Corporate Manslaughter: health and safety traps and dilemmas for directors

Safety & Health Practitioner

Kathy Holuba, legal director, corporate, Hill Dickinson LLP

Hill Dickinson will be performing mock trials as part of the SHP legal arena at Safety and Health Expo.

Following the tragic death in 2012 of an odd job man who fell through the roof of Lion Steel’s premises in Hyde, Lion Steel Equipment Limited became only the third company in the UK to be convicted of corporate manslaughter. Its directors also faced prosecution. The decision they made to avoid individual prosecution for manslaughter serves as an illustration for directors not only about their responsibilities and liabilities under health and safety legislation but also in their role as directors. Hill Dickinson’s Kathy Holuba considers how those duties come into play in this scenario and provides some tips on how a director might avoid breaching them.

Background

Initially, Lion Steel was charged with corporate manslaughter under the Corporate Manslaughter and Corporate Homicide Act 2007. Its three directors were charged with an offence under section 37 of the Health and Safety at Work Act 1974 (offence committed by body corporate with consent or connivance or neglect on the part of a company officer) as well as gross negligence manslaughter.    

The potential consequences were serious. The maximum sentence for manslaughter is life imprisonment and, though it is unlikely to be imposed, almost every conviction for gross negligence manslaughter leads to a prison sentence of at least three to four years.

In exchange for the prosecution agreeing to abandon its case against the directors, the first director held a board meeting of Lion Steel where the board resolved to enter a guilty plea on behalf of Lion Steel (to the corporate manslaughter charge).The directors had suffered a great deal through an awful experience (one gave an interview in which he admitted to having contemplated suicide) but had they, in agreeing to admit Lion Steel’s guilt, breached their directors’ duties? 

A director’s role

The role of a director is a serious one and not to be taken lightly.  Though it may seem like an accolade or reward,  directors, unlike shareholders, have a long list of duties, responsibilities and potential liabilities (arising from case law over the years and the Companies Act 2006), not only to third parties but also to the company of which they are directors.

The duty relevant to the Lion Steel scenario is the duty “to promote the success of the company” (section 172 of the Companies Act 2006).   This specifies that a director must act in the way he considers, in good faith, would be most likely to promote the success of the company for the benefit of its members as a whole. In doing so the director must take account (amongst other things) of the likely consequences of any decision in the long term, employees’ interests and the company’s reputation for high standards of business conduct.

Bearing this in mind, if the directors of Lion Steel decided that the company should plead guilty solely in order to protect themselves, taking into account no other factors, were they promoting its success, considering that it then suffered a hefty fine and conviction?  What if the immediate result of the fine and conviction was that the company became insolvent?

The Lion Steel scenario — considerations

In a Lion Steel situation, would / should the directors consider whether:

• the company was, in fact, the truly guilty party; and/or
• the company had sufficient funds to meet the fine and legal costs without becoming insolvent or threatening business; and/or
• the extent of insurance cover for defence and prosecution costs (insurance would not cover any fines levied); and/or
• if the directors were convicted, might the company suffer badly and perhaps fail because it lacked their experience, knowledge and guidance ?

Directors can often face difficult decisions, but, in order to defend their position and refute charges of breach of duty, they need to record their decisions and the justifications for it, different perhaps in each situation.   

If directors are found to have breached their duties, the company (or – in certain circumstances subject to some high hurdles – its shareholders on its behalf) may bring a claim against the director and, if successful, the remedies available are:

• an injunction
• setting aside the transaction, restitution and account of profits
• restoration of company property held by the director
• damages
• (potentially) grounds for the termination of an executive director’s service contract, or for disqualification as a director under the Company Directors Disqualification Act 1986

By comparison to the fines and criminal convictions directors could face for gross negligence manslaughter or breach of the health and safety regulations, the above penalties may seem a little pale.

Other relevant duties

The duty to promote the success of the company is only one of a long list. Other duties include:

• to avoid conflicting interests and duties
• not to make unauthorised profits
• confidentiality
• to comply with the company’s memorandum and articles of association
• to exercise independent judgment
• to exercise reasonable care, skill and diligence
• not to accept benefits from third parties
• to declare interest in proposed transaction or arrangement with the company

Avoiding breach

In the context of health and safety, two common themes recur when analysing directors’ responsibilities:

• directors must ensure that they are kept informed on a regular basis of the company’s health and safety risks and performance, e.g. by appointing a health and safety director, allocating health and safety responsibilities to a senior manager/existing director or a health and safety committee to ensure that reports are fed to the board regularly.
• putting in place sufficient risk assessment and auditing procedures to ensure compliance with the legislation.

More generally, directors should consider:

• requesting an indemnity from their company against defence costs, or costs incurred in an application by the director to the court for relief against claims (the company is prohibited from indemnifying a director against any liability for negligence, default, breach of duty or breach of trust and a director must repay costs if he is unsuccessful in a claim for which the company has paid his defence costs)
• requesting that the company (and any associated companies) purchase insurance for its directors against any liability attaching to them in connection with any negligence, default, breach of duty or breach of trust by them in relation to that/those companies
• if at no other time, then certainly in relation to key decisions in a company’s life, holding formal board meetings (with a written agenda and any documents to be circulated prior to the meeting) and having written board minutes of those meetings setting out why decisions are made so that, if challenged, the directors can produce them to justify their actions
• attending board meetings and requiring full details of any situation they are being asked to vote on — remember, the fact that a director is asked to carry out particular tasks does not necessarily remove his liability if his fellow directors fail to act properly
• requiring regular updates from their fellow directors, accountants and different areas of the business (e.g. in the form of business plans, management accounts etc) so that they have relevant and up-to-date information and can take action accordingly
• ensuring that any third party to whom they sub-contract or farm out work is, in fact, carrying out that work correctly, legally and at the right time — their failure to do so will not remove liability for errors or failure from the directors
• The Institute of Directors and the HSE have jointly issued guidance on directors’ duties on health and safety at work which seeks to establish a health and safety benchmark for boards and directors. Although compliance is not compulsory, adherence to it will greatly improve the prospects of demonstrating compliance with health and safety law.    The guidance sets out a four-point agenda for “embedding the essential health and safety principles” and setting out good practice guidelines:

1. plan the direction for effective health and safety management, including defining the roles of the board and its role in the health and safety policy
2. deliver health and safety to the organisation by introducing management systems and practices to ensure that risks are dealt with sensibly, responsibly and proportionately
3. monitor health and safety through specific and routine reports on the performance of the health and safety policy
4. formally review health and safety performance at least once a year

For public limited companies which fall under the Combined Code (the key source of corporate governance recommendations for UK listed companies), the board has to report annually on the health and safety controls within the company and how effective these are in achieving their aims.   The Turnbull Report (and the related Turnbull Guidance) was published by the Institute of Chartered Accountants in England and Wales to assist the board in order to implement internal control recommendations set out in the Combined Code and to ensure that these companies have risk management and internal control systems for the management of risks that are significant to the fulfilment of their business objectives.  The Turnbull Report and Turnbull Guidance believe that the annual report should cover the following as a minimum:

1. a statement on the board’s responsibilities
2. a description of how the board performed and any problems
3. disclosure of the board’s view of the health and safety systems of the company and their effectiveness at meeting the company’s evolving needs
4. confirmation that the duties are being carried out
5. disclosure if it has not carried out its duties

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