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May 16, 2012

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SHE 12 – The rise of the phoenix firm

The trend for companies facing health and safety investigations and potential prosecutions to go into liquidation in order to avoid punishment is increasingly common, but there are moral and legal arguments why practitioners should think twice before following this approach.

This was the key message from Alison Gray, a solicitor at Dickinson Dees, who updated practitioners on the rise of so-called phoenix firms at the SHP Legal Arena today (17 May).

Outlining the reasons why companies facing prosecution decide to go into liquidation, Alison explained that the most obvious factor is financial, as it saves the defendant having to pay out both a fine and legal costs. There is no need to participate in legal proceedings, freeing up individuals’ time, while it also minimises reputational damage, as there is much less media interest in a small fine for a company that no longer trades compared to a large penalty for a trading company.

Alison said the long, drawn-out process of many HSE investigations, and the time it takes for many cases to reach court, gives companies the opportunity to assess their financial situation and make plans to go into liquidation before resurfacing later as a new company. The insolvency rules in the UK allow companies to go into liquidation voluntarily, while there is also a heavy dependence on fines as punishment in the British justice system.

However, added Alison, there are strong moral arguments that should dissuade companies and individuals from taking this course of action – not least the fact that the public want to see those parties responsible for injuries or fatalities be made to suffer and that the families of victims should have their chance to see justice delivered.

Alison summarised a number of cases in which companies have been fined a small fine owing to their financial status before starting up again as a similar business under a similar name. Two separate cases – involving Bryn Thomas Crane Hire Ltd and Foxtel Ltd – were used as examples by Labour MP Luciana Berger, during her recent unsuccessful attempt to introduce a Private Member’s Bill that would allow the HSE to apply for the power to freeze the assets of a firm under investigation.

In the case of Bryn Thomas Crane Hire, a worker was killed during the construction of a new floor at a warehouse in Liverpool, when a crane fell and the steel column it was carrying struck him. The crane was found to be incapable of lifting the column from the distance at which the job was carried out without it becoming overloaded.

During each of the three years of the HSE investigation, £200,000 in dividends was paid out, effectively divesting the company of its assets. It went into liquidation in December 2010 and admitted health and safety breaches in April 2011. The fine imposed was £4500 but would have been closer to £300,000 had the company been solvent, the judge said in his sentencing remarks. The company was bought out by two of its directors and now trades under a very similar name.

With Ms Berger’s Bill having failed to progress on to the statute books, Alison outlined to delegates a number of alternative strategies to deter certain firms from liquidating themselves and returning as phoenix companies further down the line.

Among the suggestions, Alison highlighted the importance of the HSE carrying out preventative inspections and enforcement campaigns, the potential for the forthcoming fees for intervention to nip problems in the bud before they manifest into more serious failings, and more effort to speed up the legal process.

But Alison also highlighted a number of pitfalls and consequences for individuals who decide to start up phoenix businesses. If a company becomes insolvent, she explained, the regulator is likely to turn its attention to the individuals involved.

Furthermore, companies who have no assets will be unable to defend themselves and will almost certainly be found guilty as a result. Alison explained that guilty verdicts for companies are one of the building blocks that allow individuals to be convicted for personal failings under the HSWA.

Alison also highlighted that custodial sentences are becoming increasingly common, as are disqualification orders for directors, especially if the court sees that lessons have not been learned.

Finally, she also warned that individuals could find themselves the target of civil claims, especially if the company involved in the incident has been closed down and had no insurance in place at the time the incident occurred.

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12 years ago

I agree Bob
Start up again with a clean sheet in another name (or as you say, the dogs name) and it’s business as usual! Meanwile the person the company injured so badly that they can never work again becomes just another ‘benefit scrounger! It’s just so wrong!

Liquidating the company seems to be a standard prosecution avoidance technique (state pays costs too!), but hang on; isn’t that ‘perverting the course of justice’? if so, why aren’t the ‘defendants’ persued on that charge too?

12 years ago

I fail to understand the argument not to liquidate given the examples given herein?

To deliberately liquidate a company with a view to setting up again infers predetermination and no adhearence to any sort of morals. And the idea that disqualification prevents individuals from benefiting from company profits is laughable.

Change the name employ the Wife/Brother/Child/Dog as Company Director and away you go.

The LAW needs changing to address individual accountability post liquidation.

12 years ago

As is evidenced by the liquidation of Bingham Davis Ltd after the Liverpool crane failure which resulted in the Crane operator being paralysed, the supposed stigma attached to liquidation, and the suggestion of other “deterrants” did not affect thier ability to design themselves out of trouble.

Its a pity they did not observe as much ability and diligence in the crane base design.

The situation is only permissable by the inability of the exsiting LAW to adequately deal with these bandits.

12 years ago

The consequences of the “phoenix” approach aren’t great deterrants. A company goes into liquidation Intending to plead guilty, why waste money on legal bills? Personal failings are hardly an issue if the Officer of the company was following company policy. It’s the same mechanism as Corporate Manslaughter & vicarious liability. The companies usually operate within the law until the court date is set and only then go into receivership. Disqualification is rare and only for individual negligence.