Court of Appeal guidance on impact of linked companies' financial resources when considering fines

In overturning a decision at first instance, the Court of Appeal has confirmed that it is the turnover of the defendant company only that is the basis for categorisation of size within the Sentencing Guidelines. However, as seen in both cases, where the defendant company relies significantly on a linked company for financial support this will be a material factor on the level of the defendant company's fine overall.

• The starting point is that only the resources of the defendant should be taken in to account; the fact that companies are in the same group or have a parent/subsidiary relationship will not satisfy the test; in itself this is not exceptional.
• The Court is required to conduct an analysis of the level of financial support that the linked organisation is providing and whether that should be considered in order to achieve one of the Guideline's objectives, which is to levy fines sufficiently substantial to have a real economic impact and bring home to both management and shareholders the need to comply with health and safety legislation.

NPS: first instance decision

NPS London Ltd was fined £370,000 after pleading guilty to a breach of the Health and Safety at Work Act 1974, for failing to recognise deficiencies in an asbestos survey it had commissioned, which exposed workers to long-term risk to health from dust containing asbestos.

NPS was a joint venture, 80% owned by NPS Property Consultants Ltd and 20% by the London Borough of Waltham Forest.

At first instance, the Judge assessed culpability as high and the harm as category level 2. The annual turnover of NPS was £5-6m, making it a 'small' organisation. On this basis, the starting point of any fine should have been £100,000 with a range from £50,000 - £450,000.

However, NPS was running at a loss and its directors' report stated that the parent company would provide financial support for a period of at least 12 months. The Judge determined that NPS should therefore be treated as a large organisation, because the parent company had a turnover of £125m. This led to an increase in the starting point to £1.1m, with a category range of £500,000 - £2.9m. This decision was appealed, not only on the basis that NPS should not be treated as a large company, but also on the basis that its parent company should not have been taken into account when considering whether the fine was proportionate to its circumstances.

Court of Appeal decision

The Court of Appeal found that it was wrong to regard NPS as a large organisation for sentencing and that only the defendant’s turnover, and not that of any linked organisation, should determine the relevant starting point for the fine. It explained that there are only limited circumstances in which it is appropriate to 'lift the corporate veil', such as where a subsidiary had been used to carry out work with a deliberate intention of avoiding or reducing liability for non-compliance with health and safety obligations.

However, whilst the turnover of the defendant alone should categorise its size for sentencing, the resources of the linked organisation can be considered to ensure the fine is proportionate to its financial circumstances.

Although NPS was loss-making, this was not a reason to reduce the fine as it had the financial support of the parent company to provide the necessary funds.

Faltec: Court of Appeal decision

In a similar decision, when considering the appeal by Faltec Europe Limited against the level of its fine for three breaches of the Health and Safety at Work Act 1974 relating to controlling the risk of legionella and an explosion on a flocking machine, the Court of Appeal concluded that it was right to take into account the resources of Faltec's holding company

Faltec had been fined at first instance a total of £1.6m based on a finding of high culpability and category 1 harm (the highest level). The first instance Judge had declined to adjust this figure downwards to reflect the fact that Faltec had been trading at a loss, referring to the availability of financial support from its holding company.

Faltec appealed the fine level, one or its arguments being that the financial resources of the holding company were not relevant because its holding company did not have a legal right to the resources of its subsidiary and Faltec's accounts contained no statement that it was dependent on its support to enable it to continue as a going concern.

The Court of Appeal rejected this, noting in particular the cancellation of a £36m loan from the holding company to Faltec via a debt for equity swap carried out because the loan could not realistically be repaid. Faltec's dependence on the holding company was such that for its accounts to be produced on a going concern basis, it would be unrealistic and misleading to ignore its holding company's resources.

Helpfully, though, the Court of Appeal disagreed with the first instance Judge having taken into account an accounting provision made by Faltec for the fine. The Judge had considered it relevant that the company remained solvent even after having made a prudent provision in its accounts for a £1.6 million fine. The Court of Appeal did not agree and determined that this should have no relevance to the fining decision.

Osborne Clarke comment

The NPS judgment restates the principle that the mere fact that a corporate defendant is a wholly owned subsidiary of a larger corporation or that a parent company or other linked organisation is likely to make funds available to enable the defendant to pay a fine is not a reason to treat the turnover of the linked organisation as if it were the offending organisations.

However, both NPS and Faltec also provide guidance as to the circumstances in which, the court may take into account the resources of a linked organisation when considering the financial circumstances of the defendant company in the round. In each case, where financial support from the parent was clearly in evidence, this was a factor in deciding whether the fine is proportionate. Absent the financial support of the parent, the fines may have been further reduced to reflect the financial health of the two defendants.

In considering the wording of accounts, Faltec does provide a welcome steer that an accounting provision made for a fine will not form part of the Court's consideration on level of fine (the concern has always been the risk of signposting to a sentencing Judge what was an affordable, appropriate fine).

Whilst these cases make it clear that the financial reality of the defendant company will be broadly considered and that this may include the financial relationship a defendant has with linked organisations, the link is not automatic, but will only be made in circumstances of clear and significant financial dependency.