Sentence the operating company not the parent

United Kingdom

In October 2019 the Court of Appeal overturned part of a financial sentence by a judge who doubled the fine of a company for a health and safety offence by taking into account the larger financial standing of the offending company’s parent company. Judgments of this nature are to be welcomed because they provide guidance on when and how the financial (or other) resources of a parent company (or indeed other related group companies), should be taken into account when sentencing an operating company for a health and safety offence. The principles on sentencing of many environment offences are very similar, and hence there is read across of this judgment into environment offence sentencing.

Background

In June 2018, Bupa Care Homes Ltd (the “Company’), which operates nursing homes, was fined £3 million after pleading guilty to breaching s3(1) Health and Safety at Work etc. Act 1974 (the “1974 Act”) following the death of one it’s residents from legionella disease.

Sentencing guidelines

The sentencing of offences of this nature is governed by the Sentencing Council’s Definitive Guideline, Health and Safety Offences, Corporate Manslaughter and Food Safety and Hygiene Offences 2016 (the “Guidelines”). The Guidelines provide a structure within which the courts sentence for breaches of health and safety legislation.

In essence sentencing is based on a formula which, naturally, starts with defining the “culpability” of the defendant in committing the offence and the harm caused by the offence. The higher the culpability and harm, the higher will be the starting point for a fine. Once this culpability and harm is determined the sentencing court then looks at the turnover of the defendant company. Depending upon turnover, the defendant company will be categorised into one of the following: large company (turnover of +£50m), medium company (£10m - £50m), small company (£2m - £10m) or micro company (<£2m)). Having established the culpability, harm and size of the offending company the Guidelines prescribe a financial starting point for a fine. The guidelines also prescrible a financial range within which the sentencing judge can increase or decreased the fine from the starting point, to take account of mitigating or aggravating features.

In this case the sentencing judge found (1) the culpability was high, (2) the harm was category 2 and (3) the Company was a large company. In accordance with the Guidelines the starting point was therefore £1.1 million and the range was £550,000 - £2,900,000. The Judge commented: “in my view, given my assessment of where this sits in terms of harm and culpability within the range, together with consideration of the turnover of [the Company], there is very good reason to go up from that start point within the range”. The judge consequently placed the fine at £2,250,00.

However, the judge went further and it is this aspect which was appealed. The judge concluded that the fine should be doubled to £4.5 million, by reference to the size and financial standing of the organisation as a whole, i.e. taking into account not only the size of the defendant Company, but also of its parent company. Notably the Guidelines allow room for argument that the standing of parent and other companies might be taken into account. However, the language used in the Guidelines is particularly vague and open to interpretation. The Guidelines state “Normally, only information relating to the organisation before the court will be relevant, unless exceptionally it is demonstrated to the court that the resources of a linked organisation are available and can properly be taken into account”.

As the Company had pleaded guilty at an early stage it was entitled to the full extent (30%) of the discount available for guilty pleas. The fine was reduced therefore to £3 million (i.e. £4.5 million x 2/3rds).

Appeal

The Company appealed successfully. The wider organisation’s size and finances should not have been taken into account. The Court of Appeal reduced the fine to £1.5 million (i.e. the original determination of fine at £2,250,000 reduced by 1/3 to take account of the early guilty plea).

The Court of Appeal held that the sentencing judge had erred when doubling the fine to £4.5 million on the basis of the parent company’s turnover. This did not “properly reflect the economic realities of the situation.” The Guidelines should be applied in a way which does not breach ordinary principles of company law. The fact that a company was the wholly-owned subsidiary of its parent which had larger financial resources does not mean that the resources of the parent company should be treated as being available to the subsidiary and consequently did not justify a large increase in the fine. In this case there were no special factors justifying a departure from these ordinary principles: “The defendant in this case was Bupa Care Homes and the offence in question arose out of its breaches of duty. It did not delegate these to its parent. It alone bore criminal liability."

Comment

It is only just that the courts have leeway to consider, when appropriate, wider corporate structures when offences have been committed. For instance if corporate activities are organised, say into SPVs with little or no financial standing, deliberately to avoid responsibility. However if a court is minded to venture down this route, considerable caution is required so as to respect the deep economic traditions of business and economic organisation into corporate structures and activities and the legitimate expectation in the commercial world that the courts will respect this. To this extent decisions such as this are a welcome reminder.

In arriving at this decision, the Court of Appeal followed R v Tata Steel UK Ltd [2017] EWCA Crim 704 and R v NPS London Ltd [2019] EWCA Crim 228. In both of these cases, the defendant companies successfully appealed against fines imposed on them on the basis that the sentencing judges had taken into account their parent companies’ financial positions. In the NPS case, the Court of Appeal held that: “there were circumstances where the corporate veil could be lifted and a corporate defendant be legitimately treated as part of a larger organisation for sentencing…Such example would be where a subsidiary had been used to carry out work with the deliberate intention of avoiding or reducing liability for non-compliance with health and safety obligations. The mere fact, however, that the offender was a wholly owned subsidiary of a larger corporation or that a parent company or other “linked” organisation was in practice likely to make funds available to enable the offender to pay was not a reason to depart from established principles of company law or to treat the turnover of the linked organisation as if it were the offending organisation’s turnover at step two.”

Article co-authored by Natalie Haefner.