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May 17, 2009

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Regeneration game

Struggling companies facing prosecution over alleged health and safety failings that led to the death or personal injury of an employee, or member of the public, may consider voluntary liquidation as a means to bypass the entire Crown court prosecution process. Glyn Thompson considers the pros and cons of companies choosing this route, and examines the HSE’s stance on enforcement in such cases.

In early 2006, the board of North West Aerosols Ltd put the company into voluntary liquidation four months after an accident in which one employee was killed and three other people were seriously injured, rather — so it seemed — than face prosecution.1 At least, it was certainly presented as a company that was not contemplating insolvency until this incident happened.

Two years after the decision to commit corporate suicide the company was hit with a fine of just £2 and ordered to pay costs of £1. Once the verdict and sentence were made public, companies up and down the country facing similar prosecution — in what are particularly challenging financial times — could be heard to ask in unison: ‘Why don’t we do that?’

Seemingly, there is nothing to stop directors calling time on a company trading in an insolvent position and trying their hand at something new. So, isn’t electing to kill a company at its lowest point (i.e. when it is facing a prosecution and potential huge penalty) both a wise and attractive option?

The HSE’s position

The HSE’s official stance on companies placed into voluntary liquidation is that their attempt at ‘suicide’ does not alter their potential to face enforcement action. Of course, a company that is so far down the liquidation road as to no longer exist cannot be prosecuted because it just isn’t there to take a shot at.

In theory, section 651 of the Companies Act 1985 arguably allows for a company to be restored to the register of the companies, so it can face prosecution. However, one can imagine the public uproar that would follow news of the HSE bringing companies back from the dead only to effectively kill them off again via a prosecution. So, in real terms, when the HSE speaks of its willingness to enforce against companies placed into voluntary liquidation, it is only referring to companies that have started down the road towards insolvency but have not yet completed the exercise — as was the case with North West Aerosols Ltd.

Equally, when it talks of enforcement, it is only really talking about prosecution, as it would surely be a futile exercise to serve a company soon to be wound up with any kind of enforcement notice.

So, exactly when will the HSE prosecute a company that opts to commit corporate suicide in this way? Its enforcement policy — which the regulator says it will follow irrespective of the company’s legal position — states that it generally seeks to take enforcement action with a view to serving the following three main aims:

  • ensure that action is taken to eliminate the risk;
  • promote or lead to compliance by the defaulter; and
  • ensure that those breaking the law are held to account.

For a company heading towards liquidation, prosecution can only really be said to satisfy the third of these aims. However, the HSE’s official line is that it will still look to prosecute a company in liquidation with a view to achieving the third end, provided that it is in the public interest to do so.

The Code for Crown Prosecutors,2 as supplemented by the HSE’s Enforcement Policy and Enforcement Management Model, dictates that in these limited circumstances the question for regulators to ask is: Will the prosecution of this ‘dead’ company reverberate? Will it come to the attention of others who might also be failing to keep people safe and, in doing so, will it act to deter them from thinking that a culture of failure (in a health and safety sense) followed by suicide (in a corporate sense) is a reasonable course of action?  

The very fact that we are having this debate shows that even the prosecution of one company in this way has a massive impact. When, in the North West Aerosols case, the judge found himself in the position of being unable to administer the ‘starting-position’ fine figure he had in mind of £250,000, he arguably served the HSE’s end by handing the company a £1 fine for each of the two offences recorded. The decision sparked considerable coverage by the media, which devoted many column inches to disseminating HSE advice on the issues involved and the safety lessons to be learnt.   
Pros and cons

So, in light of the case of North West Aerosols, what is the advice for directors who might be inspired to take a similar course of action?  

The first point to bear in mind when assessing the actions of the directors of North West Aerosols is that four months after the incident this company ceased to exist. From that point onwards it posed no threat to anyone, but it also made no money. If the firm’s directors want to continue to make money in their chosen industry they will have to start again.

One might ask if this is really a major issue. Could the directors not just transfer their previous assets to a new company, thereby leaving behind not only the liability for criminal prosecution but any other debts the company may have built up? The answer, in short, is: not really.

The second downside to taking such a drastic step — beyond losing your business — is that section 216 of the Insolvency Act 1986 serves to prevent directors of a company voluntarily placing it into liquidation and then creating a new company with the same, or a similar name, where the aim of the new company is to avoid an obligation placed upon the outgoing company.

