From the courts: what you need to know

Case law: is voluntarily winding up a company a reasonable option to protect the company and its directors from litigation?

Breaching health and safety legislation, particularly where there’s been a death or serious injury, could lead to both prosecution and civil claims. Although company directors may be comforted by the fact that insurance will cover civil claims, financial penalties imposed by the criminal courts are different. As a matter of public policy, they cannot be insured against and must be met from bottom line profits. And with the Sentencing Guidelines Council saying that fines for fatal incidents should be in the order of seven figures, the punitive measures available to the courts are severe.

For directors battling to keep a company afloat, such a massive fine would be crushing. Add to that the possibility that a custodial sentence may be imposed under the Health and Safety (Offences) Act 2008 and the picture darkens further. Faced with this reality, is voluntarily winding up a company a reasonable option to protect a company and its directors from litigation, expense and imprisonment?

This debate began in 2006 when North West Aerosols Limited placed itself in voluntary liquidation four months after a fatal accident. Two years later at the uncontested trial, the company was convicted of two counts of breaching Section 2 of the Health and Safety at Work etc Act 1974 and ordered to pay just £2 in fines with £1 costs. The presiding judge expressed a view that had the company been profitable, he would have considered sentencing from a starting figure of £250,000.

In that case, the directors knew almost instantly that the company was in an indefensible position so, faced with the prospect of a fine from which the business might never have recovered, the directors chose to wind the business up. The company ceased trading with assets of just £284.

The case caused a fierce backlash from campaign groups. Families Against Corporate Killers (FACK) pointed to North West Aerosols Limited as the “…reason why the law needs to be changed, so that directors can be held personally liable.” But was the step taken by the directors improper and is it right that the law needs changing?

Some might say that for the directors to have struggled to keep the company afloat only for it to be killed off by a heavy fine would be folly. But is it advisable to take a strategy as drastic as this and were the directors placed beyond the reach of the law by their actions? 

The advice to directors is to be wary. First, the timing of such a step needs to be right. If court sanctions are imposed while a company is still in the process of being wound up, then legal proceedings can still be started with the permission of the courts. Also, if the aim is to set up a new company to take over the dissolved company’s assets, section 216 of the Insolvency Act 1986 gives prosecutors the option to prosecute both the old and new companies. The creation of ‘phoenix companies’ – companies with the same or a similar name, function, and board as a company which has been allowed to sink – is a criminal offence punishable by imprisonment and fine if it’s shown that the arrangement is a sham. For solvent companies that are prosecuted, UK sentencing policy dictates that a fine must be capable of being met by a guilty party. Judge Morrow’s suggestion of £250,000 as a starting point in the North West Aerosols Limited case was surely hypothetical, a figure he would have used if money was no object. In real terms at trial he would no doubt have ordered a solvent North West Aerosols Limited to pay a sum which would simply have made their lives miserable for a few years.

The uncomfortable fact about the North West Aerosols Limited story is that FACK and similar groups wanted the directors to be held personally responsible for the accident. They appeared to avoid prosecution through their actions but, in reality, their actions led them to be scrutinised to a much greater extent. Section 37 of the Health and Safety at Work etc Act 1974 allows regulators to prosecute the directors of a company irrespective of whether the company is prosecuted if they can be shown to have connived in, consented to or been neglectful of the company’s failings. That position isn’t affected by insolvency. The wise money wagers that if the evidence was capable of showing the directors to be guilty of any offence in that case, they would have been prosecuted. So sinking a company faced with prosecution may seem a good way out but if it’s your own skin you’re looking to save, it should be the last thing you consider.

Our thanks to Weightmans LLP for helping to write this article.