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May 27, 2010

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Construction firm’s fine increased eightfold by Scottish appeal court

Scottish judges have substantially increased the fine payable by a company convicted last year of health and safety offences, after an appeal hearing deemed the original penalty “unduly lenient”.

Construction firm Discovery Homes (Scotland) Ltd will now have to pay £40,000 rather than £5000 in relation to the death in May 2008 of employee Andrezej Freitag. The firm pleaded guilty in June 2009 to a breach of section 2(1) of the HSWA 1974 for failing to safeguard the Polish national on a housing construction site in Dundee. Mr Freitag, 55, fell from the second floor of a building down a smoke extraction shaft, around which there was no protection. (Click here for our report on the original sentencing.)

As reported on shponline last month Scottish courts are likely to have the option in future to request information on convicted firms’ financial standing in order to determine penalties. In the case of Discovery Homes, the High Court of Justiciary was asked to consider evidence about the personal wealth of company shareholders and directors’ pay. The issues before the court were whether the starting points selected by the sheriff in the original hearing were such that the fine imposed was unduly lenient.

Those starting points were that the majority of the company’s funds for the Dundee development came from a bank overdraft facility, and the bank refused to make funds available to pay a fine. The sheriff therefore took the view that the only funds available for this purpose were small amounts of cash in the bank. The turnover of the company in the year to September 2008 was £2.9m and accumulated profit amounted to £283,000. The draft accounts were neither requested by nor supplied to the Crown before the original sentencing.

Although emphasising that he considered the breach to be very serious and aggravated by the death of Mr Freitag, and that it normally would have attracted “a very substantial fine indeed” the sheriff took the view that levying such a fine in this case would result in insolvency for the company. He consequently fined Discovery Homes £5000 and one of its directors, Richard Pratt – who also acted as the site manager and sole safety representative of the company – £4000, after he pleaded guilty to breaching section 37(1) of the HSWA 1974.

On appeal, however, more detailed financial documentation was provided for the court, which also referred to the guidelines on sentencing in cases of corporate manslaughter issued by the Sentencing Guidelines Council in England in February this year. The appeal judges noted that the information provided for the original sentencing judge was “less than might have been hoped for” and that in cases such as this, “it is for the company to place before the court sufficiently detailed information about its financial position to enable the court to see the complete picture without having to resort to speculation”.

Armed with the new information, the appeal court considered the company’s arrangements for paying each of its two directors – in the form of dividend or remuneration – a sum of £50,000 a year. In light of this, it took the view that an appropriate fine for the company would be £40,000. In the case of Mr Pratt, the court was “not persuaded” that his fine was unduly lenient and so it remained at £4000.

Commenting on the decision, Laura Cameron and Katherine Brydon, of McGrigors solicitors, said: “Although not entirely clear from the court’s judgement, we understand that the Crown argued that the shareholders ought to be forced to advance further capital to the company in order to meet a higher fine. The fact that the Court chose not to go down that route should be welcomed. While there is, no doubt, a vociferous lobby who would like to see shareholders penalised directly for the failings of companies, such significant expansion of the liabilities of shareholders should not be introduced without proper debate.”

They concluded: “[This case] is just the latest in a line of sentencing appeals that demonstrate the response of the Crown and the courts to the public appetite for increased fines for health and safety offences. It is essential that companies facing a fine give thought at an early stage to the potentially wide-ranging financial information that they may need to put before the Court.

“The case is also an example of the increase in investigation and prosecution of directors that our practice has seen in recent times, as well as the potential financial consequences for directors if either the company or the director are convicted.”

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