health and safety offences being determined well outside the large organisation fine bands.

The Guideline requires the court to ensure that any fine is large enough to have a real economic impact on the company and, therefore, to impact on its shareholders (so that they, as well as the management of the company, appreciate the seriousness of the offence). If an offence sits squarely within a particular division of a larger company, and the same issues that exist there are not replicated across the business, then it might be worth arguing that the 'turnover table' to apply should be that referable to the turnover of the business division, although the accounting records would need to be in place to support this. It will be interesting to see if the court would accept that approach.

If such an argument was successful prosecutors would no doubt argue in turn that the rest of the business is a linked organisation and it would be difficult to dispute that. While there needs to be exceptional circumstances for the linked organisation's income to be taken into account, which a prosecutor may find harder to establish, there will be no 'corporate veil' for the court to lift and there would be an obligation on the wider company to pay any fine ordered.

Conclusion

Given that for health and safety offences the fine range for businesses will range from £50 to £10,000,000 depending on the business' size, there is every reason to try and argue, in a very large organisation, that the turnover attributed only to the guilty division should be taken into account.

Although concerns have been raised about the reference in the Guideline to the turnover of linked businesses being taken into account, it seems that the Guideline does not provide any sort of licence for piercing the veil of incorporation and gives no authority to require another company to pay a convicted organisation's debt.

However, if another organisation is the shareholder of a convicted business, then any fine imposed on the business (which it alone must be able to afford to pay) might be in the higher part of the fine band to ensure that it is of sufficient size to punish that shareholder.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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