Phoenix companies — as they are known — are those formed with a similar name, function, and board to a previous company, and which ordinarily acquire the previous company’s assets. Section 216 is an offence punishable by imprisonment — as well as a fine — so directors should be careful about adopting such measures if their aim is to avoid liability.

Individuals

Beyond the company itself, ‘officers’ of a company — i.e. directors, the company secretary, etc. — are protected from being held responsible for failures of the company, by virtue of what is commonly referred to as the ‘corporate veil’. Essentially, the company is treated in law as a separate legal entity from its controllers so that the acts and omissions of directors and employees are not considered to be equivalent to those of the company. The law, however, makes isolated provision for the veil to be lifted, or ‘pierced’, where wrongdoing on the part of those officers can be established.

Of immediate relevance for the purposes of health and safety regulation are sections 36 and 37 of the Health and Safety at Work, etc. Act 1974, which allow for officers of a company that has breached health and safety legislation to be prosecuted independently from, or as well as, the company, if they were neglectful in their professional capacity, consented to the breach of legislation or, worse still, connived with the company to cause or allow a breach. In short, even if the company that an officer works for is not prosecuted, the officer — generally a director — is still at risk of being charged.

The directors of North West Aerosols were, in many ways, sitting ducks, because the HSE made out its case quite easily and the company offered no defence to the prosecution. All the HSE would have needed to do was prove neglect, consent, or connivance, and the directors could have faced prosecution themselves.

One would imagine that once the HSE knew of the directors’ plans to ditch the company, their conduct would have been massively scrutinised — and yet no prosecution followed. So, although much of the media outrage generated by the North West Aerosols case was borne out of the fact that the directors appeared to get off scot-free, the fact that they were not prosecuted under sections 36 or 37 of the HSWA must surely illustrate that they themselves had done nothing wrong.

What road should directors take?

Company directors should certainly exert extreme caution before they follow the route taken by North West Aerosols. We know that proceeding in such a manner acts as no bar to a prosecution of either the company or its officers, and appearing to be underhand could even result in stirring up a hornets’ nest. Assuming, as in the highlighted case, that the officers of the company can avoid a personal charge (and they know that to be the case before they make a decision as to the fate of the company), some directors may still think that the mere avoidance of the corporation’s liability to meet a fine is sufficient reason to justify voluntary liquidation.

It will rightly be an anxious existence for those who seek to openly reappear with a new company on the day after liquidation becomes effective. However, while section 216 is a deterrent, it is not necessarily as effective as one might expect. Indeed, the level of similarity with its ‘dead’ predecessor required for a company to be classed as a phoenix is high. If the directors are sharp enough to avoid the initial penalty then it is likely that they will be equally astute at ensuring that any new company is sufficiently distinct from the old so as to avoid a prosecution under section 216.

The aim of the regulatory regime in the UK is to promote and enforce the need for companies to safeguard individuals from the risks presented by that company. The voluntary winding-up a firm by its directors would suggest that the regulators’ aim is largely achieved when a company commits suicide, albeit not in a manner anticipated by the legislation.

The wise money, therefore, would wager that prosecutions of companies in liquidation by this route will be a rare occurrence. The HSE is no doubt well aware that the ancillary costs that accompany liquidation in this way — i.e. the loss not only of livelihood for those in control of the business but loss of goodwill and reputation in industry circles — often have more impact as a deterrent than any conviction it can achieve. But if the regulator chooses to take no action, be aware that it is through choice; it can and will take action if it believes it to be appropriate.

Knowing when to jump

My advice for those who fear that the current hard times are rendering them at risk of a significant health and safety failing is to consider administration before it is too late, rather than waiting for someone to be killed and then dealing with the fall-out.

Administration, first of all, puts a moratorium on all legal proceedings, so a company cannot be prosecuted when in administration unless the court allows such. Also, under section 4 of the HSWA, the obligation to ensure health and safety rests with the ‘person in control’ of the business. Once administrators are in control of a firm, it could be argued that the directors are not. In short, by all means fight to the death to save your business — but if you allow the death you fight to be someone else’s, you will find it a difficult task to avoid the severest of consequences.

References
1  ‘Firm fined price of a pint over death’, SHP July 2008, p11
2  Code for Crown Prosecutors, see www.cps.gov.uk/publications/code_for_crown_prosecutors/index.html

Glyn Thompson is associate solicitor at Weightmans LLP.

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